Cheetah Mobile H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 16, 2025

There are 8 speakers on the call.

Operator

Okay. Well, good morning, everyone, and thank you for attending the SafeStore 2024 Full Year Results Code. With me our Group CFO, Simon Quintan. So moving on straight to the results. So this year we had a slight pullback in Group revenue and more cost driven by the combination of inflation, new stores operating costs and higher financial expenses, which are bringing back our EPS to 42.3p.

Operator

I'm of course mindful of the current endwits and I fully take them into account when taking appropriate management and investment decisions. But fundamentally that does not change the investment investment decisions. But fundamentally that does not change the investment thesis. I always expected our growth journey to have some volatility. We already had some in the past and we always emerge stronger.

Operator

We are a prudent and very tightly managed business, very entrepreneurial on a reasonably conservative manner. If I put things back in context, Safestore is a business that over the last 11 years more than doubled its revenue and EBITDA, trebled its earnings and quadrupled its dividends, all of which without asking any money to shareholders other than £30,000,000 11 years ago. As you will see when we go through the results, it is a hugely profitable business. Store margins are at 69% across the Group. RevPath is among the highest in the industry, if not the highest.

Operator

UK domestic demand is consistently growing. Loan to value is only at 25%. We have a very large self funded pipeline and the track record of delivering double digit cash on cash and our more recent openings are on track. Moving on to highlights. Our trading has shown good resilience on the back of the extraordinary growth post COVID and is actually improving.

Operator

Group revenue net of IPT is up 1.1%. Our EPS is nonetheless despite it being down this year still up 48% since pre COVID. We are therefore very happy to carry on with our progressive dividend policy and increase full year dividend by 1% to 30.4p per share. In the 1st 2 months of the financial year of 2025, Group revenue constant currency is at close to 3% with a slight acceleration throughout the period, plus 2% in November, plus 3.6% in December. Since our restarted development in 2026, we added circa 4,600,000 square feet including pipeline, which represents 82% MLA growth and that has been entirely self funded.

Operator

Since we expanded into Spain and Benelux, we have started to open new stores there which now gives us some local minimum critical size. And also these stores represent only 9% of the Group assets. They are doing well and they will contribute to our growth going forward. Including post year openings, we now have a total pipeline of 31 stores and 1,600,000 square feet representing 19% of the existing portfolio. Jointly with Nuveen, also delivered the acquisition of the premium portfolio of Easy Box in Italy.

Operator

I'm very pleased with the potential represented by this acquisition and I'll come back to it. As of today, 90% of the portfolio including pipeline is in capital cities and major metropolitan areas in areas with strong barriers to entry that will continue to support our pricing growth. The full breakdown is provided in the appendices of the presentation. Based on our business case, the pipeline will deliver £35,000,000 to £40,000,000 of additional EBITDA. Also our track record of double digit cash on cash return is actually better than that.

Operator

The entire current pipeline requires an additional €150,000,000 for completion, which on a constant valuation basis would keep our LTV at around 30%. Moving on to RevPAR on the next slide. As you know, we consider RevPAR to be the most important indicator of operational performance as it sums up all the components, occupancy, rates and ancillary sales, in particular customer good protection, which is in reality a component of the rates and one way to structure pricing. Our goal remains to maximize RevPAR with whatever sustainable combination of these levers. Since 2016, our RevPAR has increased by 48% and is certainly among the highest in the industry, if not the highest again.

Operator

You'll find in the appendices the RevPAR breakdown by region. If we dive in the following slide into the key components of the U. K. Trading, I would describe the demand for self storage from domestic customers as being as strong as ever. Our U.

Operator

K. Domestic occupancy is up 6.1% at year end and up 6.4% on January 1, 2025. That is actually above the occupancy CAGR over 10 years of 5.7 percent for domestic customers. This point may have been missed but again we increased domestic occupancy last year more than we did on average per year during the last 10 years. And in the 1st 2 months of 2025, we are aligned on that fundamental long term growth figure.

Operator

So to be clear, even if there have been and there will be quarterly volatility like we had with stamp duty holidays, The fundamental growth of domestic demand is still there. You will have ups and downs. But fundamentally we operate in an undersupplied market, the growth of which is underpinned by the slowly increasing awareness of the product. And at the current low level of supply, having more stores including from competitor is what increases storage usage overall in the country, which in turn increases awareness and the size of the market and in the long run helps us. In the early days post COVID, our pricing model detected in the U.

Operator

K. The opportunity to push rates fast and then later the need to wait until the market catches up, therefore holding the position until we can push it again. Given the 25% inflation since 2019, the storage affordability is back to 2019 level which would provide room for further rate growth. In a way the graph on the slide is a good synthetic summary of our trading 2019. We grew initially revenue very, very fast at a bit of slowdown, but still at historically high level.

