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AMERCO (NASDAQ:UHAL)

F1Q09 (Qtr End 6/30/08) Earnings Call

August 7, 2008 11:00 am ET

Executives

Jennifer Flachman - Director of IR

Joe Shoen - Chairman and CEO

Jason Berg - Principal Accounting Officer

Gary Horton - Treasurer

Rocky Wardrip - Assistant Treasurer

Analysts

Jim Barrett - CL King & Associates

Ian Gilson - Zacks Investments

Ross Haberman - Haberman Fund

Michael Millman - Soleil Securities

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the AMERCO first quarter fiscal 2009 investor call. (Operator Instructions). Thank you Ms. Flachman, you may begin your conference.

Jennifer Flachman

Thank you for joining us today, and welcome to the first quarter fiscal 2009 investor call. Before we begin, I would like to remind everyone that certain of the statements during this call regarding general revenues, income and general growth of our business, constitute forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995, and certain factors could cause actual results to differ materially from those projected.

For a brief 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 June 30, 2008, which is on file with the Securities and Exchange Commission.

Participating in the call today will be Joe Shoen, AMERCO's Chairman and CEO. I will now turn the call over to Joe.

Joe Shoen

Good morning, everybody. I am speaking to you from Phoenix, Arizona. I have Gary Horton and Jason Berg in the room with me. Rocky Wardrip joins us from Reno. Of course, we will all be available to respond to your questions after my remarks.

Four things I would like to comment on. First, we have decreased a plan on ten-foot truck availability due to the American Axle strike. Second, an improvement in utilization of our moving trucks. The overall flatness in U-Move revenue and softness in resale prices of trucks that are exiting our fleet.

We had talked about the American Axle strike, when we last spoke. We incorrectly believed that when that strike resolved itself, GM would begin production per prior plan. In fact, once the strike resolved itself, GM went into a very halting production, in fact, slowed production by our measure, and so we have been doubly put off now by the consequence of the American Axle strike.

It is anybody's guess, but we are going to be down for the year at least $4 million to $7 million because of this. It could be worse. We still do not have all the trucks. So, I kind of don’t have hard numbers, but we are losing the summer with these trucks, basically. As you all can imagine that's our best revenue period. Second point is utilization. I think that is the brightest news here. As you know, we do not publish utilization figure. However, we are up, and we are up solidly. We, this quarter, the way that they count the fleet, we were down an average in excess of 4000 units over the same time last year.

So in order to keep revenue where we kept it, we actually got better utilization. We didn’t get huge price increases. As Jim Barrett commented in his write-up, it's a little bit difficult to project a price increase, and a part of decrease, but I think it would be best for practical purposes to say prices stayed fairly constant, yet we're able to get revenue up, which means utilization went up basically.

So that's very positive. That's the fundamental economics of the business. It means a lot of people did something right. However, the overall result as I indicate is, revenue was flat-to-down in the U-Move segment, and I don’t think there is a prospect of it being greatly different in the second quarter, but the same basic factors are all operating, and I will be, actually, extremely thrilled if we can keep utilization where we have been running it, and I do not know that we can, because we are running at an all-time high on utilization, which is hard to project out that you're going to hold that, but we are working to do that.

The final point is one I think that I didn’t give you any sort of heads-up on, and I think to some extent caught me a little bit unawares through the first quarter and that’s softness in truck resale prices, which softness we saw across all models. We have all heard the automakers are struggling at the auto auctions, and that's just a truism. I under-appreciated the affect it would have. We saw it throughout the quarter and it's continuing in the second quarter.

Gains on pickups and vans, which we typically made a gain on sale have been substantially eroded, and box trucks for the quarter, essentially, sold for a little less than what their residual values were, so we post a loss. From your purposes, this, I believe all blends into the depreciation line, so it's a little bit of a black hole from your point of view, but I want to give you a little window into it, because we continue to sell about 8,000 pickups and vans a year, and about 9,000 to 9,500 box trucks a year.

And, so it's a some on going interest, substantial effort on our side, and the result there, which has been fairly predictable for a long time, slipped in the first quarters and likely will slip in the second quarter. I am continuing to focus daily on our U-Move transactions and revenue. Anytime, I keep hammering on something, and I have now been hammering on this for 18 months, it causes some loss of focus in other parts of our business. That's, how many balls can I get the team to juggle?

So, I think you are seeing a little bit of that in retail sales and self-storage. I will continue to attempt to balance our activities to get the best result over the long-term for all parties concerned. Our fleet remains very well positioned, which I think is a positive. We are relatively well-financed, which I see as a big positive. Customer satisfaction, which is, there is no real good index or hard index of it.

