U-Haul Holding Company (UHAL) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Brooke, and I'll be your conference operator today. At this time, I would like to welcome everyone to the AMERCO First Quarter 2013 Investor Conference Call. [Operator Instructions] Ms. Jennifer Flachman, you may begin your conference.

Good morning, everyone, and thank you for joining us today. Welcome to the AMERCO First Quarter Fiscal 2013 Investor Call. Before we begin, I'd 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-Q for the quarter ended June 30, 2012, which is on file with the Securities and Exchange Commission. Participating in the call today will be Jason Berg, and I'll now turn the call over to Jason.

Thanks, Jennifer. Good morning, everyone. I'm speaking to you today from Phoenix, Arizona. Also on the call with me today from our offices in Reno, Nevada, are Gary Horton, AMERCO's Treasurer; and Rocky Wardrip, AMERCO's Assistant Treasurer. All 3 of us will be available for questions after the prepared remarks. Joe Shoen, our Chairman, is traveling and unable to participate in today's call. Yesterday, we reported first quarter earnings of $4.13 a share as compared with $3.56 a share for the same period in fiscal 2012. It's worthwhile to recall that last year's results included a $0.30 per share onetime charge related to the redemption of our preferred stock, as well as a $0.16 per share charge for our last preferred stock dividend payment, which happened at the same time. For the third year in a row, we're reporting record first quarter U-Move revenues. We had a $20 million increase compared to the first quarter of last year. And the majority of this -- of the increase this quarter was driven by transactions. Both our in-town and one-way businesses are continuing to experience growth. In fact, during the month of June, we experienced our highest one-day in-town transaction volume in the history of the company. This growth in transactions and revenue was supported by an increase in the size of our fleet, which is up about 4% compared to last year at this time. We have not noticed any significant changes in the overall competitive environment with regard to pricing. It's also worth mentioning that in addition to the increases that we're seeing in truck rental transactions and revenue, we're seeing similar increases in our trailer and towing equipment programs. Now in fact, during the first quarter, we added several thousand new trailers to the fleet to better serve our customers. While we're on the topic of CapEx, for the first quarter, capital expenditures on new rental trucks and trailers were $196 million, which is about a $25 million increase compared to the first quarter of last year, while the proceeds from the sale of retired equipment were $62 million during the quarter. Our projections for rental equipment gross capital expenditures in fiscal 2013 are in the neighborhood of $490 million. That's before netting any equipment sales proceeds against them. We're still on track to invest at least this amount during the year. Now revenue growth from our storage operations continues to steadily increase as revenues were up almost $3 million for the first quarter compared to the same time last year. Now from June 30, 2011, through June 30, 2012, so for the -- over the last 12 months we reported, we've had -- we've added approximately 1.4 million net rentable square feet to the system. 419,000 of that was added during the first quarter of this year. Spending on real estate-related CapEx, primarily acquisitions but also including construction and renovation charges, for the first quarter of fiscal 2013 increased by about $17 million to $36 million as compared to the first quarter of last year. We're actively searching for new locations to acquire. Even considering this pace of additions to the portfolio, we were still able to increase our all-in occupancy fees 1% to 78%. As I mentioned in our fourth quarter investor call, SAC Holdings has made repayments to us during the first quarter of this year on some notes and interest due to us. In total, SAC Holdings repaid about $127 million to AMERCO during the quarter. The loss of the 9% yield on these notes accounts for the majority of the decrease in our investment income at the Moving and Storage segment compared to last year. Making some conservative assumptions regarding the reinvestment of these funds, this is likely going to reduce investment income by about $8 million to $9 million over the remaining 9 months of this fiscal year. A couple of comments on operating expenses. At the Moving and Storage segment, we saw these increase about $12 million during the first quarter. Personnel expense was one of the larger drivers of this increase. Now other costs that fluctuate with revenue accounted for the remainder of the increase, one of these being the operating costs associated with our U-Box program. With the ramp-up of this program, we're seeing our other revenue line increase, but we're also seeing related costs, such as freight expense, go up in tandem. Also of note, equipment maintenance costs for the quarter decreased compared to the first quarter of last year. Depreciation increased almost $10 million for the quarter while gains on the disposal of equipment decreased by about $2 million. Over the last year or so, the majority of new equipment financing has been in the form of capital leases and term loans. These types of arrangements result in what's called on-balance sheet treatment versus off-balance sheet operating leases, which was the form of financing that we had allocated most to in the previous couple of years. So we're seeing an increase in depreciation expense due to this shift in financing, but we're also seeing a decline in lease costs. However, with our accelerated depreciation schedule for trucks, the depreciation expense is ramping up faster than the lease expense is declining, and that's resulting in this net increase in equipment costs that we're seeing on the GAAP income statement. And we'll continue to see that through the remainder of the year. Our earnings from operations for the first quarter of 2013 were $151 million, which is about a $3 million increase compared to the first quarter of last year. And our cash and short-term investments at the Moving and Storage segment was about $520 million at June 30, which is compared to $309 million at the end of the fiscal year, which was March 31. We also had additional availability from existing borrowing facilities of an additional $300 million. With that, I'd like to hand the call back to our operator to start the question-and-answer portion of the call. Brooke?