Operator

We then had the delayed impact of growing inflation on our cost base which is now hitting us in a delayed manner, but the top line is at the moment turning back to growth. If I compare U. K. Occupancy today to end of December 2021, which was our record occupancy year, our total occupancy is down 200,000 square feet. That is entirely due to business occupancy, whereas domestic occupancy is up.

Operator

Structurally, the business component of our occupancy has been growing less than the domestic one for a long time with a 10 year CAGR of only 1.3% for business versus 5.7% for domestic customers. That is not something new. We have for a long time been proactively reducing the importance of business customers in the U. K. Through the repartitioning of large units.

Operator

We are agnostic as to whether small units are led by business or domestic customers, but we want to continue to reduce the number of large units. 10 years ago, business customers represented 50% of the U. K. Led space. Today, it is 40%.

Operator

Our goal is 30%, which is what we have in the other countries. We are accelerating our program to repurpose unit size in the U. K. Towards typical domestic unit sizes. We currently still have 1,000,000 square feet of units above 2 50 square feet predominantly located in London, 36% of them and in Southeast England 24%, the rest being spread out in the other region.

Operator

The target is to repurpose initially at least 500,000 square feet. The rates we achieve for the units below 100 square feet is 85% higher than that on larger units. We use a natural churn to execute this repositioning. We have a process in place so that it is typically done within a month after a unit has been vacated. We have good domestic demand and there are stores where we run out of space with smaller units.

Operator

So we are very confident that space will be absorbed and will support our rate growth over the next few years. Overall, looking at the trading in November December in our main markets, the UK revenue year to date like for like grew plus 0.9%. If you remember UK revenue like for like in Q1 was minus 2% in H1 minuteus 1.5% in Q3 minuteus 1.4% in Q4 minuteus 0.2 percent. It turned flat at 0% in November and plus 1.8% in December. In France, revenue year to date like for like in euro is plus 1% for the period, which was 1.3% in November and a slight slowdown to 0.6 in December.

Operator

In the expansion markets, revenue year to date in euro is plus 27%. A few comments on web activities on the next slide. You know we have a central digital platform that manages customer acquisition and revenue from the U. K. We launched our new website in the U.

Operator

K. In December. All countries including Italy are going to be included within the next couple of months. Enquiries have a more positive momentum in all markets, which are all up on last year, which is encouraging. Our European digital platform has a proven track record to support our growth in all markets and also in the new markets and leverage our investments in customer acquisition and pricing systems.

Operator

The majority of our contracts are e contracts. We now have 4 satellites automated stores and almost all stores have out of hours automated access controls. We also offer the possibility for customers to book entirely online from the initial inquiry to contract signature and payment. The technology is in place and we'll continue to deploy where appropriate. It is entirely possible for us to operate our stores in a fully automated way.

Operator

The only question is whether that is the best way to extract maximum value from our storage assets. Our view and experience is that whilst in some location that can work efficiently, in most locations store teams have an important role to play and they had significant value. I've been taking myself hundreds of calls from prospective customers and we have recordings and transcripts of all our customer calls. There are many reasons why store teams achieve a higher F path, but let me give you just 3. The first one is that customers very often overestimate the size they need.

Operator

Downsizing them allows to sell more expensively and still be affordable. The team has to down sell the size and by doing that they up sell the rate. The second is that customers by default will under protect their goods and the team will remind them of the importance of an adequate coverage. It is not a coincidence if our ancillary sales are by far the highest in the industry. The third one is that although some customers need lower price to move in, that is not true of all of them.

Operator

We move 60% of our customers to our price list and the rest with various control discounts. A pure online model particularly with a high absolute occupancy target means providing discounts upfront to 100% rather than to just 40% of your movies. I could add the 4th one which is that a lot of customers still like to engage with someone. And to know that there is a team locally looking after their goods. And that large stores with no teams tend to have quite quickly very low standards of cleanliness and maintenance.

Operator

We are very operationally focused. Our stores are overwhelmingly located in areas with bias to entry ranging from good to super strong. And in a fixed cost business, the top line variations have a disproportionate impact on bottom line which is what allows us to achieve double digit cash on cash on investments despite investing in premium locations. Our priority will remain to develop and operate stores with location that support that in the long run. Having extended our geographies give us more possibilities to find investments with the characteristics that we want.

Operator

Our strategy will hence remains to develop across Europe focusing on the main capital cities. We will also be using joint ventures in order to leverage further our management platform. As the business grows, we believe that our current group head office can manage a significantly greater number of stores with only marginal additions and that its cost per square foot of MLA will go down. As shown in the next slide, we've built initially bridgeheads across a number of countries. We have then increased their size to a minimum critical operational size.

