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AMERCO (NASDAQ:UHAL)

Q4 2014 Earnings Conference Call

May 29, 2014 11:00 AM ET

Executives

Sebastien Reyes – Director-Investor Relations

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

Gary B. Horton – Treasurer

Rocky D. Wardrip – Assistant Treasurer

Analysts

Ian T. Gilson – Zacks Investment Research, Inc.

Jacob Meier – C.L. King & Associates, Inc.

Robert J. Dunn – Sidoti & Co. LLC

James R. Wilen – Wilen Investment Management Corp.

Rohit R. Sahni – Harbor Spring Capital LLC

Operator

Good morning, and welcome to the AMERCO Fiscal 2014 Year-End Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

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

Sebastien Reyes

Thank you, Bettie. Good morning, everyone, and thank you for joining us today.

Before we begin, I would like to remind everyone that certain of the statements during this call, including without limitation, statements regarding revenue, expenses, income and general growth of our business may constitute forward-looking statements within the meaning of the Safe Harbor provisions of Section 27A of the Securities Act of 1933, as amended; and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain factors could cause actual results to differ materially from those projected. For a discussion of the risks and uncertainties that may affect AMERCO’s business and future operating results, please refer to Form 10-K for the year ended March 31, 2014, which is on file with the U.S. 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.

Jason A. Berg

Thanks, Sebastien. Good morning. I’m speaking to you today from Phoenix, Arizona along with Gary Horton, AMERCO’s Treasurer; and on the call from our offices in Reno, Nevada is Rocky Wardrip, our Assistant Treasurer. All three of us will be available for questions after the prepared remarks.

Yesterday, we reported fourth quarter earnings of $2.00 a share, as compared with $1.93 per share for the same period in fiscal 2013. For the full year of fiscal 2014, we reported net earnings of $17.51 a share, as compared to $13.56 per share for fiscal 2013.

And our Moving and Storage operating segment, which includes the equipment rental and self-storage business, and excludes our insurance companies. Operating earnings increased by over $17 million to nearly $72 million for the fourth quarter. And for the full year, we were up nearly $122 million to $585 million.

The revenue trends that we’ve been discussing for the last four years regarding our truck and trailer rental business have continued. For the fourth quarter, we increased these revenues by nearly $32 million, which is about 9% and for the full year, we were up $189 million, which is around 11%. It’s typically during this fiscal year recap that we discussed a few statistics regarding the size of our rental fleet.

During fiscal 2014, we increased the size of the rental fleet by approximately 15,000 trucks and 11,000 trailers and towing devices, that’s net of dispositions. At March 31, 2014, we had approximately 127,000 rental trucks, 98,000 trailers, and 37,000 towing devices. Looking into the upcoming year, we’re going to once again, cautiously evaluate the need for expanding the fleet.

Regarding our retail network, we added close to 15 new company-owned stores in fiscal 2014, our independent dealer network grew by approximately 1,000 locations that brings our combined distribution network of just over 18,940 locations at March 31. Both our in-town and one-way transactions experienced growth during the quarter and for the full year.

The majority of the revenue increase can be attributed to transaction growth rather than any widespread price improvements. We continue to be surrounded by regional and national competition. The combination of our capital investments and equipment in physical locations along with the continued process improvements that are taking place, both in our stores and on the Internet is providing our customers with a better overall experience in renting with U-Haul.

We believe that these factors are enabling us to better serve the existing demands from the self-moving market. What I’ve seen during the first month or so of fiscal 2015, we are still finding additional upside in our revenue results. As I stated earlier, we have increased the amount of equipment available to our customers.

Capital expenditures on new rental trucks and trailers increased $177 million to just under $776 million for the full year, that’s compared to the previous year. Our proceeds from the sale of retired equipment finished the year at $258 million. Our initial projections for rental equipment capital expenditures in fiscal 2015 are somewhere north of $810 million, that’s before netting any equipment sales proceeds against them.

We are projecting that the sales of equipment will also increase in fiscal 2015. and that will bring our net capital expenditures, which is our investment in new equipment less the sales proceeds from old equipment. We will bring that number below our fiscal 2014 amount, which was $518 million net.