The customer satisfaction appears to be improving not declining, and typically, when we increase utilization, which means we are very tight scheduling equipment, customer satisfaction drops, because some people get left out in the lurch, because things didn't work out as we have planned. So, I see that as a big thing that utilization went up, but it doesn’t appear that customers are more dissatisfied than they were at this time last year. So I think that's very-very positive.

Overall, our business remains very solid but tight. With that, I am going to turn the call over to the moderator for questions and answers. Moderator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Jim Barrett with CL King & Associates.

Jim Barrett - CL King & Associates

Good morning, everyone.

Joe Shoen

Good morning, Jim.

Jim Barrett - CL King & Associates

Joe, this is an accounting question. Your use of accelerated depreciation, can you give us any thought as to at what point does that catch up with straight-line depreciation? In other words, at what point does it stop penalizing your GAAP earnings?

Jason Berg

Jim, hi, this is Jason. We start to reach that point at about year five on that. I would also like to point out that we have changed our allocation this year of how we are funding new fleet acquisitions. We have gone more towards operating leases versus fleet loans. So we are going to see the lease expense number begin to go up, which goes up at a slower rate than if we were to buy the equipment and depreciate it. So there may be a moderation of the depreciation expense over the course of this year as compared to the increases that you have seen in that line in the last two years.

Jim Barrett - CL King & Associates

I see. Year five break even, what fiscal year would you estimate that to be?

Jason Berg

Well, we started this depreciation method in the third quarter of fiscal '06. We have really been adding quite a few trucks, so we're going to continue to, you if you're compare with what it would have been under straight line, I do not have that specific date, but we're still quite a few years out from that just because of how much we have put on.

Joe Shoen

Jason, I'm going to butt in here, at the risk of destroying it totally. I shouldn't normally comment on accounting. I think that there is two places where these become equal, one is where accumulated depreciation in the fleet becomes the same under both methods, and the other is where annual depreciation crosses over, and I think Jim is looking, I think, Jim, at the point when annual depreciation crosses over.

Jason Berg

That's correct.

Joe Shoen

I think Jason answered, when accumulated depreciation crosses over. I believe annual depreciation is going to cross over in the third year.

Jim Barrett - CL King & Associates

I see.

Joe Shoen

I am doing this from memory, Jim, but I mean, I am very much interested in the subject, okay. So my memory is not totally bad. Because, I believe Jason what actually happens is, the last two years you have less depreciation than you would under a lease. In the first, two, and almost three years you have substantially more. And, so, it's a--

Jason Berg

Jim, I need to actually revise my comment.

Jim Barrett - CL King & Associates

Alright.

Jason Berg

Under the declining balance method, in the first year we're taking 16% off the value of the truck. Under the straight line that would have been a little over 5%. So under the declining method it goes 16, 13, 11, 9, 8, 7 and 6. So we are actually out to about year seven or eight before the annual depreciation number would be equivalent to what it would be under the straight line. So the accumulating piece would actually be even further out than that, because the accumulated piece isn't going to reach until that straight line eclipses the declining balance.

Jim Barrett - CL King & Associates

I understand that. Joe on a separate subject, there was a mention in the Q that the company has additional opportunities for leverage in it's existing capital structure. Would you care to comment on where those additional opportunities are, and what their magnitude might be?

Joe Shoen

I am going to let Gary Horton speak to it, he is here.

Gary Horton

Could you rephrase that again?

Joe Shoen

He wants to know where do we have room for more leverage in our capital structure?

Gary Horton

We probably have some more room on our real estate assets. We have basically, I think a few, two quarters ago, we basically terminated a loan that we had on our used truck fleet. We still have a tremendous amount of value in the older fleet that we could leverage up, and we could probably leverage, like I said in a little bit more of our real estate.

We have basically gone through and with the reluctance of the credit providers in the market to look at real estate. That will probably go for another year or so, and then, we will go ahead and put some leverage on that as we go forward. I think we have some operational leverage also that what Joe was talking a little bit about by bringing the utilization up from where it had been, and I think, part of it is coming out of our new pricing model, which is allowing us to be much more aggressive on certain pricing and certain moves. So I think those are the two areas where you can look in the leverage.

I would also like to just say that when you look at the front of the Q, in looking at depreciation, and you see it going from $44 million to $64 million, a big portion of that, Jim, is caused by what we have done with taking the gain or loss into that line as a reduction. Last year, we actually had a sale of a property in New York, which had the effect of reducing the line, and this year, as Joe had pointed out, we also had more losses on the sale of our trucks. So it was a pretty big swing right there.

