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AMERCO (NASDAQ:UHAL)

Q1 2014 Earnings Call

August 08, 2013 11:00 am ET

Executives

Sebastien Reyes

Edward J. Shoen - Chairman of the Board, Principal Executive Officer, President, Member of Executive Finance Committee, Chairman of U-Haul and Chief Executive Officer of U-Haul

Jason A. Berg - Principal Financial Officer and Chief Accounting Officer

Analysts

James Barrett - CL King & Associates, Inc., Research Division

James Wilen - Wilen Management Co., Inc.

Operator

Good morning, and welcome to the AMERCO First Quarter Fiscal 2014 Investor 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.

Sebastien Reyes

Good morning, everyone, and thank you for joining us today. Welcome to the AMERCO First Quarter Fiscal 2014 Investor Call. Before we begin, I would like to remind everyone that certain of the statements during this call regarding general revenues, income and general growth of our business constitute forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. Certain factors could cause actual results to differ materially from those projected.

For a brief discussion of the risks and uncertainties that may affect AMERCO's business and future operating results, please refer to Form 10-Q for the quarter ended June 30, 2013, which is on file with the Securities and Exchange Commission.

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

Edward J. Shoen

Good morning, everybody. I'm speaking to you from Phoenix, Arizona. On the phone this morning we also have Gary Horton, our Treasurer; Rocky Wardrip, our Assistant Treasurer; and Jason Berg, our Chief Accounting Officer. And they'll all be available for the call.

This quarter's results are based on strategic moves made over the past years that were implemented in the present tense by a group of quality men and women. As Jason will go into some detail, we continued to see some U-Haul transaction increases in the quarter. We are continuing to improve the quality of our customer experience, and customers are responding with increased transactions.

In self-storage, we have been able to achieve net gains in both occupancy and net rentable square feet. And of course, that's generated some revenue increases.

I'm trying to see to it that we are reinvesting appropriately in the U-Haul organization so we can continue to grow our service to the customer.

U-Haul is faced with a consumer base that has rising expectations and a growing population of would be competitors. How this will all play out will, of course, will be determined by the customer.

Our 2 insurance companies remain basically on plan with no big surprises. We have competent teams in both insurance companies, and I look for them to continue to manage successfully.

With that, I'll turn the call over to Jason.

Jason A. Berg

Thanks, Joe. Yesterday, we reported first quarter earnings of $5.78 a share as compared with $4.13 a share for the same period in fiscal 2013.

At our Moving and Storage segment, which includes our core equipment, rental self-storage business and specifically excludes our insurance operations, operating earnings increased $47 million for the quarter to $194 million. And our operating margins, which I calculate by dividing operating earnings by total revenues, increased by almost 4%. The increased profitability stems from our growth in equipment rental revenues. For the fourth year in a row, we're reporting record first quarter U-Move revenues. We had a $55 million increase this quarter compared to the same time last year. In historical terms, this represents our largest first quarter increase on a dollar basis in U-Move revenue ever.

The majority of this includes continues to come from our ability to handle the transaction growth from both trucks and trailers.

While pricing remains competitive, we've been able to improve profitability by way of our operational efficiencies that are allowing us to serve more customers at a relatively lower cost. We continue to strategically expand the size of our rental equipment fleet, and this has helped facilitate transaction growth as well.

Speaking of the fleet CapEx for the first quarter of fiscal 2014, our new rental trucks and retailers were $213 million. That's a $17 million increase compared to the same time last year, while proceeds from the sale of retired equipment increased $31 million to a total of $93 million in proceeds.

Our projections for rental equipment growth CapEx in fiscal 2014 are still in the neighborhood of approximately $525 million. And again, that's before netting any equipment sales proceeds against them.

Revenue growth for our self-storage operations continued to steadily increase. Revenues were up a little over $7 million for the first quarter. This is due to a 2% increase in our all-in occupancy rate during the quarter, combined with an additional 2.5 million net rentable square feet that we've added since we reported the first quarter of last year.

