U-Haul Holding Co (UHAL) 2012 Q3 法說會逐字稿

Good morning and welcome to AMERCO third-quarter fiscal 2012 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).

I would now like to hand the call over to Jennifer Flachman.

Good morning and thank you for joining us today and welcome to the AMERCO third-quarter fiscal 2012 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 ended December 31, 2011 which is on file with the Securities and Exchange Commission.

Participating in the call today will be Joe Shoen, AMERCO's chairman. I'll now turn the call over to Joe.

Thank you and good morning. Welcome to AMERCO's third quarter investor call. I am speaking to you from Phoenix, Arizona. I have Jason Berg here with me. Gary Horton and Rocky Wardrip are participating via the telephone.

A week ago we released very disappointing news regarding the reserve increases at Republic Western. This is discouraging news in the face of what otherwise is a solid third quarter. Our various U-Haul teams across North America continue to merit the patronage of the self-moving customer. As we can best measure, our customer satisfaction is high and is trending up.

Our truck fleet remains well-positioned across the United States and Canada and in good operating condition. Our trailer fleet likewise is experiencing good growth, and we will be manufacturing trailers for the rental fleet going into the end of this year and into the first half of next year.

The U-Box product line continues to develop. Of course, like in a lot of things, the more we learn the more we find out we don't know. There are many subtleties to this business and we are gradually mastering them. We currently offer the product at about 1,500 locations and expect to add 500 more through the spring.

Our current good results are the result of countless small initiatives coming together. Additionally this quarter, we have benefited from a very mild winter. I look forward to a good finish to our fiscal year.

Now I am going to let Jason walk you through the numbers. Jason.

Thanks, Joe. Yesterday we reported third-quarter earnings of $0.04 per share compared with $0.80 for the same period last year. Included in this quarter's results is $1.61 of non-cash charge for the reserve strengthening in our Property and Casualty Insurance subsidiary, Repwest. I will go into a little more detail on an adjustment here in a few moments.

Taking into account this charge, adjusted earnings would have been $1.65 per share for the three months ended December 31st, 2011. Again, that would be compared to $0.80 per share for the same period last year.

Excluding our insurance subsidiaries, operating earnings at our core Moving and Storage segment increased $17 million to nearly $62 million for the quarter. For the nine months we have generated a $62 million increase in operating earnings or approximately 19% at the Moving and Storage segment.

U-Move revenues in the third quarter of fiscal 2012 increased almost $33 million or about 10%. Transactions continue to increase for both our in-town and one-way truck rental business. In the quarter we saw about an 8% increase in total transactions and for the nine months we were up just over 6%.

The average number of trucks in the fleet continues to be greater this year versus the same trade last year by about 3%. It is worthwhile to note that this marks the ninth consecutive quarter of U-Move revenue growth for us. Initial indications from January show that U-Move revenue results are continuing to trend positively compared to last year.

For the first nine months of this year, capital expenditures on new rental trucks and trailers increased nearly $74 million to about $335 million compared to the same time last year. Proceeds from the sale of retired equipment were $138 million.

Our projections for rental equipment growth capital expenditures in fiscal 2012 are likely to be near $480 million if production schedules work out as planned. That number is before netting any sale proceeds against it. Revenues for our storage program increased a little more than $3 million for the third quarter of this year compared to last year. This also represents the ninth consecutive quarter of growth in self storage revenues.

Our occupancy gains stemming from the acquisition of new facilities already in lease-up as well as from organic growth at our existing locations pushed revenue higher, while we did see modest improvements in the average rate per square foot as well. Our average all-in occupancy rate increased from 75% to 76% for the quarter as compared to the same time last year.

Included in this occupancy rate is the addition of over 1.3 million net rentable square feet to the portfolio over the last 12 months. Our spending on real estate-related CapEx including construction, renovation, and acquisitions was approximately $28 million during the quarter, bringing the nine-month total to approximately $75 million.

While consolidated total costs and expenses increased nearly $130 million for the quarter compared to the same time last year. It is important to break this out amongst the three of our key segments. Moving and Storage, Life Insurance, and Property and Casualty.

