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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the AMERCO Third Quarter Fiscal 2020 Investor Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, that the event is being recorded.
I would now like to turn the conference over to Mr. Sebastien Reyes. Please go ahead.
Good morning, and thank you for joining us today. Welcome to the AMERCO’s third 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 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, 2019, which is on file with the U.S. Securities and Exchange Commission.
I will now turn the call over to Joe Shoen, Chairman of AMERCO.
Good morning, everybody. We continue to build our business in quarter three. The basic self-move business remains solid. We were able to continue to grow units rented in our self-storage business. Expenses however, have bumped up. Our spend on some building maintenance and personnel are higher than absolutely necessary, we are tightening up on these as they have outpaced revenue.
As the press release indicated, we saw a significant decline in rentals with last mile delivery services over the Christmas rush. Amazon, pleaded up with more dedicated truck. We expected this but we were one cycle off on the timing of it. We redeployed our equipment and increased consumer transaction, but still fell far short of last year's revenue.
This last mile business has been tough for us to make a profit on. We implemented more stringent customer qualifications this year, and because of that some potential customer went to other rental company.
U-Haul is not in the business of managing dedicated fleet like, for instance, Ryder Systems. However, I plan to continue to earn last mile, gear up business as opposed to dedicated fleet. This gear up business is more a part of U-Haul's quality. I'm looking forward to continued strong rental in the self-storage business in Q4 and hopefully Q1, 2021.
New storage product from U-Haul and many others continues to flood into the market, and will ultimately cause oversupply in some localized markets. However, when that occurs, I expect our teams to be able to manage through it. Business has been and remains very competitive. It is U-Haul's plan to be the customers best choice.
Our profits for Q3 are lousy and some of that will continue to pour over into Q4. We have a solid base and there's room to grow in many markets. We remain focused on earning your continued support. Our EBITDA was down about $30 million in Q3, the rest of that money has been invested in our future and we will continue to do so.
With that, I'll turn it over to Jason.
Thanks, Joe. Throughout my comments, my comparisons are going to be for the third quarter of this year compared to the third quarter of fiscal 2019, unless otherwise noted. So, yesterday, we reported third quarter earnings of $1.58 a share as compared to $4.01 a share.
I'll start off with Equipment Rental revenues, they decreased nearly 1% or about $5 million. During the third quarter of fiscal 2020, as Joe mentioned, we experienced decreased corporate account activity or what many might call the last mile business.
Excluding the decline in this type of business, we saw a continued growth in all other equipment rentals, including our one way and In-Town market. So that’s unlikely that any offset of this business is going to be dollar for dollar. I would expect to see some positive effect on trailing repair and maintenance costs, and perhaps on proceeds from the sale of equipment, as a result of the decline in these last mile transactions. Compared to last year at this time, we have increased the number of trucks and trailers in the fleet and we have more company location.
Capital expenditures on new rental trucks and trailers were $1,161 million for the first nine months of fiscal 2020, compared with $882 million for the same nine months period last year. While proceeds from the sale retired equipment also increased to $591 million, up from $559 million last year.
Storage revenues were up $13 million, that's just over 14%. Looking at our occupied room count as of December 31, we had an increase of 45,000 units occupied compared with the same time last year, that’s a 45% increase in the pace of filling rooms year-over-year.
Since last December, we've added 122 new locations with storage product. From an occupancy standpoint, we continue to add new units faster than we're filling them. Although, that spread is narrowing. So for example, this year we added available rooms at a rate of about 18% and we've increased occupied rooms at a rate of about 16%, so a 2% difference. Over the last two years that spread has been between 4% and 6.5%, so, it's trying to come in, and that's not from decreasing the rate of rooms added, that's from increasing the rate of filling rooms.
Our all-in average monthly occupancy throughout the third quarter of fiscal 2020 was 67%. Again, this quarter, we took a look at our facilities that had occupancy over 80%. As of December 31, of this year, we had 705 locations, or close to 60% of all of our own storage locations that had occupancy over 80%, compared to last year at this time, that's an increase of 48 locations. And the average occupancy at these locations was 90%, up just slightly from last year.
