Good morning, and welcome to the AMERCO's Second Quarter Fiscal 2018 Investor Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sebastien Reyes. Please go ahead, sir.

Good morning, and thank you for joining us today. Welcome to the AMERCO's second quarter fiscal 2018 investor call. Before we begin, I'd 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-Q for the quarter ended September 30, 2017, which is on file with the US Securities and Exchange Commission. I'll now turn the call over to Joe Shoen, Chairman of AMERCO.

Good morning, everybody. A delay of the sale of some of our trucks due to rental recall and also due to our own missteps on some of our sales trucks has had four effects. Less gross and less net sale proceeds, increased repair, increased depreciation, and delay in the introduction of new units. It will take at least six months to normalize results and it could take longer. In the interim of course, we're focusing on tightening up on expenses that are controlled. The retail frontline is still performing well. We're continuing to have new storage product come online at a faster than our ability to rent up rooms. With what we have in the pipeline, this will continue for at least a year. There is a huge amount of new product coming online in the self-storage industry beyond what we're adding. This will no doubt create localized oversupply. I believe we have been thoughtful and will continue to be thoughtful on where we have net additions or add new locations. So, I don't see that impacting us very much. Our packing and moving supply business remains hugely competitive and so far, we're continuing to adapt and react to this marketplace successfully. The U-Haul truck share 24/7 program is working well as a defensive move and as a cost reduction move. It's still not clear whether it will grow the market or how much it will grow the market. We have done transactions since March at over 13,000 locations. So, our network is in place, our IT is working, the customer is learning about it and we'll see how that develops through the spring. Due to development and implementation costs, truck share 24/7 is probably not helping earnings yet, although I expect it will. With that, I'll turn the call over to Jason and he'll go through the numbers in more detail.

Thanks, Joe. Yesterday, we reported second quarter earnings of $6.36 a share, that's compared to $9.01 a share for the same period in fiscal 2017. All of my period-over-period comparisons are going to be for the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017, unless otherwise noted. Included in the results of fiscal 2017 was an after-tax benefit of $0.79 per share associated with our settlement of the PEI litigation last year that resulted in a reduction of operating expenses of $24,600,000 last year. Excluding this after-tax benefit, adjusted earnings were $8.22 per share for the second quarter of fiscal 2017 last year. Equipment rental revenue increased 4% or $29 million. Increases in both one-way and in-town transactions led to the improvement in revenue with transaction growth slightly outpacing the reported revenue growth. Hurricanes in August and September led to some displacement of the equipment rental business. However, they have not appeared to have had any lingering effects on our business. The number of trucks in the rental fleet continues to be higher than at the same period last year. The growth in the truck fleet is a combination of planned new trucks combined with some holdover of units that we would have expected to have been sold by now. U-Move revenue growth continued into the month of October. Storage revenues were up over $8,300,000 or about 11%. Revenue growth continues to come from occupancy gains at existing locations, occupancy from new facilities that we've added, and we are still seeing general improvement in rates. Spending on real estate-related CapEx for the first six months of this year was $258 million, which is just slightly higher than the $252 million we spent last year at this time. From October 1, 2016, through September 30 of…

Thanks, Jason. Operator, let's go ahead and go to the Q&A segment.

[Operator Instructions] And our first question comes from Jamie Wilen from Wilen Management. Please go ahead.

Just two areas. One, you had a $20 million payment in bonuses to employees and the last year you made a $5 million payment in bonuses. Why such an increase without a commensurate increase in profitability to make the bonus payments 4 times, what you did last year?

Well, Jamie, that was pretty much my call, right or wrong. The negative impacts in our results has very little to do with the people working at the frontline. There has been a tremendous confusion on compensation caused by the proposed Obama rules on salaried versus hourly people, which jacked around the wages and created a tremendous amount of uncertainty with the sales force. And it's still not clear what the Trump administration is going to do with those rules. And basically, it's my judgment that this was needed to get these people to be optimistic enough to go out there and create the sales that we needed. So that's what happened.

Okay. So that's a one-time hit to the quarter, not an ongoing thing? You don't expect to do that in the future? You're near leveled out at this moment?

I believe so, yes.

