U-Haul Holding Company

Good morning. Thank you for joining us today, and welcome to the AMERCO Fourth Quarter and Fiscal 2012 Year-end Investor Call.

Before we begin, I'd like to remind everyone that certain of the statements during this call regarding general revenues, income and general growth of our business constitute forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995, and certain factors could cause actual results to differ materially from those projected. For a brief discussion of the risks and uncertainties that may affect AMERCO's business and future operating results, please refer to Form 10-K for the quarter ended -- for the year ended March 31, 2012, which is on file with the Securities and Exchange Commission.

Participating in today's call will be Jason Berg, AMERCO's Chief Accounting Officer. I'll now turn the call over to Jason.

Thanks, Jennifer. Good morning.

Speaking to you today from Phoenix, Arizona. Also on the call with me here in Phoenix is Gary Horton, AMERCO's Treasurer.

And from our offices in Reno, Nevada, Rocky Wardrip, AMERCO's Assistant Treasurer, is on the call. We will all be available for questions after the prepared remarks.

Joe Shoen, the Chairman of AMERCO, is unable to participate in today's call.

Yesterday, we reported fourth quarter earnings of $1.29 per share compared with $0.52 for the fourth quarter of fiscal 2011. For the full year of fiscal 2012, we reported net earnings of $10.09 a share versus $8.80 in the previous year.

Included in the fiscal 2012 result was a $1.61 after-tax noncash charge in the third quarter for the reserve strengthening at our property and casualty insurance subsidiary. Excluding this charge, our adjusted earnings per share for fiscal 2012 were $11.70.

We posted another record year for our equipment rental revenues. These U-Move revenues for the fourth quarter increased about $27 million, which is an 8% increase.

And for the full year, we had a $131 million increase, which is about a 9% increase.

The fourth quarter of this year was aided nominally by the extra day in the month of February. Key to these improvements was growth in transactions, and this took place in both our truck and trailer fleet as well as in both our in-town and one-way rental markets.

Total truck rental transactions grew by about 6% over the course of the year. Utilization of the truck fleet and our average revenue per transaction have both improved.

Looking at early data from the first quarter of fiscal 2013, which should be April and most of May this year, it showed that revenue growth for equipment rentals has moderated compared to the last 2 first quarters, which we had significant increases in.

The fiscal year ended with an increase to our rental fleet of approximately 4,500 trucks and about 1,700 trailers compared to March 31, 2011. Capital expenditures on new rental trucks and trailers increased by about $117 million to just under $505 million in fiscal 2012.

Proceeds from the sale of retired equipment in fiscal 2012 were $166 million. Our initial projections for rental equipment CapEx in fiscal 2013 are somewhere in the neighborhood of about $490 million, which will be very similar to what we saw this year.

Our self-storage program continues to post consistent revenue gains. We had a $3 million increase in the fourth quarter, and for the full year we were up $14 million.

This is the result of occupancy improvements at existing locations and that's combined also with the addition of new facilities, many of which were already well along in their occupancy ramp-up phase when we acquired them. For the full year, our all-in average occupancy rate for AMERCO-owned locations increase a little bit more than 1% to 77% compared to the previous fiscal year.

This leaves us considerable room for additional revenue growth within this program and that's really without the need to expand our cost structure to accommodate it.

From March 31, 2011, through March 31, 2012, we added over 1,354,000 net rentable square feet to our self-storage portfolio. Spending on real estate-related items, construction renovation and primarily acquisitions increased $38 million year-over-year.

Our plan is to continue to do this opportunistically in order to expand our presence in the self-storage market. Oftentimes though, these projects may not be immediately accretive to earnings.

However, we feel that they're critical to our long-term growth.

As I did last quarter, I would like to take a few extra minutes to go into some segment details regarding total cost and expenses. I'll do this for both the quarter and also for the full year.

Starting off in the Moving and Storage segment. Our total cost increased $24 million in the fourth quarter compared to the previous year and $102 million for the full year.

For both of these time period, the cost increases are primarily tied into our increases in revenue. For example, commission expense to our U-Haul dealers; cost of goods sold for retail sales; products; our personnel and maintenance costs, which are associated with the increased transaction volumes, all of these increased during the year albeit at rates generally lower than the rate of our revenue increase.

Given the rate of fleet additions over the last 24 months and the method of financing these purchases, we're going to continue to see our depreciation expense increase throughout fiscal 2013. This will be slightly offset by declines in lease expense.

Somewhat related to this is our gains from the disposal of rental equipment, which were fairly consistent with the year-over-year this year. In the last 12 months that -- we've expanded our cargo van and pickup fleet significantly and it's these vehicles that make up the majority of our equipment sales each year.

So with an increased fleet size, it does lead to the potential for more volatility in the gains or losses upon disposal, although that's not currently expected.

