U-Haul Holding Company (UHAL) Third Quarter 2023 Earnings Conference Call Transcript (2023)

U-Haul Holdinggesellschaft (NYSE:BELT) Third Quarter 2023 Earnings Conference Call Feb 9, 2023 10:00 ET

corporate participant

Sebastien Reyes – Investor Relations Officer

Joe Shoen - Chairman, President and CEO

Jason Berg - Chief Financial Officer

Conference call participants

Steven Ralston - Zacks Investment Research

Jamie Wieland - Wieland Management

Operator

Good morning and welcome to U-Haul Holding Company's third quarter fiscal 2023 investor conference call. All participants are just listening to the conference call. [Operator Notes] There will be an opportunity to ask questions after today's presentation. [Operator Instructions] Note that this event will be logged.

I would now like to turn the floor over to Sebastien Reyes. please continue

Sebastian Reis

Good morning Thank you for joining us today. Welcome to U-Haul Holding Company's Third Quarter Fiscal 2023 Investor Call.

Before we begin, I would like to remind everyone that certain statements made during this conference call, including but not limited to statements about revenues, expenses, earnings and the general growth of our business, may constitute forward-looking statements within the meaning of the Safe Harbor Principles of Section 27A of the Securities Act, 1933, as amended, and Section 21E of the Securities Exchange Act, 1934, as amended.

By their nature, forward-looking statements involve 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 the Company's business and future results of operations, see Form 10-Q for the quarter ended December 31, 2022, filed in the US. Security and Exchange Commission.

I am now transferring the call to Joe Shoen, President of U-Haul Holding Company.

Joe Schoen

Good morning and thank you for your call. I am not satisfiedwith our third quarter or our annual numbers. The slight post-pandemic sales growth is clearly slowing. We knew it would be like this. The question now is: will we be able to retain the new customers we served during the boom? Of course I want us to.

In a new movement we experiencea decrease in average miles per one-way trip and a decrease in total one-way trips. For transactions within the city, I hope we start to stabilize. Our decline in downtown revenue in the third quarter is somewhat misleading, as while we saw a decline in last mile delivery revenue, we also increased our transactions with our trusted retail customers.

Self-storage is intensifying for everyone in the industry, and we're not immune to it. However, we still rent out rooms when clients move and we get a fair price. Self-storage is very dependent on the local market. This is nothing new, of course, and a lot of effort is being put into opportunistically and strategically adding storage.

Personnel costs increase. We employ a little more staff than our income justifies. We need to make some productivity improvements before this flattens out or slows down. The leased equipment is undergoing maintenance. The difficulty of buying enough new vehicles and the resulting trade-off between lower depreciation and higher repair costs is the trade-off I'd rather not make. At this point I believe we are trading down. We have very modest control over what OEMs are willing to produce and sell.

Until the appetite builds up and we don't find a better solution, this will weigh on us. We've been through this before and it won't be fixed very quickly. Overall, I'm very optimistic about our prospects. We are working to increase our customer service and value. It's possible and I'm working hard. Jason?

Jason Berg

thanks joe Yesterday, we reported earnings of $199 million for the third quarter, compared to $281 million for the same period in fiscal 2022. In November, we announced our new class of non-voting shares UHL.B Series N issued for our existing shareholders. This issue, along with the dividend policy we have implemented for these new shares, requires that we now report our earnings per share using what is known as the two-tier method under GAAP. This disclosure is included on our Form 10-Q as well as our income statement.

So let me start with our equipment rental income. As you may recall, last year we saw an increase of $187 million in U-Move revenue during this third quarter, and the year before that we saw an increase of $167 million. In the third quarter of this year, we are showing a drop of $77 million.

If you look at our most recent pre-COVID third quarter, which was the third quarter of fiscal 2020, and calculate an average growth rate over those three years, that would still be up 13%. The year-over-year decline in one-way transactions that we saw last quarter continued this quarter. At the same time, we also saw an overall decline in downtown transactions in the quarter due, in part, to a decline in the last-mile delivery rental business.

In the first nine months of this year, we invested just over US$1 billion in new rental equipment, up from US$809 million in the first nine months of last year. But I would estimate that half of this increase is due to inflation, while the other half is related to an increase in production of trailers, hitches and U-box containers.

