AMERCO's (UHAL) Q3 2016 Results - Earnings Call Transcript

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AMERCO (NASDAQ:UHAL)

Q3 2016 Earnings Conference Call

February 04, 2016, 10:00 AM ET

Executives

Sebastien Reyes - Director, Investor Relations

Jason Berg - Principal Financial Officer and Chief Accounting Officer

Joe Shoen - Chairman and President

Gary Horton - Treasurer

Analysts

Jim Barrett - CL King

Ian Gilson - Zacks Investment Research

Lynn Perry - Wilen Management

Operator

Good morning, and welcome to the AMERCO third quarter fiscal 2016 investor and webcast conference call. [Operator Instructions] I'd now like to turn the conference over to Mr. Sebastien Reyes. Please go ahead.

Sebastien Reyes

Good morning, everyone, and thank you for joining us today. Welcome to the AMERCO's third quarter fiscal 2016 investor call. Before we begin, I would like to remind everyone that certain of the statements during this call, including without limitation, statements regarding revenue, expenses, income and general growth of our business, may constitute forward-looking statements within the meaning of the Safe Harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain 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, 2015, which is on file with the U.S. Securities and Exchange Commission.

Participating in the call today will be Jason Berg, Chief Accounting Officer. I'll now turn the call over to Jason.

Jason Berg

Thanks, Sebastien. Good morning. I'm speaking to you today from Phoenix, Arizona. Also, on the call today is Joe Shoen, Chairman of AMERCO; and Gary Horton, AMERCO's Treasurer. All three of us will be available for questions after the prepared remarks.

Yesterday, we reported third quarter earnings of $4.17 per share as compared to $3.40 per share for the same period in fiscal 2015. All of my period-over-period comparisons are going to be for the third quarter of fiscal 2016 compared with the third quarter of fiscal 2015, unless otherwise specified.

Operating earnings for our moving and storage segment improved by $26 million. Coincidentally, that's the same -- we have the same amount of increase that we reported during last year's third quarter. All three of our primary revenue lines, equipment rentals, self-storage and retail products and service sales improved for the quarter.

U-Move revenues increased $30 million, that's about 6% for the quarter. Our distribution network continued to expand with the addition of 25 new U-Haul owned locations and just about 300 net new dealers. Once again, we experienced revenue and transaction growth in both the one-way and in-town rental markets for our trucks, trailers and towing devices. The revenue growth during this quarter came less from fleet expansion than what we've seen in recent quarters.

One factor that's been negatively affecting our reported revenue results is a foreign exchange rate between the U.S. and Canada. During the third quarter of last year, the currency conversion effectively reduced reported revenues by just under $4 million, whereas in the third quarter of this year it had about an $8.5 million effect. I have nothing new to report regarding the pricing environment, it remains competitive.

Weather conditions have been worse during the third quarter of this year and now into January than what we experienced in the previous year. This is yet another challenge our operations team is working to overcome. Despite these factors, U-Move revenue growth continued into the first month of the upcoming fourth quarter.

Capital expenditures for the first nine month of fiscal 2016 on new rental trucks and trailers totaled to $586 million compared with $635 million for the same nine month period last year. Proceeds from the sale of retired equipment for the nine months were $459 million this year compared to $268 million last year.

Looking at the self-storage portion of our business, revenues were up just under $10 million. It's the largest quarterly increase that I've seen going back into recent history. Revenue growth is coming from three directions: occupancy gains at existing storage locations, occupancy from new facilities that we've added to the system, and the general improvement in rates.

From December 31, 2014, through December 31, 2015, we've added approximately 3,600,000 net rentable square feet into the system. Just under 3 million of that came during the nine months of this fiscal year. This was an increase in our pace of new additions. Spending on real-estate related CapEx including construction, renovation and acquisitions, for the first nine months of this year was $439 million as compared to $268 million in the previous year.

Occupancy for the quarter-ended December 31, we reported 78%, which is down 3% from what we've reported a year ago. To better understand this result, it's helpful to know a little bit more about the 3,600,000 net rentable square feet that we added over the last 12 months. 50% of that came from acquisitions of existing storage facilities. Those facilities came online at the acquisition date with existing occupancy of about 66%.

