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Edited Transcript of TA earnings conference call or presentation 9-May-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 TravelCenters of America LLC Earnings Call

Westlake Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of TravelCenters of America LLC earnings conference call or presentation Tuesday, May 9, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Rebholz

TravelCenters of America LLC - CFO, EVP and Treasurer

* Katie Strohacker

TravelCenters of America LLC - Senior Director of IR

* Thomas M. O'Brien

TravelCenters of America LLC - CEO, President, MD and Director

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Conference Call Participants

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* Bryan Anthony Maher

FBR Capital Markets & Co., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the TravelCenters of America First Quarter 2017 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Katie Strohacker, Senior Director of Investor Relations. Please go ahead.

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Katie Strohacker, TravelCenters of America LLC - Senior Director of IR [2]

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Good morning, and thank you for joining us. We'll begin today's call with remarks from Chief Executive Officer, Tom O'Brien; followed by remarks from TA's Chief Financial Officer, Andy Rebholz, before opening up the call for questions from analysts.

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, May 9, 2017. But 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 that are available free of charge at the SEC's website, www.sec.gov, or by referring to the Investor Relations section of TA's website at www.ta-petro.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. The recording and retransmission of today's conference call is prohibited without the prior written consent of TA, just a reminder.

And with that, I'll turn the call over to you, Tom.

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [3]

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Thank you, Katie. By now, most of you have seen our first quarter report. Reflected in the report of results are a number of factors about which I'd like to add a little color today. I'll address directly the impact of the current litigation with FleetCor and Comdata and the onetime noncash write-offs related to our cost-savings initiatives in a moment.

But first, I want to talk about the results of our operations, call out the impact of those items so you can get a handle on what's being presented. One measure I've talked about in the past is total gross margin in excess of operating expenses. That measure declined from the prior year first quarter by $7.1 million or 6.7% to $99.1 million, and almost all or $6.1 million of that decline was due to a decline in fuel gross margin.

Nonfuel gross margin was up $11.1 million or 4.5%. The total site-level operating expenses were $11.9 million higher in the 2017 first quarter versus 2016. All of that is due to a combination of sites that we acquired since January 2016 and a $1.8 million increase in transaction fees withheld by FleetCor and Comdata for the months of February and March. On a same-site basis, site-level operating expenses declined slightly from the prior year quarter excluding those fees.

Focusing on the fuel gross margin decline. A combination of a 5% dip in volume or 6.6% on a same-site basis and $0.004 dip in margin per gallon, which was $0.003 on a same-site basis. That affected our results in the first quarter.

Demand was soft in the first part of the year. We took a disciplined approach to -- with the market handed us. And while the numbers don't look very good for the quarter by March, our fuel volume was less than half of 1% under March of 2016, the marked improvement over January and February.

In a early look at April and May shows only a modest decline in volume, while fuel margins on a per gallon basis are about the same as they were in those same months in 2016. There are at least 2 highlights that shouldn't be missed, our nonfuel revenue increased by just under 4% during the quarter and nonfuel margin increased by 4.5%, each of these was achieved despite the 5% dip in fuel volume.

Unfortunately, the unfavorable market conditions of the first quarter of 2017 eroded the positives that we achieved from ramp-up and from other growth initiatives. While it's not our goal to produce results, which are not as bad as they could've been, I do believe that our increased diversity of fuel revenues from both diesel fuel and gasoline, our efforts to expand the business, the business-to-consumer portion of our company, and our focus on same-site consolidated nonfuel revenue, which totaled about $33 per fueling transaction, an increase of 3.5% in the first quarter of 2017 versus the first quarter of 2016. All those things did help us as did the fact that many of our locations are still in the ramp-up period that follows their acquisition and positioning.

Now let me address 2 other matters that had an impact during the first quarter, which I referred to a moment ago. First, with regard to the FleetCor-Comdata litigation. The largest part of the $9.8 million increase in SG&A is the $6.4 million impact of legal and other costs related to the litigation with FleetCor and Comdata. Of course, I don't expect this litigation will go on forever, but I think it is fair for me to tell you that I believe a high level of litigation cost will continue to at least the second quarter of 2017. Because this litigation has had an impact on our earnings, our lawyers have given me the latitude to provide a brief nonlawyer description of it. If you want more information, you can review the court records in Delaware. I really won't be able to answer questions about this litigation, except to repeat what I'm about to say. The defendants in this litigation are Comdata and its public parent company FleetCor. The defendants are in the business of issuing fuel cards, which operate like credit cards in the trucking industry. Truck drivers use fuel cards to purchase diesel fuel and other goods and services at our locations. Trucking companies can also use data collected by the fuel cards to keep track of their drivers' activities. We have a long-standing agreement, under which Comdata processes payments by truckers at TA locations. Comdata withholds a transaction fee from the amounts collected from the trucking companies before a net payment is sent to TA.

