Travelcenters of America Inc (TA) 2020 Q3 法說會逐字稿

Good morning, and welcome to TravelCenters of America third quarter conference call. (Operator Instructions) Please note that this event is being recorded.

Now I'd like to turn the conference over to Ms. Kristin Brown, Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. We will begin today's call with remarks from TA's Chief Executive Officer, Jon Pertchik; followed by Chief Financial Officer, Peter Crage; and President, Barry Richards, for our analyst Q&A.

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and federal securities laws. These forward-looking statements are based on TA's present beliefs and expectations as of today, November 4, 2020. 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 statements.

During this call, we will be discussing non-GAAP financial measures, including EBITDA, EBITDAR, adjusted EBITDA, adjusted EBITDAR, adjusted net income, adjusted fuel gross margin and adjusted fuel gross margin per gallon. 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 and/or stated on today's call as well as any qualitative comments regarding performance should be assumed to be in regard to the third quarter of 2020 as compared to the third quarter of 2019, unless otherwise noted.

Finally, I'd 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, Jon, I'll turn the call over to you.

Thanks, Kristin. Good morning, everyone, and thank you for joining us and for your interest in TA. I'm pleased to report that the earliest beginnings of our transformational playbook initiatives are starting to prove effective. Despite the extensive challenges to demand, operations and management imposed by COVID, in Q3 2020 compared to Q3 2019, we report the following improvements: a 362.4% increase in net income; an almost 30% increase in adjusted EBITDA; and a 10% increase in adjusted EBITDAR. This was despite an overall revenue decrease of 19.1%.

The improved year-over-year performance was driven by improved leadership, intense focus and discipline in managing expenses and beginning to execute on operational improvements throughout the organization. These results are unusually positive, particularly considering that we are working through a global pandemic, and therefore, have much gratitude to express. I want to thank everyone on our broader team for contributing to this outcome, including our great franchisees; from [porters] cleaning bathrooms and showers to Peter serving as my right-hand and our teammates, both new and old. I want to thank our fleet customers and their drivers for increasing their business with us. RMR for its important support, and finally, stockholders who have demonstrated through increasing stock price and market cap, your persistent and growing support as well.

2020 to-date has been a year of planning and preparation as well as a year of aggressively fighting the headwinds of an historic health and economic event. We have installed a new senior leadership team with a blend of new and legacy leaders as part of a major corporate reorganization that resulted in the creation of 3 new departments: corporate development, centralized procurement and hospitality and yielded approximately $13.1 million in SG&A savings on an annualized basis.

We have developed a comprehensive transformation playbook with 40-plus defined initiatives for which each is clear ownership, critical path and the beginnings of an understanding of potential financial result. Playbook initiatives encompass all business areas across our fuel and nonfuel businesses and include many important principles like having fewer more meaningful relationships, putting our scale to use and empowering our culture and team.

Finally, we have enhanced the balance sheet with additional liquidity following an $85 million equity raise. In short, during 2020, we have put the groundwork in place to execute on transforming this great American company. Q4 2020 into 2021 should be a period of execution, development of operational excellence and substantial investment in growth and efficiency. We expect 2021 to be a year of investment in our sites, in IT in accelerating growth in franchising and in harvesting substantial savings within our site level operating expenses, analogous to the corporate savings we unearthed beginning in Q2 2020.

On behalf of our team, we are proud of our strong positive results in this quarter, even without consideration of the fact that we were fighting the economic headwinds of a pandemic. The strength of these results during this historic time is evidence of the changes we have begun to make and the collective capability of this team, and more importantly, we're only just getting started.

Turning to our results for the quarter. Solid performance from our fuel and nonfuel businesses largely offset COVID-related decreases in four-wheel traffic and in our full service restaurants. And our intense focus on managing costs delivered improved profitability versus the prior quarter. Our overall fuel sales volume increased 8.5% due to an increase in trucking activity, the addition of new fleet customers and overall increased volume from existing customers due to the early success of a variety of initiatives. Four-wheel traffic reflected in gasoline volume was down versus the prior year Q3 but showed improvement sequentially from the second quarter.

