Good morning. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the U-Haul Holding Company Second Quarter Fiscal 2024 Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. Thank you. Sebastian Reyes, you may begin your conference.

Good morning. And thank you for joining us today. Welcome to the U-Haul Holding Company's second quarter of fiscal 2024 investor call. Before we begin, I'd like to remind everyone that certain statements during this call, including without limitation statements regarding revenue, expenses, 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 risk 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 operating results, please refer to the company's public SEC filings and Form 10-Q for the quarter ended September 30, 2023, which is on file with the U.S. Securities and Exchange Commission. I'll now turn the call over to Joe Shoen, Chairman of U-Haul Holding Company.

Thanks, Sebastian. And thank you everybody for joining us again. As I'm sure you see from the numbers, we've given back more of the U-move pandemic transaction gains than I would like. The Safemove transaction decline impacts most of our product lines. All of our business lines remain competitive. However, I'm not cutting back on rental fleet CapEx due to being starved for new equipment in the 2020 to 2022 timeframe. Rental equipment acquisition and maintenance costs, unfortunately, continue to outpace inflation. Disruption of the OE supply chain due to government mandates for electrification is a huge driver of these increased costs. The public is starting to push back on electric vehicle mandates that fail to meet nearly every metric of a sustainable vehicle strategy. This may cause some pause with the OEs. U-Haul is continuing to invest in self-storage and U-Box products with the expectation of revenue over the next five years. Our typical project is about three years from acquisition to opening. Shutting down development now will cause a revenue low two to three years from now. This strategy is clearly causing increased carrying costs. We are also investing heavily in digital tools to enhance the customer experience. I consider this vital to our continued success. My focus remains on continued implementation of the fundamentals in our U-move and U-store businesses. I will now turn the call over to Jason for a run-through of the numbers.