The processing agreement between TA and Comdata has a set fee schedule in a term that runs to early 2022. Last fall, the defendants declared that TA had breached its obligations and said they would stop processing payments for TA, unless we agreed to pay higher fees. TA does not believe it breached any obligations, and we sued to prevent cancellation of the processing agreement.

During the pendency of this litigation, the defendants have continued to process payments for TA. But starting in February of this year, they unilaterally raised the fees they withhold from payments due to TA. These disputed fees amounted to $1.8 million for the months of February and March 2017 combined, and these charges are included in our site-level operating expenses under GAAP. We estimate that these disputed charges will continue to run about $1 million a month until this case is decided. One reason we incurred about $6.4 million of litigation costs in the first quarter is that we asked for and we're granted a speedy trial. A lot of discovery in legal work was condensed into the first 3 months of this year. The trial is held in April at the Delaware Chancery Court, and now our lawyers are preparing posttrial briefs and getting ready for final legal arguments that we expect will be completed in June. Thereafter, we are hopeful that we will have a decision from the court before we announce our second quarter financial result.

If we win this case, the defendants will have to refund all of the excess fees that they've been charging us. Also, under the contract language and the legal theories being argued, we are seeking to recover our legal fees and penalty damages equal to 3x the excess fees we've paid.

As I said in our last earnings call, we believe we're going to win this case, but that doesn't mean we are going to win or that we will win on all aspects that we've pleaded. Litigation is expensive and distracting and outcomes can be unpredictable. Also, although I hope the expense of this litigation will end or be materially reduced after the second quarter of 2017, there's always a possibility of appeals and continuation of some legal expense.

The second significant expense increase that I deferred discussing a moment ago is in our depreciation line. The $11.3 million increase in large part stems from 2 decisions we made during the quarter, one, to partially terminate a technology project that had been in the works for several years; and another, to scale back our use of billboard advertising. We incurred noncash writeoffs of $5.2 million related to those decisions.

Looking forward, I'm hopeful that the market will continue the gradual improvement we saw late in the first quarter and into the early part of the second quarter. Regarding the FleetCor-Comdata litigation, subject to all the caveats we've stated previously, I continue to believe we will win and that these added fees and litigation costs will come to an end in the short term. Of course, we're not just waiting around until the chips have fallen where they may on these 2 fronts to begin to think about what can be done to overcome the negatives that would be associated with an adverse turn in market conditions or with the possibility that we lose the litigation. As described in our press release, we've focused on certain cost-savings measures that we expect may produce as much as $12 million of positive impact on an annual basis. Some of these benefits are expected to begin to show up in the second half of 2017. For example, these measures include plans to significantly reduce our historical reliance on the billboard advertising because we believe our customers have come to increasingly rely upon highway department or DOT signage and may be more effectively attracted to our sites with other forms of marketing and advertising. We also expect to increase the bulk purchasing of biofuel, for example, and manage down overhead. I think all of this can be done without interrupting progress on key areas of newer store ramp-up, our commercial tire initiative, our growing mobile maintenance initiative and other plans we have for growth.

That said, and before I turn the call over to Andy and then take questions, I'd like to update you on these growth initiatives. First, our commercial truck tire business. Our tire unit sales during the first quarter of 2017 were over 6% above the first quarter 2016. And in April, we've hit a 13% growth mark for the first time, I believe, ever. This is a significant first step in a turnaround of a business, which has been plagued by unit sales declines for several years prior.

Second, over the past several months, we've continued developing a growing market acceptance of our mobile maintenance business called OnSITE. We've grown OnSITE from 32 trucks at this time last year to 105 trucks today, and we're now regularly providing mobile truck repair service from over 70% of our sites, up from 28 at this time last year. We believe this new business for us will continue to increase an importance and significance over time.

