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?

Thank you, John, and good morning, everyone. As John highlighted, this was yet another excellent quarter for the company. Before I review our performance in more detail, I think it's worth noting that when you consider our significantly improved performance over the past 11 quarters during prolonged periods of uncertainty, we have demonstrated the ability of this durable and resilient business model to deliver strong operating results and cash flow, even as we lap increasingly challenging comparisons. Now, moving on to our results. For the third quarter, we reported net income of $37 million, or $2.49 per share, which improved by $0.97 per share versus the prior year. And this translates to a 67% improvement in net income against what was a very strong comp in 2021. Adjusted EBITDA, which excludes one item in the quarter. increased by $23.4 million, or 36%, to $88.6 million, primarily due to strong diesel CPG margin and non-fuel gross margin, particularly in our truck service business. This strength was partly offset by TAs investing in growth and the impacts of inflation seen in higher labor and operating costs. Our fuel sales volume declined slightly year over year by 3.2 million gallons, or 1.5%, to roughly 583 million gallons, lapping a very difficult comp following several years of strong growth. The mix shows diesel sales up 1% and just over an 11% decrease in gasoline sales volume that likely reflects the consumer motorist segment softening as inflation tightens budgets along with higher prices at the pump. Fuel gross margin increased $26.4 million to $132.4 million, an improvement of just under 25%, and combined margin cents per gallon improved to 22.7 cents, up 4.6 cents, or 25.4% compared to the prior year. As John mentioned, the improved fuel performance was the result of favorable market conditions and continued operational excellence by the Travel Center's fuel team. I will add that while we expect the market to rationalize somewhat in 2023, in October, volatility remained at or above the levels we saw in the third quarter. As we described at the investor event in New York, we have announced a long-term target of 17 to 19 cents for blended fuel gross margin per gallon, which is above our historical shorter-term guidance. And as John mentioned, while we believe that volatility will remain elevated at least through this year due to broader supply concerns and economic uncertainty, our team has made important strides with new initiatives designed to transform the entirety of the fuel purchasing process. We expect that these initiatives will help maintain strong fuel results as we begin to see volatility potentially stabilize in 2023. The improvements we have developed from artificial intelligence in diesel pricing to our small fleet private label card program give us confidence that this segment will offer yet another example of TA's overall durability and resilience throughout any economic cycle. Non-fuel revenues increased by $53.9 million, or 10.5%, in total non-fuel gross margin increased by $34.8 million, or 11.4 percent. Importantly, non-fuel gross margin percent increased by 50 basis points to 60.1 percent due to increased higher margin truck service business and our proactive approach to increasing pricing to counteract higher input costs. Variable costs remain well controlled in truck service relative to the solid revenue increase, resulting in improved profitability. Revenues from store and restaurant, which include both full service and quick service, increased by 3.1% and 9.6%, respectively. Sales growth in this area was offset by ongoing inflationary labor and operating cost pressures. We have been working hard to manage these costs and lessen their impacts. As such, we are making necessary adjustments to help mitigate the pressures near term along with implementing the longer-term improvements John discussed relating to customer loyalty, operations, and technology. Selling, general, and administrative expense for the quarter came in at 6.6% of total fuel gross margin plus non-fuel revenue as we continue to support our growth and efficiency initiatives. As a reminder, we have established a benchmark of costs on a relative basis to the growth in our business and expect annual SG&A to be in the range of six and three quarters to seven and one quarter percent of fuel gross margin plus non-fuel revenue. We were below this range for the third quarter, yet expect to move higher in that range going forward to support our growth initiatives in 2023. We believe these investments in growth now are important to achieving our long-term targets. Turning to our balance sheet for a moment, on September the 30th, we had cash and cash equivalents of $467 million and availability under our revolving credit facility of $179 million for total liquidity of $646 million and $524 million of long-term debt outstanding. We invested $46.1 million in capital expenditures during the quarter and $136 million for the year thus far. We continue to anticipate a cash spend of between $175 and $200 million on CapEx projects in 2022. Although supply chain and inflationary pressures continue to exist, we have been largely successful this year in completing projects on time and at levels at or near our original budgets. In addition to CapEx spend, as John highlighted, we invested $109.5 million total cash consideration to acquire five travel centers and two truck service facilities year to date as of September the 30th. We are in the capital planning phase for 2023 and plan to have commentary on our expectations for next year during our fourth quarter earnings call in February. Lastly, to refresh you on our current thoughts with respect to capital allocation. Given the expectation that a recession may be coming in 2023, we are being prudent regarding the capital that we deploy. We are willing and able to deploy capital on projects that generate returns at or above our hurdle rates without long periods of stabilization and will remain focused on these areas for the remainder of the year and likely into next year as well. We remind everyone that we have multiple levers at our disposal to preserve capital, from modest to more significant, if recessionary forces further develop, some of which we have successfully executed in the past. We are confident that our strong financial position and flexible execution will allow us to deliver the innovation and growth necessary to achieve our long-term financial targets. That concludes our prepared remarks operator. We are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Brian Mayer with B. Reilly Securities. Please go ahead.

