U-Haul Holding Co (UHAL) 2016 Q3 法說會逐字稿

Good morning and welcome to the AMERCO third quarter fiscal 2016 investor and webcast conference call. (Operator Instructions). And please note, this event is being recorded. I would now like to turn the conference over to Mr. Sebastien Reyes. Please go ahead.

Good morning, everyone, and thank you for joining us today. Welcome to the AMERCO third quarter fiscal 2016 investor call. Before we begin, I would like to remind everyone that certain of the statements during this call, including without limitation, statements regarding revenue, expenses, income, and general growth of our business may constitute forward-looking statements within the meaning of the Safe Harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain factors could cause actual results to differ materially from those projected. For a 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, 2015, which is on file with the US Securities and Exchange Commission. Participating on the call today will be Jason Berg, Chief Accounting Officer.

I will now turn the call over to Jason.

Thanks, Sebastien. Good morning. I'm speaking to you today from Phoenix, Arizona. Also on the call today is Joe Shoen, Chairman of AMERCO; and Gary Horton, AMERCO's Treasurer. All three of us will be available for questions after the prepared remarks.

Yesterday we reported third-quarter earnings of $4.17 per share as compared to $3.40 per share for the same period in fiscal 2015. All of my period over period comparisons are going to be for the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015, unless otherwise specified. Operating earnings for our moving and storage segment improved by $26 million. Coincidentally, that's the same amount of increase that we reported during last year's third quarter. All three of our primary revenue lines -- equipment rentals, self storage, and retail products and service sales -- improved for the quarter.

U-Move revenues increased $30 million. That's about 6% for the quarter. Our distribution network continued to expand, with the addition of 25 new U-Haul-owned locations, and just about 300 net new dealers. Once again we experienced revenue and transaction growth in both the one-way and in-town rental markets for our trucks, trailers, and towing devices. But revenue growth during this quarter came less from fleet expansion than what we've seen in recent quarters.

One factor that has been negatively affecting our reported revenue results is the foreign exchange rate between the US and Canada. During the third quarter of last year, the currency conversion effectively reduced reported revenues by just under $4 million, whereas in the third quarter of this year, it had about an $8.5 million effect.

I have nothing new to report regarding the pricing environment; it remains competitive. Weather conditions have been worse during the third quarter of this year and now into January than we experienced in the previous year. This is yet another challenge our operations team is working to overcome. Despite these factors, U-Move revenue growth continued into the first month -- U-Move revenue growth continued into the first month of the upcoming fourth quarter.

Capital expenditures for the first nine months of fiscal 2016 on new rental trucks and trailers totaled $586 million compared with $635 million for the same nine-month period last year. Proceeds from the sale of retired equipment for the nine months were $459 million this year compared to $268 million last year.

Looking at the self-storage portion of our business, revenues were up just under $10 million. That's the largest quarterly increase that I've seen going back into recent history. Revenue growth is coming from three directions: occupancy gains at existing storage locations, occupancy from new facilities that we've added to the system, and the general improvement in rates.

From December 31, 2014, through December 31, 2015, we have added approximately 3,600,000 net rentable square feet into the system. Just under 3 million of that came during the nine months of this fiscal year. This is an increase in our pace of new additions. Spending on real-estate-related CapEx, including construction, renovation, and acquisitions for the first nine months of this year was $439 million as compared to $268 million in the previous year.

Occupancy for the quarter ended December 31, we reported 78%, which is down 3% from what we reported a year ago. To better understand this result, it is helpful to know a little bit more about the 3,600,000 net rentable square feet that we added over the last 12 months. 50% of that came from acquisitions of existing storage facilities. Those facilities came online at the acquisition date with existing occupancy of about 66%. The other half of the new storage came from our own development and construction. That was added into the system at 0% occupancy.

So from a blended perspective, we added a little over 3.5 million more net rentable square feet this year with an average beginning occupancy of somewhere around 30%. It is this growth that is leading to the watering down of our reported occupancy results. Excluding this new square footage, occupancy results shown an improvement.

