Q1 2020 Earnings Call

Good morning, and welcome to travel.

First quarter 2020, <unk> financial results conference call all participants will be in listen only mode should you need assistance. They said no conference specialist I pressed into Starkey followed by zero.

After today's presentation, there will be an opportunity to ask questions.

Ask a question. They press Star then one on your touched down south.

Please note. This event is being recorded I would now like to turn the conference over to Kristin Brown director.

Please go ahead.

Thank you good morning, everyone.

We will begin today's conference call with remarks, and taste Chief Executive Officer, John <unk>, followed by Chief Financial Officer, Peter Crage, President Barry Richards for our analysts today.

Today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act 1995, and federal Securities laws.

These forward looking statements are based on <unk> present beliefs and expectations as of today, They said 2020.

Forward looking statements when they're implications are not guaranteed to occur and they may not occur.

Yeah undertakes no obligation to revise or public <unk> publicly released any revision to the forward looking statements made today other than as required by law.

Actual results may differ materially from those implied are 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 Exchange Commission that are available free of charge at the Fccs website or by referring to the Investor Relations section.

<unk> website.

Investors are cautioned not to place undue reliance upon any forward looking statements.

During this call will we we will be discussing non-GAAP financial measures, including adjusted EBITDA and adjusted fuel gross margin. The reconciliation of these non-GAAP measures. The most comparable GAAP amounts are available in our press release that can be found on our website.

The financial and operating measures implied and or stated on today's call as well as any other qualitative comments regarding performance.

Should be assumed to be in regard to the first quarter 2020 as compared to the first quarter of 29, <unk> unless otherwise noted.

Finally, I would like to remind you that recording and transmission of today's conference calls prohibited without the prior written consent of Teekay and with that John I'll turn the call over to you.

Thanks, Chris and good morning, everyone and thank you for joining us thank for your interest in T.J.

A little while Peter will provide detail on the first quarter financial results. However, I'd like to begin by outlining three primary factors that impact the first quarter.

As wallet share a strategic basket is taking place.

First cobot 19 adversely affected March gasoline volumes and the non fuel business significantly.

Resulting in us Furloughing approximately 3000 employees.

Primarily related to the full service restaurants.

Second the 2019 polar vortex created extraordinarily severe winter weather in January and February 29 team and and as a result truck service relatively underperformed in the same period for 2020.

Third severe rapid at abrupt downward fuel pricing benefited <unk> fuel margins for the core.

As to the strategic it that I had mentioned I'm very excited to announce that over the past few days, we have undertaken the first steps and the execution of a comprehensive reorganization and transition plan.

We're currently Onboarding, several new senior Vice presidents in the areas of a new corporate development team.

New head of hospitality and they knew Chief information Officer.

Well I'm incredibly empathetic for those affected by our reductions in force I'm excited to been this begin this historical event and see a 47 year history.

The Cobot 19 pandemic has had a significant impact on our company.

As we noted on our press release in late March GE business has been designated as and Central service by many public authorities, which has allowed <unk> to continue operating at the serve an important role in supporting the nation supply chain.

As a result of the initial increase in demand for certain products early on in the cold in 19 pandemic.

This isn't helpful stocked up on T.A. experienced increased diesel fuel volume.

During the first quarter over the prior year, while demand for gasoline decline due to stay in place orders and other reductions that activity.

[laughter].

Additionally, demand for certain if she is nonfuel businesses have been impacted in varying degrees.

The full service restaurants declined the most significantly during the second half of March due to social differing thing.

Other government mandated measures.

This led to the difficult decision in mid April to temporarily shut most of our full service restaurants.

On furlough approximately 3000 people.

Given the lack of clarity on the depth and duration of this crisis. We have also agreed with by up to delay for a year or plan to convert some of our full service restaurants, our travel center Psi ops.

We have also significantly reduce planned capital expenditures and 2020 to focus on maintenance and other essential items.

Comparatively speaking the first two months of 29 team enjoyed particularly positive performance, especially in certain businesses, including truck service due to increased breakdowns, resulting from extreme weather. Therefore, the prior year index to the first two months of 2020 was elevated make.

The 2020 truck repair business show, particularly poor performance as compared to the prior year.

During precipitous drops in fuel pricing CA tends to benefit with higher than normal margins. The first quarter provided extraordinarily abrupt reductions in pricing and and as a result, T.H. fuel margins were high which offset the impact of the pandemic on fuel volumes.

Last Friday, we announced that we have taken the first formal steps in the execution of our turn around and reorganization.

With a focus on Rightsizing historical S. DNA growth.

Which is significantly outpaced revenue growth for nearly a decade.