We continue to be active on the acquisition and development front for self-storage. For fiscal 2014, this translated to an additional 40 retail storage locations, totaling over 2,100,000 net rentable square feet. Through the addition of these new facilities, combined with improved occupancy of existing locations, we increased revenue by $7 million in the fourth quarter and $29 million for the year.

For fiscal 2014, our all-in average occupancy rate increased by nearly 2%, finishing around 81%. This leaves us considerable room for additional self-storage revenue growth with little additional costs to be accommodated. Pending our real estate related items that include construction, renovation and acquisitions increased $152 million this year to approximately $321 million in total.

Our plans are to continue to opportunistically expand our presence in the self-storage market through acquisitions, while continuing to work on our conversion and development projects. Our operating margin at the Moving and Storage segment for all of fiscal 2014 calculated by dividing operating earnings before taking into consideration, the insurance subsidiaries, dividing that by total revenues, improved by approximately 2.5%, compared with fiscal 2013.

As a percent of revenues, fleet related costs, including depreciation and operating lease expenses decreased by about 1.5%, while operating expenses again, as a percent of revenue decreased by about 1%. On a combined basis, the operating earnings from our life and property and casualty insurance operations improved by just under $9 million. Both segments have been able to reduce incurred policyholder benefits.

It is important to remember that our fourth quarter of fiscal 2013 included a pretax investment gain of approximately $8,400,000 that did not recur in the fourth quarter of this year. Another important development during this last quarter was the upgrade of Oxford’s financial strength rating by A.M. Best to A-, which is considered an excellent rating. This is well known recognition of the outstanding efforts of our team at Oxford as they continue to methodically work their business plan.

Consolidated earnings from operations for the fourth quarter of fiscal 2014 were $82 million, compared to $72 million in the fourth quarter of last year. and for the full year, we reported earnings from operations of $630 million on a consolidated basis, versus $499 million a year before.

With that, I’d like to hand the call back to Bettie to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Ian Gilson of Zacks Investment Research. Please go ahead, sir.

Ian T. Gilson – Zacks Investment Research, Inc.

Good morning gentlemen.

Jason A. Berg

Good morning, Ian.

Ian T. Gilson – Zacks Investment Research, Inc.

Congratulations on another good quarter. As we look at the fourth quarter of last year versus the fourth quarter just announced, did the relative changes of the about town versus point-to-point, was that materially different, or are we maintaining equivalent growth in both sectors?

Jason A. Berg

It’s looking about the same, where we saw a little bit stronger growth on the in-town market, but both are still continuing to grow and fourth quarter, I think, we did a little bit better in both categories.

Ian T. Gilson – Zacks Investment Research, Inc.

Okay. On seeing the expenditures on the point-to-point, are we still bias towards the mid-range or has that been changing over the last year?

Jason A. Berg

When you refer to mid-range, are you referring to truck size, or a distinctive move?

Ian T. Gilson – Zacks Investment Research, Inc.

Yes, truck size.

Jason A. Berg

Truck size, I would say that more of our investment in fleet has been on the one-way fleet has certainly been on the midsize truck.

Ian T. Gilson – Zacks Investment Research, Inc.

Okay, fine. Thank you very much.

Operator

Thank you. And our next question comes from Jim Barrett of C.L. King & Associates. Please go ahead sir.

Jacob Meier – C.L. King & Associates, Inc.

Good morning. This is actually Jacob Meier calling in for Jim. Great quarter, guys. I want a quick question about the mortgage that was due upcoming next year, and it looks like that had been extended out and wanted to know, what the plan was with regard to returning cash to shareholders and I believe in the past that that had been part of contingent on that maturity forward-looking at that. so if you could discuss that a little bit and how that changes have been up?

Jason A. Berg

Sure. I’m going to hand the call over to Gary to discuss that. I think what you’re referring to is the July 2015 maturity of some of our senior mortgages and you could take that.

Gary B. Horton

We are in process right now of doing early refinancing of some of the pools. the money from this financing will then be used to pay off the remainder of the debt that comes due in July of 2015. So the cash will not basically go to the shareholders, but it will go to retire the rest of the debt that is due next year.

