U-Haul Holding Co (UHAL) 2016 Q4 法說會逐字稿

Good morning. Welcome to the Amerco fourth-quarter FY16 year-end investor conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Sebastien Reyes, Director of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today. Welcome to the Amerco fourth-quarter FY16 year-end 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 statements 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-K for the year ended March 31, 2016, which is on file with the US Securities and Exchange Commission.

Participating in the call today will be Jason Berg, Principal Financial Officer and Chief Accounting Officer of Amerco. I will now turn the call over to Jason.

Thanks, Sebastian. Good morning, everyone. I'm speaking to you today from Phoenix, Arizona. I have a few prepared remarks, and then we will open it up for questions and answers.

Yesterday we reported fourth-quarter earnings of $2.68 a share, compared with $0.47 a share for the same quarter previous year. I did want to point out that during the fourth quarter of FY15, we recorded an accrual of $60.7 million related to trademark litigation with PEI, better known in the market place as PODS. The accrual represented the judgment entered by the court in favor of PEI. The accrual was recorded to operating expense, and resulted in an after-tax charge of approximately $38.4 million, or $1.96 a share.

In addition to discussing our GAAP net income as reported, I feel that evaluating the effect of this accrual in the previous year is an important piece of information for you. Excluding the PEI litigation accrual, adjusted earnings were $2.43 in the fourth quarter of FY15. For the full year of FY16, we reported net earnings of $24.95 per share, as compared to $18.21 for the previous year. Excluding the PEI litigation accrual I just mentioned, adjusted earnings per share for FY15 were $20.17.

At our moving and storage segment, operating earnings, excluding the PEI litigation accruals for both years, increased by over $4 million to $86 million for the quarter, and for the full year were up nearly $147 million to $813 million of operating earnings.

Our U-move revenues, which is our truck, trailer, and towing device rentals, increased by over $23 million, or about 5.5% for the fourth quarter. We finished the full year of FY16 with $152 million increase, or just over 7%, most of this coming from transaction gains.

Our retail distribution network continues to expand. During all of FY16, our network of U-Haul locations continued to grow. We finished the year with approximately 19,500 independent dealers. That's up about 1,300 net outlets. Our Company owned, Company-operated locations by just over 100 outlets, bringing our total distribution system to right around 21,200 locations at the end of FY16.

Compared to the end of last year, we increased our truck, trailer, and towing device fleets. In retrospect, we likely could have used additional equipment during the second half of this year, and we're addressing this need currently. Adjusting the size and the mix of the fleet is a gradual process, though that will take time. Our current plans account for some growth in the number of available rental units in FY17.

For the first 1.5 months of FY17, we are continuing to see U-move revenue growth. Capital expenditures on new rental trucks and trailers was $881 million in FY16. All proceeds from sales of retired rental equipment were $517 million. This leaves us net fleet capital expenditures of approximately $365 million this last year.

Our initial projections for rental equipment CapEx in FY17 are just north of $1.2 billion. This is before netting any equipment sales proceeds against them. We are projecting another increase in proceeds from the sale of equipment going into this next year. Our current expectations are that net CapEx will increase to approximately $600 million next year.

We continue to focus time and capital in our self-storage business. During this last fiscal year we either opened or added storage to 77 Company locations, totaling over 3.6 million net rentable square feet. This additional capacity, combined with improved occupancy at existing locations, and a general improvement in overall customer rates, we've increased revenue by just over $10 million in the fourth quarter, and $37 million for the year. For FY16, we are reporting that our all-in average occupancy rate decreased by a little over 1% to 80% compared with the average for all of last year.

To better understand this measure, I wanted to dissect the $3.6 million net rentable square feet that we added this last year. A little more than half of that was brand new product that came online at 0% occupancy. The remaining portion of the additions was in the form of existing storage locations. Those locations had an initial occupancy averaging somewhere around 68%. That means that we added these rooms and square feet at about an average occupancy rate of 30%. That's what blended down our occupancy for the year. Excluding this new square footage, we did show occupancy improvements at our remaining group of locations.

