U-Haul Holding Co (UHAL) 2018 Q3 法說會逐字稿

Good day, and welcome to the AMERCO Third Quarter Fiscal 2018 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Sebastien Reyes. Please go ahead.

Good morning, and thank you for joining us today. Welcome to the AMERCO's Third Quarter Fiscal 2018 Investor Call.

Before we begin, I'd 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, 2017, which is on file with the U.S. Securities and Exchange Commission.

I will now turn the call over to Joe Shoen, Chairman of AMERCO.

Thanks, Sebastien. Well, the obvious good news is that the Trump tax reduction has become a reality, and it positively impacts AMERCO. Beyond the published financial results, of course, there's a real ongoing positive economic effect that we will see throughout next year and hopefully, for several years after it.

I also want to put out a big hoorah for regulation reduction, which the Trump administration has also pushing for. And it could be as impactful long term, depending on how much progress we're able to make in that matter. However, all this is only as valuable as the income we create by serving our customers. None of this comes into play until we've created a transaction.

We had a good quarter for U-Haul revenue and transactions, both. We continued the trend of adding self-storage capacity faster than we are renting it up, and I'm still going to tolerate that going on. Not that we're not trying to rent it as fast as we can, but we have the opportunity to add the capacity, and I'm confident we'll rent it up over the long haul.

I'm starting to see some results from the steps we took last summer to improve truck dispositions. We sold a few more trucks, a little more money. It was very positive. However, we recognized repair expense related to this truck disposition that's unsustainably high. We've taken steps, again, going back to last June and July, that should turn -- that can turn it around if we can manage it well. The problem is that it takes really 1 cycle to process that through. So we're going to continue to see a drag, particularly on repair expenses on the pickup and van fleet through into June.

As -- of course, as always, our business remains very competitive. Our aim is to make U-Haul the customer's best choice. On the disposition of the savings on the tax reduction, part of it will undoubtedly end up going into some personnel, if only because entry-level employees are going to be bid up in the marketplace. We've already seen that pressure, low unemployment. It's pretty logical, you should expect to see that. The balance of that money I intend to commit to upgrades in facility and equipment that I think will pay out over the next several years.

That's pretty much everything. I'll turn it over to Jason to kind of walk you through the details.

Thanks, Joe. Yesterday, we reported third quarter earnings of $27 a share as compared to $3.33 for the same period in fiscal '17. So as you can see, we have quite a bit in this quarter that needs to be unpacked. So I'll start first with the 2 unique events to the quarter: first, the sale of a portion of our Chelsea, New York property and then tax reform.

As we discussed on our last conference call on October 10, we closed on a sale -- on the sale of a portion of our Chelsea, New York location. Gains from the disposal of real estate have never been reported separately on our income statement. That's because our ongoing operating strategy does not put a focus on dispositions. But with this transaction, we've opted now to break the gains and losses from disposal of real estate out from our traditional depreciation line.

So you can see that we reported net gains from the sale of real estate of $192 million for this year, of which $191 million was from the Chelsea sale. This was structured as a tax-free 1031 exchange, and we've completed the property acquisitions to fulfill this exchange. The Chelsea gain net of taxes accounts for approximately $7.34 of our earnings per share for the quarter.

A second item is our provisional estimate of the effect the Tax Reform Act has on our deferred tax liabilities. The remeasurement of our deferred tax liability in light of the new legislation was primarily is a 21% corporate income tax rate and then the provisions covering the deemed repatriation of foreign subsidiary earnings, resulted in a $339 million increase in earnings or $17.32 per share benefit.

Our insurance subsidiaries report their results on a 3-month lag, so our fourth quarter earnings will include the effect of the Tax Reform Act for them. At this point in time, we estimate that this is going to be an approximate $10 million benefit or about $0.54 a share that will show up on our fourth quarter earnings.

Excluding the net benefits resulting from this initial application of the new tax law, we expect our blended GAAP effective tax rate for the 12 months of fiscal '18 will be approximately 34.3%. And looking forward into fiscal 2019 and beyond, we expect it to be approximately 24.3%. Excluding these items, adjusted earnings were $2.37 a share for the quarter compared to $3.33 per share for the quarter -- same quarter last year.

