U-Haul Holding Company (UHAL) Q4 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the AMERCO Fourth Quarter Fiscal 2016 Year End Investor Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event 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 fourth quarter fiscal 2016 year end 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 statements 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, 2016, 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, everyone. I'm speaking to you today from Phoenix, Arizona. I have a few prepared remarks and then we'll open it up for questions and answers. Yesterday, we reported fourth quarter earnings of $2.68 a share compared with $0.47 a share for the same quarter previous year. I do want to point out that during the fourth quarter of fiscal 2015, we recorded an accrual of $60.7 million related to trademark litigation with PEI, better known in the market place as PODS. The accrual represented the judgment entered by the court in favor of PEI. The accrual was recorded to operating expense and resulted an after-tax charge of approximately $38.4 million or $1.96 a share. So in addition to discussing our GAAP net income as reported, I feel that evaluating the effect of this accrual in the previous year is an important piece of information for you. Excluding the PEI litigation accrual adjusted earnings were $2.43 in the fourth quarter of fiscal 2015. For the full year of fiscal 2016, we reported net earnings of $24.95 per share as compared to $18.21 for the previous year. Excluding the PEI litigation accrual I just mentioned, adjusted earnings per share for fiscal 2015 were $20.17. At our moving and storage segment, operating earnings excluding the PEI litigation accruals for both years increased by over $4 million to $86 million for the quarter and for the full year we're up nearly $147 million to $813 million of operating earnings. Our U-Move revenues which is our truck, trailer and towing device rentals increased by over $23 million or about 5.5% for the fourth quarter. We finished the full year of fiscal 2016 with $152 million increase or just over 7%, most of this coming from transaction gains. Our retail distribution network continues to expand during all of fiscal 2016 our network of U-Haul locations continued to grow. We finished the year with approximately $19,500 independent dealers that's up about 1300 net outlets that our company owned - company operated locations by just over 100 outlets bringing our total distribution system to right around 21,200 locations at the end of fiscal 2016. Compared to the end of last year we increased our truck, trailer and towing device fleets. In retrospect we likely could have used additional equipment during the second half of this year and we're addressing this need currently. Adjusting the size and the mix of the fleet is a gradual process, so that will take time our current plans on account for some growth in the number of available rental units in fiscal 2017. With the first month and half of fiscal 2017, we are continuing to see U-Move revenue growth. Capital expenditures, our new rental trucks and trailers was $881 million in fiscal 2016. While proceed from sales of retire rental equipment was $517 million. This leads us net fleet capital expenditure of approximately $365 million this last year. Our initial projections for rental equipment CapEx in fiscal 2017 are just north of $1.2 billion. This is before netting any equipment sales proceeds against them. We are projecting another increase in proceeds from the sale of equipment going into this next year. Our current expectations of the net CapEx will increase to approximately $600 million next year. We continue to focus time and capital in our self-storage business. During this last fiscal year we either opened or added storage to 77 company locations totaling over $3.6 million net rentable square feet. This additional capacity combined with improved occupancy at existing locations and a general improvement in overall customer rates, we have increased revenue by just over $10 million in the fourth quarter and $37 million for the year. For fiscal 2016 we're reporting that are all in average occupancy rate decreased by little over 1% to 80% compared with the average for all of last year. To better understand this measure, I wanted to dissect the $3.6 million net rentable square feet that we added this last year. A little more than half of that was brand new product that came online at 0% occupancy, the remaining portion of the additions was in the form of existing storage locations, those locations had an initial occupancy average in somewhere around 68%. So that means that we added these rooms and square feet at about an average occupancy rate of 30% that's what blended down our occupancy for the year. Excluding this new square footage we did show occupancy improvements at our remaining group locations. The flip side of this all in occupancy figures and it illustrates the considerable room that we have for additional sales storage revenue growth from the existing portfolio. Spending on real estate related items including construction, renovation and acquisitions increased $224 million this year to approximately $592 million. We're actively pursuing acquisitions of storage facilities and we are working at our conversion and development projects as well. At our current rate and given current conditions, I could see our investment increased in fiscal 2017. At March 31, 2016 our total debt outstanding was $2.744 billion compared to $2.331 billion at March 31 of 2015. Our cash short term investments and unused availability at the moving and storage segment was $634 million at the end of this year that's compared to $562 million the year before. Last item is that during the fourth quarter of this year, we declared a $1 per share to cash dividend that was paid in April. This brings the total amount of cash dividends declared for fiscal 2016 to $5 a share. With that, I would like to hand the call back to Gail our operator, to begin the question-and-answer portion of the call.