Spending on real estate-related CapEx, including construction, renovation and acquisitions of new facilities, for the first quarter of 2014 increased $63 million to a total of $99 million. We're going to continue to opportunistically expand our storage holdings.

A couple of quick comments on operating expenses at the Moving and Storage segment, which increased $28 million. Both personnel and maintenance expense grew during the quarter primarily in relation to the transactional activity, although neither increase had the effect of reducing our operating margins.

We continue to see revenue growth from our U-Box portable storage program, which does lead to some additional operating costs, primarily the variable third-party shipping fees associated with the customer moves.

Other operational costs have increased due to the fact that we've added over 40 new U-Haul storage locations to the system since the end of the first quarter of last year.

On a combined basis, the operating earnings from our life and property and casualty insurance operations improved by about $4.5 million compared to last year with both segments performing at or above their current business plans.

Cash and short-term investments at the Moving and Storage segment was $507 million at the end of the quarter as compared to $428 million at the end of our last fiscal year, which was March 31. Unused availability from existing borrowing facilities at the end of the quarter was an additional $75 million.

I'd like to remind everyone of our upcoming Virtual Analyst and Investor meeting. This is going to be our seventh annual event, which is broadcast live over the Internet at amerco.com. This year, we're going to be holding it on Thursday, August 29, at 11:00, Arizona time, which I believe is 1:00, Eastern time. That's about 3 hours after we will be holding our live webcast of our annual shareholder meeting earlier that morning.

We will have on hand several of our key executives, who will make brief presentations and then be available for questions and answers. I'd like to remind everyone this is one of our key investor outreach programs, and I encourage you to participate live, or you can submit your questions ahead of time to Sebastien Reyes, our Investor Relations Director, ahead of time, and he will get us to address them as part of the presentation. You can reach Sebastien through our Investor Relations website at amerco.com.

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

Edward J. Shoen

Thanks, Jason. We'll go ahead now and have the operator go to the question-and-answer period.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jim Barrett from CL King.

James Barrett - CL King & Associates, Inc., Research Division

This is Jim Barrett from CL King. Joe, to what degree is -- I know you mentioned increasing competition. To what degree does the reduction in the average fleet size of your primary competitor help explain these -- the results the company is achieving?

Edward J. Shoen

Are you talking about budgets?

James Barrett - CL King & Associates, Inc., Research Division

Yes.

Edward J. Shoen

Okay. Well, First, Jim, I would say they're not our primary competitor, but they're part of the competitive landscape.

James Barrett - CL King & Associates, Inc., Research Division

Sure.

Edward J. Shoen

Historically, budgets in Penske have been of relatively similar size.

James Barrett - CL King & Associates, Inc., Research Division

Yes.

Edward J. Shoen

And Budget has been over the last 4 or 5 years kind of putting more emphasis on their car rental operations as they have expanded those. And so I don't think it's a bad thing, but I don't have any evidence that says we're getting their customers. And I don't have a good estimate, maybe you do, of how much their revenue is down. So I think most of this, Jim, is really due to us doing a better job with our customer. And when we do a better job with them, they respond. I don't think that -- I think that Budget is -- has so many irons in the fire that are, as far as I know, all good, profitable operations, but they're just deemphasizing this, but not declaring a surrender. They're just -- at this point, they have other things at the top of their list. Now I would expect that they'll come back. They've been in this business a long, long time, and as they change their priorities, I'd expect to see them come back. I think -- that's about it. And so my answer is I don't have a quantitative answer. And to my knowledge, nobody in the organization does. But I don't think it's the big thing that's going on here.

James Barrett - CL King & Associates, Inc., Research Division

Understood. And as I look forward over the next couple of years, given what you see as market demand and customer service levels, how much of a need is there to grow the absolute size of the truck and trailer fleet over the next few years?