From here on out, all of my period-over-period comparisons are going to be for the quarters, unless specifically noted. Equipment rental revenue increased over 6% or $33 million primarily as a result of improved transactions. Within this increase, we saw revenue improvements across both the truck and trailer rental fleets and in both our one-way and In-Town markets. For the quarter, transaction growth was just slightly less than what we saw the revenue grow at.

The number of trucks in the rental fleet continues to be higher than at the same period last year. The growth in the truck fleet is a combination of planned new trucks, along with some holdover of the units that normally would have been sold by now.

U-Move revenue growth continued into the month of January, albeit at a rate slightly less than what we saw in the third quarter.

Storage revenues were up just under $10 million or up 13%. Revenue growth came again from occupancy gains at existing locations, occupancy from new facilities that we added to the system as well as we are still seeing a general improvement in rates.

Spending on real estate-related CapEx for the first 9 months of this year was $400 million, that's compared to $378 million last year at this time. Over the last 12 months, so for the calendar year 2017, we've added 3.5 million net rentable square feet. A little under 700,000 of that came online during the third quarter.

Operating earnings at our moving and storage segments, excluding the $191 million Chelsea gain, decreased by $23 million to $95 million for the quarter. First, on a positive note, we are seeing personnel costs fall back in line with revenue increases. For the 9 months, excluding the onetime field bonus we discussed last quarter, our personnel expense as a percent of total revenue was flat with last year.

The single biggest driver of the increase in operating costs and then the related decrease in our operating margin is the additional maintenance and repair costs that Joe mentioned that we've incurred this year on the cargo, van and pickup fleet. For the quarter, our total repair costs were up about $32 million, with the majority associated with this issue.

Depreciation expense associated with the fleet was up $18 million for the quarter.

During the last call, we discussed the issue of margin decline due to our self-storage expansion program. In the last 3 years, we've opened just over 300 new U-Haul locations. Approximately 70 of these we bought had existing storage on them. The remainder of these locations were conversions or we built them from the ground up. These locations have personnel expense, repair costs and property tax.

This quarter, my analysis team looked into the NOI earned at these locations over the last 3 years to quantify the earnings drag associated with them. On an adjusted non-GAAP basis, we used an NOI proxy, and we believe that these locations generated negative NOI of $5.4 million or loss. If you were to take the existing revenue from these locations and apply our average NOI margin against it, this would indicate that these locations are responsible for about $6 million of margin compression for the quarter and about $17 million for the 9 months. These figures are rough estimates, but I think it's reasonable to assume that with the amount of projects that we currently have in development and the appetite for additional acquisitions, that this is an issue that's going to continue in past next year and likely beyond that.

Finishing up, capital expenditures, our new rental trucks and trailers were $788 million for the first 9 months of this year compared to $870 million for last year. Proceeds from the sales of retired rental equipment were $389 million. That's down from $403 million last year. Gains from the disposal of rental equipment for the year are down $16 million. However, for the quarter, we did see increased sales volume and increased sales per unit, which resulted in a slight improvement in our gain on disposal of equipment.

With that, I'd like to hand the call back to Joe.

Thanks, Jason. We'll go ahead and take any questions there is now.

(Operator Instructions) Our first question comes from Ian Gilson of Zacks Investment Research.

As you know, I tend to look at the balance sheet first, and there are a couple of questions I have on that. Looking at the numbers versus the second quarter, where was the transfer of the deferred tax into the cash account? From what line items was that?

Ian, this is Jason. The -- a couple of things here. First, on the deferred, there was a swing between current liability and deferred and the change in deferred then went through earnings and then right to equity. We'll recognize the cash benefits, the $335 million -- or $339 million of income we recognized. The cash will come back to us over approximately in the next 5 years or so. Another change as a result of this is that the tax reform passed on December 22, our required tax deposit was due on December 15, so we'd already made that. So that resulted -- basically, we've prepaid $53 million of federal income taxes over the first part of this fiscal year. So we won't -- we don't expect to pay any federal income tax for at least the next, say, 5 quarters. So we'll recognize -- we'll start recognizing the cash benefits beginning this next quarter.

Okay, okay. The gain from the sale of the Chelsea operation, is that -- have you adjusted for the, what was it, is it the 1030? You have a special number for that, right, for the purchase of new assets against the sale of the old one?