Third, with regard to the disclosures we make about our acquired and developed site since our acquisition program began, while, as I've discussed today, market conditions in the first quarter were not kind, we did manage a modest $2.5 million sequential improvement in contribution from acquired and developed sites for the 12-month period ended March 2017 versus the 12 months in 2016. Some of you have asked us to provide you with some idea of the elements that would be necessary such that our investments in our newer truck stops would be in the range of 4x to 6x their contribution, and our investments in convenience stores would be in the range of 6x to 8x their contribution.

On the truck stop side, there's a gap of only about $5 million of improvement to get us into that range and a little less than $18 million of improvement will get us to the midpoint. On the convenience store side, there's a gap of just under $20 million of improvement to get us into that range while about $27 million of improvement will get us to the midpoint.

I have been and continue to be a believer in the achievability of ramped-up results for our acquired and developed sites, and nothing in the first quarter of 2017 has caused me to waver in that belief. Of course, there are many pieces that make up the basis for this belief, and I'll try to give you something which may be useful to you as you evaluate it.

For the TravelCenter segment, our investment in the truck stops purchased in 2011 to 2013 is 5.2x their contribution for the 12 months ended March 17 -- excuse me, March 2017, actually slightly elevated from the 5.1x achieved for 2016 due to the tough Q1 2017 market conditions. In other words, the substantial majority of the gap comes from 10 sites, which were acquired or developed during the 3-year period that ended March 31, 2017: 3 of these 10 were newly developed and, on average, have been open for only a year; 2 were completed in 2015; 2 were completed only in the third quarter of 2016; and the completion of the improvements of the remaining 3 is expected during the next year. The improvement required to get into the range is almost a negligible amount, a modest increase of about 12% fuel volume and nonfuel revenue, even if expense ratios are managed only to system averages is what is needed to hit the midpoint. For the convenience store segment, generally speaking and all other things being equal including the market, about an 8% increase in fuel margin and an 8% increase in nonfuel sales would put us inside the range and about double that to achieve a midpoint of that range, each with related ratio management. Considering the fact that 139 of these sites have been rebranded from a gasoline standpoint in the last 18 months and 106 of them had not yet begun to participate in the gasoline loyalty programs as of January 1 this year as well as the improvements made totaling $63 million in 2016 and 2017, these increases appear modest to me.

The last quarter, I told you we expect to spend less on growth capital in 2017 than the $174 million we spent in 2016. Our capital expenditures in the first quarter 2017 totaled $30 million compared to $56.5 million in the first quarter of last year. My expectation is that our capital expenditures in the remaining quarters of 2017 will average fairly close to the amount spent in the first quarter.

In sum, the negatives in the first quarter report include really 2 things: tough sledding in the market in Q1, which I might add has been experienced by many in the convenience store space; and of course, the litigation related cost that I've talked about. The positives include continued ramp-up of new sites, the recovery that we seem to be feeling here in April, our cost-savings initiatives and our new business growth in particular, both commercial tires and OnSITE, each of which is fairly modest capital needs going forward. In other words, I believe the negatives may be short lived while the positives are longer term.

And with that, I'll turn the call over to Andy Rebholz, our Chief Financial Officer.

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Andrew J. Rebholz, TravelCenters of America LLC - CFO, EVP and Treasurer [4]

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Thank you, Tom, and good morning, everybody. I'll first turn to our consolidated results. For the 2017 first quarter versus the 2016 first quarter, fuel gross margin decreased $6.1 million to $85.6 million, primarily as a result of the impact of lower demand in the first quarter of 2017, reactive pricing strategies of our competition and our response to these strategies. Fuel gross margin on a cents per gallon basis was $0.166 compared to $0.17. The 5% decrease in fuel sales volume for the first quarter was attributable to market factors during the 2017 first quarter, including soft demand for fuel that was due in part to tepid consumer demand and in part to a relatively soft trucking freight environment as well as continued fuel efficiency gains by TA's commercial diesel fuel customers.

Nonfuel revenues increased 3.5% from the 2016 first quarter. Sites acquired since the beginning of the 2016 first quarter generated an incremental $18.9 million of nonfuel revenues to overcome a $3.5 million or 0.8% decrease at same sites that primarily resulted from 2 factors: first, the temporary closure of several restaurants during their renovations; and second, lower selling prices for tires through TA's new commercial tire initiative, under which TA has -- generally has lower prices for tires.

As the tire unit sales volume, which increased 6.1% for the quarter, continues to ramp-up, we expect both revenue and gross margin to exceed the prior year amounts, despite lower unit selling prices for tires.