Jim Barrett - CL King & Associates

Okay. And, last but not least, Gary, speaking of real estate, since you last had the real estate, I assume appraised by the banks, and the last time the company borrowed against that real estate, broadly speaking, has the value of your properties gone up, down or sideways?

Gary Horton

I think, I am going to say primarily sideways. In certain markets, they actually have the effect of increasing in value. We don't have, what I would say, in none of our loans are tied primarily to loan to value, so we do not have that risk. We really have structured all of those to be based upon cash flows and debt service coverage. So we are very strong there. And, we do not get caught with the whipsaw, where a lot of the people have done that, and where the loan to value is too high, and oh my God. Then we said, people start doing fire sales and other things.

We do not have those problems going forward. As Joe said, we are very well capitalized. Our maturities are very manageable going forward. Again, a lot of that is, it's done in timing, and we put out all the real estate from multi years, and I think, we have one loan next year that comes up at an actual maturity, and it's somewhere around $40 million.

Jim Barrett - CL King & Associates

Thank you, all.

Operator

Your next question comes from Ian Gilson wick Zacks Investments.

Ian Gilson - Zacks Investments

Good morning. Joe, you are talking about increasing the leverage; that means basically you would have extra cash. What are you going to use it for?

Joe Shoen

Well, right now we are keeping it for a rainy day Ian. But, we're like everybody else, if the opportunity of the decade comes up, we would be foolish not to jump on it. I have not seen any fire sales either in the self-storage business, or in the equipment business. But, I don’t see every deal out there, and I have high hopes if something came up, particularly in the self-storage business, that we'd have sufficient liquidity to act on it, if it was anywhere near proportion to something we have business doing.

So, right now we are basically saving it for a rainy day, but we're, you've been around a long time. This current economic doldrums or whatever you want to call it could last a year. It could last four years. There is nobody owns that piece of information, and I'm aware of, and so we're taking a fairly conservative posture.

Yet I won't lie to you. I am average greedy, and if something that looked pretty exciting came up, I would try to get us to step up. So having some liquidity would be key, because it seems that there is at least for us, liquidity is not easy to come by right now. In other words, the lenders aren’t out there just trying to shower money on everybody who has a proposition. So if something came up, having some of our own liquidity, I think we will have a better chance to actually close the deal.

Jason Berg

You know, Ian, where we came from and what we went through, we want to make sure that we do have a conservative amount of liquidity, and as we look at it, we've got a substantial amount of cash and liquidity at this point.

Joe Shoen

For our standards. There is a lot for us historically?

Jason Berg

Yes, it is $300 million plus.

Ian Gilson - Zacks Investments

Yes, but you have got $240 million in cash and cash equivalents on the balance sheet. Is any of that tied to any of, say, loan covenants that you had out there?

Jason Berg

We do not have loan covenants per say Ian. Let me explain why we have cash. With all of the problems with the banks, sometimes I would rather go through and make sure that they would live up to their commitments, so I would draw the cash down, and I would take that as an insurance policy. Under normal times, that would probably be shifted from cash to unused lines of credit.

Joe Shoen

So we are over-borrowed and have a negative arbitrage, Ian, right now. You can call it being phobic. I don’t know what you want to call it, but that is just the truth. We have over-borrowed on some lines, and thus we have a negative arbitrage on those funds. We did it intentionally because our child is scared of fire.

Ian Gilson - Zacks Investments

Okay. On the truck shortage, was there no possibility of switching manufacturers?

Joe Shoen

No. That particular truck has just some little weirdness to it. Yes, if we could have switched over to Ford, we would have. Ford had capacity. The way that truck is built, it uniquely fits the GM chassis, and so that was kind of the deal. We were able to do some switching of axles. We actually got GM to introduce some axles different than what we had originally planned to put on trucks. That got us, I do not know, like 400 or something trucks.

But it's, people are shaking the trees. I was very disappointed with what GM did, but they have an overall strategy, both GM and Ford do. This parcel van and pickup size business of shrinking the manufacturing supply. You may have heard that Ford has actually put off the introduction of their new F-150 into the late fall. They do not share with me exactly what their plan is, but they are obviously trying to shrink oversupply in the marketplace, and that partially, I hope, trying to address the soft resale values.

So it is hurting us going in, but maybe a year from now it will help us going out. I mean our interests aren't at odds with the manufacture, and I was very surprised to see GM essentially slow production rather than accelerate it when they came back after the strike.