Fuel gross margin for the quarter increased by just 1% versus prior year, boosted by higher diesel volume and the federal biodiesel tax credit and offset by a more favorable Q3 2019 purchasing environment. Just after the third quarter, it is worth mentioning that starting on October 1, we began using our economies of scale purchasing power to purchase diesel fuel in substantially larger volumes, versus inefficiently purchasing in smaller increments previously. This is expected to reduce diesel fuel cost of goods sold and increase diesel gross margin without changing the risk profile of our purchasing at all. We have -- as we have noted previously, we estimate every $0.01 of increase in fuel gross margin per gallon translates to approximately $20 million in increased EBITDA. On the nonfuel side of the business, overall, our revenue was only down 3.7% versus the prior year quarter despite the fact that our full-service restaurants were dramatically affected by COVID. In many states, these restaurants were deemed nonessential services by government authorities, which forced them to shut down. Additionally, even where and when not forced to shut down, demand at certain locations dropped so precipitously that we chose to shut down.

At the beginning of COVID, we made the difficult but appropriate decision to furlough nearly 4,000 field employees, which mitigated loss by reducing costs, somewhat commensurate with the loss of demand and sales. We began to slowly reopen some of these full-service restaurants in June with limited menus, reducing inventory and labor costs and allowing us to test different and more effective approaches to running this labor-intensive business more efficiently. Today, a majority of our full-service restaurants have reopened, and we have begun returning some employees from furlough. Many other creative methods for utilization of the full-service restaurant spaces on our sites are currently being evaluated and soon will be beta tested with an eye toward optimizing performance.

Quick service restaurant revenues improved by 4.2% compared to the prior year quarter through more disciplined leadership and management. For the c-stores, improved management and merchandising have begun to have a positive impact. And for the quarter versus 2019, revenues increased by 3.7%. Also, we have begun working to centralize purchasing and manage inventory more efficiently, which eventually will translate into better margin for these businesses.

Importantly, truck service revenues as compared to the prior year third quarter, showed a solid improvement driven by an increase in work orders. While multiple changes are being tested and installed, imposing increased accountability through the creation of a new middle management role and enhancing training and oversight has begun to make a meaningful difference. Truck service remains a top focus for the company as both a key competitive advantage and an opportunity to further increase our market share among fleet customers. Nonfuel revenues also continue to benefit from strong demand for diesel exhaust fluid or DEF, and we expect the demand for DEF to continue growing as more pre-2011 model year trucks are retired each year.

Shifting to network expansion through franchise. We signed 23 new franchise agreements since the beginning of 2019; 4 began operations during 2019, ten have opened year-to-date, and we anticipate an additional 9 locations will open by the end of 2021. Also, we have entered into an agreement with one of our franchisees to add 2 additional ground up TravelCenters to our network. In addition, we are currently -- we currently are negotiating franchise agreements for 11 more TravelCenters with over 50 other locations in various phases of the application and diligence processes.

Finally, it's important to mention what may very well be our single biggest opportunity to improve our bottom line operating results; site level operating expenses. I'm particularly excited about the opportunity to dig into and drive down site level operating expenses. We found approximately 8% improvement in corporate, and it will be interesting to see where our efforts take us at site level, which total approximately $900 million on an annualized basis.

To conclude, I'm very proud of the progress demonstrated by our results this quarter versus 2019 on top of the results from the second quarter. We now have 2 sequential quarters under our belt, where we delivered solid improvement in net income, EBITDA and EBITDAR, and we did so through a worldwide health and economic crisis. These are the early innings, but I'm optimistic we have started to deliver on the promise to rebuild trust and credibility within the marketplace and have shown a sincere and effective commitment to change through these results.

I would like to end my remarks by once again offering gratitude to our teammates and colleagues around the country for their hard work and dedication as well as all the professional drivers and fleet customers for allowing us to serve them as we continue to successfully navigate through this unprecedented time together.

And with that, I'll hand the call over to Peter to discuss the quarter's financial results in detail. Peter?

Thank you, Jon, and good morning, everyone. As Jon mentioned, we are very pleased with our results in the third quarter, particularly given the continuing challenges presented by the pandemic. In my remarks that follow, I will be referring to the third quarter of this year as compared to the prior year third quarter, unless stated otherwise.

For the quarter, we generated net income of $8.7 million or $0.61 per share compared to $1.9 million or $0.23 per share last year. Excluding several onetime items as detailed in our earnings release, we generated adjusted net income of $9.2 million compared to $1.9 million in the prior year. Adjusted EBITDA was $41.5 million, an increase of approximately $9.6 million or 29.9% compared to the prior year. The increase in adjusted EBITDA was primarily due to reductions in site level operating expense and selling, general and administrative expenses, partially offset by a decline in nonfuel and fuel gross margin, excluding the benefit of the federal biodiesel tax credit.

