U-Haul Holding Co (UHAL) 2017 Q3 法說會逐字稿

Welcome to the AMERCO third-quarter FY17 investor call and webcast.

(Operator Instructions)

Please also note that today's event is being recorded. I would now like to turn the conference over to Sebastian Reyes. Mr. Reyes, please go ahead.

Good morning everyone, and thank you for joining us today. Welcome to the AMERCO third-quarter FY17 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 and 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, 2016 which is on file with US Securities and Exchange Commission.

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

Thanks, Sebastian. Our third quarter continued to show some recovery in one-way truck transactions, and that trend it looks like it went on through January, and hopefully will continue here in February.

We have our box truck rental fleet in better quantities than a year ago, so we should be able to get some transactions, just because we have more fleet. The truck and van resale market remains down, both in volume and price over last year, but it seems to be trending up in the fourth quarter. The fourth quarter is starting to trend up over the third. We typically look for significant vehicle sales starting in March, so we will have a better feel by then.

Self storage continues to be a very competitive, very market-specific industry. We have many projects in development and plan to continue to bring product online, in markets that will support more product. What I see indicates that with some declining regulation and judicial consistency, our business will follow others in expanding. I look forward to a good quarter. Jason?

Thanks, Joe. Yesterday, we reported third-quarter earnings of $3.33 per share, as compared to $4.17 per share for the same period in FY16. Unless otherwise noted, all of my period-over-period comparisons today will be for the third quarter of FY17, compared to FY16.

Operating earnings at our moving and storage segment decreased $26 million to $118 million. Equivalent rental revenues increased nearly 5%, or approximately $24 million. During the quarter, we continued to see growth of transactions in our in-town market, and we started to build some momentum within our one-way transaction growth.

Transaction growth just slightly exceeded revenue growth on a percentage basis. It is this continued growth in transactions that leads us to believe we have opportunities to further improve revenue beyond our current pace.

The number of trucks in the rental fleet continues to be higher than at the same period last year, as Joe just mentioned. This is a combination of a backlog of pickups and cargo vans that we intend to sell, combined with a desired increase in the size of the box truck fleet. We saw U-Move revenue growth continue into the month of January.

Capital expenditures on new rental trucks and trailers were $870 million for the first nine months of FY17. That is up from $568 million last year at this time. Proceeds from the sales of retired rental equipment were $403 million, that is down from $459 million last year.

Net gains from the disposal of property, plant and equipment decreased $4.5 million for the quarter. We did increase our pace of truck sales compared to the third quarter of last year, but for the nine months, we are still close to 1,000 trucks behind what we sold in FY16. The decrease in gains for the quarter was primarily a result of the higher average cost of the equipment that we are selling, along with a decrease in the average sales price per unit.

One significant factor that is leading to our reduced GAAP earnings is rental equipment depreciation. I wanted to spend a little bit of time on this call talking about depreciation.

For the quarter, depreciation associated with the rental fleet increased nearly $19 million. For the nine months, that brings us to a little over $48.5 million increase in rental fleet depreciation.

As we have discussed previously, beginning in October of 2015, we began producing our largest moving truck, something that we had not done since June 2008. These new trucks not only have a higher price tag than the old ones, but the seven-year gap in production is also leading to outsized depreciation fluctuations, due to how our model works. The larger trucks that we produced in 2008 and earlier are now depreciating at an annual rate of less than 2% of their annual cost.

The new trucks that we are adding now are being depreciated at their first year rate, which is 16% of their cost. While the units we sold removed a little bit less than $500,000 of depreciation from the books, the new trucks added $15 million in the third quarter, bringing the nine months total to $37 million.

Under our current fleet plans, this same variation should continue into the fourth quarter, and then the impact will reduce until the fourth quarter of next year, when we should see the depreciation flatten out or even decrease for this model of truck. That is not to say that total depreciation will be decreasing next year.

The slower sales of pickups and the cargo vans resulted in approximately $1.5 million of additional depreciation in the third quarter. For the nine months, that led to about a little over $8.5 million of additional depreciation. I would not expect that to continue into the next year at this point.

Storage revenues were up a little over $9 million, or about 15%. As has been the case over the last several years, revenue growth comes from occupancy gains at existing locations, occupancy from new facilities, as well as general rate improvement.

From December 31, 2015 through December 31, 2016, we added about 3.1 million net rentable square feet to the system. About two-thirds of this is coming from our own development, and the last third is coming from the acquisition of existing storage facilities. Of the 3.1 million net rentable square feet, about 830,000 of that came online here during the third quarter.

