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Edited Transcript of TA earnings conference call or presentation 8-Aug-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 TravelCenters of America LLC Earnings Call

Westlake Aug 14, 2017 (Thomson StreetEvents) -- Edited Transcript of TravelCenters of America LLC earnings conference call or presentation Tuesday, August 8, 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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* Alvin C Concepcion

Citigroup Inc, Research Division - VP and Senior Analyst

* Benjamin Preston Brownlow

Raymond James & Associates, Inc., Research Division - Research Analyst

* 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 morning, and welcome to the TravelCenters of America Second 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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Thanks, Andrew, and good morning, everyone. Thank you for joining us. We'll begin today's call with remarks from our Chief Executive Officer, Tom O'Brien; followed by remarks from our 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, August 8, 2017. 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. Just to remind that the recording and retransmission of today's conference call is prohibited without the prior written consent of TA. 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. This morning we released our second quarter 2017 results. The second quarter results were, as is typical, noticeably better on a quantitative basis than the first quarter 2017 results, as we saw firming on several fronts during that second quarter. On a year-over-year basis, net income declined due to a net loss of $3 million in the second quarter, before the impact of expenses related to the FleetCor-Comdata dispute, which totaled about $5.3 million during the 2017 second quarter. EBITDA rose 8.4% over the second quarter 2016 on strong performances in both fuel and nonfuel gross margin and in controlling both site-level operating and selling, general and administrative expenses. Importantly, the fuel volume showed a 1.6% decline in the second quarter, much improved compared to the 5% decline during the first quarter, and more specifically, same-site diesel fuel volume declined only 1.7% versus the 7.5% decline for the first quarter of 2007 -- excuse me, '17. Each is compared to comparable 2016 periods as uncharacteristically difficult factors that weighed on volume during the first quarter 2017 abated. We've continued to incur excess transaction fee and litigation related expenses from our dispute with FleetCor and Comdata. I had hoped to have a ruling from the Delaware court before today but that has not occurred. I believe that we will prevail in this litigation and hope we'll have a ruling from the court soon. If we do prevail, we hope to recover at least all of the $13.5 million of cost that we've incurred in the first half of this year. But as I have said previously, litigation can be unpredictable.

Our internal growth initiatives include our commercial truck tire business, expanding our on-site mobile maintenance business and renewed growth in our RoadSquad emergency breakdown service. Overall, growth in the truck service part of our nonfuel business generated $2.6 million, more nonfuel margin during the 2017 second quarter than in the 2016 second quarter. We're about 50% of our total growth in nonfuel gross margin in the travel center segment. We've added enough service volume and margin to more than overcome the increased operating expenses incurred during the 2017 second quarter to support these initiatives, but I believe there is more revenue and margin growth to come. Tire unit sales increased 9.2% during the 2017 second quarter and events logged by our 2 vehicle-based service delivery businesses, OnSITE and RoadSquad, increased almost 17%, each versus the 2016 second quarter.

We continue to press forward with this business not only in an effort to improve upon the metrics I've mentioned, but also to ultimately drop more of the revenue and margin from these initiatives to the bottom line.

While we've continued to ramp operating results at acquired sites, increased contributions from certain acquired convenient store sites have not yet returned to the pace of growth seen prior to the first quarter 2017. There have been some challenges, in particular, convenience store markets that have seen high-quality operators construct new or upgrade existing stores.

Our fuel pricing, merchandising and operating cost strategies and many of our recently completed improvements are resulting in benefits. Same-site results grew 8.5% despite being dampened by the new competition in certain markets that I mentioned. I still believe we will generate contributions from these stores in the expected magnitude. I reported to you on our last call that we're focused on certain cost savings and other measures that we expect may produce as much as $12 million pretax positive impact on an annual basis. These initiatives have begun and are substantially on track. We've already begun to realize some of these benefits in the second quarter 2017, and we believe these efforts during that second quarter positively affected pretax income and EBITDA by about $2.5 million.