During our last earnings call, I reduced our forecast for gross capital expenditures for the fleet to $1.4 billion and have now reduced it further to just under $1.3 billion. Revenue from the sale of leased equipment retired during the nine months increased $56 million to $527 billion. Pickup and van sales revenue increased year over year, but we deliberately reduced van sales for the time being.

Retail values ​​for pickup trucks and vans, while historically strong, are below last year's levels at this time. Self-storage performance remains strong, although as Joe mentioned, there are signs of moderation. Storage revenue increased by $31 million, a 20% increase. Looking at the number of occupied units at the end of December, we had an increase of 55 thousand occupied units compared to the same period last year.

In addition to the increase in occupancy, we saw an average growth in revenue per foot of almost 9%. Our occupancy rates across the entire warehouse portfolio decreased 70 basis points year-over-year to 83%. The subdued occupancy is also reflected in the same-store clusters of these properties, where average occupancy is down about 80 basis points to 94.6%.

On the expansion front, we invested just over $1 billion in property acquisitions in the nine months of this year, along with developing self-storage and U-Box facilities, up from $783 million over last year. In the last 12 months, we added 77,000 new units, or approximately 6.2 million net leasable square feet. And we currently have another 6.2 million square feet under development across 148 projects.

And then we have about 153 other projects where we own the land or the buildings but haven't started the actual construction yet, which should be at least another 9.2 million square feet by the time we're done. On the new acquisitions front, we've narrowed it down to just under 60 fiduciary agreements. When we talked last quarter, we were at about 100, so that number started to go down.

In the handling and storage segment, we saw growth in expenses outpace growth in revenues, resulting in a decline in operating results. Our moving and storage operating income decreased $99 million to $305 million in the quarter. This continues to represent our third best third quarter - still one of our best third quarters in company history as measured by total operating profit. And it's one of the best operating margins of the third quarter as well. That's not to say we're not working on improvements.

Within operating expenses, we increased by US$75 million. In the press release, we highlighted the $34 million attributable to fleet, repair and maintenance. On this front, we are increasing our in-house capacity to handle more repair work ourselves. And when it comes to preventive maintenance, the fleet is well positioned for the summer months. The increase in personnel expenses slowed to a $13 million increase in the third quarter, and in December we saw a slight decline. But there's a lot more work we can do here.

The next largest increase in operating expenses was a combination of property-level costs, which include utilities, construction, maintenance and property taxes combined, which increased by $13 million. We continue to have strong cash and liquidity at the end of December. Our cash and borrowing facilities available when we moved the storage facility totaled $2,895 billion.

We also invested $225 million in six-month US Treasuries during the quarter to boost our yields. Currently, this US$ 225 million is not reflected in cash, but in fixed-term investments. During the quarter, our interest expense on relocation and storage increased by $15 million, while interest income on our cash and short-term investments increased by $24 million. And then our interest expense for the nine months increased by $43 million, while interest income increased by $42 million.

With that, I want to pass the call back to our operator, Gary, to start the Q&A portion of the call.

Q&A session

Operator

Excuse me. We now begin the question and answer session. [Instruction Manual] [Technical Difficulty]

Joe Schoen

[Technical Difficulty] Purchase Cycle. And of course I put more emphasis on budgets and I think that's standard management. We have some opportunity, I think, in leverage cost of ownership. For our customer-facing team, we would need to reduce work to reduce staffing costs. And we have several initiatives that show promise.

And of course you can see from Jason's comment that our finance team has had great results.

Sebastian Reis

The second question is, with self-storage migration rates on the decline and utilization in the industry declining, is there any change in the desire to expand self-storage?

Joe Schoen

As for the desire, the desire is very great. So -- but of course what we're trying to do, memory is a very market-specific business. In my experience, it's not a national market. So we're trying to take opportunities to find things that are doing a little bit better than what the macro market is reflecting. And I think we're showing some success with that. Of course we take it all forward and we have a lot of confidence when we start, it doesn't always work as expected, but in the macro sense it works.