The other half of the new storage came from our own development in construction that was added into the system at 0% occupancy. So from a blended perspective, we added a little over 3.5 million more net rentable square feet this year with an average beginning occupancy of somewhere around 30%. It is this growth that is leading to the watering down of our reported occupancy results. Excluding this new square footage occupancy, results show an improvement.

Operating expenses at the moving and storage segment increased $16 million for the quarter. We saw personnel expense, along with other cost that are associated with the expansion of our network and expenses that go along with the growth in revenues increase, while direct operating costs associated with our U-Box program decreased. Consolidated earnings from operations were $158 million compared to $133 million for the third quarter of last year.

Our cash and credit availability at the moving and storage segment was just under $700 million at December 31, 2015. One last note, during the third quarter of fiscal 2016, we paid a $3 per share cash dividend that took place at the beginning of the quarter on October 2, bringing our total cash dividends paid for fiscal 2016 to $4 per share.

With that, I'd like to hand the call back to Nain, our operator, to start the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Jim Barrett of CL King.

Jim Barrett

Joe, a question for you. Used truck pricing, where are we in your opinion in the cycle? What do you see is the main drivers of your healthy pricing for that equipment? What do you see as you look in the windshield?

Joe Shoen

So, first of all, the numbers that we recorded are because we are rotating a bigger fleet, so don't confuse the big jump means that per unit price has jumped, Jim. We're simply selling more trucks because we expanded our fleet about 18 months ago. So used truck pricing has been evolved across the board. I think you have to first look at new vehicle pricing, there has been a big change in the pickup and van business, because Ford introduced the all-aluminum pickup, which they were trying to, with their F-150, change the market and Ford also introduced the Transit, which they're trying to push the market.

And I think the market is probably going to follow them on the Transit, if not, it's clear that they're following them on the aluminum truck. So I would expect the prices are going to stay pretty good. My information from my dealer friends is that they're still seeing very strong demand at retail level, so used trucks kind of mirror retail truck sales in my experience. So I think we're looking at probably the next six months at least to run the bulk how it's been running.

But it's a volatile market, and of course, we are very small part of the used truck business, so we can't make it or break it, we kind of have to ride with it. So if you look at new truck sales, I think you see a probably reflection of what we'll see at least through the next six months, which is pretty much a repeat of last year.

Jim Barrett

When you look at these self-moving sector, the trends that are underlying transaction growth in your own performance, do you see it staying the same, is it improving, is it getting more difficult?

Joe Shoen

Well, you know me, Jim. To me it seems more difficult every morning. There's a lot of challenges. As we continue to grow, we have to continue to be sharp on exactly how we add locations in fleet, and it's a balance all the time for running something little over 20,000 locations. And as we increase that we have to be very careful how we bring the truck fleet along with it, so we can keep not only growth, but also utilization of individual trucks, and that kind of ebbs and flows.

So I think we probably have been a few trucks light in the fleet from what would have been perfect over the last six months. I think we probably left a little money on the table there. But these are decisions that were made a year or year-and-a-half prior. So you can't adjust the fleet on a six month basis or something. You have to make these -- you have to do careful analysis and try to be sure that what you're doing is going to balance out, so I could look back. I think demand is still very strong. I think there is plenty of opportunity, but we have to be very thoughtful in how we do it.

Jim Barrett

And you did mention in the press release how much new competition has come into self-storage. I'm trying to reconcile that with the level of investments you're making in real estate, which I assume is mainly self-storage. How should we think about that?

Joe Shoen

We're going right ahead in the self-storage business. And like a lot of the things, every firm that have put together a few billion dollars seems to think that they now are storage experts, with a little more customer service to it. And I think they understand, and I think there will be some people get an unpleasant surprise.

I believe we're very well-positioned. I believe we understand the customer. I believe that our customer service puts us in the upper tier in that business. And it's not just a real estate business, it's a park and service business. That's how I see it. I think there is a lot of people coming in and think it's a real estate business, either they'll be right or wrong or vice versa.