Spending on real estate related CapEx for the first nine months of this year was $378 million. That is down a little over $60 million, with the majority of that decrease coming from reduced acquisitions of existing storage facilities. Our all-in quoted occupancy statistics for the quarter were 75%, that is down about 3%.

If you just look at the amount of square feet occupied on average, for the quarter we had 2 million square feet more occupied than we did at this time last year. As with our rental fleet, the significant amount of CapEx that we have invested in buildings and improvements, and related non-rental equipment is leading to increased depreciation costs as well. Depreciation associated with essentially everything else besides the rental fleet was up $7 million for the quarter, and for the nine months up almost $18 million.

To put this into perspective as to where it is coming from, over the last 24 months, we have added approximately $1 billion of buildings improvements and non-rental equipment to the balance sheet, with over $575 million of that coming in this fiscal year. The increased amount of assets to depreciate, combined with our very active approach towards component depreciation, which has had the effect of shortening the average lives of our depreciable assets. Both of these have effectively increased the amount of our real estate related depreciation.

Operating expenses at the moving and storage segment increased $32.5 million for the third quarter. I wanted to comment on a couple of the largest drivers of this.

Approximately half of this is coming from personnel costs. Of that portion, about $4 million was from field compensation, that was essentially pushed from the second quarter into the third quarter, and the remainder is from generally having a 5% increase in our overall headcount in the system. I estimate that this had the effect of reducing our margin by about $7 million.

The larger rental fleet has also added maintenance and repair costs. However, while this has increased our overall operating expenses, it has fallen in line with the increase in revenue, and I don't believe it has reduced our margin.

Property taxes increased just under $3.5 million. Within that, we saw about a 2% increase in our existing stores, with the remainder coming from new locations. This probably had the effect of reducing margin by about $2.5 million.

And the last significant item contributing to the increase in operating costs and our quarterly decrease in operating margin was the change in accounting for the expensing of smaller capital items. We added another $4.3 million of net expense onto the income statement this quarter.

Consolidated earnings from operations, this includes moving, storage, our life and property and casualty insurance operations, were $132 million. That is a decrease of $26 million.

We generally encourage those interested in our Company to look to our long-term generation of operating cash flows. At times, our cash flow statement that we present can get a little bit messy with items that run through the working capital accounts. Many of the investors I speak to about the Company perform their own cash flow proxy calculations, such as EBITDA.

As a rule, I typically discourage these figures. However, during times like we're in now, where we are experiencing lumpy fleet CapEx, these non-GAAP measurements can provide some indication of the underlying direction of the operations, which for the quarter and the nine months I believe that you will still find are positive.

To summarize, what I think are some of the key financial takeaways from the quarter. First, we are seeing revenue growth up across all of our major programs, equipment rental, self-storage, U-box, and retail sales.

Second, we are positioning ourselves through our capital investments for future accelerated revenue growth. For those who have followed us for years, you have seen time periods of capital investment that have resulted in reduced GAAP earnings, largely from the depreciation charges.

Our philosophy of growing our operations while maintaining the conservative balance sheet at times, can lead to these temporal dips in earnings, which is why we try to orient everyone to a longer investment horizon with AMERCO. With that, I would like to hand the call back to Joe.

Thank you, Jason. Let's go to questions now from people on the call.

(Operator Instructions)

Our first question is from Ian Gilson of Zacks Investment Research.

Good morning. How are we doing?

Good morning, Ian.

I have got a couple of questions. You have announced that you have committed to 3,000 additional full trucks. Are those spread across both types? Or, are we biased more toward in-town, or how would those trucks by distributed? And, when will they be coming into the fleet?

They will be small trucks. They will come into the fleet -- I don't have a firm date, but probably around June. Maybe right in there. Then, they will kind of -- they come in on an even basis, Ian. They don't come in, in a big glob. I think we are going to be able to absorb them into the marketplace.

Okay. As we look at transactions, I know there is a seasonal bias. But, was the dollar generated per transaction in the third quarter up versus last year? And, how does it look versus the second quarter of the current year?

Yes. It is up. It is not up as far as I want, but we saw a little increase in dollar per transaction, and we saw transactions increase. So, those are -- that is the way you want to run the trend. And, I would like to see a little bit more on the dollar per transaction, and we are trying to manage to that. So, it is trending in a positive direction. I was a little more shook.