But, they make our truck in a plant, but they make a lot of other trucks for other people, and so, they had a macro view of the thing that indicated to them that shrinking the supply was okay.

It negatively affected us and we will never recoup that. Whatever that loss of revenue ends up being ultimately, that is what it will be. It’s part of just the vagaries of this business. We are a very big customer for trucks. A very big customer for trucks is not that big a customer, and trucks, especially light trucks are kind of a like a bad word now. Everybody thinks they are a bad business if you are an automaker, because the pendulum is swinging to the other side of the road. So we are not calling the shots at the automaker in any sense of the word. They have a whole host of other opportunities that are driving their decisions. Although they are keeping us up to date, and we have good relationships, and we are getting good pricing. But, without the trucks, we can not rent them.

Ian Gilson - Zacks Investments

It's not the first time you have had a problem with General Motors.

Joe Shoen

No, it sure is not. I think that that is a sad comment on General Motors, and I am a very pro-American manufacturer type person. Yes, GM is marginalizing themselves as a supplier.

Ian Gilson - Zacks Investments

But, Nissan makes some nice big trucks. So does Toyota.

Joe Shoen

This was to say, these were, this one is of ten foot, it is our smallest truck, and it is a niche that their product simply works for, that is just. We have been scouring around, and of course as we go to our next round of purchases, we are going to have whatever you want to say, a very jaundiced eye towards their promises of their deliveries and we will be looking at other people here.

Ian Gilson - Zacks Investments

Okay. Great, thank you.

Operator

Your next question comes from Ross Haberman with Haberman Fund.

Ross Haberman - Haberman Fund

Joe, I want you to go over; you threw out I think a $4 million to $7 million number related I guess, to not being able to get the amount of trucks you hoped to. Was that a shortfall in net income for the second half of the year? I didn’t quite understand what that referred to?

Joe Shoen

Well, the numbers are not all in. It's going to be a substantial amount of money. It will be a top line of impact. Of course, then, we are not going to pay some depreciation and some other costs. But, a truck in it's first year is a somewhat profitable item. I do not have and I could not tell you, if 10% of that goes to the bottom line or 30%. I have never done that precise calculation.

But, we lost the revenue, and we had personnel in place. We had facilities in place, all these things that would have used the gross margin, not necessarily the net. So we didn’t get to see any reduction. Let's say its $7 million, a $7 million reduction in the top line, it's very, it's essentially impossible for me to compensate for that in G&A. It just doesn’t work. I have not been able ever to make it work. I am not saying someone couldn’t but.

So it will have a noticeable little tick. There is quite a disappointment to me and to my truck rental team, because they are all working against a plan and commitments that they have made to me going into the year, and now this comes back and this is negatively affecting their ability to perform. They are all very unhappy about it.

I think it was big enough to mention, but it will be a onetime thing through. We will get the trucks certainly, by mid-fall we will have the trucks. Of course, it is having, the trucks after the customers have all gone home. So it is not when I would like them, but okay, fine, we will have the trucks, so some amount of gross revenue.

$4 million to $7 million is not an inflated number for the revenue we will lose. It could be a little bit higher than that. And, it's a big disappointment to us, and I am sure to everybody who follows us.

Gary Horton

Joe, I would like to add a little bit. When you put a new truck in, primarily, the expenses that you will have in that first five to six months will probably be limited to an insurance charge, a depreciation charge, because maintenance and repair on the truck in its first four to six months is virtually nonexistent. You really truly have all the facility costs, and you have all of the people costs, etc.

Some of these rentals would be a dealer, so on those you would not have the 20% commission paid out. However, the number that you get in the first part of the truck's life is very substantial.

Ross Haberman - Haberman Fund

In terms of an operating income number, you are saying?

Gary Horton

Operating income, that is correct. If you look at it from an EBITDA standpoint, adding your depreciation back, it is very sizable on the cash side and the cash flow.

Ross Haberman - Haberman Fund

There is no other way to temporarily lease the trucks from elsewhere to help make up the shortfall?

Joe Shoen

Here's where we missed, Ross. What happened was, we are always selling and buying trucks, okay? We believed this was basically in the bag; these trucks were coming in. So we began to sell, because we had excess capacity late spring, okay? So we could begin to sell there, and we would not be in jeopardy. In other words, we had access trucks conceptually in April and May.

Ross Haberman - Haberman Fund

Right.

