U-Haul Holding Co (UHAL) 2006 Q3 法說會逐字稿

Good afternoon. My name is Valerie and I will be your conference facilitator. At this time, I would like to welcome everyone to the AMERCO third-quarter fiscal 2006 investor call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you. At this time I will turn the call over to Ms. Jennifer Flachman, and you may begin your conference.

Thank you for joining us today and welcome to the AMERCO third-quarter fiscal 2006 investor call. Before we begin, I would like to remind everyone that certain of the statements during this call regarding general revenues, income and general growth of our business constitute forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995 and certain factors could cause actual results to differ materially from those projected. For a brief discussion of the risks and uncertainties that may affect AMERCO's business and future operating results, please refer to Form 10-Q for the quarter and December 31, 2005, which is on file with the Securities and Exchange Commission.

Participating in the call today will be Joe Shoen, Chairman of AMERCO and I will now turn the call over to Mr. Shoen.

Hello. This is Joe Shoen speaking to you from Phoenix, Arizona. I have Gary Horton, AMERCO's Treasurer and Jason Berg, AMERCO's Chief Accounting Officer on the call with me and they will be available to answer questions.

For the nine months, net earnings available to common shareholders came in at $5.26 a share compared to $5.25 a share for the same period last year. Earnings for the quarter were $0.57 a share and this is a very good result as the seasonal nature of the U-Haul business can result in a loss for the third quarter. Our two insurance companies continued to perform on plan.

The financial results that you see today are greatly impacted by actions taken in prior years. Likewise, what we are doing today impacts our future results. As an owner myself, I take a very long-term look at our results.

U-Haul of course performed well in the quarter. With top-line growth improved compared to the first two quarters and this is as we had planned and I believe discussed in prior calls. The very mild winter in the United States this year has mitigated any winter weather disruptions of our U-Haul rental business. All of this contributed to a very good third quarter.

As we have discussed in prior calls, U-Haul continues to bring new rental trucks into the fleet at a very brisk pace. For the nine months, we introduced about 12,000 moving band units. This pace will continue or accelerate into the new year.

While most truck initial acquisitions have been financed by track leases, U-Haul will likely use debt financing for part of this activity in the fourth and into the first quarter. Funds availability and pricing remains competitive in both lease and debt markets.

Sales of moving-related items continued well in the third quarter. Propane sales were dampened by the mild winter weather. Towing accessories continued to outperform last year by a substantial margin.

U-Haul Self Storage revenue and occupancy growth continues on plan. We expect to see gains through the first quarter. We have made some modest capital commitments for more product as we mentioned last fall. The Company continues to methodically pursue self storage opportunities, both owned and managed. Our eMove affiliate program, which is our primary thrust, continues to make gains as per plan.

Overall, AMERCO had a good nine months and should finish the year well.

I will now turn the call back to the moderator and we will proceed with the question-and-answer session. You're welcome to direct your question at Jason, Gary or myself. Moderator, would you pick it up again?

(OPERATOR INSTRUCTIONS). Ian Gilson.

Congratulations. As I look at the ratios, there is revenue components versus your expense components. I notice that operating expenses as a percentage of rental revenue showed a significant and marked improvement over prior third quarters. Is there anything in there that sort of benefited or was it just the unexpected high level of revenue?

Ian, this is Joe speaking. As I think we talked about in the last quarter, we did a favorable trade-off and should for a few more quarters get a favorable trade-off of the acquisition costs of new equipment versus the capital costs and repair costs of equipment it's replacing. And we think we will continue to see that for a couple more quarters.

We were as I said in my comments, we were blessed with good weather and so we didn't get smacked; you can get smacked and lose a couple million dollars of growth any time in the third and fourth quarters and not recover that growth. And we didn't have any of that experience. So there was a little bit of top line. But we had forecasted we would have top line. And so I think that most of what you're seeing was in just general cost control but moreover was in the trade-off of repair expense against lease and interest and depreciation, which is somewhat predictable if you had all the specific numbers, which I understand you don't. But --

Did we have any unusually high level of truck sales in the quarter?