So I still have a desire to increase self storage, it's a minimum asset of 30 years and I don't know how long this current slump is going to last. If it takes a few years, that's fine, up to 30 years, if there aren't such big disruptions. So I'm still taking it forward.

Sebastian Reis

And finally, CapEx for new trucks is increasing, but it looks like management is still looking to invest more in the aging fleet to improve. On a scale of 1 to 10, how close is the company to where it wants to be in terms of fleet age? Any color on how much management has to spend to get the fleet back to good condition would be helpful?

Joe Schoen

I'll tap on it and then Jason can try to give you a number. In fact, it's not the age we're working on, it's the cost per mile. There is a trade-off that relates to the accumulated miles of the vehicle and that correlates with age, we have the same uses. This will be very model specific.

On a scale of one to ten, we're likely to have the best shape in our small trucks and the worst shape in our larger trucks. And I think if you just say we're having more restrictions and replacing our bigger trucks than our smaller trucks. Well, I don't know on a scale of one to 10, it's not how I imagined it, I wanted to tell you.

Jason, would you like to address the number?

Jason Berg

I still think we are about a year behind on truck purchases. So that's not going to be all -- it's not all going to happen in one year, it's going to be spread out over several years. So there will be increased spending over several years. I would say so far this year we haven't been able to make much progress on the vans to improve that. We're just treading water, but with the number of new, larger trucks we're getting.

Sebastian Reis

Gary, do we have any more calls on the line?

Operator

We do. The first question comes from [Steven Ralston] (ph) with Zacks. please continue

Steven Ralston

Good morning I'm sorry I broke up. I went to star one and I don't know if this question has already been asked. But I paid more attention to the fact that it was a very tough comparison quarter. I thought you were implying that and we are trying to keep the customers you are getting during COVID. You also mentioned that you've been in this situation before. Could you talk about what you've done in the past and will you do the same this time, or is there something extra you would do to try and keep the customers you've gained during COVID?

Joe Schoen

In general, consumer expectations in the United States have increased over the past 20 years and I expect them to continue to rise. So everything we've done in the past is applicable, but the customer expects us to do more, and my challenge is to do more without just increasing relative costs. The positioning of our so-called rotational fleet, that is, the fleet that basically stays in one place most of the time. This is a critical step. I think we've introduced new analytical tools that give freighters peace of mind that people are doing or trying to make a decision at the local level. It must be on the truck, in locations A and B or C and D, and this sounds like a simple thing, but it's a storm of information.

We've spent some time getting new or better analytic tools that I think will help with that. And I think we only saw a small part of that effect in Q3. And that's who I am – it's just a bunch of little things. It's like thinking football. So many little things that had to be fixed.

Steven Ralston

Yes, block and tackle. I was impressed by Sebastien's comment that you had an increase in operating margin in the third quarter, which is normally a slower fiscal quarter. And I look back and yes, the operating margin was under 20% almost the entire time, and here you got to 23%. Has the cost structure changed structurally?

Jason Berg

this is jason I'd say it's probably double. It probably has more to do with revenue, and we have this larger self-storage revenue base, we have U-box revenue. So our business and margins are economies of scale. So the more utilization we can squeeze out of our assets, the better things will be. So if you look at our expense structure over a longer period of time, I think we've done a good job of improving revenue without increasing expenses so much. In any small period of time, compared to the last couple of years, you see some big fluctuations.

But over time, we've done a good job growing revenue without significantly increasing expenses. There used to be times when we went on a losing streak in the third or fourth quarter. And I think self-storage is a big factor in why that's no longer the case.

Steven Ralston

In order. Thanks for answering my questions.

Jason Berg

thanks Stefan

Operator

The next question comes from Jamie Wieland of Wieland Management. please continue

Jamie Wieland

Hey guys. Of course, that's the U-Haul call now. The first question concerns Public Storage's public announcements that they would try to buy lifetime storage for 11 billion. And Life-Storage said the price wasn't enough. Just for reference: Life-Storage has approximately 80 million square meters of property and management. What is our current square footage for self-owned and managed self-storage?

Joe Schoen

Jason looks up the number.

Jason Berg

In terms of domestic square feet, we have just over 55 million square feet, and including managed square feet, we are about 78 million.

