U-Haul Holding Co

NYSE:UHAL

Earnings Call Transcript 2018-Q3

[Operator]

Good day and welcome to the AMERCO Third Quarter Fiscal 2018 Conference Call. All participants will be in a listen-only mode. [Operation Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Sebastien Reyes. Please go ahead.

[Sebastien Reyes, Director, IR]

Good morning and thank you for joining us today. Welcome to the AMERCO's third 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 December 31, 2017, which is on file with the U.S. Securities and Exchange Commission.

I'll now turn the call over to Joe Shoen, Chairman of AMERCO.

[Joe Shoen, Chairman, President and CEO]

Thanks Sebastiean. Well, the obvious good news is that the Trump tax reduction has become a reality and it possibly impacts AMERCO beyond the published financial results of course it’s a real ongoing positive economic effect that we will see throughout next year and hopefully for several years after.

I also want to put out a big hoorah for regulation reduction, which Trump administration has also pushed forward, and it could be as impactful long-term depending on how much progress we’re able to make in that matter. However, all this is only as valuable as the income we create by serving our customers, none of this comes into play until we created the transaction.

We had a good quarter for U-Haul revenue and transactions both. We continue the trend of adding self-storage capacity faster than we were renting it up and I'm still going to tolerate that going on, not that we are not trying rent it as fast as we can, but we have the opportunity to add the capacity and I am comfortable rent it up over the long haul.

I'm starting to see some results from the steps we took last summer to improve truck dispositions. We sold a few more trucks, a little more money. It was very positive. However, we recognized repair expense related to this truck disposition that’s unsustainably high. We have taken steps again and going back to our June and July that should turn -- that can turn around, if we can manage it well.

The problem is that it takes really one cycle to process that through, so we are going to see a drag particularly on the repair expenses on the pickup and van fleet through into June. Of course, as always our business remains very competitive. Our aim is to make U-Haul, the customers' best choice.

On the deposition of the savings on a tax reduction, part of it will undoubtedly end up going into some personnel, if only because entry level employees are going to be bid up of the market place. We're already seeing that pressure, lower employment. It's pretty logical. We should expect to see that. The balance of that money I intend to, commit to, upgrades in facility and equipment that I think will payout over the next several years.

That’s pretty much everything. I'll turn it over to Jason to walk you through the details.

[Jason Berg, CFO]

Thanks Joe. Yesterday, we reported third quarter earnings of $27 a share, as compared to $3.33 for the same period in fiscal '17. So as you can see we have credit bid in this quarter that needs to be impact. So I'll start first with the two unique events to the quarter; first, the sale of a portion of our Chelsea, New York property and then tax reform.

As we discussed on our last conference call on October 10th, we closed on a sale -- on the sale of our portion of our Chelsea New York location. Gains for the disposal of real estate have never been reported separately on our income statement that’s because our ongoing operating strategy does not put a focus on dispositions. But with this transaction, we have opted now to break the gains and losses from disposal real estate out from our traditional depreciation line.

So you can see that we have reported net gains from the sale of real estate of 192 million for this year of which 191 million was from the Chelsea sale. This was structured as a tax-free 1031 exchange and we have completed the property acquisitions to fulfill this exchange. With Chelsea gain net of taxes accounts for approximately $7.34 of our earnings per share for the quarter.

The second item is our provisional estimate of the effect. The tax reform act has on our deferred tax liabilities. The re-measurement of our differed tax liability in light of the new legislation, which primarily is the 21% corporate income tax rate and then the provisions covering the deemed repatriation of foreign subsidiary earnings resulted in a $339 million increase in earnings or $17.32 per share benefit.

Our insurance subsidiaries report their results on a three-months lag, so our fourth quarter earnings will include the effect of the tax reform act for them. At this point in time, we estimate that this is going to be an approximate $10 million benefit or about $0.54 a share that will show up in our fourth quarter earnings.

Excluding the net benefits resulting from the initial application of the new tax, we expect our blended GAAP effective tax rate for the 12 months of fiscal '18 will be approximately 34.3%, and looking forward in the fiscal 2019 and beyond, we expect it to be approximately 24.3%. Excluding these items, adjusted earnings were $2.37 a share for the quarter compared to $3.33 per share for the same quarter last year.

From here on now, all of my period-over-period comparisons are going to be for the quarters, unless specifically noted. Equipment rental revenue increased over 6% to $33 million primarily as a result of improved transaction. Within this increase, we saw revenue improvements across both the truck and trailer rental fleets and in both our one way in entire markets.

