U-Haul Holding Company (UHAL) Q4 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Amerco Fourth Quarter Fiscal 2018 Year-End Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sebastien Reyes. Please go ahead.

Good morning and thank you for joining us today. Welcome to Amerco fourth quarter fiscal 2018 year-end 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-K for the year ended March 31, 2018, which is on file with the U.S. Securities and Exchange Commission. I will now turn the call over to Jason Berg, Chief Financial Officer of Amerco.

Thanks, Sebastien. I'm speaking to you today from Phoenix, Arizona. After a few minutes of some prepared remarks, we'll turn it over for questions-and-answer session. Yesterday, we reported fourth quarter earnings of $0.56 a share compared to $0.49 a share for the same period in fiscal 2017. This last quarter, we recorded an additional net tax benefit of $16.5 million associated with our insurance companies recognizing the effects of the Tax Act. Excluding this item, we had adjusted losses for the quarter of $0.28 a share as compared to their earnings last year of $0.49. For the full year of fiscal 2018, we reported net earnings of $40.36 a share as compared to $20.34 per share in fiscal 2017. However, as you recall, both of these years had some significant one-time items that we wanted to break out separately. So included in the results of fiscal 2018 were two of these events. As discussed in the third quarter conference call, we closed on the sale of portion to Chelsea, New York location. That gain, net of taxes, accounted for $7.34 of our earnings per share for the year. The other event was the Tax Reform Act and the net benefit for this for the full year was $18.16 per share. And I also want to remind you that last year's results included an after-tax benefit of $0.79 per share associated with our settlement of the PEI litigation that resulted in a reduction of operating expenses of $24.6 million. So we feel that it would be a useful supplemental measurement to look at our earnings excluding these items and that results in adjusted earnings of $14.86 per share for fiscal '18 compared to $19.55 per share for the fiscal 2017. We do have a reconciliation of all of these amounts included in our press release as well. Equipment rental revenues increased a little over 6% or about $31 million for the quarter, and we've finished the full year with a 5% increase or $117 million. For the quarter, the increase was primarily the result of transaction growth combined with slightly better revenue per transaction. And for the year, revenue – the revenue increase was more closely matched to the increase in transactions. During fiscal 2018, we increased the number of trucks and trailers in our rental fleet. [Indiscernible] revenue growth has continued into the first half of the upcoming quarter. Capital expenditures on new rental trucks and trailers was just over $1 billion for fiscal 2018 compared with $1.179 billion the year before. Proceeds from the sales of retired equipment also increased from $475 million in fiscal 2017 to $491 million this last year. Our initial projection for rental CapEx going into fiscal 2019 is to once again spend approximately $1 billion. That's before netting any equipment sales proceeds against them. We are projecting another improvement in proceeds from the sales of equipment going into next year. Our current expectations for net CapEx is $450 million. At this point, I believe that this would result in a nominal increase in the size of the rental fleet. Storage revenues were up just under $10 million or about 13% for the quarter, and also 13% for the year or $37 million. A portion of the revenue gain came from growth in occupied rooms. If you look just at our occupied room count March 31 of this year, we had an increase of 23,000 rooms compared to the same point in time last year. That same statistic for March of 2017 showed an increase of 19,000 rooms compared to 2016. Moreover, the occupied rooms included in this amount that we added via the acquisition of existing self-storage facilities accounted for 1,700 fewer filled rooms this last year than the year before. This all points to improved organic rental. We are continuing to see an improvement in the underlying revenue per