If you would have talked to me back in October or really September because I wasn't seeing the trends going the way I wanted to. They seem to be going that way. As always, Ian, it is a combination of how we manage and how optimistic the public is. I think we are going to -- I believe we are going to see some optimistic public, and that is the single biggest thing that will give us the opportunity if we can manage to serve some more customers.

Okay. On the balance sheet, the pre-paid expense line from March of last year to December of last year went from $134 million down to $54 million. Does that mean those expenses were off the income statement? Or, [just] prior periods, or why? And, what was the impact on the income statement?

Ian, this is Jason. I apologize. Off the top of my head, I am not coming with it. I think what happened during the third quarter of last year is that we had the retro application of the bonus depreciation which wreaked a little bit of havoc within our balance sheet, and we reclassified accounts between pre-paid and the deferred tax provision. I believe that is the majority of that. As we go through the quarters and aren't having the tax payments, that is getting worked out. So, I believe that where you see that in the cash flow statement is reduced payments of cash taxes.

Okay. Okay. Fine. That is it for me. Thank you very much.

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

Good morning, everyone.

Good morning, Jim.

Joe, a couple of questions for you. There was a mention that investment in self storage assets abated in the quarter. You said in the past you find acquiring those assets in many markets tend to be expensive. Do you view this as the start of a trend if prices stay where they are? Or, is there simply a shortage of opportunities?

It is really a shift, Jim, between what we are developing, whether it is a reuse or ground-up versus what we are able to acquire. It is hard to give an absolute firm number because there are so many -- this stuff is so herky-jerky how it comes online. But, I believe we have at least as many square foot of projects in the pipeline as we did a year ago. I think we are going to have real strong projects come on through August.

I don't have a dead square foot number because it is a fluid thing, but it looks to me that we -- I'm attempting to actually step that up. So, I would expect it will happen. We are going to see the gap between how fast we are renting up and how fast we are adding products probably widen a little bit because in development everything you bring on comes on at zero occupancy.

When you are buying, even if the thing is only at 30% occupancy, it is still 30%. So, I would expect that you are going to see a little gap widen of additional inventory will step ahead of additional rent-up. Then, we will reel that back in over the next 18 or 24 months.

On a related note, given the number of retail closures we all read about in the papers reflecting the fundamentals in that industry, are you seeing an increasing number of retail boxes that are suitable for self storage?

Yes. And, I am trying to be all over it and also not alert all my competitors so the less you talk about it the happier I will be.

Fair enough. And, secondly, I know it is a moving target. But, if the corporate tax rate were cut to 15% to 20%, and if, for argument sake, they remove the interest expense deduction. Would that change your view of how much cash, and maybe it is a board decision, of how much cash the Company would be biased returning to its shareholders?

It [sure would] require a whole new analysis. I have not done that analysis. So, you are saying if two things happen. Deductibility of interest goes away and the corporate tax is reduced 40% or 50%?

Right.

I don't know Jason. I am trying to think how that nets out for us.

Jim, as I've looked at the proposals, I've looked at them in my tax structure. I've looked at them in two ways, basically. One is the reduction of the corporate income tax rate by itself. Which if that were to happen this year, if we were to go from say the 35% to say 20%, it would reduce our cash taxes by about $80 million to $90 million. And would also reduce our outstanding deferred tax liability maybe upwards of $300 million.

Now, as far as the interest -- elimination of the interest deduction. We've looked at that in tandem with the proposal to expense all new capital investments up front. That those two are a tradeoff. That if you expense all of that upfront you forego the interest deduction. So, we may be looking at the proposals a little bit differently than you are. I haven't looked at the interest deduction by itself.

We, at first pass-through, I think it would benefit us more to deduct the interest and not do the immediate CapEx deduction, but we will still look at those. The big one for us would be the reduction in the income tax rate.

Right. And, my last question when I look at the 9% increase in operating expenses for the quarter. Accepting opening up new locations, which obviously need to be staffed, considering that personnel accounts for half of that increase. On a static basis, do you have as many personnel as you need to run the current number of locations?

Yes. And, I think that is a little bit inflated because we do an annual bonus for people. More of that went into the third quarter than went into the second quarter. So, really the second quarter should have been up a little bit, and the third quarter should be a little down. I don't think we've got into a structural problem here at this point.

But, you are exactly right. We call personnel costs the head of the dragon. And, if you are not watching that, you are going to get yourself crossways. At the same time, of course, we want to pay an attractive living so that we are able to attract competent personnel.