For the quarter, transaction growth was just slightly less than what we saw the revenue grow at. A number of trucks in the rental fleet continuous to be higher than at the same period last year. The growth in the truck fleet is the combination of planned new trucks along with some holdover of units that normally would have been sold by now.

U-Move revenue growth continued into the month of January, albeit at a rate slightly less than what we saw in the third quarter. Storage revenues were up just under 10 million or up 13%. Revenue growth came again from occupancy gains at existing locations, occupancy from new facilities that we added to the system as well as we are still seeing a general improvement rates.

Depending on the real estate rate related CapEx for the first nine months of this year was $400 million as compared to $378 million last year at this time. Over the last 12 months from the calendar year 2017, we have added 3.5 million net rentable square feet, a little 700,000 of that came online into the third quarter.

Operating earnings that are moving in storage segment excluding the $191 million Chelsea gain decreased by $23 million to $95 million for the quarter. First on a positive note, we are seeing personal costs fallback in line with revenue increases. For the nine months excluding the one-time field bonus, we discussed last quarter our personal expense as a percent of total revenue was flat with last year.

The single biggest driver of the increase in operating costs and then the related decrease in our operating margins, the additional maintenance and repair cost as Joe mentioned that we have incurred this year on to cargo van and pickup fleet. For the quarter, our total repair costs were up about 32 million with the majority associated with this issue.

Depreciation expense associated with the fleet was up $18 million for the quarter. During the last call, we discussed the issue of margin decline due to our self-storage expansion program. In the last three years, we have opened just over 300 new U-Haul locations approximately 70 of these we bought had existing storage on them. The remainder of these locations were conversions or we built up from the ground up. These locations have personnel expense repair cost and property tax.

This quarter my analysis team looked into the NOI earned at these locations over the last three years to qualify the earnings drag associated with them. On an adjusted non-GAAP basis, we used an NOI proxy, and we believe that these locations generated negative NOI of $5.4 million loss. If you take the existing revenues from these locations and apply our average NOI margin against it, this would indicate that these locations are responsible for about $6 million of margin compression for the quarter and about $17 million for the nine months.

These figures are rough estimates, but I think it's reasonable to assume that with the amount of projects that we currently have in development and the appetite for additional acquisitions as this is an issue that's going to continue and pass next year and likely beyond that.

Finishing up, capital expenditures, our new rental trucks and trailers were $788 million for the first nine months this year compared to $870 million for last year. Proceeds from the sales of retired rental equipment were 389. That's down from $403 million last year.

Gains from the disposal of rental equipment for the year are down $16 million, however, for the quarter we did see increased sales volume and increased sales per unit, which resulted in a slight improvement in our gain on disposal of equipment.

With that, I'd like to hand the call back to Joe.

[Joe Shoen, Chairman, President and CEO]

Thanks Jason. We'll go ahead and take any questions there is now.

[Operator]

Thank you. We will now begin the question-and-answer-session. [Operator Instructions] Our first question comes from Ian Gilson of Zacks Investment Research. Please go ahead.

[Ian Gilson, Zacks Investment Research]

As you know, I tend to look at the balance sheet first. And now a couple of questions I have on that. Looking at the numbers versus the second quarter, where was the transfer of the deferred tax and into the cash account? And what line item was there?

[Jason Berg, CFO]

Ian, this is Jason. A couple of things here, first on the deferred, there was a swing between current liability and deferred and the change in deferred that went through earnings and in right to equity. We'll recognize the cash benefits to $339 million of income we've recognized. The cash will come back to us over approximately next five years or so. Another change as a result of this is that, the tax reform passed on December 22nd, are required tax deposit was due on December 15th. So, we'd already made that. So that resulted basically we've prepaid $53 million of federal income taxes over the first part of this fiscal year. So, we won't -- we don't expect to pay any federal income tax for at least the next say five quarters. So, what we'll recognize -- we'll start recognizing that the cash benefits getting this next quarter.

[Ian Gilson, Zacks Investment Research]

The gain from the sale the part of the Chelsea operation, is that of you adjusted for the more of the 1031, you have a separate number for that right, for the purchase of new assets against the sale of the old one?

[Joe Shoen, Chairman, President and CEO]

Yes, we structured that sale as a tax free exchange, so we sold that and then to make it tax free or tax deferred. We will have to purchase the same amount of assets. So, I think we've finished buying the last of those assets over $195 million in new assets here in January. So essentially those are going to be treated on a carryover basis, and as well as we don't sell those assets, we will be deferring those taxes indefinitely.