Jason A. Berg

And just to further expand on that, I think just on the last comments, regarding that is that as soon as we get our self-refinancing point then with additional cash from operations are existing cash, not any cash from the refinancing piece. Is that then we would take a look at the capital structure at that point and see what we wanted to do with some of those options that perhaps including dividends and whatnot that I think we’re kind of holding off on that. So to sum up, what Gary said we’re still on plan for successful refinancing with that and we’ll hope we have more information as we approach the July 2015 maturity.

Jacob Meier – C.L. King & Associates, Inc.

Okay, great. Thanks guys.

Operator

And our next question comes from Robert Dunn of Sidoti & Company. Please go ahead.

Robert J. Dunn – Sidoti & Co. LLC

How are you?

Gary B. Horton

Good morning.

Jason A. Berg

Hi, Rob.

Robert J. Dunn – Sidoti & Co. LLC

Good. I was wondering if maybe you could quantify or at least frame what the impact weather had in the quarter?

Jason A. Berg

Early on there was when the storms ran through the Atlantic seaboard and down south through like the Atlantic area. we saw a few days where this increases across the system actually flattened out. so it did have an effect for a few days. I think overall, as you can see from our results, we’re able to adjust that fairly well. but certainly, the ice storms I mean that brings the roads to a halt. we did have to close some stores and we saw there was in the quarter at least, maybe just four, five, six days, where the weather did kind of pause things for a moment, however I don’t think it had a significant impact overall for the quarter.

Robert J. Dunn – Sidoti & Co. LLC

Okay. and you talked about the trends in first quarter. I mean do you think you could be a bit more specific in terms of additional upside to revenue? Do you think you kind of had said maybe 7% to 8% was a sustainable view? Do you think that that’s moved up or down, do you think it’s starting to assume maybe even a low double-digit clip in fiscal 2015?

Jason A. Berg

Well, 7% to 8% for us is historically high. Our average growth has historically been 4.5% to 5%. Over the last three years, we’ve been looking at if you add up all three years closer to 8% growth. So in the month of April, we’ve seen something similar to what we’ve seen at the last few years, we don’t really project to head on what we expect, but certainly all of our plans operationally speaking are to try to be able to service that much of an increase. but I’m not going to go out and give you a targeted growth number.

Robert J. Dunn – Sidoti & Co. LLC

Okay. Just in assuming in that sort of revenue growth context, how do you think we should think about the leverage, particularly in the equipment rental segment?

Jason A. Berg

We still have upside in utilization. This last year what we’ve done was, we’ve added a significant amount of fleet and on a broad basis; we’ve been able to maintain utilization within the fleet. so our goal then would be now that we’ve added all those equipment to kind of pick up a trajectory on utilization and start improving that.

so there’s a whole lot of work to adding the amount trucks that we’ve added this year and getting them distributed across the system approximately. so we would hope to be able to capitalize on some of that. and our first method for growth would always be improved utilization of the fleet versus simply added equipment.

Robert J. Dunn – Sidoti & Co. LLC

And maybe, a couple of comments on the pricing environment, I know you said that it was mainly transaction growth, but could you put a little context towards the pricing environment?

Jason A. Berg

There has been no real change in the pricing environment, and I think what we found is that there’s nothing good to ever come from us commenting on the pricing environment. So I think what we’ll say is, the pricing environment hasn’t changed. What we’re focused on is that, we can improve our earnings; we can improve our revenue without necessarily having to increase prices. We can increase utilization, I think we have done this last year to expanding the dealer network in the company-owned location network, I think has had the effect for us of improving the transaction, right, I think what we’re seeing is that we’re able to fulfill more of the existing demand that’s out there by moving into more of these niche markets that we weren’t in before.

Robert J. Dunn – Sidoti & Co. LLC

Okay, great. Thanks very much.

Operator

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

James R. Wilen – Wilen Investment Management Corp.

Outstanding quarter and great year for us, a couple of questions, could you tell us what the age of your fleet is now, now that you’ve bought a lot of trucks in the last two years, a lot of equipment?

Jason A. Berg

We don’t have an average age of the fleet. The way that we stratify trucks across our network, we typically hold our trucks longer. I would say that the overall health and that health being measured by down trucks, trucks not being actively rented is at one of its lowest points that we’ve seen historically. So, I think on an overall basis, the satisfaction of our customers with the equipment is at one of its highest points that we’ve seen.

