U-Haul Holding Company (UHAL) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the AMERCO Fourth Quarter Fiscal 2015 Year-End Investor Call. All participants will be in listen only mode. [Operator Instructions] I would now like to turn the conference over to Sebastien Reyes. Mr. Reyes, please go ahead.

Good morning, 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, 2015, 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.

Thanks, Sebastien. Good morning. I am speaking to you today from Phoenix, Arizona along with Gary Horton, AMERCO’s Treasurer and also on the call from our offices in Reno, Nevada is Rocky Wardrip, our Assistant Treasurer. All three of us are going to be available for questions after the prepared remarks. Yesterday, we reported fourth quarter earnings of $0.47 per share. That’s compared to $2 per share for the same period in fiscal 2014. During the quarter, we recorded an accrual of $60.7 million related to trademark litigation with PEI, better known in the marketplace as PODS. The accrual represents the judgement entered by the court in favor of PEI during the quarter. The accrual was recorded to operating expense and it resulted in an after-tax charge of approximately $38.4 million, that equates to $1.96 per share. In addition to discussing our GAAP net income as reported, we feel that evaluating the effect of this accrual is an important piece of information for our investors. But excluding the PEI litigation accrual, adjusted earnings were $2.43 a share in the fourth quarter of fiscal 2015. It’s about an improvement of 21% over the same period last year. For the full year of fiscal 2015, we reported net earnings of $18.21 per share compared to $17.51 in the previous year. Again excluding the PEI litigation accrual, adjusted earnings were $20.17 per share for fiscal 2015, about a 15% improvement over the previous year. At our moving and storage segments, operating earnings, excluding the litigation accrual, increased by over $9 million to $82 million for the fourth quarter, and for the year were up nearly $87 million to $671 million. For the fourth quarter, we increased our equipment rental revenue, what we refer to as U-Move revenue, by over $31 million or 8%. And for the full year we had a $191 million increase which is just about a 10% improvement. Our retail distribution network continues to expand. During all of fiscal 2015, we increased our independent dealer network by 800 net outlets along with another 60 company-owned and operated locations, bringing our total system to nearly 19,800 locations. We once again increased the number of trucks, trailers and towing devices in our rental fleet. As we head into fiscal 2016, we are once again going to cautiously evaluate the need for expanding the fleet further. The majority of our revenue increases continue to be transaction-driven. Both in-town and one-way transactions experienced growth during the quarter and for the full year. We did experience some -- relatively small amount of weather-related disruption during the quarter, a little bit more so than in the fourth quarter of last year. As a general comment, revenue per transaction of which pricing is a component showed some improvement during the year. However, we continue to be surrounded by regional and national competition. From what I've seen during the first seven weeks of fiscal 2016, we are still seeing increased revenue compared to the same time last year. As I mentioned, during fiscal 2015 we increased the amount of equipment available to our customers. Capital expenditures on new rental trucks and trailers increased $183 million to just under $959 million as compared to fiscal 2014. Our proceeds from the sale of equipment finished the year at $407 million. Our initial projections for rental equipment CapEx in fiscal 2016 are somewhere north of $1 billion. This is before netting any equipment sales proceed against them. We are projecting the sales of equipment will increase in fiscal 2016. Our expectation would be that net capital expenditures which is the gross amount that we spend on equipment less sales proceeds should be just under our fiscal 2015 amount, which was $552 million. Looking at our self-storage business, we continued on with acquisition and development activity. During the last fiscal year, we either opened or added stores to 63 company locations that added just over 2.1 million net rentable square feet to the system. By way of this additional capacity, combined with improved occupancy at our existing locations and the general improvement in the overall customer rates that we can charge, we increased revenue by just over $7 million in the fourth quarter and $29 million for the year. For fiscal 2015, our all-in average occupancy rate for the 12 months increased by just over 1% to 82% as compared with the average throughout last year. Our occupancy ratio includes all of our self-storage products, not just stabilized locations. So, for example, of the 2.1 million net rentable square feet that we added this last year, about a third of that was brand-new product that we added to the system at 0% occupancy, the remaining two-thirds came on with initial occupancy averaging right around 70%. So all of these new rules are blended into our overall occupancy results throughout the year. What this tends to show is that we have considerable room for additional self-storage revenue growth from just what has already been acquired or developed. Spending on real estate related items, largely self-storage, including construction, renovation and acquisitions, that increased $54 million this year compared to last, up to just around $375 million. We continue to actively pursue acquisitions of existing storage while we’re working on conversion and development projects as well. On a combined basis, the annual operating results from our life and property and casualty insurance operations improved by $7 million to $53 million combined and both are performing to expectations. Together our insurance operations have a combined investment portfolio of just over $1.5 billion. At March 31, 2015 our total debt outstanding which includes loan, capital leases and an estimation of off-balance-sheet operating leases, was $2.331 billion, that’s compared to $2.165 million 12 months earlier. Our cash, short term investments and unused availability from existing borrowing facilities at the moving and storage segment was $562 million at March 31, 2015. With that, I’d like to hand the call back to Kate, operator, to begin the question and answer portion of the call.