Total gross margin for the first quarter of 2017 increased by $4.8 million or 1.4% from the first quarter of 2016 due to an $11.1 million or 4.5% increase in nonfuel margin that was partially offset by the $6.1 million or 6.7% decrease in fuel gross margin. Our nonfuel gross margin increase resulted from an improved nonfuel gross margin percentage in both of our operating segments on a same-site basis.

Our same-site nonfuel gross margin percentage grew 70 basis points to 56.8% for the 2017 first quarter, reflecting the positive impact of our strategies for purchasing and pricing goods for resale and certain marketing initiatives.

Our site-level operating expenses in the first quarter increased by $11.9 million or 5.1% over the prior year quarter, due to sites acquired since the beginning of the 2016 first quarter and the $1.8 million of increased transaction fees withheld by FleetCor-Comdata. On a same-site basis without the excess transaction fees, site-level operating expenses declined $0.5 million from the prior year quarter and site-level operating expenses as a percentage of nonfuel revenues increased slightly versus the prior year by 30 basis points, a result of the decline in same-site nonfuel revenue.

Our selling, general and administrative cost for the first quarter increased by $3.4 million or 11%, excluding the $6.4 million related to our dispute with FleetCor-Comdata. Our rent expense increased $4.5 million compared to the 2016 first quarter, primarily due to the sale-leaseback transactions we completed with HPT in 2015 and 2016 under our transaction agreement as well as from sales to HPT since the beginning of the first quarter of 2016 of improvements made to leased sites.

Our first quarter 2017 depreciation expense, excluding the $5.2 million expense associated with the writeoff of certain abandoned assets that occurred in the first quarter was $26.6 million, which decreased by $1.2 million from the fourth quarter of 2016. The amount of our tax benefit for the 2017 first quarter increased by $13.6 million compared to the 2016 first quarter, due to the increased pretax loss and a 3.4 percentage point increase in our effective tax rate, resulting from the effects of permanent difference items between periods.

We reported a net loss for the 2017 first quarter of $29.4 million or $0.74 per share. This compares to a net loss of $9.9 million or $0.26 per share in the first quarter of 2016. Our EBITDA in the 2017 first quarter declined $21.2 million compared to the year-ago quarter. This increase in net loss and decline in EBITDA are due to the factors I've just described. To recap, a tough first quarter in terms of market conditions, some growing pains, the FleetCor-Comdata litigation and some noncash writeoffs, all of which, we expect will not last long term for the reasons Tom has pointed out.

Looking at our results by segment. In the TravelCenter segment, our site-level gross margin in excess of site-level operating expenses for the 2017 first quarter was $91.6 million, a decrease of $9.5 million or 9.4% from the 2016 first quarter, resulting primarily from a $7.5 million decline in fuel gross margin, driven primarily by sales volume, and the $1.8 million higher transaction fees being withheld by FleetCor-Comdata.

In our convenience store segment, our site-level gross margin in excess of site-level operating expenses for the 2017 first quarter was $5.4 million, which reflects growth from the 2016 first quarter of 22.7% or $1 million, attributable primarily to the continued ramp-up of our recently acquired c-stores. Our 200 same-site stand-alone convenience stores generated site-level gross margin in excess of site-level operating expenses of $5 million, an increase of $615,000 or 14% from the 2016 first quarter, which can be attributed to the continued ramp-up of those sites, dampened, we believe by soft market conditions generally during the 2017 first quarter. Our corporate and other site-level gross margin in excess of site-level operating expenses in the first quarter was $2.2 million, an increase of $1.4 million that principally is attributable to our acquisition of the Quaker Steak & Lube restaurant business in April of last year.

Looking at our investing activities this quarter, we spent $30.1 million in capital expenditures compared to $56.5 million in the first quarter of 2016. Our acquisitions totaled $6.1 million this quarter compared to $35.1 million in the same period last year. Proceeds from asset sales to HPT totaled $25.5 million of this quarter compared to $37.8 million in the first quarter of last year.

In summary, while soft market conditions and litigation matters weigh on results this quarter, we continued to make progress in our unit growth integration and ramp-up activities and our internal growth programs. We believe there is a significant potential going forward as market demand increases and our investments and strategies continue to progress. In addition, we have identified opportunities that we expect will lower our cost by approximately $12 million on an annual basis beginning in the second half of this year. All without retargeting our growth initiatives.