Operating expenses at the moving and storage segment increased $16 million for the quarter. Retail personnel expense, along with other costs that are associated with the expansion of our network, and expenses that go along with the growth in revenues increase. While direct operating costs associated with our U-Box program decreased. Consolidated earnings from operations were $158 million compared to $133 million for the third quarter of last year.

Our cash and credit availability at the moving and storage segment was just under $700 million at December 31, 2015. One last note: during the third quarter of fiscal 2016 we paid a $3 per-share cash dividend. That took place at the beginning of the quarter on October 2, bringing our total cash dividends paid for fiscal 2016 to $4 per share.

With that, I'd like to hand the call back over to Nan, our operator, to start the Q&A portion of the call.

(Operator Instructions). Jim Barrett, CL King.

Good morning, everyone. Joe, a question for you. Used truck pricing -- where are we, in your opinion, in the cycle? What do you see is the main drivers of your healthy pricing in that -- for that equipment? What do you see as you look in the windshield?

Well, first of all, the numbers that we reported are because we are rotating a bigger fleet, so don't confuse the big jump that means that per unit price has jumped, Jim. We are simply selling more trucks because we expanded our fleet about 18 months ago (technical difficulty). But used pricing has been falling across the board. I think you have to first look at new vehicle pricing, and there's been a big change in the pickup and van business because Ford introduced the all aluminum pickup, which they were trying to -- with their F150 -- change the market.

And Ford also introduced the Transit, which they are trying to push the market. And I think the market is probably going to follow them on the Transit. It's not as clear that they are following them on the aluminum truck. So, I would expect prices are going to stay pretty good. My information from my dealer friends is that they are still seeing very strong demand at retail level. And so used trucks kind of mirror retail truck sales, in my experience. So, I think we're looking at probably the next six months, at least, running about how it's been running.

But it's a volatile market. And of course we are a very small part of the used truck business, so we can't make it or break it. We kind of have to ride with it. But if you look at new truck sales I think you see probably a reflection of what we'll see at least for the next six months, which is pretty much a repeat of last year.

I see. When you look at the self-moving sector, the trends that are underling transaction growth in your own performance, is it -- do you see it staying the same? Is it improving? Is it getting more difficult?

You know me, Jim. To me it seems more difficult every morning. (laughter)

Right.

There's a lot of challenges. As we continue to grow, we have to continue to be sharp on exactly how we add locations and fleet. And it's a balance all the time of -- we're running something a little over 20,000 locations. As we increase that we would have be very careful how we bring the truck fleet along with it. So we can keep not only growth but also utilization of individual trucks. And that kind of ebbs and flows.

I think we probably have been a few trucks light in the fleet from what would've been perfect over the last six months. I think we probably left a little money on the table there. But these are decisions that were made a year or a year and a half prior. So, you can't adjust the fleet on a six-month basis or something. You have to make these -- do careful analysis, and try to be sure that what you are doing is going to balance out.

And so I could look back. I think demand is still very strong. I think there's plenty of opportunity. But we would have to be very thoughtful in how we do it.

Okay. And you did mention in the press release how much new competition has come into self-storage. I'm trying to reconcile that with the level of investments you are making in real estate, which I assume is mainly self-storage. How should we think about that?

(multiple speakers) We're going right ahead in the self-storage business. And like a lot of things, they are going to -- every fund that has been put together, a few billion dollars, seems to think that they now are storage experts. There's a little more customer service to it than I think they understand. And I think there will be some people getting unpleasant surprise.

I believe we are very well-positioned. I believe we understand the customer. I believe that our customer service puts us in the upper tier in that business. And it's not just a real estate business; it's a product and service business. That's how I see it. I think there's a lot of people coming in who think it's a real estate business. And either they will do right, wrong, or vice versa.

Yes. And then, finally, Joe, could you discuss the reasons for the transfer of your shares and your brother's shares to the Willow Grove Holding Limited Partnership?

Oh, sure. We are just making our estate plans kind of more firm. And we are starting to realize our mortality and want to make sure that our death isn't a liquidity event for the Company.

