Earnings Call Transcript - UHAL Q3 2021

Operator, Operator

Good morning and welcome to the AMERCO Third Quarter Fiscal 2021 Investor Call and Webcast. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sebastien Reyes. Please, go ahead.

Sebastien Reyes, Head of Investor Relations

Good morning and thank you for joining us today. Welcome to the AMERCO third quarter fiscal 2021 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, 2020, which is on file with the U.S. Securities and Exchange Commission. At this time, I'll now turn the call over to Jason Berg, Chief Financial Officer of AMERCO.

Jason Berg, Chief Financial Officer

Thanks, Sebastien. I'm speaking to you today from my office here in Phoenix, Arizona. Joe Shoen, our Chairman and CEO, is out traveling in the field, working in some of our locations and was unable to be on the call today. After a few minutes of prepared remarks, we'll open up for questions and answers. Yesterday, we reported third quarter earnings of $9.33 a share, compared to $1.58 a share for the same period fiscal 2020. As usual throughout my presentations, all of my comparisons will be for the third quarter of this year compared to the third quarter of last year, unless otherwise noted. Over the course of the third quarter, we continued to see strong customer demand for our self-moving products and services. Our frontline teams have been answering the calls since the onset of the pandemic and all of the government's responses to it. The efforts of our field teams, our independent dealers, combined with the technology that was already in place, put us in a superior position to serve moving and storage customers. Equipment rentals saw an increase of 30% or about $187 million. For the nine months, we're now up 10%, or $219 million. That's a good result under even normal conditions. Compared to the same period last year, we increased the number of retail locations, independent dealers, box trucks and trailers in the rental fleet. Of note, our corporate account business, or what many refer to as last-mile business, experienced an increase in revenue for the quarter. We've seen growth in U-Move revenue continue for the month of January. Capital expenditures on new rental trucks and trailers were $541 million for the first nine months. That's down from $1.161 billion for the same nine-month period last year. The combination of planned decreases along with COVID-19 delays are responsible for the decline. We're working to ramp up the manufacturing of new equipment as quickly as possible. Absent any additional unforeseen delays, it will likely take us a year-and-a-half to two years to normalize our fleet rotation program. The investments that we've made in the fleet prior to this are what put us in a position to weather this supply disruption without negatively affecting our ability to serve customers. A rough estimate of fiscal year 2022 fleet CapEx would suggest that spending is going to be similar to that of fiscal 2020. Proceeds from the sales of retired rental equipment decreased by nearly $162 million to a total of $430 million for the first nine months of this year. Sales volume is still below last year's levels. However, sales prices have improved. The self-storage industry, as a whole, continues to do well and we continue to have success in filling rooms. Looking at our occupied unit count at the end of December, we had an increase of 66,900 occupied units compared to the same time last year. During our second quarter earnings call, I reported to you September-over-September growth of 53,800 rooms. So you can see the pace of filling rooms has continued to accelerate, and is doing so as we go into January as well. Revenues for self-storage were up $16 million or 15%. For the second quarter in a row now, our all-in blended occupancy rate experienced an increase. The third quarter rate went from 67% last year to 73% this year. We've added just over 29,000 new rooms during the first nine months of this year. Last year for the same nine-month period we had added 59,000 rooms. For the first nine months of this year, we've invested $365 million in real estate acquisitions as well as development of self-storage and U-Box warehouse space. That's down from $600 million, same time last year. Our goal is to increase the pace of investment. However, that's going to be dependent upon our ability to find opportunities that fit our economic model. We currently have approximately 6.6 million new rentable square feet in development. That's across 134 projects. We have an additional cohort of around 50 properties that are not yet in the active development phase, but that we own. As with equipment CapEx, growth in storage CapEx is going to take us some time to ramp back up. Retail product sales increased $20 million or 37% for the quarter with all three of our major product lines reporting gains. These lines are moving supplies, hitches and towing accessories, and propane. And we are seeing these improvements continue into the month of January. Operating earnings in our moving and storage segment increased $202 million, to a total of $264 million for the quarter. For our three largest operating expense categories, personnel, maintenance and repair in the fleet, and liability costs, we saw quarterly increases but they were well below the rate of revenue increase. Given the volume of rentals over the last two quarters, we will see another increase in repair and maintenance costs next quarter, but it should be well below the revenue trend. For personnel, the company has not recorded an expense this year yet for a contribution to the employee stock ownership plan. That will likely be recognized in our fourth quarter, whereas last year we spread that expense out over four quarters. We continue to improve our cash and liquidity position. At December 31st of this year cash and availability from existing loan facilities at our moving and storage segment totaled $1.343 billion. During our third quarter, we declared and paid a $2 per share special cash dividend. With that, I would like to hand the call back to our operator, Rash Naveed, to begin the question-and-answer portion of the call. Thank you.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Steven Ralston with Zacks. Please go ahead.