[Ian Gilson, Zacks Investment Research]

On the new tax rule, is the accounting treatment going to be basically that you will record zero taxes? Or will you have any deferred tax base added going forward?

[Joe Shoen, Chairman, President and CEO]

For the GAAP presentation, we will continue to accrue taxes. Our GAAP effective rate for the foreseeable future right now is going to be 24.3%. We had been in the past running just right around 37%. So essentially next year, we will accrue those taxes, nothing will be paid and they will be due in the future.

[Ian Gilson, Zacks Investment Research]

And moving back up to the income statement, over the past I think it is about three quarters, four quarters. The operating expense line has -- at the sense of rental revenue has gradually increased. So, there is now a significant GAAP as to what you were showing three years ago, so we say. Is that primarily from maintenance on repairs? Or are there other factors in there that has impacted that line?

[Jason Berg, CFO]

Ian, this is Jason. For this year, the biggest piece has been maintenance and repairs. So, if you look for the quarter for example, if you take our operating margin and I'm going to exclude depreciation and lease expense. The way I would talk it looks like about $21 million decrease in operating margin for the quarter, and repair and maintenance account for about 25.5 million of the margin decreased.

Personnel had been a drag through the first two quarters. We actually had a margin increase to personnel this quarter, but it wasn’t -- it certainly wasn’t enough to offset the maintenance and repair drag. Then, we are beginning to try to calculate on an ongoing basis. The margin decline due to the development of these new storage facilities and our estimates for this quarter was little over 6 million.

[Ian Gilson, Zacks Investment Research]

Now the maintenance and repair bills, they tend to a certain extent on the averages age of the fleet. Is that correct?

[Joe Shoen, Chairman, President and CEO]

Yes, Ian that’s correct. That isn't what driven this increase. We have actually held that, that hasn't been working against this. We have obviously some increases, number of trucks and number of miles goes up. It's pretty much linear relationship. What's really hurt us here goes back where we've talked about 24 or 30 months ago, which is the automakers were able to succeed to get substantial price increases through on vans and pickups.

And then which compressed our margin on resale, they actually were able to get better margins which we saw with less potential money at resale. And then, we made some missteps that are fairly considerable when you have them all up in the specific and not very great. But when you put them over 30,000 trucks, we made some missteps on damage collection and damage management.

And we probably collected $40 million to $50 million of negative expense there that I would say is avoidable. Now, we'll see if we can manage to that, but I believe it's that much of avoidable expense there. And then as you recall, last June or July, Ford puts through a recall on our entire van fleet our Ford van fleet, which is the bulk of our van fleet where we could not sell those trucks while they were on the recall.

So that set us back every bid of 3,000 or 4,000 trucks sold from where we want to be, and we're having to work through that lump. And it doesn't work through so well in the winter. I'm hoping we'll be work through it by June, but these trucks that we we're unable to sale last July and August. We had of course our plans have been to -- trucks in August September and October. And we were able to increase our sales enough to absorb that.

We're now in the time that we had planned for very few truck sales. We're aggressively trying to sale trucks, but since these trucks don't sales along the winter. And so, it's going to be a couple of months before we see for sure can we normalize that situation and we have to normalize this to both volume of truck sold. And as Jason said, we saw some pretty good indicators in the quarter that we're getting that on our control.

The proceeds are going to be it looks to me permanently down as a percentage or the absolute dollar per truck over three years of build. Because the automakers got through increased upon us that we're not able to pass through on resale. And then we've made mistakes in damage and damage collection, which I think will have worked through the whole P&L which was complete will have cycled onetime by this coming June.

And so, we should be passed that now whether we'll get -- we'll work this whole $40 million back or not. Well that's of course the test of management. Can we manage to that? I would like to tell you, I could guarantee it, but I can't guarantee it. And we're trying to hit that hard, of course, we have multiple initiatives on any given date. But I've been hitting that hard over the last six months and hopefully that situation will turn.

[Ian Gilson, Zacks Investment Research]

But when you buy trucks, you are looking at the capacity requirement not a dollar requirement, correct?

[Joe Shoen, Chairman, President and CEO]

Yes.

[Ian Gilson, Zacks Investment Research]

You sold -- you really can't do much about the purchase price of the truck?

[Joe Shoen, Chairman, President and CEO]

Really can't, you're exactly right. And they've got 30 months ago, they've got through substantial increases and we've just got a little to press all.

