Q2 2020 Earnings Call

Good day, you might come to the America's second quarter financial to try them trashing investor Cold and wet guest all participants will be in listen only mode to should you need assistance. Please signal that conference specialist the best in the stocky followed by zero.

After today's presentation, the we'd be an opportunity to ask questions.

That's good question you made press Star then one I touched them. So in two weeks ago. Your question. Please press Star then to be.

Please note today's event is being recorded I would like to turn the conference call about to Sebastien Reyes. Please go ahead.

Good morning, and thanks for joining us today welcome to the Americas second quarter fiscal 2020 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 27 eight of the Securities Act at 933 as amended and section 21 eat up the secured.

These exchange act of 934 as amended.

Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantify.

Certain factors could cause actual results to differ materially from those projected.

For a discussion of the risks and uncertainties that may affect Americas business and future operating results. Please refer to Form 10-Q for the quarter ended September 32019, which is on file with the U.S. Securities and Exchange Commission.

I'll now turn the call over to Joe show in Chairman of America.

[noise], Thanks, Sebastian and good morning to everybody appreciate you being on the Paul.

I assume you've all seen the numbers are moving equipment utilization did not keep pace with moving equipment fleet growth for the first half the year.

I'm focusing on that and would expect to see some improvements by fiscal year end.

The big our economic opportunity for you all.

Is to have the always moving fleet position geographically.

Evenly relative to demand.

I believe we could have done better.

Overall, our fleet capacity is considerably less than demand.

However, the seasonal periodic and geographic nature of demand makes the match up.

Tricky.

Of course, this is our business and we should note.

Self storage continues to be a growing segment, both for U haul and others.

As I have cautioned in the past ready capital will encourage oversupply from time to time a place to place.

I believe our team can hold the increased pace.

We are operating act.

We have a supply of into rooms in many good markets.

I look for us to do our job in rent these units.

Well in excess of 20 years U haul is maintained its own proprietary database of self storage rates and supply in all 50 states in all Canadian provinces.

We tried to soberly approach the market.

Although we have made mistakes from time to time.

The storage assets or 20 to 50 year.

Assets.

Historically over supply as healed itself with gross growth in demand.

There is a substantial supply of new empty units in many markets I'm not certain that time alone will heal them all.

Of course, you all must manage its costs we are.

Showing strong depreciation increased greases, which do not bother me.

I continue to look for vehicle maintenance expenses that are unnecessary.

Personal has run up a bit and.

Need to be thoughtful there.

Overall, the U haul business correlates with consumer confidence.

You halls.

Geographically widely dispersed operation.

I expect to benefit from operational improvements and an overall growing economy.

And look forward to talking with you in the future.

Jason you want to go through the numbers. Thanks, Joe.

Throughout my presentation. This morning, all my comparisons are going to be for the second quarter this year compared to the second quarter.

Fiscal 2019, unless otherwise noted.

Yesterday, we reported second quarter earnings of $7 in 97 cents, a share compared to $8, a 35 cents a share the previous year.

Equipment rental revenues increased 3% or approximately $23 million.

Transactions in revenue were up in both our one way and in town markets.

These trends were similar for both trucks and trailers.

Our footprint of company owned locations continues to expand.

Since September of last year, we've added over 90, New company owned retail locations.

Capital expenditures on new rental trucks and trailers for $1.037 billion for the first six months for fiscal 2020.

That's up from $787 million the year before.

Our truck purchase schedule is skewed heavier weighted to the first half the fiscal year, meaning this pace will slow over the next six months.

Proceeds from the sales of retired equipment decreased to $397 million for the first six months.

From $428 million last year.

As you May recall at this point in time last year sales were a bit higher as we were still recovering from delays stemming from manufacturer recalls.

Sales this year are meeting our expectations.

Storage revenues were up $13 million, that's just under 15%.

The majority of the revenue gain came from growth in occupied rooms.

Looking just at are occupied room count as of September Thirtyth, we had to increase of 47000 rooms compared to the same time last year.

