AMERCO F4Q08 (Qtr End 03/31/2008) Earnings Call Transcript

| About: Amerco (UHAL)


F4Q08 Earnings Call

June 5, 2008 11:00 am ET


Jennifer Flachman - Director of Investor Relations

Edward J. Shoen – Chairman and President of AMERCO. Chief Executive Officer and Chairman of U-Haul

Gary B. Horton – Treasurer of AMERCO and U-Haul

Rocky D. Wardrip – Assistant Treasurer of AMERCO

Jason A. Berg – Principal Accounting Officer of AMERCO


Jim Barrett - CL King

Ian Gilson - Zacks Investments

Bob Bruce


Welcome to the AMERCO fourth quarter and fiscal 2008 year-end conference call. (Operator Instructions) Ms. Flachman, you may begin your conference.

Jennifer Flachman

Welcome to the fourth quarter fiscal 2008 year-end 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, and 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-K for the year ended March 31, 2008, which is on file with the Securities and Exchange Commission.

Participating in the call today will be Joe Shoen, AMERCO’s Chairman and CEO. And, I will now turn the call over to Joe.

Edward J. Shoen

I’m speaking to you from our Phoenix, Arizona offices. I have Jason Berg here in the room with me, and Gary Horton and Rocky Wardrip are connected on the phone from Reno. They will all be available to answer your questions at the end of my remarks.

We just reported on what in retrospect was a tough year for rentals. There continues to come to me speculation that increasing residential foreclosures are conversely decreasing home sales are significant drivers for our Moving and Storage business. Our analysis indicates that on the contrary, while general economic conditions affect our business, those two specifics are not really measurable drivers. Our belief is that we are affected by general economic conditions and then our own level of performance.

So I look forward to us faring well this coming year in a tough market. Sustainability is a word that’s all over the news. The candidates are all mouthing it. We are trying to make sure that we’re positioned properly in that discussion. And from a macro viewpoint, I believe our rental business clearly enhances the sustainability of the communities we serve.

U-Haul truck and trailer rentals are a relatively efficient method for the occasional transport of household goods. We are working to communicate this fact and to position U-Haul as part of the solution, not part of the problem. As more government intervention becomes a reality, it may be important how we are viewed, although presently there is not enough specifics for anybody to get their teeth into.

You’ve all seen the numbers, both our insurance companies performed close to plan and they both are performing close to plan as we go ahead. I think the truck and trailer rental business will stay tough during the year ahead because I think general economic conditions are going to be basically tough on the year ahead. We plan to continue strong truck and trailer investment over the next six months at least.

We’ve been working to position our fleet. I believe our fleet is presently in as good condition as I have ever seen it in 25 years. Likewise, we plan to continue steady investment in self-storage. This remains a solid industry in a part of the foundation of the company.

With that, I will go ahead and go to the question-and-answer session.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Jim Barrett - CL King.

Jim Barrett - CL King

On pricing, there was some mention that there was incremental improvement. Is that more a function of the competition easing back, or do you attribute that to your new rate system or combination of the above, and is it continuing into the summer?

Edward J. Shoen

It’s a combination of the above. It should continue into the summer. We are still learning our rate system. It’s quite a little learning experience. We are still learning it. And as we learn it, we find little pockets of opportunity. I think that the Budget organization has backed off a little bit on just less than full cost of the pricing. I think they backed off on that a little bit. And we have been trying to communicate that to them very strongly because we believe that, of course, it serves no one including the customer.

I don’t have any pipeline to them particularly and there are a lot of prices up there. But I worked real hard starting about in January to tell my field people float the price up and give them at least a month to match the price, just in case they don’t get it, in other words. And so, my field force thought that they gave away a little bit of transactions by doing that.

But I think that if we communicated we have a genuine willingness to see a little bit of price increase that it would benefit everybody including ultimately the customer. I think it’s a little bit of everything, but not one thing that I could give you a benchmark or something that would be easy for you to ascertain.

At the same time, given this whole fuel thing in the news and everything, and of course, our trucks burn fuel. In immeasurable way that probably made consumers possibly more price sensitive. I don’t have anything cost concrete on that.

And we are, of course, every day talking with customers to ask about fuel economy or MPG and I think I reported to that group, we began putting fuel economy gauges in our new production trucks about this time last year. This thing was obvious this was coming. And that has been reasonably well received by customers.