Good morning, Jonathan and Peter. Thanks for all those comments. A couple of questions for me. You know, there's a lot of noise out there in the news related to, you know, the country, specifically the Northeast, running out of diesel fuel oil. Not really sure what to make of that and, you know, how it would impact you guys. I mean, I'm sure it would be devastating to the parts of the country where it impacts in general. But can you give us any comments as to what you're hearing or seeing out there related to this?

Sure. And it is making – thanks, Brian, by the way, and good to connect this morning. There is a lot of noise out there. And if you recall, I think it was around earnings call, the last one or the one before, there was similar concerns that were out there. And I think it's maybe a little louder this time. But, you know, in staying very focused with our fuel team, who in turn are, of course, very focused. We're often bragging about our fuel team because they're doing such a great job. And so we're in close, close contact with them. And we have a pretty high degree of confidence that if we go dry anywhere, will be infrequent and short-lived and very sort of focused surgically certain key area or certain specific areas but we do not have broad protracted wide-ranging concerns that could affect you know meaningfully measurably affect volumes we don't on the one hand and on the other hand the same environment back to sort of this resilience we keep you know sort of harping on because it's I think we've seen it now long enough that we really truly believe in it we expect to have relatively higher margins during this period. So I think two things, net-net, I think we're going to be okay, just sort of in whole-dollar margin. And two, we do not expect, again, I'll just repeat it, wide-ranging protracted outages where we go dry. If they happen, they'll be very focused and in very limited areas and for relatively short periods of time. The way we purchase fuel, our contracts, both short- and long-term, give us a level of protection. But anyway, so those are our thoughts. There is a lot out there, and I think the media has really grabbed onto it. But hopefully that gives some further insight into what we think and maybe what will happen.

Okay. Thanks for that. And then, you know, we've been talking about the franchise pipeline for, you know, a couple of quarters, a couple of years now. And I know that the pipeline is, you know, deep and growing. but it doesn't seem like they're actually, like, turning on the light switch maybe as fast as we would have thought. And I think that you mentioned in your prepared comments about, you know, there being a lot of ground-up development related to this. Can you talk a little bit about why the slowness to actually really onboard? Is it signage? Is it IT? Is it, you know, existing relationships that maybe in-place operators who are already open for business might have? I mean... How do we ramp that up faster?

Sure. No, that's a great question. I've been surprised going back, you know, putting my hat on from two years ago, let's say, where we really started pushing on this two and a half, yeah, two, two and a half years ago. I've been surprised at two things. One, how long it would have taken, meaning looking ahead from back then. And part of that is, you know, supply chain challenges where getting stuff, both labor and product materials, has just taken longer. And the other surprise was that we have far more ground-up franchisees than I would have expected back then. And so the combination of much, much heavily weighted toward ground-up, number one, and number two, supply chain and its effects on both labor and materials, which ultimately affect the entire industry. development process has just taken a lot longer. We're very focused on it. We've added some resource to further support franchise in general. The good news about it, and so that's the bad. The good news is by adding some resource, which again, increases some SG&A, of course, that's part of the example of investing in growth. The good news is that much of this is in front of us. And I think you will see during this next year, during 2023, a much lumpier effect of franchise of more opening and greater incremental EBITDA. It has taken longer than I had anticipated, again, for those reasons. Again, the good news is a lot of value right in front of us.