Steven Ralston, Analyst

Good morning.

Jason Berg, Chief Financial Officer

Good morning, Steve.

Steven Ralston, Analyst

Congratulations— I don't say this often—an amazing quarter. I am looking through the numbers. Historically in the third fiscal quarter, the company has reported usually between $3 and $4, except for one year where you had a real estate transaction. I was very aggressive with my $7-plus estimate, and you came in with $9, which shows the extreme leverage of the business. If you could talk about that, because you were quite conservative on the second fiscal quarter call, saying that it was going to be a challenge in repositioning the vehicles—the driver being the rental business. And obviously you accomplished that. You sort of gave a one-liner that there was strong consumer demand, and you congratulated your field teams. But could you talk about this leverage that you have, when pricing and volume come in and you have this large infrastructure and you're able to utilize it better?

Jason Berg, Chief Financial Officer

Sure. It's a great question. I'll break it down into a couple of pieces. During this quarter, I would say that, of the revenue increase that you saw for equipment, maybe 40% of that was coming from transaction growth. The remainder of that is coming from what we refer to as revenue per transaction, which is a combination of either more miles driven per transaction, the mix of trucks that are being rented, or rate. I think what we saw during this quarter was the majority of that was in the form of rate. Regarding concerns about the placement of equipment across the country, I don't think we've solved that to any large degree at all. We're coping with it and we're dealing with it, but we still have equipment dislocations. I would say they're a little more pronounced through this cycle than what they've been in the past, but our teams are adapting. There are certainly parts of the country where you'll see more equipment than usual, and we're still working through that. One of the ways that we work through that is through the prices that we charge customers. It's natural supply and demand: as equipment becomes harder for us to put in certain places, rates go up. We saw the benefit of that during the quarter.

Steven Ralston, Analyst

No, that's fine. Thank you. Also, I noticed that it seems like your cost structure has gone down proportionally. Revenues went up over 30% and costs went up only about 4%. Was there anything done in that area?

Jason Berg, Chief Financial Officer

Our three biggest expenses are personnel, maintenance and repair in the fleet, and liability costs. For personnel, we probably picked up the most margin. For the quarter, our personnel expense maybe only went up $5 million to $5.5 million on a pretty significant increase in revenue. The majority of that increase in personnel costs is coming from field performance compensation. Our field was hit fairly hard in the first quarter of this year as transactions and revenue went down, so their adjustable or performance-based compensation went down with it. They've now, in the last two quarters, made that up. So we're seeing those bonus costs go up. In total, we've been able to keep a lid on headcount. Our medical plan costs have remained relatively flat, as the virus has kept people out of utilizing medical care. We have benefited for the first nine months of the year by about $11 million because the ESOP expense that last year was spread out evenly—$3 million to $4 million a quarter—hasn't hit yet this year and will probably hit in the fourth quarter. That should still keep us in a margin-positive area. On maintenance and repair, we've sold fewer trucks. The two biggest components of our repair and maintenance structure are repairs that we do to prep the trucks for sale and preventative maintenance on the fleet. We've been doing preventative maintenance on the fleet as fast as we can, but we're a little bit behind where we were last year due to the volume of transactions. So we'll see preventative maintenance costs rise again in the fourth quarter. But that's been offset by a decrease in repair and maintenance costs prepping trucks for sale. All the other smaller categories saw some increases, such as property tax, but revenues outpaced those costs. I don't recall any other expense category sticking out right now.

Steven Ralston, Analyst

Thank you. Your ESOP expense, is that going to be in line with last year or up a bit this year?

Jason Berg, Chief Financial Officer

It will probably be in line and be about $5 million.

Steven Ralston, Analyst

All right. Again, congratulations on an amazing quarter.

Jason Berg, Chief Financial Officer

Thank you.

Operator, Operator

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

Craig Inman, Analyst

Hey. Hey Jason, I thought that the biggest driver of repair is miles driven. So seeing that repair and maintenance number not up a lot is surprising. Can you talk about that?