Operator

We now have 35 stores in our expansion market. We have a pipeline of 5 stores that will soon bring that number to 40. Post year end, we also extended 2 stores in Paris and added 5 new stores in London including 1 acquisition in Chelsea and one in Paris. Just to avoid any confusion, the pipeline as of year end in October was 1,600,000 square feet. We opened Node.3 in November, December so that the remaining pipeline as of today is 1,300,000 square feet.

Operator

This does not include Germany and Italy. In Germany, in joint venture with Carlyle, we have a pipeline of 3 additional stores. And as you know, we acquired 20 stores in Italy. There is a clear opportunity across all Europe shown in the next slide as Safe Storage is significantly underdeveloped and it is a product that does work everywhere. The current density is still relatively low in the U.

Operator

K. At 0.9 square feet per inhabitant more so in the Netherlands, Spain, Paris, Belgium and Italy where it is close to 0 and the opportunity is massive. So we are very pleased with the EasyBox acquisition described in the next slide that gives us a very strong position to create a presence with a strong platform while investing for now a reduced amount of equity. We bought 12 premium stores located in Milan, Turin, Florence, Genova and Rome, 2 of which are due to open in the next few months. They are very prominent locations and they are invested at a high standard of quality.

Operator

11 are freehold and 1 is long lease. The 10 open stores are strong trading track record. The Safe Storage supplies there at 0.02 square feet per inhabitant is equivalent to 2% of U. K. Supply density.

Operator

These stores will all be managed by Safe Store. Our equity investment is €45,000,000 The stores are within a tax efficient real estate investment fund structure. We expect them to be dilutive by 0.3p in 2025, earnings neutral in 2026 and accretive thereafter. As for all our investments, we then target double digit cash on cash. This acquisition has been done in joint venture with Nuveen in line with our strategy of leveraging cross European management platform and de risking development.

Operator

The acquisition which is of a minimum critical size will provide for some stores 20 years of trading and marketing data points. The trading data will be fundamental to decide our potential additional developments over time. I believe there is a vast potential of growth in the Italian market. The product is not very well known there. Usage will as everywhere else increase as supply increase.

Operator

But the current stores are trading well and some have very high occupancies. So social demographic characteristics of density of population and income in most large towns of Central and Northern Italy are very favorable. There are more than 15 combinations with population ranging from 500,000 to 3,000,000 people with purchasing power higher than Madrid, Barcelona or the Randstad. It Italy is in the country in which development is not always easy and straightforward, which constitutes a strong barrier to entry and having the possibility to start from a sizable platform to develop further is a significant benefit against new entrants. The following slides provides a detail of the store pipeline of 1,600,000 square feet of which I said Node.3 has already been opened in November December.

Operator

It is a total of 30 stores plus 1 extensions once again with top locations with deep populations and barriers to entry, 10 in London, 8 in Paris, 5 in Barcelona and Madrid, 2 in the Randstad, 1 in Brussels and the remaining 5 in regional cities. I'll go relatively fast on the next two slides, which break down our future MLI. So Slide 11 shows our how we have filled additional space as we expanded over time. Our current pipeline leaves us with almost 3,000,000 square feet available before we reach 90% occupancy. That is a combination of the pipeline plus the space that is already available in our current portfolio as like for like will of course remain a key component of our growth.

Operator

Please note that the rate percentage growth shown in the graph since 2013 is diluted by the new geographies where rates are materially lower than in the U. K. Or Paris. They now represent 10% of the Group occupancy, up from 0% in 2013. Next slide from the pipeline of 1,600,000 square feet following the 0.3 that have been delivered in the 1st 2 months.

Operator

1,000,000 will be delivered in 2025 and 2026 and 0.3000000 beyond. The next slide is very important to us as it shows how we track with our return on investment targets. These results are driven by our discipline in land acquisition as well as strict management of our construction cost. The left chart show all the new store developments since 2016 excluding acquisitions and how they have matured from a financial point of view. As you can see, they all track in the right direction and deliver the return we want including the most recent openings.

Operator

To answer a question which is frequently asked, this is how we track investments rather than tracking speed of occupancy. Occupancy comes in due course, but we focus on the optimal combination of rate and occupancy as well as ancillaries that maximize our returns. The chart in the right includes acquisition and development and show by investment vintage what is our cash on cash position. Basically that means that our investments up to October 2020 are all already above the target. The 2021 investments are close to it at 9.1 and the more recent stores are maturing.

Operator

Of course, the stores opened in 2024 are headwind on earning as you would expect as new stores typically breakeven within a year and reach financial maturity 4, 5 years after opening. I believe that this provide a very strong support to our expected EBITDA contribution from the pipeline of £35,000,000 to £40,000,000 in 5 years' time. The next slide is as usual an update on our leases. Same as usual in many ways, we constantly rigear them well in advance, so that unexpired lease length is very stable at around 13 years. We sometime buy 1 or 2, we denied in the past 10 years actually 2 this year including our very prime Parisian store of Le Marais which has probably the highest RevPAR of the group.