[Operator Instructions] Our first question comes from Jim Barrett of CL King & Associates. Please go ahead.

Good morning, could you hear me?

Yes.

My question is related to the spending on self-storage. It has escalated both in fiscal 2015 and fiscal 2016, is this a function of the company seeing more attractive opportunities out there or is it a function of the fact that the balance sheet has improved and how do I reconcile that with Joe's comments the world of self-storage is getting increasingly competitive?

Jim, it is a couple of things, so first the number of opportunities, there is a lot of people coming to market right now because they think that the markets are good. We have increased our acquisitions of existing storage facilities and that number actually increased a little bit compared to where it was last year but larger increase in spending that we are seeing compared to last year is in the development of projects. And as Joe has mentioned over the years those take quite some time from when you buy them to when you can actually build and when you start renting. So the projects that we bought into one, two, even three years ago, we're starting to see those now having some construction spend attached to them and it is kind of building up this balance of construction and development cost. So I think it is kind of building on itself, so as I look into next year, it’s hard to say exactly how much new product we're going to buy. However if we were to just finish out where we were at now and close on projects that we have an escrow that's probably a $400 million of spending right there in the pipeline. So Joe's comment, we still have been maintaining pricing discipline on what we're buying that's why we’ve been doing probably more development than we have in the past. We still think that there are opportunities on the development side. And we are still finding - we are still finding some deals on the storage acquisition side albeit probably in smaller markets.

Okay. And Jason when I look at truck fleet, it increased on net basis by 4,000 in fiscal 2016 and I heard your comments that you’re going to spend $600 million net on rental equipment which is an increase year-over-year? Where do you see the truck fleet in terms of the optimal size given the opportunity in the North American markets?

Joe touched on this a little bit in the last call and I think it's still hold true that we, we felt like maybe we didn't take advantage of some opportunities that we could have taken advantage of had we invested a little bit more in the fleet. So if you look at our net CapEx number for this year, I think it's closer to $360 million, $365 million, that’s closer to our maintenance CapEx number, I know at the end of the periods we showed an increase. Throughout the year it was probably little bit less of an increase in actual trucks. So, I think we have some ground that we feel like we can make up which accounts for the increase in spending. So, on a growth basis we did $880 million approximately in equipment purchases this year and right now our current plans and these things swing based upon timing on when we actually buy the units but probably somewhere closer to $1.2 billion or a little bit higher on a gross basis which - and that – there is fleet growth embedded in that number.

Okay. Thank you very much.

Our next question comes from Ian Gilson of Zacks Investment Research.

Good morning. Can you run through the fourth quarter depreciation and the truck sales during the quarter? And we seem to have a significant increase in depreciation without a corresponding decline in lease expense?

Sure Ian. If you would exclude the gains from the dispose of equipment from both the years, the depreciation expense is up just under $9 million for the quarter, about a little less than a third of that increase is from buildings and improvements so that the real estate that we have been adding, the remainder is from the rental equipment which is the newer trucks put on the books. Gains on the disposal were down about $14 million for the quarter compared to what they were at last year's, so if you add those two numbers the $9 million increase in depreciation coupled with the $14 million decrease in the gains on disposal, you get to the net increase in the depreciation for the quarter end. For what we thought during the quarter on the gains which is the bigger piece of this, is that we sold fewer units into the marketplace and also we're going up against the real tough comparable and in looking back over last several years, the fourth quarter on a per unit basis was one of the healthiest quarters that we had, the fourth quarter of fiscal 2015. So we have gone up against a pretty tough quarter and when we just didn't sell as many units into the marketplace as we did in previous year.