I see. Okay. Well, thank you very much.

Ian Gilson, Zacks Investment Research.

As we look at the income statement, the lease expense charge declined significantly, down from a year ago, and of course down from the first half of the year. Have we been buying more trucks in the third quarter versus leasing them than we normally do?

Ian, it's Gary Horton. Yes, we have changed our method of acquiring trucks from doing leasing to basically purchasing them. Again, we are using the depreciation, which is the offset to the lease expense. And it's up because we need the tax shield.

I'd like to jump in on that, too, Ian. You have followed the Company, I don't know, 20 years now or something. And you have heard us say countless times, you should look at EBITDAR. Which is kind of a Gary Horton-ism, I guess, in a way. But we believe that you need to look at leases, depreciation, amortization all as one number, because we will try to optimize -- or Gary's Treasury team will try to optimize and get us the lowest cost and not be as concerned where it falls on the balance sheet.

They are looking to try to get net-net costs. And so, when you are looking at our EBITDA, you really need to put rents in there or lease expense. And you very consistently have done that. But I think that's how we look at it. And I think that's a good way for the investor to see it also.

Yes. But when a truck comes off lease, let us say you have a two year lease, you just return the truck, correct? You don't sell it. Because it's not yours. (multiple speakers)

No, we actually don't. We actually have -- we put that into -- we call our rotation fleet. And then we run it in more of the local market after that point.

Ian, we have the legal right to return the truck. But in fact, in the last 20 years, we have not returned one truck. So, in fact, in all cases, we have essentially purchased them from the lessor and put them on our balance sheet. So it's -- legally, it's very correct that we could return the truck but practically speaking, we have never chosen to do it. And I don't see where we would change that policy.

Yes, also, Ian, what we have chosen to do -- and we've changed this over the last couple years -- is what we basically do is we have a limited deferred liability, which is having a lease amount to pay at the end of the term, which is generally seven years, where we actually have pre-funded that. And we basically are not getting 100% on the trucks; we are getting 70% on the trucks. Again, with that, we can change at any point in time. But what we've chosen to do right now is to eliminate a deferred liability that's out there seven years.

So are the leased trucks operated by you for an above-average period of time, as compared to the about town rental fleet?

No, they are going to be managed almost identically depending on model by model. But we don't make a distinction in how we manage the fleet based on the financing behind it. So, Gary goes out and tries to -- knowing about what our plan is -- he tries to optimize the service life financing costs. And then my rental team works on, of course, matching that to our plan for rental income.

And it's done -- so, we don't distinguish. Once it's in the fleet, we don't distinguish, in the operations side, between a leased or an owned vehicle.

Okay, and would I be correct in assuming that the lease vehicles are more of the complete vehicle, and less of the custom-built trucks that you make in your manufacturing facility?

No, it's just the (multiple speakers).

They are all the same.

They are the same; there's not really -- it's just going to vary by what the market is for financing. And right now, Gary is getting a better net-net cost and arguably a more conservative balance sheet, I would say, too, by frontloading essentially we'll call it the down payment or the equity part of this and doing it in the financing he's doing presently. So, we are going to do it totally based on what Gary sees in financial markets.

Okay. Now, on the tax rate for the quarter, if you look at the nine months versus the quarter, it seems to be a little bit above -- not much, but it still is above prior years. What do we estimate that the tax rate would be for the whole year?

This is Jason. We should hover back towards 30 -- a little -- right around 36% to 36.5%.

Okay. Net sales, as we used to call it -- I see you have changed the name of that line -- propane continues to decline in price. What impact is that having on your revenue in that area? And how much inventory do you carry, roughly? And is that priced at market?

Let's split that question. I will address the pricing. I'm going to see if Jason has an inventory number. I don't. I should have command of that, but I don't. So he's digging for numbers. I'm talking. What propane is, is basically what we're trying to solve for is a gross margin. So I see gallons in gross margin, not so much the price, and get nearer -- the pricing is volatile in that market, both seasonally and year to year to year. Right now propane is at historic low levels.