Okay. And then just last for me, on the full-service restaurants, I mean, I know that you, you know, swiftly and meaningfully closed, you know, the vast bulk of those, you know, right when COVID hit, you know, 2Q20 and and then identified that there had been a lot of EBITDA losers in that bunch and were slow to reopen those. Can you give us an update as to what's going on in the full-service restaurant business within TA?

Sure. A few things. One, as you said, restaurants, if you go back to that, mid-year 2020 when covid really hit starting in march and by mid-year restaurants were down something like 90 because they were not they were the one part of the business that was not essential so to your point we responded reacted it wasn't strategic it was reactive but it was the right thing at the time and we shut down most of them uh some did some sort of delivery someone could kind of come to the door and they'd almost do just take out but really it was very limited we reopened roughly 80% of them now, and I feel like we're within roughly the right number. There may be a couple others where we rethink, but generally speaking, again, in the order of magnitude, I think we're at the right place now in terms of number. In terms of how we're executing, we're still – I'll tell you very specifically first. We've added a few IHOPs. We're actually negotiating and addressing the possibility, which will be more than a possibility. It will be a probability of leasing some of them. So some, like our traditional model, we're the operator. And now in others, we will be the landlord. And that will create a nice sort of stable, predictable cash flow from those locations and mitigate risk. And so they'll create some certainty there. And frankly, in some markets, places where there are established, excellent operators who just focus only on that, I think they'll probably be able to do better than we do in general. So you'll see more of that as we get through this quarter and announcements into next year. Again, IHOP and some of us, some where we're operating, some we're leasing. And then you'll see some other brands, again, we've been working on now for some time in a couple of locations, one proprietary company. that we'll be announcing around the corner in at least a couple of locations. And then finally, last but not least, not to skip over, we're pretty focused just on how to continue. And this is a broader comment about the company, sort of continuous process of improvement. So we're continuing to try to find ways, whether leveraging technology or just traditional operation, you know, schedule management tools that we have at our disposal to improve efficiency, stuff like that, that I think over time will continue to improve the efficiency and effectiveness of the full-service restaurant. So that's pretty much the story there.

Okay. Thanks a lot, Jonathan.

Thanks, Brian, as always. Again, if you have a question, please press star, then 1. The next question is from Ari Klein with BMO. Please go ahead.

Thanks, and good morning. Fuel margins have clearly been a significant positive, though it did decline during the quarter. Can you talk about the margin trajectory through 3Q and maybe what October looked like, especially with the noise of diesel shortages that you mentioned increasing?

Sure. So, you know, through the quarter and going back, I mean, this is the stories now, you know, multiple quarters, maybe, you know, three, four quarters old now. And I could be corrected on that by Peter or otherwise. But, you know, we've had atypically high margin as we've emphasized. Yes, there's been favorable market conditions as well as a great, great execution, I would say, and continuing to improve execution under a person who's been elevated up as lead in that department over time now. And so I think we can take some credit for it, but we also have to point to the market. October, I think as Peter mentioned in his remarks, October was very strong. And just keeping it a little higher level and more broadly, the same conditions that have been creating this environment historically through the third quarter have persisted, and we have every reason to think we'll persist, at least for the visible future. And in my mind, that means at least through the fourth quarter and most likely into some part of 2023. Obviously, like anything, as you get farther and farther out, it's harder to have really great visibility, but we have a level of confidence. And we said the same thing in the last quarter, that we gave an outlook that the next quarter, the one that we're reporting, the third, would be, you know, we had a positive outlook on fuel margin, and we're repeating the same thing. And I think even then, last quarter, we said we feel reasonably comfortable in saying the outlook for fuel margin through the year is positive, that it will be higher than typical. And we're repeating that now. We have that same confidence. And it's all the things that we all hear about and see about, whether it's the war in Ukraine, other things that affect fuel supply, those conditions And those uncertainties tend to create a more favorable environment. And we have no reason to think they're going to abruptly change within at least the end of this year. And as I said, I think at least into the beginning of next year. Beyond that, you know, too much time between now and then to really feel confident. But last comment there, I come back to this resilience of the intrinsic resilience of this business model. I know we use this word a lot on this earnings call, but we've come to really believe in it where at certain times in our past, since at least we've been here, Peter and I, we had shortfalls in an area or headwinds in an area at the same time as tailwinds and upside in other areas. Whatever that means, I still feel really confident that this team, blended with folks who have been here a long time, with new folks, will continue to outperform whatever we see, whether it's COVID and other things like that, a supply chain and then tight fuel supply. And who knows what the world will bring? But, boy, in the three years we've been here, two and a half years, we've really seen about everything. And our EBITDA is breaking the trailing 12 well into the 300s. Last year, this time, it was looking like trailing 12 was well into the 200s. And the year before that, it was in the low 100s. So I feel like this team is going to execute no matter what comes along in the next couple of quarters, let's just say.