Our operating margin at the Moving and Storage segment, which is operating earnings divided by total revenue, went from about 8% in the fourth quarter of last year to about 11% fourth quarter of 2012. And for the year, we saw about a 2% increase in our operating margin.

In April of this year, A.M. Best upgraded Oxford's rating outlook from stable to positive.

Last quarter, I also went into detail regarding the reserve strengthening adjustment that took place at Repwest. I wanted to go over this again as it was a major effect to our annual earnings.

It was during the third quarter that they took an after-tax charge of $31 million following an internal review of their excess workers' comp business. This was a business that they wrote between 1983 and 2003 and have been out of ever since.

The underlying risks aren't associated with U-Haul's core Moving and Storage business or its customers. That charge was primarily responsible for the $46 million increase in costs and expenses that we see in this segment for the year.

Our consolidated earnings from operations for the fourth quarter of fiscal '12 were $58 million, which was an $18 million improvement compared to the same time last year. And for all of fiscal '12, we reported operating earnings of $416 million compared to $378 million the year before.

If you were to isolate the Moving and Storage segment, our operating earnings at that segment improved $78 million for the year, or about 22%.

At March 31, 2012, AMERCO held $281 million of notes and interest receivables related to SAC Holdings and its affiliates. AMERCO earns about a 9% interest rate associated with our investment in these notes.

In April and May of this year, we received a $118 million of repayments from SAC on these notes. Assuming that these funds would be reinvested in short-term investments that are available today, we will experience a decrease in investment income of about $10 million for the 12 months in fiscal 2013 due to the reduction in yield.

Our cash and short-term investments, along with unused availability from existing facilities -- credit facilities at the Moving and Storage segment finished the year at $628 million.

So with that, I'd like to hand the call back to our operator so that she can start the question-and-answer portion of the call.

I've got several questions, actually. In the fourth quarter -- all my comments specifically relate only to the quarter, not to the full year.

Lease expense declined, interest expense declined, depreciation went up slightly. But is there anything behind these numbers that basically will show a continuation of those trends into 2013?

Yes, Ian, it's Jason. As I mentioned in the prepared remarks, our depreciation expense is going to continue to increase.

Over the last several years now, we've switched our -- some of our financing allocations from lease financing to on-balance-sheet financing, and that's going to result in the interest expense. We'll see that kind of increase a little bit year-over-year, the lease expense decrease and the depreciation go up.

Now it's important to note that the -- our -- the increase in our average debt outstanding has been more than offset by our average borrowing costs, which are down year-over-year by a little over 50 basis points all in. So that's helped to moderate that.

Okay. So the reason the interest expense went down was the decline in borrowing costs, not a decline in the financing of purchased trucks?

That's correct.

Okay. You did a special dividend, which you did not mention.

Is that likely to be a regular occurrence, or was it just this -- was this just a onetime event?

From what I can tell, that was onetime in nature. Although, every year, I believe the board considers this.

So depending upon where we're at in fiscal 2013, it's going to be reconsidered again. So I really can't give you any guidance as far as whether or not that's going to happen.

Again, all I can say is that it will be considered again.

Okay. Although it's not a very significant change, but if we look at accounts payable and accrued expenses on the balance sheet for the end of the year and look at them as a percentage of revenue for the fourth quarter at -- this percentage increased at -- year-over-year and quarter-over-quarter sequentially.

Is there anything behind that increase, or is it too small to worry about?

Well, that's -- it was a multimillion-dollar increase. And what happened there is that we were somewhat subject to when the year closes and that has an effect upon when we settle our credit card transactions and debit transactions.

So we finished the year with about -- an increase of about 115,000 transactions that hadn't settled at the end of the year. So it's really transient and that number came back down then in April immediately.

So now I wouldn't put a lot of significance in that change other than just the day of the month that we happened to -- the year closed on.

Okay. And then finally, I know I'm being lazy, but could you give me, for the quarter: room count, square foot rooms occupied, occupancy rate, square feet occupied?

And I know you like to hear the owned and managed numbers, so I'll provide you that. We finished the quarter with 423,000 rooms available and that translates to 37,762,000 net rentable square feet.

Of that, we had occupied rooms at the end of the year -- for the quarter of 329,000, which is occupied square feet of 29,856,000. And total owned and managed occupancy was, for the quarter, 77%, which was up about 1.3% compared to last year.

Okay. Can you give me total square feet again, was that 77?

37,762,000.

Okay, all right. And you mentioned that, looking at the first quarter of the year, the gains are slightly -- the trend has been slightly down.

And I note that my weather records for the first quarter showed that we were fairly benign in the weather across the U.S. And I know -- although I see your trucks in Mexico, I know you had no business in Mexico.