I hear anecdotally in the last two weeks of who drove his truck and had his young son in the front seat with him. In the whole trip, his son kept goading him every time he got out of the green field economy place. Hope that drives our customers, that’s why the kids talking to him or in fact they appreciate it, but the father reported in a positive manner. In other words, he thought we were trying to at least be on his side in this deal.

So there’s a number of factors all coming together, I think what it is going to do is just make for a hard market. It’s going to be opportunity for us to keep the prices from dropping back down. Always in the summer, it should be the easiest time to hold prices because, of course, demand is greater.

The real test will be next October if people get skittish again. And I am committed to being very deliberate about that and not just knee jerking down. And at the same time, hunt out the pockets where other service provider. Well, let’s get a price there that’s above the cost of doing business. Let’s not just because in neighboring markets maybe we get price down to a non-sustainable levels, where I am encouraging our people not to apply that in markets where just there is no reason at all to do that.

Always our business has a little bit of price pressure because, of course, we’re the economical moving alternative. So this isn’t something, I can’t just say we are going to raise price 5%. It doesn’t work that way. But on balance, I feel a lot better about it than if we had this conversation 12 months ago.

And I also feel that the pricing system, the computer system we put in about this time last year that we have not come anywhere near mastering it and that there’s potential in it, and my job and the job of my subordinates is, of course, to realize that potential. So I am guardedly positive about it.

Jim Barrett - CL King

And the 21,000 trucks that you plan to add this year, I know in the last call you talked about possibly about tempering CapEx spending if you didn’t start seeing a payback, is the addition of 21,000 trucks evidence that you are starting to see a payback on that planned investment?

Edward J. Shoen

Yes. We saw a little bit of positive change in the utilization and utilization over a view greater than a quarter or a year. Utilization is a big key to how the economics turns out. So we got a little bit of a strengthening in utilization and the way we report our fleet size. Our fleets are actually down a little bit over last year because we’ve been a little more aggressively putting trucks up for sale, and that is a combination of where we feel the repair and trade-off is versus the other trade-offs. So that’s one.

I didn’t mention, of course, is that for sale truck business. The paper this morning had some gloom and doom article about you can’t get a trade-in on your used pickup truck. Well, those are fully optioned trucks that went out for $35,000 into a consumer market. We’re not seeing that pricing pressure in the market where we’re selling trucks.

The market we are selling trucks is work trucks, and we are selling a truck in a market where due to I’d say environmental reasons, the price of the new equipment just continues to escalate. So people in the used truck business, end of the deal, they just know that they are in a good deal. That’s about all there is to it. They know they are getting a good deal.

They are not, so we haven’t seen that. But we are watching that because we turn a decent number of pickups and vans. That resale market was to get soft, we wouldn’t want to be sitting on our hands, but we are monitoring that every day and that doesn’t so far appear to be where it’s going to be affected. But again, the trucks we are selling are, they are work trucks. They are white, they have plastic interior. And they are just a basic, let’s go to work and get work done type vehicle. So I think we’re okay at least going out 6 or 12 months.

Jim Barrett - CL King

The cost of your fleet in this upcoming year, how will it compare to your cost of fleet in the prior year? I was referring to financing cost here.

Gary B. Horton

Despite the fact that spreads overall in the market have been somewhat higher than what we’ve see in the last few years, the drop in treasury has since resulted in our financing cost to be actually less than what we had seen in the prior two years. Vehicle perspective, we’ve been pretty stable in that regard.

Rocky D. Wardrip

And there has also been some very positive things that have been put into place. The government stimulus program has actually helped over.


Your next question comes from Ian Gilson - Zacks Investments.

Ian Gilson - Zacks Investments

Could you go through why the tax rate in the fourth quarter was so different from the other three quarters, which those three quarters were very similar to each other? What adjustments were in there and how this carries through to the next year?

Jason A. Berg

The fourth quarter tax adjustment was at the Life Insurance Company. It had to do with the implementation of FIN 48. It’s a one-time adjustment. Our tax run rate, it should be close to the 39% on a go-forward basis. I wouldn’t use the fourth quarter number or even our 12 months number as a projection. I would use what we’ve seen over the last several years. We are just close to the 39%.

Ian Gilson - Zacks Investments

What were the truck sales during the quarter, number and dollars?

Jason A. Berg

Ian, for the quarter, we sold approximately 2,500 box trucks and another 1,000 pickups and vans. That was about a 10% increase over last year at this time.