And then can you reconcile, I guess, the 15 to 17 cent baseline comment versus the longer term 17 to 19 cents? Is that where you think? you know, in the near-term margins are headed once we exit the volatility, I suppose, sometime in 2023, that it kind of goes to 15 to 17 cents before, you know, increasing over the longer term?

So, you know, we increased by a penny, I think, a quarter, maybe two quarters ago from 14 to 16, 15 to 17. We really wanted to get our skis under ourselves. And we've been here now three years. And we, you know, in about year two and a half, we upped then maybe two quarters back. On the one hand. On the other bookend, we're looking ahead going, okay, we know the team is executing at a higher level. So at the bookend, meaning the forward-looking target, not guidance, but target, meaning within this three to five, we have a level of confidence that we're going to move up to the 17 to 19. So the question is, where in the middle do we sort of put a stake in the ground and give near-term guidance that's higher? We're still sort of comfortable coming back to this Upped but only by the penny 15 to 17 but giving sort of the outlook so we have this guidance and hopefully this isn't confusing but we have this guidance that guidance to me is You know, we're trying to make almost almost a commitment, right? It's not quite literally that but that's how I psychologically think about it and that we really really want to have enough runway behind before we make those very high sort of levels of Again, I'll put in quotes commitment to change the short-term guidance. But at the same time, as we're saying here on this call, and we said last call, that we expect to have atypically higher margin in the nearer term. So we're giving, we're sort of stuck on our guidance. We're giving some outlook, short-term outlook on top of that. And for now, looking farther ahead and saying we're going to get to this other place. At some point, we'll put a stake in the ground and move that baseline up. We're not quite there yet, but I feel comfortable in signaling these outlooks above a baseline in the context of a broader long-term target for now. And hopefully that gives enough to sort of understand and to make some assumptions. And at some point, we'll move the needle, I expect.

Got it. And then just on the fuel volume side, is that something you would anticipate slowing and or declining with macro pressures increasing? Or can what you were doing with fleet sales offset, you know, any headwinds you might see there?

That's a great question. I mean, I think right now we feel reasonably confident that we will stay in a relatively stable place in terms of volumes. Will that go up or down a little bit over the near to midterm? That's very possible. You know, and looking farther ahead, I mean, if recessionary forces, inflation forces, you know, inflation 8%, 9% recession, it protracts through some long period of time, we may very well see a decline in volumes. That said, we do have these tailwinds that I'm really excited about. And I'm repeating, I know the AI for street diesel, which attacks the sort of highest part of the customer segmentation, and then the private label small fleet program, which is really getting some tailwind, getting some momentum there. The rate of growth of that, which we haven't reported volumes yet for that new program. I expect probably as we get into early next year, we will. But the rate of growth there month over month, the last couple months, has been 100%. So that is growing very rapidly. And so it will be an offset. How much of an offset? Will it be a complete offset so it will be a net positive versus a negative? It's impossible to say. There's, again, just recessionary, inflationary forces, how protracted they are measured against these new programs. The good news for us is that we have these programs and we are unique in that we are able to find very significant, substantial, meaningful new opportunities like those that are still the value of which is still in front of us. And as we've mentioned, we alluded to in the comments, You know, I expect AI and machine learning to broaden into other parts of our business on the fuel side initially and probably other places eventually. We may very well have an AI in-house resource or resources eventually, not just use leveraging outside companies. Because I really do believe the future of most business, that will just be a department or a set of resources. It will be a core and therefore inside function. So anyway, those are some thoughts. Yeah, there are some pressures. But on the other hand, we have some initiatives, and I do – I'm very confident there will be at least an offset. Will it be a complete offset? It's impossible to say at this point.