Okay. As far as self-storage goes, you've added three million square feet again this year and you've done that in the past couple of years, and this is incredible investment spending for what will happen in the long term for U-Haul self-storage. But as you say, it takes a couple of years for these self-storage facilities to become profitable on operating basis. I think you said it took four years before it would contribute. Can you kind of go through the program for what's it cost us to build one million square feet of self-storage space? And how much of a - we're carrying this in the short term for the long-term benefit, which is a great thing, but I just want to see how much of a short-term hindrance it is in year one, two, three and it goes away in year four, then how much of a long-term benefit it can be on a contributory basis in year five and six?

I'll let Jason take kind of take a cut at that thing.

As far as how much it costs us to develop the product, it varies by state. However, I'd say an average of the projects that we have in development right now, to build out the projects, buy the land, and in many cases, the existing buildings, we're running somewhere between $115 to $130 a foot on that. What we've seen on - I've looked at some of the buildings that we've built over the last several years. And generally, we're almost over 90% of the time we're beginning to cover costs at the end of the year two. And then after year two, then it begins to add something, it would begin to hit the return numbers closer to year four or five.

Okay. When you say cover costs, do you include depreciation in that?

No, it's more - that is more cash and operating viewpoint versus depreciation.

Okay. And obviously, once you build these facilities, there's little in the way of capital expenditures over the next many years?

There's routine repair and maintenance, but certainly in the first few years of its life, where we just finished building it, those shouldn't be significant. The roof is in good shape, the HVAC is in good shape. We shouldn't need to do anything to the parking lot so it should be in pretty good shape.

Okay. So, for example, the three million square feet you put on this year it's going to cost you approximately how much on an operating basis?

Over the - let me see where I can find the numbers for the - we've added $3.5 million over the last 12 months. And total real estate spending over the last 12 months has been a little over - right on $510 million. Now that's not attributed just to the projects that were finished. So that might not be the best comparison. I don't have those figures for you right now exactly how much that $3.5 million cost us per foot.

No, but I think, how much does it cost you on an on your - all these things are filling up, there's an operating loss that's going to have to be incurred its part of the investment spending. In aggregate, approximately these 3.5 million square feet we'll lose in year one prior to depreciation is [indiscernible].

Jamie, I don't have that number for you right now. I'll try to get something put together and bring everyone up to speed on that for the next quarterly call.

And then.

[Indiscernible] question Jamie, I don't know either. I don't - the way we - that I see it all the time is by location, okay? And on a by location basis, it would be nothing for a location to lose $200,000 its first year, that I can tell on a by location basis. Now it gets - I don't see the - Jason kind of does the macro accounting, but how we actually manage is, that we manage it back to every location. And this spring, we went through and had a big exercise to try to better understand how we can, by location, better manage that start-up losses. And I think we've learned a little bit as we went through that, that will help us. But it's - you're going to lose a fair amount of money just being open the hours. And we also probably lose a little more than the industry average because we're running a full scale retail store, not just a storage place. And the retail store or the U-Haul business also takes a fall of the ramp up. Now it ramps up faster than the self-storage in most cases. So, they get pretty ramped up about the second year. But I wouldn't - I think I'd be fair to say that the first year of the U-Haul operation in a totally new place, the U-Haul operations loses money, by the time you put all the different costs and they're fairly proportioned to it. So, I've not seen a great deal of success of showing a profit after all expenses including depreciation and interest until the third year, maybe the end of the third year. So, it varies by where you are in all of this. But those are - that's kind of my experience.

I'm just trying to get a flavor, as we're putting on the 3.5 million square feet, does it cost us $15 million to $20 million this year, but then by the time we hit year four and year five, we're making $15 million to $20 million on what we put on this year. And obviously, we've put on, over the previous years, things that are at various stages of maturity that first were profit inhibitors and will become profit contributors. Is that aggregate number kind of a ball park, $15 million to $20 million today? And we'll make $15 million to $20 million back five years from now on these guys?