Thanks, Joe. Good morning, everyone. Yesterday we reported second-quarter earnings of $2.74 or $234 million, compared to $350 million for the same quarter last year. From an earnings per share perspective, we reported $1.40 for non-voting shares this quarter, as compared to $1.73 for non-voting shares in the second quarter of last year. This brings our reported six-month earnings to $530 million, compared to $688 million for the same period last year. We reported $2.71 per non-voting share for the six months compared to $3.41 per non-voting share last year. Starting off with equipment rental revenue results, compared to the second quarter of last year, we had a $93 million decrease or about 8%. Over the last five quarters, we've had a $320 million decrease in U-move revenue. Once again, I remind everyone of the eight quarters before that, starting with our second quarter of fiscal 2021, where we experienced a $1,428 million increase over that timeframe. Compared to our last pre-pandemic second quarter, which ended on September 30, 2019, we've increased our second-quarter equipment rental revenue results by over $265 million on a compounded growth basis, that's about a 7.5% annual rate. All of this to say that while we're giving back some of the pandemic-era gains, we are far from losing all of that. The trends that we've seen the past several quarters continued. Total transactions declined a little over 4%. Miles per transaction fell compared to last year, although we're still ahead of pre-pandemic numbers. Revenue per mile has continued to incrementally improve, albeit at a slower rate than what we've seen in the last couple of years. October results continued to trend downward compared to last year. Capital expenditures for new rental equipment for the first six months were $974 million. That's a $256 million increase compared to the same time last year. We've increased our fiscal 2024 full-year net CapEx projection, net of sales, from $820 million to approximately $870 million. Proceeds from the sales of retired rental equipment increased by about $80 million to a total of $405 million for the six months. Sales volume has increased, while average proceeds per unit sold have declined. Switching to Self-Storage, revenues were up $23 million. That's about a 13% increase for the quarter. The improvement was split between increases in the total number of occupied rooms combined with higher revenue per occupied square foot. Our occupied unit count at the end of September was up over 35,000 compared to the same time last year. During that same time frame, we added nearly 53,000 new units to the portfolio. This differential is leading to our all-in average occupancy rate during the quarter decline by 120 basis points to 84.2%. This same moderation in occupancy can also be seen in what we're referring to as our same-store grouping in our press release, where we had an occupancy decrease of about 170 basis points to 95%. From what I can read and hear, other public firms in the self-storage space have been reporting a toughening market brought on by changing consumer behavior and perhaps rate actions that have been taken over the last couple of years. I can tell you that we are experiencing a slowdown in move-in activity as well compared to the last couple of years. However, our asking rents for new customers on average across the entire portfolio are up a little over 3% year-over-year. Another metric to consider is our average new customer rents compared to the rents that are paid by people who are leaving. The incoming rates were a little over 1% higher than the rents paid by customers who have been leaving. It’s very likely that the downward pressure on new move-ins and the reported discounting by some of our competitors could slow our Self-Storage growth for the rest of this year. During the first six months of fiscal 2024, we invested $633 million in real estate acquisitions, that's along with Self-Storage and U-Box warehouse development. That's a $49 million increase over the first six months of last year. Most all of that is in the form of additional development costs. During the quarter, we added 872,000 new net rentable square feet, about 400,000 of that was the acquisition of existing Self-Storage. And we currently have a little bit north of 7,400,000 new net rentable square feet being actively worked on. Our operating earnings in our Moving and Storage segment decreased by $113 million to $402 million for the quarter, brought down by the slowing of U-Move revenue. Operating expenses were up $24 million for the second quarter. Fleet repair and maintenance was up $17 million. That's a combination of costs associated with prepping trucks for sale, along with costs associated with preventative maintenance work. Personnel costs were up $18 million. Our headcount for this quarter compared to the same quarter last year was up about 2.5%, which is significantly down from the increase we saw last year at this time of around 16%. As a percent of revenue, this quarter was higher than what we reported in the last two fiscal second quarters. However, if you go back in time, personnel costs right now are not out of line in comparison to similar time periods in previous years. We're continuing to place a premium on having access to cash and liquidity. At the end of September of this year, cash along with availability from existing loan facilities in our Moving and Storage segment totaled $2.555 billion. With that, I would like to hand the call back to our operator, Sindhu, to begin the question-and-answer portion of the call.

Our first question comes from Steven Ralston from Zacks. Please go ahead, your line is open.

Good morning. Reviewing the numbers, it seems to me that the operations are impacted by a slowdown in moving activity. It appears to be a transition to a lower plateau from the record year. I've examined several segments and have a model that accounts for seasonality. Even in the Self-Storage business, it looks like a slight decrease to a mid-single-digit level. Would you agree with that?

This is Joe. I would agree. I'm not accepting that. I'm looking for something different, but I think that is a number for sure.

Given that premise, at least from my point of view, the only aberration I see is that the cost of the self-moving equipment has increased more than expected. And also these products increased somewhat also. I guess about two conference calls ago, you had plans to deal with this increased cost, primarily due to inflation. Could you expand on how that's progressing?