[Ian Gilson, Zacks Investment Research]

Okay, so as I look at what you have said in the past as to the composition of the fleet, you have basically increased the larger trucks relative to the smaller trucks. Is that cycle continued through the next four quarters? Or are you done balancing the fleet?

[Joe Shoen, Chairman, President and CEO]

Right now, we don’t have that in our production plan, but I could see us bump in them a little bit towards this coming fall. There is a bunch of opportunities there. If we can find those our sweet spot of course I want to do it, I want to be aggressive there. But right now, we don’t see a big deal there now.

[Ian Gilson, Zacks Investment Research]

And last question is that. On the other income line that you closed, looking on a sequential quarter and that was down significantly at any particular reason?

[Joe Shoen, Chairman, President and CEO]

I'll let Jason handle that one.

[Jason Berg, CFO]

Yes, let me -- that’s not jumping off the page. I mean you're saying other income from moving on storage from second quarter to third quarter.

[Ian Gilson, Zacks Investment Research]

Now you had 61 million in Q2, so the 9 million in Q3?

[Jason Berg, CFO]

Yes, that normally does a drop off. I think last year drop off of 15 million or 20 million. The majority of that line is our U-Box revenues, so that kind of moves in tandem with the moving business. Although, there is a pretty strong storage component to that which is why the lines, they're still quite a bit there. But the moving activity does fall off, so it's somewhat in nears what we see on the truck and trailer rental line.

[Operator]

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

[Jamie Wilen, Wilen Management]

Jason thanks for the info on self-storage. The numbers you were referring to $5.4 million loss in the quarter. Is that just for the locations you opened in 2017?

[Jason Berg, CFO]

No that’s -- I started to looking at that -- I took three years of facilities. So that would be the last three years would be the fourth quarter fiscal '15 through now. I think those about 235 locations.

[Jamie Wilen, Wilen Management]

So, if you want back a few more years to see how this plays out and to see how -- obviously you started zero percent and overtime you get to a reasonable level where you have a stable and sustainable occupancy with great cash flow. If you look at the units you opened in 2012, '11, '12 and '13. What are they producing? You take the ones for the list three years and you have got a $20 million operating loss, but how about the ones three year prior. What do they turn into?

[Jason Berg, CFO]

I don’t have those broken, but I'll say that my team broke these out in the quarterly cohorts and the first cohort of these, the ones from the fourth quarter of '15 are the last quarter began cash flow in positive. So that does kind of fit our model about three years into it. So an answer to your question to get another question, we will keep looking into these things. From what I can tell big picture without going into 330 individual projections, at this point it would appear that they are going along as planned as far as once we open them up.

Now, there is a lag as some of these include properties that we've opened and we have a temporary showroom and a renting trucks, so then we'll wait into get, it's only approval for storage or permits to build and sometimes that can take up to a year. So for some of these, the three years clock for getting occupancy up hasn't even starting yet.

[Jamie Wilen, Wilen Management]

Okay. And as you look forward, do you anticipate maintaining this pace of opening up new locations in the next few years?

[Jason Berg, CFO]

Everything I've seen in our acquisition activity and in our backlog of projects, we'll need to indicate -- or lead me to say yes.

[Jamie Wilen, Wilen Management]

On the truck side, you've talked about in the past that trucks are made better. So we should have less maintenance cost. I've realized some of this was repair because whatever deals that didn't inspect the truck and somehow damages were not seen. But are these -- is it a maintenance issue or repair? Were you repairing the trucks or the maintenance on these trucks is higher than we thought they would be? I look at new vehicles on, and when I own car and requires much less maintenance today than it did many years ago. Is it not same with trucks?

[Joe Shoen, Chairman, President and CEO]

It's closed and it's Joe. So, well, you mean talking about just what's our cost per mile. Our cost per mile is down over five years ago, I can't quote you the amount. And that's as Ian indicated that, we've shifted the fleet to a little bit newer. And then you have more capital expense and less repair expense for first say 4-5 years of the truck's life. So we've shifted more vehicles in that fleet. But very simple, they're making great high quality vehicles. We're getting longer new side of the brakes. We're getting longer -- we're actually getting longer between all those changes. All these things add up. There this could be $50 million path we're seeing is primarily damage related. And that means it should be subject to management.

So that's where I'm pushing my group. I am telling this is avoidable expense. Now, how much it will avoid? I'd like to avoid 100% of that. Let's see what we get to with it. So, does that answer your question? But right now, we're buying a very high quality product, both from Ford and General Motors. They always have their little [indiscernible], but if you did a 10 year look back, you'd so much rather have the equipment they're selling us today than what they sold as 10 years ago. You have a huge preference for it. And but of course, it's at a higher capital cost -- cost is higher.