First, total costs at the Moving and Storage segment increased nearly $26 million. That is about 6.5% compared with revenues for the quarter which increased $43 million or nearly 10%. Of the $26 million increase, operating expenses at the Moving and Storage segment increased about $18 million for the third quarter compared to the same time last year. A significant portion of that increase is tied into personnel expense and can be related to the increase in business activity.

Maintenance and repair costs did experience a moderate increase during the quarter. However, the rate of increase was substantially less than in the previous three quarters.

Our operating margin for Moving and Storage, which is defined as operating earnings divided by total revenue, improved from 10.2% to 12.8% for the quarter. For the nine months, we have seen an improvement in operating margin of approximately 2% as well. The reduction in lease expense associated with the truck and trailer fleet has contributed to the improvement in operating margin.

Oxford, our Life Insurance subsidiary, entered into another reinsurance agreement in the third quarter of fiscal 2012 to assume a percentage portion of a block of whole Life Insurance business. The accounting for this type of transaction results in recording the assumption of the reserves for these policies [as] been increase in premium and benefits during the quarter resulting in no material change to the period's net income.

As you may recall we closed a similar reinsurance transaction in the third quarter of last year along with the acquisition of a block of Medicare supplement policies. Taking into account these transactions, Oxford's premiums increased $58 million for the third quarter of fiscal 2012 compared to last year. These transactions had a similar effect on Oxford's benefit line which increased $57 million during the quarter. Oxford's operating earnings improved by nearly $2 million for the quarter.

Oxford continues to pursue its strategy of optimizing its allocated capital through acquisitions of business that fall within its scope of expertise.

Repwest, our Property and Casualty Insurance subsidiary, took an after-tax charge of $31 million during the third quarter of fiscal 2012. This, following an internal review of its excess workers' compensation business. This is business that was written by Repwest from 1983 to 2001 and then assumes from other insurance carriers from 2001 through 2003.

The underlying risks are in no way associated with U-Haul's core Moving and Storage business or its customers.

The review found that claims had been developing much more adversely than previously anticipated due in part to medical inflation, additional claimant treatment, longer claim terms and changes we found in seating entity and third-party administrator reporting practices.

It was these factors that led to a change in our underlying loss assumptions that culminated in the reserve strengthening. The Company has bolstered its routine review process to encourage a proactive assessment of the claims going forward and as well as the adjusted projected claim cost in a timely manner. But while we believe that we have set our assumptions at a conservative level to properly estimate future costs we cannot provide absolute assurance that future increases will not be necessary.

We will continue to focus on identifying opportunities that they afford us a permanent solution to this block of business.

The result of all of this was that earnings from operations for the third quarter of fiscal 2012 were $25 million compared to $51 million last year. For the nine months, we had operating earnings of $357 million compared to $337 million last year. Also of note, on December 7 of this last year the Company declared a special cash dividend on our common stock of $1.00 per share that was subsequently paid on January 3 of this year.

In wrapping up with our cash and short-term investments, excluding our insurance Company balances, we had $406 million at December 31, 2011. We also had cash availability from existing borrowing facilities an additional $312 million.

With that, I would like to have the call back to Joe.

Thanks, Jason. We will go to the moderator now and accept questions from anybody who calls. (technical difficulty)

(Operator Instructions). [Gao Shien] with CL King & Associates.

This is Gao Shien with CL King and Associates for Jim Barrett. My question is how has your pricing been? Could you comment on that please?

Sure, this is Joe speaking. As you may be aware, we spent considerable effort rolling out an entire new pricing matrix about 4.5 years ago. It took us two or three years to really master the implementation of it, and now we have a pricing system that allows us to discriminate almost endlessly, and it better matches our approach to the market because we -- unlike most of our competitors, we service the entire North American population. Every small town in Canada and the United States. And so we need to be able to do very, very discriminating things with pricing which we are now able to do.