As I mentioned on February's call T.A.S.G.N., a has grown at an unsustainable annual growth rate of 7% since 2012.

Well not fuel cell to growing at a 5% CAGR.

And overall fuel volumes declined by almost 3%.

By enhancing our overall leadership team with new key leaders and identifying operational efficiencies, we intend to create a better running organization with improved visibility and accountability as well as improved financial performance.

Reorganization plan includes significant leadership changes to complement our new Chief Financial Officer, who joined several months ago as well as my arrival at the end of 29 team.

We were adding two senior vice presidents, one friend newly created hospitality department under which the areas of restaurants gaming and convenient stores will be consolidated.

As well as in information technology.

These leaders brings decades of valuable experience as well as initiative critical skills and new visions that approaches to these crucial but underperforming areas of tea business.

In addition, as part of its reorganization plan.

He is reducing its corporate head count by a total of approximately 130.

And eliminating certain positions.

On an annualized run rate basis. The S.G.N. a changes are expected to result in a net annual recurring savings of approximately 13.1 billion.

We've also created a corporate development department under the leadership of a third additional new senior Vice President.

Focused on driving our reorganizational initiatives.

Among these initiatives is the creation of a central procurement department to consolidate purchasing.

Dr. economies of scale pricing.

Improve standardization.

And to apply professional negotiating skills to the company's procurement activities.

Our search for an SVP of procurement is underway.

The new leader of the corporate development group debt is King has begun to review along comprehensive list of initiatives.

He is prioritizing based on size of opportunity and organizational time and cost to realize.

By way of example, these initiatives include cost savings and increased revenues, including merchandising and the convenience stores over the road delivery truck repair training in staffing and I T systems among many others.

While there is always difficult on a personal level to undertake reductions in force.

There's a level of anticipation and excitement over the opportunity to drive meaningful change in such an established historic large and complex organization like T. A.

I believe we now have the team in place to take the company forward.

Although it will take time for the initiatives to be fully realized and the cobot situation is likely to impact the implementation of certain initiatives. However to be clear. These changes, we announced Friday have nothing to do with a current health and economic crisis.

I'd have everything to do with executing our turnaround strategy and driving tall toward long term shareholder value.

By focusing on the message and ways to improve the for National health and function of the organization, there's a new day for T.J.

Turning to our first quarter operating performance, our overall fuel sales volume increased by 16.9 million gallons for 3.6%.

In addition to increase trucking activity during the last two weeks of March the implications of the Koeppen 19 pandemic began to be widely understood.

We believe these increases were also driven by our ultra one customer loyalty program, which was in introduce early last year as well as business one from fleets by our commercial sales team and improved market conditions. During the first two and a half months to 20 Twond.

We have also change some aspects of our approach to fuel pricing and purchasing.

Which seems to have provided some benefit.

[noise] within truck service year over year performance was significantly off.

As mentioned this was partly due to unusually strong 2019 January and February resulting from the polar vortex, that's beneficial effect on the repair business.

And partly due to continuing challenges relating to tech attrition and overall execution.

This is one of the very top focuses of our reorganization and is the first priority for our President Barry Richards I'm confident we will be successful in turning around the hallmark part of our overall business.

Newer trucks on the road do generate strong demand for diesel exhaust fluid or death.

It continues to benefit our store division revenue.

We expect the demand for Jeff to continue growing as more pre 2011 model. Your trucks are retired each year.

Reasonable performance for Chris from our quick service restaurants with more than offset by the underperformance of our full service restaurants, which were impacted impacted by government mandated temporary closures and then as a result experienced sharp revenue declines during the second half of March.

Overall rep restaurant revenues decreased by 5.1% or $5 million versus the prior year quarter.

Finally in terms of our network expansion, we assigned 18, new franchise agreements under one of T is travel center brands since the beginning of 2019.

For began operations during 19.

I have opened year to date.

And we anticipate the additional 10 locations will open by the end of the first quarter of 2021.

In addition, we are currently negotiating franchise agreements for an additional 13 travel centers and are engaged in later stage the discussion and negotiation with the operators of another six locations.

With approximately 83 other sites in various stages of the application and diligence process.

To conclude this has been an unusual quarter between same period prior year anomalies and the cobot 19 crisis.

However, I could not be more excited to have our team in place and begin execution of a wide range and long list of improvement initiatives focused on organizational efficiency and adaptability.

Creating a financially centric and disciplined culture.

And implementing strip stringent cost controls.

This brings on an entirely new day for T.A.

I would also like to thank our employees for their hard work and dedication.