Our goals in the near term are to continue, and indeed, accelerate growth in results of our new locations, particularly, the c-stores. To get the litigation with FleetCor-Comdata behind us, and to increase productivity in our newer initiatives, particularly, our commercial tire network, OnSITE and RoadSquad. I told you last quarter that the negative factors weighing on results may be short-lived while the positives are likely to be longer term. Certainly, the extreme environment experienced during the first quarter 2017 did not repeat in the second quarter and may not yet have answers on our litigation, but we're closer now to a ruling than we were before and we've prepared for the worst even though we don't think we will face it.

It may take a little longer than I had hoped for our c-store acquisitions to hit their stride but our cost saving initiatives are taking hold earlier than expected and the advances we made in truck service, in particular, in a very short time, are already showing early promise with more, I believe, to follow. 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. We reported a net loss for the 2017 second quarter of $3 million or $0.08 per share. This compares to net income of $3.5 million or $0.09 per share in the second quarter of 2016. Our EBITDA in the 2017 second quarter of $31.1 million declined $2.5 million compared to the year-ago quarter. For the 2017 second quarter versus the 2016 second quarter, fuel gross margin increased $3.8 million or 3.7% to $105.8 million, while fuel gross margin on a per gallon basis increased $0.01 to $19.2. Both increases were primarily a result of the decline in fuel prices during the quarter and our purchasing and pricing strategies. The decrease in fuel sales volume of 1.6% for the second quarter primarily resulted from comparatively weak consumer demand for gasoline and a decline in diesel demand largely attributed to continued fuel efficiency gains, especially by our commercial diesel fuel customers. Nonfuel revenues increased $10 million or 1.9% from the 2016 second quarter. Sites acquired and developed since the beginning of the 2016 second quarter generated an incremental $7.1 million, while same sites generated an incremental $2.5 million. The increase on a same-site basis was primarily due to favorable effects of certain of our pricing and marketing initiatives.

As expected, the tire unit sales volume, which increased 9.2% for the quarter, continues to ramp up. And this initiative, in conjunction with our other truck service programs, contributed to increased truck service revenue and gross margin in the second quarter 2017 versus 2016. Total gross margin for the second quarter of 2017 increased by $11.7 million or 3.1% from the second quarter of 2016, due to an $8 million or 2.9% increase in nonfuel margin and a $3.8 million or 3.7% increase in fuel gross margin.

Our strategies and initiatives lead to balanced improvements in both our travel centers and our convenience stores, and on both a consolidated and same-site basis.

Site-level operating expenses in the second quarter increased by $8.8 million or 3.6% over the prior year quarter, primarily due to a $4.9 million increase at sites acquired and developed since the beginning of the 2016 second quarter and the $2.8 million of excess transaction fees charged by FleetCor-Comdata.

On a same-site basis, site-level operating expenses were up 1.6% versus the prior year quarter and increased slightly by 50 basis points as a percentage of nonfuel revenues versus the prior year. But it's important to note that these amounts include the excess transactions fees charged by FleetCor-Comdata.

Our selling, general and administrative expenses for the second quarter increased by $1.9 million or 5.2%, but this amount includes $2.5 million of litigation costs related to our dispute with FleetCor-Comdata. Our rent expense increased $4.4 million compared to the 2016 second quarter, primarily due to TA sale to and lease back from Hospitality Properties Trust of 5 travel centers and improvements at other lease sites since the beginning of the 2016 second quarter.

Our second quarter 2017 depreciation expense was $28.6 million, an increase of $2 million when you compare it to the first quarter's depreciation expense before the impact of onetime write-offs.

In our TravelCenter segment, site-level gross margin in excess of site-level operating expenses for the 2017 second quarter was $122.9 million, an increase of $2.3 million or 1.9% from the 2016 second quarter, resulting primarily from a $5 million increase in nonfuel gross margin and a $2.5 million increase in fuel gross margin, driven primarily by our purchasing, pricing and marketing strategies. These increases were offset by the $2.8 million of excess transaction fees charged by FleetCor-Comdata.

In our convenience store segment, site-level gross margin in excess of site-level operating expenses for the 2017 second quarter was $11.7 million, which is a 10.8% improvement over the 2016 second quarter, attributable primarily to the continued ramp-up of recently acquired c-stores.

During the second quarter 2017, we invested $38.3 million in capital expenditures as compared to $86.9 million in the second quarter of 2016. Proceeds from asset sales, primarily to HPT in both periods totaled $53.1 million this quarter compared to $83.3 million in the second quarter of last year.