Jason Berg, Chief Financial Officer

Sure. I didn't answer the last question fully earlier. Preventative maintenance, which is driven by miles, is the preventative maintenance you referenced. That portion of our repair and maintenance expense is up. It's just being offset by the decrease where we're down roughly 4,000-plus units sold this quarter. The unit cost for prepping those for sale—pickups and cargo vans, the ones we've had issues with in the past—hasn't run through as much for the quarter. So we're still seeing an increase in the preventative maintenance area, and we do have a bit higher backlog than normal right now, but that's simply because we don't usually have this volume of transactions in November and December. We will have some additional catch-up in the first quarter of this year, but it's not anything out of control.

Craig Inman, Analyst

Okay. I hadn't really formulated this question well, but I'll try it. Mobility in the U.S. is probably on the rise now. What's going through management's head with regard to this newfound freedom of driving around or migration across the country? Are you going to think about making the business bigger permanently, or have we pulled forward demand and now we're at a right level of utilization on the fleet? Some thoughts around the evolution of migration and how that's affecting your business.

Jason Berg, Chief Financial Officer

That's an interesting question and certainly not something we foresaw early on. The business model we've been working on for decades is trying to be everywhere the public is going to be. This environment has created an opportunity for us to expand into more markets with company stores. Often there have been markets that haven't been big enough or vibrant enough for the economics of a company store, so we'd have a network of independent dealers that cover those areas. I think this has spurred us to keep working the plan where there are new markets we can get into. Over the years, I've mentioned how many markets with at least 50,000 people we're in, and there are still some of those markets we haven't entered. This has pushed us to continue down that path and find economical ways to get in and meet demand. Early in the pandemic, our dealer network was affected more than our company stores as many of their businesses were shut down while we remained open as an essential business. We tried to help many of them stay open by letting them use the U-Haul business as a reason. Over the second half of this year, they've come back in a very strong way and are keeping pace with the growth we're having at company locations. We've actually grown our dealer network; it's been relatively flat the last several years, and I think we're up a little over 1,000 dealers from December of last year. So we're making a concerted effort to get closer to customers. I don't think this has dramatically changed our business model. In some ways it's reaffirmed it, and in other ways it's encouraged us to go a little harder at it.

Craig Inman, Analyst

How do you get reports on whether this is a one-time move or a more permanent condition in terms of demand for your product?

Jason Berg, Chief Financial Officer

Joe may have a different opinion, but I don't have a real good feel for that yet. I've always said our business is based upon life's events. There's a bunch of people who've moved out of big cities, which has moved our equipment to certain places. I think there will be a natural ebb and flow to how people treat big cities. Perhaps some will move back, and we'll be positioned well to help them do that as well. If they stay where they are, they'll likely be moving around for other normal life events—marriages, deaths, going to college. The whole process of going away to school has changed, and we'll have to see how the dust settles. I think it will return to a somewhat normal pattern, and if not, we'll adjust to it.

Craig Inman, Analyst

And then the fleet obviously the migration has changed. Did you say, I missed the first part of the call, how much of the revenue growth was volume versus transaction?

Jason Berg, Chief Financial Officer

About 40% has been transaction growth this quarter.

Craig Inman, Analyst

Okay. And the 3-year cohort on the stabilized 80% occupancy metric—has that improved?

Jason Berg, Chief Financial Officer

I stopped using that 3-year formulation after it proved less useful a couple of years ago. But here are a few ways to look at it. At the end of December, 65% of our locations—about 831 locations—were over 80% occupancy. That's an increase of 127 locations compared to December of last year. The occupancy for locations over 80% now averages about 92%, up close to 2% from where those locations were last year. For properties that have been open or at 80% occupancy for at least two years—what some REIT competitors use as a stabilized occupancy number—that group's average occupancy was 93%, up about 3 points. So no matter how you look at it, our stabilized property occupancy is probably up about 2 to 3 points. We've also seen growth in a whole bunch of other facilities starting to fill up as we had hoped.

Craig Inman, Analyst

Okay. That's where I was getting at. The tax refund—looks like you still have about $380 million to go there?

Jason Berg, Chief Financial Officer

We have about $123 million that we've filed refunds for and are waiting on; those are now past the point where the U.S. Treasury is paying interest on them, but we haven't received them yet. In December we filed our fiscal year 2020 tax returns, and the refunds that are being filed as carry-backs for that will total about $258 million. So that's all still in process, and through the quarter and up through today, we haven't actually received any of that cash yet.

Craig Inman, Analyst

Okay. Great. That's all for me.