Jamie Wieland

So there were 80 million, where there are 78 million, there is something different...

Jamie Wieland

79 million.

Jamie Wieland

On your premises. Okay, pretty much the same. Are there differences in your facilities or occupancy rates or rental rates or growth trends in your business as this is publicly available information compared to our self-storage operation?

Joe Schoen

Well, this is Joe. I thought Uncle Bob's wife, I thought that -- well, that change was -- I don't remember getting a good response from shareholders in the short term, I think it was a real breakthrough. They got to where they had a brand name that they could leverage before they had no brand presence at all. I think they've done, you know, a credible job of moving that forward. I don't know about it. I can see many of their establishments, but they don't post specific information about them. But my impression is that the Life Storage team has increased the ratio of Class A to Class B storage in their organization since they did B, moved away from Uncle Bob, and worked hard after that.

So I think they did it decently in my eyes. I don't know if they are - last time it looked like they said they still had some interest. I don't know exactly, I don't feel it, it's better to say.

Jamie Wieland

They called them Class A and Class B rates. How would you characterize U-Haul's self-storage asset?

Joe Schoen

Well I think it's the same mix. I mean, if you have a 30-year asset, it's not what you would build today. Now we typically go through these projects again and reconfigure them and say, okay, well, we have a complete list of features that we want to see in an installation, we take an installation and we implement it. Looking back and where it falls short of what we would build today. And is there a way to do this? And then you see us spending money on what I think we call improvements to some [technical difficulties] for that.

But - so we do it all the time. I couldn't tell you I don't get many opportunities to browse other people's sites. I get some but it's not - they're not as open about it. You need to adapt the operator a little bit to do this. So I think it's clear that we have a long-term strategy. I think so, let's argue with more certainty. But other than that, it's kind of, it's quite a bit of money, but I think they did a decent job at first.

Jamie Wieland

There's -- Joe, has Public Storage approached us yet?

Joe Schoen

Yes, around 1988.

Jamie Wieland

OK.

Joe Schoen

Good covers, the point of use.

Jamie Wieland

Given that they're looking to make a switch from storage to lifetime storage, it would be interesting if you could consider a switch from storage to our self-storage to crystallize the value you've created in self-storage. that $11 billion is not far from our total market cap for the UHOL. If we could get shares for that and then distribute those shares to shareholders, or a very efficient way to create liquidity and preserve value for that operation. And we'd still get all of our truck rentals basically free if we could. Would you imagine such a scenario? Sounds like an interesting way to create value for shareholders and your family in a very tax-efficient way?

Joe Schoen

You know, sometimes I didn't really look at it closely. I think the fact that our strategy is to deviate from the standard self-storage REIT and that we're in the U-Box business, which has gone public and gone, is really good. So we're in the truck rental business, which the [unidentifiable] public is involved in, they have nothing to do with it. I think for extra space and life there are still some places that offer their own truck rental.

But we have -- I think our physical strategies have diverged, but it's probably not something I would expect from any real movement, that would be my opinion. Again, you never know if our strategy will work. We have somewhat divergent strategies, as Jason said, self-storage has probably solved the problem, so we don't need to seasonally adjust our workforce as much as we did 15 or 20 years ago. 15 or 20 years ago, in October, September, we were still at rock bottom because we just didn't have -- there was too much seasonality in the trucking business.

And so we've done a lot of things, part of which is the U-Box, a bunch of storage, and then we've done a huge amount, like us -- the size and location of our so-called rotational fleet. And all three combined gave us more predictable gains during the winter months. Well I don't - it's getting real, I have no idea if audiences in life can make that happen. I have no idea if they -- who wants to do what, I'm not privy to that, but it's really interesting if they have slightly different strategies.

And combining them, I suppose both could argue, the other's strategy is no good. So I really don't know. Public does a great job of both. Getting value for their NOI and I think they're doing a great job in the market and they respect a lot of investors. And so I think every other REIT competitor has been struggling in the numbers that I've seen. I haven't seen anything in the last 30 days, but we're looking into things. The public seems to be doing better at attracting investors to give them our rental income. So maybe we can make this thing work. But with regard to operators only for operators of both grades.