square foot as well from increasing rates. I want to give a little bit more information related to our reported occupancy figures. The reported average occupancy that we put in the 10-K for fiscal 2018 was just under 72%. This last quarter, my analysis team looked back over that same period of time and we broke the occupancy between facilities opened 36 months or longer and those opened 36 months or less. Our average occupancy for locations opened at least three years was 84% for the year while those less than three years ran an average of 39% for the year. Another statistic highlighting the health of our self-storage portfolio, at March 31, we had 43% of our owned locations with occupancy greater than 90%. That's an increase of 35 locations compared to the same time last year. Our real estate-related CapEx for the year was $607 million as compared to $484 million last year at this time, and we've been attempting to redeploy the proceeds from the sale of our Chelsea location. During fiscal 2018, we added right around 3.7 million net ratable square feet to the storage portfolio with about a third of that coming online in the fourth quarter. Operating earnings in the Moving and Storage segments decreased $40 million to a loss of $11 million for the quarter and for the year, if you exclude the real estate gains, operating earnings decreased by $168 million to $520 million. I’d like to go through a bit of a laundry list of items that led to this. The single biggest driver of the increase in operating cost and the related decrease in operating margins has been the additional maintenance and repair that we have incurred this year on the cargo van and pickup fleet. For the quarter, our total repair costs were up $18 million, and for the year, they were up $73 million. This became an issue on the income statement in the second quarter of fiscal 2018. So, we are approaching the one-year mark and we feel like progress is being made. Customer behavior started to change and we are seeing increased sales of the damage waiver products, but there remains much that can still be done on the repair expense front. During the fourth quarter, we issued a bonus to all of our employees in relation to the enactment of tax reform. That bonus was approximately $20 million. Absent this bonus in the quarter and also excluding the second quarter field bonus that we discussed back during that call, we had minimal margin decline due to personnel expense during the quarter and in fiscal 2018. Depreciation and lease expense associated with the rental fleet increased to $11 million for the quarter and $51 million for the full year. We have continued to invest in the fleet, and this has resulted in the average fleet size over the course of fiscal 2018 being up 10%. Comparing fourth quarter to fourth quarter, the average fleet size was up 8%. Gains on the sale of rental equipment were down a little over $4 million for the quarter and $20 million for the year. Over the last several calls, we've been discussing our challenges and trying to increase sales volume. We've had some success with this over the last two quarters. Over the last year and a half or so, we faced challenges that we've created, namely the damage to the units along with manufacturing challenges in the form of recalls and delivery issues. However, on the positive side, what's remained constant through all of this has been the underlying consumer demand to continue to rent these units. Property taxes, building maintenance, and utilities are three of the larger non-personnel expenses associated with new properties that we've been buying. These costs increased by nearly $11 million for the quarter and $26 million for the year. During the fourth quarter of fiscal 2018, we declared a $0.50 per share cash dividend that was paid in April. This brings the total amount of cash dividends declared for the fiscal year to $2 a share. We continue to maintain conservative cash balances. At March 31, cash and availability from existing loan facilities totaled $882 million that are moving in the storage segment. With that, I would like to hand the call back to Gary so that we can begin the question-and-answer portion of the call.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from George Godfrey with C.L. King. Please go ahead.

