U-Haul Holding Company (UHAL) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the AMERCO Second Quarter Fiscal 2013 Investor Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Jennifer Flachman. Please go ahead.

Thank you. And thank you for joining us today. 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-Q for the quarter ended September 30, 2012, which is on file with the Securities and Exchange Commission. Participating in the call today will be Joe Shoen. I will now turn the call over to Joe.

Good morning. I'm here with Gary Horton, Jason Berg and Rocky Wardrip. Our basic U-Move and U-Store business is performing well. We again had most parts of our operations come together elegantly this quarter. Our truck and trailer rentals saw good transaction growth. Our self-storage grew through acquisition of additional rentable square foot and we had some occupancy increases. We are now entering our slower second half of the year. The month started poorly with Hurricane Sandy. The last several years, we've had pretty benign winters. The opportunity, of course, is that lost income this late in the year is very difficult to compensate for with reducing expenses and therefore, lost revenue translates very directly into reduced profitability. At the same time, Gary Horton and his treasury team continue to maintain good access to capital, so we're very liquid. On balance, we have operations in good shape. My plan is to keep them that way. There are plenty of problems to keep me busy full-time. Jason is now going to walk you through our public information. Jason?

Thanks, Joe. Yesterday, we reported second quarter earnings of $5.61 a share. That's compared to $5.20 a share for the same period in fiscal 2012. To minimize repetition during my prepared comments, all my period-over-period comparisons are going to be for the second quarter of fiscal 2013 to the second quarter of fiscal 2012 unless specifically noted. For the quarter, our U-Move revenues increased nearly $27 million to $538 million. This represents the highest single quarter of equipment rental revenue in the company's history. Transaction growth is largely responsible for the revenue increases as competition continues to keep pressure on rates. During the quarter, we experienced our single highest day of in-town truck rental transactions in our history. Revenues from our trailer and towing fleet are also contributing to the positive variance. During the second quarter, we add -- we continued to add several thousand new trailers to the fleet. Speaking of fleet additions, demand for the use of our rental equipment remains strong. And in line with this, our capital expenditure investments remain steady. For the first 6 months of 2013, fiscal 2013, CapEx on new rental trucks and trailers was $331 million, which was a $79 million increase compared to the first 6 months of last year. Proceeds from the sale of retired equipment was $131 million. Our projections for rental equipment growth capital expenditures in fiscal 2013, as before net any sales against them, are in the neighborhood of $490 million. Our self-storage operations continue to grow with revenues up $4 million. Since September 2011, we've added 1,600,000 net rentable square feet to the system with a little over 600,000 of that added during the second quarter of this year. Our all-in occupancy figures increased by about 2% to 81% for the second quarter of this year. Spending on real estate-related CapEx, including construction, renovation and acquisitions for the first 6 months of this year, increased by about $24 million to $71 million. And we're actively searching for more locations to acquire. Other revenue items, such as sales and moving supplies, hitches, towing accessories and their related installation along with U-Box rentals, have all increased in comparison to last year. Revenue from propane sales in our locations which offer the refilling services are off of last year's results due to decreases in the price of propane. Operating expenses at the Moving and Storage segment increased by $14 million. Personnel cost, largely associated with our field operations, increased, as well as to a larger degree, legal fees and liability costs. Our cost of sales declined due to the reduction in the price of propane. As we saw in the first quarter and we're seeing again now in the second quarter, equipment maintenance cost decreased compared to last year. A portion of the decrease in this fiscal year can be attributed to work we did last year to refurbish portions of the trailer fleet. That work led to increases in repair and maintenance cost last year at this time. Depreciation expense net of gains on the disposable property, plant and equipment increased almost $11 million. The majority of the new equipment has been financed through capital leases or term loans. This is resulting in depreciation increases as well as decreases in operating lease expense. I mentioned that legal fees increased for the quarter, much of that was related to the dismissal of the shareholder derivative litigation. In August, we announced that all of the remaining plaintiffs in this case filed a dismissal with prejudice that terminated the litigation in its entirety. This is a positive development from a cost perspective as well as allowing our team to focus more on operations than defending against this harassing litigation. Earnings from operations for the second quarter of this year were $194 million compared to $184 million last year at this time. Our cash and short-term investments at the Moving and Storage segment, not including the insurance companies, was $561 million at the end of the quarter. That's compared to $309 million at the end of the last fiscal year here in March. We also had additional availability through existing facilities of another $318 million. Also of note, yesterday, the company declared a special cash dividend on our common stock of $5 a share for holders of record as of November 19. This is set to be paid on November 30. And with that, I'd like to hand the call back to Joe.

Thanks, Jason. We're going to go ahead and go to question-and-answer segment now, so we'll let the operator take that over.

[Operator Instructions] And showing no questions, I will turn the conference back over to Joe Shoen for any closing remarks. Oh, I apologize. We do have a couple of questions that just entered the queue. And our first is from Jamie Wilen of Wilen Company.