Operator

The vast majority of our pipeline since 2016 has been freehold so that today in value 85% of our assets are freehold. The U. K. Leases represent 8.7% of asset value and the French one 5.3%. Next slide on ESG, we are ahead on our plan to reduce carbon emission.

Operator

The Safe Storage intensity is well below other real estate asset classes, but Safe Store is also just below the average Safe Storage intensity as calculated by EPRA. We plan to reduce the intensity further. Very importantly, we've been awarded again the investor in People Platinum again. We moved up from gold 4 years ago. That is a strong recognition of our investment in our team, particularly our store team, which is very important in our business model to achieve higher SPAF.

Operator

Our customer satisfaction also remains very high as measured by Trustpilot, FIFO and Google reviews. I think finally the business is structurally very well placed to continue to benefit in the vast opportunities linked to the growth of the self storage industry. I now let Simon go through the financials.

Speaker 1

Thank you, Frederic. Good morning, everyone. I'm going to start today with the key financial highlights on Page 18. We're presenting results today, which show robust trading performance in challenging market conditions. Like for like revenue at £217,900,000 had a small decline of 0.5% on last year when including the negative impact of currency exchange rate movements.

Speaker 1

At constant exchange rates, revenue was flat year on year. Underlying EBITDA on a like for like basis was £134,700,000 5.4 percent down year on year, 4.9% down on constant currency basis as we've been impacted by inflationary cost pressures. Revenue on a total group basis at £223,400,000 was in line with last year, increasing 0.2% at constant exchange rates. This includes the additional income from new stores, which was offset by the impact of insurance premium tax in last year, and I'm going to talk about that a bit more later. Similarly, on a total group basis, underlying EBITDA was £135,400,000 including the additional earnings from new stores, down 4.8% on last year at actual exchange rates.

Speaker 1

As a result, when combined with higher interest costs, adjusted diluted EPRA EPS, our favored measure of earnings, which excludes gains on property revaluation, was down 11.7 percent at 42.3p per share. The business is strongly cash generating, and in the year, we delivered £86,200,000 of free cash flow from our operations, which was broadly in line with last year. We remain confident in our business with favorable medium term dynamics and strong cash generation. And so we're announcing a recommended 1% increase in the final dividend to 20.4p per share, taking the full year dividend to 30.4p.

Operator

So if you

Speaker 1

look at our underlying results in a little more detail. These figures exclude the gains on revaluation of investment properties and show how the costs of leasehold property rents as a single line. As we have seen, revenue was broadly stable year on year at £223,400,000 for the year, down 0.3% at actual exchange rates. We have been impacted by general cost and wage inflationary increases, and which we have seen across all of our markets. Underlying costs, excluding leasehold costs, were up 7.4% on the prior period, with both cost of sales and administrative costs increasing.

Speaker 1

Leasehold costs were up 4%, just over £500,000 increase year on year, mostly driven by market rent reviews on properties in the U. K. But with also with inflation linked leases in France. Finance charges were £5,500,000 higher than last year as a result of additional borrowing to financing our development program and as interest rates on our floating rate debt were higher on average over the year. As a result, adjusted EPRA earnings of GBP92,700,000 has seen an 11.8% decline year on year.

Speaker 1

So a quick run through of the components of revenue growth starting with the U. K. Overall recorded revenue fell 2.4% in the year, and this was made up of a 1.2% decline on a like for like basis, which we've seen gradually improve as we've gone through the year, as Frederic described. A 0.1% contribution from new stores, and there was a 1.3% reduction from the insurance premium tax. So the £2,200,000 impact from insurance premium tax and recorded revenue versus last year comes from a change in the nature of the product which we offer for customer goods protection.

Speaker 1

In the 2023 financial year, this protection product attracted IPT, which was recorded in both revenue and in the cost of sales. But the new product, which we've adopted in the 2024 financial year, does not attract IPT. Therefore, this is a reduction year on year in both reported revenue and in cost of sales. And because it's not reflective of performance and has no economic impact, for comparative purposes, we've excluded it from like for like. We can see on this slide that the revenue on our markets outside of the U.

Speaker 1

K. Has had a meaningful contribution to group revenue and for growth. In combination, our markets outside the U. K. Grew 4% on a like for like basis, and we saw an addition €2,800,000,000 of additional revenue from new stores in our expansion markets.