But what we are seeing with the consumer is we are still able to get as much gross margin as we were when it was priced higher. In fact, in a few markets, a little bit more gross margin, because the consumer is seeing the reduction in overall pricing. But we have actually -- we believe we are doing a little better this year than we did last year. Although dollar sales are down, gallon sales are not.

Ian, this is Jason. We have just under 1,100 locations across the US that offer propane service. The ones owned by AMERCO is just under 900. The dollar amount of inventory in those is fairly insignificant in the big picture. So, I hope that helps answer your question.

You don't have a (multiple speakers), do you?

Yes. It is less than $5 million.

Yes. I would say it is certainly less than that.

All right. Right. Thank you very much. Oh, one question. Or one more question. When can we look at the resumption of growth for the U-Box?

Well, just as soon as I can get them to do it. So, I have a little push going on. My plan is to see growth resumed in -- as we go into spring. Of course, that's always my plan. So we'll see just how we do, Ian. There's no structural reason we can't do it. And so, I'm asking my point-of-sale teams to get us some growth there and we'll see how we do. It has been a frustrating last year for me. But I -- but there's no structural reason we can't see growth there.

Okay. Great. Thank you.

(Operator Instructions). Lynn Parry, Wilen Management.

Good morning. I have a couple of questions. First, the self-storage market seems very healthy. Some new supply coming into the market at a rapid pace or do zoning issues, et cetera, slow that down?

Zoning issues -- we'll say land use for entitlements -- I would say you're looking at a 12 month minimum to get through there. You get into a tough market, two years then. So, yes, it is slowing it down very much. There is a lot of very yield-driven money out there. They are bidding up the price of existing storage as well as encouraging people to start new projects.

So there's two things going on, and you see how we bought less storage and did more development over the last 12 months. Well, that is a reflection of that existing storage being bid up by money that, to me, is money just chasing yields. It's very market specific on land use, but of course that is a big drag on development.

Okay.

The supply is going to expand, just because of readily-available capital. I mean, you probably know more about that than I do, quite honestly. But you see everybody wants to have some self-storage in their portfolio today, and they are going to buy and large succeed at it. We have been at that business now a little over 40 years, I believe. And there's quite a customer service component to that industry. And it's not -- well, it is quite a customer service component. And that's where we have concentrated our efforts. And we believe that is what the long-term entrants in the field are going to do.

Okay. Okay. And then, also, can you give us percentage of the seasoned self-storage facility that are over 90% occupied?

I am going to let Jason -- I'm trying to think myself.

Yes, at this point in the year, this is traditionally a down period within the year. So it's going to be a little bit less than -- or right around half right now. But during the peak time of the year -- which should be June, July, August time frame -- I think we were getting closer to 80%, maybe.

Okay. Thank you.

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

Good. I would like to hit one, which is on self-storage occupancy, I used to drive myself nearly insane because I would try to get every entrant to the field, see what they reported for occupancy. And I finally understood that there was a bunch of people who were correcting for what they called mature properties, or they had different words for it.

And then there's people who measure it by number of rooms. Other people measure it by number of square feet. And then there's finally people who measure it by economic occupancy. And here about 10 years ago, I told my team to throw in the towel on how we measure it. And we do an absolute for -- internally, it is rooms rented this year versus rooms rented last year. It's kind of the litmus test.

And that's what we drive on. And it makes our numbers jump around a little bit because we don't do the same storage estimates, and we don't try to pick the measurement that optimizes the percentage. We just pick a number and run to it.

At the actual store level, I think, if you look at same-store and rooms rented this year over rooms rented last year, you are at the litmus test. My locations don't set the prices. Our prices are set nationally. And I have a very disciplined -- what I believe to be a very disciplined team of people setting prices. So the yield will come out okay if you are managing at the operating level rooms.

With that, I want to thank everybody for coming on the call. And I guess, Jason, I don't know if you have a SEC warning to close this off with, or --?

We will see everyone when we report our fourth quarter and fiscal year end earnings at the end of May. Thank you very much.

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