[Operator Instructions] The first question comes from Ian Gilson of Zacks Investment Research.

On good numbers. As we look into the current fiscal year, as compared to last year – last year we sold a large number of trucks at apparently a good price. Are the resale values holding up so far as you look at this year? And could we expect to an additional increase to the total fleet for the full year?

Thanks, Ian. The resale market for our box truck fleet and we also the light commercial fleet, I will call it, has remained consistent over the last several years. We are still seeing strong prices looking at April results. I don’t think we’ve seen any significant shift downward or upward in the month of April. It is a significant item of volatility for us or could be an item of volatility for us. We watch that very closely. The increase in proceeds from this year is largely just from the increased number of units sold more so than any dramatic increases in the price per unit. Regarding the size of the fleet, we’re looking at that pretty closely. We’ve come up with our initial fleet plan. The growth in the fleet then will largely be determined by how many trucks we take out of it. I don’t think that, that’s been ultimately determined yet but it is entirely possible that we could continue to grow the fleet this year.

Okay. During the – so far in the year, when everything stops in the northeast, what you might call the Southern crescent sort of carries the company. With the recent flooding and tornado activity with Texas and Oklahoma, were you involved in loss of any equipment during that period and likely have an impact on your results for the current quarter?

Ian, that’s a great question. Right now the reports that I have seen from our field team indicate that we had two locations in Texas, one in Houston and one in Austin that were affected by the most recent storm – affected significantly to the point that I think they stopped operating for a couple days. One in Houston was affected by flooding. That was the location that you’re fairly familiar with our types of stores, that was a gas station style outlet. It suffered from flooding. I believe it might already have reopened. The Austin facility was a self-storage facility that we operate and manage – and that did suffer some significant wind damage. We lost – I think we have 20 trailers that are being repaired and we may have lost a van that as a toll [ph] but nothing that I think would reach the magnitude of showing up in our financial results at this time.

And the next question comes from John Goodman of Colden Capital.

I guess I have a couple of questions. The first question is in the self-storage and moving products business. I know that piece generally is a big portion as U-Box and I know you guys referenced the weather hurting some of the self-storage, self-rental equipment piece. Did it also impact that side of the business or is there some sort of change given litigation that is affecting U-Box?

No, on U-Box, we've been talking about some of the operational changes that have taken place there for at the last 6 to 8 months, 6 to 9 months. I think the revenue challenges that we face there are more our own doing versus weather or any sort of, what words we can use on our website. It has more to do with us effectively pricing the product transactions on our website and coordinate that on the shipping side. So I think the challenges that we face are more our own doing. We grew that very rapidly. We may have outgrown our capabilities and now in the process where we’re trying to put the new administrative systems in place. I think we continue to have some growing pains. I don't think we’re necessarily leaking margin like we did during our second quarter but the revenue has stopped growing here in the last three or four months.

But you guys hope to improve over the next two to four quarters or ---

Absolutely and that’s the goal. I am not sure if you were here back in – I think it was ’06, ’07 when we put the truck and trailer reservation and fleet management system into place but that took us several years to kind of master, then finally see the benefits of that. We are pushing our U-Box, people have kind of mastered their system on maybe be a little bit quicker pace here but we have some good people on it and it’s kind of a process of scientific management for us where we’re attempting to change maybe one or two things every so often and then evaluate the effects of that. Last year we changed a whole bunch of things one time and it was hard to figure out the effect of each one of those things. We’ve tried to slow the pace a little bit and do a better job of evaluating the effects of our changes. So if we change the delivery schedule, would that change a whole bunch of different pricing items or call mechanisms along with that, it’ll just change one thing at a time and then see what effect that, that has. So we’re still hard at it. It’s something that we’re committed to organizationally. From a capital perspective, there isn’t a significant amount of capital that we have to put back into right now, we have the boxes and equipment that we need. We have real estate locations in order to handle it. Now it’s more just a function of human capital as far as getting the program to work again.