Edward J. Shoen

But that’s light. You only show 1,000 pickups and vans in the quarter. That’s light for our annual run rate, Ian. We slowed down pickups and vans because we are having trouble getting replacement vehicles and we should accelerate them a little bit in the second quarter. We are turning in that combined fleet almost 8,000 vehicles a year. So a number I would have looked for it to have been was closer to 2,000 pickups and vans, but we have deliberately withheld them from the sale market.

Ian Gilson - Zacks Investments

We basically finished the restructuring the fleet as far as size is concerned. I know we had been adjusting that is that adjustment still going on.

Edward J. Shoen

I think we’re real close, Ian. I don’t remember if I went over this group but a strike in the American Axle postponed us receiving 3,000 10-foot box trucks. And that’s probably going to cost us $5 or $6 million in gross. It’s a little speculative now, but the delay in getting them, we were scheduled to have gotten those six or eight weeks ago and they are really just starting to come in next week. So that’s costing us some top-line growth.

But as far as just the overall mix is starting to level out, which I think also means that dollars per transaction the way you see it, which is in an aggregate form, is probably going to be less influenced by the fleet decision and may be more influenced by pricing decisions.

Ian Gilson - Zacks Investments

On the Casualty Company, I noticed there was a pick up in the reported revenue from prior quarters.

Jason A. Berg

In general that the increase that we are seeing at Republic Western is we’re offering the U-Haul customers a new additional liability program that they can purchase along with their rental transaction. And we have seen a pretty nice increase in that for the year.


You have a follow-up question from Jim Barrett – CL King.

Jim Barrett - CL King

Joe, in terms of your self-storage business, have you seen any difference in occupancy and just general end demand in those states with significant housing problems like California, Arizona, Nevada, and Florida as opposed to be more benign parts of the country?

Jason A. Berg

Jim, we have been looking this over the last couple of months at some of our larger markets and comparing that with foreclosure rates in those areas. So areas like California, Arizona, Nevada, Texas and Florida, and then also in the Detroit area and we haven’t, technically speaking, being able to find a statistical correlation there.

In some markets that have high foreclosure rates like Florida, we’ve seen our occupancy rates come down. But then in other areas like Arizona, Las Vegas and Houston areas where the foreclosure rates are elevated, we’ve seen the occupancy rates stay flat or go up a little bit. So just looking at the numbers part, I haven’t been able to draw any conclusions from foreclosures in our significant areas.

Edward J. Shoen

Jim, I kind of agree with what Jason said, I don’t go and look at it quite that way. What I see is that, I’ve driven my field force very hard on truck and trailer utilization over the last 12 months and it has slipped in storage if that make sense.

In other words, I gave them just so many balls. And I think I need to get a little bit of balance and I started making that correction about six weeks ago. I think there’s a little more in the storage that might cost me a few million dollars in top-line U-Haul, but I make bottom line by a little bit more attention to the storage product.

And ordinarily, I see this on a store-by-store basis, but I think we could get a little bit more gain out of the storage, a little more gain that fell to the bottom line out of the storage by me getting a little bit of balance in how I am directing the field force and I am working towards that.

Houston is a good example. We have nice directions through most of that area and we got a little gain there. So there is never a right or a wrong until you see it in hindsight, but I think that just a little more shading in favor of the self-storage even if it costs me some dollars off the top-line in the U-Move might just overall be the right prescription and that’s the way I am headed.

You won’t be able to see that as the top-line in moving because it will be imperceptible. But I think it’s a subtle shift that’s appropriate and I am trying to make it.

Jim Barrett - CL King

Capacity utilization aside, what are the general pricing trends in self-storage?

Edward J. Shoen

I’d say if you’ve got the occupancy, you can get a gain, but it’s reduced over the same time last year. The market is very much driven by service. In other words, just being there isn’t enough, Jim. If you provide the service, people will still pay. There has got to be an end to that, particularly if the economy contracts or something.

But our experience is it will provide a higher level of service that we’ll get a modest amount of rate out of it. And if all we do is stay stagnant, we won’t get a rate increase where three or four years ago we’d have got a rate increase just because we were there I think.

Very clearly today, you want to get a rate increase, you need to step something up with the exception of some few markets that are because of land use regulation are artificially the supply is constrained.

But there is an adequate supply of self-storage out there. There are a lot of people with reasonably well-located facilities. So to distinguish yourself to the customer, you need to have value-added services. We’re very cognizant of that. We hit on it daily.