Gary Horton

So about then, American Axle goes on strike. So we said, well, should we stop sale or should we continue sale? Well, we went back and forth, and all the predictions were this was going to be a quick strike and blah, blah, blah, and no way GM is going to let it lay out. Well actually, so we went ahead and reduced our fleet by about 650 trucks, okay?

Ross Haberman - Haberman Fund

Via sales?

Joe Shoen

Via sales.

Ross Haberman - Haberman Fund

In hindsight it was the wrong decision.

Joe Shoen

The way to compensate was not to sell the trucks.

Ross Haberman - Haberman Fund

Right. Got you.

Joe Shoen

So about the time we saw the catastrophe, we quit selling the trucks but I would already let 650 of them out of the rental fleet.

Ross Haberman - Haberman Fund

Which in hindsight you could have used.

Joe Shoen

I sure wish I hadn't done it. You are exactly right. I did it.

Ross Haberman - Haberman Fund

It was your decision at the point in time.

Joe Shoen

Yes. So, well yes, we could have done in retrospect a better deal. The way you modify it, you actually regulate the size of the fleet by your rate of dispositions, not your rate of acquisitions. If that makes sense?

Ross Haberman - Haberman Fund

Right.

Joe Shoen

Acquisitions have got to come in at somewhat of a pace that is determined by other people. However, we control the dispositions largely. So, if I would have handled dispositions better, I would have had a better result. However, we were attempting to do two things.

We were going to grow that fleet and we were trying to sell some basically early in the cycle where we thought we could get away with very minimal maintenance expenses and still sell that truck early enough in the cycle. So we tried to do it two-step and it did not work.

Ross Haberman - Haberman Fund

I think I understand now.

Joe Shoen

Thank you.

Ross Haberman - Haberman Fund

Just one follow-up question; could you give us some color on the self-storage side of the business? What are you seeing in terms of demand as well as general pricing?

Joe Shoen

Sure. First, I would like Jason to address the published financials because they appear to differ from our narrative in the press release. Jason?

Jason Berg

Sure. Our press release includes or refers to AMERCO-owned self-storage properties. If you recall, the third quarter of last year we went through an accounting process that deconsolidated SAC Holdings II, which was a variable interest entity. So SAC II results are included in our prior-year results for the first, second and third quarters of last year, which on a consolidated financial creates some variances that it appears that revenues are down much more than they actually are.

I just wanted to point out on the storage-side, if you look at the face of the consolidated statements that the SAC Holding II last year had $5 million of storage revenue, and $4.7 million of retail sales revenue, that then were not included in this year's financial results. that goes a long way in explaining some of the revenue variances.

Joe Shoen

Then I want to address just what is the state of the market, which was I think your direct question. Our situation is, we are down slightly in total rooms rented, and we are up slightly in total inventory. It has a little bit to do with a location we were compelled to sell last year due to things that were not in our control. However, the truth is, is that our system-wide occupancy is down. System-wide revenue is up, which basically means where we did a good job, we did okay, and where we did an average job, we did not do so well.

Houston, which is an over-developed storage market if there is such a thing in the world. There is more self-storage in Houston that you almost can not turn around and not find a self-storage place there.

In Houston, our results were slightly up because we improved our management basically. So my conclusion is that in a very tough market, which is a fair characterization of Houston; you can still see revenue up.

Now, as an industry, we are all smarting in Florida. Florida was, a blind man can make money four years ago, and a blind man is not making any money this year in Florida. We are off a little bit in Arizona, which I think is maybe a combination of factors.

One of which is I promoted my guy out of Arizona to go run a large district for me, and so you always suffer when you do that. He was doing great and now he is not there, so results will always tend to slip a little bit there. However, the industry is also complaining about Arizona.

I think we can rent some more rooms as we focus on it better. I would not say that our delinquency is particularly up or something that is an indicator that the consumers are running from the self-storage business. On the other hand, they are not running to it. A lot of people in the press have said, well, if you lose your house you are going to go to a self-storage room and all that.

We have not seen any such correlation at all. We would rather see you moving to a new house than being foreclosed out.

Gary Horton

The other thing I want to point out is, we do not make a distinction between same-store and lease-up. We have got three fairly large properties that have just come on board in San Francisco, New York, and we do have one in Florida. Those have added to, and as both people have talked to the number of rooms we have available, but they are very early lease-ups.

Joe Shoen

I will give us that, Gary, but I think, and I do not think I am telling tales out of school. Total rooms rented, we are slightly down over the same time last year. That is your total litmus test, okay? In other words, I try to discourage my guys from giving me all these cuts of the data that basically explain away their performance based, you know, well the world is not an easy place. Total litmus test is, we are slightly down in total rooms rented, yet our inventory is up.