Thank you and good morning. Thank you for taking my question.

Hi, George.

Thank you. The $20 million bonus that was paid in the fourth quarter this year, what was that amount a year ago? Was there one?

We didn’t have one a year ago.

Okay. So that was strictly related to the tax benefit then?

Correct. It was a combination of recognizing the efforts that have been put forth and then also recognizing the efforts that we need to put forth going forward. So the Tax Reform Act, it's a tool that is allowing us to reinvest back in the business, but our team needs to now take that and actually create value from it. And it was meant as a thank you and as a motivation that if we can create more value and actually kind of turn the tide here and increase the operating earnings, perhaps future bonuses might be possible.

Got it. Thank you for that. And does that appear in the $460 million operating expense line item or is it spread out amongst other expenses?

That would be in operating expenses.

Okay. And then you talked about additional maintenance and repair on the fleet being up this quarter and for the year. Is that reflective of the maintenance itself being more expensive meaning inflation or is the truck -- the average truck being serviced older or could you just go into more detail on what the $18 million and the $73 million? Is it that renters are damaging the trucks more? If you could just be a little bit more granular on what exactly is driving that maintenance or repair. Thanks.

Sure. Great question. So typically, what our maintenance and repair costs are is doing routine preventative maintenance on the fleet. So, as I mentioned during the prepared remarks, our average -- the number of trucks in the fleet on average increased close to 10% this year. So there should have been an increase in repair and maintenance costs just because we had 10% more trucks during the year and we did see that. But on the positive side, the underlying preventative maintenance that we're doing is falling within expectations. It increased a little bit less than the size of the fleet size increase and really didn't contribute to, I would call, the margin decline. So the -- what contributed to the margin decline was primarily these additional repairs, largely cosmetic, to the pickups and the cargo van portion of the fleet that we need to take to sale. So, what happened was a year or two ago, the equipment that we were sending to auction was going there with too many dents and dings. It wasn't cleaned up enough. So we began a concerted effort to fix the bumpers, fix the dents, replace windshields, do all those things that you need to do to increase your ranking going into the auctions. That is the bulk of the repair and maintenance flux year-over-year, and that's the piece that we believe over time now we're going to be able to manage those costs down, and that we don't think that that's a structural increase in repair and maintenance. So, I can't tell you that we're 100% there. I’d say that we're probably halfway there, and the next two quarters are going to be very telling in how well we've done that because the issue kind of – the anniversary of it here is going to be the second quarter of 2019, and we'll get a better sense then of how well we've done. I will say that we have been collecting much more from customers for selling them the damage waiver, so that if they do any damage, it’s covered. We've been doing – to a lesser material extent, we've been collecting more damage payments from customers for damage that they have done. So, I think we still have more opportunities on all three of those sides. I think during the checkout process and the check-in process, our team has been doing a better job of revealing the equipment at the customer.

Great. Thank you. And then, my follow up. Thank you very much for the occupancy rate on properties owned 36 months or more or 36 months or less. If we just focus on the ones that you've owned for 36 months or more, 84% occupancy rate, if we look at the revenue per unit or revenue per square foot three years ago versus today, is that on average up with inflation, up more, or flat or down? Do you have any sense on where that's trended relative to inflation in the market? And thank you.

Sure. I wish I had the presentation we gave at your conference here in front of me, but my sense of it is as we've been – our revenue per square foot has been increasing north of 3% to 4% per year over the last several years. And I think we saw for fiscal 2018, that number was actually a little bit higher, probably closer to 5%. And that's a function – and that's all units. That’s not just the units that are three years and older. So, we're still seeing some healthy improvement in rates that I think is a little bit ahead of the inflation factor.

Great. Thank you very much.

The next question comes from Ian Gilson with Zacks Investment Research. Please go ahead.

Good morning.

Good morning, Ian.

As we look at the transaction rate, was the utilization up or were the fee increases that added to the revenue apart from the increased number of trucks?

So far our equipment rental revenue, mostly transaction driven. In the fourth quarter, we saw miles per transaction increase a little bit which – that’s what kind of gave us the spread between revenue increase and transaction increase. As far as utilization goes, no, we – the increase in trucks was greater than the increase in transaction. So we did not recognize increasing utilization for the year.

Okay. And how big was Chelsea in the revenue stream considering you've cut back on the space there? Is that going to have any material impact?

No. It – what’s getting cut back there or what got cut back there was the storage revenue. The remaining building that we have – our operations team when I spoke with them, they think that they're going to be able to maintain our equipment rental numbers. I think that's going to be a challenge. But – so even if they come close to it, that won’t be a huge impact. But what we will lose is the storage revenue, but I think we've more than offset that through the reinvestment of those funds back into additional storage property. So I don't think it will be something that will be big enough for anyone to recognize.

Okay. On the sale of the, let’s say, repaired trucks, is it better that you sell them damaged and take the loss rather than spend the money on fixing them and then selling them?