Yes. We structured that sale as a tax-free exchange. So we sold that, and then to make it tax-free or tax-deferred, we had to purchase the same amount of assets. So I think we finished buying the last of those assets over $195 million in new assets here in January. So essentially, those are going to be treated on a carryover basis. And as long as we don't sell those assets, we'll be deferring those taxes indefinitely.

Okay. Now on the new tax rule, is the accounting treatment going to be basically that you will record 0 taxes? Or will you have any deferred tax base added going forward?

For the GAAP presentation, we will continue to accrue taxes. Our GAAP effective rate for the foreseeable future right now is going to be 24.3%. We had been, in the past, running just right around 37%. So essentially, next year, we'll accrue those taxes. Nothing will be paid, and they'll be due in the future.

Okay, okay. And moving back up to the income statement, over the past, I think it is about 3 quarters, 4 quarters, the operating expense line has -- at the [sense] of rental revenue has gradually increased. So that there is now a significant gap as to what you were showing 3 years ago, shall we say. Is that primarily from maintenance and repairs? Or are there other factors in there that have impacted that line?

Ian, this is Jason. For this year, the biggest piece has been maintenance and repairs. So if you look for the quarter, for example, if you take our operating margin, and I'm going to exclude depreciation and lease expense, the way I would calculate it, it looked like about a $21 million decrease in operating margin for the quarter. And repair and maintenance accounted for about $25.5 million of the margin decrease. Personnel had been a drag through the first 2 quarters. We actually had a margin increase due to personnel this quarter, but it wasn't -- it certainly wasn't enough to offset the maintenance and repair drag. And then we are beginning to try to calculate, on an ongoing basis, the margin decline due to the development of these new storage facilities. And our estimate for this quarter was a little over $6 million.

Okay. Now the maintenance and repair bills depend, to a certain extent, on the average age of the fleet. Is that correct?

Yes, Ian, that's correct. But that isn't what's driven this increase. We've actually held that. That hasn't been working against us. We have obviously some increase as the number of trucks and number of miles goes up. It's pretty much a linear relationship. What's really hurt us here goes back to what we talked about 24, 30 months ago, which is the automakers were able to succeed to get substantial price increases through on vans and pickups, and then -- which compressed our margin on resale. They actually were able to get better margins, which we [sought] with less potential money at resale. And then we made some missteps that are fairly considerable when you add them all up. In the specific, they're not very great, but when you put them over 30,000 trucks, we made some missteps on damage collection and damage management that we probably collected $40 million to $50 million of negative expense there that, I would say, is avoidable. Now we'll see if we can manage to that, but I believe there's that much of avoidable expense there. And then, as you recall, last June or July, Ford put through a recall on our entire van fleet, our Ford van fleet, which was the bulk of our van fleet, where we could not sell those trucks while they were under recall. So that set us back every bit of 3,000 or 4,000 trucks sold from where we want to be, and we're having to work through that lump. And it doesn't work through so well in the winter. I'm hoping we'll be worked through it by June. But these trucks that we were unable to sell last July and August, we had -- of course, our plan had been to be selling trucks in August, September and October. And we weren't able to increase our sales enough to absorb that. We're now in the time of the year that we had planned for very few truck sales. So we're out aggressively trying to sell trucks. But simply, trucks don't sell as well in the winter. And so it's going to be a couple of months before we see for sure can we normalize that situation, and we have to normalize to this to both volume of trucks sold. And as Jason said, we saw some pretty good indicators in the quarter, that we're getting that under control. We -- the proceeds are going to be, it looks to me, permanently down as a percentage or as an absolute dollar per truck over 3 years ago because the automakers got through increases on us that we're unable to pass through on resale. And then we made mistakes in damage and damage collection, which I think will have worked through the whole P&L because the fleet will have cycled 1 time by this coming June. And so we should be past that. Now whether we'll get -- we'll work this whole $40 million back or not, well, that's, of course, the test of management. Can we manage to that? And I would like to tell you I could guarantee it, but I can't guarantee it. I'm -- we're trying to hit that hard. Of course, we have multiple initiatives on any given date. But I've been hitting that hard over the last 6 months, and hopefully, that situation will turn.