And but was the weather a factor in boosting the first quarter? And then in the June quarter, we'd get back to a more normal weather pattern?

No, I don't think that's the case. The comment was directed more towards what we've seen in April and May of this year, which really haven't been affected by weather.

We haven't had, to my knowledge, a significant disturbance in the system due to weather. What we're looking at is the last couple first quarters.

I think we've been around somewhere 6% to 7% increases. We also had the way that Memorial Day and Easter fell, some of our statistics are a little off there.

So we're just noting a little bit of caution and that what we've seen is that revenues certainly are increasing at the same rate that we saw in the first quarter of last year, yet this is an incomplete number. June is always a big month for us.

And we're geared up for that, so we'll wait and see how the rest of the quarter develops.

Just to clarify: Did you just say that your rate of growth in Moving and Storage in April and May was comparable to your rate of growth in April and May of last year?

No. I was saying that we're looking at some tough comparables in previous years in which we had some fairly large increases in April and May in prior years.

So we're still doing quite well. It's just trying to eclipse those results has been somewhat of a challenge this year so far.

I see. And you touched upon it, what is the current outlook for used truck pricing?

Well, so far, we haven't seen any material changes in that. I just wanted to note that we have increased the pick-up and cargo van fleet a significant number, which I think it was 3 or 4 years ago, maybe a little bit longer, when we saw a pullback in truck and in pick-up pricing that has an effect on our gain-and-loss number.

We don't anticipate that happening, but we are a little more exposed to price fluctuations in that fleet on a go-forward basis.

And you did reference that you plan to spend $490 million in CapEx this year?

For the truck and trailer fleet.

I see. Because the company overall spent, I believe, $590 million in fiscal 2012.

That's right. So then, on a real estate side, which was about $100 million in fiscal 2012, we would love to meet or exceed that objective here in 2013.

But we -- I can't give you a specific number on that because it -- that number comes and goes as the opportunities come and go.

I see, okay. And could you talk broadly in terms of the March quarter?

You've had 2 years where you've actually earned a profit in the quarter. Is there any reason to believe that -- if competitive factors remain unchanged, that March will prove to be a profitable quarter for you, going forward?

Well, certainly, we expect to do better every year. So we've had a good fourth quarter in the last couple of years.

Our goal is certainly to meet or exceed that going forward. And I'm not -- and I can't point to any specific items that took place in the fourth quarter that were that significantly unusual that they wouldn't recur in the future if we do everything right.

Well, this past year, unlike last year, you did have the -- what seemed to be very favorable weather that may or may not repeat next year. Was that a key factor in making the $1.29 that you made?

Well, it helped. But I can't really assign a dollar amount to that.

Okay. And then finally, can you give us an update on the expansion and the success to-date of U-Box?

Sure. I think we're in over either 1,200 or 1,300 of our locations now or virtually in every U-Haul location.

Our revenues for that, although not large enough yet to break out, over the last couple of years have essentially been doubling each year. And we continue to roll out some fine-tuning and some improvements to the product and the way that we deliver the service.

So we're still high on the product. Although, as Joe would certainly say if he was here, we're not ready yet to say that's accretive to earnings.

But it certainly is starting to take on some size and substance here.

Just a few questions. First back to what you said regarding the June quarter.

You, I believe, said the rate of growth would not be equivalent to the 6% to 7% growth you've been enjoying in -- enjoyed in the last 2 years, but are you saying that you're still seeing growth in the April and May time frame, just not as large as last year? Or you're not seeing growth?

We have seen growth in April and may.

Okay. Secondly, the depreciable life of the vehicles versus what the real life expectancy is of a truck, could you describe that?

Sure. We target our depreciation to match the useful life.

Now what happens is, is that our trucks, once they get out to year 12 or so, we start to make decisions based upon the current needs of the business. So we may accelerate or we may extend the life of a truck based upon the needs of the fleet.

On average, we're depreciating our trucks out over 15 years, and they certainly do last that long. Our trucks have several different lives.

We -- and when we first put the truck into the fleet, we run them in what we call our one-way fleet, which is our higher-use, longer-mileage rentals. And then, we can downshift them after a few years to what we call our in-town market.

And then towards the latter years of their life, we use them at dealers or we use them for several other programs that we have, from mobile storage to other things. So we find various uses for them over their entire 15-year life.

Over time, we found that those -- it averages out to work quite well with our depreciation. We use an accelerated depreciation method, whereas the majority of the cost of that truck is recognized in the first 3 or 4 years.

We depreciate 16% of a truck's value in the first year alone. So we're pretty aggressive in those costs, which is why when we fleet-up and we have those trucks on balance sheet, you see our depreciation number climb, like what we're seeing right now.

So after the first 4 or 5 years, you've depreciated more than 1/2 the value of the truck. But at that point in time, it's -- the residual value was much more than it's carried for in the balance sheet, I would assume.