So our performance is down, and the question is, is this macro forces driving us, or is this our performance? I think there is a little bit of macro forces, but I think a fair amount of it is our performance, which is why I made the comment in my opening remarks of, as I keep bearing down on everyday on truck rental, they only have so many hours a day, and I have to be careful I do not drive them to where then they neglect the other part of their business.

We manage geographically, so the person who is running Phoenix is handling the truck rental, and the self-storage. So at a very low level, that management coincides. So that person, if they spend time on one, then to a certain extent they neglect the other. I have to try to balance that in a way to get us a good result.

I do not think the self storage market is in trouble. When we went through the '87, '92 area, which I think was a good tough market, and we were not as capable then as we are now. When we went through that, the best we could do was basically hold total rooms rented.

We did not go up, we did not really go down. We worked hard and retained total rooms rented. So, I think that is a real bad scenario would be that. I think there is room for us to do better.

Again, what Gary says is, when we publish our number, it is an all-in, all-done number, so do not have a heart attack. Almost everybody else has some version of same-store, which my guys have that same number and they will give us a real good figure, because of course they are going to choose statistics that give them that figure.

So that is a long way of saying, I think the (inaudible) business is still a good business. We are still expanding in that. I am not at any breakneck speed. However, as I commented to Ian, if something hot came up, I would be for committing capital to it.

I have not seen anything hot, and I think that also reflects the fundamental state of the storage business. There is nobody in a panic to sell anything right now. If things were really off, we would see a few panicked sellers. We are not seeing them. We look, I do not know, three or four places a day. My acquisition people look at, at least. So they are looking at 1,000 places a year, something like that.

So we are constantly sifting through what is for sale. With arguably, say, 45,000 or 50,000 units in North America, it is not unusual if 2,000 of them sold in a year. With your average amount of divorces and deaths and normal people's plans that change. So we are not seeing a big increase in places for sale, and we are seeing very little softness in price.

Once in a while we are seeing one, and if we see it and it fits into our program, we are trying to acquire it. However, we are not seeing much softness in price. So I think overall, the self-storage business is doing okay to us. We could do better, and I think the industry views themselves as being in a good, a decent position, not a high-growth, but a good, decent position.

Ross Haberman - Haberman Fund

Okay, thank you.

Operator

You have a follow-up question from Jim Barrett with CL King & Associates.

Jim Barrett - CL King & Associates

Joe, to follow up on Ross's question about self-storage, you're not seeing much softness in self-storage. Are you seeing the same level of competitive interest in terms of when properties are put up for sale, the number of parties and the strength of those parties in terms of attempting to buy properties?

Joe Shoen

I do not know the answer to that. Jim, it's a good question. Prices are pretty much holding, which would indicate there still is interest, but, no I think there is some of those stuff that has been going, these cap rates that were 17 times NOI, whatever that is, I do not know what that is, 5, okay. I think that stuff is going away. But, if somebody wanted to sell a storage place at an 8 cap, I think they would get run over at the escrow company. I think there would be a mob of people wanting to buy it.

Jim Barrett - CL King & Associates

All right, okay.

Gary Horton

Jim, I think what you also see is, those, looking through the different storage companies, and they're all reporting now, and at least a couple of them that I have looked at so far have either gone out and bought some additional locations where they have actually set up facilities so they can go out and buy more storage. And, when you look at the REITs, they need to keep growing and growing, and a lot of times the way they grow is by buying more locations.

Joe Shoen

So we are not the only people who got money, who wish there was some smoking deals in self-storage. So if one came up, you better be quick on the draw would be my guess. That's why I put the caveat, we do not see every deal. Some deals are going through that we do not see, and of course, that makes me a little bit agitated with my staff, is why didn’t we see that deal. Did it therefore go to below market rate and we could have had an opportunity there. So we're constantly sifting through this stuff, and I am just not seeing softness there. It's off the big peak or the land rush, but it's not soft.

Jim Barrett - CL King & Associates

Okay. On a separate subject, could you comment generally on your fleet acquisition cost? I did read in the Q that you are switching to operating leases versus debt financing, but could you, any trends there that are of note?

Joe Shoen

I think pretty much everything is the same. We do not have a new model. We will get little price increases from the manufactures as this goes along, but we are not getting slaughtered on price increases, because a lot of the stuff we have is negotiated increases, and so we are still living off that. We did, I think you're going to see pressure, but automakers are obviously under pressure. If they can get a price increase through, they're going to take it. And means, they will put it onto us. But, so far it hasn’t been something worth mentioning. So I do not see a big change there.