Thank you very much, as a shareholder, for the special dividend. It's a wonderful thing. I didn't hear the start of the call. But could you comment on one of your competitors' budget has announced that they're cutting back a little bit on the number of facilities and kind of going back into their shell a little bit on the truck rental market and how that will impact you and if there are any plans as you see? If they cut back on capital expenditures, will you actually increase yours to take advantage of the market?

Well, first of all, we have been increasing our capital expenditures now for some time. I guess, fortunately, we live in a capitalistic society, and so while Budget is retrenching, Penske is advancing, Enterprise has entered the business with all 4 feet and many hundreds of millions of dollars. So while I have a dream of obliterating the competition and destroying every evidence of their existence, that's not in fact what's happening. So the Budget model has been a troubled business model for some time in the truck rental business. They're probably doing something that makes good business sense for them. We're going to continue to try to do what makes good sense with our customers. There's a lot of just contradictory evidence out there. I always start with what the U.S. Census says, which they say a change of residence -- household moves have been declining for 20 years. That's what they say as a percentage of the population. So what our job is, Jamie, is to go out and find the business we've missed in the prior 67 years and the little niches of that and offer a solution to the customer that's attractive, and that's what we're doing. And we've been able to do a decent job of that over the last several months. I think that it's -- I would rather they were reducing their fleet than not. But I think this is really -- this goes back -- this has been a 3- to 5-year decline. I did not read the particular press release for whatever it is that had this particular piece of information. Budget has been -- they are in a very competitive business and their car rental enormously dwarfs their truck rental business. I have some operations like that, that you wonder why you're doing them at all. And so I could see Budget cutting back. And yes, we are expanding a little bit because of Budget but a little bit -- but more I would say because we continue to scour North America and find little pockets where we are underserving it. And we've either added locations -- in most cases, we've added locations in those areas, and that gets us a little bit of marginal business.

Okay. And you mentioned Enterprise, and they have a different way of going to market. Are they becoming more of a competitive threat for you over time?

Well, Enterprise has had a 10-year plan to compete with us. They very jealously view our position, so they are extraordinarily covetous, I guess, would be a deal [ph]. So they imagine the grass is greener on this side of the fence. Of course, the more they get on this side of the fence, the more they'll find out about the grass. So we'll just go ahead on that basis.

Okay. Within the self-storage area, you've acquired a number of facilities over time. Do you change the shape of how that business is operating each time because you're able to add the truck rental business to a self-storage and just change the nature of what you've acquired to make those instantly more profitable than they were?

And that's very specific. I wish we had a magic wand. And if we select the place right, we'll have a more positive effect. But we've bought several places that we're really just replacing brand X with U-Haul. And we're going to do -- we're going to perform basically on what would've been forecasted NOI. So that's -- what you described is what I look for. And I've been -- and for most of my work career, I've been so capital-limited, I couldn't consider anything but those kind of locations, okay? Right now, we've bought some locations in the last 20 months that a little bit more -- we're just kind of a little bit more going to rebrand them and we're not going to give them a huge jet assist. But in the storage business, there's more going on than just a location-by-location. We're intending to build a brand name, and we've been working very diligently at that. I don't talk about it a lot. But part of having a brand name is having coverage. And we have for several years had the broadest coverage of anyone in the self-storage business, and we intend to maintain that broader coverage. So it's just kind of a strategy thing, that sometimes I'll go ahead and advocate that we acquire a location that again we're kind of just replacing their brand with ours but it fits into the network and allows us to tell the customer, yes, in a market that we presently aren't able to say yes in.

Okay. On the insurance side -- and again, I'm sorry if you've covered this earlier. But how do we handle the -- is there an excess liability? Are we all self-insured for anything with the self-storage units? And do you see any potential one-time hit from that?

Are you talking about catastrophic damage, wind, rain, that sort of thing?

Well, the storm in the Northeast.

Sure. Jason, you want to talk to that a little bit?

Sure. We're still assessing the losses there as far as our property and casualty subsidiary, Repwest, is the lead insurer on the insurance coverage that we provide for tenants at our facilities and at some third-party self-storage locations. Our initial assessments of that is that it isn't going to be material to the organization. I'm hearing numbers in a range right now of $1 million, but that's still very early. So it can change, but just to kind to give you an idea of the magnitude.

That's customer goods. Now then how about buildings and business interruption?

On any property damage, we have insurance coverage for our locations that has a $250,000 deductible per occurrence. So that is not per location, that's per the entire event. We have good coverage on the property. And then we also have business interruption insurance, so some portion of the losses of net to us we should be able to pick back up through that. And that will take several months to work through.