Edward J. Shoen

Well, I think you know it would -- been my intention to try to aggressively expand just to keep all the spots on the checker board filled. I don't have a big desire to leave a void. So if we see a market opportunity, I think you should expect us to appropriately put equipment on that opportunity. So we do a repetitive analysis to try to determine where that is. So I would say it would be my hope we'd be able to continue to expand it somewhere near the pace we have over the last 24 months, but I'm ready to turn that on or off depending on kind of how the customer responds to us. And so I don't -- well, that'd be my guess. My guess, you could project about -- that's what you really want to do, is projecting equipment.

James Barrett - CL King & Associates, Inc., Research Division

Yes.

Edward J. Shoen

That would be my best guess. But we try to maintain our flexibility. So if something goes awry, we can back off.

James Barrett - CL King & Associates, Inc., Research Division

Okay. And I recall, Joe, during the height of the real estate bubble you were averse to paying current market multiples for self-storage locations. Obviously, it didn't happen in this quarter, but what is your general sense as to your ability going forward to buy self-storage locations and/or existing facilities at prices that you feel are attractive? Are you starting to see prices in that area increase dramatically?

Edward J. Shoen

I think that -- what we've seen is and the REITs and the people who think they're going to alter the -- us to a REIT are on a feeding frenzy on storage presently. Of course, it's a 20-year investment, and doing it based on present interest rates is always a risky thing to do. The REITs have a whole different capital structure than us, and as near as I can tell, they can get away with this. They appear to be paying multiples of 15x to 20x NOI. That looks like what they're doing pretty routinely now. I don't have access to their books, obviously, but they seem to be doing that. I don't think that's a good strategy for us personally because that would have to be, in my judgment, factoring in a bunch more inflation, and I think you already took that. So I don't think that's a good strategy for us to follow, which means we're going to do -- we'll bid a bunch of deals, but we're not going to get a bunch of them because we're not comfortable to that multiple, very frankly.

James Barrett - CL King & Associates, Inc., Research Division

Right.

Edward J. Shoen

Well, that's just how it's going to be. How long it'll stay that way, I have no way to tell. But we still have a lot of other opportunities, and so we need to kind of, in my judgment, focus on what is an opportunity for us and let them go about their business. But it's creating a lot of extremely high expectations amongst individual storage owners when they see these kind of multiples, and we'll just see where that goes, I don't have a way to answer it. You're in the investment business. You have a better opinion of how long people are going to want to accept the current rates of return that they're seeing. And I really don't know that answer.

Operator

Our next question is from Jamie Wilen.

James Wilen - Wilen Management Co., Inc.

Following up on that, you are the third or fourth largest self-storage owner in the country at present?

Edward J. Shoen

Well, that's a hotly debated question, but we're big in the business, that's for sure. And it's part of our long-term strategy. So as -- and I don't know how you're invested in us, but as you're looking at us long term, we intend to be in the self-storage business in a -- with a national presence.

James Wilen - Wilen Management Co., Inc.

Right. And the -- over the last 2 to 3 years, the average price you paid x NOI for what you acquired was about what?

Edward J. Shoen

That's a good question. I don't know. Jason, if you know -- it was nowhere near 15, I could tell you that. I don't know if Jason has a number. And most everything we do is on trailing 12, and a lot of where these sales are taking place now is on forecasted next 12 months, and that gets very dicey. So when I say 15 or 20x, I'm saying based on trailing 12.

Jason A. Berg

Yes, this is Jason. I think many of our deals are priced closer to 12, anywhere from 12 to 14.

James Wilen - Wilen Management Co., Inc.

Okay. When I look at your numbers, there's a stark difference in what you do in Canada, your EBITDA margin as a percentage of sales versus what you do in the United States. I mean, in the States, it was 36% this quarter versus 22% in Canada. Why is there such a large difference? And can you close that gap?

Edward J. Shoen

We're all holding our breath here to see who's laid their hands on that actual information, and Jason is still going through the data.

