TravelCenters of America Inc.

Good morning and welcome to the Travel Centers of America third quarter 2022 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the call over to Stephen Colbert, Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. We will begin today's call with remarks from TA's Chief Executive Officer, John Perchick, followed by Chief Financial Officer, Peter Crage, and President Barry Richards for our analyst Q&A. 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 2nd, 2022. 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, or SEC, that are available free of charge at the SEC's website or by referring to the investor relations section of TA's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. During this call, we will be discussing non-GAAP financial measures, including adjusted net income, EBITDA, and adjusted EBITDA. The reconciliations of these non-GAAP measures to the most comparable GAAP amounts are available in our earnings press release that can be found in the news section on our website. The financial and operating measures implied and or stated on today's call, as well as any qualitative comments regarding performance, should be assumed to be regarding the third quarter of 2022 as compared to the third quarter of 2021, unless stated otherwise. Finally, I would like to remind you that the recording and retransmission of today's conference call is prohibited without the prior written consent of TA. With that, John, I'll turn the call over to you.

Thanks, Stephen. Good morning to everyone, and thank you for your continuing interest in TA. Resilience, durability, and consistency are the hallmarks of operational excellence, and my 19,000 teammates at Travel Centers of America have demonstrated these attributes once again in the outstanding third quarter results that we reported yesterday. I believe that TA's continued strong performance during what remains a challenging and uncertain environment provides further evidence that solid results like these are sustainable and repeatable moving forward. As our team displayed at the graduation day investor event in New York City, we see a bright future for TA, or we are just beginning to hit our stride with growth and innovation. For the third quarter of 2022, as compared to the prior year quarter, TA produced the following. A 67% improvement in net income to $37 million. A 36% improvement in adjusted EBITDA to $88.6 million. And a 57% increase in adjusted trailing 12-month EBITDA to $320 million versus the prior year period. Once again, healthy top-line growth resulted in significant increases in net income and operating cash flow. It is important to remember that our Q3 2021 improvement over Q3 2020 results was significant, which makes this quarter's results even more impressive against a difficult high-performance comparative period. After now reporting 11 quarters of excellent performance We acknowledge the increasingly challenging comparisons that we face, yet we remain confident that our operational excellence and growth and innovation plans will continue to drive solid multi-year improvements that are both consistent and resilient. I want to clearly emphasize TA's ongoing multi-year financial improvement thus far. In 2019, the last pre-transformation period, TA's adjusted EBITDA was $131 million. In 2020, our new and refocused team generated adjusted EBITDA of $147 million, despite the uncertainty and negative impacts from the COVID pandemic. In 2021, we saw further milestones as TA broke the $200 million mark with $220.2 million of adjusted EBITDA. And now, I'm proud to report on a trailing 12-month basis we have generated $320 million of adjusted EBITDA. These impressive results demonstrate the significant value creation that TA's current leadership team is delivering through operational excellence and resiliency over a sustained and dynamic period of time. Importantly, while fuel margin remained a robust component of this quarter's results, broad strength and innovation can be found throughout our business, frankly overcoming significant inflationary forces that are affecting the broader economy. Within fuel margin, TA's fuel team continues to identify and capitalize on opportunities to not only ensure adequate supply of product in a constrained marketplace, but to improve our dynamic buying processes, ever striving to lower costs on each delivered load, thereby increasing margin. In short, our fuel team has continued to meaningfully improve the supply management process and again, continue to leverage opportunities within a volatile marketplace to drive strong diesel CPG margins. It is important to underscore that while favorable market conditions did continue during the third quarter, our solid results in fuel were due in part to the team capitalizing on that environment. Moving beyond fuel but staying on liquids, we saw ongoing strength from demand for diesel exhaust fluid or DEF. This product has become an important part of TA's business and we remain on track to have depth dispensers on the diesel fuel islands at all TA Petros nationwide by the end of this year. Turning to the commercial division, truck service revenues were robust with substantial growth coming largely from our mobile maintenance business, which involves large repair vehicles and technicians working within the yards of our large fleet customers. This strength drove margin expansion as ongoing inflationary pressures are more than offset by top-line growth. We see truck service as an important differentiator and growth driver for the future of TA, with new initiatives ranging from heavy-duty trailer repair, footprint expansion, new technology, and improving tech retention and efficiency, all designed to harness this unique and differentiated business. Moving to hospitality, while we continue to thoughtfully increase prices to offset inflationary labor and operating cost pressures, those pressures remain a persistent but not new headwind as we move into the fourth quarter. The ongoing increases seen in operating expenses are likely to persist into and through much of 2023 for both hospitality and the broader economy. CA is fortunate that its intrinsically resilient business model combined with excellent execution and much remaining low-hanging fruit that's yet to be harvested should position TA to continue to perform at high levels. Importantly, we do see opportunity in hospitality for our many new initiatives, such as TA's customer loyalty program, improving food operations, merchandising efficiency, and leveraging technology to reduce friction, improve the customer experience, and correspondingly benefit margins. To provide more detail on a few areas of focus, we have announced a partnership with the great Cleveland Clinic, which will designate healthy meal options in our full-service restaurants to improve driver wellness, and we expect this relationship to broaden and grow. We are upgrading some of our full-service restaurants, which are a key differentiator, by bringing on known brands for us to operate and separately for us to lease to. These are just a couple of ways we are carefully working on our various offerings to continue to improve both top and bottom line results as inflation impacts consumer behavior. Beyond the individual