Fuel gross margin increased slightly to $80.1 million as compared to the prior year; primarily a result of an increase in fuel sales volume and the $9.6 million benefit from the federal biodiesel blenders tax credit, partially offset by a more favorable fuel purchasing environment in the prior year quarter. Excluding the benefit of the biodiesel tax credit in this year's quarter, adjusted fuel gross income -- adjusted fuel gross margin decreased $8.9 million or 11.2% to $70.6 million, primarily due to a decrease in adjusted fuel gross margin cents per gallon or CPG of 2.8 cents or 18.1% to 12.7 cents. This was partially offset by an increase in fuel sales volume of 43.4 million gallons or 8.5% to 551 -- 555.1 million gallons.

However, during October, we saw a general improvement in CPG against the prior year as well as continued increases in overall volume. Non-fuel revenues for the quarter decreased by $18 million or 3.7% as compared to the prior year. The decrease was due to the temporary closure or limitation of services at both our stand-alone and TravelCenter restaurants, offset by improved performance in our truck service and store and retail services and by a 16.1% increase in diesel exhaust fluid revenue.

Nonfuel gross margin decreased by $8.5 million or 2.9% as compared to the prior year due to the aforementioned decrease in full-service restaurant revenues. However, nonfuel gross margin as a percentage of nonfuel revenues improved to 60.3% from 59.8% in the prior year, primarily due to a change in the mix of products and services sold and certain pricing and marketing initiatives. Rents and royalties from franchises, franchisees, in the quarter increased by about $224,000 or 6% as compared to the prior year as a result of 11 franchise TravelCenters and 3 franchised stand-alone, Quaker Steak & Lube, or QSL, restaurants that began operations after the third quarter of last year.

The increase was partially offset by the permanent closure of 3 franchise standalone QSL's and our purchase of one stand-alone QSL from a former franchisee. Site level operating expense decreased by $19.9 million or 8.2% as a result of the difficult but necessary decision to furlough field employees in response to the decline in business brought on by the pandemic. Additionally, we reduced nonlabor costs such as maintenance, certain utilities resulting from closures and curtailments. And curtailments of supplies as we continue to rationalize our cost structure.

SG&A expense for the quarter decreased by $7.2 million or nearly 18% as compared to the prior year. This decrease reflects the full quarterly impact of the late April reorganization plan, which eliminated approximately 130 positions as well as reductions in marketing costs not deemed critical at this time. Real estate rent expense for the quarter increased $1.3 million compared to the prior year due to impairment charges related to certain operating lease assets for underperforming stand-alone QSL locations. And 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 $8.2 million or 33.8% in the quarter, primarily due to a $6.6 million impairment charge relating to certain low-performing standalone QSL restaurants and a $2.4 million write-off of certain capitalized costs related to RoadSquad truck service technology initiatives that are being replaced with new and more customer-friendly technology in the coming months.

Turning to our balance sheet for a moment. At September 30, our cash balance was $280.4 million. We have no amounts outstanding on our $200 million credit facility as of October 31 of this year, and we have no near-term debt maturities. We have focused on and have significantly improved our liquidity position this year. We collected $69.9 million of the $70.2 million in federal biodiesel tax credit that we recognized in the fourth quarter of 2019 when the government retroactively reinstated the credit for years 2018 and 2019. And as you consider our upcoming fourth quarter performance expectations, please note that this will not recur this year.

As of September 30, 2020, we owned 50 TravelCenters, 4 stand-alone restaurants and a stand-alone truck service facility that were unencumbered by debt. We successfully financed one owned location in West Greenwich earlier this year in February at an attractive rate. And we continue to evaluate opportunities to raise cost-effective capital to fund our near and midterm growth initiatives. We invested $9.2 million in capital expenditures during the quarter, bringing the year-to-date total to $36.8 million. And as we've mentioned in previous calls, we've also revised our 2020 capital investment plan to be approximately $68 million in order to preserve capital and maintain financial flexibility. However, now that we have closed on our equity raise, we are carefully considering projects to improve facilities and our IT systems infrastructure, consistent with our planned use of these funds, including those that could potentially be initiated in the last months of this year.

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

(Operator Instructions) First question comes from Paul Lejuez of Citi Research.