And so I think that while industry pricing is sluggish when you get down to point to point pressing we are able to have them have the same opportunities in [specific journey destination], combinations that are unique to U-Haul. So in other words from a very small town in Alberta to some very small town in North Dakota, we are able to price right to that rather than in a more generalized function.

And I think that really helped our situation. But I think that's probably a company phenomena and not an industry phenomena.

Okay. And in terms of your average life of your trucks and the trends in used truck prices, could you comment on that please?

Ask that one more time, could you?

In terms of the trends in the used truck prices and the average life of your truck prices.

Sure. Used truck prices are going to continue to inflate because vehicle manufacturers are under constant pressure to add features to new equipment and so to -- and from a macro point of view used truck prices are always going to trend the way new truck prices are which is up. Of course right now the economy is seeing a little bit of an upswing. And so truck prices are a lot firmer than they were three years ago.

So there's kind of a macro and then -- but the very specific term is is right now truck pricing, used truck pricing is pretty decent.

Okay. Could you provide me a little color on the U-Box part of your business?

Sure. We are -- our strategy is to offer the product comprehensively not just in major metro, so that gives us a different strategy than any other entrant I'm familiar with in the business. And we see lots of anecdotal information that the customer very much would like this product.

The question is how to provide it at a quality level that the customer considers acceptable and at the same time make a profit to us.

So at this time I can say with no doubt we are not making any money. But I also would say that we are pretty much expensing our costs in a responsible manner so we are not building a big bow wave of unamortized cost ahead of us. We are feeding them as we go so I think it is going to be a success, it's just a question of when.

I thought we would be successful by now and I could announce that to you all but we are not there yet. We are definitely heading in that direction in my judgment.

Will the CapEx increase on the going forward on the U-Boat business?

It kind of gets buried a little bit in some of the real estate and in some of the equipment. It is not going to be a great big jump, no but, for instance, if today I was to buy a new facility in the Albany area or build a new facility I would put in accommodation for U-Box there. Whether that would be -- it would be a $200,000 to $500,000 accommodation would be a pretty good guess. So that would be on a project that otherwise would maybe be a $3 million project or a $2 million.

So it might bump a new real estate project as much as 10%. But it's not going to be -- in my judgment at least you are not going to see something that's a $50 million bump or something of that nature, no.

Okay. And in terms of a general macro trend, there's reduced mobility in society. How do you reconcile that with your revenue growth?

Well we are just trying to do a better job. You know, we have a 65 year history with people and a lot of people give us a chance about their business because they've been served acceptably in the past, and as I mentioned our customer satisfaction Index which is hard to measure but is near as I can measure is up. I think that principle of free economy is people go to the highest value/least cost provider. And we are attempting to do both. It doesn't always work out for us.

But right now we are getting a pretty good matchup with the customer being both the highest value and lowest cost provider.

Thanks. Thank you for your time and congratulations on your performance.

(Operator Instructions). Ross Haberman with Haberman Management.

Nice quarter, nice year. I just have two quick questions. The $406 million of cash, was that at the holding company or is that including the cash at the insurance companies as well?

Rocky or Gary, you want to answer that?

Actually, Ross, it has kind of slipped between the parent and U-Haul International but that is all held outside of the insurance companies.

Okay, the $406 million. Okay. And I think I might have missed it. Did you say how much you are spending on new trucks for the coming calendar year?

No we didn't and what we do is we try to commit about 90 days at a time and so -- I think our truck expenditures will be equal to or maybe a little bit. How exactly it flows into the financial statement of course depends on our split between lease and buy. So I mean do you have a projection, Jason?

Yes, Ross, for it to wrap up the year our projection for the 12 months was gross CapEx of about $480 million with expected sales around $165 million. So our net CapEx would be about $315 million for this year as compared to about $209 million net CapEx in fiscal 2011.

And then for the fourth, I don't have a projection yet for fiscal 2013 but how that would flow through the fourth quarter would be net CapEx of about $118 million in the fourth quarter compared to $95 million last year.

Okay. And just pricing for used trucks, up, down or about the same?