So I'm not sure what you meant by other products, but I'll address self-moving products and services. I think that any pressure there is give or take, inflationary, it's not out of control. When you get into our motor vehicle fleet, there's where you see what you read about in the newspaper, which is basically due to government mandates, all suppliers are subsidizing electric vehicles by enormous increases in gross margin on their internal combustion fleet. We're stuck in that little bind right now. Buying electric vehicles isn't the way out because they don't really have product. I don't have any effective way to lobby the manufacturer to change course there. As you know, they have tremendous political pressure on them. So what's really going to have to modulate this in my judgment is sales at the dealerships. The point they can unload this stuff with the dealerships, they're going to have to face the music. The retail customer does not have to buy the vehicle this year. We're running a business. We kind of need to replenish stocks, but the retail customer can postpone a vehicle purchase. And I think that until that happens, we're not going to see any change in the manufacturer strategy, which is basically to subsidize their enormous losses on electric vehicles by charging people who drive a gasoline-powered vehicle. What can we do given that we can't influence that at least in the short term? We have to work on the productivity of rental equipment, which is largely positioning. Having over 32,000 retail outlets is a wonderful competitive tool, but it goes the other way on productivity of equipment; the more outlets you have, the harder it is to maintain levels of productivity. Over the years, we've been able to deal with this with improved electronic tools and more or less knowing where our equipment is on a real-time basis. There are still some gains to be made there. And so I'm focusing on that real hard. We're investing steadily in improving the digital experience for the customers. Our customers, much like everybody in the economy, want a digital experience, not a person-to-person experience. So we're investing to improve that experience. Those gains are slow, but we see that we're making some progress there, and we get the customer a little happier. The positioning of the equipment is a big focus of mine at this time because that's something we can control. We don't entirely control it because customers go where they want to go. But we have ways to influence that. This has been my focus. I had all my direct field reports in about a month ago; we went through some ABCs of how we're going to better position this equipment. That takes a little while; you can't just move it. But we'll make some progress on that and maybe dent these increasing costs a little bit. But right now, I don't see how we're going to get ahead of them in the near term.

Initially, you did not accept my premise that we just stepped down to a slightly lower plateau in the basic self-moving business. What is your view?

Well, I thought I said that, yes, we're now at more historical growth levels. And you're calling that a plateau, okay, I hear the same thing. And there's no question that's it. But of course, over my career, I've always believed that there is room in a capitalistic economy for someone who will hustle everyone else. If you work on a problem long enough, you will gain some advantage. I don't expect that. I expect us to go ahead. I don't see any advanced strategy staring me in the face, okay? But we've gone into self-dispatch on rental equipment to a great extent. We've moved heavily into self-storage. Those you can't pull it from the numbers, but that's baked into the numbers. And that's not been enough to turn the thing. You can say we're right back where we started, although we're well ahead of where we, projected our revenue five years ago. We did project we'd be anywhere near as good on revenue. So all my life, we've been able to increase transactions at greater than the rate of population growth. You can argue that moving is a need, not a want. People do it because of fundamental things like births and deaths. So then you could say, we should be performing at the rate of the population growth. Well, I've never accepted that. And in fact, we have never performed at that lower level. What we're continually looking for are more customer needs that we can satisfy with our self-move or self-storage product. We continue to push hard on the U-Box product, which resonates with a significant number of customers. I have an effort right now to make our digital tools much more customer friendly. Our transactions are still too complicated, and we're trying to get that simplified to where it's easier for the customer to execute.

Our next question comes from Keegan Carl from Wolfe Research. Please go ahead, your line is open.

Yes, thanks for the time, guys. I guess maybe first, just trying to better understand what some of the moving parts in the moving business. So I understand it's down 8% year-over-year, but obviously, you've grown your store count and footprint, too. So I'm just curious how much of your store count grows in the same period year-over-year? And I know Jason mentioned transaction is down 4%. I'm assuming it's not on a comparable basis. I'm just trying to better understand because I'm actually a bit surprised how well it's held in given what's going on with the existing home sales on a year-over-year basis.

Keegan, this is Jason. I'll start with the distribution footprint. We're about the same number of retail locations that we were last year at this time; within 30. We're at about 23,730 at the end of September. We did manage to grow the company-operated locations by about 66 from last year at this time to this point.

I'll pipe in on that. I usually consider one company location to be the equivalent of 10 independent locations. So you could argue that if we're up 60 locations, I'd say we're really probably up 650 or something like that. The net effect on the consumer is disappointing because I'd like to have seen more transactions. Of course, with many parties, we learn as we go, but I think we're going to continue to see transaction growth. We have stabilized a little bit in what we call in-town transactions, which is the rent it here, return it here. Those transactions are a bit easier to project than one-way transactions, and that’s very positive because it’s still a move. We want to capture all the moves. So yes, I think you’d have to say our productivity per location is down a decimal point or something. Not a tremendous amount, but a small change there has a big impact ultimately on cash flow and profitability. So we're always watching this and also the productivity of the equipment by type and volume. We're doing some realigning there and may be about four months behind on sales. But sales are now catching up after we didn't sell trucks for about two years because we couldn't buy any. So now we're rotating some of those trucks out into the for-sale market, which will help clear out our volume of repair because the oldest trucks obviously create the most repair.