No, truck sales has been just steadily gaining momentum. I want to accelerate it but there wasn't anything outstanding -- maybe we were running at -- I'll just guess 5% better than we didn't in the second quarter. I would like to have seen a little more truck sales, frankly.

Thank you very much.

One other comment, Ian, I want to take a moment to recognize you for a person who has objectively looked at this story and you're the person who really looked at this story hard two-and-a-half years ago and I appreciate it.

Jim Barrett.

Hello, everyone. Joe, if we fast forward a year, you added 12 new trucks through the first nine months. How many new trucks, including the 12, do you expect to have when we look out one year?

I'm doing the math here. I'd say 30,000 plus. I don't buy them out that far, okay, so I have my u-turns built into this process. But I am committed out into the summer, as you might figure. I mean I have a pretty good idea where we're headed so I don't want to have my feet held to the fire on that number. But I'd say that's a pretty good number, assuming we continue to make good progress in the marketplace, which it is my plan to do and assuming we can continue with decent truck sales because I want to remove trucks not just -- not solely add trucks. We've gained a little bit of net rental equipment inventory but I'm not looking to add over that period of time say 15 or 18,000 more trucks to total inventory. So I need to be selling trucks too.

I see. Clearly, you seem to be benefiting from reduced maintenance expense relating to these new trucks and your operating expenses were down $15 million roughly year-over-year. Was that completely due to lower maintenance or are there other issues involved there?

Well, we got a couple of lucky breaks on some other lines, ok? In other words, things happened the way we planned for them, so I shouldn't say they were lucky. Things worked in a couple of lines. But the vast majority of them is in the maintenance line.

And again, as you are very well aware, Gary Horton, for years, has tried to encourage people to look at us as an EBITDAR, and when you do that, you can see the -- at least the trade-off on interest and depreciation. There's in fact a trade-off to go back against maintenance. And so, as we kind of reshuffle the deck here a little bit or resort the cards, obviously, we're sorting for more net and there's continued opportunity there.

Right, well, certainly, if you save 15 million in the quarter and the vast majority of that was maintenance -- and again I understand it's extremely preliminary to look out a year -- why wouldn't you see continued improvement in your maintenance expense item as we go over the next four quarters as opposed to just the next couple? Because presumably the trucks that you bought two quarters ago I wouldn't think would be breaking down when I look out a year. And those trucks are maybe a year-and-a-half, two years old?

I have got some low-hanging fruit, number one and so that's easy. The second is I don't actually have my repair plan in place in the next 12 months for the next 12 months. So we go through a very methodical program of trying to budget this out. Because what you first want to always spend enough on repair. It's a catastrophe to under-spend on repair. So what you want to do is be very premeditated about this. You want to feel totally comfortable with what you do there because repair is -- it's just like repair on a home. You cannot do it any one year but you always end up having to do it. You know what I mean?

Right, exactly.

That's the same thing with the fleet. So I want to be very, very deliberate and I don't want to forecast something that I think would result in putting a liability into a future time period or that would in any way do anything to lessen the rental or the nature of any individual truck.

So we have got some low-hanging fruit. I've got a little bit of low-hanging fruit staring me in the face. I can assure you I have very deliberate people working through this and their objective, of course, is to continue to improve the situation and if there's improvement, they will be going after them. And you can be sure with the capital markets the way they are now and the availability of funds that to find a good trade-off will make the trade-off? Does that make sense?

Yes, yes.

We're not restricted in that regard. So we are aggressively doing it. But again, I haven't gone -- and we do this at a very detailed level -- and I haven't been through that exercise past this March. And my people are working that up right now. We will go through that exercise here no doubt in the next 45 days and we'll have a pretty good idea of some very specific targets and I would have a more knowledgeable opinion.

