Earnings Call Transcript - UHAL Q2 2023

Operator, Operator

Good morning. Thank you for joining us today. Welcome to the AMERCO second quarter fiscal 2023 investor call. Before we begin, I would like to remind everyone that certain 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, 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 September 30 and 2022, which is on file with the U.S. Securities and Exchange Commission. I'll now turn the call over to Joe Shoen, Chairman of AMERCO.

Joe Shoen, Chairman

Thanks, Sebastien. Good morning, everybody. In the face of some mediocre results this quarter, I am very positive on our underlying businesses. U-Move will struggle with hard-to-win one-way transactions. We have been through this before. The tide is simply running against us for a while. U-Box is about flat compared to last year in this quarter. This is a first experience with this for the U-Box organization. The pattern seems to be mimicking one-way U-Haul truck rental transactions. Self-storage remains strong. Of course, as I have been saying for the past 2 years, there will be a crunch in many storage markets eventually. I am endeavoring to invest in markets we believe still have unfilled demand. Moving supplies sort of fall you move, but they are currently outperforming it. Our Moving Help business is up, customer support is substantial. As you saw in the financials, we're seeing a lot of cost pressures, just as you and your customers are. For us, it's vehicle repair expense, personnel expense, cost of acquiring new truck chassis, cost of bare land, cost of construction, utilities, and property taxes. Jason has done a job with our funding, so we are not borrowing as much at the new higher rates. Continued focus on expenses by our teams is going to help. We're not really implementing cost savings in my judgment. There is still unserved move demand, but we have not been successful in tapping into it. We are, of course, committed to locating and serving more customers. You should expect us to continue to work on the liquidity of our stock. Jason is presently attempting to line up a second analyst. If you have someone you would recommend, drop Jason an e-mail. I appreciate your continued support, and I encourage you to visit our stores. Thank you.

Jason Berg, CFO

Thanks, Joe. This is Jason. Yesterday, we reported second quarter earnings of $17.95 a share compared to $20.90 a share for the same period in fiscal 2020. My comparisons this morning will be for the second quarter of this year to second quarter of last year unless otherwise noted. Starting off with equipment rental revenue, we saw a decrease of 1% or approximately $17 million. In-town transactions and revenue continued to improve during the quarter. However, declines in one-way business, as Joe mentioned, more than offset that. We are seeing reduced moving activity for trucks, trailers, and U-Boxes. And just to clarify Joe's comment about U-Box, for the second quarter, revenue was still up for U-Box; however, so far into the third quarter, it has flattened out. On the capital expenditures front, the flow of new equipment has improved for certain truck models. We've invested $718 million for the first 6 months of this year in new truck purchases compared with $564 million last year at this time. There's still uncertainty surrounding the delivery schedules for receiving equipment from manufacturers. During our last earnings call, I had reduced our forecasted gross fleet CapEx number down from $1.5 billion. This quarter, I'm further reducing it now to just under $1.4 billion. Proceeds from the sale of retired equipment increased by $25 million to a total of $325 million for the 6 months. Sales proceeds from pickups and cargo vans have increased compared to last year, while we have purposely slowed the sales of box trucks for now. Resale values remained strong throughout the quarter but have begun to show signs of weakening. Performance of self-storage remains strong. Looking at our occupied unit count at the end of September, we had an increase of 61,000 occupied rooms compared to September of last year. In addition to that, our occupancy ratio across the entire portfolio of storage locations increased 1% to 85% year-over-year. Within that group of properties, about 84% of our storage locations are operating at or above 80% occupancy as of September 30. And of those properties, their average occupancy is at 95%. Our plans for expanding our network of company locations continues with self-storage being a focal point of each new store. For the first 6 months of this year, we've invested $584 million in real estate acquisitions along with self-storage and U-Box warehouse development; that's up from $444 million last year. Over the last 12 months, we've added 70,000 new storage units, translating to about 5.4 million net rentable square feet. We currently have about 5.8 million new square feet being developed across 131 projects. We also have an additional 146 or so projects where we own the land and buildings but we haven't started the construction yet. I would expect these projects to result in approximately 8.7 million new net rentable square feet. Close to 100 additional deals are currently in escrow that we're evaluating. In the Moving and Storage segment, we saw expense growth outpace revenue growth, resulting in a decrease in our operating margin. This led to operating earnings in our Moving and Storage segment decreasing $41 million to $515 million for the quarter. Operating expenses increased by $114 million. We highlighted in the press release the $34 million in fleet repair and maintenance. The challenge there continues to be the lag in our fleet rotation program, combined with the increase in miles driven by the fleet over the last several quarters. Personnel costs increased by $29 million, a rate faster than revenue this quarter, primarily due to headcount increases. The next largest increase was in freight cost, both for our U-Box moving product and the cost of shipping our product amongst ourselves and to our customers. We are starting to see moderation of freight costs. Other increases came from what I would call property-level costs such as utilities, property taxes, and non-fleet maintenance or building maintenance. Beyond that, payment processing fees, fleet license expenses, and professional services were all higher. Outside of our normal cost discipline, we have not yet addressed the growth of operating expenses in a meaningful way. Given the direction of revenue, I would expect that this posture is going to change as we move into the second half of our third quarter and into the fourth quarter. Our two insurance segments reported a combined decrease in operating earnings of nearly $16 million. Accounting conventions related to their investment portfolios led to over $11 million of this decrease. It's a combination of mark-to-market rules and expected credit loss allowances, all of it noncash. Thanks to our treasury team, we continue to have a strong cash and liquidity balance at September 30 of this year; we had, at the Moving and Storage segment, $3.175 billion of cash and available credit. After the quarter end, the company announced several corporate actions, including changing the name of AMERCO to U-Haul Holding Company; we expect that to be completed by the end of the calendar year. We also have the creation of a new class of nonvoting shares and then a 9:1 dividend of these shares to all existing AMERCO shareholders of record as of November 3 of this year. These shares began trading this morning. The Board also announced a regular dividend policy for the new class of shares at $0.04 per share per quarter, with the first dividend taking place in this third quarter coming up. With that, I'd like to hand the call back to our operator, Joe, to begin the question-and-answer portion of the call.