Speaker 1

Paris delivered a solid 1.4% growth

Operator

on

Speaker 1

a like for like basis, and I think it's now grown pretty much every year for 25 years in a row. The expansion markets of Spain, the Netherlands and Belgium showed strong growth from both like for like stores at 12.9 percent and from the new stores, which I mentioned, taking total new growth sorry, total revenue growth to 29%. This takes total revenue from these combined markets to €20,600,000 and it demonstrates the significant growth potential that expansion markets now provide for the group. Looking at the build up for our like for like revenue performance in terms of occupancy and the rate we achieve. Overall, across all of our markets and excluding the effects of currency exchange rates, we achieved flat like for like revenue year on year.

Speaker 1

In the U. K, there was a decline of 1.2%, which was made up of a decrease in average occupancy of 1.8% with a small decline in average rate of minus 0.6 percent, with overall revenue supported as in all of our markets by growing ancillary revenue. On a U. K. Regional basis, we saw a consistent occupancy picture, with average rates decreasing 1% in London and the Southeast as we lapped stronger growth in the prior year and with rates flat for the rest of the U.

Speaker 1

K. In Paris, like for like revenue saw an increase of 1.4%, which was a result of flat occupancy on average year on year and an increase in storage rate of 0.7%. Across our expansion markets, we've seen strong like for like revenue growth year on year of 12.9%. And this has come from a combination of improving average occupancy, which rose 2.3 percent, and increasing average rate, which rose 7.7% year on year. Increases in average occupancy came in all three markets, with increases in average rate particularly coming through in Belgium and the Netherlands, where the teams continue to be focused on capturing the value available.

Speaker 1

Like other businesses, we haven't been immune to inflationary cost pressures in the year but have maintained our disciplined focus on keeping costs down. We have seen increases in both cost of sales and administrative costs. In cost of sales, an increase in store costs from new stores and developments was offset by the absence of the insurance premium tax, which I mentioned earlier. Excluding these on a like for like basis, cost of goods sorry, cost of sales grew 8.6%. This was largely driven by high levels of bad debt provisions, including in Paris, where we've been impacted by changes in our recovery practices business rates where we are impacted by both inflation linked increases and in unwind or tapering discounts on higher ratable values in the U.

Speaker 1

K. And wage inflation for our store teams, where base salaries for some of the team are directly impacted by increases in the national living wage. The business rates and store salary levels are both directly impacted by external indices and largely represent the high levels of inflation seen over the last few years, now feeding through to these cost lines. We've had a similar story in administrative costs where once again wage inflation is the largest factor, together with increases in team capabilities across the group. You can see that we continue to be a strongly cash generating business.

Speaker 1

Free cash flow at £86,200,000 for the year was broadly flat year on year, with a £3,300,000 increase in operating cash flows offset by higher interest payments. We believe that the free cash flow generated from our operations, together with our debt facilities, continue to provide ample liquidity for both our development program and our progressive dividend policy. Our balance sheet further strengthened in the period with a 13.9% increase in the value of our open investment properties. We saw increases across all of our markets with a £301,900,000 or 11% increase through the revaluation of properties, led by a 53 basis point reduction in weighted average exit yields on freeholds, with yield reduction seen in each country. This reflected the strong transactional market which we've seen across Europe in the last year.

Speaker 1

Net debt increased 11% as we used our committed facilities to finance our new store development program. At 25.1%, our loan to value ratio decreased 30 basis points year on year, reflecting the increase in property values. Following the exercise in the year of the £100,000,000 accordion on our revolving credit facility to take the committed amounts to £500,000,000 We had £144,000,000 of debt capacity at the end of the year. This was boosted by a new €70,000,000 8 year USPP, which we issued in December following the year end, financing a portion of the drawn RCF and fixing rates for the loans term. We have no other debt maturing until the end of 2026, with a weighted average term to maturity of 4.2 years of the balance sheet debt.

Speaker 1

Interest rates have been a little higher year on year through increases in floating rate interest, with our year end effective rate increasing by 38 basis points to 3.96%. This, combined with our increased net debt, as described, reduced our interest cover ratio to 4.3x, but we're still in a comfortable position there. In the last 2 years to October, we opened 21 stores, and these are our non like for like stores for the 2024 financial year. And in addition to that, we have a pipeline of another 31 new stores at the end of the last year, due to be and these stores are due to be opened in the next coming years. As Frederic described, we've got a rock solid track record of achieving double digit cash on cash returns from developments like these.

Speaker 1

But earnings have a shape to how they come through, and so it's important to lay out how these could impact us from a profitability perspective. There are 2 key elements to consider. The first of these is a short term drag on earnings. This happens as the stores take a few years to fill up and generate significant revenue, while the underlying cost base, including interest from the development's financing, is in place from when the development starts or when the store opens. The result is that we've seen the total program have an approximate 2.2p per share impact on EPS this year, with a projected 3.1p per share impacted for 2025.