You have a follow-up question from Ian Gilson – Zacks Investments.

Ian Gilson - Zacks Investments

I noticed that we’ve had more disasters in the last year, 60 days, than any other time that I can remember in the United States. And I know that you offer some free storage in those areas and have done consistently over the years. But I have never heard what the retention rate is by offering that? I know it has a modest cost to you, but how does it benefit you? Could you go through that for a minute?

Edward J. Shoen

I won’t give you the exact numbers for two reasons. One I don’t know off the top of my head, and two if I knew them I wouldn’t tell anybody because I don’t want our competitor to know them. But sure you get some retention, and oftentimes pretty decent.

What we’re doing is offering people 30 days free storage and most people this event is going to cause a longer than 30 days dislocation, Ian. So they might move in. We give them 30 days. They will be there for a period longer than 30 days. So it’s a handshake and a greeting that gets them in the door.

At the same time, land use regulation remains the single biggest obstacle we have in the self-storage business going ahead and I think this positions U-Haul favorably in many communities. People hear about us and look upon us and think that the people are acting in a locally supportive fashion as opposed to taking the money out of the community and transporting it to Phoenix, Arizona where it then goes to who knows where.

So, I think it’s gotten us a benefit from not just a public relation, but very specifically land use regulation, which is a local government issue. I think it has helped us. And as you indicated, the marginal cost is fairly modest.

Of course, all those offers are subject to availability. If we have no rooms, we can’t give a room away. And if you’re really up on your facility, you should always have one, two, or three rooms you could give away at your marginal cost being essentially $10 or something, the cost of processing the transaction.

So, we are continuing it because we believe it works. We study it. We study it facility-by-facility and event-by-event. So, we are not just on automatic pilot on the thing. We had some anecdotal experiences out of Katrina in Houston where we had people calmly move in and then their lives were so discombobulated that they eventually went bad. We had to go into the whole foreclosure and sale process, which is the money loser.

So, not every time does it turn out right, and particularly in these situations where you see it’s a localized flood, a localized twister sets down, it doesn’t so discombobulate the economy that people lose their bearings. Katrina did some of that. We had people just literally lose their bearings. But most of these, these people are well grounded, and whatever they’re able to salvage from the disaster and store with us they place a value on it. They are going to pay their rent and they’re going to get their lives back going again.

So, on balance, we believe it’s a positive thing to do, and I don’t see where we would cease it in the future, but I can assure you if we’ve one room left, that room is probably not headed towards a free month. But on the other hand, that occurrence is not the norm. The norm is we have rooms and we’re just on the margin letting some people use them.

Ian Gilson - Zacks Investments

You’ve mentioned again a couple of times and it seems to, that I get the sense that it is a concern about local land use regulations, is this hampering your growth? You did mention earlier about capital placement into self-storage.

Edward J. Shoen

I think it is everybody. It’s just a fact. It’s not unusual, Ian. In fact I’d say, the norm is from the time you identify an acquisition and get agreement with the seller for a piece of bare ground, the absolute bottom is it will take you a year to get a building permit. One is the long-end, it could be three years, and these are considered by the local land use planners as normal delays or normal time frames.

And then, what they allow you to do to the property is, I don’t know what you want to say, is highly subjective. And we have a project going in Florida right now, one of women on the planning committee wants to see us move the two-storey part where the one-storey part is and vice versa. She just simply thinks it looks better. She has no other reason other than that and she has the power to do that.

But for a whole bunch of things, it makes it less efficient to manage on an ongoing basis. And in a perfect world, you certainly wouldn’t do it that way. But she is about a hair’s breath away from getting her way just purely because she just thinks that looks better and has no comprehension of what service we provide or those things, and that’s very frustrating.

So the more accepted you are at the local level, the more likely you are to get these discretionary considerations to go your way as opposed to the other way. And we believe it’s important to build that reservoir of goodwill. I wish we had more of it. And if I could buy at a defined price, I would probably go out and try to buy some.

Ian Gilson - Zacks Investments

Can you give us an idea of how much land that you have that is undeveloped at this stage? The number of projects that you don’t have a building on.

Edward J. Shoen

No. A part of the problem is lot of our projects like the one in Florida, we bought four acres of budding and existing sites, so in our records, it would show as a site with a building on it, but it’s a site which is under built, in other words. So, no, I don’t have that number.