I think the switch to leasing is, again, Gary is always looking at Rocky or always looking at a net cost. Also we are trying to keep a conservative posture, so it's a little better to say I have got cash in the bank, then I have got lease commitments unexecuted on, okay? So, we kind of, we got a little bit more conservative I think early spring, we feel better with cash in the bank. And, it's always a very-very tight race between the lessors and the debt providers, as to net net cost. And so, I do not think that the lease people are necessarily that much cheaper right now, but it is just very tight, and we kind of said we have a little preference to hold a little more cash right now.

Gary Horton

Also, one of the things which really, by not getting things in, the economic stimulus program really, really works on both, because what Rocky and Toby, who works on the leases a lot more than I do, they basically got the lessors to pass on the stimulus savings. Because we went out in December of last year. We will probably, for all of this year, we will probably do the same again this year. But, it was the effect of the leases, they gave us the same thing as we would have bought it from the stimulus program.

Rocky Wardrip

And Gary this is Rocky, Jim. I would add to that with the reduction in rates and the overall treasury market too, even though we saw a little bit wider spreads this year, our actual financing costs will be less on this year's fleet than it was on the prior two years' fleet.

Jim Barrett - CL King & Associates

Thank you. And, Joe finally, the last question is, the company didn’t buy back any stock in the quarter. Can you give us your general feelings on capital allocation and using it specifically for share repurchase at this juncture?

Joe Shoen

I do not really have much of it. I think, to a certain extent, we have just been kind of conservative. I don’t know what to say there, I really do not. Gary, do you have a comment?

Gary Horton

We do have, and we basically set aside money to buyback stock. We have not used it all. I think there was a $50 million approval, we bought back, what, about $25 million against it, $23 million. So we have $26 million left. There is actually a nice chart on page 45. Having said that, we have not announced anything, but that is still out there.

Jim Barrett - CL King & Associates

Thanks, and everyone have a good day. What's that Joe?

Joe Shoen

We are not being any help to you at all.

Jim Barrett - CL King & Associates

It's actually been very helpful, but I appreciate it.

Joe Shoen

Alright. Thank you for your time my friend.

Jim Barrett - CL King & Associates

Sure. Thank you.

Operator

You also have a follow-up question from Ian Gilson with Zacks Investments.

Ian Gilson - Zacks Investments

My question has been answered, thank you very much.

Joe Shoen

Thank you, Ian.

Operator

Your next question comes from Ross Haberman with Haberman Fund.

Ross Haberman - Haberman Fund

Just a follow up. Rocky, could you refresh us, what was going to be your capital expenditures for this calendar year? Whatever it is, are you rethinking it?

Rocky Wardrip

On the rental fleet, I believe we are right around $400 million, and that includes pickups and cargo vans, which would probably be somewhere in the $110 million area, which are largely probably on a net basis about $10 million as opposed to the full gross amount. And, I believe on the real estate side, we are budgeted around $160 million, and we have an additional $37 million of track leases that we will purchase as they come to the end of their term.

Ross Haberman - Haberman Fund

Given the environment, so between the $400 and the $160, you are talking about $560 million, is that that would be a gross and what would be the net number?

Rocky Wardrip

I believe our sales number is probably going to be somewhere around $150 million to $155 million.

Ross Haberman - Haberman Fund

So that is about $400 million between the two issues net? If my math is right?

Rocky Wardrip

Yes. And, we have secured financing on all, but roughly $69 million of the production through March of next year, and we have people working that right now, and we are hoping to nail that down here within the next week or two.

Ross Haberman - Haberman Fund

Joe, given the environment, are you comfortable spending that level of money today?

Joe Shoen

Absolutely. And again, so much of this is replacement. So you're looking at the economics of what you have and what you are getting it, and if I thought revenue was going to drop 10% or something, no, I would have a different attitude. But, even with flat revenue, it's replacement. So it's an easier calculation from my point of view. I feel comfortable with it, yes.

Ross Haberman - Haberman Fund

How much of the 400 is replacement?

Joe Shoen

Well, except for the real estate, 100% of it is.

Ross Haberman - Haberman Fund

It is? Okay. All right, I did not understand that. I thought part of that was part of, where part of the 400 was for expansion.

Joe Shoen

We are actually slightly down in fleet, so I actually have some catch-up to do. So no, we are not expanding the fleet really at this time. Now, I'm not against expanding the fleet, is something you know but, right now, no, we are having trouble just getting replacements in. So, if we were going to expand the fleet, it would be next spring or something.