The flip side of this all-in occupancy figure is that it illustrates the considerable room that we have for additional self-storage revenue growth from the existing portfolio. Spending on real-estate related items, including construction, renovation, and acquisitions increased $224 million this year to approximately $592 million. We're actively pursuing acquisitions of storage facilities, and we're working at our conversion and development projects as well. At our current rate and given current conditions, I could see our investment increase in FY17.

At March 31, 2016, our total debt outstanding was $2.744 billion, compared to $2.331 billion at March 31 of 2015. Our cash, short-term investments, and unused availability at the moving and storage segment was $634 million at the end of this year. That's compared to $562 million the year before.

My last item is that during the fourth quarter of this year, we declared a $1 per share cash dividend that was paid in April. This brings the total amount of cash dividends declared for FY16 to $5 a share. With that, I would like to hand the call back to Gail, our operator, to begin the question-and-answer portion of the call.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Jim Barrett of CL King & Associates.

Hi Jason and Sebastian. Good morning. Can you hear me?

Yes.

My question related to the spending on self-storage. It has escalated both in FY15 and FY16. Is this a function of the Company seeing more attractive opportunities out there, or is it a function of the fact that the balance sheet has improved? How do I reconcile that with Joe's comments that the world of self-storage is getting increasingly competitive?

Well Jim, it's a couple things. First, the number of opportunities -- there's a lot of people coming to market right now because they think that the markets are good. We've increased our acquisitions of existing storage facilities. That number actually increased a little bit compared to where it was last year.

The larger increase in spending that we're seeing compared to last year is in the development of projects. As Joe's mentioned over the years, those take quite some time from when you buy them to when you can actually build, and then to when you start renting. The projects that we bought into one, two, even three years ago, we're starting to see those now having some construction spend attached to them. It's building up this bow of construction and development cost. I think it's building on itself.

As I look into next year, it's hard to say exactly how much new product we're going to buy. However, if we were to just finish out where we were at now and close on projects that we have in escrow, that's probably $400 million of spending right there in the pipeline. Joe's comment, we still have been maintaining pricing discipline on what we're buying. That's why we've been doing probably more development than we have in the past. We still think that there's opportunities on the development side. We are still finding some deals on the storage acquisition side, albeit probably in smaller markets.

Okay. And Jason, when I look at the truck fleet, it increased on a net basis by 4,000 in FY16. I heard your comment that you're going to spend $600 million net on rental equipment, which is an increase year over year. Where do you see the truck fleet in terms of being optimal size, given the opportunity in the North American market?

Joe touched on this a little bit in the last call, and I think it still holds true, that we felt like maybe we didn't take advantage of some opportunities that we could have taken advantage of had we invested a little bit more in the fleet. If you look at our net CapEx number for this year, I think it's closer to $360 million, $365 million. That's closer to a maintenance CapEx number. I know at the end of the period we showed an increase. Throughout the year it was probably a little bit less of an increase in actual trucks.

I think we have some ground that we feel like we can make up, which accounts for the increase in spending. On a gross basis, we did $880 million, approximately, in equipment purchases this year. Right now, our current plans -- and these can swing based upon timing of when we actually buy the units -- but probably somewhere closer to $1.2 billion, or a little bit higher, on a growth basis, which then there's some fleet growth embedded in that number.

Okay, thank you very much.

Our next question comes from Ian Gilson of Zacks Investment Research.

Good morning, gentlemen.

Good morning.

Can you run through the fourth quarter depreciation and the truck sales during the quarter? We seem to have a significant increase in depreciation without a corresponding decline in lease expense?

Sure, Ian. If you were to exclude the gains from the disposal of equipment from both years, depreciation expense is up just under $9 million for the quarter. About a little less than 1/3 of that increase is from buildings and improvements, so the Real Estate that we've been adding. The remainder is from the rental equipment, which is the newer trucks put on the books.

Gains on the disposal were down about $14 million for the quarter compared to where they were at last year. If you add those two numbers, the $9 million increase in depreciation coupled with the $14 million decrease and gains on disposal, you'd get to the net increase in depreciation for the quarter. What we saw during the quarter on the gains, which is the bigger piece of this, is that we sold fewer units into the market place.