I don't have that number and Jason's got a quizzical look on his face. I would say that another way that might be helpful to you until Jason can get you specific numbers, we're now in our third year of significant expansion. So, this will start to normalize. In other words, the three-year-old ones are starting to kick a little money out now and so we're feeding our growth. The kind of - the ramp up costs you more than it does once it starts to normalizing, on the course whether we could maintain that pace depends on whether we can continue to rent up units and also availability of capital, which both those look okay right now. So, I would expect it will kind of normalize and you'll see less interruptions or less events that affect a particular year. And of course, as Jason has said a couple of times, three and four years ago, we were able to add places that were existing. They were maybe half rented up, maybe a little more than half rented up. And that basically puts you into them, you're like - you're starting at the 18-month period. So those that Jason was putting on three and four years ago were cash flowing a lot quicker. So, as we've had to get into more development and conversion, which I think he's talked about before, it's doing exactly what you're talking about. And it seems reasonable we would have some kind of a number for you, I just don't have it.

Okay. And as you move forward, you mentioned the amount of activity in this space. Would you expect to be able to maintain that pace? Or are you going to cut back from the $3.5 million square feet to your additional level?

Well, right now, I'm expecting to maintain it. But this is just - you're constantly searching for pockets, okay? And there's a lot of sharp people out there and a lot of people with availability of capital. So, I saw a project recently where - when we finally got to where we were breaking ground, someone else had already broken ground within 0.5 mile away. So, I mean, we're both going to kind of screw up each other's projections. Because of course, they came to the same conclusion we did, independently of each other probably. And for whatever reason, either they started earlier or got quicker, they got in and sometimes it's the other way around, we're in and - or we're under construction and somebody else is starting. So, when you get that, you're going to slow each other down, but I don't think that's going to weigh us down in any macro sense at all. There's still a lot of pockets out there but you have to do your analysis or you're going to end up in a situation that will be a very slow rent up. When we put dogs [ph] on board, it's taken five, even seven years to reach normalized occupancy. You make a big mistake there, you're going to push that expense well into the future. So, I'm aware of that and trying very hard to avoid it. But undoubtedly, we'll make mistakes at three or four locations, but I don't think macro is going to come through at any significant amount. But I don't want to be gloom and doom, but there's a little of a reckoning that kind of this business as always does when everybody who knows a builder and knows a banker goes into it. And so that will happen but at that spot, we'll be in decent position in occupancy, and I would expect that we'll profit from the occurrence of that, although short-term it'll be a little uncomfortable.

Okay. And then lastly as far as the hurricanes, was there any significant impact of your business or is that just a - natural disasters come and go?

We've skated on this. We had very little building damage, relatively speaking. Either we were better prepared or God just put the storm so it just didn't hit our geocode. We came out okay. We had a lot of costs. We moved fleet and secured buildings in advance of the storm and then we had to relocate the fleet and unsecure the buildings. So, it bumped some costs but it - we didn't see capital losses like we have in other events of this magnitude. So, whatever was that, the one up the East Coast, Harvey or whatever, I forget the name of it, but three or four years ago that thing smacked us and of course, Katrina smacked us. So, I think we view this as we got off easy this time.

But any impact on the truck rental business from volume?

Localized, very big impact. But net, I would say it was almost neutral on transactions. So, we had some people of course, running away ahead of the storm and then we had some people running back with the building supplies. But then we had a four-day period due and no rentals at all, so I think it probably it kind of normalized. We sold a few extra boxes, we sold a little bit extra propane, which we expect to do when there's a weather event. The cities are becoming more and more vocal on these evacuations and telling all businesses to close. So, we had more stores closed than I would've liked to seen but this was a situation where the mayor was saying he wants all businesses to close. And we closed, although I'm kind of a guy that would stay open to the last minute myself but. So, we complied with that. So, we lost some but I'd say we picked up a little bit on both sides of it and it probably broke even transaction wise.

Okay, thanks.

And our next question is from Ian Gilson from Zacks Investment Research. Please go ahead.

You mentioned, Jason, about a deferred tax liability on the accounting for the sale of the property?

Yes, that's related to the sale of the portion of the Chelsea, New York location.

Okay. That is just a book number but it is an actual tax liability, right? So, on the income statement, there will be a tax impact, am I correct?

Yes, on the income statement, we will tax effect it. However, if we never sell any of the replacement properties that we've purchase, we're never actually going to have to pay that tax. So, it's a manageable situation where I don't think we have any intention where we're going to do something that would ever trigger an actual cash tax liability.

Okay. Do you have any idea of the amount on the income statement?