That’s – it's an excellent question. It's a little bit more nuanced process. I think what we ran into was we were going into a market that if we didn't do the repairs, they weren't going to really sell at all. So now we're at a point where we're trying to figure out what the right amount of sales or what the right amount of repairs are in order to get the best bang for our buck. So I think there's a calibration process taking place right now. Our fleet management team here – our sales operations team here has been able to pick up the volume, meaning over the last several calls, Joe has been discussing that we’re back several thousand units of sales. I think we've made some progress there. We may have given up a little bit on price to do that although from what I've seen over the last quarter, it seems to me like our prices have not been going down any more. They've hardened up a bit and we've caught up a little bit in volume. So I don't think we're nearly as far behind. So when we first started this, it was more a case of we need to do the repairs to get them to sell. Now I think, Ian, we’re more – we’re at a point where your question comes more into play, and that is what is the right amount of repairs to do in order to maximize the sales process.

Okay. Now if you increase the sales of that, let's say, the tail end of the fleet, when do you think we could see those significant expenses, the actual expenses sort of disappear because those trucks have been sold, in the middle of this current fiscal year or towards the end?

Well, we've been kind of targeting the second quarter of this coming year is going to kind of be – we're hoping it’s going to be an important inflection point for us. If you hear what I’m saying, I don't have 100% confidence in that yet. But from where we're headed, I think we have a really good shot of seeing improvement, hopefully some part of that in the first quarter but certainly into the second quarter.

Okay. The 24/7, presumably 365 initiatives, now that's completing the company-owned spaces, correct?

Yes.

Is that extended into other major affiliated dealers or…

It's working its way through our dealer network right now. So April was the one-year anniversary of our launch of that tool, and we continue to see customer acceptance of that tool. People want to use it. And now what we're seeing is, for the last – I’ll say the last four months, the ratio of transactions via 24/7, the ratio taking place at dealers has been steadily increasing. So, that's telling me that there's going to be a broader acceptance of the tool by our dealer network. I think we still have a lot of blue sky there to harvest, but it looks to me like it's starting to take hold.

Okay. On the security of those shops, there's a little lockbox, correct? That you open…

Yes.

That you open with an app?

Well, you use the app. And then as part of the app, you're interfacing with an actual person here at our call center so that we can verify who you are and that you're the person who’s supposed to be renting the truck and the person on the driver's license. And then, once all of that is confirmed, then our team provides you with the code that's necessary to open up the box.

Okay. So, the IT security is pretty good?

Yeah. I feel comfortable with how that's working out. Our – right now, our concern there is just the live verification process. It seems that the IT structure behind it is holding up just fine. And what we don't have is we don't have some sort of a wireless connection to the lockboxes. That can all be handled in a little more physical process. So, we have been able to take that complication out of it.

Okay. And lastly, is there any intention of making a dividend – a regular dividend so that it appears on the financial site as a dividend per share? Because you're not getting any benefit in valuation from an irregular payment.

That is completely understood and has been communicated, but a change has not been made yet.

Okay. Great. Thank you very much.

You're welcome.

The next question comes from Craig Inman with Artisan Partners. Please go ahead.

Hey, guys. Can you all hear me?

Yeah. Craig, it’s good to talk to you again.

Hey. How are you doing? Hey. A question. So the fleet grew about 8% year-over-year, but it looks like in CapEx and I think in the comments, you all are saying the fleet will grow kind of nominally this year. Is that right?

That's the plan right now.

Okay. And is that to kind of improve the utilization or you just have enough trucks out there and let it kind of grow into that dynamic or – I'm just curious because it's been growing a good bit in the last few years.

Yes. So a few things there. The fleet grew a little bit more than what was initially anticipated, at least by me, and I think the majority of – I mean, we did increase the amount of equipment that we bought versus the original projection. But then we also sold fewer box trucks than what I thought as well. So the quickest way that we can grow or shrink the fleet is through the sales process versus the acquisition process. So we sold fewer trucks. So going into this year, I think there's a chance that we may sell more box trucks versus what we did in the previous year. We are still facing the complication – and complication for our rates and distributions team on the equipment side is we continue to add additional locations into the system, additional company-owned locations and additional dealers. So you keep trying to find the right mix, the right amount of equipment that we need in order to service this growing network. I think that there's certainly a focus here on improving utilization. The number one way we increase revenue isn’t through raising prices; it’s through increasing utilization. It’s through increasing utilization. And we certainly now have an opportunity to increase utilization as that really hasn't happened now for the last year or two.