Speaker 1

Thereafter, the program's headwinds for the pipeline is expected to reduce with significant EBITDA growth contribution coming down the line. In fact, as the stores stabilize, which can take 5 to 6 years each, the developments become highly accretive to returns. And from this, we're projecting that we will see new store development program achieving estimated additional £35,000,000 to £40,000,000 of EBITDA in 5 years' time, adding 8.1p or 17 percent EPS. This is an additional real engine for growth for us in the medium term, and it sits on top of the growth that we can deliver to driving performance from our like for like portfolio, creating significant further value for shareholders. Looking ahead to this new financial year, we're expecting to see continued pressure on operating costs from inflation, particularly in store staff costs as a result of the national living wage increases and the national insurance increases in the U.

Speaker 1

K. And as a result of inflation linked increases and unwinding and tapering effects of ratable value increases in the U. K. Business rates. Overall, we're currently projecting like for like operating costs, increasing 7% to 8% year on year.

Speaker 1

In addition, we're indicating that gross interest before development related capitalization will be £34,000,000 to £36,000,000 for FY 2025, with an underlying P and L interest charge £6,000,000 to £7,000,000 higher year on year. And this comes from an increase in projected average borrowings as a result of our development pipeline, including our investment in Italy. Our pipeline of 31 new stores are estimated to cost £281,000,000 and of this, £150,000,000 is estimated still to be spent. Of this outstanding amount, we're projecting that £112,000,000 will be spent in FY 'twenty five, with £38,000,000 following that. So to wrap up, we have an operating we have a robust operating performance in the year, with steady like for like revenue for the total group, comprising resilient results with gradually improving like for like in the U.

Speaker 1

K, robust growth in Paris and strong like for like and new growth from new stores in expansion markets. We continue to be impacted by inflation linked increases to our operational cost base, both in the year gone by and in the next year. But we're well positioned for growth with a strong balance sheet, robust cash generation and an exciting new joint venture in Italy and a development pipeline, which is expected to add material earnings to growth in the medium term. And with that, we conclude the presentation, and we'll open it for questions.

Speaker 2

Thank you. Aaron Guy from Citi. Just going back to that sort of guidance slide that you had there and what visibility do you have over potential upside pressure on the cost inflation that you're anticipating or guiding for 2025? And the question sort of is, should we be thinking about this given you've got 1% to 2% earnings growth or like for like growth in the 1st 2 months of this year? Should we be thinking about these earnings as kind of the clearing event for the earnings decline with the cost pressures you faced over the last year or 2?

Speaker 1

Yes. I think we think about the cost inflation coming through largely as part of known factors around inflation, so around national living wage increases, around the national insurance increases, as we can see in the U. K. So these things are relatively tangible at this stage. And similarly, with the position on business rates in the U.

Speaker 1

U. K, we can look through those with a good degree of confidence. I think I would position them as our cost base, because it is impacted by these indices like national living wage and so on, is quite rearward looking in terms of the way that the cost increases come through. So the large increases in cost of living and inflation generally that we've seen across the U. K.

Speaker 1

And across the rest of Europe have taken a bit of time to feed through. So we've captured them earlier in terms of revenue, captured them a bit slower in terms of cost, coming back to a more normalized margin towards the end of the period.

Speaker 2

Just a second one. On the property valuation, there was an acceleration in the second half, and you mentioned there was some strong transactions. Given you sort of completed a transaction pretty much just before sort of Christmas, can you just give us a little bit more color around how you're seeing investment markets in self storage? Do you feel like the second half, there was a greater push for more capital to push into the sector and buy more assets? Was it quite competitive bidding process in Italy?

Speaker 2

And what are you seeing elsewhere?

Speaker 1

Yes. I think I would characterize the market as being very healthy. During the course of last year, there was a lot of interest in a number of assets and portfolios that came up, not least lock and stall, which transacted in the U. K. There was some pretty tight pricing generally seen across the board, which reflected a general confidence in the sector, I think, amongst the investment market.

Speaker 1

And yes, we haven't seen any signs of that slowing down. But of course, it's early days this year so far.

Speaker 3

Hi, good morning. Ana Scalante from Morgan Stanley. Two questions, please. The first one, could you please provide a little bit more color on current trading, particularly in the U. K, whether that like for like revenue increase came mainly from rate increases or that was occupancy as well, bit of both?

Operator

Well, there are some different moving parts depending if you talk about the domestic of the business. Clearly, there is a strong push from the domestic occupancy. I would say that at the moment, the year on year occupancy position on the business is not declining. It's stable where it is, but we don't see when you look at inquiries at the moment a big pickup in demand compared to where it was. So it's not deteriorating, but it's not progressing yet.

