UHAL - NYSE

Good morning and welcome to the AMERCO Second Quarter Fiscal 2023 Investor Call. [Operator Instructions] Please note, that this event is being recorded today. I would now like to turn the conference over to Sebastien Reyes. Please go ahead.

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.

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 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. itches, 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 a bare land, cost of construction, utilities and property taxes. Jason has done a job with our funding, so we are not borrowing so much at the new higher rates. Continued focus on expenses by our teams is going to help. We're not really implemented on 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 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.

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 way 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 or 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 for 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 (inaudible). 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 which translates to about 5.4 million net rentable square feet. We currently have about 5.8 million new square feet being developed across 131 projects. And then we have an additional 146 or so projects where we own the land 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. And then we have close to 100 additional deals currently in escrow that we're evaluating. In the Moving and Storage segment, we saw expense growth outpaced revenue growth, leading to a decrease in our operating margin. This resulted in operating earnings in our Moving and Storage segment decreasing $41 million to $515 million for the quarter. Operating expenses increased $114 million. We highlighted in the press release the $34 million in fleet repair and maintenance. 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 and that's due primarily to headcount increases. The next largest increase was freight cost, both for our U-Box moving product as well as 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'd call property level costs such as utilities, property taxes and nonfleet maintenance or building maintenance. Beyond that, payment processing fees, fleet license expense 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 2 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 Instructions]

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 and move in economic activity?

Let me address that a little bit. We're still not getting sufficient new vehicles for ordinary replacement. And this is, of course, throwing a little wrench in the works. We don't have an expectation that in the next 12 months, the Ford and General Motors organizations will be able to produce what we have requested in purchases. On the overall fleet size, we may see just a little contraction. Of course, it gets very specific, if you're going to do this but I think we may see a little contraction there in both the assigned box truck fleet and in the pickup and van fleet. On a good note, you all have heard that last mile delivery companies are a little bit stressed. And this time of the year, ordinarily, we got a fair amount of business from them. We've -- to the extent that business has dropped off, we've been able to replace it with normal consumer business. So that's -- we've done that in a pretty straightforward fashion. I'm happy to report that.

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

There's no plan that I'm aware of that doesn't preclude it. But this is, for us, at least, this was 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.

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?

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 was to consider such matters. The hope is, of course, to increase the liquidity and ultimately perhaps positively impact the share price overall.

Our first live question today will come from Brian Marks with

Actually, this is Steven Ralston from

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 components that go into that, the largest 1 are 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. So much of the decrease in the one-way revenue came from a decrease in transactions. On the In-Town business, we saw a 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.

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 the home, they might stay in town rather than try to go to a new town for a job. So we would see that as a 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 run side of Phoenix to (inaudible). So the underlying drivers which are marriages divorce, first deaths, these sorts of things, promotions, demotions, those go on. There'll be a little flurry of activity in some markets, people do big layoffs. But what happens there, we soon run out of trucks. So they can do -- 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 system. So we'll see a little bit of that kind of activity and we're probably seeing, I know for sure, we're seeing something now. but we don't -- 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. We're going to continue to see people pull in their horns, not be so aggressive in their activity and that will reflect itself in less miles travel. We're going to have an opportunity because, of course, the cost of new vehicles are going up. The point they actually sell us stuff, they're costing us more, so we're going to have to see -- have some price you see to make that work out. And 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 a terrific product right now. So it's a very durable product and they'll have a good economic life. But the downside is, is there Jackson prices greater than the national rate inflation.

Yes. In a way, it is unexplored territory. I did see a statistics. Now it isn't totally comparable because it's just the rates on U.S. treasuries which don't perfectly mimic the increase in mortgage rates but they're close. And what I saw was that this rapid decline in the increase since -- I can't believe this, 1788, the change in rates in us. But then again, it seems like these statistics, as you said, the correlation with the -- with U-Haul truck rentals is sort of like hit and miss, it doesn't have a high probability of a good correlation.

