U-Haul Holding Company (UHAL) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the AMERCO First Quarter Fiscal 2016 Investor Call and Webcast. [Operator Instructions]. Please note that this call is being recorded. I would now like to turn the conference over to Sebastien Reyes, Director of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today. Welcome to the AMERCO first quarter fiscal 2016 investor call. Before we begin, I would like to remind everyone that certain of the statements during this call, including without limitation statements regarding revenue, expenses, income and general growth of our business, may constitute forward-looking statements within the meaning of the Safe Harbor provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain factors could cause actual results to differ materially from those projected. For a discussion of the risks and uncertainties that may affect AMERCO’s business and future operating results, please refer to Form 10-K for the year ended-- for the quarter ended June 30, 2015, which is on file with the US 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, everyone. I am speaking to you today from Phoenix, Arizona. Also on the call from our offices in Reno, Nevada, is Rocky Wardrip, and also here in Phoenix with me is Gary Horton, AMERCO’s Treasurer. All three of us will be available for questions after the prepared remarks. Yesterday, we reported first-quarter earnings of $8.74 a share, as compared with $6.36 per share for the same period in fiscal 2015. I will try to minimize repetition during my prepared comments. All of my period-over-period comparisons are going to be for the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015, unless specifically noted. At our moving and storage segment, operating earnings increased $70 million to 281 million. Starting off with equipment rental revenue, it increased 9% or approximately $54 million. Transaction growth remains healthy; both the in-town and one-way markets recognized improvements. The transaction revenue growth is spread across our truck, trailer and towing device fleets. Notwithstanding the competitive pricing environment, we have been able to achieve some improvements in rate through our evolving knowledge of our reservation and fleet management tools. The combination of owned or operated moving and storage centers and independent equipment dealers grew during the quarter. Our retail distribution network now exceeds 20,000 locations. While we don’t discuss the specific size of the fleet during our quarterly calls, in general terms I would like to note that we have grown the fleet since the same time last year and based upon current projections we would expect to see this trend continue through the year. U-Move revenue growth continued into the first month of the second quarter. Shifting to our storage operations, revenues were up over $8 million or about 16%. Our revenue growth is coming from occupancy gains at existing locations, occupancy from new facilities added to the system, as well as general improvement in rates. That’s from a very broad perspective. From June 30, 2014, through June 30, 2015, we have added approximately 2.100 million net rentable square feet to the system. About 415,000 of that came online during the first quarter of fiscal 2016. Spending on real estate related CapEx, including construction, renovation, and acquisitions, for the first quarter of this year was 113 million, compared to 86 million last year. Our quoted occupancy statistics include all available rooms and locations, regardless of whether or not they are brand new or seasoned. Occupancy at the end of June increased by 1% to 85%, compared to the same time last year. Of the 415,000 square feet of new storage that we added during the quarter, about half of that was from acquisitions of existing storage facilities. Those facilities came online with existing occupancy of approximately 60%. The other half of the new storage came from our own development and that was added with 0% occupancy. Operating expenses at the moving and storage segment decreased to $1 million for the first quarter. The reported net decrease really doesn’t tell the entire story, though. Our three largest operating expenses, personnel, repair and maintenance, and liability costs, combined all were up during the quarter, albeit less than our revenue increase on a comparative percentage basis. Offsetting these additional costs was a significant improvement in U-Box freight expense. While we did have lower U-Box revenue this quarter, on a margin basis we made up significant ground compared to last year. As you may recall, we encountered numerous operational issues during the rollout of some new U-Box related systems last year starting in the first quarter. Since that time, our team has been hard at work trying to further improve the customer experience, as well as coordinate back-office processes. Much progress has been made and we are seeing that both in this line and in our earnings. Depreciation expense increased $13 million for the quarter, due to the larger fleet. Meanwhile, gains from the disposal of equipment increased just over $23 million. This resulted in a net decrease in our reported depreciation expense of about $10 million. Proceeds from the sale of retired equipment were $193 million, an increase of $65 million. We have increased significantly the number of units sold. Residual values on the truck fleet have been strong and this is reflected in our reported net depreciation expense. Consolidated earnings from operations, this includes moving and storage, our life and property and casualty insurance operations, were $291 million, which was a $72 million improvement. We continue to have strong cash and credit availability at the moving and storage segment. It was $545 million at June 30th of this year. Notes, loans, and capital leases payable on this same day were approximately $2.190 billion. Gary and his team are in the process of securing additional financing on several groups of currently unencumbered real estate assets and we should have something to report on that during our next quarter. During the first quarter of fiscal 2016, we declared a $1 per share cash dividend. That was paid on July 1st of this year. With that, I would like to hand the call back to Dana, our operator, to start the question-and-answer portion of the call.