Well, I wouldn't say that. We don't do a lot of truck sales at that point, so the value that we have that truck on is we're also trying to match revenue and expense.

So in later years, that truck is running a little bit less, there's a little bit less revenue attached to it as well. So from an economic value on our balance sheet, we think that we have valued appropriately.

By the end of the life of the truck, we feel that we've matched the residual value quite well.

And lastly, you utilize your vehicles. You advertise your services very effectively on the back and side, on -- and the cab of the truck, yet you seem to use the side panels as a public service to -- just to be nice to the world.

And as I look at the math, you have about 130,000 trucks on the road these days. And if -- maybe -- I realize you've looked at this many times in the past, but if you could rent out a movable billboard to a Coca-Cola, McDonald's or Kraft for $1,000 a side, that adds up to pretax profitability of somewhere in the neighborhood of $0.75 billion.

Now I think it's nice to do things as a public service and it's wonderful for the states to see mountains and birds, but as a public company, to -- it would seem to be a very easy thing to capture this extra $0.75 billion of profit without doing a whole lot of effort. And it's probably -- you could probably lease those sides for a lot more than that, anyway.

But it just seems like you're doing a very nice thing but there's going to be some balance between being a great corporate citizen. And I think giving up $0.75 billion to the world is being a great corporate citizen and being a nice guy but also earning a reasonable amount of profit on really underutilized assets in those movable billboards.

I certainly appreciate the question. And yes, we've heard that before.

And our view on this is a little longer term in nature and maybe a little difficult to quantify in the short term. But the -- our equipment is our best advertising tool, and we don't have really other advertising expense outside of a dwindling amount for yellow page advertising.

So the clarity of message having just U-Haul in the trucks is important to us and there's -- are costs that we don't incur by having that. We also have several other concerns that work in tandem with this and that is that the success of U-Haul is based upon the breadth and depth of the availability of our equipment and the system and our ability to get into neighborhood and into communities.

And we need to have a positive relationship with the entities that regulate us in those places. And -- I'm sorry, I just lost my train of thought.

We think that there's some customer goodwill with us that we could recognize some short-term revenue from that but that our sense of it is still that, that is something that might cause more harm to us over the long term than what we could collect in the short term. And opinion, there's the diversity of opinion on this and I -- we certainly respect those that think that way.

But we've taken the choice of not going down that route.

I mean, you talk as if it's a short-term minimal impact. I'm talking profitability of $0.75 billion a year.

I don't know if the state of Montana really gives you any great benefits by promoting them. Do you really think that's -- you'd get that much of a benefit from that?

Well, if we're not allowed to rent equipment in New York City or if we're not allowed to enter a market, the long-term effect of that is going to be extremely significant to us. And there's some regulatory concerns with that.

And again, we think that there is a relationship that we have with the customer that we're not going to compromise our brand for that. But we have done some things on a limited basis.

And when I spoke with you about the other useful lives of our trucks, we do have programs when a truck enters older life. We have utilized those vehicles for signage for people who can rent those trucks and put signs on the side.

But it's no longer a U-Haul rental truck, it's not in the moving transaction. So we have experimented with the idea, but we haven't gone anywhere close to rolling it out to all of our fleet.

And you -- to clarify, you -- perhaps you not have -- have you gotten pushbacks from the states when you've ever approached the subject to anyone?

There are rules about advertising and signage as far as us being able to put equipment places and what constitutes an advertisement and what doesn't and what constitutes a sign and what doesn't. And each municipality has fairly strict rules about the signage that you're allowed to have.

It opens up a bit of a can of worms and it's very unique to each jurisdiction.

On the pick-up trucks, you don't depreciate those over 15 years, do you?

No. No, those -- we're targeting those for anywhere for 12 to 18 months.

Okay. What percentage of the fleet is that type of truck?

Those right now make up maybe about 12,000 units in our fleet.

Okay. A couple of years ago, you've introduced a new computer system.

Has that added to the incremental profits?

The -- we've done a few new systems. I'll go through a few of them.

We did our new rate and reservation system, which I think any cost savings that we've -- drive from that pale in comparison to the revenue improvements that we've gained from that. But certainly, we've picked up profitability from that system.

We've been able to improve utilization of the fleet and expand the number of transactions that our fleet can handle without having to really increase the fleet size that much. We also rolled out a voice over IP system at our centers nationwide here in the last 24 months, and that certainly have had the benefit of containing some costs but then more so improving customer service.

So I think a lot of these things have contained costs, maybe lower them a bit, but also improved customer service and allowed us to improve our revenue line.

I'd like to thank everyone for their participation in the call. And we look forward to speaking to you after our first quarter earnings release.

Thank you.