Okay. But when you buy trucks, you're looking at the capacity requirement, not a dollar requirement, correct?

Yes.

So you really can't do much about the purchase price of the truck.

Really can't, you're exactly right. And they got through -- 30 months ago, they got through substantial increases, and we just got to live with it. That's all.

Okay. So as I look at what you had said in the past as to the composition of the fleet, you had basically increased the larger trucks relative to the smaller trucks. Does that cycle continue through the next 4 quarters? Or are you done balancing the fleet?

We're -- right now, we don't have that in our production plan. But I could see us bumping them a little bit towards this coming fall. It's just there's a bunch of opportunism there. We have -- if we can find a sweet spot, of course, I'll want to do it. I'm kind of -- I want to be aggressive there. But right now, we don't see a big deal there, no.

Okay. And last question is on the other income line that you quote, looking on a sequential quarter, that was down significantly at any particular reason?

I'm going to let Jason handle that one.

Yes, Ian. Let me look at that. That's not jumping off the page. I mean, are you saying other income from moving and storage from second quarter or is it third quarter?

No, you had $61 million in Q2, $39 million in Q3.

Yes. That normally does drop off. I think, last year, it dropped off about $15 million or $20 million. The majority of that line is our U-Box revenues, so that kind of moves in tandem with the moving business, although there is a pretty strong storage component to that, which is why the line's -- there's still quite a bit there. But the moving activity does fall off, so it somewhat mirrors what we see on the truck and trailer rental line.

Our next question comes from Jamie Wilen of Wilen Management.

Jason, thanks for the intro on self-storage. The numbers you were referring to, $5.4 million loss in the quarter, is that just for the locations you opened in 2017?

No, that's -- I started looking at -- I took 3 years of facilities, so that would be the last 3 years, so it'd be the fourth quarter of fiscal '15 through now. I think that was about 235 locations.

Okay. So if you went back a few more years to see how this plays out and to see how -- obviously, you started to represent, and over time, you get to a reasonable level where you have a stable and sustainable occupancy with great cash flow. If you look at the units you opened in 2012 -- '11, '12 and '13, what are they producing? You take the ones for the last 3 years, and you've got a $20 million operating loss. But how about the ones 3 year prior? What did they turn into?

I don't have those broken out. I will say that my team broke these out into quarterly cohorts. And the first cohort of these, the ones from fourth quarter '15 are -- this last quarter began cash flowing positive. So that does kind of fit our model about 3 years into it. So an answer to a question begets another question, so we'll keep looking into these things. But from what I can tell big picture without going into 230 individual projections at this point, it would appear that they're going along as planned as far as once we opened them up. Now there is a lag because some of these include properties that we've opened, and we have a temporary showroom and a renting truck. So then we're waiting to get zoning approval for storage or permits to build, and sometimes, that can take up to a year. So for some of these, the 3-year clock for getting occupancy up hasn't even started yet.

Okay. And as you look forward, do you anticipate maintaining this pace of opening up new locations in the next few years?

Everything I've seen in our acquisition activity and our backlog of projects would lead me to indicate -- or lead me to say yes.

Okay. On the trucks side, you've talked about in the past that trucks are made better, so we should have less maintenance costs. I realize some of this was repair because whatever dealer didn't inspect the truck and somehow damages were not seen. But are these -- is it a maintenance issue? Or were you repairing the trucks? Or the maintenance on these trucks is higher than we thought they would be? I look at new vehicles and on -- and when I own a car, and it requires much less maintenance today than it did many years ago. Is not -- that not the same as trucks?

It's close, Jamie. This is Joe. So what you've been talking about is what's our cost per mile. Our cost per mile is down over 5 years ago. I can't quote you the amount. But that's -- as Ian indicated, we've shifted the fleet to a little bit newer. And they -- you have more capital expense and less repair expense in the first, say, 4 or 5 years of a truck's life. So we've shifted more vehicles in that fleet. But very simply, they're making very high-quality vehicles. We're getting longer use out of the brakes. We're getting longer -- we're actually getting longer between oil changes. So all these things add up. This big $50 million pop we're seeing is primarily damage-related, and that means it should be subject to management. So I -- that's where I'm pushing my group. I'm telling you, this is an avoidable expense. Now how much of it will we avoid? I'd like to avoid 100% of it, and we'll see where we get to with it. So does that answer your question? Yes, right now, we're buying a very high-quality product, both from Ford and General Motors. They always have their little idiosyncrasies. But if you did a 10-year look-back, you'd so much rather have the equipment they're selling us today than what they sold us 10 years ago. You'd have a huge preference for it. And -- but of course, it's at a higher capital cost, [earnings costs are higher] .