[Operator Instructions] Your first question comes from Ian Gilson with Zacks Investment.

The usual questions. Your end of quarter numbers on room count, square feet, rooms occupied, occupancy rate?

Sure. At June 30, our owned and managed room count was 428,000; our square feet available was 38,174,000; average rooms occupied during the quarter was 341,000; average square feet occupied during the quarter was 30,888,000. So the occupancy rate based upon rooms was 80%, which is about a 2% increase compared to last year for the total owned and managed portfolio.

Okay. Truck count at the end of the quarter?

We were up about 4,000 units, which is -- takes us to about 108,000.

Okay. Why do I have -- well, let me see. 4,000 -- I had 101,000 for the truck count at the first quarter of last year. Am I out on that number?

[indiscernible]

Yes, that seems a little low. I'm showing something about -- about 104,000.

Yes, Ian. This is Rocky. I think that may have been the March 2011 number that you have.

Okay, okay. [indiscernible] go back there and [ph]. Yes. Now I had 98,000. So there.

Where we're at today is about 108,000.

[Operator Instructions] Your next question comes from Jamie Wilen with Wilen Management.

A couple of different questions. On the U-Box program, how much do you expect to spend over the next couple of years? And what do you see happening to this business? If you can project out, how much it can bring in and how much you're going to spend to achieve there, what type of revenues the U-Box program can do not now but down the pike.

Okay. I would say that a large piece of the CapEx related to the purchase of the boxes and purchase of, I'm going to say, the delivery equipment, which would be the trucks and the forklifts. The vast majority of that has already taken place. Where we're spending money today is primarily real estate-related. And we do these U-Box facilities in conjunction with our Moving and Storage and our [indiscernible] Centers. So what we end up -- it's kind of a mixed CapEx cost, Jim. It's hard to allocate it specifically to U-Box. Over the last 3 years, excuse me -- we've been just about doubling the revenue on a trailing 12-month basis over the last few years. That pace probably isn't going to continue as we start to get into larger and larger numbers. Were not quite at the point yet where it represents an amount large enough for us to break out. But we've had it now -- widespread across the country now for at least a year in over 1,000 locations. We’re starting to see some real traction on it and growth. But we're not yet ready to say that it's accretive to earnings. But I think that we're looking towards that point here in the next year or 2.

Okay, very good. On the self-storage side, pricing within the self-storage, I mean, when does it reach a point where prices can actually be raised? Or does there have to be much greater occupancy rates?

Well, as we typically say in this, that's such a micro market that in different areas, we're certainly raising prices. On an overall macro basis, our pricing is up a little bit year-over-year. So you have to get the occupancy gains before you can start increasing the prices. We have several hundred facilities that are over 90% occupancy, so we're seeing some price movement on those facilities. On some of the newer ones that we have, we're still in the ramp-up period, and there may be some concessions to start with until we can get those -- to get those up. It's hard for me to give you one answer that fits the entire country.