Jamie Wieland

OK. Joe in - I'm sorry.

Joe Schoen

Continue.

Jamie Wieland

Joe, on the truck rental side, one of the things you've said in the past is that the most important metric that you really look at is fleet utilization. Now I realize that we need to increase the age of the fleet, but it seems that the volumes are decreasing a little bit, but the fleet size is increasing. How does this fit with your goal of optimizing fleet utilization?

Joe Schoen

So we need to tweak it a little bit, we were -- I think a little shocked by those three years of very heavy occupancy, but the average miles per existing unit has mostly gone up. And average miles are a better indicator of cost per mile, right? So -- and also the availability, I'll be a little off, but we have about 2,000 more trucks out of service for maintenance today than we did a year ago, because you've seen, as you probably know from servicing your own vehicle, there's a lot from [Unrecognizable], and then, it continues, you have to take it to maintenance and you have to take it out of maintenance. And that wastes time and basically makes the fleet unproductive.

So, we invested a lot and hired employees to try to speed up this process a little. But we're -- if you take our number of top-of-the-line vehicles compared to last year, I'd say we're taking 2,000 because they're just not running. 2,000 more than we would have seen a year ago. And I agree with you, we're getting to the point where we might have to print some -- but we have to do a very specific model, we have to give up some trucks. But the vehicle fleet also becomes expected with increasing age. When it's hard to maintain the same usage just because maintenance intervals are getting in the way. We've worked really hard this winter, as Jason alluded to, to get to spring with a fully serviced fleet. We've probably crossed that line in the last six weeks from where we are to where we won't be.

Now of course I have to wait and see how customers react to this. It's not very clear, I see all kinds of positive signs, but overall, like I said, one-way trading is down. And if we don't have the transaction, we don't need the trucks, it's easy. I agree with you 100%.

Jamie Wieland

OK. And finally, a few years ago, you used technology to start a program where people can rent a vehicle without having to go to a store, and they can do that 24/7. Can you talk about the successes and failures of that and how it changed the dynamics of your company?

Joe Schoen

Well, it's obviously an example of technology changing, but also, if the consumer wants it, there are more people who want to do a low-contact version of the transaction. And there are people who want to transact at times when Walmart is open for business rather than when U-Haul is open for business. Then there was a new transaction at 9am and we didn't see an opportunity to act on it. So what we call a 24/7 truck rental has been a success. It's a percentage and a little bit more of that at merchants as a percentage of the total transactions we do at the centers. And that's because our centers operate seven days a week and dealers typically operate five days a week. This has allowed us to mitigate what may have been a small decrease in overall demand through an improvement in our service and the customer has responded. So it was a success.

There is still a lot of room for improvement and we can hardly improve on that. I would pick a location in Park Slope, Brooklyn Park Slope and that's where the company runs a location, it's a big location. They are the managers who did a really good job of literally getting the customer to complete the transaction all the way to the keys. So the customer comes in, calls and basically everything is in order. We need to see the driver's license and ask a question or two handling keys. And so the trucks are all -- we have them all -- we code most of our locations so that any time we can tell where the truck is, we can direct the customer to do that.

And in Park Slope, they just go to the truck and go. So this is an example of increased productivity. And we just need more of that and we're very aware of that. We're working on it. It's not -- it didn't come as quickly, but we've got good reception with this particular program. I can't put the number of transactions accumulated in the year very, very carefully. But I think we're up about 14% or 15% year-over-year on those transactions, that's one of those numbers.

Jamie Wieland

OK. thanks joe I am grateful.

Operator

That ends our question and answer session. I would like to turn the conference back to management for closing remarks.

Joe Schoen

[Todd] (ph), this is Joe. I just appreciate you calling. As you can see, we are trying to learn how to improve communication with investors. I appreciate Steve that Zach is on the phone. I mentioned last time that I would like another organization to follow us. We're trying that, but I'm not learning right now, it's not a 30 or 60 day process. It takes a while. And so I'm not going to say we have something until we have something, but we're working on it. Again, I appreciate it. I look forward to speaking with you on the next call.

Operator

The conference is now complete. Thanks for watching today's presentation. Now you can disconnect.

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