Got it. Thank you for all the color.

Thanks, Ari. Thanks for the questions and your support.

The next question is from Paul LeJouze with City Research. Please go ahead.

Hey, guys. This is Brandon Cheatham on for Paul. Hope you all are doing well. Can we go back to the CPG question and just talk a little bit about how fuel margins progressed through the quarter? I think last we talked, you know, CPG was at 26 cents for July. So just kind of wondering how that exited, and then can you talk about where that is, you know, today, and maybe if we could frame a little bit more expectations for fourth quarter? Sure.

Well, you know, we ended the quarter reasonably well. I mean, significantly higher than typical. As Peter said, and I'll hand it to Peter in a second, October was very strong. And, you know, reading the tea leaves a little bit with what's out there, frankly, with making the news is almost, you know, even more exaggerated what the news is in terms of supply constraints and the volatility and uncertainty that comes with that. And as we've articulated how some of that in the short run is beneficial to us. So, Peter, anything to add in terms of the trajectory within the period? Sure, sure.

You know, we've been, you know, knowingly and more transparent with what we see in the first month of the quarter when we report, and that's always dangerous in a volatile environment. No question, in July we saw 26, we came in at 22.7, so clearly it softened during the remaining two months. October we're seeing a similar situation to what we saw in July, but, you know, I provide the caveat that, yes, we want to be transparent here, but you will see in a volatile environment you could see, obviously, a decline later in the quarter. So what we said in July, what we say in October may ultimately be what we see for the full quarter, but I provide that caveat.

Got it. So October has, you know, increased relative to September just to kind of put a bow on that statement.

Yeah, I think it's a bit of a carbon copy of what we saw in the third quarter. But, again, I'm stating it again for impact that the quarter, there's volatility that exists, and we saw that in the third quarter. We could see that in the fourth quarter as well. But we're seeing a bit of a carbon copy.

Got it. And anything to share on why gasoline volumes are down as much as they are, is that really just macro drivers or is there anything else that, you know, might be impacting that segment traffic?

So, you know, we never fully, as we just repeated in the beginning, we never fully recovered to pre-COVID on the volumes. A, and B, you know, I do believe much, if not most, if not approaching all of that is oriented around people being a little motorist, the motorist side of our business being a little more austere and careful with what they do and how much time they spend in their car. But with that said, I definitely don't want to leave anybody with the impression otherwise we're constantly looking for opportunities for improvement. And frankly, the first places we always look and the areas we put the most energy in are the places of softness. And from the first day we got here till now, there's always been softness somewhere. There's always been something broken. There's always been some opportunity to improve. And it's a psychological, it's an expression of our psychology here. We're constantly looking. I say to these guys, it's bad news first. What are the things that are soft? How do we fix those things? We're continuing to look for ways to improve, and this is an obvious area of focus. I mean, when we have volumes down, it's not good enough for me or us just to say, well, it's just motorists, or, well, it's never recovered to pre-COVID. Those things are, you know, largely true, the motorist comment, and maybe completely true. You know, we don't know for sure. I don't know mathematically, I should say, but we are very focused on it as an area of potential significant upside.

Got it. If we could just switch to the non-fuel side, you know, as you continue to pull levers there, you know, what are you the most excited about? You know, where do you think the biggest opportunity is over the next 12 months to add value there?