Also, we were going up against a real tough comparable. Looking back over the last several years, the fourth quarter on a per-unit basis was one of the healthiest quarters we had the fourth quarter of FY15. We were going up against a pretty tough quarter, and we just didn't sell as many units into the market place as we did in the previous year.

What was the actual net gain on the sale of equipment?

The gain was -- hold on one second, let me get that for you. For the quarter, it was -- I'm sorry -- to find it here -- $10.9 million. That's compared to fourth quarter of the previous year it was $24.7 million.

Okay. Now, is the decline in units due to your need for more equipment, or because the market was soft and you didn't have the buyers?

I think it was more strategic and probably closer to the second answer, where I think we're trying to strategically place the units out into the re-sale market. Our team has done an amazing job at selling this increased number of units every year. I think they were looking at the market place and thought that maybe we should hold off a little bit and try to place some of these a little bit later into our first quarter, calendar year second quarter. I wouldn't classify it as a soft market, but it certainly isn't as healthy as it was or as strong as it was fourth quarter of the previous year. I think that's why we held off a bit.

Okay, what was the actual truck count at year end?

We were at 139,000 trucks.

That include trailers or just trucks?

Trailers, we had 108,000 trailers and we 38,000 towing devices.

Okay. Given the fact that you need trucks, and given the fact that in the last few quarters you have mentioned that you would purchase rather than lease, plus the fact that your return on cash is abysmally low -- not just yours but everybody's -- and the cost of capital is also low, are we looking for a basically flat to down lease expense and continued increases in depreciation through 2017?

I agree with the second half of that statement. The first half I would expect lease expense to probably drop another $10 million to $12 million next year, maybe a little bit more, just because we're not putting new operating leases on, and we're going to have some of the older ones phase out. All of the new debt that we're replacing will be on the balance sheet and it will show up in depreciation.

Looking at your -- you're still keeping a double-declining balance for the first five years, right?

That's correct. For our box trucks, that's how we depreciate them.

You're looking at something like 20% of the additional capital expenditures going from the beginning of the year to the end of the year of $80 million?

Let's see. Yes. On the new equipment, it will be timed a little bit differently. That's probably a decent growth number, but it's going to be phased in over time, so we probably won't recognize that amount all in the 12 months. Does that make sense? Although, I'm going to have some coming on line from this year. I don't have my depreciation forecast ahead of me, but I think you've got the number on a going-forward, 12-month look.

Okay, thank you very much.

The next question comes from Jamie Wilen of Wilen Management. Please go ahead.

Hi, Jason. I wanted to get out a little color to the truck fleet number. You said you ended the year with 139,000. Where was it at the end of the prior year, and where would you expect it to be at the end of our current fiscal year?

I think it was about 135,000 trucks year before. As far as where it's going to be the next year, it would increase more than it did this year, but I'm not going to give out an exact number on that.

Okay, that's fine. As you add to the fleet, what's the key metric you're looking at here? It's obviously not the utilization number of that fleet. It's the total operating income that your fleet can enjoy, I would assume. Utilization is not your key criteria there?

When looking at the fleet, utilization is one of the tools that we look at to see -- if your utilization goes down too low, you're not necessarily looking to add equipment at that point. Our distribution team is looking at this really at a very detailed level by market place. The complexity that we add by adding these additional locations, it complicates their job.

They're looking at how healthy are transactions by region, and if transactions aren't where we thought they were going to be, or if we pick up on consumer demand that we weren't able to fill, what's the reason for that? Is it us not using our equipment effectively that we have, or is there just not enough equipment available. I think our guys did a look last year and determined that we didn't have enough equipment available to meet the actual demand that we saw. There isn't just one metric. Utilization is one item that factors into it, but that's certainly not the full item.

Where would be the strongest points that you're going to add the most to your fleet? What parts of the country?

I don't have a specific part of the country. We have parts of the country where we are seeing above average productivity, and we have some that are below. That changes from year to year. At certain points of the year you get too much equipment in one part of the country, say Florida. Now maybe you don't have as much there. It swings between -- throughout the year.

I would say equipment-wise we're probably focusing on some of the bigger trucks in this coming year, and trying to get some more of those out to meet demand and replace the older fleet. Otherwise, I don't have a specific area to tell you, because two months from now that area is probably going to change.