So, the biggest thing we can drive on, Jim, are what I call productivity-enhancing techniques. In other words, enable people to do more. When you get into this whole function of running this retail end, there is a lot of work involved, and we have got to keep engineering the work out of the process which we have done a lot of that. If you were to -- I don't have a productivity-per-person metric in my head, but that is what we are driving on, is increasing the work that can be done by a given person.

I am always thinking we are on the edge of a breakthrough there, and it always comes an inch at a time. We are driving on that. I don't see it that we have it reset to a new, less advantageous ratio, okay? But, clearly the numbers are not what I am sure you expected, and I get that real clear.

Thank you both.

Our next question comes from Jamie Wilen of Wilen Management.

Good morning, fellows. You've talked over the years about the improved quality of the vehicles that you've purchased and lower maintenance costs with that. The logical thing would be if they are in good shape, maybe we should extend the life of those vehicles. I mean, third and fourth year of operating a vehicle is often its most cost-efficient.

Can you explain your model of truck purchasing and the expected life of those trucks? And, has that changed over time? And, will it change in the future if, indeed, the quality of these vehicles is improving as you say they are?

Okay. Up until, and including right now, I have been trying to steadily upgrade our fleet with the expectation that the federal government's mandate to the automakers on fuel economy is going to cause them to build crappy vehicles for four- or five-year period. I can't tell you what day that ticks off.

This is a year-by-year battle where we try to get the automaker to keep the same content in the drive train and not alter it. And, their willingness to extended that circumstance to us has been a narrowing window because they are facing fuel economy mandates that they actually don't know how to meet without substantially reducing the content. Not the price. The price will actually go up, but the robustness of the drive train is going to go down. So, if the administration will give some relief to these people, to the automakers on that, that is going to change my fleet plan more like what you are talking about. We could extend out and maybe slow down purchases.

I have been trying to bulk up now for three or four years of costly -- get the fleet in better and better and better circumstance with expectation of having to live through a very tough period. As the regs are [set] today, I think we can look forward to a very tough period where the automakers can't produce the reliability in the vehicle because they have had to make sacrifices that they don't totally understand in order to get fuel economy.

The improved fuel costs are paid for by our customer, not by us.

Absolutely. We don't participate in fuel savings, but we participate in increased maintenance expense or lower reliability. In my experience with the automakers is whenever they try to make a big jump, and this current jump that is ahead of them is bigger than the ones they made in the 1980s and 1990s by quite a bit. My experience is that the reliability and maintainability and actually the capability of the truck, its ability to actually go up a hill, tow a trailer, tow a car, is all going to be sacrificed for that.

I have innumerable instances of it even currently. They are struggling as they go to these technologies. They are searching for tiny fractional increments in fuel economy, and they're having to go to a very extensive means to get them. As they do that, the price of the vehicle is going to go up, and its reliability is going to go down.

So, we right now have as reliable a bunch of vehicles as I have ever seen in my working career. If I could have these trucks in some sort of supply for the next ten years, I'd say it's all going to be great. In fact, unless the fuel economy standards change significantly, we are going to see a decline out maybe three or four years. It depends on the product cycle of the different manufacturers.

Ford is already into the product cycle with their van. They have gone to great lengths to redesign their whole van series. And, with the result being increased cost and some increased expense of reparability. Fortunately, that particular vehicle we are not going to keep. We turn those vehicles every year, so we are not going to be -- if maintenance comes up real hard in the second year, we are not going to see that maintenance. But still, it is kind of the shades of things to come there, Jamie.

I think that I'm going to stick with the present idea which is let's bulk up the fleet. Let's keep making -- I won't say the exact. But, we're essentially trying to get the fleet newer and newer so if we have to we can run it out. Does that make sense?

As you look out the next two to three years, you would expect us to peak and have a waterfall as capital expenditures and the age of our fleet will start to grow a little bit a couple years down the pike?

For sure, if the vehicle quality drops at the automakers. For sure. Yes. Now, I think it is inevitable given the present rules, but today it is uncertain. And, of course, the automakers say it is never going to happen. Of course, they have to say they are going to have the quality and everything. They have got a real problem doing it.

But, I have been through this cycle before with them. It is a bridge too far for them, and they always fall a little short of the mark no matter how hard they work. And then, the consumer, in this case it would be us, suffers for it. So, I am hoping that Trump is going to take a common sense look at this and encourage these people to back this off to something that is actually attainable. And, still increases fuel economy and everything which is, of course, good for everybody. But, not to the point of severely impacting reliability and cost.