That's a 75% increase in pace year over year.

Since last September we've added 127, new locations with self storage at them.

From an occupancy standpoint, we continue to add new units faster than we're filling them, although that spread is narrowing.

Our all in average monthly occupancy throughout the second quarter of fiscal 2020 was 70%.

This quarter, we took a look at facilities that had occupancy over 80%.

At September Thirtyth of this year, we had 744 locations or about 63% of all of our owned storage locations that were over 80% occupancy.

Compared to last year at this time, that's an increase of 59 locations.

The average occupancy at these locations was 91% up just slightly from where it was last year.

Our real estate related Capex for the first six months of this year was $423 million, that's compared to $481 million last year.

However, within these figures to some reallocation to.

The portion attributable to acquisitions has declined while the amount from construction and improvements has increased.

From October Onest 2018 through September Thirtyth 2019, we added 6.076 million net rentable square feet.

We're about 73100 stores units to the portfolio.

About 1 million and a half of that square feet came online during the second quarter.

Operating earnings in the moving and storage segment decreased $7 million to $229 million for the quarter.

I'd like to touched on a few of the more significant items.

Depreciation expense associated with the rental fleet deep increased $17 million as we've continued to add new equipment to the fleet.

Meanwhile, gains on the sale rental equipment.

Increased $6 million.

Depreciation on all other assets, primarily storage location assets increased by 8 million.

Outside of depreciation personnel costs represented the largest single increase in operating expenses.

These costs increased at a rate greater than our revenues.

Other costs, including property taxes insurance expense and freight costs are three the other larger items that generated increase.

These four types of expenses in aggregate accounted for approximately $26 million at the operating cost increase during the quarter.

In August we declared a 50 cent per share cash dividend that was paid in September .

As of September Thirtyth, 2019, our cash and availability from existing loan facilities at our moving and storage segment.

Totaled $559 million.

With that I'd like to hand, the call back to our operator to begin the question and answer portion of the call.

We'll now begin the question and answer session to ask a question you May Press Star then one last question from.

This question is from John Gottfried.

We see hacking. Please go ahead.

Well George.

Yep.

Joe I was wondering if you could expand on your comments about I'm sure you know exactly I am going.

The number of units in the storage building out and just thinking over past calls about your desire to increase that capacity and now you're not sure that time will pull that up.

Done more analysis proprietary for yourself in the industry that suggest that perhaps we had an overcapacity state that isn't going to be corrected anytime soon I just want to get an understanding of what your apartment supply. Thanks.

No I don't think we're in an overcapacity because there is no such thing as a market thats the problem.

So but in the past people have added units and.

Well, it's always kind of surprised me up in general in this business a while it's always surprised me, but yet demands always kind of caught up to adapter.

Five six years.

No. There's so much going on right now.

Yeah, we estimate that I see a new construction.

I believe is below its actually occurred by as much as 50%.

No that's seems like an awfully big air, but Thats my opinion okay.

We don't have.

Good data.

On on supply increases by year that are really vary.

But.

Of course, our job is to make sure we don't put product in those markets.

And pretty much fully we've avoided that so I don't think were.

Particularly.

Vulnerable to that.

Other words, putting something that's going to be a.

Marketing dog indefinitely, but we'll we'll go out of as much as we've got going wound up with some.

Short term Barking dogs us we're sure. The other thing is our product is is a lot different.

Most of our products as a lot different than what you see in the market out there George because we.

Do this in conjunction with the.

Truck and trailer operations, and that's just a little bit differently.

We get a little quite a little bit different customer than most of our competitors again, it's hard to generalize because there's so many.

Subtleties, but.

We have.

We try to cater.

Mostly tour U haul.

Customers and not just to customers in general on that.

Gives us a little tiny little bit of edge, if we do a good job.

So I'm not concerned that we have stuff out there, but it's.

I see what juicy.

And.

C.