businesses, I think it is important to speak to the resiliency of TA's business model itself. As we have discussed before, TA has a unique strength in that certain areas benefit from the same conditions that cause a headwind in other areas of the overall business. For example, while we are seeing the consumer motorist segment impacted by inflation, slowing discretionary spending at the C-stores, these same macroeconomic uncertainties have also created a favorable fuel market environment that allows our team to deliver higher CPG margins. This is just one example of the balanced and resilient TA business model. On the subject of TA's resilience through uncertain times, we expect persistent volatility to remain at least through the end of 2022 and perhaps well into 2023. Drivers such as the recent OPEC supply cut, the war in Ukraine, ongoing supply chain constraints, stubborn inflation, and other macroeconomic concerns are unlikely to resolve in the near term. Of course, elements like inflation are likely to continue to impact consumer behaviors at the gas pump and in the store and adversely impact TA's SG&A. However, we also anticipate favorable diesel margin conditions that we have seen throughout much of the year within which our excellent fuel team will continue to deliver. That said, while we provided an updated long-term fuel CPG target range of 17 to 19 cents at our September investor day, we have not changed our baseline guidance to 15 to 17 cents. Importantly, as noted, we remain optimistic as we enter the fourth quarter that higher than typical fuel margins are likely to persist throughout the remainder of 22 and possibly beyond. Despite this positive backdrop, we are not content to rest on strong market enhanced performance for CPG. We are actively implementing transformational initiatives in fuel, including expanding TA's new small fleet private label card program, and the development of an artificial intelligence platform to support diesel street pricing. We believe these activities are beginning to contribute to relative fuel performance and have the potential to drive non-fuel retail and hospitality sales over time. Moving to growth initiatives in our network expansion plans, we have completed the acquisition of five travel centers and two truck service locations during the first nine months of 2022. Our acquisition pipeline remains robust with several additional opportunities under serious evaluation during the fourth quarter, which position us to add more sites along active corridors to strengthen the TA network's geographic coverage. As we have discussed, our corporate development team underwrites these acquisitions with a target minimum mid-term mid-teen return on investment, and I am happy to report that the first two acquisitions we closed in April are significantly outperforming our pro forma EBITDA return expectations. We are excited to see the dedication and excellence that this team and the field operations team have delivered as seen in such strong financial performance. As described at Investor Day, acquisitions will provide substantial incremental run rate EBITDA and we expect to deploy 75 to 120 million annually as we move towards our long-term three to five-year financial targets. Turning to franchises, since the beginning of 2020, we've entered into agreements covering 56 travel centers. Five of these franchise sites began operations during 2020, two during 2021, and one during the second quarter of 2022. We expect to open the balance of these 48 mostly ground-up travel centers by the fourth quarter of 2024, with an expectation of opening 30 annually in our long-term financial target. We anticipate that TA's franchise expansion will begin to contribute very meaningful incremental EBITDA as we enter 2023 and beyond. As we enter the fourth quarter, we continue to forecast our non-acquisition capital spend in 2022 to be between $175 and $200 million. These projects are focused on growth opportunities and improving the overall customer experience, including significant upgrades at travel centers, expansion of restaurants and food offerings, and further enhancing TA's technology systems infrastructure. Before we begin to wrap up, I would like to remind everyone of our long-term growth strategy and financial targets that we presented to investors at our graduation day event at the NASDAQ in New York City. First, we expect continued operational improvement and new initiative tailwinds, along with an intelligent capital plan to drive ongoing strong organic growth in all areas of our current business, counterbalancing near-term inflationary headwinds within the broader economy. Second, Acquisitions are a core component of our expanded network growth strategy. We are targeting $75 to $120 million of tuck-in acquisitions annually designed to strengthen our geographic footprint and deepen customer relationships while providing solid cash-on-cash returns. Third, franchises are a key focus for TA, and we are targeting 30 to 35 openings annually. This program has been quite successful thus far where independent operators that become franchisees have benefited from the scale of TA through greater purchasing power, higher volume fleet deals, and the far-reaching TA brand recognition. Finally, these three legs of the stool all lead to our three- to five-year long-term EBITDA target range of between the mid-$400s and $500 million. Before I turn things over to Peter, I would like to take a moment to review the transformational journey that our 19,000 teammates embarked on over the past 11 quarters. When we began this journey, the company had no clear mission statement, culture, or vision for the future. We had many talented people that simply were not being utilized to their vast potential. With a thoughtful reimagination of the business and a focus on results and accountability, we leveraged key new hires and promotions from within to implement a plan to set the stage for growth and innovation. Over the past year, we have seen this transformation plan deliver the positive results of resiliency, strength, and operational excellence that define the new TA along with the trailing 12-month EBITDA in excess of $300 million following the prior year where we breached $200 million. The transformation to the new TA culminated in our graduation day investor event where we rang the bell, the closing bell at NASDAQ and delivered a long-term financial framework for our innovation and growth-driven targets. Additionally, during the third quarter, we delivered our first-ever ESG report that highlights the important steps that we have taken thus far at the company to foster inclusion, community, and sustainability, while laying the groundwork for TA's future and the next generation of mobility. Now, as we move forward in the growth and innovation stage towards the longer-term three- to five-year targets that we outlined at Investor Day, I am confident that we have assembled the best team possible to achieve our long-term goals through 2023 and beyond. Finally, and as always, I would like to end with an expression of gratitude to our teammates, guests, customers, analysts, and shareholders. Thank you all for your continuing commitment to TA, and with that, I will hand over the call to Peter Crage, our CFO. Peter?