In summary, while litigation matters weighed on results this quarter, overall, our operations performed well in both our fuel and nonfuel businesses, and we exercised good site level and corporate cost control.

In addition, the cost savings initiatives identified last quarter have begun to take hold and we're seeing positive results. We continue to make progress in regard to stabilizing acquired sites and our internal growth programs. We believe there is significant potential going forward as our investments and strategies continue to progress and we believe we have positioned our business for success in the long term. And with that, I will 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) The first question comes from Alvin Concepcion of Citi.

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Alvin C Concepcion, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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I'm just curious about the FleetCor litigation costs. Any insight as to how long you expect these costs to continue for?

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

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Well the last bit of the trial ended in late June, and so between then and now, we're likely not -- well, we haven't seen as much in terms of litigation costs because the active part of that trial is over. Really, what we're doing is waiting for the Delaware court to issue a ruling. What we call excess fees, which are running about $900,000 a month, continue. There's really 2 pieces of that, the litigation costs have abated while the fees have continued. Make sense?

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Alvin C Concepcion, Citigroup Inc, Research Division - VP and Senior Analyst [4]

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Yes. Makes a lot of sense. And just some color on the fuel gross margins this quarter. Did a great job with those. Just curious how they're running in the third quarter to date so far and what sort of puts and takes should we consider going forward?

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

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Sure. First thing to recognize is second quarter was -- we had both for both diesel and gas declining product costs. So far in July, we're seeing increased product cost so that's putting some pressure. What we've seen in July is a volume decline of about 4%, you know 1.5% versus the same period in 2016. $0.015 decline in margin per gallon.

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Alvin C Concepcion, Citigroup Inc, Research Division - VP and Senior Analyst [6]

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Great. And then, we haven't asked about this in a while but how should we think about unit growth over time? Maybe organically, since it's hard to speculate on acquisitions? So just how are you sort of thinking about that on a longer-term basis?

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

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Frankly, our focus is on developing the businesses that we have, that we think is going -- that we think has the potential to increase the scope of services that we provide to our existing customers but also gives us the opportunity to garner new customers, in particular, in the truck stop business. So a ton of focus on the truck service business expansion activities that I've talked about.

As far as unit growth, we don't have plans on introducing any significant development. The truck stop acquisitions are opportunistic and there's not a ton in the pipeline. I think we've acquired one this year. The convenience store acquisition market is pretty hot right now, to the point where we look at stuff but haven't taken an active role in pursuing any of that. We'll be opportunistic as far as external acquisitions go, for the foreseeable future until things change.

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Operator [8]

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(Operator Instructions) The next question comes from Bryan Maher of FBR Capital.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [9]

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Just a couple of quick follow-ups to Alvin. Just a point of clarity. You said $0.015 per gallon with the volumes down 4%. Is that $0.015 per gallon down from the second quarter or from 3Q '16?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [10]

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That's July versus July '16.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [11]

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Okay. And then my other question is, you just suggested that the c-store space acquisition activity wise is hot and yes, we've been seeing that. Would that compel you at all to think about selling your c-stores into a hot market?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [12]

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We do think about that. We haven't taken action. We're in a mode where the first half of this year -- excuse me, the first half of the first half of the first quarter was a pretty tough market operationally. We haven't yet seen the full impact, we believe, of the improvements that we've made and we have a ton more growth. Now if I can -- if it were the case that I could get someone to pay for the growth that has yet to come, we'd consider that. But at this time, I think, there is a case to be made for continuing the ramp-up and then seeing what market we're in when that's completed.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [13]

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Okay. And then on the FleetCor-Comdata ruling, do you have any thoughts as to when you might hear? Do you think it's an August event or a September event or do you just not know?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [14]

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I would've told you but I think it's an August event but we're reading tea leaves. It's really not in my control nor do I have any particular insight into that. So my honest gut is telling me we're going to hear in a month but we could be back here at the third quarter telling you that we haven't heard yet. It's really sort of in the hands of a party that we don't -- obviously we don't control.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [15]

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But there were no developments or anything new since we last spoke on our earnings call, is that correct?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [16]

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That is absolutely correct.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [17]

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And I don't know if you can share with us but you've expressed now a couple of times your optimism in prevailing in this case. Is there anything you can share with us as to why you feel that way?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [18]

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Well, I don't want to misspeak and talk about too many details of the case, but I think that TA has done everything that it was supposed to do with regard to our various agreements with Comdata. I believe that very strongly. And I don't believe that Comdata's actions to attempt to terminate our merchant agreements have -- I don't believe that they have a basis for it.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [19]

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Okay. And then lastly, yes, we did notice cost saving, particularly, in the SG&A line. Can you share with us because if you have it on the call, a couple of examples of where you're identifying cost savings, like specific examples?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [20]

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Sure. I think the 2 biggest pieces in there, there is probably a dozen or 15 elements in it, but the 2 biggest pieces, one is our use of billboards. And we believe that, that as a marketing tool has declined in importance, and as a result of that, we have taken a pretty significant -- we've taken a pretty significant cut in our use of billboards around the country. I want to say we had 500 and something billboards and we've reduced that to about 120. That's in the neighborhood of $5 million to $6 million a year. And the second bit is the way that we buy bio, which is in some markets, added to diesel, blended with diesel to make biodiesel. And in the past, we typically splash blended that, which requires a vehicle to make 2 stops. One at the diesel terminal and one at the bio location, whereas today, we are using a lot more blending equipment at sites that use bio. That drives down the cost because we can buy it in bulk. So those are 2 very specific things that are included in that.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [21]

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And as a follow-up to the billboard thing. Did you just let those leases, I guess, you had on those billboards expire or was there any cost to get out of this?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [22]

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I think there was -- there's no cash costs. We did have some, if you will, improvements to some of those billboards, which in the form of price packs and those were written off in the first quarter when we made that decision.

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Operator [23]

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The next question comes from Ben Brownlow of Raymond James.

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Benjamin Preston Brownlow, Raymond James & Associates, Inc., Research Division - Research Analyst [24]

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On the road side, on RoadSquad, truck service and pretty strong growth there. I know Pilot, Flying J are launching roadside assistance. Can you just help us think about the competitive landscape and how that's evolving and help frame the competitive advantages at RoadSquad?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [25]

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Yes, I think the competitive landscape is evolving principally because of the things that we're doing. That is to say, we've been the leader in the truck service business among the -- certainly among the travel centers for a long time, and frankly, I think, some of our competitors are tired of being asked why they aren't more like us. But one of the differences in RoadSquad, the emergency roadside business, for example, is that we're backed by -- our trucks are backed by 3,000 analysts -- excuse me, techs that have been doing more than just tires and out-of-fuels for a long, long time. We have an expertise in that business. It's also backed by a international call center, and when I talked about the costs that we put in place in the second quarter to support the growth of that business, really talking about the costs that are designed to right-size that business so that we can efficiently onboard new customers. I think that -- we don't -- I am not trying to say that we aren't -- that we don't look at and carefully watch what our competition is doing, but in this case they are following and we're leading by quite a bit.

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Benjamin Preston Brownlow, Raymond James & Associates, Inc., Research Division - Research Analyst [26]

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Great, that's helpful. And just one for me. The Quaker Steak & Lube. Any color around kind of contribution there versus your expectations?

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [27]

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That's running ahead of our expectations by a little bit and that's despite weeding out some franchisees. I think, what our next step there is there's 2 things: One is getting the franchising program back in gear. We have made some moves on the management side to try and make that happen; and the second bit is, probably before the end of the year, maybe the first part of next year, we'll have introduced a, call it a, Quaker Steak & Lube Express, which will be a smaller format of that brand. We think it has a place within our own network of truck stops in some circumstances but it also may appeal to franchisees who have particular size facilities or what have you. So I think it's a difficult transition, it takes a little bit of time, but we've got all the pieces in place. Over the next year, I think we'll see even more growth than we've seen.

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Operator [28]

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This concludes our question-and-answer session. I would like to turn the conference back over to Tom O'Brien, Chief Executive Officer, for any closing remarks.

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Thomas M. O'Brien, TravelCenters of America LLC - CEO, President, MD and Director [29]

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Well, that's all I've got other than thank you for participating this morning. Thanks a lot.

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Operator [30]

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