James Wilen - Wilen Management Co., Inc.

Well then, while you're looking for that question, I'll catch another one on you. The -- you have notes with SAC Holdings.

Edward J. Shoen

Yes.

James Wilen - Wilen Management Co., Inc.

You tell me -- and the interest income went up in the quarter from last year for some reason by $5 million. What -- how come -- how could the interest income go up but amount of note didn't go up? And what is the interest rate that they are paying?

Jason A. Berg

The interest income went up at the end of last year for some investments that were non-SAC related.

James Wilen - Wilen Management Co., Inc.

Okay.

Edward J. Shoen

Right. And what's the interest rate? It hovers around 9%.

James Wilen - Wilen Management Co., Inc.

Okay.

Edward J. Shoen

9% is a good rule of thumb, but, I mean, we'll have to go through the exact documents to get every single interest rate..

James Wilen - Wilen Management Co., Inc.

Okay. Okay. And back to Canada?

Jason A. Berg

On Canada, there are some pricing that goes on between the U.S. operations and the Canadian operations. The -- I don't have a real good answer for you, but just in broad strokes, there are some pricing and allocation issues between the entities. Overall, I think if you were to just look at the truck rental operation on their own, there isn't a huge variance in the operating margin there. However, there are some things that we do a little bit differently accounting-wise between the 2.

James Wilen - Wilen Management Co., Inc.

Okay.

Edward J. Shoen

Again, I think your question -- this is Joe again. Always the issue is does something become a stepchild? Or does it get the full attention. And that from my point of view in operations, that's always the issue. The numbers kind of fall where they fall, but we've taken steps in the last 18 months to increase our management intensity in Canada. I would expect over the next 3 to 5 years you will see their operation move ahead noticeably. So it's always a -- look, there's no question about it, we're a US-based company and that gives us a little bit of prejudice towards the local operations as opposed to Canadian. But I think we've taken the steps to intensify there and we'll get some improved results.

James Wilen - Wilen Management Co., Inc.

Okay. And as far as your new business initiatives you bought [indiscernible], how much is that costing you along the way? And where -- when do you think that will turn from a cost to a profit center?

Edward J. Shoen

Well, that's -- Jason and I were just talking about that before the meeting. What I've been trying to do with every one of these operations is have them burn no more indirect expense than their total gross revenue. What that means is what's getting burned up is indirect or allocated overhead. So I would think, marginally they're very close -- each one of those operations is close to a breakeven, could be 1%, plus or minus, or breakeven, but they're close to a breakeven. It gets very -- what shall I say? It's very unclear how to properly allocate overhead, so I'll take myself for instance. I have spent a disproportionate amount of time on U-Box in the last 12 months. And so I'm not going to say this number of [indiscernible] have spent 30% of our time on U-Box. Well, certainly that's not proportionate to our gross revenue. So on a marginal basis, it's fine. But probably, if you really full-costed it, we have -- we're burning up some money. From the accounting standards, I'm trying to see -- and Jason is working with me on this to see that we're aggressive enough in our depreciation and expensing, so we're not building a bow wave of unabsorbed expenses. I don't know, Jason, if you could address that.

Jason A. Berg

No, I think we've been pretty conservative with our capitalizing the assets that we use towards this. I look at the U-Box program a little bit differently in that in the broad sense, it is using some of the same resources that we use throughout the rest of the organization, so its not all of this additional costs. So it is assisting in covering some of the overheads for the rest of the organization. So on a stand-alone basis, it isn't yet accretive to anything. However, I think in the grand scheme, there may be some benefit to it currently.