Operator

And I think that the segment of our demand, which is the most correlated with the general activity. When you look at what these business customers are, they are I mean, a lot of them are people who are supporting the construction. I mean, you will have the local plumber, electrician, which has some working activity somewhere and needs a storage near a construction site, for instance. You will have a lot of customers engage in hospitality or supporting hospitality. And what we see that the demand from the most fragile of them, which are reduced.

Operator

If I dive further down into our customer occupancy, I see the segment which has reduced is the most entirely the lowest paying ones. Whereas if I look at my customers which are and it's a bit of a proxy to understand their size, if you try to differentiate the sole traders versus the more established limited companies or even a few PLCs, that occupancy has never declined and they are the one which pays by far the highest rate. And when we look at the business occupancy, I mean, there is no acceleration of departure. There is no change in the churn rate. There is no change in the length of stay.

Operator

What we see that there's clearly less demand. So when you look at the rates, you have to I mean, of course, this is something that the moving rates varies all the time, store by store, size by size. I would say that the average rate position is quite healthy and is I don't know, the rate is up year on year. But that could change at any time as we our models constantly adapt our position to what we see in the market.

Speaker 3

Thank you. My other question is on the dividend. I see that you're guiding to more or less matching the EPS growth in the medium term. But given how what's the outlook for EPS for the next couple of years, is there any risk that you cut the dividend or we see a dividend reduction in the next couple of years?

Operator

Well, I can certainly not anticipate on what the board might decide next year. But that is clearly not our thought and our expectation at this stage.

Speaker 1

And we've got plenty of color from a cash perspective and earnings perspective at this stage.

Speaker 3

Thank you.

Operator

And the dividend is covered, yes, by earnings, not by any other means.

Speaker 4

Sam King from BNP Exane. Just a couple of questions on the EZBOX acquisition in Italy, please. Picking up on your comments on the strong trading track record of the portfolio, are you able to share what the current occupancy is as of today? Presumably, it's quite low given typical breakeven for new developments is about 50%. And then I suppose linked to that, what are you assuming in terms of occupancy ramp up over the next 2 years to get to earnings accretion from that deal by FY 'twenty seven?

Operator

So similarly with Germany, where these investments are also privately held by our partners, so we don't disclose detailed trading data. But I don't think it would be correct to assume the occupancy is low because there are 2 stores which are due to open. So of course, their occupancy is still 0 now. But and the last opening, which was in Florence about now probably a year ago or a bit more than a year ago, has had a very strong start and has well past its breakeven. I would so I think the occupancy, I mean, some stores are on the 80s and there is a quite so the occupancy are relatively high, but can be pushed higher.

Operator

And the rates also are healthy.

Speaker 4

Okay. And I suppose linked to that, just in terms of the pipeline more generally, I noticed that the dilution or the expected earnings dilution in FY 'twenty six has got worse versus when you last reported at the half year. Is that just a function of the pipelines got bigger, so you've got more near term costs? Or is there anything else going on?

Speaker 1

No, it's just adding in new stores. So we've developed out some stores and we've added to the pipeline over that period of time. So that's all that is.

Speaker 4

Thank you.

Speaker 5

Morning. It's Matt Spire from Peel Hunt. Frederic, I think you mentioned in your presentation remarks that affordability is back 2019 levels. Can you just remind me how you measure affordability?

Operator

I mean, it was just comparing the relative to how inflation went and how in the same period as we put the curve in that slide. And we know that dealing with national living wages and salaries generally have quite followed that inflation metrics. So but it's essentially in relation to the general CPI. Hello, Kanad from Barclays. Can you give some color on the expansion markets?

Operator

What led to the double digit like for like and I mean it's pretty strong compared to the other markets? Well, it's a combination of manufacturers. The fact that some of the stores that we acquired when we started to manage them, we meaningfully increased the volume of inquiries by bringing them into our platform at a much reduced cost. That was particularly strong in the particularly the case in Spain, but that was also true in Belgium. I think we have managed also the rates very proactively and the rates that we've been able to charge as a result of our ways of operating stores have increased enormously in Belgium.

Operator

Belgium, we still operate only the same 6 stores that we bought now 3 or 4 years ago. I joined with Carlyle at the time and the rates, the RevPAR growth and they were highly occupied already, but the RevPAR growth has been stellar there. In Spain, it's a combination of having also adding added a lot of stores over the years which have ramped up nicely. And we bought only 4 very small stores. I mean 3 of them were very small in the center of Barcelona.

Operator

We've added close to 16 or 17 stores open in total now in between Madrid and Barcelona. And the one which have been opened 3 years ago, 2 years ago, 1 year ago, have been ramping up very nicely. And so they all underpin that growth. And it's a similar story in Netherlands. So I think that's what is behind that.

Operator

And of course, this new activity in relation to the core base is large in proportion, so to compare to what we purchased on day 1. Thanks for taking the question.