Operator, Operator

Joe, while we wait for the questions to get in the queue, I'll ask a few that have come in before the call. These are from Craig Inman of Artisan Partners. The first question is, where does the company stand regarding catching up on fleet rotation and how, if at all, is management's view of the size of the fleet changing as we see a slowdown in moving and economic activity?

Joe Shoen, Chairman

Let me address that briefly. We're still not receiving enough new vehicles for regular replacement, which is causing some issues. We don't anticipate that in the next year, Ford and General Motors will be able to meet our purchase requests. Overall, we might see a slight decrease in fleet size. This could be particularly true for the assigned box truck fleet and the pickup and van fleet. On a positive note, as you may have heard, last mile delivery companies are currently facing some challenges. Typically, this time of year, we see a good amount of business from them. Though their business has declined, we've managed to offset that with regular consumer business, and I've happy to say we've done this successfully.

Operator, Operator

The second question from Craig is, does the company plan to pay out larger cash dividends going forward beyond what was announced?

Joe Shoen, Chairman

There's no plan that I'm aware of that doesn't preclude it. But this is, for us, at least, quite a flurry of activity. The declared dividend policy comes out to something like $1.44 on the old share basis. So it's very comparable to kind of what was done before, but it was done totally on a subjective basis, where this now has a pattern and something people can look forward to.

Operator, Operator

And finally, did the Board consider in creating a new share class without voting rights that those shares might trade at a material discount to the shares carrying voting rights?

Joe Shoen, Chairman

The actual structure was done by an independent committee of the Board, which I was not a member of. But of course, this was part of their charge to consider such matters. The hope is, of course, to increase the liquidity and ultimately perhaps positively impact the share price overall.

Steven Ralston, Analyst

Actually, this is Steven Ralston from Zacks Investment Research. Even though your tone seems to be on the concern side, my only concern about the quarter is the equipment rentals, obviously the U-Box, which is trailing that. I should say mimicking that. Could you expand upon the demand in pricing? In other words, you usually use your statistics of transaction volume and average revenue per transaction, and obviously, you probably have seen this many times before with the decades of experience management has. Do you track certain things like new single home sales or existing home sales that might account for this? Or are there other variables that you use to guide your expectations of volume and pricing in the equipment rentals?

Jason Berg, CFO

Steven, this is Jason. I'll start off and I'll let Joe clean up my answer or add to it. As far as statistics that we're tracking on revenue per transaction, the largest one is miles per transaction, then revenue per mile or rate. So in the one-way business during the quarter, the rate continued to improve compared to the same time last year, but we did see a decrease in the average number of miles driven. So those largely offset each other. Much of the decrease in the one-way revenue came from a decrease in transactions. In the In-Town business, we saw similar changes; however, transactions were up for the In-Town business. As far as correlating our business to macroeconomic factors, we've done that in the past and haven't found anything. We're taking a fresh look at that now. It's been quite some time since we've seen interest rates on mortgages shift so dramatically in such a short period of time. I think that deserves a look, but I can't tell you definitively that that's behind any of the changes right now.