Sure, okay. And two other quick questions and I can probably infer this from your results, but how do you characterize the competitive pricing environment currently?

Way better than prior years. Still not crystal clear and the one thing that has always kind of baffled me about this, business I would expect it to function where we just simply do price leadership and everybody would come along but I have been confounded over the last 20 years by the number of people who think if they shade me a little bit that I'm going to stand still for it and let them pull share. So I'm not going to let anybody pull share that I know about. And right now, people are acting that way and so they're not just totally trying to shade me by 3 or 5%, which has a downward spiral on prices. I don't have -- there's not good communication in this industry. In other words, the three main competitors don't talk to each other. I don't have a clue what they plan to do. If I guess, I guess wrong.

[Chuck] Sullivan.

Good afternoon and congratulations on a great quarter. A couple of questions have already been answered but a couple of quick more if I may. Would you touch basically on the synergies between the units?

You want to talk storage and uMove or you want to talk (multiple speakers)

I guess specifically drilling down to the Oxford and how you see it fitting.

Good. Oxford has no synergies with U-Haul. Oxford is an insurance company and it originally had synergies but we can contract around it in more creative and thereby potentially more cost-effective ways and have been doing that for some time. Our other insurance company, Republic Western, has about 250 employees of whom about 215 or so actually work in handling U-Haul property damage claims. So those people are integral to the operation and they operate essentially at a breakeven or a slight cost plus basis. We pay the claims and then we pay them an adjusting fee to adjust the claim. So there's no synergy other than just it's a function they provide that we think in a good manner. We have had some real positive results. You may see some of the press releases on fraud prevention.

Insurance fraud is a an epidemic in this country in the rental business and we have had some great success and we think we've got another year or two of fertile ground to plow there. We can see other opportunities in fraud prevention. So we're very excited about that.

The Storage and the U-Haul, we believe those are literally synergistic or same customer, different day. And so we're very, very committed to that. Oxford is a financial investment and Republic Western, the vast bulk of it, is handling claims. The other part, which is the part that lost us $100 and some million dollars, is methodically being shrunken and it continues in de facto runoff; that's not a technically correct answer. But all it is doing is paying claims and investing its reserves and then reassessing its reserves and comparing it to what cash they actually have on hand to be sure that they are optimizing that. And at the end of the day, that will leave some hopefully very considerable pile of cash.

But that's a process and it's agonizingly slow. There is not a panacea that I have been able to find. In other words, we can't just transfer that risk to somebody else. For us to do that, they want way, way, way too high a price. It's very, very cost ineffective. So if that answers your question or if you have a further follow-up, I'd be glad to answer it.

Well as a follow-up on the Oxford, since there's not necessarily any obvious synergies upfront, is it a divestiture candidate at some point should the right party come along?

Well, I think we're opportunistic there, sure. Somebody comes on who has got to have it, it's kind of like somebody had to have my car or my house, they're likely to get it! So we are not where that doesn't happen. On the other hand, it's a reasonable deployment of capital. We have what we believe is a very competent group of people in that business. It's essentially trouble-free. It just turned in a performance very much on plan. To that extent, it's unremarkable in that it's trouble-free, if you hear me there.

Oxford does not burn up much of my time. It doesn't burn up much of the Board of Directors' time and it doesn't have the kind of exposure that the property, casualty business does for God next year, the results could be 3 or 400% different than they are this year. Their business is basically a margin business and of course this is an inopportune time for someone in the margin business right now, at least from the life insurance point of view.

So, the fact that they're coming in at all on plan and it's a halfway okay result means well if we had a period of a little different interest rate environment, they might actually make a couple of pretty aggressively decent years for an insurance company, so.

And your balance sheet is improving too, as well?

Yes. And we have gone through the balance sheet, scrubbed and scrubbed and scrubbed, both of those companies, their balance sheets -- and boy, I just -- because I do not want to see a surprise there. I just don't see surprises coming from the balance sheet at either place.