Jon, just wondering if you could talk about the new franchise TravelCenters, those converted in 2019 and 2020. Can you maybe talk about the year-over-year revenue lift that you're seeing in those centers relative to before the conversion?

No, I don't have that sit -- any detail sitting here in terms of the revenue lift, and that's something we'd be happy to follow-up with, if you like, in terms of those newly joined -- new members of the fold. But we're happy to follow-up and give some detail on that. And Peter, anything to add to that, do you have any detail sitting on our fingertips?

No. We have to take a look at those very specific locations -- get back.

Okay. No worries. You guys have initiations, initiatives, to increase fuel gasoline gross margin, store retail service margins, improve operating efficiencies at restaurants. Can you maybe just talk a little bit about what inning you feel like you're in with each of those initiatives? And just how we should think about the timing of when those benefits might kind of hit the P&L?

Sure. So I mean, we are definitely in the early innings, maybe the first couple of innings. I'll give you a smattering of the kinds of things we're doing by each of those areas, and maybe that will help reach your own conclusion.

And as I said in the remarks, in principle, this was a year of kind of preparation planning, reorganizing, getting our sort of chess pieces on the board. Next year is the year of investing and execution. So I think most of the value will be captured, while we've driven a lot of value through really disciplined cost control this year and pushing on certain other levers. But next year, I think, over the course of the year, we'll really start feeling and seeing the impacts of these various initiatives.

As an example, on the fuel side, just October 1, so that wouldn't -- this would not be captured in the quarter. This would be early fourth quarter. We -- and I mentioned in principle, I'll be a little more specific here in my remarks.

As of December 1, we started purchasing fuel following a very lengthy RFP process to acquire fuel through contracts or an agreement for 750 million gallons rather than many, many little 30 million gallon increments -- incremental agreements. And we were basically -- we used to buy fuel in similar volumes to a franchisee or 2, and now we're buying fuel in a much more meaningful way. And so that is already starting to course through the system kind of real time, just barely.

On October 8, also not captured in this quarter, but we're using pricing analytics to support what we determine should be our pricing. So those are some fuel examples that are going to start to happen kind of real time. In one location and soon to be 2, we've -- we're selling our own branded gasoline. So instead of TA, it's TA gasoline in the same way we sell TA diesel. And I'm pretty excited about the early signs and results of that. And we're just really barely a month into doing that. So those -- that's a smattering of examples on the fuel side, where none of that's captured in here, we're going to start to see -- we are starting to feel it. And as we get through this year and into next, I think we'll see more and more of that.

On the nonfuel side, again, just a couple of examples then I'll pause. We have, for example, a VP of merchandising. Our category managers are people making pricing decisions and placement on shelves and what should be where, there was a void in kind of middle level management. That's one example that's real time and sort of just happening in the last month or so.

Similarly, we have roles we've created in both the c-store retail and in truck service, where we've inserted kind of a middle management role that I think of as a compliance kind of role to do nothing more than visit sites, work with teams and make sure what's actually happening on-site matches what should be happening according to standard operating procedures and creating more accountability. So that's just a quick smattering. Those are all sort of just now real time.

Some of the things that will be growth oriented, that will take some growth CapEx, you'll start to -- there'll be more of a lag and to see the impact, probably a couple of quarters realistically. And some that will take even longer than that. And hopefully, that's somewhat responsive to your question.

Yes. Very helpful. Just last one for me. Just to follow-up. In terms of the cents per gallon savings, you talked about on diesel, the $0.01 equal to $28 million. What do you think is feasible there? What's the goal?

I don't want to -- I don't really have a goal to be perfectly frank. I'm really -- we're looking through the new expertise and new senior leadership and then leadership we're installing at different levels to look for opportunities and almost see where they take us. And I don't -- frankly, I think it's premature for me to put anything out there just because, look, I've been here ten months now, Peter, 7 or 8, we've had a pandemic. Our new leadership, our head of fuel, for example, just came to us he was a little bit of a late comer. Our group came May 1. He came about June 1. It was only a few months ago, and it takes time for him to get up to speed, get some of his sort of leadership and at a lower level, beneath him and organization constituted.