Your next question comes from line of Bob Bruce.

Bob Bruce

I was just wondering what you’re going to do with your cash? What you’re going to do with anything about your preferred? And also, could you speak to your stock repurchase, how that’s going and how you look at it in the future if the price stays in this area?

Gary B. Horton

Right now, our cash is about probably around $150 million and we have some availability of that. So we will get about $275 million. We are constantly looking at opportunities to buy storage, to enhance our fleet and at the same time maintain a cushion of liquidity. Having gone through one thing, we sure are not going to go through it again.

The other one is, I think, in the price range that you see the stock we will continue to go selectively into the market and buy back stock and use some of our cash for that.

As far as the preferred, right now, it’s one that we consistently look at. Once you have redeemed it, for example, if you’ve used your money for that, you’ve basically permanently eaten into your availability. Right now, it would cost us about $156 million to buy it all back and I think that would cut into our liquidity and cash resources more than we would feel it would be prudent at this time.


You have a follow-up question from Jim Barrett – CL King.

Jim Barrett - CL King

Somewhere in the 10-K there was a mention the company was evaluating temporary storage. What are your thoughts on how well POD has done and how interesting an opportunity that might be?

Edward J. Shoen

I think it’s a really interesting opportunity. We were one of the people who reviewed PODS when they were available for sale and at least got as familiar as any other bidder did on that. We are in the self-storage market, we are in the self-move market and that particular product offering touches both markets, Jim.

We are running market probes and made that decision probably I’m going to guess last October, December somewhere in that timeframe. So some of that stuff is actually starting to hit where we will be serving a few customers through the summer. And then, we are going to take a good look at that in the fall and see what our intelligence tells us to do. I believe it’s going to lean real hard towards entering that market.

Assuming we enter the market, we will enter it a slightly different than what that organization has done. They’ve done a wonderful job and I would never take anything away from them. On the other hand, they are living with all their early decisions and I don’t need to take the same decisions if I have 20/20 hindsight. So we have some opinions and we are trying to get some real customer feedback on our opinions to see if our opinions, our direction is correct.

If they are we’ll go into it. I don’t think it is going to burn a lot of capital this year or we would have commented on it. But if we decide to go really jump in the water, it will burn some capital up next fiscal year.

I think you probably know me a little bit. I’m not a timid person, but I am fairly conservative. And so, until I have a pretty good reason, it’s hard to get me to cut loose some money. But I have put some personnel on it and I have some trucks and we have some boxes and we’re in some markets that we determined for reasons that we believe were good.

We have certain test markets that we’ll be offering and we presently and will continue to offer through this summer this product and see if we can get ourselves to where we can have a business plan that we can see real light at the end of the tunnel. I think that it makes just basic common sense for us to be in it. But since we’re a business, of course, we have to say can we reasonably forecast to make money doing it.

And it’s not clear that anybody in that business today is making any money to speak of. It’s just not because they are doing some business, whether they are actually making a living or whether they can reasonably forecast on a three to five-year time horizon or something that they are going to be making profits. I don’t think that’s near as clear.

But there is a lot of consumer interest in the product and service combination and there are a lot of people out there offering it. So it’s everybody from I think United Van Lines has an offering in it. Of course, the PODS organization does. There’s now Pack Rat out of the Carolinas. There is a variety of local or regional people in the business. So there is a lot of interest in it and we’re one of those interested people.


There are no further questions at this time.

Edward J. Shoen

I want to thank everybody for being on the call. I don’t want to appear too somber out here. But we need to be deliberate in this market that we are in. U-Haul has a long history of being here on good days and bad days. And if this market tightens up, which depending on who you will consider to be the appropriate presidential candidate and appropriate course of action, you will all have varying opinions about that, but if this market tightens up, I want to be sure we are positioned strongly and securely for myself, the other shareholders and for the people who work here.

And I believe we are there and I believe having a somber attitude is opposed to it, but that doesn’t mean that I am anywhere near, a sober attitude might be it, I have a sober attitude. I believe we will have a decent year in a tight market and that the underlying businesses are all very solid.

And oftentimes, and Gary alluded to it, if you are holding cash in that market, an opportunity may just come your way. So we’re going to hold some cash and if an opportunity comes our way, we want to be able to at least be a contender in acting on that opportunity.

So I thank you all for your attention here today and look forward to speaking to you again in the future.

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