And all the professional drivers and fleets for allowing us to serve you asked me navigate through this unprecedented time together.

And with that I will hand, the call over to Peter to discuss this quarter's financial results.

Thank you John and good morning, everyone.

Oh for the first quarter, we reported a net loss of $18.5 million or $2.23 per share.

Excluding several onetime items, we reported an adjusted net loss a $15 million compared to an adjusted net loss a $14.6 million in the prior year.

We reported adjusted EBITDA of $10.3 million for the quarter, a decline of approximately $1 million versus the prior year.

The decrease in adjusted EBITDA was primarily due to.

<unk> decrease in Nonfuel gross margin.

And increase in site level operating expenses, partially offset.

By an increase in fuel gross margin and lower real estate rent expense.

Fuel gross margin increased by $7.2 million or 9.6%, that's compared to the prior year.

Excluding the 3.5 million dollar benefit from the federal biodiesel blenders tax credit in the 2021st quarter under the $2.8 million onetime benefit due to the reversal of loyalty awards recognized in connection with.

Introducing a revised customer loyalty program in the prior year first quarter.

Fuel gross margin increased by $6.5 million or 9.1% as compared to that prior year.

The increase in adjusted fuel gross margin was due to a six 3.6% increase in fuel sales volume and a more favorable purchasing environments primarily in March of this year.

Yes.

Nonfuel revenues decreased by $15.9 million or 3.6%, primarily as a result of a decrease in revenue at the company's Standalone and full service restaurants.

Driven by government mandated temporary closures amid the cobot 19 pandemic.

As well as strong prior year first quarter for truck service and store in retail services as a result on the extreme cold weather relative to the mild weather and the 2021st quarter.

These decreases were partially offset by an increase in diesel exhaust fluid revenue as a result at a higher number of newer trucks on the road compared to the prior year as well as the positive impact of our marketing initiatives on the performance of our quick service on the performance of our quick service restaurants.

Nonfuel gross margin decreased by $9.3 million for 3.4% due to the decrease in Nonfuel revenues, partially offset by a 10 basis point increase in Nonfuel gross margin to 61.9%.

Site level operating expenses increased $3.8 million for 1.7%.

And site level operating expense as a percentage of Nonfuel revenues was 55.7% as compared to 52.8% for the prior year.

This increase primarily reflects higher labor costs as a result of new positions created from the realignment T. A's regional in field management structure during the prior year fourth quarter.

An increase in bonuses to field employees, who continue to work during the cobot 19 pandemic.

An increase in medical and workers compensation claims expense and general liability claims expense.

These increases were partially offset by decreases in non labor expenses, including maintenance and environmental expense and inventory shrink.

That's true DNA expense for the first quarter was $37.2 million roughly flat with the prior year.

Decreases in legal fees and marketing as well as reduced head count as a result of the realignment of cheese regional and field management in late 2019.

We're more than offset by $1.7 million of expenses related to executive separation and retirement agreements.

And executive recruitment fees recognized in the first quarter of this year.

Real estate rent expense decreased by $2.8 million for 4.3%.

Primarily due to our purchase of 20 travel centers from SDC in January of 2019.

As previously disclosed this reduced the annual minimum rent, we pay to SBC by $43.1 million.

Given our current leasing arrangements, we continue to expect a real estate rent expense to run at a quarterly rate of approximately $64 million.

Depreciation and amortization expense increased by $3.8 million or 15.4%.

Primarily due to an asset write off $5.2 million related to an investment in a system for truck service deemed no longer viable.

Turning to our liquidity and balance sheet for a moment at March 31st our cash balance was $20.3 million.

We have no amounts outstanding on our 200 million dollar credit facility as of April Thirtyth 2020, and we have no near term debt maturities.

We have collected $32.1 million in cash refunds related to the federal biodiesel blenders tax credit.

Expect to collect the remaining $38.1 million.

By the fourth quarter of this year.

These cash refunds will be used to fund 2020 initiatives that would've otherwise been finance, let the credit facility.

As of March 31st 2020, we own 50 travel centers.

<unk> Standalone restaurants, and a standalone truck service facility there were unencumbered by debt.

In February we closed on a $16.6 million secured financing of a t. a travel center located in West Greenwich, Rhode Island.

This represented a 66% loan to value based on an appraised value of $25 million.

The loan has a 10 year term with a fixed rate of 3.85% for five years and we'll then be set for the final five years based on the five year FHLB rate plus 198 basis points.

During the quarter, we invested $16.6 million and capital expenditures.

We did not sell any improvements to SBC during the quarter.

We have also revised or 2020 capital investment plan to be approximately $62 million down from $118.9 million previously.