James R. Wilen – Wilen Investment Management Corp.

Okay. But operating expenses, I would assume would be lower with newer trucks and better quality of trucks as they’re manufactured today?

Jason A. Berg

Yes. Generally, we replace trucks that need maintenance, we don’t reduce maintenance per se. so with the way that fleet rotation is looking now, we’re in a great spot with that. We did see repair and maintenance costs go up this year as we addressed portions of the older fleet that we did some refreshing campaigns on over the year. But your general premise is correct that the newer the fleet, the lower the repair cost is. Now conversely, the higher the depreciation expense is as well the way we do depreciation, but does that answer your question?

James R. Wilen – Wilen Investment Management Corp.

Yes. And with the potential for refinancing the debt out there, any idea as the potential savings and interest cost that could occur?

Jason A. Berg

We’re looking at it right now. It will have the effect of lowering our interest cost, a few million dollars a year for the next 10 years plus. if we’re at an all-time low and what we’re choosing to do in some cases is extend the financing terms to a longer maturity, fully amortizing and being able to do it at a very attractive rate.

James R. Wilen – Wilen Investment Management Corp.

Outstanding, I know you weren’t talking about pricing as far as the moving business goes, but within your self-storage units, as occupancy rates continue to tick higher, have you also changed a bit of your pricing in that area?

Jason A. Berg

Sure. that’s always taking place in a location-by-location basis, as we improve service, we then look to be, get a fair rate for that additional service, so that’s taking place across the country. Because of all the activity that we have going on within that portfolio right now, it’s hard to get kind of an overall generalized increase in rates across the country, because we have so much new products coming in that I don’t have a real good number I can tell you that rates are up 2% or anything like that.

All I could say is that we have probably half of our locations are at 90% or better and at those locations that we typically are at that point, because of great service. And as we improve that service, we’ll also seek to improve the rate there.

James R. Wilen – Wilen Investment Management Corp.

Okay, outstanding. And lastly, any further discussion of possibly changing the corporate name as people go out and say why don’t we rent a U-Haul as opposed to why don’t we rent an AMERCO?

Jason A. Berg

The comment has been heard by the Board, I think the comment has been heard by everyone who has been on the earnings calls now for a while, and I still don’t have anything new to report to you on that.

James R. Wilen – Wilen Investment Management Corp.

Okay, outstanding job in managing the business. thank you.

Jason A. Berg

Thank you, Jamie.

Operator

(Operator Instructions) And our next question comes from Rohit Sahni of Harbor Spring. Please go ahead.

Rohit R. Sahni – Harbor Spring Capital LLC

Hey, guys. Congrats on a great quarter. I had two quick housekeeping questions and then one question on just the outlook. I know you don’t get the actual outlook for revenue growth, but could you comment briefly on just margins over the next year or two, obviously, you’ve done a very nice job increasing them by over 250 basis points this year. Can we see margins showing healthy improvement as you go forward? And then the two housekeeping questions. One is can you just clarify, I think you said something about the CapEx guidance for 2015, can you just mention those numbers again, if you did just so we have them? And then secondly, can you just comment on what your actual net debt is now for the year-end versus what it was last year?

Jason A. Berg

Sure. I’ll start off with, I guess, with your last question. The debt, and what I’m going to include in this is the on balance sheet, the loans, capital leases and then also our best estimate of the liability for operating leases and their residual value guarantees. at March 31 of this year, that number was $2,155 million; at March 31 of last year, that number was $1,992 million, I think to offset that cash at the Moving and Storage segment at the end of the year was $464 million; last year was $427 million. so the net debt number would – for this year is $1.7 billion, last year, it was about $1,565 million.

Rohit R. Sahni – Harbor Spring Capital LLC

Yes, great.

Jason A. Berg

As far as the CapEx number, just to kind of go over what I mentioned there, our growth CapEx on fleet spending, this last year was $776 million. Right now, we’re predicting a slight increase in that to about $800 million – a little north of $810 million, that number for anyone who tracks our projections in the queue from quarter-to-quarter will know that that projection changes from quarter to quarter as our operations team evaluates the business, so that’s our best estimate as of today.