Speaker 6

Hi, Max Nimmo at Deutsche Numis. Just on the bringing down the sort of business customers in the U. K, do you expect that will have from sort of down towards 30%, do you think that will have an impact on the cyclicality of that of the U. K. Part of the business?

Speaker 6

And maybe just kind of related to that kind of comment, I think you said Paris revenues have been up for the last 20 years. Just a kind of comment between the mature markets in the U. K. And the mature markets in Paris and a bit of a comparison there. What's the driving differences between them and why one is less cyclical than the other?

Operator

Well, I think that business component actually more recently has been what has been driving the cyclicality at the moment. It could be different in the future. I know it was different in the GFC in 2,008, 2009. The cyclicality was more driven by the domestic business. But I think the industry has changed a lot since.

Operator

I mean that was many, many years ago for the self storage industry. I think it is quite different from in terms of awareness and usage. But of course, you can never exclude that at some point in the future something like that comes back. But I think clearly now it's more I mean the depth of the demand where you have the greater number is domestic. I mean there are many more people than there are businesses in any countries.

Operator

And I think the business community is much more aware of the safe storage industry because I mean when these guys have storage needs, they've been looking for storage facilities and I think they've noticed the self storage industry. I think lots of people, private people don't really take notice about it. They may have seen something what's driving, but without paying too much attention to it. And I never thought about using it until the day they start to need it. And this is where you have clearly the huge potential growth of the market everywhere.

Operator

And I think the more that demand increases, well, the more of course they will absorb our space. It's very hard to predict of course what would be the future volatility on that. In terms of comparing with Paris, I mean, Paris situation is quite unique in Europe in having a big cities, which is essentially divided with 2 operators, it's Shor Gaurd and us. I mean there are a few other players, but they are relatively small even when we aggregate all of them. We have quite a unique position in the center of the city in the wealthiest in the wealthiest area.

Operator

If you take the inner city of Paris itself, which is about 2,000,000 people within the Paris area, which is super hard now to develop with stores and we have a lot of stores there. The wealth of the people is probably I mean that would compare to the best part of London. To give you some figure, if I take the center of Madrid in terms of purchasing power, if I take Madrid, Barcelona, I will be just above 20,000 per people. If I take the Randstad, that will be at this level. If I go to the best Italian cities, I will be a bit higher, more like 24, 25.

Operator

In Paris, it's 35. And so strong barriers to entry, a strong supply from us, very dense city, Paris is center of Paris is the densest city in the Western world after Manhattan and high purchasing power. I think that is what has underpinned the very strong growth over 20 years of our Paris business. And we have been able because of course the supply within the city of Paris itself is limited and we would like to put many more stores, but of course it is super difficult. We have been able also to bring a lot and to offer to a lot of people from the center of Paris, storage facilities outside where it was slightly easier to develop.

Operator

And that is also one of the reason why our rates outside Paris in the suburbs are still very high compared to what others may achieve because our marketing and selling machine in Paris, not only in the suburb targets the local customer base, we have of course good offer for them, but we are able to bring and to move people from the center of the city to the outskirts and that lifts the rates. Are there any so no more question here. Are there any question on the line?

Speaker 7

Yes, we have a question on the line. But beforehand, I would just like to remind everybody on Zoom that if you wish to ask a question, please use the Q and A button to ask a text question or use the raised hand function to ask your question verbally. Our question first comes from Gerardo Ibanez Herrero from Kempen. He asks: Could you please provide some color on the operational performance differences between domestic and business that you have in the 1st 2 months across the UK? And how do you see this evolving into 2025?

Speaker 7

On the back of this, could you please provide some color on how much you expect to reduce business exposure in the UK during 2025? When do you anticipate reaching the seventy-thirty split?

Operator

So I think on the first question, I think we've probably in the meantime covered it. So I would be in the danger of repeating myself. And but on the second part, which is unless of course there is a one point of the question I'm missing, but on the second part, which is so when it's well, it's difficult to give a precise date. As I said, we want to achieve at least 500,000 square feet of repurposing of units in the next few years. But I don't think it depends on how the demand evolved because we do that as always in a prudent manner.

Operator

So we look at absorptions and the demand on the smaller sizes. And of course, I think it's worthwhile to remember that should the economy slightly turn around and the business demand pick up, then I think we are the sort of business with our national presence that would benefit from it very quickly. And very and that would be on top of our on the deep fundamental domestic demand be a very strong accelerator of our revenue growth.

Speaker 7

Thank you. That was our only question via Zoom. So I will hand it back to you.

Operator

Okay. Well, then thank you very much for your attention. And then that concludes our presentation. Thank you.

Speaker 2

Thank you.

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Earnings Conference Call
Cheetah Mobile H2 2024
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