Okay. And obviously terrific job on the moving and Storage revenues. almost a little over 8%. Taking away the weather variable for a moment, is that type of growth sustainable?

It sure is. But it's 1,000 little details coming -- right, Scott. And of course that's the people who are hear in management are paid to do is to get those details to come in right. It's absolutely sustainable.

Is it sustainable on a quarter-by-quarter basis? I would say no. There's more volatility than say you know, it's not like a train on a track and you know where it's going to come out. So the underlying business will support it if we can manage to it. In other words, the market would support it were we to manage to it; does that make sense?

Yes, well the demographics are certainly there.

Yes, the demographics are there but there's a lot of little wrinkles. We're not the only business who could say, yes, the underlying market is good but did we hit the nail on the head or were we slightly off the mark and that was my comment. Many of these things were -- results were preset by decisions we made 18 or maybe even 36 months ago.

And so in my job always, what we just had happen is ancient history and I am in a more uncertain environment. Out a year or two, how are we going to be there? Certainly now, I am within a month or two of being done with next summer, okay? Because if I don't have it happening here within the next 30 or 45 days, there's no hope of implementing anything before next summer. Everything just gets lost in the wash. You've got to have it done.

And again, I think we're typical of most enterprises in that they have to lay their plans well in advance and then go and plan again for the future and hope they planned right and then take that feedback. But the underlying market will support 8% growth, sure.

Terrific. Obviously, the brand speaks for itself and you know an ingenious form of advertising on the road every day and that's all perfect. Can you talk a little bit about the eMove and how you might be marketing that sort of technology breakthrough (multiple speakers) leverage the business a little bit?

Yes, what we are trying to do is leverage our existing commitments and enhance our competitive position. The Storage business remains with very few brand names and very little brand identification. We, like a lot of people, believe that will ultimately change. And in addition to owning and operating or owning and managing places, our strategy is to bring in independent people into the fold, similar but not the same as our model has been with U-Haul dealers over the last 60 years. And so in this case, we're able to bring quite a bit to their business in the form of just sharing our infrastructure, be it credit cards or information systems. our purchasing power and make that available to these people at some slight markup over our cost. But we have very little expense in extending that to them. We're building a network of these people across the United States and Canada and it's steadily building. It is still not enough to warrant breaking out on a separate line item on the reported results but it is my fond dream that it become that because if essentially some kind of fee income, which means it potentially has margins that are different than what we see in most of our business. And I want to do that.

I also want to enhance our competitive position because I believe that Storage will be branded, ultimately. And to the extent we can have our brand on it, I just think it may be a 15 or 20-year period, but the Company will reap results from that.

Absolutely. Last question, one of the competitors out there, at least on the storage side, Shurgard, is potentially on the block and I'm wondering if that's on your radar.

Yes, it's very much on our radar. And the Shurgard assets are a little controversial to some funding people but I don't think they're real controversial in the storage business. They're good assets. Depending on how you manage them, there's some upside in those assets. They have not been literally mismanaged from let's say an operations point of view. I can't speak to their finances because I don't -- I have no knowledge of their finances.

But from an operations point of view, it's an upper level product with better than average locations and I'd be -- I think our shareholders would be well served if we were able to participate in an economical way in something, whatever that may be.

So sure, it's a real possibility and we have of course, as I think any responsible party in the self storage business should, we have given it a lot more than a cursory review.

Of course. Again, terrific job and best of luck in the future.

Thank you.

(OPERATOR INSTRUCTIONS). Ian Gilson (technical difficulty)

Can you give me the self storage occupancy rate for the quarter?

I will look it up, just a minute. You want the ending rate for the quarter or average -- we have average. Jason is looking through the -- he will give you average for the quarter.

Average is fine. Also the tax rate was up and for the full year it was 37.9%, for the nine months, rather. Do we have an estimate for the full year?