On the other hand, while we've got all that coverage, this Hurricane Sandy has just disrupted the heck out of the place. At one point, we had 100 stores closed out of 1,500. That's very significant. All stores are back open today, but that doesn't mean they're running. That just means that they're are open. Many, many stores are on generators and probably will be for a couple of days still. In many stores, we just tore the drywall off the walls, and we're just operating in a bare building because of flood damage and that sort of thing. So we're not exactly at business as usual. And it's going to take us a while to really know what this is. We've concentrated our efforts on getting back open, not on the tallying up the damage at this point.

Got you. And lastly, one comment. You guys do an incredible job of managing a business in the truck rental market, building a brand name. And I would hope one day you change the corporate name from AMERCO to be able to trade under the name of U-Haul, which is so well-known by the investing public.

And our next question comes from Ian Gilson of Zacks Investment Research.

What is the truck count and trailer count at the end of the quarter?

Ian, we've not been giving that out publicly. And we talked about it before the call, we're going to stick with that position. I think we've said that we're up a little bit. I think Jason has already said that, but he hasn't given you the exact numbers. And so I know you'd like to have it, but right now, we're going to stick with our policy just giving that count once a year.

What was the CapEx on trucks and trailers in the quarter?

Well, for the first 6 months, it was $330 million for the quarter. I think that works out to about $135 million.

Are you primarily dealing with General Motors again?

No, we're sticking -- we're doing a lot of business with GM. But Ford is our primary supplier. In our smallest box truck, our 10-foot truck, we deal primarily with GM. But on the rest of the product line, we're heavily committed with Ford, and that has a lot to do with commonality of parts. And we've just made the decision that we're able to achieve economies of maintenance by doing that, Ian.

Okay. What was the location count for company-owned and then affiliated stores, end of the quarter?

So dealers and centers is...

Ian, I don't have the location count. I did get the rooms available -- the square feet available for you. I know that you normally ask that.

No, I'm talking about the truck...

Ian, we're slightly over 16,000 dealers at this point. I don't have today's count, but we're slightly over that. It could be 16,100 or 16,010, I'm not sure. So we're up on that. And on company stores...

About 1,460, I think.

Yes, I think that sounds about right.

Okay. Now a somewhat esoteric question on the balance sheet. The line item of liabilities from investment contracts has gone from $241 million as of March 31. It's $262 million on June 30 and $396 million as of September. What is that number? And what impact has that change had on earnings? And what happens if that number goes down? Is there a corresponding change -- has there been a corresponding change on the asset side. And what would that be?

Ian, this is Jason. That is taking place at our life insurance subsidiary, and it's related to the annuity business that they're writing. They have shifted gears a little bit on new sales. In the past couple of years, we've been focusing on some single-premium whole life insurance products that run through the income statement as premiums. This year, they've launched a couple of new annuities, single-premium deferred annuities that delay the accounting works for those. So that when they make a sale, they book the cash, invest that in bonds, and then the corresponding entry goes into this liability that you're talking about. So that represents policyholder funds that we're holding and crediting interest on. How that runs through earnings in the long-term is that Oxford earns interest income on the assets that, that had purchased with those deposits, and then it pays the policyholders an interest rate and we earn the spread. So over time, you'll see Oxford investment income increase, and that should then be slowly accretive to their earnings over time. That number goes up when they sell a policy and as interest accrues to the policy. And then that number would decrease if the folks chose to surrender those policies and take the money back. In which case, if they do that within the first 10 years, there's a surrender charge to help cover our costs associated with the sale of that.

And I would add to that, Ian, Jason said that Oxford invests in bonds. In fact, they invest in a number of things there. So I think a more robust...

Bonds, mortgage loans.

A little more robust answer. And Jason can attest it's a little bit complicated how annuity credits. And I guess, it's a little complicated is all. But these are all crediting about what range of...

I would say right now, their crediting range around 1.5%.

So it's not improbable that we'll make money out of it, Ian. I'm a little bit always conservative on that kind of thing. And so they appear to be sound to me. But clearly, we've got the investment risk and we -- Mark Haydukovich and his team over at Oxford has a solid 30-year history on investment risk. They usually don't -- you don't see much of that. And so Jason and I are both keeping an eye on that. We believe that, that is under control. But I appreciate you bringing it up because it is a change and some other investors might have missed it.

What is the corresponding asset?

Well, it starts off as cash, so it'll be somewhere -- it's either cash or some sort of investment, either a mortgage loan, preferred stock, corporate bond. It will show up in their -- I think the line item on the balance sheet is fixed maturities.

Okay. That only went down. It didn't go up in March, so -- okay. I'll take a look at it. And if I have a core problem, I'll give Jennifer an email.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Joe Shoen for any closing remarks.

I appreciate everybody's continued support of the company. We're going to try to stay the course through the second half of the year. As I said, it's always a little dependent on some Mother Nature outside of our ability to control. But we will do our best to control what we can. Look forward to seeing you -- talking to you all in another 90 days.

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