We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Ian Gilson with Zacks Investment Research.

Congratulations on such a good quarter. Technically, every moving and storage margin parameter improved year over year and, in fact, if you adjust for the seasonality, they also improved sequentially quarter to quarter. Was this due to the U-Box or is there some other factors there that have contributed to such strong margins?

It was spread across several items, the U-Box being one of the largest items. So, last year I think we reported approximately $8 million to $10 million of additional costs associated with the U-Box program that we were able to effectively roll those back this quarter. Even though we had lower revenue, we did pick up margin by not having those additional costs. Our big three personnel, repair, and liability costs, we did have some pickup in margin there as the revenue increased a bit faster than the increases that we saw on those lines. In particular, the repair and maintenance line slowed a bit. Our commission expense line item, we had a subtle shift of business more to U-Haul owned locations, which had the effect of lowering the commission ratio just slightly. Then our cost of sales numbers also on a percentage basis related to retail sales had a slight improvement as we saw the cost of propane decrease during the quarter. So, every -- you are absolutely right, Ian. Each of the line items had some improvements compared to last year.

Okay, fine. Thank you very much.

You’re welcome

Our next question is from Jim Barrett with CL King & Associates. Mr. Barrett?

Gary, this may be a question for you. You ended the quarter -- the Company ended the quarter, rather, with 475 million in cash. I understand you are financing unencumbered real estate. With the proceeds from those financings, can you describe where you see the reinvestment opportunities at this point?

Jim, what I’m looking at right now is the excess cash, which is virtually all of it. We have been putting that back in the business.

Right.

Jason mentioned how much storage we have added. We’re also adding fleet, so we are basically putting it back into the business.

And if I could add to that, Jim. I think last quarter I may have mentioned, or last call with you mentioned that if we didn’t buy anything else that we have an existing pipeline of construction in excess of 120 million or so. And we have increased that here over the last three or four months, and that number, it’s a rough approximation, but it is probably approaching 200 million at this point, so I think Gary has been lining up funds for closing out the rest of this construction. As we switched more towards building, if you notice during the first quarter this year, the new stores was about half acquired facilities and half developed facilities.

I see.

At this time, that was probably an 80-20 split, in the form of acquisitions being 80% and building being 20%. There is a longer tail to development and it is a little bit tougher for Gary and his team to project the cash needs for that, because that could spread out over 12 months or 24 months, and so I think he is trying to line that up. Does that make sense?

Yes, it does. Yes. Jason, can you tell us whether the freight savings-- as I recall, it was $16 million to $18 million in fiscal 2015 for U-Box that you thought did not need to be repeated this fiscal year. Can you tell us what percentage of those freight savings occurred in the June quarter?

We probably picked up about $9 million to $10 million this quarter.

I see. Okay. And can you tell me why U-Box revenues were down? I understand why expenses are down, but why the business is not growing at this point?

Well, that has a lot to do with our continuing narrative where we have pulled back a little bit to fix the back-office processes. Some of that is our own doing; some of that is rate related. We certainly haven’t pulled back on the product offering out to the customers. We are still growing that. But I would say that we are-- we have taken a step back on pricing the moves a little bit and that has resulted probably in a little bit of slowing there, but I think that has been welcome for us. Even though the revenue is down for the quarter, I would say that we are closer to where we were in fiscal 2014 where we actually have a net contribution from U-Box and that has been a pretty amazing change, given that it has been about 12 months since the thing really came off the rails.

Yes. And I know your core business, you have done numerous analyses over the years that indicate that it does not track with housing starts or housing turnover. Is your view that the U-Box business itself is a business that tracks, broadly speaking, with housing turnover?

I haven’t done -- had that analysis done yet, so I don’t have an educated theory on that yet. It is great question and we will put it on our list of things to look at, but I can’t comment yet on that.

Understood. Well, we are looking to see you at our conference in September and thank you for answering the questions.

Our next question is from Jamie Wilen with Wilen Management.