As we have deferred all non essential projects to 2021 in order to preserve capital and maintain our financial flexibility amid the ongoing cobot 19 pandemic.

We also expect to incur one time costs of approximately $4.2 million associated with the reorganization plan John discussed.

These costs consist primarily of severance outplacement services stock based compensation expense associated with accelerated vesting of previously granted stock awards for certain employees and fees for the recruitment of certain executive positions.

T a recognized $404000 of executive recruitment fees during the first quarter and expects to recognize the remainder of these costs during the second quarter of this year.

That concludes our prepared remarks, operator, and we're now ready to take questions.

Thank you well now begin the question answer session asked the question you May say Star then one on your Touchtone phone.

When you think speakerphone, please pick up your handset before passing the key.

Hey, withdraw your question. Please press Star then too.

First question say comes from Brian There with B. Riley Fcr leap, though.

Good morning, guys or hope you're doing well in this difficult time.

A couple of questions from me on that for you or a plan and the subsequent layoffs, particularly on the corporate side can you drill down a little bit as to what type of positions or what departments were affected with those layoffs.

Thanks, Brian, It's John and I hope, you're well as well through this this Ah this crisis.

The layoffs and at corporate as a significant part of the plan.

Our really throughout the organization.

We've done our best to two attempts inside for Scott here really almost since day, one to try to evaluate our people process and technology and you know initially it was just me as a new fresh faced from outside and then Peter and you know we booked as best in hard as we could throughout the organization and attempted to.

Find places where.

Supporting they if they do the core functions of what we do with an organization.

You know, what how or how should the company be organized to support those you know its core functions and that was the big sort of guiding principle and we look throughout the organization and I I'm not sure. There was one department that was on affected and so we found opportunities consult to consume.

The holiday roles to move functions from one area to another to consolidate functions and so.

The the head count reduction we wanted to make sure. We did in one fell swoop. So we didnt signal to the organization Hey go look for another job and that's what we undertook a last week.

Hereafter, we will be consolidating and moving people. That's still in you know that's still happening we don't anticipate that wall.

Result in any further reductions, but there is continuing consolidation of.

Bits and pieces of the company and a few critical areas I'm happy to explore that that are still being undertaken really last Thursday was the first real step up until then was really planning and preparation. These are now the first two or three steps I guess less than a week later a few days later that we're beginning to start March forward under this.

New clad.

Okay, and when we think about the 13 million in savings in SGN day.

How quickly does that can't get I mean, with <unk> with a lot of layoffs at one would suspect maybe kicks in sooner than later of course backing out the the 4 million in charges.

I mean is that it two key new 20, and all that really your outlook for 2021.

Sure. So so first of all.

That is the full year run rate right. So here. We are you know into May. So you know us third almost 40% of the year is behind us so.

The 13, one is the run rates are first then discount off of that or it's just a partial year that we have in front of us and then Furthermore, there are severance and other kinds of Reorganizational expenses that really primarily due primarily to severance and things related that will impact us for some period of time here, perhaps why pause or Peter can piggyback.

I need to get your clear is that what the run rate effect should be happening, but it's offset <unk> effectively immediately but it's offset by these near term severance obligations to go and related Secondly theater sure Hi, Brian Peter Crage, Yeah, 13, one obviously at the run rate, we're expecting a EUR estimate is.

8.6 million.

Savings from this reorganization in 2020.

Back off the for two and real work so in effect of approximately four four on EBITDA.

Okay, and then shifting gears, a little bit and made maybe Peter will stick with you for a second here yeah that was an impressive property financing you guys did happen was granted <unk> is there an opportunity that you might be exploring did you more of those you know kind of a sub 4%.

Interest rate and retired the score a component of your 8% floods baby bonds.

Obviously the out there are opportunities there, where we're taking a look as you might expect given you have in the pandemic and giving focus on liquidity one of the first things like jumped into when I got here and look at all all these options as a clearly options say no. We called out the 50 properties that we are that we own outright and our unencumbered so where we're looking at a number of saw altered.

And it has and that could very well be one of them.

And maybe Peter this might still be for you on that $5 million write off that you guys reference for some trucks servicing initiative can you give us a little more detail what that was [noise].

Yes, I understand a truck service program, Oh, believing they have been off shelf, but but ultimately became a b spoke.

Work Order works work order program for the truck service group was it was initiated I believe product. So few several years ago. A couple three years back it was to determine that at that buttons, having challenges and difficulties and although the team I think tried to focus on it over the last year or two it was ultimately concluded that Oh. This.

Work Order program Chuck Service program was just wasn't viable any longer. So we took the rest of the charge a in a in the first quarter above this year. So it's a it's completely a completely up a written off.