Tremendous amount of new supply coming online and it's a lot of its pretty good product.

The other thing when you look at supply is is that there's.

Various types of product out there so a general statement.

How many of the our units or how many square foot there in a market doesn't really tell the story.

Because.

Your standard drive up as much different from.

Interior interior climate controlled in.

The markets, while there is certainly overlap markets are different.

And.

And so demand is just going to reflect a little differently. So I'm not.

I don't want you in any way to think I'm trying to run on the market I don't think so it all but I think we got.

We're going to have some exciting times appeared in close my opportunity is try to make whole this be an opportunity for U haul.

And.

I'm committed to these assets.

Going ahead as I said these are 20 to 50 year assets we have.

A number of assets that we've now had out there for 40 years and I don't think.

Anybody could have predicted 40 years, when we first putting them.

But the fact the batteries.

The customer.

As indicated they want the sort of a product and they wanted all across.

The country.

We are we're much more geographically dispersed than anyone else in the market but.

I don't have a way too.

Say it exactly but we're.

I would say were at least twice as.

Disbursed as anybody out there is a major name.

And so.

When things slow down, though kind of slowdown.

Market by market, which means we won't be stuck entirely of slow markets or we won't be blessed by entirely past markets, but we'll we'll kind of.

We are able to pick our way through the.

Situation should be able to do good so I'm very excited we've had a good room.

Good last 12 months on room Roundups.

Of course, we needed it since we put a bunch of new product out there needed to ramped up.

But it hasn't sold that.

Doesn't discourage me at all.

I'd say on Barry.

Positive on the self storage business.

Obviously, a very positive on the truck and trailer business.

Understood. Thank you for that clarification I get back in Q.

Your next question is from Ian Gilson Zacks investment research. Please go ahead.

Good morning.

Good morning here.

I have two questions.

We had a significant gain again and the other revenue category.

Hi, good to us as it goes through what is driving that revenue.

Hi in this Jason.

The majority the vast majority of that in the moving and storage segment is associated with up with our U box product.

So we're still seeing double digit percentage growth in.

In new box, both both shipping of the boxes and then a storage.

Of the boxes.

Okay.

What are we going to break that out as a separate line item.

But are we going to break it out well, yes. This is Joe of course, I want to show as few cards as possible, but there's some accounting rules that relate to this and.

Well before we trip them, we will of course break it out.

Yes, it's still is a relatively modest.

Part of the whole mix, but it's part of the future we're building.

And of course, the what we need to do is.

Doing great job with these customers and they'll tell their friends and we'll have more customers next year. So.

What I can tell you is where we're doing a better job as you know I listen my phone number.

All over the Internet and so.

Got a lot of customer calls and this is Adam.

We're we're far from perfect, but we're steadily improving our execution with that product and steadily increasing our footprint.

And so were you know we're active from.

Halifax, Nova Scotia too.

Lets you know.

The Texas border down there you know border with Mexicos were active about product all across the deal with.

This is a a good market and it's a speaks to a lot of.

Changing demographics are people that at least a sort they're changing demographics with millennials.

Bob Loblaw, So I think it's a good product for us.

I'm very optimistic about it.

We're not it's not costing us to be in the business.

And.

As long as we can grow solidly in the not cost us to be in the business I'm I'm for.

Keep jumping into it.

So.

So the simple answer is I'm not going to disclose it until it gets pretty close to half too.

Okay. Okay, that's fine.

Only moving into storage on the store inside again HM.

Two quarters since that both through the quarters as this fiscal year.

Calculation of revenue per square foot and revenue per room.

Sure slight decline is that a trend or just coincidental.

Are you seeing with our numbers.

Yes, I'm looking at doing them.

Yeah, I think what you're probably seeing.

He is our free month move them.

We've had a few more takers in that and that debt.

As you are as you're expanding rooms of course, you had a percentage of free moves stays the same you're expanding pre move ins, okay, and so those kind of have to churn and they typically take about three months to work themselves.