And the issues that we had, have it been -- has it been from dealers or our own locations?

Both.

Okay. And we've got systems in place that you can tangibly measure that we are actually going to be reducing that cost?

So it's not quite as exact as I'd like it to be. But yes, it's starting to turn. Now -- but in the last week, I've come across a place I was very unhappy with. So of course, kind of my job is to be a little bit unhappy. And -- but this, it's just it's stupid to let a customer damage a vehicle and only pay the rental rate, it's just ignorant to do that. And every time we do it, we're essentially throwing away money. Now the problem is, is once it's happened, it's very difficult. You can't really go back and attribute it as well as you'd like to imagine you could. So have the damage before rental is old and good luck. You've lost the money and what you have is a personnel issue or a dealer management issue, and there is where I'm trying to drive on it.

Also, the U-Box program, you didn't mention it. Are we still making progress there?

Yes. This is Jason. Top line and, well, our contribution margin are both improving compared to last year for the year. I think we're up over 15% revenue-wise. We did the acquisition of the small competitor back in -- it was April or May, Door to Door. We fully amortized the acquisition costs associated with those boxes. And the persistency of those boxes in storage is a little bit better than what we expected. So I think that's going to work out well for us as well. So it's still all systems go for that.

Okay. And the new programs where people can get a vehicle 24 hours a day, you've had to develop new systems. How is that working out for you?

Well, it's working out well. We've done in excess of 250,000 transactions. I don't have -- I apologize, I should have a transaction count today. But we're steadily clicking it. And of course, it's -- our business is making U-Haul a superior choice in a customer's mind. And for some customers, this is -- it is exactly that, and it's making us a superior choice. The more we do with that, the more secure our total business becomes, so I'm very interested in driving that harder.

Okay. And being that you want U-Haul to be a superior choice in your customers' mind, we, as an investors, we would like U-Haul to be a superior choice in investors' mind, yet Coke goes by the name of Coke, Pepsi goes by the name of Pepsi and Harley-Davidson goes by the name of Harley-Davidson. U-Haul goes by the name of AMERCO. It's hard for me to come up with a good reason why we shouldn't change the name to U-Haul, so we can be more in the front of the minds of investors.

Well put.

Okay. And then lastly, with the tax rate changes, it looks like we'll add an incremental $5 or so a share to earnings. Am I in the ballpark there?

Probably a little bit less than that. I think I calculated off of -- if 2017 had had this rate, I thought it was somewhere in the $4 to $5 range.

Our next question is a follow-up from Ian Gilson of Zacks Investment Research.

Are you self-insured on damage?

Yes, 100%.

So that -- any variance in claims would go into the Republic West?

Actually, this goes right through the repair line, Ian. So this won't hit them. This isn't really an insured event. Now if it was a collision with another car, there'd be insurance. But this -- these aren't people colliding with the cars, that they rubbed the telephone pole or touched another vehicle or backed into a post in the front of their house or some God forbidding thing. It's all avoidable stuff. There's no third party present or who is damaged. It's all just property damage to our own equipment.

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

Okay. I'm going to do 1 thing. I think when I listened to Jason. He said earnings were $2.37 for the quarter, and the sheet he gave me said $2.34. Maybe I heard him wrong, but I don't want anyone to think that he was representing different than the GAAP presentation. I appreciate everybody sticking with us. We have an opportunity to improve. And of course, the -- anything that the government does to encourage us to improve just motivates me further to do a better job. So I think that we've gotten a little bit of that, and we've seen a little bit of good signs with the consumer, so our opportunity is to manage better.

With that, I'll turn it back over to Sebastien.

We appreciate your support, and we look forward to speaking with you on our year-end call in May. Thank you.

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