So I don't really want to -- while I certainly have some, a vision, and for all of our initiatives, we have a vision. And I don't want to call it an expectation because it's too raw for that. We have sort of bracketed ranges by initiative of what we are hoping for. It's just too early for me to put something out. I'm hopeful, as we get to the end of this year and probably into the first quarter, I will be giving very crisp responses to questions like that. I just -- I don't want to set a false expectation prematurely. I'd rather -- we're trying to build credibility here at this company that may have been lost over some period of time. And as part of that, I don't want to just give a guess or a finger in the air kind of answer. I want to have something crisp. And if I don't, to tell you what I just told you.

Next question comes from Jim Sullivan of BTIG.

Just following on that question about the cents per gallon savings that you've talked about before back at midyear when you kind of outlined various initiatives, and again, they weren't targets or estimates, they were kind of aspirational, I suppose, or illustrations as to how positive they would be if implemented. But one thing that's interesting is in this quarter, your total gallons sold were much higher than the run rate that you had been operating under in previous quarters.

And so I'm just curious, Jon, as we think about the potential positive impact, whether it's $0.01 per gallon or plus or minus. But if it were a $0.01 per gallon, given the volume levels that you posted here in the third quarter, presumably, you're confident in your ability to maintain that kind of increase that you've achieved? And if so, then therefore, the positive impact of the $0.01 gallon obviously would be that much better. Is that fair?

I mean I think so, if you just isolate the variables, obviously, if we drive more -- materially more volume then it's going to mathematically increase. So I think that presumption or that assumption or that view mathematically makes sense. And as we saw this quarter, the other variable there is the CPG, obviously, we all know is volatile. It goes up and it goes down. And some factors we can control to drive some of that and some we can't. We're certainly pulling the levers going forward that we can.

But as an example, this past quarter, the one we're talking about Q3 versus Q3 a year before, I think we did 14.4% CPG in Q3 2020. 2019, we did about $0.01 [one] over that 15.5%. That period saw more volatility in terms of the index and market, which helps us. That's a good environment for us, and we can drive more value where there's a differential between wholesale and retail. So obviously, the answer to that question relies on what happens on that side of things. But yes, that basic view is accurate, Jim, subject to what I just said about margin and volatility.

One other question related to the new approach in terms of purchasing fuel, where you talk about larger orders, smaller number but larger orders. To what extent does that entail higher risk on the part of the company in terms of exposure to a higher fixed cost than market changes might otherwise expose you to.

So to be clear, we spot buy and so we cancel [loads] every single day. That process is exactly the same. All we've done and our head of fuel brought to us, is a very simple thing, and that is instead of -- and I'll be -- what I'm going to say is illustrative, don't take it as absolutely factual. But if in a little region of 3 or 4 locations, we would agree to buy from some supplier in that region for a period of a year in a total gallon amount of, say, 30 million gallons. And then in -- that's Region A and then Region B, C and D, we do the same thing in these -- from other suppliers in these little increments, right? We basically consolidated that, and about 40% of our gallons are now -- we basically ran a process, and we've now found a supplier to provide all of it in many regions rather than these little sub areas.

So the risk profile and how we're purchasing is exactly the same. The difference is we're working with one supplier and a large volume of gallons. And so the risk profile is exactly the same as it was before. It's just we're using our scale in a simple way to create leverage and drive down costs and therefore, margin up. And that same principle, by the way, as I shared before, we haven't had a consolidated procurement function before. So this principle of using our scale and leverage was not embraced historically for many, many years. I'm not sure why, but both on the fuel side and nonfuel side, that's a very simple principle, right? And we're just self inflicting a disadvantage on to ourselves, and we're not doing that anymore.

Okay. And then a quick question here on the write-offs in the quarter. Again, I guess, QSL assets were where the write-offs took place in part. And I'm just curious if we could have an update on how you guys are thinking about the QSL brand. You've had the multiple write-offs here. The size of the brand has declined over time. And can you just give us an update on how you're thinking about that brand and the possibility of either, I don't know, selling it or closing it or converting it, or what the strategy is given the write-offs that we're seeing?

Great. Thanks for the question, Jim, about impairments. And they're actually -- I'll address that and maybe add what the other item was because I think it fits very much into our sort of world view of where we're taking the company, the other one as well. So I'll touch on that, too.

But first on QSL, I think we've put out -- we've effectively engaged in an exploratory process to understand the value of those assets as a potential strategic part of this organization and not. And we're pretty deep into that process; let's just say. And as a result of that, it was time to take an impairment.