It'll be priced 35% of $188 million.

Okay, okay. Did I hear you're saying that you need 5,000 more trucks to get back to a normalized fleet level?

No, we need to sell 5,000 more trucks. We got too darn many trucks right now, Ian. And so, we got behind on truck sales through the summer. Some of it was our own missteps. But what happened was Ford issued a recall on every transit van in our fleet, which was - approached 19,000 trucks. And under legislation passed during the Obama administration, we're prohibited from selling a truck that has an open recall on it. Ford had no parts availability so we had to stop sales. Now this, of course - it just ruined our truck sale program. So, we now have parts. We've completed enough of these, we can be selling. We haven't completed the repair on all these vehicles but we have completed it. As part of the repair we'll be reimbursed by Ford as a warranty. They're a stand-up company on that. But the net effect is, is that we're behind where we had forecast on units sold. We're behind on gain on sale and we're up on repair. And then because we're holding more trucks than we intended to, total depreciation is up. So, it smacked us four ways, every one of which was negative. And to clear this up, we must now clear the market at the same time, selling the trucks we normally had planned to sell in December and January, February. So, it really means we have to increase our sales beyond what we had in our plan by at least 5,000 units. And that's going to be a little trickier. To do that and not have fire sale pricing and everything is going to be a little tricky, and we're attempting to get that done. But I've not negotiated that particular event in my life, and it's going to be a trick. I think it will take us six months best case to get us back to normal. And of course, the people I have doing the work I'll get it done, blah, blah, blah. But it's very complicated and there's a lot of pitfalls along the way. So, we're 5,000 trucks heavier than we intended to be at this time a year ago.

Okay. On the increase in operating expenses due to this, have we seen the maximum effect in the second quarter so it would diminish over the next three quarters? Or are we basically - approximately the same in each quarter? How do we stagger that when we look forward?

Well, I think that's a good question. I would say depreciation will stay up at least through June. Repair isn't going to be as bad as it was but repair is going to be up. Now some of that will be offset in a subsequent period as Ford honors warranty claims. But some of it's not going to be - some of it's our own stupidity. And then there's a lot of just, let me call it, G&A costs. Every time we do this, we have to transport the truck in, transport it back out. That's at least $100 each way. So, there's a bunch of just collateral expenses. So, my answer is no, I don't think this will normalize for six months. Now am I working to do better? Oh, you better believe it. Everybody's on goals and all this, but you can only push this so hard. And this is the wrong time of year to be pushing it. Sales, in our experience, are lower through the winter and they're more robust in the spring and the summer. So, we're trying to recover from a bad position in the wrong time of year. So, this is all operating against us. On the other hand, it's a big country and there's a lot of uses for it. And I think one of our enterprising people is going to sell six trucks into Puerto Rico this week, so I applaud that. But we have to sell six trucks a 1,000 times to get where we need to be, so we've got our hands full.

Okay. So - just so to put it in a number and I'm not suggesting it's an actual number, but let's say it was $20 million in the second quarter, are we looking at something like $15 million, $10 million, $5 million, or are we looking at $15 million, $15 million, $15 million? What is the sort of schedule that is likely to happen?

I'd say $15 million, $10 million, $10 million, but I could be - it is a little unknown as the trucks get a little older, you see increased real depreciation and we don't drive that. That's the difference between a model year '16 and a model year '17. It's a little bit anybody's guess. It has to do with the general truck market. But as the truck gets out, at the 18th month it starts to depreciate actually faster in our experience. A real depreciation, okay? So, I think I'd hold that at the higher number at $10 million just to hedge the bet because of course, I don't want to disappoint you and come in higher than that. That would be my guess. But.

Are we looking at the one-way trucks or the about town trucks?

The about town trucks.

The about town, that's short of a quick rollover on a normalized basis, right? You swap them out after 24 months or so?

Yes.

Okay, great. Thank you very much.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

This is Joe. Again, I want to thank everybody. The results, of course, aren't what everybody wanted to see, but I don't see them as a fundamental alteration of the economics of it. We have a plan on each part of this. And I expect we're going to manage through it although it's disappointing to everybody involved, particularly on the truck sales end of it. Sebastien?

We'll talk to everyone again in February, and appreciate your attention on the call. Thank you.

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