Jim Barrett

And then finally, Joe, could you discuss the reasons for the transfer of your shares and your brother shares to the Willow Grove Holding Limited partnership?

Joe Shoen

Sure. We're just making our state plans kind of more firm, and we're starting to realize our mortality and we want to make sure that it is in the liquidity event for this company.

Operator

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

Ian Gilson

As we look at the income statement, the lease expense charge declined significantly down from a year-ago, and of course, down from the first half of the year. We've been buying more trucks in the third quarter versus leasing them than we normally do?

Gary Horton

Yes, we have changed our method of acquiring trucks from doing leasing to basically purchasing them. Again, we are using the depreciation, which is the offset to the lease expense, and it's because we need the tax share.

Joe Shoen

I'd like to jump in on that too, Ian. You've followed the company, I don't know, 20 years now or something and you've heard us say countless times that you should look at EBITDAR, just kind of like Gary Horton is in my guess in a way, but we believe that you need to look at leases, depreciation, amortization always one number, because we'll try to optimize or Gary's treasury team will try to optimize and get us to lowest cost and not be as concerned where it falls on the balance sheet.

They are looking to try to get net-net cost and so when you're looking at our EBITDAR, you really need to put rents in there or lease expense, and you've very consistently done that, but I think that's how we look at it and I think that's a good way for the investor to see it also.

Ian Gilson

Yes, but when a truck comes off lease, let us say you have a two-year lease, you just return the truck, correct, you don't sell it, because it's not yours --

Gary Horton

We actually don't. We put that into, we call it, rotation fleet and then we run it in more of the local market after that point.

Joe Shoen

Ian, we have the legal right to return the truck. But in fact, in the last 20 years we have not returned one truck. So in fact, in all cases, we've essentially purchased them from the lessor and put them on our balance sheet. So legally, it's very correct that we could return the truck, but practically speaking, we've never chose to do it and I don't see where we would change that policy.

Gary Horton

And also, Ian, what we have chosen to do, and we've changed this over the last couple of years, is what we basically do is we have eliminated a deferred liability, which is having a lease amount to pay at the end of the term, which is generally seven years, where we actually have pre-funded that and we basically are not getting the 100% on the trucks, we are getting 70% off the trucks. Again, with that we can change at any point in time, but what we've chosen to do right now is to eliminate a deferred liability that's out there seven year.

Ian Gilson

So are the lease trucks operated by you for an above average period of time as compared to the about time in rental fleet?

Joe Shoen

No, they're going to be managed almost identically, depending on model by model, but we don't make a distinction in how we manage the fleet based on the financing behind it. So Gary goes out and tries to knowing about what our plan is. He tries to optimize the service life financing cost. And then my rental team works on, of course, matching that to our plan for rental income, and then it's done. So we don't distinguish -- once it's in the fleet, we don't distinguish the operation side between a leased or an owned vehicle.

Ian Gilson

And would I be correct in assuming that the leased vehicles are more of the complete vehicle and less of the custom-built trucks that you make in your manufacturing facility?

Gary Horton

They're the same.

Joe Shoen

They're the same. There is not really -- it's just going to vary by what the market is for financing. And right now Gary is getting a better net-net cost and arguably a more conservative balance sheet, I would say too, by frontloading the, essentially we call it, the down payment or the equity part of this, and doing it in the financing we do it presently. So we're going to do it totally based on what Gary sees in financial markets.

Ian Gilson

Now, on the tax rate for the quarter, if you look at the nine months versus the quarter, it seems to be a little bit above, not much, but it still is above prior years. What do we estimate that the tax rate would be for the whole year?

Jason Berg

We should hover back towards 30s -- right on 36% to 36.5%.

Ian Gilson

Net sales, as we used to call it, obviously you've changed the name of that line. Propane continues to decline in price. Now, what impact is that having on your revenue in that area and how much inventory do you carry roughly? And is that price-led market?

Joe Shoen

Let's split that question. I'll address the pricing. I'm going to see if Jason has an inventory number. I should have come in, but definitely I don't, so keep digging for the numbers, while I'm talking. But propane as it is, basically we're trying to sought for as gross margin. So I see gallons in gross margin, not so much the price.