Our real estate related CapEx for the first nine months of this year was $600 million, that's down from $639 million last year at this time. And over the last 12 months, we've added 6,142,000 net rentable square feet to the storage portfolio about 1.2 million of that came online here during the third quarter.
Operating earnings at the Moving and Storage segment decreased $58 million to $62 million for the quarter, and I'd like to touch on a few of the more significant expense items. Depreciation expense associated with the fleet increased by nearly $17 million as we've continued to add new equipment to the fleet. We are nearing the normalization of the rotation program for our 26-foot truck, this should lead to a slowing in acquisitions, which will then result in a stabilization of the fleet depreciation for this model in the next 12 months or so.
Depreciation on all other assets primarily storage location assets, increased by $7 million. The increase in this category was a function of our self-storage development. We begin to recognize the economic depreciation from these projects immediately, while the revenue begins to steadily offset them overtime.
Repair costs associated with the rental fleet increased a $14 million during the quarter. With the increase in the number of trucks in the fleet preventative maintenance costs have gone up in relation. Additionally, during the quarter, we saw a higher count of trucks sold and being pulled out of the fleet for sale as compared to the third quarter of last year, resulting in higher repair cost as we prepared them for auction compared to the third quarter last year.
Outside of depreciation and maintenance, personnel cost represented the largest single increase in operating expenses. Other costs including property taxes, insurance expenses, utility costs or three or larger other items that experienced increases. These four types of expenses including personnel, in aggregate accounted for about $26 million of the operating cost increase during the quarter.
In December, we declared a $0.50 per share cash dividend that was paid in January. And at the end of December, cash and availability from existing loan facilities at our Moving and Storage segment totaled $659 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. [Operator Instructions] First question comes from George Godfrey, CL King. Please go ahead.
Thank you. Two questions. The first one is on the last mile; I understand the profitability has been challenging. And so, if I want to separate the profitability of that revenue and the revenue itself, because if the revenue was going down in the loss of accounts, then that's a less profitable business. I would have thought the margin would have gone higher. That’s first question.
Okay, I'll take that. It probably did, but we still have the fixed cost of that fleet, and the fixed cost variable. So, what happened is we ended up increasing our consumer transactions during the period. So, let's say, the average consumer transaction is $100 minus and the average last mile delivery transaction was about $1000 representative number.
So what happened, we needed 10 to 1 to offset it and we didn't get anything like that. So, you're exactly right, if we had depleted, which we would have seen that happened. We ended up fleet [indiscernible] their business and the business…
And George, this is Jason. One other point to that is, some of the cost aren't from a time perspective immediately on top of each other. The repair and maintenance costs and a line of what the costs that come along with that business, you recognize later on a life of the truck that they use. So, when we have to fix them after they bring them back and when we prepare them for sale, we end up recognizing a more of the cost associated with those transactions. So, it's a little disjointed.
Understood. And then my second question is FedEx was pretty clear about not delivering or working with Amazon and Amazon themselves, tried to push back on other third party sellers from using them as well as they build out their own fleet of delivery services. Is there a concern that Amazon could take that fleet and start cutting into more of the traditional, moving and rental equipment that you offer as well? Just wanted to see if you're thinking about Amazon becoming more of a competitor - not just losing them as a customer but more of a competitor. Thanks.
Well, yes, I was without trying to be too flippant, if they did that, I'll be glad that I'm not an Amazon shareholder, because they are going to lose money right there. These businesses are so different than the utilization side of the equipment, where you have to have the equipment in position. So grossly different.
And you saw that with Ryder Systems, is a very disciplined company, they exited this business precisely for those reasons not that they don't have confidence, they've got a lot of them. But you get in this consumer business, it's a different situation than managing a fleet.
I'm sure Amazon will be fully occupied time to manage this dedicated fleet that they're bringing on it. It's considerable, I don't have actual insight into their numbers. But I got some guess, they brought on it, and they will be pressing everybody's system to just to keep the fleet operate.