[Jamie Wilen, Wilen Management]

And the issues that we had, has it been from dealers or our own locations?

[Joe Shoen, Chairman, President and CEO]

Both.

[Jamie Wilen, Wilen Management]

And we've got systems in place that you couldn't tangibly measure that we are actually going to be reducing that cost.

[Joe Shoen, Chairman, President and CEO]

That's quite exactly as I like it to be. But yes, it's starting to turn. Now, but in the last week, I come across places where we are happy with. So of course, that's kind of my job is to be a little bit of unhappy. But this is just, it's stupid to let a customer damage your vehicle and only pay the rental rate, just take them to do that. And every time we do it, we're essentially throwing away money.

Now, the problem is once it's happened, it's very difficult. You can't really go back and attribute it as well as you'd like to imagine you could. So have the damage before rentals old and good luck. You've lost the money and what you have as a personnel issues or either management issue. And there is where I'm trying to drive on it.

[Jamie Wilen, Wilen Management]

Also the U-Box program you didn’t mention it. Are we still making progress there?

[Jason Berg, CFO]

Yes, this is Jason. Top line and what I'll call contribution margin are both improving compared to last year for the year. I think we are up over 15% revenue wise. We did the acquisition of the small competitor back in April or May door-to-door. We fully amortized the acquisition costs associated with those boxes. And persistency of those boxes and storage is a little bit better than what we expected. So I think that’s going to work out well for us as well. So our systems go for that.

[Jamie Wilen, Wilen Management]

And the new programs where people can get a vehicle 24 hours a day, you had to develop new systems sales that working out for you?

[Joe Shoen, Chairman, President and CEO]

Well, it's working out well. We've done excessive 250,000 transactions. I don’t have -- I apologize I should have a transaction count today. We are steadily clicking it and of course it's --our business is making U-Haul superior choice in the customers mind. And for some customers, this is exactly that and making us superior their choice. The more we do of that the more secure our total business becomes, so I'm very interested in driving that harder.

[Jamie Wilen, Wilen Management]

And being that you want U-Haul to be a superior choice in your customers mind, we as an investors we would like to U-Haul to be a superior choice in investors mind. Yet Coke goes by the name of Coke, Pepsi goes by the name of Pepsi and Harley Davidson goes by the name of Harley Davidson. U-Haul goes by the name of AMERCO. Charge for me to come up with a good reason why we shouldn’t change the name in U-Haul, so we can be more in the front of the minds of investors?

[Joe Shoen, Chairman, President and CEO]

We will put.

[Jamie Wilen, Wilen Management]

And then lastly with the tax rate changes, it looks like it will add an incremental $5 or so a share to earnings. Am I in the ballpark there?

[Jason Berg, CFO]

Probably, a little bit less than -- I think I calculated off of 2017 and had this rate that was somewhere in the $4 to $5 range.

[Operator]

Our next question is a follow-up from Ian Gilson of Zacks Investment Research. Please go ahead.

[Ian Gilson, Zacks Investment Research]

Are you self insured on damage?

[Joe Shoen, Chairman, President and CEO]

Yes, 100%.

[Ian Gilson, Zacks Investment Research]

So that -- any variance in claims would go into the public works?

[Joe Shoen, Chairman, President and CEO]

Actually, this goes right through the repair line, Ian. So, this won't -- this won't get then, this isn't a really insured event. Now, if it was a collision with another car, it would be insurance. But this -- these aren't people collided with the cars, but they rub the telephone pole or touched another vehicle or backed into a post in front of their house or some God Forbid things. It's all avoidable stuff because no third-party present or who's damage, it's all just property damage to our own equipment.

[Operator]

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

[Joe Shoen, Chairman, President and CEO]

Okay, I am going to do one thing, I think when -- and listen to Jason, he said, earnings were 237 for the quarter and the sheet he gave me said 234, maybe I heard him wrong, but I don't want anyone to think that he was representing different than the GAAP presentation. I appreciate everybody sticking with us. We have opportunity to improve and of course, anything that the document does to, and purge to improve, this motivates me further to do a better job. So I think that we've gotten a little bit of that and we've seen little bit of good signs with the consumer. So our opportunity is to manage fair. With that, I'll turn it back over to Sebastien.

[Sebastien Reyes, Director, IR]

We appreciate your support and we'll look forward to speaking with you on our year end call in May. Thank you.

[Operator]

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