Got it. And I think your commentary on one-way moves is interesting. I'm just curious, do you know what percentage of your moves or what percentage of your revenues you'd attribute specifically to the one-way moves?

Yes. This is Jason. The one-way revenue is probably 46% to 47% of the total truck rent revenue.

Got it. That's really helpful. I guess shifting gears here to Storage. On a relative basis in your portfolio, it's performing well. I'm just curious, do you know what percentage of your customers are tied to movement more short-term in nature? And I guess what sort of upside do you see in that business if existing home sales start to improve?

I don't believe that home sales will have any impact on it. Approximately 40% of people are in rental situations, and it could be higher if we consider households with multiple families. We've never observed a strong link between new home sales and our business. However, we've noticed a strong positive connection between overall consumer confidence and moving, which is logical because when people feel optimistic, they're more inclined to take the risk of relocating. I hope that answers your question.

Okay. And then maybe on storage pricing power, I thought your commentary was interesting that you rent roll-up, which is much different than your public peers. I guess how are you thinking about rate increases in your existing customer base because you actually have a revenue tailwind if they move out?

Sure. This is Jason. We have a very methodical approach to rate increases, which I think in the last year, the competition was much more aggressive than what you saw us be. So they are dealing with the effects of that, whereas I think we still have some upside. Now, we normally just go about working our plan regardless of what everyone else is doing. If we're providing a good product and service to folks, we stick with it. I think we still have opportunities. I look at the facilities we've opened in the last year, and they're still filling up at the same rate or faster than what facilities have opened in the last three to four years.

Got it. That's super helpful. And then maybe just shifting gears here to the final topic, really focused on CapEx associated with your new fleet. I guess just any update on how the refreshing of the fleet is going? And then I know you mentioned sales are down on your used trucks from a pricing perspective. Just kind of curious maybe how down is it on a year-over-year basis?

Sure. I'll hit this first before Joe does because it's important to look at our truck sales in two pieces, right? There's the smaller trucks and cargo vans that sell in and out much more frequently. In that section, we've increased the pace of sales this year, and the prices that we're seeing at auction and wholesale have come down. So our average gain has decreased. On the trucks that Joe was referring to earlier about us being behind in sales, that would be the larger trucks, the 10-foot trucks up to the 26-foot trucks. There, we're about where we were last year on truck sales, but we pulled a few more thousand from the fleet prepping them for sale. That's where we're likely to get the benefit on the repair and maintenance side is by pulling those trucks out because those are the trucks that we're holding 10 to 15 years in the fleet. And throughout the strike, we have not had an issue as far as getting those new cabs and chassis, fortunately. So this has been a pretty good year as far as bringing in new equipment, albeit at a higher price.

Got it. And I guess, is it fair to assume that as you guys work through replacing the fleet, your near-term CapEx will ramp, but there's going to be a material decline in maintenance CapEx? Is that the right way to think about it?

I've discussed this with others on the phone. The $1.6 billion we plan to spend this year on the fleet likely includes both growth and maintenance expenditures. At this point in the cycle, unfortunately, most of it is for maintenance capital expenditures, and I believe we will experience another year or so of this. After that, we will stabilize and determine what the maintenance capital expenditure figure will be. It used to be around a net $600 million, but with current pricing and the size of the fleet, it has risen from the mid-500s to possibly the mid-600s. We need the pricing environment to stabilize, and we need to determine the appropriate size of the fleet to establish a reliable run rate for maintenance capital expenditures.

Got it. That's it for me. Thanks for the time, guys.