Understood. Thank you for taking my question.
Next question comes from Ian Gilson Zacks Investment Research. Please go ahead.
Hey, good morning gentlemen. As we look at the operating expense line, as a percentage of the rental costs has gone up significantly in the fourth quarter. Now, I understand and to have had quite a significant cost increases but according to my calculation and there is something like 4 percentage points of your rental income, revenue rather totally went in that operating expense line alone. So, to illustrate that for the fourth quarter and normally, historically the third and fourth quarter have been closed to expenses, operating expenses. What are we looking at the current quarter? And how much going forward, how longer is it going to take us to get back to a more normal ratio of expenses?
Hi, Ian. This is Jason, I'll start off with this one. Your calculation is the same thing I'm seeing here as far as being up a little over 4%, operating expense as a percentage of revenue. So, in this quarter, I think the biggest flux wasn't necessarily a dramatic increase in expenses, it was the decline in equipment revenue, whereas it should have been a more of an increase in equipment revenue.
The biggest cost drivers are personnel costs for the quarter and we still have to make a decision there that there's some piece of that is a variable, there's some portion of that that is out in the field and is probably in line with revenues at this point.
On the repair and maintenance costs, if you look at what we've reported over the first three quarters, the majority of the fiscal year-to-date increase from repair and maintenance happened here in the third quarter. So, it just so happened in the quarter that we were down in revenue was when we pulled a significant number of pickups in cargo vans and prepping them for sale. And we saw some increase in cost associated with that.
We have the continued drag from property taxes, utility cost and building maintenance associated with the storage development. However, that has been lessened in overtime. It's still a bit of a drag but it's better. I think the drag from those about two-thirds of what it was during the third quarter of last year. So, in my estimation, still the biggest driver of the decreased operating margin is still on the revenue line.
Ian, Joe here, I'll jump in. Think about my comment, which is we had some personnel and some - we still remain with expenses, we’re in absolutely necessary and those should be better under control. At the same time, entry-level wages are going up in this country, both legislatively and demand driven. But, we're competitive, we have a lot of people that we’ll call very operative or entry-level positions. So, that's not a surprise and I have no excuses. We have to make those people more productive in a given hour in order to be able to pay them more. Part of that’s revenue driven, part of it's strategic driven.
We had personal expenses that were in my judgment too strong at both our call center and with our IT personnel, of course, you tend to throw money at both those things. They're very unsettling areas but, I think we overspent there a little bit, and we should be able to dial that back without causing some unforeseen disturbance in the whole operation. But, that'll take, it will be summer before that there be a fair gap. You make a correction it takes a while.
Okay. And you mentioned in the second quarter call about the - exited from California, primarily Los Angeles, and I believe and also San Francisco. Is that continuing with a truck shortage in that area, or are we managing to redress that from?
It's a massive shortage, which the other way to look at it is we need to rent more trucks in but, it's been a challenge for us to rent more trucks. And those areas grow not from internal migration, they grow from external migration. So, people from the Pacific Rim and Mexico, and so when they arrive in that community, we get a zero percentage of them bringing our trucks now. So, that causes this imbalance.
And we've done a variety of things to attempt to balance it out, but we don't have a balance on it, and I think everybody is experiencing the same thing. There's not a magic elixir on that. We have none of our truck assembly plants in California for that very reason in Los Angeles because you just do what you would like to add supply there, but you can't, quite do that with the truck and an amount that would relate to the flow. So, until something substantially changes in the economic [ph] climate, I would expect those places are going to be short of one way eventually.
Now, we can deal with that Ian as you know, with equipment that we use in the local area and return to the same store. And we have been and continue to try to fleet that up so that we have a strong enough revenue base to keep all of our stores active. But, the one way or the outbound equipment is going to be short there for the foreseeable future.
Okay. Finally, how does a U-Box program doing on a year-over-year basis? I noticed that the other revenue line basically was blank at $51 million in it.