Yeah. That makes sense. Yeah. I’m not – that definitely makes sense, just it should improve the earnings. And the disclosure around the self-storage is great on the three-year. Is there any change there to kind of the capital plans as of now? Just this last year was the first one where we promised all revenue growth lower than square footage growth. But you guys are still seeing returns you expect or has there been any change there?

No. I think we're really excited about that, and we have – I looked back at how projects are progressing. So, I have the analysis team go back and pick out properties that have reached their five years in maturity now this last year, but those are probably that should have reached stabilization. And they were able to identify a 135 of those locations that have now reached the five-year maturity point. And of those, the average occupancy at those locations now is 82%. 60% of those are over 85%. And we looked back at how they were progressing year-by-year, and that grew – that 135 properties matured pretty much how we would have projected them to mature. I think if there was anything that was a little bit different is that early occupancy went faster and then the later occupancy was much slower. So, I think we got up to 70% within three years, and in the next two years. It took us two years to get another 12 to 15 points of occupancy. So I think we're encouraged by those. Now, we have a lot of ahead of us. We have – I think, this last year we closed on 143 acquisitions. I think we have 112 active projects right now in development, close to 6.5 million of square feet in those. And then, we have another 87 properties that we don't have plans for yet. So this is a – it's a multiyear development plan. But from what we're seeing right now in the rent up, it appears to be renting up as we expected. So I'm encouraged. I was a little concerned, but after I kind of was able to sit down through some of these analyses, I'm encouraged by what I'm seeing.

So that 82% level at five years, those returns are working for you guys in terms of getting those pre-tax unlevered returns?

Yeah. Our target typically, depending upon the market, 85% or 90%. So…

Okay.

While the average is 82% for – the median is 88%. So, we have a few facilities in there that have kind of dragged that down. But the majority of them are past that 85% point and those are doing what we expected and to your point, hitting we price them.

Okay. One kind of random question, I noticed the Canadian market, which you guys break out in the K. Earnings have gone down a lot over there. It's not meaningful in terms of the total business, but it's a big change. I was curious if there is anything specific there or what could be going on.

Sure. Yeah, it did. It does kind of stick out as the percentage base is a pretty big decrease. And a few things there, they’ve faced the same challenges that we have in the United States as far as development. We’ve been adding, I think somewhere, over the last two years probably 10 to 15 projects up there that are in development versus existing storage products. So they’re saddled with some of the same things, property taxes, utilities, personnel costs. I think when we did the tax reform bonus, even though it’s not Canadian tax reform, those people up there are part of our team and receive something as well. And then, also, during the year, my treasury team placed up, in U.S. dollars, I think it was about $65-million loan on real estate up there. We felt like we underleveraged it, so the number this year includes some additional interest expense that we threw at it.

So it’s non-fundamental? Okay.

No. Up there, we’re still seeing improvement in storage revenues. We're still seeing improvement in equipment rental revenues. So the basic revenue makeup still looks a lot like what's happening to U.S.

And then just lastly, how many used trucks kind of extra do you think we have right now just waiting to be sold, from the recall, just kind of the truck overhang?

I think we’ve worked that down, at one point, I think we were 5,000 to 7,000 heavy. Now, I think it’s probably down to a couple of thousand.

Okay. That's good. Okay. Great. I appreciate it.

Thanks, Craig.

Thanks.

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

Hi Jason. In the fourth quarter, we had an extra $20 million expense for bonuses because of tax reform, so basically $1.75 after-tax expense this quarter that didn't appear last year.

I think that's how it works out. Yeah.

Okay. And in total, we paid $40 million of bonus this year that we didn't pay last year.

Yes.

Are these onetime things for salaries where you would expect paying $40 in bonuses out of nowhere regardless of operating performance in the future years?