A couple of questions, the first on U-Box. You expect it to contribute in 2016? Is that what you said?

Yes, if things continue as they are, I think it is going to be not just a net positive compared to last year’s performance, which was negative, but maybe just even on a standalone basis it should be a positive for us.

Could you quantify how much it did not contribute last year?

I think I had thrown out a number close to 18 million.

And on the self-storage side, you always put out your monthly occupancy statistics, but obviously a lot of Greenfield facilities and acquisitions. If you just looked at the facilities that you have not opened or acquired within the last two years, what do you think your occupancy rate would be?

I don’t have that specific calculation, but what I can give you is how many facilities we have operating over 90%. We have approximately 64% of U-Haul’s owned locations that are operating about 90%. Last year at that time, that number was 59%, so on a-- even adding these facilities on a common size base, we have increased the number of facilities that are operating above 90% and that’s through June. So this is July/August is typically the highest period of the year, so we might be able to even pick up a few more here into the second quarter. But I think that’s a pretty good representation of the performance that we have outside of some of the newer locations.

Excellent. And on the truck rental side, I believe it was asked before, we tend to get a pickup on the residual value when we sell the trucks and it seems to be an increasing number over the last few years. Are we depreciating the trucks a bit too aggressively in the short term? I realize it all flows back at the end, but are we a little too low in the residual values and should we relook at how we view depreciation on these things?

That’s a good question, and once you sell them, you have a real good 20/20 hindsight on what you should have done before. There is new truck models. There is varying costs that we are bringing into the fleet this year. We view that resale market historically past the last three or four years as somewhat volatile. We have been a little surprised by the volatility and haven’t wanted to adjust the depreciation methodology yet. I think from the perspective of evaluating core performance, we set the depreciation methodology based upon a couple things. There is an assumption, the economic value at the end of its life, but there is also an assumption upon the rental operations of the truck and our ability to earn a margin off of that. I think that there is a certain amount of value in seeing -- in holding that number constant and seeing the change in the gain on the disposal of equipment year over year and evaluating earnings outside of that, if you want to do that calculation. So, it’s an excellent point. I think we still see enough variables in the marketplace that we are still hesitant to adjust that number yet.

Okay. And lastly, on the proxy statement we received for the annual meeting, I was pleased to see a number of questions out there about proposing a 7 for 1 stock split, I believe, and potentially looking into a REIT spinoff of the self-storage unit, though I didn’t see a name change potentially to the name of U-Haul. But I was wondering, even though it has to be on the proxy because a shareholder provided the right form to be included in there, given that management controls voting rights within the Company, what could possibly be the outcome of the predominant portion of the shareholders actually voting in that direction for those two proposals?

Jamie, I can’t speak to how they’re going to vote. I haven’t had those discussions, and if I did, I probably wouldn’t be privy to communicate them anyway. So, I’m interested in seeing how all of the shareholders vote, the control group and the outside group. I think that that is going to be informative to management, at least to myself. Management has taken a position on the REIT proposal. We have not taken a position on the other shareholder proposal about the stock dividend and we laid out our position on the REIT in the proxy statement.

Okay, but when you say management has not offered a position on the stocks, but has the control group offered a position on the stock split that you know of?

Not that I’m aware of, other than one of them proposed it.

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

Thank you. I would like to thank everyone for your interest in and support of AMERCO, and also I wanted to take this moment to remind everyone of our upcoming virtual analyst and investor meeting. This is going to be the ninth time that we have held this event. It is a live, interactive videoconference that we broadcast over the Internet at AMERCO.com. We’re going to be holding it this year on Thursday, August 27, at 11 o’clock Arizona time. I believe that’s 2 o’clock Eastern time. The meeting will be moderated by Joe Shoen, and this year it is going to be structured more in a question-and-answer format than in the past. With several shareholder proposals being voted on beforehand in the morning during the annual shareholder meeting, we thought that this format might be a little more conducive to an open discussion with our investors. And this is one of our fundamental investor outreach programs. I encourage you to participate live. While you can submit questions during the live feed, we have found it helpful in the past and probably even more so this year if you can submit your question to Sebastien Reyes in our investor relations department ahead of time so that we can prepare to address them as a part of the presentation. You can reach Sebastien through our investor relations website at AMERCO.com. Thank you, again, and I look forward to speaking to everyone on August 27th.

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