Joe Shoen, Chairman

I might add to that that we've seen that when people in the country are less optimistic, they travel shorter distances. It's about that simple. So you can imagine if it was your son or daughter leaving home, they might stay in town rather than try to go to a new town for a job. So we would see that as they still move because they're moving out of the home, but instead of being a $400 rental from Phoenix to L.A. or something like that, it's a $100 rental just inside of Phoenix. So the underlying drivers, which are marriages, divorces, first deaths, promotions, demotions, those go on. There'll be a little flurry of activity in some markets when big layoffs occur. However, we soon run out of trucks. They can lay off 10,000 people, but we only have 800 trucks, so they wipe us out, and there's no more upside at that point. In fact, it disrupts the system. So we'll see a little bit of that kind of activity. But I know for sure we're seeing something now, but it doesn't really turn out to be like a benefit exactly. So we're going to continue, I think, based on what we'll loosely call consumer optimism, to see people pulling in their horns, not being so aggressive in their activity, which will reflect itself in fewer miles traveled. We're going to have an opportunity because, of course, the cost of new vehicles is going up. The point is, they are costing us more. So we're going to have to see some price increases to make that work out. The customer is tolerating some price increases. I don't know if, in the final analysis, they're going to cover enough of a price increase. The good news on the truck equipment side is, generally speaking, both Ford and Chevrolet are making terrific products right now. So it's a very durable product with a good economic life. However, the downside is that the prices are greater than the national rate of inflation.

Steven Ralston, Analyst

Yes, it is somewhat uncharted territory. I came across a statistic that, while not entirely comparable—since it only looks at U.S. Treasury rates, which don't perfectly reflect mortgage rate changes—is still relevant. I found it surprising that the decline in rates dates back to 1788. However, these statistics, as you mentioned, show that the correlation with U-Haul truck rentals is inconsistent; there's not a strong likelihood of establishing a good correlation.

Joe Shoen, Chairman

Right, that's right. We run all those numbers until you're blue in the face. I kind of lost interest in them because I've just had no luck doing it. So I say, okay, great, this is how it's going to kind of play out. Now our job is to find more customers. And if you look at a 20- or 30-year track record, we've constantly outpaced the population growth, given that most of our businesses are with consumers. At the bottom of the deal is the biggest driver is population. We've consistently outpaced it because we've found a slightly different twist on the use of the product and an application for the customer. They've responded and given us more transactions. So that's what I'm focused on now. That won't happen in one quarter, but we're on it as much as we're on it. I think if we're a little slow on the draws, what Jason said, we're a little slow on the draw on expenses. I don't know how big a dent we're going to be able to put in them. You're seeing the same force as we are.

Steven Ralston, Analyst

Just one last question. Is this enabling you in any way to better reposition your fleet around the United States?

Joe Shoen, Chairman

Actually not. But we've had a real strong initiative over the last 18 months to add a group of young, bright people into that part of the company. I think we're making modest gains there. That thing doesn't move very fast, and even a tiny move has a very positive effect on revenue. I think we're going to see some help. Last year at this time, we were able to rent to the last mile a truck that was 800 or 1,000 miles from where they wanted it. They would get it and bring it to their market and leave it where we wanted it, which was a win-win. This year, we're not getting that little boost. We got that just about this time last year. We had a real nice boost from that. So we're not seeing that. But these are the kinds of things; they are all small maneuvers but they can be significant. And I can assure you people are motivated to find the right now.

Jamie Wilen, Analyst

First off, I'd like to give you a hearty thank you for changing the name to U-Haul, doing the stock split, and initiating a quarterly dividend. A couple of questions. First, as U-Box is trending more flattish than growth, is that a function of the industry that it's in, or is there more competition out there in that industry for them?

Joe Shoen, Chairman

I do not believe it's a competitive situation. I believe U-Box gets more long-distance moves as a percentage of moves than the U-Haul business does. So when U-Haul sees long one-way moves soften for U-Box, that's almost all of their moves or these longer moves. I think it's just that simple. Of course, we're looking at whether we are doing something in pricing on this. We're actually getting a tiny increment better freight pricing, which has been favorable for us over the last 60 days. A lot of forecasts indicate that I think it's just simply this. Now, on the other side, what I tell my teams is, you can rest assured we can find more customers for more work and deliver a good solution. I expect that we'll get that turned around.