And so we don't like to take impairments on the one hand, but it's -- in some ways, we're on a path of exploring where that road goes. And we're deep into that path. And so again, we took the impairment as a result and it was certainly the right thing and the appropriate time to do so.

The other item that you didn't ask about, but just to touch upon because it is strategic and it very much fits. While it's an impairment, there's a good sort of story behind it or a good purpose that's very much consistent with what we're up to.

There was sort of a bit of technology that the company historically had invested in that was one example, an illustration of a lot of the challenges that we've had historically on the IT side that we've talked -- I know in each of the quarters we've talked about this, that is very important to us going forward to create efficiencies and allow this company to really optimize and realize what it's capable of.

A number of those fall within the area of IT. And this is one of them where we basically effectively are writing off or letting go of some expense that was already sunk in a technology that wasn't going to really be the best-in-class, wasn't going to benefit us. There were a much better alternative. And so we've made that decision to go forward on this technology that's within the truck service part of our business. And as a result, had to take our un-impairment there.

Next question is from Bryan Maher, B. Riley FBR.

Yes. So otherwise, besides the fuel margins, pretty decent quarter that you should be pretty proud about. But sticking with fuel margins for a second and having been involved in this name for over a decade, can you tell us -- and I don't want to beat a dead horse here, but was there anything weirdly impacting the fuel margins in the third quarter that you have or could identify which would explain it coming up a bit short of what we were looking for.

Yes. Thanks for the question, Bryan. And again, good to connect this morning. There really isn't. There was nothing sort of extraordinary, and I'll share again, I'll walk through this, and maybe it will be useful. I know it is to me.

The manner by which we buy the spot buying in periods of volatility, where there's a [vig] between wholesale and retail pricing, and we can hold retail pricing up relatively longer than the wholesale side has changed. We make -- that's better for us when there's movement.

When you look at 2019 versus 2020, Q3, and I looked at this just to have sort of a very fact sort of mathematical point to make here. If you look at the volatility in 2019, Q3 versus 2020, the average daily market change in 2019 for that period was 2.9% -- 2.9 cents, for 2020, it was 1.9 cents.

So mathematically, there was a lesser -- lower volatility period for us. Which caused us to lose, I don't know, about $0.01, a little over $0.01, I think it is, comparatively. So there really was nothing odd. We're certainly -- that's something I and Peter look at every single day.

I mean there are a number of things, right, to run this business, we look at everyday; one of the very top ones, because of how much a part of this company is -- is diesel, particularly -- both kinds of fuel, but diesel, particularly; volume and margin. And volume has been terrific, and we're really happy with that, particularly in this period of time where 9 months ago was scary, what it could have been fast forwarding to today. And so it hasn't been, and we're really proud of where we are on the volume side.

The margin side, it's something we look at every day. We're pulling whatever levers we can every day, playing around with -- I'm moving to gas for a second. But on the gas side, greater differentials in premium to regular. There's a lot of small levers and now with the new leader, Jeff Burrell on the fuel side, has only been with us about 3 and a half months, really looking hard at that and his team every day. And we've kind of added to that team a little bit.

But that's where it flushed out for the quarter. And I'm excited that, as I mentioned, those 1 data points or facts, I should say Q -- I'm sorry, October 1 with that larger purchasing RFP and to the analytics we're relying on as of just October 8. I'm optimistic we'll start seeing a difference as we go forward. But no, there really wasn't anything sort of odd or aberrant or unusual to offer as an explanation as to where the quarter ended on fuel margin -- on diesel margin, particularly.

Okay. But just to be clear, because I don't want anybody to get the wrong idea because volumes were well above where I think a lot of people, ourselves included, thought, but margins were down. There's no intention by the company to try and compete on price to drive volumes at the expense of margins. Would that be a correct assessment?

That's a correct assessment. We're not taking active steps to trade margin for volume or vice versa. We're sort of -- while the variables obviously are very much related, we're very focused on things that drive volume that are somewhat different and detached from just giving up margin, if that makes sense. So that -- what you summarized is correct.

Great. And then you touched upon this in your prepared comments, but drilling a little bit deeper on-site level operating expenses, and I really applaud what you've done so far. It's probably the first time in many, many years, I've been pleasantly surprised with site level op.

But as you've been in the role now for ten months, and Peter, you've been there since the first quarter, when you look at the $900 million to $950 million-ish of site level operating, what is your gut telling you that you could take it down to? Is it a low $800 million number? Is it a mid-$800 million number? I mean do you have -- can you give us any thoughts there on where you see that may be heading?