I guess the second question I have is margin expansion. I know you guys grew margins, I think, 120 or 140 basis points if you add back the charge. Could you kind of just talk a little about, is that just better utilization of the existing fleet?

Utilization for the year, I think we had a small incremental improvement of that. I think we still have areas that we can make up on utilization certainly. I mean we’ve added -- I look back over the last 10 years, we’ve added close to I think 43,000 trucks to the fleet and we’ve been able to maintain or improve utilization just a little bit in that same timeframe by adding 50% capacity to the fleet or 45% to the fleet. As far as our operating margin figures, I kind of look at our operating margin somewhat similar to where it was at last year. If you take out some of the gains that we had from the disposal of equipment and looks more at an operating perspective, I think we did about as good as we did last year. So I think that there is still improvement that can be made going into fiscal ’16.

Again, that’s good to hear. And Jason, as you know, I've been a long-term shareholder and I just want to echo some comments that have been made in past conference calls of trying to split the stock, whether four for one or five for one and from our perspective I think a split doesn't change management's ownership, doesn't change the control, just provides better trading liquidity and we believe a higher valuation, which in the end is a limited cost to the company. If I take a step back and look at Avis which I think is the number two player within your business and granted they have another piece of their business, but they have a $1 billion market cap less than you guys. They have nine analysts covering them and five of them from five major brokerage firms. You guys being as I said over $1 billion bigger and only have one or two regional firms covering you, in talking to many analysts and other kind of shareholders, a lot of we think that relates to limited trading liquidity and by just doing a split would be something that I think would be very helpful. And I believe also you would see significant increase in buy side firms wanting to get involved with the higher liquidity and other sell side firms trying to cover you. I mean, it's a shame that you guys have executed extremely well. I think your revenue growth of high single digits is two to three times the S&P. Your earnings growth as you said, 21% this quarter, which is probably three times the S&P and yet you trade at a 3% to 4% multiple discount to the S&P. And so I think as limited downside in trying to split and only potential upside and hopefully having the stock trade closer to true intrinsic value.

John, if you could hold a second, because you have been making those comments for now probably seems like years. And we are certainly listening to that but is there any – when you say stock split, there is a lot of ways to get to that. I mean stock dividends, stock split, is there any preferred way that that if you were to make the call, how you would do it?

If it was up to me, I would say you guys should do a four or five to one stock split. And I know this is little off topic as well. I know you guys have been consistent in doing special dividends each year but if that’s still the course that you guys are going down, I think you should also try to be a little more explicit to the market saying that we will continue to do special dividends but we don't want to put a specific marker out there because they want some flexibility but do expect a special dividend every year as well.

Certainly appreciate your feedback, John.

The next question comes from Jim Barrett of CL King & Associates.

Hey, Jason, Sebastien. Had a few questions on capital expenditure, capital allocation. Your gross expenditures for trucks and trailers in ‘15, I may have missed it but can you tell us how much was new equipment versus replacement?

That’s kind of a hard thing to nail down. We spent on new equipment just under $916 million during the year. We had sales of equipment, it was right around $401 million. The truck fleet grew a net amount of I think about 8000 units during the year. I don't recall the exact number of trucks cycled out and the exact number of trucks cycled in. So I'm not sure I am completely answering your question.

Well, it's helpful. Is the $400 million the new normal looking beyond ‘16 for what should be the annualized proceeds from property, plant and equipment, given the larger size of the fleet?

I think we are actually expecting that number to increase a little bit going into next year. So I wouldn't use that as a run rate. I think it’s going to go up possibly over another 100 million from there given the current size and allocation of the fleet, how much we have split between our box trucks and our light commercial fleet.

So in the number we look at ‘15, there was no one-time large real estate gains in that number?

Yes, I think there was – I think about 5 million of real estate gains during the quarter.

And does the management team have a comfort level in terms of the level of debt on a sort of normalized basis for the rental business and the self storage business?

When you say comfort level, do you think we can have more or do we like we are appropriately leveraged, under-leveraged, is that –

Yes, I would be interest thoughts on both. What would be the upper limit of what you’d consider prudent and then B) whether you have a particular target in mind?

I don't think that we necessarily have a particular target in mind. Our general sense is that we aren’t close to being overleveraged at all. I think that there is more upside to that. I think Gary Horton would like to chime in for a second on this one.