And with that, I'll turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Bryan Maher with FBR.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [2]

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Can you share with us what it is that Comdata, FleetCor is alleging you breached?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [3]

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I think -- yes, I think can do that. Well, they're alleging we breached the merchant agreement, which is what I call the processing agreement. And you know what, I'm going to stop there. That's a pretty important piece of the litigation. I think if you read what we wrote, I don't have it in front of me, sorry, I'm a little bit hesitant, it's in the Q. And basically, they've alleged that we defaulted under what we call, in the Q, and you'll see it there, an RFID Agreement. It's a separate agreement. They think that the fault allows them to terminate both the RFID Agreement and the merchant agreement, and that's how they get there.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [4]

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Is that the thing where the trucks pull up and it automatically like identifies with the reader near the pumps that, that truck is that truck?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [5]

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You have that correct. That's right. RFID technology is deployed in. At the truck-stop location, there's a reader and inside the truck is an RFID tag. And that connection between those 2 initiates the transaction for fuel.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [6]

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On the $5.2 million in programs writeoff that you said was affiliated with tech, not necessarily -- I don’t really care about the billboard component of it, but can you give us an example what type of tech you're writing off?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [7]

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Yes, it's really one thing. We've been exploring and designing a new system for replacements of legacy system in our truck service business. Obviously, it's a pretty high growth area for us. That process has actually been several years in development, but the hardcore design part of it has really only come in the last year or maybe a little bit more. There's very few companies. There may be none with experience in systems for heavy truck repair that's both retail oriented, operates in multiple states, multiple tire brands, multiple truck brands, multiple delivery methods, and you take away 3 out of 4 of those things or was it 5, you can find something. But when you put it all together, you're talking about a build of the system from the ground up. And we've recently undertaken the commercial tire business, the OnSITE business added to the complexity and our projected cost to the point where we made the decision that improvements of the legacy system would be more effective from a timing and a return on capital standpoint. So we pulled the plug. There are some parts of that, that planning and design work that will be used. So we wrote off just like -- I think I've talked about we wrote off a portion of it.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [8]

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Okay. And then just lastly and kind of the elephant in the room here, the spending and the resulting revenue whether it's soft market or otherwise is not kind of playing out as fast as I think investors and others have expected, and I think that that's probably reflected in share price over the past couple of quarters and specifically today. If you were to -- if we -- one were to assume that our RMR and HPT would not stand in the way of a strategic review process for TA or potential sale of the company, do you think that the company would be open to at least exploring something at the current time?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [9]

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Well, that's a good question. I think that there are a number of factors that are in play in the current market conditions, one of which you've pointed out is the pressure, particularly this morning on the share price. Another market factor is some of the announced acquisitions in the convenience store space, whether on a per unit basis or multiple basis. Those are things that we need to consider. On the other hand, I think our plans are the sum total of our growth plans or the big pieces that I've talked to you about, which include OnSITE, commercial tire business and the continued ramp-up. I really do believe that those have the potential impact of let's say over the next 5 years doubling the EBITDA that we generated in 2016. I think we have a solid -- a good solid plan, but that does have to be tempered with some of the things I mentioned before, not the least of which is -- it may be nice for me to point to benchmarks or high watermarks or whatever you want to call it in terms of our c-store valuations, but the fact is that we're not done with ramp-up yet. So those may not be achievable even if we wanted to pursue them. And then, of course, the unknowns associated with the litigation, no matter what I believe, those are not going to foster the pursuits of some other things that you're talking about. That's a long way of saying that I'm aware of things that are happening in the marketplace, some of which are applicable to us, some of which are not yet applicable and some of which are not applicable at all. I hope that answers your question.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [10]

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Right. So it seems to me like you would not be totally averse to exploring something, but recognizing that you're still ramping your c-store business and you have the litigation overhang. But assuming a potential buyer, recognize those and assign their own growth rate projections for the C-store ramp and their potential for success in the litigation, clearly, a smart buyer could come to a price. But you're not totally averse to it?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [11]

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I would say a little bit, not to split hairs with you. But I would say it a little bit differently, that I'm fully confident in our business plan, but that there are always market factors that are worthy of the consideration, and that's not a change to the way that we think about this business. I guess, I would say it's still applicable.

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Operator [12]

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(Operator Instructions) And ladies and gentlemen, having no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks.

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [13]

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Just thank you to everybody for your support and for listening in, and we'll see you again in about 3 months after the second quarter ends. Thanks a lot.

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Operator [14]

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The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect.