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Edited Transcript of TA earnings conference call or presentation 5-Aug-19 2:00pm GMT

Q2 2019 TravelCenters of America LLC Earnings Call

Westlake Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of TravelCenters of America LLC earnings conference call or presentation Monday, August 5, 2019 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 Inc. - CEO, MD & Director

* Barry A. Richards

TravelCenters of America Inc. - President & COO

* Katherine J. Strohacker

TravelCenters of America Inc. - Senior Director of IR

* William E. Myers

TravelCenters of America Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Bryan Anthony Maher

B. Riley FBR, Inc., 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 2019 Financial Results Conference Call. (Operator Instructions) Please note that 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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Katherine J. Strohacker, TravelCenters of America Inc. - Senior Director of IR [2]

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Thank you, and good morning, everyone. We will begin today's call with remarks from TA's Chief Executive Officer, Andy Rebholz; followed by Chief Operating Officer, Barry Richards; and Chief Financial Officer, Bill Myers. We'll also have time 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 5, 2019. 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 or by referring to the Investor Relations section of TA's website. Investors are cautioned not to place undue reliance upon any forward-looking statement.

During this call, we will be discussing non-GAAP financial measures including adjusted fuel gross margin, adjusted fuel gross margin per gallon, adjusted income from continuing operations, adjusted income per common shares from continuing operations attributable to common shareholders and adjusted EBITDA. The reconciliations of these non-GAAP measures to the most comparable GAAP amounts are available in our press release that can be found on our website. The financial and operating measures implied or stated on today's call as well as any qualitative comments regarding performance should be assumed to be in regard to the second quarter of 2019 as compared to the second quarter of 2018, unless otherwise noted. 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.

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

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Andrew J. Rebholz, TravelCenters of America Inc. - CEO, MD & Director [3]

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Thanks, Katie, and Good morning, everyone. Thanks for joining us and for your interest in TA. I have a few prepared remarks regarding this quarter's performance and our business initiatives, and then I'll turn the call over to Barry and Bill for their comments on operational and financial matters.

But first, let me point out 2 events that occurred subsequent to quarter-end that I believe are worth discussing on this call. On August 1, we converted from a Delaware limited liability company to a Maryland corporation and changed our name to TravelCenters of America Inc.

From our conversations with investors over the years, we know certain investment firms have been interested in owning shares of TA but have been prohibited or dissuaded from doing so due to TA being a limited liability company. In addition, our status as an LLC has excluded investment in TA by some index funds and ETFs. We've attempted to address this investment barrier with the conversion to a corporation. While there is no guarantee this change will attract investors to TA or that index funds or ETFs will invest in TA, we expect that our conversion to a corporation will enable and encourage a broader group of investors to own TA stock.

From a governance perspective, TA stockholders now have substantially the same rights and obligations as they did when we were an LLC. The changes made were to conform to or comply with the requirements of the Maryland General Corporation Law as distinguished from the Delaware limited liability company statute, and as I said, resulted in no significant change in stockholder rights.

Also on August 1, TA completed a 1 for 5 reversed stock split of our outstanding shares. TA shares are now treading on a split-adjusted basis, and our outstanding share count has been reduced proportionately. TA's Board selected a 1 for 5 ratio for the reverse split with an objective of a postsplit price per share in the mid- to high teens. Given the then-current price per share of $3.55, the 1 for 5 ratio is what made sense.

We believe in the business plans that have been established for this company, including our growth programs. We believe they will increase the profitability of the company over time, and accordingly, I want to present an opportunity for a broader group of ownership with investors who share those beliefs.

Now to second quarter performance. Our operating results showed improvement this quarter in spite of wetter weather that held back our nonfuel business. We had net income of $1.2 million compared to a net loss of $34 million last year. After adjustment for certain onetime items, our income from continuing operations this year showed a slight decline of $787,000 from last year.

The second quarter's adjusted EBITDA of $31.2 million improved by $1.7 million over the 2018 second quarter and from an operating standpoint, was aided by growth in both our fuel and nonfuel areas. Fuel sales volume increased by 3.3% in total and by 2.5% on a same-site basis. This is the second consecutive quarter of healthy same-site growth in fuel sales volume that, I believe, reflects the success of our business initiatives.

Dating back to the second quarter of last year, we've had a steady improvement in same-site fuel sales volume. Nonfuel revenues improved by 1% in total and by 0.3% on a same-site basis. Store and retail services revenue grew 3.2%, led in part by our revamped UltraONE customer loyalty program that customers continue to embrace.

Restaurant revenues grew 1.3%, driven by solid demand for our quick service options, offset by some reduced revenues associated with certain full-service restaurant rebrandings and hours of operation reductions that took place.

Truck service revenues fell by 1.5%. Unfortunately, this result was weaker than has been the case the last several quarters than we had expected. But we believe the weather suppressed demand for truck service and was especially hard on our tire sales levels. 83% of the truck service revenue decline was in tire revenues.

The first 5 months of 2019 have been the wettest in U.S. recorded history back to 1895, and May nearly set a record as the nation's all-time wettest month. The wetter conditions were a big detriment to our tire and other truck service sales, adversely affecting our nonfuel revenue growth trend this quarter. With the adverse weather behind us, we expect over nonfuel revenue growth trend will be much stronger in the third quarter.

Fuel gross margin was $0.153 per gallon, which was flat compared to last year. As a result of the 3.3% increase in fuel sales volume, fuel gross margin increased by $2.4 million.

The U.S. Congress to date has not enacted legislation to extend the biodiesel blenders tax credit for 2018 or 2019. If this tax credit is retroactively reinstated for 2018, TA will recognize a $35 million benefit to fuel cost of goods sold. The amount of benefit we might recognize, should this tax credit be enacted for 2019, was $17 million for the first 6 months of the year. Any cost of sales reductions we might recognize as a result of the retroactive reinstatement of this tax credit would be recognized in the quarter the tax credit is enacted.

Our site expansion program is progressing, and we continue to attract new franchisees and potential franchisees and identify potential acquisition targets. And this quarter, we opened our first franchised TA Express travel center. Barry will talk more about this in a moment, but our pipeline makes me confident we can achieve our site expansion goal this year, primarily through franchising.

We remain focused on costs and spending. We kept our site level operating expenses for same sites in line with our nonfuel revenue increases, experiencing a 60 basis points increase in the ratio of those expenses to nonfuel revenues. It was due in part to increased truck service staffing and training and slightly lower nonfuel revenue growth than expected.

We also continue to keep a tight rein on capital spending without allowing our sites to fall into disrepair. Spending control and reductions will remain top of mind.

With that, I'll turn the call over to Barry for his comments.

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Barry A. Richards, TravelCenters of America Inc. - President & COO [4]

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Thanks, Andy, and good morning, everyone. We continued to see positive signs from our travel center operations in the second quarter. Our business initiatives and marketing efforts led to increases over the prior year quarter in fuel sales volume and nonfuel revenues.

Overall in the market, freight trends have slowed down a bit. At the same time, manufacturers have reported strong increases in the sales of new Class 8 trucks for the first half of this year compared to last year. Having more trucks on the road isn't always great for certain parts of TA's truck service business. Add to this the factors Andy just mentioned, the suppressed demand for tires and repairs, and we believe that explains the slight decline in truck service revenues this quarter.

We believe the continued trends in GDP growth still show an overall U.S. economy that is expanding, and this should be a short-lived topline trend.

Growth in our remote service programs continues with certain large customers looking to add services and new locations, which has led to our continued hiring activity ahead of the sales growth. This contributed to the slight decline in our site level gross margin and excess of site level operating expense.

The UltraONE customer loyalty program introduced in January continues to be embraced by professional drivers. We have attracted approximately 128,000 new and/or reactivated members so far this year, and our gallons per member and average fill per member both increased over the prior year. These results are good indicators of our progress and success to date. Fuel sales volume increased by 15.9 million gallons or 3.3% due to a same-site fuel volume increase of 11.9 million gallons or 2.5%. Fuel volumes increased by a net 4 million gallons in sites opened or closed since the beginning of the 2018 second quarter. Fuel gross margin increased by $2.4 million or 3.3%. Diesel margin cents per gallon was flat compared to last year due to rising costs partially offset by increased sales volume. Gasoline gross margin was primarily responsible for the overall increase as our team balanced volume and margin per gallon. On the same-site basis, fuel gross margin increased by $2.7 million or 3.7%.

Nonfuel revenues increased by $4.6 million or 1%. Same-site nonfuel revenues increased $1.3 million, or 0.3% due to the positive impact of the marketing initiatives that were partially offset by the 2.4% decrease in truck service revenues.

Within Truck service, tire unit sales were up 0.6% versus last year. RoadSquad work orders increased by 2.4% and our mobile maintenance service continued to show strong growth, producing a 72% increase in work orders. Our store division revenue increase was driven, in large part, by increased Diesel Exhaust Fluid demand and grocery sales. We expect the demand for DEF to continue growing as more pre-2011 model year trucks are retired each year.

Our restaurant business remains healthy, showing total revenue increases of 1.3% or $1.4 million, despite having a handful of full-serve restaurants closed for rebranding to nationally recognized concepts. Nonfuel gross margin increased by $1.4 million or 0.5% due to the $4.6 million increase in nonfuel sales, offset by a 30 basis point decline in the nonfuel gross margin percentage to 60.6%.

The nonfuel margin percentage experienced a slight decline due to the change in mix of products and services sold. Site-level operating expenses as a percentage of nonfuel revenues on a same-site basis was 49% as compared to 48.4% for the 2018 second quarter.

In total, site-level operating expenses increased by $5.8 million, or 2.5%, of which $2.2 million was due to new sites. Looking ahead, we continue to see great growth potential and opportunities for our truck service programs, especially the mobile maintenance program that we have branded as TechOn-SITE. We've earned the confidence of a number of large customers who enjoy the improved reliability and uptime and their equipment being properly maintained. Their increased confidence in us continues to fuel sales growth and provide us further opportunities. Our national call center, which supports our fleet of RoadSquad emergency repair vehicles continues to attract fleet customers that retain us to handle their breakdown calls and allow them to focus on deliveries. Currently, we have agreements with 100 fleets to handle their calls either for nights, weekends, and in most cases, 24/7.

And finally in terms of how our network expansion, we're pleased to announce the opening of the former Steele, North Dakota Coffee Cup Fuel Stop as TA Express, the first branded franchise under this newly launched brand. Business trends have been what both we and team at Coffee Cup had expected. Fleet drivers are now frequenting this travel center in ways not experienced prior to being a TA Express. We signed 5 franchise agreements in the second quarter bringing the total to date this year to 7. We expect that the 6 sites not yet operating as part of our network will be added by the end of 2019 or the first few months of 2020.

In addition, we currently have 9 agreements under legal review and 10 sites about which we are engaged in detailed discussions or negotiations. We have approximately 160 other sites that are in various phases of applications and diligence process.

We have not acquired anything this quarter but continue to work through negotiations and due diligence for 2 operating travel centers and 2 development parcels we hope to acquire before the end of this year. We continue to be excited about our progress to date in these areas, and even more excited about the potential they hold.

And with that, I'll hand the call over to Bill.

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William E. Myers, TravelCenters of America Inc. - Executive VP, CFO & Treasurer [5]

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Thank you, Barry, and good morning, everyone. Before I discuss our quarterly results, let me first discuss a few events that occurred since the second quarter ended. First on July 19, we amended the loan and security agreement governing our $200 million unsecured revolving credit facility. Under the amended revolving credit facility among other things, the premiums charged for each of the 3 pricing tiers were increased by 25 basis points and the maturity was extended from December 19, 2019, to July 19, 2024. As of June 30, we did not have any amounts outstanding on the credit facility.

Second, as Andy mentioned, on August 1, in conjunction with our conversion to a corporation, we completed a reverse stock split of our outstanding common shares, pursuant to which 5 shares were exchanged for one share of our common stock. As I'm sure you noticed, we restated our shares and EPS amounts for all periods presented in the press release we issued this morning, and in the Form 10-Q we will file later today.

Now to our quarterly results. For the second quarter of 2019, we reported net income of $1.2 million, or $0.15 per share compared to a net loss of $34 million or $4.25 per share in the second quarter of 2018. The net loss last year was largely due to a $42.6 million loss from discontinued operations net of taxes. Excluding onetime items, adjusted net income from continuing operations for the second quarter of 2018 was $2 million, or $0.24 per share. For the second quarter of 2019, we reported adjusted EBITDA of $31.2 million, an increase of $1.7 million, or 5.9%.

The improvement in adjusted EBITDA was primarily due to a decline in run expense as well as the increases in fuel and nonfuel gross margin discussed earlier. SG&A expense for the 3 months ended June 30, 2019, was $39.6 million, an increase of $12.1 million.

Excluding one-time items reported in the second quarter of last year, the increase was $3.8 million or 10.7% that was primarily attributable to an increase in compensation expense as a result of annual salary increases and increased headcount to support growth. SG&A was in line with our expectations. We believe that SG&A expense should be approximately $39 million per quarter for the remainder of 2019, absent any unusual legal expenses or other currently unforeseen items.

Real estate rent expense decreased by $6.9 million or 9.8% in the 2019 second quarter, primarily due to purchasing 20 travel centers from HPT in January 2019. As previously discussed, this reduced annual minimum rent by $43.1 million. Given our current leasing arrangements, we continue to expect our real estate rent expense to run at a quarterly rate of approximately $64 million. Depreciation and amortization expense increased by $2.1 million, or 9.9%, primarily due to the purchase of 20 travel centers in January from HPT.

Turning to our liquidity and investment matters. At June 30, our cash balance was $25.8 million, and we also had approximately $127.3 million of -- available to us under our revolving credit facility. We own 51 travel centers, 6 stand-alone restaurants, and a stand-alone truck service facility that are unencumbered by debt. During the quarter, we invested $20.5 million in capital expenditures. Thus far for the year, we have not sold any improvements to HPT and our intention is not to sell any improvements for the remainder of 2019. Lastly, our 2019 capital investment plan continues to contemplate approximately $100 million of capital expenditures. That concludes our prepared remarks.

Operator, we're now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Bryan Maher with B. Riley FBR.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [2]

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So a lot take in there on the quarter. Let's -- I've got a couple of things. On the truck servicing, when you ramped the hiring there and the training, and then we ended up having a not-so-great quarter, in hindsight, was that a mistake? Is it reversible? How can you control that if that happens again? Is it just kind of stuck money because you've hired these people and trained them or what's the flexibility there?

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Andrew J. Rebholz, TravelCenters of America Inc. - CEO, MD & Director [3]

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There is flexibility to reduce staffing if we thought that was the right thing to do. We don't believe that's the right thing to do, didn't believe it then and don't believe it now. It's -- that business unfortunately is one that without the people, you simply can't get the business. So we've a lot of new business that is lining up with some customers that we've been serving for a while as they continue to grow their operations, and we're going to need the technicians that we have, and we're going to need more than that.

And so we need to continue to work through the hiring of those folks, the training of those folks, and also the -- I'll say, the growth and productivity of those folks after their training -- a tech who's brand new is just not as productive, typically, as a tech that's been working for a number of years, both in the kinds of work that they can do as well as how quickly maybe they get through the work that they're doing. So part of what we're seeing here besides just -- and maybe that all falls under the category of training, kind of on-the-job training, I guess, but gaining experience. Each of those techs will become more and more productive. We actually had a similar amount of techs, maybe that was for June, that number, as we did last year.

But the relative experience level, maybe, of the techs is lower because many of them are more newly hired. And so if we knew for sure that the sales levels were going to be what they were in the second quarter, I think we would have continued to hire. I mean the fact of the matter is we track our wait times by site. So when a customer comes in and says hey, I want you to do this work on my truck, we create a work order, we know how long the wait time was before we addressed that customer's truck. And the wait times are longer than they could be, and we would like them to be, which means we could use some more techs in many areas and/or use more experienced techs or looking forward to the growth and experience from the techs that we have out there right now.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay, and then kind of bigger picture and I know that a lot of made people may be listening to this call are interested in this because I get e-mails on it in addition to my own concerns. But when we look at SG&A expense, $39 million a quarter now, I guess you said was the projection. And we hear about salary increases, and we see site-level operating go from, I think, you said 48.4% to 49% for the quarter for the year-over-year.

And when we look back and we see before the reverse split, this 2011 through 2015, TA was earning on average $1 a share in EPS, which would translate into $5 a share in EPS now. And now we run kind of flattish. What can be done on the cost side to get the earnings per share back to the level we saw from 2011 to 2015? And I know that there's a lot in that question, so maybe just focus on some of the bigger picture things that you can be doing.

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Andrew J. Rebholz, TravelCenters of America Inc. - CEO, MD & Director [5]

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I think the -- without having any of the numbers in front of me to compare 2011 to now, one of the very big cost increases that we incurred was with regard to rent and one of the biggest things that we can to help with our cost increases, we did by trying to address, or at least in part addressing the rent with the transaction we did in January. Other than that, there is certainly lots of things we can do, there's lots of things we are looking at doing. As an example, as we talked about in previous calls maybe throughout last year, we went through this initiative to reduce cost at the site level by consolidating or centralizing the site accounting function here at headquarters.

So that brought with it a $1.5 million increase in SG&A in order to get a net $6 million, $6.5 million total cost reduction. So that's something that we did, which increases SG&A, reduces site-level operating expenses, and you might say, well, I don't see that reduction in site-level operating expenses, but it's one that is there. It's just maybe they would would've that much higher. I think in this particular quarter, the -- if you want to call it an issue with the ratio, the site-level operating expenses to the nonfuel revenues, I think, really the biggest issue this quarter was the sales not being there the way they were expected to be and so much of the expenses are in fact fixed, property taxes and utilities, and the managers and things like that.

One of the other things that we're dealing with this year, just maybe it's luck of the draw, is slightly higher, I know we mentioned this in the MD&A in the 10-Q, which you haven't seen yet, but slightly higher maintenance expenses versus the prior year. I think that that's reflected in those numbers and maybe that's a function of, to some extent, restricting or controlling or curtailing capital expenditure spending. Instead of spending $1 million to repave a parking lot somewhere, maybe we're spending $50,000 to fill in potholes or fill in cracks or things like that. So there's a little bit of that trade-off in there. We're looking at some other things to both improve the cost structure and hopefully operations. We've had -- I'd like to tell you that there were lots of savings we could get in procurement, but frankly, we did have a Big 4 consulting firm in here to do a procurement purchasing review with us, and quite honestly, they thought that both our processes and, I don't know, the cost or the prices that we're paying, there wasn't much there to work on, and so we're turning over other rocks for where we can fix things.

And then maybe as a final point, because this answer is getting long-winded. I think that all of that also reflects just the employment situation across the country right now, both in regard to the lower levels of unemployment rates everywhere and the increasing minimum wage story in many of the states and other, I'll say, rule changes that while they might not be a change in minimum wage or something like that, still tend to increase labor costs. And all of that's a reality. How big a percentage does that make of the increases? Impossible to say, I suppose. But we are having to pay more to get people to staff both our retail locations, and our IT department, our accounting department, things like. So it's a lot going on.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [6]

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And then just 1 last for me, and I'll turn it over to the rest of the queue. What's the hold up with the biodiesel fuel credit? It seems like it's going on quite a long time now? Is there anybody in the trucking industry who is in Washington lobbying to get that passed or is just you are at the whim of Congress actually ever doing anything in this term?

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Andrew J. Rebholz, TravelCenters of America Inc. - CEO, MD & Director [7]

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There is the -- the last part of your comment there, I think, is -- I mean we're -- obviously, we're at the whim of the government. There are many, many people in Washington lobbying for this, both from the -- or not both from, but from primarily the farm states, where they're producing the crops that could turn into some of this biodiesel. And it's Senator from Iowa, Senator Grassley who heads the Senate committee that is charged with this. And that's why there is confidence that something is going to be done. I just think that to date, I'm not a politician or one that enjoys following all that stuff, but the situation, the relationships in Washington right now obviously, not fantastic for the 2 parties working together, but there is a belief that it will get done because there are enough people on both sides of the aisle that want to get it done.

This -- it's -- this is one of several of these tax extenders, and everybody has got their favorites, I suppose. But it's really I guess the way I understand or I've heard it from our Truck Stop Trade Association folks that are lobbying hard for it, that it's finding the right legislation to attach this to and get it done. And that's why there's a belief that maybe in September, there's a good chance because there is litigation -- sorry, legislation that will need to get passed and would be of the type that taking up the extenders as part of that will make some sense. So hopefully, it's something that happens in September, but I believe it's fair to say that the current political environment has probably delayed this much longer than -- obviously, it's delayed much longer than has been the case in the past. So we all just have to suck it up, I suppose.

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Operator [8]

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This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Andy Rebholz for any closing remarks.

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Andrew J. Rebholz, TravelCenters of America Inc. - CEO, MD & Director [9]

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Thanks, Nancy. Again, thank you, everybody, for your interest in TA and your attention this morning. Have a great day.

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Operator [10]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect, and enjoy the rest of your week.