Got you. On the self-storage side, for existing storage -- now I know you've added a lot in the last year or so. But for existing storage, could you give us the -- you said the occupancy levels increased, but could you give us a number of what they're averaging, or what percentage are above 90%?

Sure. Well at this point of the year it's normally the down part. July is our highest point of the year. I think our U-Haul-owned portfolio, we hit a high point -- and this is a blended all-in number of 85% this year -- so that's even with all of these new facilities. If you look at the facilities that we manage -- the off-balance-sheet entities, those are finished over 90% for the year. I think underlying, I don't have a same-store calculation for you, but I think that our same-store occupancy is plus 85% to 90% range.

Okay, outstanding. Obviously with adding that many million of square feet, you've added a lot of depreciation, and you've actually hurt your GAAP income. How much additional depreciation on the self-storage space? And will you ever break out the operating income from your self-storage operations?

Well, for the quarter I think we had an additional $3 million or so of depreciation related to what I'll call buildings and improvements. Most likely, the majority of that is on the self-storage side. If you just run that out, it was somewhere probably $10 million to $12 million. As far as your other question goes, that isn't something that we're likely to do in the near term.

Okay. As you look at the industry and you look at Sovran making a $1 billion purchase of self-storage units, when you look at the metrics that people are paying for self-storage, it really looks like your self-storage business is worth an extra $100 to $150 a share for U-Haul stock. Any comments on the transaction prices going through in the industry, and how that relates to the value of your portfolio?

As far as the value of the portfolio I think it reflects very well; but we're not really in the market to sell anything. As far as the transactions and what we've seen, you mentioned that large transaction. They've had a couple large ones recently. I don't think that we're at the point where we would be willing to pay those multiples for something. Our view is a little bit different, as far as what our future looks like.

In talking with our storage team and with Joe, they've all been through several cycles. We've been in this since the late 1970s. It's going to go down. It goes up and down. At this point, I think there's probably more value there than -- in your opinion, more value there than what's listed. I don't have much more of a comment on that. I'm not sure where to go with that one.

Okay. Lastly, on the capital structure, obviously a very decent amount of cash lying on the balance sheet. You've had a nice dividend being paid, but never a regular dividend being paid. Any thoughts about the capital structure, paying dividends, repurchasing shares, and what is your view in the future toward that?

Well, we've been doing fairly -- I won't call them routine, but I'll call them regular cash dividends. I know that the Board and Management appreciate the flexibility that it gives us to be able to control those distributions in light of what our capital needs might be.

I mentioned it in an answer earlier just about the -- it looks like we're sitting on a large piece of cash, but we're also sitting on some large -- I'll call them encumbrances, or cash that needs to be spent. It's not properties that -- our Treasury team is really good at going out and getting debt financing, but you have to have some income attached to that. On these development projects, you're going to wait a couple years before they can do -- really do a good job of financing them. I think we've been keeping one eye on the development pipeline and one eye on the cash. We're probably more concerned about raising debt than we are at trying to find ways to distribute the cash.

Okay, outstanding job, Jason. Thank you very much.

Thank you, Jamie.

Our next question comes from Jim Barrett of CL. King & Associates. Please go ahead.

Jason, just a point of clarification. You mentioned that the Company was unable to meet demand in the second half of last year for trucks. Then you mentioned that your team also delayed the sale of used trucks in the March quarter, given the fact it was -- presumably demand was there, and they chose to instead sell the trucks in Q2 and Q3. I'm trying to reconcile that with the fact that your peak demand is actually in the first half of the year. Should I take those comments literally that you actually had difficulty meeting demand essentially in your off season?

No, I think this started earlier back in part of the busy season where we could have had them. I'll break this into two pieces. First, the trucks that we hauled off selling are the smaller units that aren't necessarily the portion of the fleet that we felt was in need of some additional investment. The hold-off on the sales had nothing to do with the other piece necessarily.