No. No, clearly not. The – I believe we had this discussion also back during the second quarter when we did the large bonus for our field management team. And then on the tax reform policy, as I mentioned to George a little bit earlier, that was – it’s meant to motivate us to create additional value and performance. Now, over the last two years I would say that there's been some things that have happened that clearly we have room to make up before something like this happens again. Now, I am not the final decision maker on that. However, my suggestions are that we need to have an improvement in underlying performance before we think about doing something like that again.

Sounds like the right idea, Jason. You gave us the statistics on the self-storage units that we have held over three years at 84% occupancy in 2018. Do you have that figure for the prior year?

I do. And – but I had them run that exact calculation then, but with facilities that would have been three years last year. And I think what it shows is we’re down about 75 basis points on both. So, it's not – I asked them for that kind of late in the game, so I’m not sure I’ve had a chance to really think through what that means because we have some facilities that would have shown up in the – before three years but then jumped up. So I think that was a big number. So, overall, if you were trying to analyze kind of same-store occupancy, I think they were probably down somewhere in the 50- to 75-basis-point range this year.

Okay. And overall, when we look at the capital strategy of the company which doesn't appear to be focused in proper balance between long term and near term, I know when you look at – gee, we’ve put on 15 million square feet of self-storage over the past several years and it's going to be a wonderful long term. But are we indeed doing too much investment spending that is hurting us in the short term? When I look at overall occupancy rates because self-storage comes on at 5%, so it's an impact to earnings. When I look at – we're spending so much on buying trucks such that our utilization rates actually declined a little bit this year, shouldn't we be looking toward a proper balance in how can we optimize – not maximize but optimize utilization rates, optimize capacity percentages, have a really well-defined capital program such that our dividend is not an irregular dividend but part of the program? And as you look at the returns on investments, you look at the whole piece. I mean we have a company where – and it – when I look at Life Storage, which is the, I believe, the fourth largest self-storage, and we're the third, their market cap is over $4 billion. So if you say ours is worth no more than theirs, two-thirds of our market cap is attributable to self-storage and only one-third to a proper – to a profitable truck rental business. When I look at that and say, wow, we are massively undervalued, we should have a dividend program. Given how undervalued we are, we should have a very large share repurchase program. And maybe we're putting too much money in on an annual basis into building self-storage because, as you say, gee, our five-year program to get us there. Well, that's kind of a long time for an incredibly heavy period of time. Isn't there a point of time when we begin to harvest more than invest? And aren't we there now because we've invested so much over the last five years which is wonderful the long term? But isn't it the time to more harvest and optimize our capital expenditures and have a more defined – well-defined capital program?

Jamie, great insight. I always forward to hearing your comments on the call. That debate is certainly happening here internally, and those exact thoughts are being discussed actively. We have a great deal of capacity for future revenue growth that I think there's a great argument for saying, let's harvest some of that on the truck and trailer side, as well as the self-storage side. So, I don't have a definitive answer for you other than that's a very serious discussion that's taking place here and it's being considered.

Well, if I could put forth a suggestion, a $4 per share annual dividend paid $1 quarterly would certainly be a reasonable return. A $0.5 billion share repurchase program especially at these levels which seemed to be a reasonable use of our capital. And just tone down the self-storage and we can more spot pick our better potential unit. As opposed to doing 3 million, I'd rather do 1.5 million of higher potential units and have our capital allocated elsewhere.

I appreciate the thoughts, and I'm sure everyone who was listening is taking them into consideration as well.

Okay. Thank you, Jason.

You're welcome.

The next question is a follow-up from George Godfrey with C.L. King. Please go ahead.

Thank you. Because there's been so many moving pieces on the tax side, what should we use for pro-forma modeling assumptions on the tax rate in 2019? Thanks.

Sure. Yeah. This year was really ugly because there’s a partial-year rate kind of a compound rate. Going forward, we're expecting our GAAP effective rate to be approximately 24.3%, I think, is what we've reported.

Thank you.

You're welcome.

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

Thanks, Gary. I'd like to thank everyone for their interest in AMERCO and for your support, and we look forward to speaking to you again. Our first quarter conference call, I believe, is going to be on August 9th. So I look forward to talking to everyone then as well. Thank you very much.

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