Out.

But the good news is we're continuing to grow move in so we continue to have some of these free rooms, and they kind of dilute the rental rate the way you're calculating it I don't think theres any dilution in the rates were actually charging.

In this is Jason I are done a group of properties that we that we manage are essentially kind of a same store portfolio never seen about 2% improvements in year over year rate.

It just to give you a sense of our growing something that would be close to a same store measurement.

Okay.

Yeah, I don't have a word loath to cut rates okay.

We were kind of just that were just loath to do it and.

Okay, So long as I'm here I.

We intend to stick with that plan.

Okay.

Okay, we had a significant gain.

The third quarter from corporate account.

There are many idea how about say that Q, P.S. and D H and so on.

Oh positioning there three.

Oh, we likely to see that account right so grow again.

Yes. It is there's a lot of flux there.

They are growing their fleets, but of course, they are adding their own vehicles. It.

But a tremendous speed I don't have access to any of their internal data, but they source vehicles from people. We source vehicles from so we have kind of an idea that throughout their strongly adding fleet.

I would expect our business from them.

Might be flat or down a little bit this year, it's still too early to tell but kind of guessing.

Oh the November 1st we'll just passed as kind of the day they start.

Running in here, so I don't have a clear enough picture I have a lot of anecdotes.

And my anecdotes is there they are going to be a a factor but they may.

Brought on enough for their own fleet.

That there'll be less of a factor that just to guess you know I mean, all we need is.

My wife to start buying more John .

And they're going rent more trucks.

<unk>.

And finally so.

You are rolling those possibly a.

Continuation or they slow growth period.

Adjusting your expenses to me, but I noted expectations.

I don't think we've adjusted them enough. So I got work to do there.

Okay, great. Thank you.

The next question is from Jamie Whelan Wyndham management. Please go ahead.

Hi films on self storage could choose.

Give us a shot at that those stores that are operating over 80% I assume that's that's that's a solid existing base, what the same store sales levels or on those stores.

Jason I mean, let you try to give an answer to that.

Hi.

Jamie I guess I don't.

What I was looking at what is was the occupancy figures for those I don't have.

An estimated.

And while our revenue number for those right now, but revenue out of track of occupancy.

No not yeah, so an on those.

Occupancy at at all of our locations that were greater than 80% was about flat at 91, but we added 59, new locations that were under 80% last year.

So.

I guess I don't have exactly to answer that that you're looking for right now Jamie.

Gotcha, and if you could help us look at at the full long term strategy of self storage. If you put a 5 million dollar investment.

Into building a self storage facility five years ago.

Could you track whether it would be over those five years. Initially you got a lot of depreciation and amortization.

And you're not making any money yet when you get.

234 or five.

We're probably not spending a lot of money to redecorate to cinderblock walls.

But we're still depreciating it over a.

Straight line basis, I would assume so.

Cash flow by your five should be significant I was wondering if you could walk us through a model for what a 5 million dollar investment would be from year one through your five.

Well, Jamie I guess I'll start by by going through the the actual occupancy figures that we've been seeing for our properties that are hit five years and maturity here.

And we've been averaging in the first year, we get to about 40% occupancy.

And then it gets to 60.

Your Threeseventy then it starts to slow starts to slow down your three of them. Your four were somewhere around 77 to eight in the near 580 to 85 is what we've been averaging I think then if you look at the outliers that I'm not on the meeting were probably running closer to 89% to 91% at your five so.

So the.

The cash expenses that we have upfront.

Is the property taxes and a lot of these deals if it's a conversion we got the utility costs as than we do open up.

The shop, and we have some some.

Personnel expense.

Those are the personnel may may increase a little bit overtime.

By the time, we open up the storage product, where typically in year, one we're starting to get U box revenue.

And truck and trailer at revenue it and sales are pretty a retail products.

On the on the facilities that we've been tracking here over the last.

Five years.

Typically were cash flow positive.

In year three.

And then.