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. And 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 which would be at the bottom, given that most of our businesses with consumers, at the bottom of the deal is the biggest driver is population. And we've constantly outpaced it because we've found a slightly different twist on the use of the product and an application for the customer. And they've responded and given us more transactions. So of course, that's what I'm focused on now that won't happen in 1 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. And 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.

Just 1 last question. Is this enabling you in any way to better reposition your fleet around the United States?

Actually not. But we've had a real strong initiative over the last 18 months have added a bunch of young bright people into that part of the company. And I think that 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. So I think we're going to see some help kind of an interesting thing 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 will get it and bring it to their market and then they would leave it where we wanted it which that was a win-win, okay? This additional trucks; and so 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 kind of things. So they're all small maneuvers but they can some to be significant. And I can assure you people are motivated to find the right now.

Our next question will come from Jamie Wilen with Wilen Management.

First off, I'd like to give your hearty thank you for changing the name to you all, doing the stock split, 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?

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

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

Generally, I will but I'm not going to give out anything that I think that 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 3 high, 4 highs in some cases 5 highs, that's all incremental gains. So it's -- if you can get the height -- 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 1-month tenant because we give you 30 days storage included in the purchase because you're going to have it at your home for a few days, then you may store it for a week at our warehouse in Temp, then we ship it to San Antonio, stays for a week in our warehouse there. And then on the fourth week, we redeliver it to your house. So that shows as a month of storage. In our statistics, it's in many ways, it's just simply moving. We debate back and forth how to count that. Once the people actually store, in other words, it's not just in transit in a move. Once they actually store, they're about like our longer-term self-storage customers, they're going to stay a while. 3 to 5 years will not be an extraordinary long stay. And there -- these people -- 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.

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

Yes. It's not just sitting there, it's still there.

Understood. Okay. Okay. 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 2, 3 years ago?

Jason?

Well, the occupancy point is still about the same which is 70% we're paying the bill, 80% and above. We're starting to make some money. We have, for the most part, locations opened in the last 2 years. I think we've seen about an acceleration of about 10 points of occupancy each year versus what we would normally see. But I think that 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 as far as assuming a 5-year ramp-up. So if that does continue to flow, it will still fall within our pricing range. But to get back to your question, typically, it's around year 3 to 4 and I would say that maybe that during COVID that's accelerated almost 12 months.

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

Yes. So on that, the -- our Property and Casualty company holds common stock of unaffiliated companies. So the change in market value of your common stock portfolio gets run through income. So 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. Because I think there was an $8.5 million decrease in the market value of their common stock. At the life insurance company, we don't have common stock over there, it doesn't fit the liability profile. However, with the change in interest rates that -- we do have an allowance for expected credit losses, the accountants for CECL. And that number went up, I think, about $2.5 million, $3 million during the quarter. So another noncash adjustment, we hold -- we're still in a position where we can hold our investments to maturities, so we don't expect that to result in any losses. But you can see that at the Life segment, there comprehensive income actually went or accumulated other comprehensive into what negative for the quarter. So again, if we don't sell the investments, we won't realize those losses.

Okay. But I don't think we quite answered the question and I don't know if you can, if you have an answer. 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 yes, correct.

No. Over the last year, the value of those bonds because of the interest rate swings in the market have 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. And as I said, we don't intend to sell those bonds at this point. So we won't be recognizing those.

Yes, at the life insurance company, they're all matched against the risk. And unless we have a big run that's not statistically forecast is kind of be 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 at this point causing a bunch of fear on our side. I think it's -- that company is overcapitalized by most measures. There's not much is going to have to sell on.

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

Well, thank you all for your support. Again, if anybody knows an analyst who's looking to add a company to follow introducing to Jason or Jason, 1 or the other, Jason will take cold calls from analysts, I don't think they do such a thing but he readily accepted. I think we appointed me make several times to need additional following to get this to go the way you all would like to see it. So 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.