What was the actual net gain on sort of equipment?

The gain was, let me take a look at that. For the quarter was, I'm sorry, $10.9 million and that's compared to fourth quarter of the previous year was $24.7 million.

Okay. Now, was the gain in units due to your need for more equipment or because the market was soft and you didn’t have the buyers?

I think it was more strategic and probably closer to the second answer. I think we are trying to strategically place the units out to the resale market. So our team has done an amazing job at selling those increased number of units every year. I think they were looking at the marketplace and thought that maybe we should hold off a little bit and try to place some of these a little bit later into our first quarter, calendar year second quarter. So, I wouldn’t classify it as a soft market but it isn’t as healthy as it was or as strong as it was fourth quarter of the previous year. So, I think that’s where we held off a bit.

Okay. And what was the actual truck count at the year end?

We were at 139,000 trucks.

That includes trailers or just trucks?

Trailers we had 108,000 trailers and we have 38,000 towing devices.

Okay. Given the fact that you need trucks and given the fact that in the last few quarters you have mentioned that you would purchase rather than lease, plus the fact your return on cash is basically low not just yours, everybody. And the cost of capital is also low. Are we looking to basically a flat down these expense and continued increases in depreciation through 2017?

I agree with the second half of that statement, the first half I would expect lease expense to probably drop another $10 million to $12 million next year, maybe little bit more just because we’re not putting new operating leases on and we’re going to have some of the older ones phase out and so all the new debt that we're placing will be on balance sheet and sharp in depreciation.

And so looking at your – you’re still keeping a dollar decline in balance for the first five years run?

That's correct. For our box trucks that’s how we depreciate them.

So you’re looking at something like 20% of the additional capital expenditures going from the beginning of the year to the end of the year to $80 million?

Yes, on the new equipment it will be time to little bit different as probably a decent growth number, but it’s going to be phased in overtime. So we’ll probably won’t recognize that amount on the 12 months. Did I make sense although, I mean I'm going to have some coming online from this year, so I don't have my depreciation forecast ahead of me, but I think you kind of got the number on a going forward 12 months work.

Okay. Thank you very much.

The next question comes from Jamie Wilen of Wilen Management. Please go ahead.

Jason, I wanted to get out a little color to the truck fleet number, you said at the end of the year with 139,000 where was it at the end of the prior year and where would you expect it to be at the end of current fiscal year?

I think it was about 135,000 trucks a year before. As far as where it's going to be to next year, it would increase more than it did this year, but I'm not - I'm not going to give out an exact number on that.

Okay, that's fine. As you add to the fleet, but what's the key metric you're looking at here, it's obviously not the utilization number of that fleet, it's the total operating income that your fleet can enjoy out this time. The utilization is not your key criteria there?

Well, when looking at the fleet utilization is one of the tools that we look at to speak. If your utilization goes down too low, you're not necessarily looking to add equipment at that point, but our distribution team is looking at this really at a very detailed level by marketplace and the complexity that we add by adding these additional locations it complicates their job. So they're looking at how healthy our transactions by region and then if transactions are where we thought they were going to be, or if we pick up on consumer demand that we weren't able to fill, what's the reason for that is that us not using our equipment effectively that we have or is there just not a enough equipment available. And I think our guys did look last year and determine that we didn't have enough equipment available to meet the actual demand that we saw. So there isn’t just one metric, utilization is one item that factors into it but that’s certainly not the full item.

Okay. And where would be the strongest points that you are going to add the most to your fleet, what parts of the country?

I don’t have a specific part of the country. We have parts of the country where we are seeing above average productivity, we have some that have blown that changes from a year-to-year. At certain points of the year, you get too much equipment in one part of the country say Florida, now may be you don’t have as much there. So, it swings between just throughout the year, I would say equipment wise we’re probably focusing on some of the bigger trucks in this coming year and trying to get some more those out to meet demand and replace the older fleet but otherwise I don’t have a specific area to tell you - two months from now that area is probably going to change.