I don't have a common size measurement on what the.

Bye bye year five.

I guess I don't have a specific number I can give you on a 5 million dollar investment I'd have to think about that and get it back to you.

Okay, because that's an interest interesting number what that stabilized numbers that you're going to return returning over an extended period of time once we hit that 80% level.

Certainly would love to have that on the truck and trailer rental side.

It seems to be it Joe you've always said your main target is fleet utilization yet.

[noise] fleet utilization is a function of.

A number of trunk rentals by number of trucks, we have out there we seem to have over expanded our fleet.

And I was wondering as you look forward.

Well, we keep our fleet. The same size has the market grows oh, we're actually shrink our fleet a little bit. So we can increase that utilization and profitability number.

Oh.

I don't think will shrink the fleet.

Just a little bit.

Sorry.

So there's not a totally simple answer to give you.

I think we have.

Location problems or location issues.

That are.

More telling in results.

In total truck issues the problem is that.

It's trucks it it available point in time that tells you whether you're.

Too many we obviously you've had too many at some points.

Because we haven't been able to rent, but the same time I've been out.

Trucks.

Wednesday middle the week.

Many markets in California amount of trucks.

Not Saturday Wednesday, so I have under Fleeted, California, but the problem is it.

You can't just quite add one in California.

And there's other markets just like the Chicago would be an example were.

We are chronically short so my opportunity is to tune or something.

Distribution enough started initiative all that probably.

The two or three months ago and.

Things take little time to bear fruit and I'd expect to bear a little bit of fruit.

Of course, you don't really see the good results until spring because pint of.

Due to the cyclical nature of our business you know what kind of have.

An oversupply, but still in the uptick.

Hey in Chicago, both those times you could call mid week and you might have trouble get the truck right now.

So.

If we can get the equipment into those markets will pick up a little teeny bit utilization.

I I don't think our or.

The total trucks is is.

Where we should react and.

So I guess the answers I don't think it's going to go down on could go down a little bit just because of different models age out I'm still struggling with the big truck getting the right numbers, we spent at Toledo on them.

Over the last.

12 months and I still don't have the right amount of them, but it's it's you know it's kinda like.

Swallow into bigger chunk right now there's just poor those things on again, so we're going to.

What kind of holding on that a little bit even though the market would support more of those units, but there are a.

A big financial commitment so I don't think you'll see us shrink the fleet although.

Yes.

The demand to wars.

Our fleet.

The problem is can we do our job and habit, where it needs to be that's it's about that simple.

Demand dwarfs, our fleet now.

It's not the demands not 365 24, seven the demand is very periodic converse cyclical but.

We could have done a better job I believe and I believe we'll do a better job I haven't focused a lot over the last 24 months on driving storage I'm getting some results and storage.

I think I just need to.

Drive a little bit more on the truck rental I think I can squeeze a little bit more utilization out.

Okay, you guys know truck rental better than anybody else in the world because you've been doing it for longer than anybody else.

The phenomenon that there's more trucks right in California, and Chicago, and it's hard to keep up should be easy thing for you guys to understand and put your capital. There we spend a billion spent a billion dollars on trucks and trailers in the first.

Six months of the year, one would think.

This is more of just a Joe deciding where the truck should go we should have incredibly sophisticated modeling for what's the best utilization for trucks, where should we have the most and how much money, we should spend to get the most effective return on our capital dollars absolutely into service.

Student.

Can you can do that.

What what happens with this.

One way business and we've put the I don't have a dollar number we put a lot of.

New one way trucks in encounter started in California.

They get one rental to Dallas and they're just out of out of commission.

That makes sense.

Or one rental to Boise.

And you can basically standard alley, and see the people go into Dallas in Boise.

You.

Make your own opinions why they're leave in California.

So getting that trucks back, there's a little bit more of a trick.

Rate alone won't do it.

You can have a disparity of rate.

A multiple disparity in other words I could charge.

Twice as much leaving California.

As going in and that would not even out demand.