Sure, Bryan. And I would love to give you again a numerical answer, and I'm not going to as much as I want to. And I'm not quite there, but I'll say this, the numbers are huge, right? $911 million, I think it is, $500 million labor, $400 million non-labor. So we're looking at those 2 -- the labor and non-labor differently. The way you get to a result or an improvement on each of those, the process is a bit different. And so we're looking at those somewhat unpacked.

We've engaged with a number of companies who, at least one of whom we will probably seek some help from going forward to dig into this to supplement Peter's team just because there will be a heavy lift that will take a period of time to dive into these really deeply and get us to a place of kind of optimization or close to that.

But in the process of interviewing a number of companies, number of firms, we heard some very lofty potential, and I emphasize potential. But I was encouraged what I was hearing from folks who do this for a living -- granted, they're trying to persuade us into hiring company A versus B versus C, but good companies also are careful not to over-commit and then under-deliver later.

So I'm really encouraged how far we can go here, but at the same point until I get into it, and like, I feel good about it, I look myself in the mirror and say, from $900 million -- the $500 million, we can get to X $500 million minus and the $400 million, the non-labor we can get from $400 million to Y minus -- until I can look myself in the mirror with something and have a deeper contact with it, I really don't want to set an expectation even directionally.

I just, again, really important right here is for us to build credibility and trust back from you guys and from the market with authenticity. And if I start loosely throwing things out there, it's contrary to that. And I just -- I'm reluctant to do that. Peter, if you want to add to that, maybe?

Yes. Bryan, if you look at the year-to-date, we've cut quite a bit, $655 million from $709 million. But I just want to remind everyone that we have a burning platform here this year. And the pandemic has caused us to make a number of decisions you might not make in a normal year. Yet in that normal year, you might expect revenues to increase.

So in absolute dollar amount, we're spending a lot of time right now as we put our budgets together for 2021 so that we ensure we identify what is sticky and what isn't sticky, vis-a-vis, hopefully, some modest growth in revenue next year.

So an absolute dollar amount is difficult to predict, an absolute percentage is difficult to predict. Having said that, focusing on what's sticky so that we can drive increased free cash flow. That's how we think about it.

Great. And just last for me and kind of quickly. The IHOP, you touched about it in your earnings release. And I think I might have noticed a $1.4 million number for a conversion versus -- I think maybe a year ago when this first came up, it was like [$1.1 million]. Am I reading that right is the number of potential cost conversions increasing? And could that influence your decision to pursue that in scale?

Thanks again. Good question, Bryan. You're absolutely right, by the way. The number, when I sort of got here early in the year, was about the [$1.1 million] exactly. Your recollection is spot on. And after the experience of opening the first one in South Atlanta, the real numbers came in a bit higher, closer to $1.4 million. Now it would be very easy to sort of build in and bake in something closer to $1.1 million, that we're going to get better at it. You start doing more of it, etc. That's not how we look at things. We tend to be very conservative. So that's A. So yes, the number did go up. And for now, the [$1.4 million] is more of a real -- an actual number from a one-off, and I'm hopeful and even maybe optimistic we'll do better than that, but that's not how we plan here. So that's the number.

The differential -- sure. It could -- around the margins, it could make a difference as we pro forma different locations, and we are developing pro formas that are peculiar to locations because different markets will behave differently. The 300,000 could very well be dispositive. It could put us above or below a threshold that we're not comfortable with. On the other hand, we were only -- our agreement really calls for 20 total. With the option to do much, many, more. We have enough sites, I'm hopeful of this. I don't yet know. But I believe in sitting here. We have enough sites that 270 total non-franchise, 230 plus, that 10% are going to pretty, for sure, have an IHOP that we can figure that out. Out of every ten, we need one. So I think the math will end up working out. That's my just gut check. That's not anything more than a gut check, that the math will work out with that slightly higher number or higher number, not necessarily, a slightly higher number as we get into it.

But again, as we also open -- we're not going to just tomorrow go open 20. We'll do a handful, several more and build on that. We'll learn as we go. Hopefully, we'll start seeing efficiencies. And then, based on those efficiencies, perhaps the $1.4 million comes back down to a $1.1 million or $1.2 million, and then we continue to learn and improve how we think about things, how we model things and then ultimately how we make choices and decisions.