Jason Berg, Chief Financial Officer

I'd like to address some questions that Jamie Wilen submitted ahead of time; he couldn't be on the call today. First, Jamie asked whether, given the pause in construction because of COVID, it's reasonable to expect occupancy rates to continue to rise versus a year-ago levels. The short answer is yes. Have rates changed at our self-storage facilities? Looking at the average rates for customers moving into locations that were in the portfolio last year versus this year, those rates are up about 1%. But once you blend in all of the new locations, our average rate per square foot looks relatively flat across the whole portfolio. He also asked how many square feet of new facilities we'll add this fiscal year, how many we did last year, and expectations for next fiscal year. For the first nine months of this year, we've done 2,866,000 new square feet. For all of fiscal 2020, we did 5,845,000 square feet. Right now our active project list has us projected to build out another 6.6 million square feet, but that's not all going to happen here in the next 12 months. I would suspect that by the end of fiscal 2021, we're going to do maybe about 3.5 million square feet. For fiscal year 2022, that's probably going to look closer to this year versus what we did in fiscal year 2020. He asked whether we've reached a point where we were close to capacity and trucks for rental were not available, and whether we can expect fleet utilization to continue to be well above prior years with the pause in delivery of new vehicles. The short answer: there are always time periods, such as the end of the month, where supply is strained due to demand. Add in the significant movement of the one-way fleet to high demand areas, and it's accentuating that strain. The investments in the fleet we've made previously are how we've been able to handle this demand today. So yes, we should expect fleet utilization to continue going forward. He asked whether when we talk about corporate business we are referring to supplementing the fleets of Amazon, FedEx and UPS during the holidays. When we say corporate accounts, the majority of that is the last-mile delivery business. We have a whole team of account managers who work with those operators and with smaller accounts. This business comes in throughout the year, and we have a great working relationship with these organizations. I don't see any reason why that wouldn't continue. As I mentioned in the prepared remarks, we saw this business increase during the quarter with more of our traditional last-mile operators, not so much with Amazon. Regarding depreciation charges changing with the pause in self-storage construction and fleet additions, for fleet depreciation quarter-to-quarter it was down about $9.5 million and $17.5 million for the nine months. You're not going to see that very often. A few quarters ago I mentioned we would start trending back up towards the end of the fiscal year; that's been pushed back. I think now we're looking at the middle of next year to trend up, and a lot of that has to do with the timing of production of our 26-foot trucks, which we're now starting to produce and which have a significant effect. All other non-fleet depreciation was up about $5 million for the quarter and maybe $18 million to $19 million for the nine months, largely related to our self-storage development. I would expect that to continue to increase, but at a lower rate now as we start to run into larger comparable quarters starting in the fourth quarter. Jamie also asked to quantify U-Box revenues, their percentage increase from last year, and their profit margins. We're not at the point where we're required to report that, and we feel that reporting it puts us at a competitive disadvantage, so we're not in a hurry to do that because no one else is reporting their results. These revenues are embedded in the moving and storage 'other revenue' line, so if you look at that line and the change in it you can get a sense of the direction of the program. Regarding profit margins, we prepare a managerial P&L for U-Box that allocates expenses as best as we can. That pro forma EBITDA margin sits just below our overall moving and storage margin—it's not quite at the same level as the overall segment, but it's still quite positive and within a couple of points. There is a one-quarter lag in the change in marketable securities value hitting the income statement for our insurance companies. Both of our insurance companies are affected by the expected credit loss standard, CECL. For the 12 months, our Life Insurance segment is going to have a charge of around $900,000, but for the fourth quarter it will actually work out to be about a benefit of $800,000 to get them there. They were affected more negatively in the first half of the year. For our P&C company, it's a smaller adjustment and actually ended up being positive as they reduced their allowances as the corporate bond market improved, which reduced our CECL allowance. Regarding cash build: at the end of December, excluding available debt, we had $1.250 billion in cash at the moving and storage segments. At March that was $459 million. A couple of things are going on: net CapEx (CapEx less asset sales) was down $792 million for the nine months versus the previous year, and operating cash flow as presented in the GAAP cash flow statement was up $405 million. We don't officially espouse EBITDA because it's a non-GAAP measurement, but our nine-month EBITDA is at a record level of about $1.272 billion, which is a $300 million increase. For outlook on cash, we're going to remain cautious as we try to ramp back up the CapEx programs and also see what happens with COVID and what direction government regulation and tax policy take. I think that's all the questions. If the operator doesn't mind, I'll go ahead and wrap up the call now. We appreciate everyone's support. Our next earnings release will be our fourth quarter results and our 10-K; we'll file those on May 26 and hold our next call on May 27. Thank you all for your participation and we'll talk to you then.

Operator, Operator

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