Okay, okay. Will there ever come a point in time when we would buy the holdings from SAC, the self-storage facilities, now that we're much more financially capable?

Well, I think that right now, we already -- we manage those. We have truck rentals from those that are labeled as U-Haul centers. If we were to invest in those, we would pick up an additional revenue stream from the storage income, but we're getting management fees from those. I think we're looking to expand our footprint a little bit more and do more acquisitions of new facilities, ones that aren't already in the system. So that certainly is an option down the road, but I would say that we're more focused right now on growing the footprint with facilities that are currently outside the system.

Got you. You all do an incredible job of marketing a truck rental fleet and all the ancillary services. And that 19, 29, 39 is just emblazoned on the minds of people throughout the country as they see your trucks around. Yet on the flip side, your job of marketing U-Haul as a publicly traded entity doesn't seem to be quite that good. And while 19, 29, 39 is what U-Haul is known for, your stock price is more like 89 and 99. Why wouldn't we think -- and with limited trading volume. Why wouldn't we think of doing a 3- or 4-for-1 stock split to get our price within the normal U-Haul mantra of 19, 29 and 39?

Well, I don't know if we've taken the step of trying to relate the marketing on truck pricing to the marketing of our common stock. But I get your point, and it's certainly one that's come up. But it just hasn't reached the point where we've decided to make a move on that. There's a lot of things that are discussed on an annual basis, from stock buyback programs to dividends to stock splits. All of those things are discussed, but I would say that, well, we made a move on the dividend last year, we've done stock buyback programs in the past. As far as a stock split goes, there's nothing actively being pursued on that, but it is something that we continue to look at. I understand your point, and we'll continue to communicate that.

Okay. And as well as changing the corporate name from one that no one knows, of AMERCO, to one that everyone knows, of U-Haul, would that ever happen for the publicly traded vehicle?

That's been mentioned in the past to us and it's been put on a list of things to consider.

Okay. And lastly, within the competitive environment, I mean, you're adding a bunch to your fleet over time. Is the overall market expanding that much? Or are your competitors adding to the same rate to expand the fleet as you have been?

Well, we don't have real good visibility into what they're doing. Budget presents a little bit of information in their public documents, which, from my recollection, doesn't include large increases. We really don't have an idea of what Penske is doing because they don't report anything publicly. So we're just worried about the business that we're leaving on the table, and we have a sense that we could better serve that with some more trucks in the fleet. So that's what we're doing.

[Operator Instructions] Your next question comes from Jim Barrett with CL King & Associates.

Jason, could -- you mentioned in the -- it was mentioned in the Q that capital expenditures would be $325 million, excluding any lease buyout. Is that a good number to use this year and next, excluding any opportunistic purchases of real estate, for net CapEx?

Yes, I think we're still on track to hit that number. I mean, there's 2 things going on in that number. There's how much we're spending and then how much we're selling. So on the sales front, we haven't seen any dramatic shifts in resale prices in the fleet. So we're still targeting that number. And then on what we can have a little bit more control over, which is how much we're building, I think our plans are still to meet -- I mentioned a gross CapEx number of building or buying about $490 million, and I think we could do that or a little bit more.

Okay. And can you talk about self-storage locations? I mean, the company has been buying opportunistically typically single locations for a number of years. I know it varies widely, but how much competition do you typically face when you attempt to grow the business through those acquisitions? And are multiples broadly improving for those assets?

Well, to start off with, competition-wise, we face a lot of competition going into each one of these deals. So there is an appetite out there, whether it's the existing large storage operators or there's a lot of investors wading into the market as well who are looking for opportunistic deals. So on each one of these, we're facing competition going in. We bring some intangibles to the table that allow us to compete on a number of levels that aren't always just absolute dollar amounts, or at least we can get close to the dollar amount, but there's a few other things that we do quite well in the process. We have had to get a little creative in our approach as far as trying to find new deals, and we're certainly doing that. But there's a lot of the people out there looking for self-storage right now, especially the larger players.

And what are the intangibles U-Haul brings to the bidding process?

Well, we have a nationwide footprint. We're in every state. So we can respond quickly to an opportunity. We can -- we have excellent liquidity right now. So we can bring quick closing times to the table. But also, there's deals that we can reach much quicker than anyone else just because we already have the infrastructure in place.