And then when we think about the full service business, maybe shifting back to Jonathan or possibly even Barry.

Are you guys getting indications from the states that are reopening that you might be able but to reopen those restaurants in.

Yeah, I'll I'll start Brian and thanks for the question and I'll, probably aspire to fill and behind me, we have already undertaken rolling some locations on right now and we're doing it in a very sort of freedom.

Self disciplined way so.

Where we are opened up in certain places in Georgia. As an example, we're opening with limited hours with a much more I'll call. It disciplined menu our offerings I think it some of our restaurants are in the 767.

68 item range that inefficient. So we're opening on a more like a 25 27 item basis.

And in general, we intend and already have begun rolling on some of these but in a much more disciplined way that quite frankly, I think in some you know unexpected way. This this pandemic does give us an opportunity to look really hard at how our full service restaurants operated in the past separate and parallel from.

The move toward and with <unk>. We also mentioned in the release at our in our discussion earlier. This gives us an opportunity to explore ways to get to become more efficient on a full service restaurants side, but with that buried maybe if you'd like to chime in behind me that'd be great.

Yeah, Hi, Brian how are you [laughter] doing well thanks.

Listen Hum.

So yeah I think the theme of this is limited hours limited menus and limited.

Service so [laughter].

Because of the restrictions that are still in place I don't think any other states that have allowed us to reopen.

Allow us to.

Have 100% occupancy in summary, lowest 25% [laughter] so it gets.

It gets real difficult to be effective. So those are some of the things were monitoring when we decide to reopen a restaurant.

But as John said, if if there was driver demand out there.

We're opening up a limited menu and it it's gonna take fewer people to operate and it's going to be hours will be reduced.

I would also point out that the.

So a bar and buffet features.

Wont be coming back or at least for this initial opening in you know that landscape could be changed forever just just given.

Public reaction, so what kind of have to wait and see you but.

Those are the plans were keeping track of what the Governor's allow and then sometimes after that.

[noise] municipalities will chime in with with tougher restrictions or you know I know the Governor said it was okay to open but you're going to have to wait for a while I'm be certain services. So.

It's very complex and we monitor it hour by hour.

And and.

Try to try to stay ahead of it and be ready to reopened as the market works.

And just want to last short ones for me. The I hop delay is there any financial repercussions or cost associated with that or was it just put on a pause.

It was just put on a pause I mean, there is an economic there for a number of reasons, but one you know there is a significant capital expenditure related to conversion I think two I hopped may face their own challenges for the time for the short term and so it seemed to make sense just said to call.

I was on that while we sort of see how close the light is at the end of the title at how bright it becomes then how quickly you know so forth.

Got it and just lastly, you talked about curtailing capex spending for 2020 can you share with US what range do you think that might be is it 50 to 60 million 60 to 70 70 to 80.

Sure sure, Brian and all the answer is dependent quite a bit on what facts come to us over the next few months of course.

The your started with a budgeted or a plan for it I think we referenced earlier 118 million.

As we started to see the early signs of coal good at all of a sudden start realizing this is going to become a go from a health crisis for the country to a financial crisis, you know the lever that we have that we can most quickly and relatively easily Paul do you know preserve liquidity for as long as this thing could have gone. This is a this will thought.

<unk> has a month and a half ago.

We quickly look to Capex and so the number we are managing toward right. Now is 62 million from 118, and even that there may be some opportunity to control further.

Depending on what against facts come to us and so that I think it is a very realistic number.

We manage this extremely carefully with intense focus at the very highest levels you know in effect 20 million has already been.

Hopes completed and effectively spent about another 19 is in process right now so theres. Another 20 million that's to be spent and to be started to potentially move the needle not suggesting for a second 62 could come down to 42 way that's not possible, but that is the realm within which we can affect things on the other had quite.

Shankly as we see the light at the end of the title and there are some early signs now again, we're not change we're not pulling leavers, yet it's premature but as we see states opening up an easing and add people starting to get out which may be reflected in consumption.

We're also prepared but our foot slowly and cautiously on the accelerator there too, but that's the number for now that we're managing against or toward.

Great. Thanks, that's all for me good luck with the second quarter.

Thanks, Brian I appreciate it thank you bye.

This concludes our question and answer session I would now like to turn the conference back over to John parent check for any closing remarks.

Well, thank you and thanks, everybody for joining today and for your interest in T.A. and for your attention. This morning, I have a great day stay safe and Oh look forward to next time, we have a chance to speak again. Thank you.

This conference yourself included thank you for attending today's presentation you may now.