Ian, this is Jason. The U-Box program is revenue wise still growing probably at a slower pace than what we saw last year. But, the freight cost in an environment where shipping costs have been increasing across the board. Our team has done a great job of lowering our shipping costs in relation to what they were in previous years. So, whereas revenue growth has slowed a bit, I would say the contribution to profit has normally improved third quarter versus third quarter.
And this is Joe. We also ran our U-Box promotion, that was the first time we'd run it. And we think that it cost us more revenue than we had forecasted the cost. And so, we thought we'll run that promotion again. But transactions are continuing to be strong and there is a strong consumer amongst certain consumers is a strong preference for that sort of move. So, we're going to continue to drive on it. And, I would expect to see that line increase over the next 12 months.
Okay, great. Thank you very much.
Our next question comes from Jamie Wilen from Wilen. Please go ahead.
As far as it seems like at U-haul, we continue to have a major capital allocation problem. As you've said, one of our prime objectives, if not a prime is fleet utilization is the key metric you look at, and that's been declining for a while now. And we continue to really overspend for our fleet. We spent a $1 billion in nine months and when you are adding more trucks, it really hurts the utilization figure.
You know, we're looking at a company where, if we were managing our company better if you have flat sales, you're able to understand that reduced your costs and increase your profits. If you have increased sales, you get leverage on that. But, with flat sales, and an increasing truck fleet, it makes it very, very difficult for us to increase operating profits.
You look at the company our pre-tax profits are lower than where they were five years ago. That's just an incredible number. So, as I look at what we haven't done and forgetting about how much we're spending on self-storage, I really think the company has to add a new Chief Operating Officer, someone from outside the company, outside the company's current culture, who is more focused on generating cash, return on investment, reducing expenses and increasing profitability for the company. It is nice to have a gazillion trucks out there so that you'll never have one that cannot rent. But we've got to optimize profitability, we've got to optimize our sales. And, we have got to be able to generate cash as opposed to being a user of cash.
And, I'm hopeful, that the Board looks through these transcripts, and we'll really look at this closely to see whether we do need some outside input from an experienced person with a different perspective, who can be aggressively cutting cost, raising cash, and making U-Haul a much more productive and profitable company in the years ahead.
Well, thank you, Jamie.
I had a question, but I would love your commentary.
Well, thanks Jamie. I'll make sure that that gets communicated through to the Board. The capital allocation to rental fleet is a little bit torture. We have, essentially two fleet from your perspective which would be our pickup advance fleet which we can make year-to-year moves that are discernible.
With our other truck fleet, you really end up every time you make a move with the head. It's really a seven to 10 year move every time you make a move. So, we are already pretty deliberate there but it's always better to have sharp eye towards that. So, I appreciate your feedback.
And secondly, on the self-storage area. There does come a point in time when you talk about the overcapacity in the industry in the building outlet that we are indeed contributing to that, it behooves us to let more of our stores mature and turn into profit generators to create more for the future as opposed to spending so much, so that our utilization rate goes down. We have an abundance of stores that are not yet profitable, because it takes three to four years to get there. And if we could slow down on that curve of capital expenditures for new storage units significantly, we could see the profit of that business and the cash generation of that business improve at a rapid rate. You plan to do that?
Jamie, this is Jason. So there's a bit of a lean time involved with that. So, our number of active projects has ticked down just slightly. We're down maybe 10 active projects from where we were, it sounds like a small amount, but I think we're going to see that as the beginning of a trend. And when I say leading indicators, I look at acquisitions made over the last 12 months, which are largely conversion properties that will eventually turn into these projects. And we're down fairly significantly on trailing 12 month acquisitions.
So, our total spending at that that we call real estate related, was down like $38 million. It was down to $600 million for the nine months. But there's two components to that, there's the construction component and the acquisition component. And the acquisition component is coming down much quicker, while the construction piece is going up.