Our net CapEx number last year stood net of sales of $518 million. we think we’re going to see increased truck sales this year, so that we should be coming underneath that. I don’t necessarily have a magnitude of how much below that right now. but hopefully, we’ll have a much better update after the first quarter and we’ll start to see how we’re able to move that volume of trucks.

For storage CapEx, this year, we almost doubled it or just about doubled it a little more, I guess from – up to $320 million. I think we’re $169 million last year. I don’t have a specific budget for that other than to say that we’re going to keep looking for opportunities. we could easily do another 300 million in this year based upon what we have in the pipeline as far as conversion and development projects, combined with a reasonable run rate and then the last question was about margin projection and we’ve talked about this before, we’re kind of uncharted waters on margins.

If the revenue were to keep increasing at the rate at it is, there’s no reason why we shouldn’t be able to try to improve upon what we’ve done in the past, but we do have some headwinds with the bigger fleet, the opportunity for maintenance and repair costs to go up is there, and I think we’re looking at probably some increase in our insurance expense on the fleet this coming year. so we do have a couple headwinds, but it’s certainly possible. It’s not out of the question for further increases.

Rohit R. Sahni – Harbor Spring Capital LLC

Got it. and with respect to competition, obviously, some of your large competitors are shrinking their fleet or getting smaller. Any notable trends that you’re seeing in the competitive landscape that we should be aware of, versus what we saw last year?

Jason A. Berg

No, I don't think that there has been any significant change with our competitors. For every one that downsizes someone else may see an opportunity to increase the size of their fleet. I’ll say, we’ve said it again and again that we’re inwardly focused and the revenue improvements that we have this year weren’t from anything that our competitors did. It was from what we did, which was expand locations, increase the amount of equipment to get to those locations and serve customers that likely weren't using anyone’s equipment before, but now we’re more of a convenient option for them.

The equipment may look nicer; it may be closer to their house. the process on the web may be easier for them to navigate. I think all of those things have contributed to people utilizing us more versus any sort of wholesale pullback by competition or any large structural increase in demand.

Rohit R. Sahni – Harbor Spring Capital LLC

Got it. Okay, great. Thank you very much.

Jason A. Berg

You’re welcome.

Operator

And we have a follow-up question from Mr. Robert Dunn of Sidoti & Company. Please go ahead, sir.

Robert J. Dunn – Sidoti & Co. LLC

Hi. The corporate expense in Moving and Storage fell pretty dramatically in the quarter, I was wondering if there was anything special going on?

Jason A. Berg

When you say it fell, you’re comparing it versus last quarter or last year.

Robert J. Dunn – Sidoti & Co. LLC

Quarter-over-quarter.

Jason A. Berg

Yes, and that typically happens. You also see that the revenue came down as well. so our business is a little bit cyclical, so personnel costs kind of fell. So looking at just as a percent of revenue, we were able to improve a little bit compared to where we were at last year, but that decrease quarter-to-quarter is fairly routine for us.

Robert J. Dunn – Sidoti & Co. LLC

Okay. And I think I missed what you said about CapEx on the storage side?

Jason A. Berg

Sure. Just commenting that last year, we did a little over $320 million of CapEx, a year before that we did $169 million, we don’t have a specific budget for what we have to do, what we found generally, because that may lead people to do deals that aren’t the greatest deals, just to try to hit their investment number. so we’re more opportunistic in how we deploy that capital. We have a whole bunch of projects in the pipeline, I mean the locations that we required that we have some work to do on, we were adding storage to those. We’ve added 50 locations this year that are doing truck rentals, 40 of those already have storage, so that means we have 10 more to work on in order to get the storage up and running at those. We have several more in the pipeline. So we would love to do another $300 million this year, but I can’t give you a firm projection on that, because it’s kind of varying on where we find the deal.

Robert J. Dunn – Sidoti & Co. LLC

Okay. And then that would be over and above $810 million.

Jason A. Berg

Exactly. Yes.

Robert J. Dunn – Sidoti & Co. LLC

Okay. All right, great. thanks very much.

Operator

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

Jason A. Berg

I’d like to thank everyone for their interest in following the company; I’d like to thank the U-Haul team for all their efforts this last quarter and this last fiscal year. And we look forward to speaking to you in our first quarter earnings call. Thank you.

Operator

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

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