So, you know, there's two parts to that story. There's probably more, but, I mean, the two that first come to mind. On the truck service side, the team is just performing at such a high level, And it is such a unique differentiator. And with some of our biggest customers that are just helping us grow there very significantly, I'm just really excited, sort of broad brush generally over there. A little more specifically, we're adding some both CapEx and OpEx, again, back to investing in growth, you know, vehicles to further expand that business. And in particular, our mobile maintenance business that I mentioned in my comments, that's business where We literally send a big truck and a tech or two behind the gate into the yard of our customers and perform services there. That's a business we're expanding. That's a business that historically was tethered to a location. So if we had a travel center, we would dispatch a truck like the one I described behind the gate in the yard. We realize that business, while we'll continue to expand that way, we can have further reach by growing that business in markets where we may not, or corridors where we may not have a travel center, but there's demand, customer demand. And so that's a way to expand. And frankly, it's a capital light and operational expense light way of growing that business. So we're very focused on that. And there are a lot of other things in truck service. Those are just a couple. Separately on the hospitality side, I'm convinced, and it's a different reason, but I'm convinced there's opportunity. And when I say that, I lump in, even though it's not really technically hospitality, but it's really more the motorist side of the business. It's the fuel, the gasoline comments we spoke of a minute ago. I think there's opportunity there that relates to C-Store and restaurant and food performance. And so some of the investment we're making in the full-service restaurants, you know, these self-checkout and technologies that reduce the friction at the point of sale, some of the IT investments we're making that support that, There's a whole range of things on the retail side of the business that collectively I'm very excited about. So I know that's a broad answer. That's truck service. That's retail. And I guess this would be repeating, but I really am excited about the relative impact that the fuel stuff we talked of before, the private label card and separately AI for street diesel will have. So I don't have any one thing. There's just so much happening here that's really exciting. that I guess they're all sort of in somewhat equal parts get me really excited of what we can do into next year.

Got it. Appreciate it. And one more, if I can. Sure. Can you talk about, you know, the cash balance? You have debt that is, you know, able to be paid down at the end of this year. I know you wanted to wait and see kind of what the acquisition pipeline looked like. So just any update there, you know, do you think you'll have a pretty good handle on what that, pipeline might look like, you know, any plans for, you know, paying down any portion of that debt and plans for the cash balance.

Thanks. Sure. So thanks. Thanks for that also, Paul. So as we've been saying for probably a year now or thereabouts, we've loosely indexed to the end of this year as a window within which we really wanted to prove out how acquisitive we could be, and we're starting to do that. You know, two, we can, you know, we have the ability to refinance if we choose to with more flexibility and, you know, less fees, economic impact of doing so, et cetera, also indexed to the end of this year. So right now we're in this window of, you know, budgeting for next year, preparing plans for next year. And so, you know, a part of that dialogue, of course, will be, what do we do with our cash balance sheet or what do we do with our cash balance and how can we most effectively put it to use? So we haven't made any, we certainly haven't made any firm decisions, but it is part of our very active, you know, and real-time dialogue right now. Peter, what would you add to that?

I think the headline is we have the maximum flexibility on the allocation of the capital, to John's point. And And having that flexibility, particularly given, you know, the fact that a recession may come along or obviously the pipeline is strong. You can see we invested $110 million in acquisitions that will deliver really well next year in the light of maybe moderating CPG. So we're thinking about the entire business. But that flexibility in our capital allocation for me is very important.

And, Paul, one thing to add, while it goes beyond capital, although a lot of our capital plan, of course, is built around growth, you know, on our SG&A, Our SG&A has grown, as, of course, we've reported. Roughly two-thirds of that, roughly two-thirds of that, not with mathematical precision, but order of magnitude, the SG&A increase, roughly two-thirds, relates directly or indirectly to growth and investing in growth. Roughly a third, you know, five, five-and-a-half percent or so, is growth. relates to sort of inflationary costs. So it's, I think, important for folks to understand that we're really focused on creating long-term value. We're genuinely committed to investing in growth. We had certainly cut back on growth plans if we wanted to or thought that was best, but that's not best for the company in the long term. And so while you see what I would put in quotes an artificially high SG&A growth, That's directly or indirectly related, most of it, two-thirds of it, to investing in things that we'll only see later in time, not in the immediate, immediate, to create value. And there's a long list of things that we're doing like that to invest in growth. So we're very committed to that on the capital side, but also on the SG&A side. And I think it's worth saying that and everybody hearing that.

Got it. I appreciate the call, Aaron. Thanks, guys, and good luck.

Thanks, Paul. Thank you. The next question is from John Lawrence with Benchmark. Please go ahead.