I see. Okay. And is that likely to be your primary use of your cash, excluding simply maintaining the fleet or growing it modestly?

From my perspective, I would say that's the case. I don't know if Gary would like to comment on that.

Well, one of the things, Jim, that we have been doing is really taking advantage of the lower rates of longer-term financing and, in a way, doing some pre-borrowing while rates are down and looking at refinancing our debt, as we can, going forward. So that's part of the use, and we are continuing to grow our cash balance.

Your next question comes from Jamie Wilen with Wilen Management.

Jason, what is the -- is there a standard multiple of EBITDA you're paying when you're acquiring the self-storage units?

Well, it would be a capitalization of income approach. And what we're seeing right now, it's still -- typically, most deals that we're getting into are greater than a 7 or an 8 cap.

Okay. But at -- what you borrow at, that's nicely accretive anyway.

Yes.

I would assume. And lastly, the decrease in rental equipment maintenance, how does that happen when your fleet is growing?

Excellent question. First quarter of last year included some campaigns where we were, I'll call it revitalizing or refreshing portions of the trailer fleet. So those were -- I would call those like campaigns or maintenance where we're trying to add to the usefulness or the utility of an existing piece of equipment. And we did that last year, and we just run that through maintenance expense.

So with the level you're running at now, that was kind of a onetime upcharge, and now this is more of a standard quarterly maintenance figure that you're going to run at today?

Yes. I mean, all things being equal, if we increase the fleet 4% over time, you would expensive the preventative maintenance costs, then, to go up in tandem with that. And we've seen that the last couple of quarters, and now we're just running into a quarter where we had some additional costs last year that we didn't have this year.

Okay. So what we're seeing this quarter should be somewhat equivalent to what we'll see next quarter as far as the [indiscernible]...

Well, yes. I mean, all things being equal. There's a lot of things -- I've heard of plans to do some additional campaigns this year on different types of equipment. So we could add some expense to that line. But on -- I'd say this month is a pretty look at what it should look like if we didn't have that.

Okay. And lastly, you mentioned that June was -- I think you said one of your best months ever or a record month for truck leasing. How's -- how has the time subsequent to the end of that going for you?

July is continuing to trend up. So we're still seeing an increase in revenue compared to July of last year.

Okay. But trending up at a decent rate? I mean, when you did the conference call last quarter, you had kind of cautioned that things looked like they were slowing down a bit. But are we -- is that not true any longer?

Well, I'm going try to be careful with how I say that this time around. The -- for the one month that we've looked at, the rate of increase is a little bit less than it was last year at that time.

Okay.

But it was still increasing.

And what was it last year at that time?

You know what? I don't have the month of July at my fingertips. I apologize.

Okay. But you're comparing -- you're not comparing the...

I'm just comparing July to July.

Okay. Not July to June? Not June's rate of increase?

No, no. For how our business runs, you really can't compare month-to-month like that because we have much busier months than other months, and June is typically one of our busiest months.

At this time, there are no further questions. Gentlemen, are there any closing remarks?

Yes. I'd like to thank everyone for your interest and support of AMERCO and also take this moment to remind everyone of our upcoming Virtual Analyst and Investor Meeting. This is going to be our 6th annual event, and we broadcast this live over the Internet at amerco.com. We're going to be holding it this year on Thursday, August 30 at 11 o'clock, Arizona Time. We'll have all the details posted on amerco.com. This year, we're going to be focusing primarily on our Self-Storage segment. And we're going to have on hand some of our key executives who are responsible for our success in this area, and they're going to make some brief presentations. They'll then be available for questions and answers. This is one of our key investor outreach programs, and I encourage you to participate live, or you can submit your questions to Jennifer Flachman, who's the head of our Investor Relations Department. You can give those to her ahead of time, and we'll try to incorporate them as part of our presentation. You can reach Jennifer through our Investor Relations website at amerco.com. Thank you again. I look forward to speaking to everyone on August 30.

Thank you. This concludes the conference. You may now disconnect.