Edward J. Shoen

Yes. And what's our timetable? It kind of varies by the operation. I believe our moving both business is clearly making us money. I don't think -- is it -- Jason, you? I don't think there's -- it's not some huge amount of money, but it's money ahead. I think that the U-Box business may be 2 or 3 years out from doing something that'd be worth discussing. In other words, if we make or lose $1 million in the scheme of things, it's not a -- it doesn't have a tremendous impact. But I think 2, maybe 3 years out, the numbers would be big enough that we -- if we lost money, it would be big enough to talk about, and if we made money, it'd be big enough to talk about. The -- our College Box business remains relatively small. And I think -- again, I think we could say it's very close to a breakeven. I'd say very close. But it has a lot -- all these programs have a lot of IT costs to them. And it gets -- we try to cost it out, then we follow the accounting rules for how fast you can write it off. But those costs are very -- they're kind of ephemeral, but there's a big -- we have a big burn on that. Last time I checked, we had over 100 programmers on staff full time. And they are working on everything, trying to work on new programs, same kind to keep the U-Haul boat sufficiently operational, but it works. So I don't think we have an absolute knowledge of it, but we are consciously trying not to accumulate unexpensed costs with the thought we will recover them in a future year. We're trying to be aggressive or conservative, I guess, is what Jason called in that regard.

James Wilen - Wilen Management Co., Inc.

Okay, very good explanation. And one last thing. When you talk about that $1 million here or there, doesn't really move the needle, I look at that -- you've done an incredible job of managing these businesses from all fronts. But from a shareholder front, $1 million here and there obviously doesn't move the needle, but there are certain things that you can do that would be of great benefit to shareholders. You have built an iconic brand name that is still well known throughout America, and it amazing that it would cost you next to nothing to change the corporate name that people would know you wander under as U-Haul. I don't see how it would hurt anybody for anything to do that, but it would be a great benefit to all shareholders. I would certainly give you money if you needed extra to do it, but I think you have enough to be able to change the name, and I think it would really help the trading awareness for the company, as well as a 3 or 4-for-1 stock split because there are only 20 million shares out, we are a $170-or-so stock, one of the higher-priced stocks, and additional trading volume would be of great benefit to shareholders. So I would hope those 2 things, which would not cost the company much money, would -- but would be of great benefit to shareholders would be considered in the future. And can you tell us if you have indeed discussed them and why you wouldn't do them currently?

Edward J. Shoen

Sure, we've discussed them. I don't know that I could tell you why we wouldn't do them. May I ask you for the -- why do you feel so strongly? We really [indiscernible] that before on the name. But what's your -- what's kind of your experience in that regard?

James Wilen - Wilen Management Co., Inc.

Because no one knows that AMERCO is U-Haul. When -- I mean, I -- when people look at their statement, they saw, "What is this AMERCO?" And then you have to tell them that's U-Haul. And people are -- people love the U-Haul business. They love to see the U-Haul trucks on the road. People would love to invest in the U-Haul company, but they don't know that it's actually trading under a different name. I realize the symbol is U-Haul, but it is one of the world's great brand names that is unknown on Wall Street. And I would admit, if Wall Street was more aware of you and you did a 3-for-1 stock split or 4-for-1, the stock price wouldn't probably be 50% higher than it is today. You've done such an incredible job of running the business, but you're kind of like a tree falling in the forest that nobody sees. Your numbers are fantastic, and your market position is incredible and dominant. And as a shareholder, I love to travel in the highways and see a U-Haul trucks all over the place, and I'm sure everyone else would, too. So I think it would have incredible benefit that. I think it would cost us nothing to do, and I think we could -- we have very little coverage on Wall Street beyond CL King. I think we're very worthy of getting coverage on Wall Street. We're a couple billion dollar market cap, but we should be a couple billion more than that.

Edward J. Shoen

Okay, I appreciate your thoughts, and I'll try to reflect on that.

Operator

[Operator Instructions] Our next question will be from Mikhail Guput from Front Four Capital.