Our next question comes from Jamie Wilen from Wilen Management. Please go ahead, your line is open.

Thanks. Joe, you've always mentioned that fleet utilization is one of the keys to profitability for U-Haul. I realize that during the COVID-related spike, we didn't have enough product there. But given that demand is a little down, shouldn't we reduce the fleet size a bit right now so we can increase utilization?

Absolutely. We have reduced the pickup advanced fleet roughly 4,000 units. And we will trim some out. You reduce the fleet as a tail end. Yes. That's these trucks that we'll take them to sale.

Okay. On the self-storage side, you have a chart in there for the various occupancy rates in metropolitan areas around the country. Does that guide you at all as to where you should put your resources as you grow your self-storage business? In other words, putting more units in the ones where occupancy rates run very high like Georgia and less in areas like Pennsylvania where they're running lower?

Generally speaking, yes. A lot of the decisions get down to a micro market. Let's say, a 3 or 5-mile circle, not a state like Pennsylvania. There are still opportunities in Pennsylvania. There are more opportunities in Georgia. So we kind of sort through that. It’s a little bit opportunistic because there has to be a site available, so you can find some places where the occupancy and the rate are great, but the sites are just very cost-prohibitive. I currently have three sites that we committed to, and now we're not going to get land use on, so I'm going to be stuck with those sites, but in the competitive real estate market, we had to go hard before we could be absolutely certain land use would bite you. So they're great areas, but they're not going to let us build on them, but everything comes out on. So yes, you're always looking for rate. Every time we do a project, we pro forma a rate, of course. Rates around the country can vary substantially. Certainly, $0.40 a square foot per month is a significant variance. It’s not always explained by costs or whatever. So you're trying to sort for places where you're going to have a rate that at least allows you to forecast a profit and get some of these markets; they’re difficult because it’s been rough to sell something in L.A. at the prices stuff is selling for, very difficult to project the profit. I would say our movement in L.A. over the last four years has been largely driven by the need to do something or we’re going to go out of business, not because it's a huge profit opportunity. In other words, we need some network here, and we need to get in, but are we going to make money to make Jason and his team happy? It’s hard to forecast that. Now with this inflation running, that may bail us out on some of these things. You don't know for a fact. Yes, so we're absolutely trying to go where the occupancy and rate combination would suggest that it's a good thing to go there. Now of course, so are a lot of other people and over the last 20 years, more people have accumulated information on these markets. So one time, I think we clearly had the best information on that with public storage very close to us. Now there are third-party sources that offer pretty good information on rates and occupancy. So it’s not a big secret where these pockets are. Does that make sense? We have to be careful.

Yes. In self-storage now, we're doing on a run rate probably $900 million to $1 billion of revenues. And again, when you look at the publicly traded peers like CubeSmart, when LSI was public. The market value for $1 billion of self-storage revenue was about $8 billion. How can we close that value gap for U-Haul with where the third-largest self-storage operator, we're a good operator, and we've grown at a faster rate of building new units than anybody else that I can see? Any thoughts on how we can close that value gap for shareholders?

We did a couple of things trying to make the shares trade a little bit better that we're working, of course, with analysts, and you heard some of them on the call here today to try to get them on board. And then, of course, we're stuck with our performance. At the end of the day, you have to perform. I think we are building in some increases, but I don't see us seeing those kinds of evaluations in the next three years. No, I just don't see that happening. Of course, all of my family's wealth is tied up in this operation, 100% trust me. Yes, if this stuff trades at that, it's a good deal for me. I have a cuisine of interest, maybe a little different timeline, but I got an interest in a very patient person with us. Much longer than normal time horizons compared to your peer group or at least what I've been exposed to. But it has to happen, and we're working towards that.

And lastly, when you talk about the disposal of vehicles, a lot of the equipment rental companies have gone from putting all their fleet at auctions to doing a bit of it themselves, feeling like they can gather a much higher price per unit if they can do it themselves. Does U-Haul send everything, all the vans to auction, or do we have a mechanism ourselves where we dispose of them to try and get a higher revenue on disposal?