As far as the unmet demand sounds like a bigger, more macro issue, I think this is just us optimizing. We felt like we could have grabbed some more transactions if we had the additional fleet in place. It's one of those scenarios like we did several years ago with the smaller trucks. We saw an opportunity that wasn't being filled and we tried to fill it by going with some additional trucks. In this case, I think it's more of a situation that we were six months, six to nine months late on bringing in an era of trucks that we probably could have done a little bit sooner than we initially expected.

I see. Then on an unrelated topic, why is the growth of product and services lagging the growth that I'm seeing in rental equipment? I would think they would correlate fairly closely?

Yes, it's a good question. We have three things going into that retail sales line. I think what you're thinking of, which is our boxes and moving supplies, which are increasing, not quite as fast as the transaction growth is increasing. There is some improvement that can be had there. I think it's a competitive environment for boxes. Similar to our competitive posture on trucks is that we're hesitant to give up transactions. I think we've increased volume a little bit more than what shows on that and giving up a little bit of price.

We also do towing and hitch accessories, which has had a pretty good year this year. Then we have had propane, which the price of propane has been down. That's slowed the growth of that line to a certain extent. Your point is still valid. I think that there's some growth opportunities still available on the moving supplies, but it's not quite as bad as what that gross number looks like.

Thank you very much.

You're welcome.

Our next question comes from Walt Sosnowski of SRC Capital Management. Please go ahead.

Of the total CapEx in FY16, approximately how much of it was growth CapEx, and approximately how much of it was maintenance CapEx? I know you touched on the maintenance CapEx earlier, but if you could approximately quantify how much was growth and how much was maintenance CapEx, that would be great?

It's a relatively small amount. At the end of the year, our truck count shows 4,000 units up. If you were to do an average across the year, you wouldn't see as big of an increase. Less than -- it's a hard number to quantify, but I would say less than $50 million would be growth this year. Most of what we saw this year has been maintenance CapEx. I've tried to estimate what our maintenance CapEx schedule would look like on a net basis. I've normally given out a number somewhere in the $350 million range, give or take $25 million or so. I think this year we came pretty close to what it would look like on a maintenance schedule.

Okay. By the way, that's helpful. Just to clarify, for the full year gross CapEx was about $1.64 billion, and then net CapEx was $969 million. What you're saying is the net maintenance CapEx is about $350 million of the $969 million, plus or minus $25 million, is that what I hear you saying?

Well, I would point you to I have a schedule in the 10-K that breaks it into a little finer detail for you. The amount of the growth CapEx that was spent on rental equipment was $881 million. Then you had real estate, which was $592 million, and then we had a bunch of other stuff in there, so -- .

By the way, are you referring to the table on page 33 of the 10-K?

Yes.

Okay, so I'm looking at that now, so keep going.

The net number I'm showing is the $881 million, then a significant portion of the sales, which is the $539 million. I think there's a couple pieces of real estate that were sold, and we sold some non-rental vehicles. I think if you get down to it, there's some exclusions from the sales. But if you were to take those two numbers and net them, that's going to get you pretty close to what our net fleet spend is.

When you say those two numbers, which two numbers?

The top number in 2016 was $881 million.

The $881 million number, and then the $539 million number?

Correct.

Okay. If you combine those two numbers, how does that reconcile to the $350 million net maintenance number?

Well, you'll take the $881 million and you subtract the $539 million from it. That gets you to $342 million. There was some other sales of real estate included in that proceeds number, so you add another $10 million or $20 million back to it.

Oh, okay, I've got it. All right, that makes sense. Thank you very much.

You're welcome.

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

Thanks, Gail. I'd like to thank everyone for your participation in today's call, and for your continued interest in Amerco. I'd like to remind everyone that on Wednesday, June 8, we will be holding a special meeting of shareholders to vote on (technical difficulty). This meeting will be webcast live through our website Amerco.com, and we encourage you to attend this meeting electronically. I also look forward to speaking with you again the first week of August for our first quarter FY17 earnings call.

In closing, I wanted to take a moment to remember our Treasurer, Gary Horton, who passed away in March of this year. Gary was a 47-year veteran of Amerco. He was our Treasurer since 1982. He was a friend, a kind generous man who dedicated a large portion of his life to U-Haul, its team members, and its customers, and he will be missed by everyone. Thank you very much.

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