Ian, on the average occupancy for the quarter, we were at 86.9% for the Company-owned locations. And the tax rate increased slightly for the quarter from a provision for some state income taxes. I wouldn't expect that to continue.

Okay. Did we recover any capital out of either of the insurance companies in the quarter?

We engaged in a transaction that was a nonmonetary transaction and you will see that in there. I think it's reflected at either 27 or 25 million. Jason, how does it show in the --?

There was a non-cash dividend from Republic Western to AMERCO in the form of reducing intercompany payables and receivables. I believe it was about $27 million.

Jim Barrett.

Yes, Joe, considering what appears to be a healthy acquisition environment in self storage, is that why the idea of using your cash to retire your preferred shares is not terribly attractive to you at this point?

Jim, Gary Horton, why don't you speak to it, Gary?

Really, in going through that, we were really trying to keep our cash powder dry because in looking at several different opportunities, once you pay off the preferred, then you would have to go back and reissue. I would much rather play a little bit of wait and see how bids go, if something comes up and then take that into consideration at a later date.

So Gary, you're saying if you retire the preferred, you would have to go out and reissue more debt at this point?

If a large opportunity came up where you needed cash, yes, you would probably have to go out and issue more debt. Again, we have been very thankful for all the capital markets because we have been not only being able to attract more stakeholders but at a lower cost. I mean it's really pretty good.

And again, having to go in and place debt when you really need to place debt is not always the best on rates. So we have quite a bit of liquidity and that gives us all the opportunities that we want. Again, preferred stock is one of those at some point, so.

And then on a minor note, I'm a bit confused that your property and casualty insurance premiums rose, seem to have doubled in the quarter. Can you explain that?

Sure, what actually happened was the $27 million transaction actually created let's say about 1.5 million or 1.7, I believe, of premium income. It created in identical amount of whatever you call it, expense. It's a wash. Claims and income were a wash there.

The other part that accounts for the increase is we had better penetration of what we call our safes product. And they (multiple speakers) a percentage of that safes penetration. So that percentage -- while the percentage remained constant, the total amount of the safes went up in the quarter and that reflected as premium. And that really is -- or property called premium, I would say, from your or my way of looking at things. That contributed to their result for the quarter and to their margins.

Then finally, Jan and early Feb, how would you characterize the weather relative to a typical winter or relative to last year?

Very mild.

It certainly appears that way in New York.

(OPERATOR INSTRUCTIONS). Eric [Rachman].

I'm curious, have you signed a confidentiality agreement with Shurgard as it relates to potentially looking at their portfolio?

Yes, I don't have anybody here who is an attorney besides myself and so I don't know what the right thing to tell you is but the sample is yes.

Do you think there's much opportunity to further expand the U-Haul brand overseas maybe into Europe and such or --?

In the truck and trailer business, I'm not real bullish on that. In the self storage business, there is opportunity for anybody to do that. And Shurgard has the lead, by the way, and it's not by a narrow margin either. So there's some upside in that. That's not nearly as synergistic to us as the domestic business.

Sure. Just in terms of the ability to greatly expand your portfolio, is the ability to rent trucks, is that something that you think you could dramatically increase with a dramatic increase in the number of self storage locations?

Well that gets to be a more complicated equation because that goes back to utilization and [would you] just simply moving business from a present site to that site or do you expand total business? That's a little more difficult to accurately project. So, if I rephrased your question would be, if you were analyzing the Shurgard portfolio, would you be putting a lot of upside in it based on truck rentals? And my answer would be no. That doesn't mean it wouldn't be there, it just means exactly what I said it did.

At this time, sir, there are no further questions. Mr. Shoen, are there any closing remarks, sir?

I would just like to thank everyone for their support. Again, I am, as you, I'm always buoyed up by good results but it's the work we do today that determines our result next year or next quarter and I have a motivated group of individuals who are attempting to do their best at that and I look forward to good results in the future.

This concludes today's AMERCO third-quarter fiscal 2006 investor call. You may disconnect at this time.