Jim, when it comes to the real estate financing and I will take that one first, we’re actually deleveraging because we’re basically paying off a lot of the existing debt and we've unencumbered a fairly large amount of real estate. As we go with the debt on our rental equipment, a great deal of the increase was due to what I'll say our shortfall equipment which would be pickups and van. And we basically turned that around and so on that basis I feel very comfortable and one of the other things you can look at is you look at the interest expense that we are moving today with a higher level of debt and it is about the same, it’s up slightly but not very much. And the amount of cash that we are throwing out of the – off from the business, including the sale of the trucks, we feel comfortable where we are at this point but again we will be measuring that as we increase this and as we go forward but I don't think -- I think we’re fairly comfortable with where we are today.

And this is Jason again. To kind of put it into context, just comparing it to five years ago from some measurements, debt to equity, debt to EBITDA, debt-to-assets, all of those ratios are down compared to where were at five years ago. So we do have more debt in an absolutely sense, however, as a ratio to other metrics we’re actually little bit lower leverage.

Jim, this is Rocky too. I would add to the comments that Gary and Jason have made as well, is that on the fleet financing, we are much more conservative than we were say three to four years ago in that we, for most of our history we financed 100% of our costs down to a 30% residual in that financing. Today we’re attempting 60% to 70% of our costs down to a zero residual. So if anything, that also has been delevered over the last three or four years.

Jason, if I could just squeeze in a few more. I caught most of your comments on U-Box. My understanding was that was at a breakeven level, maybe it was slightly profitable and the revenue just stopped growing. With the legal accrual aside, what is the plan to rejuvenate that business and what its effects, could you just talk about that?

Sure. Just to kind of put on a ball on some of our comments or assumptions. But in fiscal ’14 we certainly felt the program was at about a breakeven or a little bit positive. We took step back this year and it hasn’t been – there hasn’t been net addition to earnings hear this year, So we've taken a step back. As far as what do we think we can do to do improve that? Whenever we were kind of inundated with the amount of business that we got in and our ability to service that business was taking a toll on the statue and the towers and more importantly was taking a toll out in the field. So it wasn’t greater administrative system and field force stepped up to the plate and cover up a lot of problems that we had created here at the home-office generating that much business but it was something that it could have eventually maybe had a deleterious effect on other programs, truck rental or self-storage by them having to focus that much time and trying to fix UK-Box customer services. So we took the steps here to fix that by improving our systems, improving our tracking of boxes but calling to customers, to set customer expectations, better, working with third party foreign carriers in order to get a category of what the rate going to be and that process is just coming again little bit slowly right now.

And then my final question, and it harks back to what Gary and Rocky just touched upon, I know back a year ago there was some suggestion that as you deleveraged some of the real estate debt this year, the board would consider returning cash to shareholders in some form. Given the fact that leverage on balance seems to be down versus a few years back, where does that rank in the priority list relative to the opportunities you see or reinvest in the business? –

Well, it’s still something we’ve discussed throughout the year, not generally during this portion of the year where we are kind of focused on operations, from Memorial Day to Labor Day. We did do another dividend last year you know we’ve heard John’s point the questions earlier about making a statement regarding dividends. We have gone that far yet but there’s the natural tension that we have year to continue to reinvest in the business, but the dividend has been able to the discussion now for several years and it’s going to main there were at least from perspective.

The next question comes from Jamie Wilen of Wilen Management.

Hi, fellows. Congrats on another good quarter. First, want to give an amen to John for the rationale for why we should do a five for 1 stock split. I think it was well articulated and hopefully you can bring that to the board. It would be a great benefit to all shareholders. First, in the self storage area, you added 2 million square feet during the course of the fiscal year. Could you tell us about how much you're looking to add in the current fiscal year and kind of how that flows through to when you expect the units that you put on, when should they be cash flow breakeven, how long does it normally take?

Sure. When we're sitting down and modeling these out, if we have a facility that we started at zero percent, we generally target depending the market 3 to 5 years for it to begin cash flowing positive. For ones that we've acquired depending upon the acquisition price some of those – if we bought them at the right price of 70%, they may be cash flowing for us. Generally speaking though, we would like to see the occupancy number get to 80% and then we start to feel pretty good about it. Going into this coming year, we don't have a specific target just because of how the market is. We do have an existing pipeline of projects that we've acquired buildings or acquired land that now we just need to do the development. When I say just, that makes it sound kind of simple but there is land use permitting, building and depending upon where you are out in the country, can only build during certain times of the year, all of that. But we usually have - from a dollar perspective we have $100 million to $120 million of construction projects in the queue right now that we would like to finish over the next two to three years and bring those projects online. We’ve been mentioning over the last couple of years or the last year really that prices on self-storage project have been going up. So we have been a little bit more careful on acquisitions of existing storage. I think we will see in the next year or so probably is that the ratio of new rooms coming online from acquisitions may be being a smaller percentage of the total versus stuff that we’re building. I think that probably is going to be a larger percentage of what comes online. We’ve been pretty consistent the last three years now, I think, we’ve been able to hit right around 2 million, 2.1 million square feet added to the portfolio. So we’ve been pretty successful with that. And we have been stockpiling these projects that we need to finish over time and we’ve got a whole team of folks that are focused on doing that.