Jamie Wilen, Analyst

Can you talk about the dynamics of the U-Box business as far as the earnings range for how many months that happens?

Joe Shoen, Chairman

Generally, I will, but I'm not going to give out anything that I think our competitors would care about. The U-Box rate depends on how high you can stack them. If you're stacking them too high, it’s about like self-storage. As you gain three high, four highs, in some cases five highs, that's all incremental gains. So if you can get the stacking height, your economics of the storage of the U-Box massively improves. The length of stay is a little confusing because everyone shows as a one-month tenant because we give you 30 days of storage included in the purchase. You have it at your home for a few days, then you may store it for a week at our warehouse in Tempe, then we ship it to San Antonio, which stays for a week in our warehouse there. Then in the fourth week, we redeliver it to your house. So that shows as a month of storage. In our statistics, it's just simply moving. We debate back and forth how to count that. Once the people actually store, they're similar to our longer-term self-storage customers in that they tend to stay a while. Three to five years would not be an extraordinary long stay, and most of these people are solvent. They have a higher percentage of credit card billings. Once they're in storage, they're a much more predictable phenomenon.

Jamie Wilen, Analyst

You're saying U-Box can be sitting in your storage for years?

Joe Shoen, Chairman

Yes. It's not just sitting there; it’s still being used.

Jamie Wilen, Analyst

Understood. Thank you. On the self-storage side, as rates have increased and things are filling up more quickly, what is the time frame before a new unit, on average, becomes cash flow positive today versus two, three years ago?

Jason Berg, CFO

Well, the occupancy point is still about the same, which is 70% where we're paying the bill and 80% and above where we're starting to make some money. For the most part, locations opened in the last two years have seen about an acceleration of about 10 points of occupancy each year versus what we would normally see. However, I think we're starting to see the velocity of that slow as far as how quickly these locations are filling up. I think there was a COVID boost to occupancy. When we were pricing new deals, we never changed our discipline regarding assuming a five-year ramp-up. If that continues to flow, it will still fall within our pricing range. Typically, it's around year three to four, and I would say that maybe during COVID that accelerated almost 12 months.

Jamie Wilen, Analyst

Okay. Lastly, with the change in the value of your bond portfolio, I think it's a couple of hundred million dollars from the beginning of the year until now. Only a portion of that flows through to the income statement?

Jason Berg, CFO

Yes. Regarding that, our Property and Casualty company holds common stock of unaffiliated companies. The change in market value of our common stock portfolio gets run through income. That's why you see this large decrease. I think we actually posted negative investment income, as you can believe that at the P&C company, due to an $8.5 million decrease in the market value of their common stock. At the life insurance company, we don't have common stock; it doesn't fit the liability profile. However, with the change in interest rates, we do have an allowance for expected credit losses, as per CECL. That number went up by about $2.5 million to $3 million during the quarter. So another noncash adjustment. We're still in a position where we can hold our investments to maturity, so we don't expect that to result in any losses. You can see that at the life segment with comprehensive income going negative for the quarter. Again, if we don't sell the investments, we won't recognize those losses.

Joe Shoen, Chairman

Okay. But I don't think we quite answered the question, and I don't know if you can. I think he's suggesting we lost as much as $200 million in bond value due to interest rate changes. I don't think that's correct.

Jason Berg, CFO

No. Over the last year, the value of those bonds because of the interest rate swings in the market has resulted in a decrease on the books of that much. Now the closer they get to maturity, those unrealized losses come off, or as interest rates come down. As I said, we don't intend to sell those bonds at this point, so we won't be recognizing those.

Joe Shoen, Chairman

Yes, at the life insurance company, they're all matched against the risk. Unless we have a big run not statistically forecast; it's kind of just much to do about nothing. We're seeing a little bit of an increase in what we call lapses or withdrawals, but it's not causing a bunch of fear on our side. That company is overcapitalized by most measures. There's not much we need to sell.

Operator, Operator

This will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Joe Shoen, Chairman

Well, thank you all for your support. If anybody knows an analyst who's looking to add a company to follow, please introduce them to Jason or me. I think we have mentioned several times the need for additional following to get this to go the way you all would like to see it. We're going to keep working at that and hope to get a result. I look forward to seeing you again in 90 days on our next quarterly call.

Operator, Operator

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