Next question comes from Chris Sakai of Singular Research.

I just had one question. There may not be any numbers behind this, but I just wanted to get your feeling on this. As far as the restaurants are concerned, could you give a proportion of total restaurants that are out -- currently outside? And if you don't have that, any sort of -- just any sort of idea there? Thanks.

Chris, just if you could clarify, when you say the restaurants that are outside, just -- I want to make sure I'm responsive. So if you can share with me what you mean, so I can again be appropriately responsive.

Well, their outdoor dining?

Okay. So the restaurants that I have visited, everyone I visited, and I don't know if Barry, you'd want to chime in after me, if you have -- can clarify or correct what I'm about to say here. But every restaurant I have visited has -- a full-service restaurant has indoor seating. A few of them -- or actually, more than a few, many have an opportunity to sit outside, whether it's to eat that meal or to just sit and enjoy a soda or just take a break before getting back to your truck or car. But I haven't visited one that had sort of exclusive seating outside. Barry, is that correct? Can you just…

Yes, Jon, that's correct for the TravelCenters. The Quaker Steak & Lubes, however, almost all of those have outdoor seating on their patios and kind of helped us get through this pandemic, but nothing on the TA side.

Okay. Yes, just because I wanted to get an idea of, as we head into the winter, what do you -- what is being planned for as far as maybe the -- I don't know if it's possible for these outdoor dining areas to be sort of sheltered or indoor.

Yes. I don't -- my perspective on that is I don't think that will have a material impact on the business or even the FSR, the full -- I'm sorry, the full-service restaurant part of the business.

As you know, just going back a moment of a brief historical comment. When we first hit the pandemic, in call it early March, our sales went down for that part of the business by 90%. And as a result of that, we sort of took this, imagine, third month as CEO, first a couple of -- first month for Peter as CFO. We took a fairly aggressive and quick response to that, separate from our transformational plans, and we furloughed 4,000 people.

We've opened restaurants back up very cautiously, very carefully, in some places, as permitted by the authorities. And some we still chose not to open because we didn't see the demand there.

We will continue to run these restaurants with intensive discipline and focus. And as we shared, certain things we're doing as we reopen, for example, the buffets have not reopened, we're opening with much fewer menu items. But menu items that our professional drivers have voted with their wallets by what items sold in volume and at a reasonable margin. And so we're only selling those items.

So we're going to continue to operate these restaurants as well as consider alternatives to how we operate our restaurants, whether outside brands like IHOP or others, to potentially even other -- on a case-by-case basis, potential other uses for those spaces. So we're going to continue to evaluate and consider all of that.

And I just -- I don't -- I'm not particularly concerned as that being a factor in impacting the overall company performance. We'll just continue to adapt as necessary and as we've proven we can through the second and third quarters with respect to demand on this part of the business.

Next, we have a follow-up question from Jim Sullivan of BTIG.

Yes. Just a quick one. Again, back at midyear, you talked about the introduction or the development of a truck service rehab program and you were estimating that that would boost the margin for that retail, for that nonfuel segment. You did have a nice increase in truck service, the truck service line on a sequential quarter basis.

I know that line item is going to be very much impacted by weather, and therefore, it can be very volatile. But I just wonder if -- when we look at the third quarter for the truck service, is that rehab program impacting that business yet?

I think it -- they're all -- again, thanks again for the question, Jim. There are a lot of levers we're pulling that I think are impacting that part of the business and how we engage with our customers to that role that you just referenced, this rehab. And we created a role under a gentleman who is really -- and I referred to it indirectly before -- is creating more accountability in truck service.

We have the same exact role -- based on the success of that person and that role we've now done the same thing in the c-store a month later. And it, frankly, may even drive broader organizational change, just having this mid-level manager with a different purpose and driving accountability.

So while there are a lot of levers we're pulling, and I think a lot of different contributors, and it's a little tricky to -- it's a little confounding because there's so much going on, but that's with intent. That it's hard to isolate variables and say this exactly contributed that much.

But I absolutely believe the single biggest contributor to that business so far and how it's performing, is this -- what you described as that truck service rehab and the creation of this sort of increased accountability role that I just described. So thanks for the question, Jim.

This concludes our question-and-answer session. Now I'd like to turn the conference back over to Mr. Jon Pertchik.

Great. Well, thanks to everybody for listening this morning. Thanks for your interest in TA, and have a great day. Thanks, everybody.

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