So the demand is pretty profound there for reasons that.

Gotcha, just or so.

But that we have other ways to legal on that and like you said. This is our game. We are the nor game. So I think we could have done better and we've we've taken steps already in the fleet.

Just might work a little bit so we're hard at it and I think on.

Guilty of not being focus this time last year I wasn't is focused on that as I am right now.

And yet the organizations our organizations like any.

I would ask people to juggle so many balls and then also when they start dropping malls.

So I have to kind of be a little bit.

Careful on that I drove everybody pretty hard on.

Room storage unit rentals, and we've got a little bit of result that might.

Actually have a little bit to do with why some people lost focus.

So I'm back focused on it I would expect we should.

See some movement I don't know food will show up in the money.

By fiscal year end, but albeit will to see way deeper than the money at all have an opinion, whether we're making progress.

By that.

Okay, and lastly, Joe and as the first the rate of capital expenditures as you look down the next 12 months in self storage and expanding the truck fleet, what kind of numbers would you expect them to be similar more or less than what you're spending today.

Well storage May just trail off a little bit it's difficult as Jason said, we're we're spending more on.

Construction and conversion than we are on acquisition.

And so that's a little bit discretionary in other words I can acquire piece of property then just decide not to build it.

Okay. So I can just postpone if you get when these things it's probably.

Seven to one on what the.

Improvements are compared to the land acquisition.

It varies but it's a.

The improvements is the big amount to the deal.

So all the land acquisition is obviously carried on our balance sheet you see it in.

Interesting property taxes.

When we get into construction.

The money kind of course out.

And it's hard to get real good deals and construction right now because.

Everybody's building stuff. So you can't just it's kind of a sellers market as far as construction.

Services.

So.

If it looks like it's going to goes off with little project off its about that simple, but we have enough stuff teed up we could run real close to this rate.

And not run out of sites. Okay. So I don't want to mislead you we have plenty of stuff teed up.

But there's a many.

Points of time in there, which you can turn it off.

And if it looks like it's you know.

It's appropriate will pull back off on those expenses hopefully retain the properties and keep them in inventory build them out two years later.

Well, we have done a fair amount of his phasing construction, where we've gone in and.

Put in the first maybe 50% of the expense it held off on that.

Because that gives us enough room to rent for your and a half two years held off on it.

Bigger as it feels we'll we'll spend it I.

I think battle, that's kind of helping us modulate this a little bit better, but I wouldn't look for the.

Construction to fall a heck of a lot but it is.

Our that real estate expenses to Paul Heck of a while they may taper off that kinda tapered off a little bit.

The fleet.

[noise] likely will be a little bit less Jason level was yeah. We number on that it's still early for projecting that next year's fleet plan, but but the first versions of what we've been thinking about would be somewhere say maybe.

75 million last but but that's that's very preliminary.

You know, we're getting hit by budget price increases from the manufacturers.

They have a lot of additional content due to this.

These sensors on the it's all this stuff that their readying for autonomous vehicles.

And they're building that into the architecture, the vehicles and it just simply raising costs.

Without providing much benefit I wondered if there's not a lot that I can.

Extract from my customer for wiring, but they're not using.

So we're we're we're suffering a little bit of that night, we were.

Having a rounded out more of course, we're pushing back real strongly so.

We're not getting a spoken deals on equipment right now.

But we're going to buy fewer that big trucks.

And we are split already started by if you are the big trucks from that.

They cost.

Twice, what a small truck costs are roughly.

So that'll have a little effect too.

Okay. Thanks Fellas.

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

Well again, thanks to everybody I appreciate you asking questions.

We're red hot and running as far as.

Business in General of course, we got to get that the filter through to the bottom line, which is.

Part of my opportunity I look forward to talking to you all know another 90 days.

Jason any closing funded.

Well talk at the end of third quarter.

Sebastian give legal remarks.

Talk yet yeah. Thanks, alright, Thank you again.

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

[noise].