Okay. One other thing. I would like to revisit something that I know you visit all the time but have never moved forward on, and that would be selling advertising space on the side panels of your vehicle as a moving billboard. If we could do those things and sell it for a $100 a month, I think that comes to the line of an extra $0.25 billion of income. Obviously, if it is $200 a month, it is quite a bit more.

I know you have looked at it in the past. Is there any reason why you won't look at it currently and create a new source of profitability for U-Haul?

It is not on my horizon right now. That is just the truth. There are a lot of issues with that.

Right now, our trucks are allowed to operate basically under the interstate commerce clause of the constitution, and states and cities cannot regulate them. Okay? At the point that they become billboards, that is going to be a slightly different issue. Now, so you see, I am going down the road. Today, everybody almost has graphics on their truck. We pioneered that back in the early 1990s. But, today, the milkman, the grocery guy; everybody has some graphics on their truck.

I am not intimately familiar what the regulation is on these people who run a billboard truck. We are all familiar with them. You see them around. But, conceptually, it is a different thing than a truck in interstate commerce. And, I honestly would have to get myself very comfortable with that because our ability to not come under the regulation of every municipality and every state as to what the truck looks like gives us flexibility that if we lost that would increase the complexity of our business substantially.

And then, I don't know that there is actually anybody that wants to pay $100 a truck. I have no idea the market for this. I know zero about selling advertising, zero. But, there are people that know about it, and I don't have a hard answer. When you say that big a number, of course, boy, that gets your eyeballs opened wide. I would have to go back and look at it. I don't have a decent answer, Jamie.

Okay. And lastly, on the U-Box program, we have now settled the litigation. You said revenues are growing. Is it profitable? And, now that the litigation is behind us, how do you look at this program over the next couple of years and where can it be from where it is today?

Jamie, this is Jason. I will start off with the profitability piece first, and then hand it over to Joe for the bigger picture look at it. But, from a profitability perspective, we turned -- I refer to it in terms of the contribution margin. I try to load it up with as many costs as I can on a conceptual basis, but it is like the rest of our programs where it is woven in with everything else.

But, from as best we can tell and I'm throwing as much cost against it as I can including some form of imputed rent. It went positive last year. It is staying positive. I would say it is a small contribution margin, but it has doubled. The revenue continues to grow. We are almost back up to where we peaked before, and we don't have the same issues with the freight costs or the accelerating expenses so it looks like whatever Sam and his team did to it, it is working as we grow it.

And, on that one, this is a moving product. It is one that struck a chord with the consumer. It is not going away. The real question is what can we grow it to? To me, $400 million or $500 million a year would be a good, decent goal.

I don't have a plan to be there in X number of years or something, but I believe that with a modest market share, we can be at those sorts of numbers. There is a lot of detail in this as there is in everything, but there is no question we can make a profit doing it if we will hammer on it, just like truck rent. We have got to hammer on it, and we are hammering on it.

The customer simply wants it. Always -- I am one of these people that always fears an alternative technology or an alternative provider slamming us rather than Penske or Budget putting us out of business. I am more concerned about somebody who is not clear in the rear-view mirror, and I think the box business has a lot of those characteristics. For us to not participate in it would be foolishness. Could it be more than $400 million or $500 million, I have no -- if we get it that big, the thing is a [rolling deal], and it's going to go and be a good contributor for years.

We are attempting to responsibly expense and depreciate things. I rely on Jason for that, but he gets very clear direction from me. We don't want to be building a bunch of liability up ahead of us. We want to have all that flushed on an annual basis. I believe we are doing that, so I would expect that we are going to see it continue to grow, and this summer is clearly heading in the right direction. We are already seeing it book up now.

It fits in with our basic consumer, but it is a whole different game. It is not a truck rental, and it is not a storage rental. We are confident in both truck rentals and storage [room]. This is another full skillset. I think we are about where we ought to be at this point in our life.

Okay. Thank you. Outstanding job of creating value for shareholders. We appreciate it.

Okay.

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

This is Joe again. I would like to thank you all for participating. I appreciate your input. I am looking forward to a positive close to the quarter even though we will going to have snowstorms and all the other stuff that we normally get. But, I think we are positioned to have a positive fourth quarter. So, my thanks again and look forward to talking to you in 90 days.

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