Great, thanks. Good morning, guys. Hey, John. John, you spoke a lot about the fuel business, and you gave a lot of those sort of initiatives at Investor Day. I just want to walk down through some of those. When you look at the margins, And then you look at availability that you have. You talked about various things, as you have on the call, the card, the IT projects, the AI. Then the colonial pipeline is one that really intrigues me a little bit. Can you talk about which one of those are the most, and I assume these returns you're talking about 15% to 20% on all projects, basically, that fits that, but can you talk about which one of these affects, I guess the pipeline is more about availability, but does that help margin as well?

Thanks, John, and welcome, by the way. Buying on the pipeline is something we've done, but in a very limited way. Our direct competitors do that. Most of the industry buys from the pipeline in addition to the way we sort of have described that we purchase fuel. And it is something we're testing in a somewhat modestly, like everything, we beta stuff before we go headfirst into things, and we're constantly testing things. And that's an area that we're in the process of testing, kind of early innings of testing. So it's too early for me to really have, frankly, my own expectation of what it could do, other than to say, I am excited and intrigued that it is something that could be very significant for us. And I'm always asking myself, well, there's got to be a reason others are doing it and have done it for so long, and why aren't we doing it? It's a very simple curiosity. So it's too early to really say, but others do very well by buying directly from the pipeline. Separately, on AI for street diesel, once again, that's Using the machine to drive street pricing, that's pricing that small fleets or independent truckers who are not part of a big discounting program, even a small fleet discounting program, just pull up and pay the sign rate. And it's the process by which we price. And using the machine, in quotes, to – and a machine that learns and gets smarter as it goes, machines that support – Facebook and all these other very complex algorithms that when you go shopping and you look for an odd item and for the next three weeks all you see popping up on your screen is that odd item, the amount of mathematical equations that need to be calculated to personalize that to the world is unbelievably complex for us. It's fairly simple but still more difficult than I think the human mind can just handle. And so I'm really excited that the AI for street diesel pricing we'll find a much more optimized place. And we're in the process of rolling that out across the network. Our early beta testing that was done over a few months was very, very significant. If you were to roll it out across the network, Very meaningful incremental EBITDA, very noticeable, measurable. So I'm excited for that one. And the private label card, as I mentioned, by definition, we're serving small fleets. So these are, again, literally by definition, you don't get huge volumes as you sell a fleet, your private label card. But we very rapidly, we are very rapidly growing that. and I think we're going to start to see meaningful, measurable impact as we get into next year. So it's really hard for me to parse out. We certainly make assumptions, but I wouldn't want to set an expectation outwardly until we got farther along in all of them. But I believe very, very strongly that these are things, particularly the latter two, colonial pipelines a little too early for me to have formed a very strong belief, but the other two I'm very confident are going to improve relative performance.

Great. Thanks for that detail. And secondly... The mobile maintenance business, is it by contract? Is it by just appointment? Is it a long sales cycle like these fleets are looking at that business maybe once a year? Or is it more as needed?

Again, great question. For the most part, if not exclusively, it's by contract. These are vehicles, these big Ford F-550s, it's like a shop on wheels, that we take a very heavy-duty vehicle and then outfit the back of it literally with just about a shop, not a complete shop, but a shop on wheels. And that, in many cases, those vehicles will exist most of the time in the yard. And so it's by contract, and they're going around doing regular maintenance services, and then as needed, bigger services than that. So that's what it is. And it's a very, I would say, sticky, in a positive way, business for our brand. Because once the vehicle's there and creating that convenience, boy, is it needed. And the more it's there, the more it seems to be needed. And so We're really, really growing this with a lot of focus. And I didn't mention earlier, but somewhat similarly, our trailer repair business is another area where, you know, when we say repair, usually you think of the tractor, the front of the truck, where the engine is, et cetera. But we've gotten into this last 18 months or so, two years, trailer repair that's also growing very significantly that we're also investing in as well. And two very unique parts of that business, that not only are differentiated and unique but are growing very well and that also create kind of a stickiness to the broader relationships that we create with these large fleets. Great. Thanks for that detail. Good luck.

Thanks, John. Appreciate the support and your being here. This concludes our question and answer session. I would like to turn the conference back over to John Perchick for any closing remarks.

Again, thank you for your interest in TA and your attention this morning.

Have a great day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.