Got you. On the self-storage side for existing storage, I know you’ve added a lot in the list but for existing storage could you give us the - you said the occupancy levels increased but could you give us a number of what their averaging or what percentage or above 90%.

Sure, well at this part of the year is normally the down part. July is our highest point of the year. I think our U-Haul owned portfolio, we hit a high point and this is a blended all in number of 85% this year, so that's even with all of these new facilities. If you look at the facilities that we manage to off balance sheet entities, those finished over 90% for the year. So, I think underlying I don’t have a same store calculation for you but I think that our same store occupancy is plus 85 to 90 range.

Okay, outstanding. And obviously with adding that many million of square feet, you’ve added a lot of deprecation and you've actually hurt your GAAP income. How much additional depreciation on the self-storage space and will you ever breakout the operating income from your self-storage operations.

Well, for the quarter I think we had an additional $3 million or so of depreciation related to some of the call buildings and improvements so that most likely the majority of that is on the self-storage side. So, if you just run that out of some more $10 million to $12 million and as far as the other question goes, that isn't something that we're likely to do in the near term.

Okay. As you look at the industry and you look at sovereign making a billion dollar purchase of self-storage units. When you look at the metrics the people are paying for self-storage it really looks like your self-storage business is worked an extra $100 to $150 of share for U-Haul store. Any comments on the transaction prices going through in the industry and how that relates to the value of your portfolio.

Well, as far as the value of the portfolio, I think is fractionally well, but we’re not really in the market to sell anything as far as the transactions and what we have seen, you mentioned that large transaction they had a couple large ones recently that, I don’t think that we're at the point where we would be willing to pay those multiples for something. Our view is a little bit different as far as whether what our future looks like and talking with our storage team and with Joe, they’ve all been through several cycles we have been in this since the late 70s. And it’s going to go down, it goes up and down and at this point I think there is probably more value there then in your opinion more value there are the once listed but I guess I don’t have a much more of a comment on that, I’m not sure what it go with that one.

Okay. And actually on the capital structure obviously a very decent amount of cash line on the balance sheet, you had a nice dividend being paid but never a regular dividend being paid any thoughts about the capital structure paying dividends, repurchase shares and mortgage if you win in the future or about.

Well, we have been doing fairly on routine both on regular - cash dividends, I know that the board and management appreciate the flexibility that it gives us to be able to kind of control those distributions in light of what our capital needs might be in. I mentioned it in an answer earlier just about the - it looks like we're seeing a large piece of cash but we’re also sitting on some large common encumbrances or cash that needs to be spent at - it’s not properties that our treasury team is really good at going out and getting debt financing but you have to have some income attached to that and on these development projects, you're going to wait a couple of years before they can do - really do a good job of financing them. I think we’ve been keeping one eye on the development pipeline and one eye on the cash and we’re probably more concerned about raising debt than we are at trying to find ways to distribute the cash.

Okay. Outstanding job, Jason. Thank you very much.

Our next question comes from Jim Barrett of CL King & Associates. Please go ahead.

Jason just a point of clarification, you mentioned that the company was unable to meet demand in the second half of last year for trucks and then you mentioned that your team also delayed the sale of used trucks in the March quarter given the fact it was - presumably demand was there and they chose to instead sell the trucks in Q2 and Q3. I’m kind of reconcile that with the fact that your peak demand is actually in the first half of the year, so should I take those comments literally that you actually had difficulty in meeting demand in the - essentially in your off season?

No, I think this started earlier back in part the busy season where we could have had them and I will break this into two pieces. First, the trucks that we held off selling or the smaller units that aren’t necessary the portion of the fleet that we thought was in need of some additional investments. So the hold off on the sales had nothing to do with the other piece necessarily. And as far as the unmet demand, it sounds like a bigger more macro issue, I think this is just us optimizing, we felt like we could grab some more transactions, if we had the additional fleet in place. So it's one of those scenarios like what we did several years ago with the smaller trucks we saw an opportunity that wasn't being filled and we try to fill it by going with some additional trucks. So in this case I think it is more of a situation that we were six months, six to nine months late on bringing in an area of trucks that we probably could have done a little bit sooner than we initially expected.