Well, it --. We are on a wide spectrum, as I think you know. Everything from year-old pickups and vans to possibly as old as a 15-year-old six-wheel truck. So there's not any one statement but pricing is firming up and it's not -- there's no indication that it is going to fall off the edge of the Earth. And if you just look at what the new vehicle manufacturers are having to do, they are having to add more content and more value. And so prices on new goes up and to a certain extent over a period of time used prices simply follow the trend of new.

And new is going up. There's just whether it's the new fuel economy standards that are being put through, they are going to raise the price of new vehicles. Now that is good for used vehicle sales but we are buying new all the time too. So it is not so good for new.

But they kind of are proceeding in tandem. We try real hard not to have ourselves in a position where if sales go to hell for a 180-day period or something that we are all of a sudden caught in some kind of a bind. You understand?

So we are constantly trying to manage our position so that -- because it's a key economic factor managing this whole business is, can you take out the bottom what you put in the top? And I have the same team in place I had all last year and the year before. I don't have a new team or an inexperienced team and they are managing this, I think, as well as we ever have in the last 30 years. So but we are subject to, if there's some big macroeconomic thing that happens and it beats down [rises] of used vehicles we just simply will stop buying new and let them all age out another year.

You see, we are not necessarily in a spot where everything has to flip every time. Now but on the other hand, when you can flip them let's keep them flipping. So we are busy selling trucks right now.

Just one final question, and I know it is sort of a hypothetical. How many years out are we away for you to convert over your fleet to natural gas like we are hearing from other, I guess, maybe not nonmoving but other fleets of --?

Give or take 50 years.

(laughter). All right, fair enough.

I just -- I think what you want is a baloney answer I will tell you what we are very active at this. We have a strong sustainability initiative and we are going to do everything we can to ensure a good life for my children and grandchildren, which I have plenty of.

But you are saying it is a number of years away.

Well, yes, sure. You just go log on to any manufacturer's website and see what they are selling. Now if the government mandates this, this will be an economic catastrophe and lower the standard of living of most Americans and we will offer that truck.

But in the meantime, that truck is not likely to happen. There's no infrastructure to fuel that truck. There's no mechanic knowledgeable in maintaining that truck, and pilot programs which of coarse we engage in various pilot programs at all times, pilot programs are just that. There are pilot programs. And every one we do costs us money. Doesn't make us money.

Now that doesn't mean we -- we are socially conscious. We got the idea and we are clearly doing that. But I can impact carbon footprint of this Company by a factor of 10 or 20 by other clearly known means than going to an [alt field] right now. Now when the alt field becomes reasonable we are going to be all over it.

Again I just mention it because I'm hearing from other types of other nonmoving fleets that they are moving towards that within a year or two.

I don't want to be discouraging, but I don't want to fool you either. Of course, whatever works for the environment, we are going to do. But right now we have ways we know we demonstrate -- I have a PhD in sustainability on the payroll full-time. I don't take a casual attitude towards it but I have real grandchildren I want to breathe real air not baloney. You understand? And so a baloney program I'm not for. A program that gives clean air to my grandchildren I am very, very much in support of and we are very aggressive on that.

So total carbon footprint, we are reducing not increasing. But it is not true at this time. It is not through alt fuels. Alt fuels is still a tentative thing and even if the manufacturer, you see, the fiasco for the GM company with their recent electric vehicle. I have no reason to believe they are anything other than totally sincere and I know they are competent, hard-working people and they have got themselves an economic mess on their hands.

So we are monitoring it. We are aware of it. But it's still beyond the reach of anybody I've met.

Okay. Appreciate it. Nice quarter, nice year. I'll stay in touch.

(Operator Instructions). At this time, there are no further questions. I would like to turn the call back over to management for closing remarks.

Thank you again for your support over the prior 90 days, over the prior year and over the prior five years. As you have heard me say before, the business cycle at U-Haul is a one-year which is good news because present trends will probably continue for a little while. But it also means the thing doesn't turn on a dime. The results you see today are the results of actions we took two, three, four, five years ago.

My thanks and look forward to talking to you again at our next earnings call.

Thank you. This concludes today's conference. You may now disconnect.