So, as an example, today, we have in escrow approximately 63 deals that we're looking at - I'm sorry, 27 deals for $63 million. That's down close to $200 million from the pipeline of deals in escrow last year at this time. So, we aren't going to stop buying new properties, but we have certainly slowed the acquisition of new deals, which then in the next year or two, you will begin to see that translate into less square footage being released down to the system.
Any ballpark for what capital expenditures are now in self-storage versus what they will be next year and the year beyond?
If you look, right now, I think our trailing 12 month CapEx which is acquisition and construction is somewhere around $950 million, $960 million. And I think we'll see that trend down closer to $800 million in the next 12 months or so, and then we'll see after that, if it comes down further from there.
Okay. Don’t you all think those numbers for expansion of the truck fleet and expansion of self-storage seem a bit high for our company?
I think they're a little bit high, part of it is trying to be make sure we're at the party too. Those are businesses, there's always a little risk to this Jamie, and I appreciate that. There's plenty of movement in the country in repositioning and of course, I don't want to be left out of new markets. This land use is up quite a demand driven. When I see a good opportunity to get into a market that I know is going to continue to go up over the next 20 years, I get a little bit worried that we don't get into the market, this land use problem will become insurmountable.
We have many, many communities where literally the land used to not available. And I'm trying to think of some communities, the Oakland, California has had a moratorium on self-storage for maybe eight years. So if you weren't in, you're not getting in, whether I liked it or not, that's how they view it and they have that power. So some of these markets, and it's a judgment and we could be wrong, I'm not going to stay, we're going to be right every time, but some of these markets just want to get into because they're going to close the door. And that is an accelerating trend, it’s a long-term trend, but it's massively accelerated over the last three to five years.
So this is a common thing that does that these city councils that should, they just cease some development types and they're very almost trendy in what they want and what they don't want. And there's quite a little trend that they don't want self-storage. So some of these are pickup. We have a Dallas suburb and we got the property maybe eight months ago and we beat their deadline by 30 days and they've just shut all self-storage down. Just shut it down.
Now we have yet to build the project because I don't want to spend the money, but we have got plans, we're in their site plan deal and we'll be able to drag that out for two years before we have to really go spend money. But, if I don't get the property, then they're not getting that, they're just going to close the door on it, whether I liked it or not, whether I think that's reasonable that I'm not really in charge of that process.
We're not the only people in the self-storage business, but I'm confident if you talk to any other REIT based, they're encountering that same thing where communities are just shutting the door. I'm not at all unwilling to as this particular Texas property, we'll just buy it toward the inventory and drag it out, because I don't want to spend the next $6 million or something, whatever it's going to cost to build it out. But, having us there and spending that money, I think the money well spent. We secured the use and the communities growing massively and there'll be good business.
I understand your view of looking 20 years out for what would be the best usage of capital today that might be worthy in 20 years. But again, fleet utilization of the truck fleet, capacity utilization of the self-storage facilities, our metrics which you should be looking at on a quarterly basis to increase to make this company more profitable. Looking out 20 years is good. But I think you also have to look out 20 months and saying, how are we going to get from here to there? And maybe our view is too long-term and we need to be looking a little bit more shorter-term for how to run this business more efficiently and more profitably. That's my piece. Thank you.
I appreciate that. And Jason pressed me, he has a quarter-by-quarter analysis and, he spreadsheets them all out and we look at what started planning and where's it going? And there's, I think he's trying to do a good job of representing that position and we try to give him real visibility on it. And I'll communicate your input to the Board also. Thank you.
Thank you.
Our next question comes from Ted Wagenknecht, Applied Fundamental Research. Please go ahead.
Ted, are you there?
Sir, are you there with us? Let's move to our next question from Craig Inman from Artisan Partners. Please go ahead.
Operator, at least we're not hearing the question come through.
[Operator Instructions] Our next question from Craig Inman, Artisan Partners. Please go ahead.
We're still not hearing Craig.
This concludes our question-and-answer session. I would now like to turn the conference back over to management team for any closing remarks. Please go ahead.
Alright, this is Joe Shoen, I want to thank you again for participating in the call. We look forward to speaking you in the future and appreciate your continued support. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.