And then on unrelated topic, why is the growth of product and services lagging the growth that I’m seeing in rental equipment, we think they would correlate fairly closely?

It’s a good question. We have three things going into that retail sales line. I think what you're thinking of it, which is our boxes and moving supplies which are increasing not quite as fast as the transaction growth is increasing. So there is some improvement that that can be had there, I think it’s a competitive environment for boxes and similar to our competitive posture on trucks is that we’re hesitant to give up transactions. So I think we have increased volume a little bit more than what shows on that and given up a little bit of price. We also do towing and hitch accessories which had a pretty good year this year, and then we’ve had propane which the price of propane has been down and that's kind of slowed the growth of that line to a certain extent. So, your point is still valid, I think that there is some growth opportunity still available on the moving supplies but it’s not quite as bad as what that gross number looks like.

Thank you very much.

Our next question comes from Walt Sosnowski of SRC Capital Management. Please go ahead.

Of the total CapEx in fiscal 2016 approximately how much of it was growth CapEx and approximately how much of it was maintenance CapEx. I know you’ve touched on the maintenance CapEx earlier, but if you could approximately quantify how much was growth and how much was maintenance CapEx that would be great?

It's a relatively small amount. So at the end of the year our truck count shows 4,000 units up, if you were to do an average across the year, you wouldn't see as big of an increase. So less than - that's a hard number to quantify, but I would say less than $50 million would be growth this year. Most of what we saw this year has been maintenance CapEx. I've tried to estimate what our maintenance CapEx schedule deal would look like on a net basis and normally given out a number somewhere in the $350 million range give or take $25 million or so. So I think this year we came pretty close to what we would look like on a maintenance schedule.

Okay, that's helpful. So just to just clarify, so for the full year gross CapEx was about $1.64 billion, and the net CapEx was $969 million. And so what you're saying is that the net maintenance CapEx is about $350 million of the $969 million plus or minus $25 million is that what I hear you saying?

Right. I would point you to - I have a schedule in the 10-K that kind of breaks it into a little bit finer detail for you, so that the amount of the growth CapEx that was spent on rental equipment was $881 million and then you had real estate which was $592 million and then we had a bunch of other stuff in there.

Are you referring to the table on Page 33 of the 10-K?

Yes.

Okay, all right. I'm looking at that now, so keep going.

Then the net number I'm showing is that $881 million then a significant portion of the sales, which is the $539, I think there's a couple pieces of real estate that were sold and we sold from non rental vehicles. So I think if you get down to it where there's some exclusions from the sales, but if you were to take those two numbers and net them, that's going to get you pretty close to what our net fleet spend is.

Okay. When you stated those two numbers which two numbers?

The top number in 2016 with $881 million.

The 881 number and then the 539 number?

Correct.

Okay. And so, but - so if you combine those two numbers, okay, but how does that reconcile to the $350 million net maintenance number?

You take the $881 million and you subtract the $539 million from it, and that gets you to $342 million and there were some other sales of real estate included in that proceeds number. So we add another $10 million or $20 million back.

Okay, I got it, all right. That makes sense. Thank you very much.

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

Thanks Gail. I'd like to thank everyone for your participation in today's call and for your continued interest in AMERCO. I’d like to remind everyone that on Wednesday, June 8 we'll be holding a special meeting of shareholders to vote on - .This meeting will be webcast live through our website amerco.com. And we encourage you to attend this meeting electronically. I also look forward to speaking with you again in the first week of August for our first quarter fiscal 2017 earnings call. And in closing, I want to take a moment to remember our Treasurer, Gary Horton who passed away in March of this year. Gary was the 47 year veteran of AMERCO. He was our Treasurer since 1982 and he was a friend, a kind generous man who dedicated a large portion of his life to you all of team members and its customers and he will be missed by everyone. Thank you very much.

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