On the truck fleet, you have spent a lot of money over the last couple years and obviously your fleet has grown but the age of the fleet I would think would be continuing to move lower. Could you tell us what the average age of the fleet is currently?

I don't have the average age number. I would just say that, that in talking with our operation folks who deal with the trucks on a daily basis, they’ve never been happier with the fleet. We have one measure of how good the shape the fleet is in, just how many trucks are down for repair. This last year we hit all-time lows in the number of trucks that were down for repair, even considering that we were at an all-time high for the number of trucks in the fleet. So I think all of those things point to us being in great shape on the status of the fleet.

And as far as rental rates and what not, could you tell us is the length of the average rental changing for longer or for shorter and is there any change in the percentage of rentals that we do one way as a percentage of the total?

The rental days – I don’t have that statistics at my fingertips. I would say that mileage compared to last year is up just a little bit, that’s the component of our revenue per transaction. As far as the ratio of one way transactions to in-town transaction, that has adjusted slightly up more towards in-town over the last year or two. So maybe a 1% shift.

And lastly, as far as the litigation, it is -- you have appealed -- you've taken the charge on the income statement, the balance sheet, but I assume the process is still going on? And lastly, how did they arrive at the amount of $60 million?

The process stands legally and this is coming from a non-attorney is that we've field post judgment motions that need to be settled by the trial court. So, we are not at the point yet where we are to file an appeal. If we are unsuccessful in those post-trial motions then we fully intend to file an appeal. I can't speak to how the jury arrived at the damage figure. I can’t give you any information on how they arrived at that. Certainly it wasn’t a number that we presented and it wasn’t a number that the plaintiffs presented.

The next question is from Rupesh Sahu of Titan Capital [ph].

Congratulations on a good quarter. I had a couple of questions, I guess. So as we look to 2016 on the self-storage business, is there some kind of a good number or a range to use for what CapEx could be from the business of a per square foot of space being added?

That’s a tough one. First, let me start off what our gross CapEx spend has been. It’s been -- I think last year we did 321 million, fiscal ’15, 375 million and year before that was a little bit less. So that number has been trending up and we have been adding about the same number of square feet. Now that isn’t in total a comment just on how expensive it’s getting per foot, a lot of that is that we've been acquiring these facilities that we have to do build out over time. So there’s some amount that’s been spent that doesn't have any net rentable square feet associated with it yet, if that makes sense. We were -- for several years we were buying existing product at less than what we could build it for and that’s why we focus on doing that. We are now at the point where that’s kind of shifted to we are acquiring existing facilities at or above replacement cost. So we are now building at more of a market rate. So we build everywhere across the country, so the cost per square foot for us could range anywhere from $60 a foot to $140 a foot, may be even outside of that but it’s kind of a wide range for us. So I can’t give you one specific number. We would certainly like to spend another 300 million plus growing the line next year if we could.

And then one on the rental equipment CapEx, kind of a follow-up to Jim’s question, so when we look at the rental equipment business and the 959 odd million of CapEx, how much of that is just maintenance to keep the fleet count and age flat versus actual growth CapEx that adds to the fleet count?

We talk about that in pieces. Because there is a large piece of that, maybe little more than half of that which is on fleet that we’re rotating in and out on a much more frequent basis say 12 to 18 months. So that’s a little bit higher maintenance CapEx, however we are selling for a pretty decent amount, so the net CapEx on that isn’t – if you look at our net CapEx, we were about $552 million this year. Historically our maintenance CapEx number would be probably somewhere – it’s a wide range I am going to give you, I don’t have a specific number but $400 million to $500 million, we could probably go lower than that if we really needed to come up with cash. But on the current fleet range it would be somewhere around 500 million or less.

And then my final question is, any update on your thoughts in evaluating the formation of REIT for the storage business?

No, I don’t have any comments on that. End of Q&A

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

Thank you. We appreciate everyone calling in. It was a good year. I know Joe wanted to pass along thanks to all of our customers and system members and investors for your continued support of the company. And we look forward to talking to you again the beginning of August for our first quarter results. Thank you.

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