And the pricing is volatile in that market, both seasonally and year-to-year-to-year, and right now propane is at historical levels, but what we're seeing with the consumers were still able to get as much gross margin as we were when it was priced higher. In fact, in a few markets it's a little bit more gross margin, because the consumer seeing the reduction in overall pricing. So we believe we're doing a little bit better this year than we did last year, although dollar sales are down, gallon sales are not.

Jason Berg

We have just under 1,100 locations across the U.S. that offer propane service. The ones owned by AMERCO is just under 900. The dollar amount of inventory in those is fairly insignificant in the big picture. So I hope that helps to answer your question.

Joe Shoen

You don't have, what is the --

Jason Berg

It's less than $5 million.

Joe Shoen

Yes, I would say certainly less than that.

Ian Gilson

When can we look at the resumption of growth for the U-Box?

Joe Shoen

Well, just as soon as I can get them to do it. So I have a little push going on. My plan is to see growth resume in as we go into spring. Of course, that's always my plan. So we'll see just how we do, Ian. There is no structural reason we can't do it. And so I'm asking my point-of-sale teams to get us some growth there and we'll see how we do. It's been a frustrating last year for me, but there is no structural reason we can't see growth there.

Operator

Our next question comes from Lynn Perry of Wilen Management.

Lynn Perry

I have couple of questions. First, the self-storage market seems very healthy, so new supply coming into the market at a rapid pace or do zoning issues, et cetera, slow that down?

Joe Shoen

Zoning issues -- we'll say, land use for entitlement, I would say you're looking at a 12 month minimum to get through there you get into a tough market two years, Lynn. So I guess it's slowing it down very much. There is a lot of very yield-driven money out there. They're bidding up the price of existing storage, as well as encouraging people to start new projects. So there is two things going on, and you see how we bought less storage and did more development over the last 12 months, well, that's kind of a reflection of that existing storage being bid up by money that to me is money just chasing yields.

So it's very market-specific for land use, but of course, that's a big drag on development. This supply is going to expand just because of the readily available capital, and then you probably know more about that than I do quite honestly. But you see everybody wants to have some self-storage in their portfolio today and they're going to by and large succeed at it.

We've been at that business now a little over 40 years, I believe, and there is a quite a customer service component to that industry. And it's not -- well, it's quite a customer service component, and that's what we've concentrated our efforts, and we believe that's what the long-term entrants in the field are going to do.

Lynn Perry

And then also, can you give us the percentage of the season self-storage facilities that are over 90% occupied?

Joe Shoen

I'm going to let Jason. I'm trying to think myself.

Jason Berg

At this point in the year, this is traditionally a down period within the year, so it's going to be a little bit less than or rather on half right now, but during the peak time of the year, which should be June, July, August timeframe, I think we were getting closer to 80% maybe.

Operator

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

End of Q&A

Joe Shoen

Good. I would like to hit one, which is on self-storage occupancy. I used to drive myself nearly insane, because I would try to get every entrant in the field and see what they reported for occupancy. And I finally understood that there was a bunch of people who were correcting for what they called self-mature properties or they have different words for it.

And then there is people who measure it by number of rooms, other people measure it by number of square feet, and then there's finally people who measure it by economic occupancy. And here about 10 years ago, I told my team to throw in the towel on how we measure it.

And we do in absolute, internally it's rooms rented this year versus rooms rented last year, it's kind of litmus test. And that's what we drive on and it kind of makes our numbers jump around a little bit, because we don't do same store adjustments and we don't try to pick the measurement that optimizes the percentage. We just pick the number and run to it.

At the actual store level, I think if you look at same-store and you go rooms rented this year over rooms that rented last year, you're at the litmus test. My locations don't set the prices. Our prices are set nationally. And I have a very disciplined, what I believe to be a very disciplined team of people setting prices, so the yield will come out okay if you're managing at the operating level room.

With that, I'd want to thank everybody for coming on the call. And I guess, Jason, I don't know if you have an SEC warning to close this off with.

Jason Berg

We'll see everyone when we report our fourth quarter and fiscal yearend earnings at the end of May. Thank you very much.

Operator

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

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