Unknown Analyst

I kind of just want to share my sentiment with the previous investor. And I kind of also agree with him. I think it would be extremely beneficial to the equity. It would create greater liquidity and allow investors who can't buy the stock to do it. For sure, it's an opportunity to invest. But I guess further following up on that, I had seen the business. It's clicking on all cylinders. CapEx dollars are starting to bear fruit. Given that and kind of your strong balance sheet, so kind of 1, 1.5x leverage, what are your thoughts around capital allocation? And I guess more specifically, how do you guys view a share buyback and/or regular dividend? An opportunity there to reward shareholders and your employees via the ESOP. Do you think you can give a little more color there?

Edward J. Shoen

Sure. And this is Joe again. If you go look at our capital structure, so I think it's pretty much laid out in the public documents, we have a fairly good bump coming up in our debt. And it really relates to the chapter filing we did in 2002 or 2003. And until we absorb that, which is about 18 months from now, we're going to be a little bit of a burnt child who's scared of fire. In other words, we're hyper on liquidity, and we want to see that absorbed. And of course, right now, it appears like there's no way it can't be absorbed, but I've been there before. So we're keeping a lot of liquidity to ensure that, that is a nonevent, basically. And as that is processed -- and we're on that almost every day working on that subject. As that is processed, I think we're going to be much more open to looking at capital allocation issues. I'm not going to say what we'll do or will not do. But right now, I think just as a group, we're still -- that's very much in the near-term memory of the organization. It doesn't want to get close to that. And while the numbers aren't big for some companies, for us these are big numbers, and we want to have that totally -- the path totally clear on that before we start reallocating capital to other activities.

Unknown Analyst

Okay, fair enough. That's helpful. And I guess lastly regarding U-Box, can you just talk a little bit about the market dynamics there? How big is that potential market? And how big of a player do you envision kind of being there?

Edward J. Shoen

Well, I would expect it to be a several hundred million dollar product line for us. Now does that that mean $200 million or $600 million? That's a good question. I wish I knew the answer to it. The -- there's a considerable amount of business there, and it is -- some of it overlaps our business, but some of it is totally in other areas. And so, we're very much still learning that business. We'll have a nice increase in overall revenue in it this year. I don't know what percent. Jason, if you know. I'm not sure what our percentage would be.

Jason A. Berg

We could -- we were on track. I know they'll double it.

Edward J. Shoen

Yes, about double. And so -- and you'd expect that for the first several years of a program. It's the program it's working on. And so, if we could double it this year, double it next year, then we'll start to get some consumer awareness. We have almost -- we have very modest consumer awareness of the product. And so, that is -- gives us a lot of uncertainty about how big of a market it really is. I think it's going to be pretty big. And I could see it being $400 million. Not being just crazy talk. Now there's a lot of work we'll have to do here and there. And we have to increase the quality of our customer experience there because of course, every time we mishandle something as we're going through this learning curve, we burn a customer and we're having to go back and try to make it right by these people. But we're making unfortunate errors as we continue to expand our footprint. Right now, on the optimistic point of view, we have the largest footprint in the business, bar none, to my knowledge. In other words, we're servicing the most geographic areas. Now we're servicing them very thinly. But part of our U-Haul strategy is to be in all markets. And so that's one of the things we're trying to do at U-Box, that we'll make our competitors' market penetration being not necessarily relevant because we're going -- our intent is, is to be in markets or what they would consider 2 tier below their markets, submarkets. And we think there's a lot of business in there, and that's our U-Haul experience. If there's obviously very small towns, there is business there. And so we -- we're building our models so it's -- so we can just hold our costs absolutely to the minimum so we can get into these less intense or lower-duty cycle markets. Now if we can do that, I think we'll see this business $400 million-plus.

Operator

This will conclude our question-and-answer session. With that, I'd like to turn the call back over to management for closing remarks.

Edward J. Shoen

Well, thank you all again for joining us, and thanks for supporting our efforts. As Jason said, we're going to have our investor webcast on Thursday, August 29, and I look forward to anybody -- if you have the time to log on there, we'll try to make it worth your time. Thank you again.

Operator

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

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