If you're talking about a van, it's similar to a Ford Econoline van. We sell 90% of our own trucks through a large sales organization. For vans, we engage in what could be termed commercial sales, which includes a considerable amount of business outside of auctions. The pricing is usually comparable, primarily targeting buyers who have purchased trucks from us for years, including medium-sized fleets. We work with various customers, like plumbing companies, that need to buy 12 or 15 trucks and deal directly with us. We maintain a centralized sales operation with an online presence, so we do sell these vehicles ourselves. However, we've struggled to achieve higher volumes from our lots, aiming for 30% or 40% of those vehicles to be sold directly. Part of our strategy is to keep a fairly consistent fleet size as we add leads, which means I need to sell some trucks this week, and auctions are effective for that because they clear out equipment quickly. We can maintain our investment in the fleet at a planned level. We have a detailed plan to pull three vans from Booster, Massachusetts and bring in three new ones, converting them into cash. This doesn't always align with the retail market. Selling in remote locations like Anchorage or Juneau poses challenges, but there is significant money involved. We're investing around $500 million to $600 million annually on these vans and pickups, and we aim to sell them when we choose. Although auctions may not yield retail prices, they help us move a lot of vehicles. Unlike vehicle sales organizations like Penske, which focus on retail and have developed that skill set, we emphasize our rental operations. Nonetheless, we must sell these vehicles profitably, targeting $28,000 per unit without any nonsense. There have been a few occasions where prices were lower than we would have preferred, emphasizing our preference for liquidity over price.

Okay, thanks for your time. Joe, appreciate it.

Our next question comes from Craig Inman from Artisan Partners.

Quick question about cash. We discussed this last quarter. How much liquidity do you think you need? It looks like cash on the balance sheet is down about $1 billion since September 2022. Considering liquidity, especially with the self-storage project and increased fleet CapEx, what is your minimum cash requirement? Are you still in a strong position?

This is Jason. We are still finding ways to reduce our cash balances. Before COVID, we managed to lower our cash balance to about where we aimed for, which was roughly between $500 million and $600 million. We're still working towards that target. As you mentioned, we have net invested nearly $1 billion compared to this time last year. Additionally, we are accumulating a substantial amount of liquidity in unfinanced real estate. I believe our net real estate borrowings have decreased by $90 million from last year to September 30. We have been acquiring new real estate, which I haven't included in our liquidity figures. However, I can say that we clearly have over $1 billion in unfinanced real estate proceeds available for financing if we decided to pursue that; for now, we are just holding back from the market.

Okay. So that's plenty there. I don't really have any major questions. Clearly, cap rates have shifted in self-storage. You all have switched in the past from development to acquisition. Is there anything on the acquisition front that looks interesting?

The big ones are still pushing. They've got investment bankers pushing them, and they're still trying to rope a sucker in my opinion. But we did, in the last 90 days, we did something.

Close to half of the square feet that came online in the quarter was from the acquisition of existing self-storage facilities. The ones coming online for us today are perhaps tertiary markets or areas that, in some cases, we have a presence that we just wanted to grow the self-storage presence. Those are the ones that are presenting themselves today. But I think you're right, the market is headed in that direction. We will try to participate where we can.

If an opportunity arises, you have sufficient liquidity between development and acquisition, but it's essential to remain prepared for lean years by keeping ample resources available at all times.

Yes. I think we're kind of what we say in a bit of a cautious approach. Hopefully, we do that. Of course, nobody knows. Nobody knows. You don't know if this is a one-year deal or a five-year deal, nobody knows. I say we make 12% for money. It’s unimaginable to my present staff, but I lived through it.

There are no further questions at this time. I will return the conference back to the management team.

I want to thank everyone for joining us. I assure you that everyone is busy and focused on their work, and I expect we will continue to make progress and hopefully achieve results that everyone will be satisfied with.

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.