Ross Haberman - Haberman Fund

Got it. Okay. Thanks again guys.

Joe Shoen

You bet Ross. Thank you.

Operator

(Operator Instructions). Your next question comes from Michael Millman with Soleil Securities.

Michael Millman - Soleil Securities

I am sorry if you went over this earlier, but given that you were shorted on trucks, why didn’t that get reflected in better pricing?

Joe Shoen

That's a fair question. I don’t know that I have a straightforward answer to it. Of course the competitors out there, I can't tell you that they got the business that we had forecasted we were going to get. I do not know. I don’t have a straightforward answer to it. A lot of transactions are driven by availability that there is a price that we believe people will pay, and that the price is not all that flexible. But, if you don’t have a truck, let's say in Poughkeepsie, you just don’t make the rental. You don’t get to raise the price of the truck in Albany. You just don’t get the rental in Poughkeepsie. I don’t think that's a fair enough answer to your question, but that's about as good a one as I have.

Michael Millman - Soleil Securities

Did the shortage of trucks, was that in specific locations or was it spread across your market?

Joe Shoen

Well, it's always in a specific location, but it wasn’t geographically concentrated to my knowledge. So, no, I don’t think it was geographically concentrated. But, the market is always very specific. So every Saturday, Michael, I have customers who call and complain because we didn’t honor our commitment to get them a rental truck, because in their defined market area, there just wasn’t one. We are running about 15,500 locations, and if half our trucks are rented on a given day, that means we have something like 45,000 trucks available, and they just don’t spread evenly.

In other words, every day, I will be wrong, but more than 10% of my locations every day have zero trucks at them, more than 10%, because that's just how the cookie crumbled. So, if a customer calls that place and has zero trucks, there is a high probability that the person at that place will mistakenly say; we are out of trucks. Now, U-Haul is not out of trucks, but they are out of trucks.

So, this phenomenon of number of locations and number of equipment equating to transactions has been a historic thing with us, and we got an increase in utilization over that same period of time, which means we did do somethings better. But, no, we did not get a price increase in that size truck.

Michael Millman - Soleil Securities

Generally, what's the outlook for price increases going forward?

Joe Shoen

Well that's always the $64,000 question. I would say, it's a lot better than it was a year ago. A year ago, I would have been fairly pessimistic. There is things happening out in the marketplace that I don’t control with my truck rental competitors that could change that. But, Jim Barrett did I think a fair assessment, although he does not have a crystal ball totally either. But, he did a fair assessment of things that, and I would concur that the budget wanton price cutting that we had rampant a year ago, a year and a half ago, is mitigating.

I can't tell you it's mitigated, but it's mitigating, and, so that's a very positive thing for everybody, because we're subject to the classic economics of transportation problem that some idiot begins to price at marginal cost, and nobody can replace the fleet. It's a very attractive thing for a shortsighted person, and we're always definitely afraid of that. And, at any time because of inventory imbalances, somebody is pricing at marginal cost.

In other words, if I had way too much fleet in Boston, I would be motivated to rent it out at my marginal cost, and I would think I did good. So there is some of that pricing always in the marketplace by all competitors. And the trick is not to let that become a downward cycle that now we have now price more and more markets at that way. We say no, let's just hold that just to Boston. Sometimes they have a lot of equipment and we do not, or vice versa. So our needs in pricing are different. So you good see a 20% spread in pricing easily that's totally inventory-driven, and it looks like something that is not.

So overall, I like our distribution of our fleet today. I think it's reasonable. It's not bad, that's for sure. I have a hard time telling where my competitor's fleet is. We do things to monitor them and we have a lot of anecdotal information. But, I don’t think their fleet is, either Budget or Penske is stacked up in any particular place. So I think that Jim's assessment that the downward spiral on pricing is mitigating is a very accurate one.

And of course I would like to see prices inch-up because costs are always going up. No matter what I do, costs go up because of macro forces. So, I would like to see pricing go up, and I have been very vocal about that over the last year, trying to encourage my staff to not just jump on price every time, but of course sell the other attributes of the product, which are considerable attributes.

Nevertheless, if Budget will rent a truck for $400, my person is going to have a hard time getting $500, so we will match that rate and do that everyday, and that’s a common industry practice. So, are we going to get a price increase this year? I don’t know. Are we going to try to get one? Sure, we're going to try to get one, you bet. Gary is saying it's always spotty. You will get a price increase in LA, and you won't get one in San Francisco. Okay, fine, or sometimes you get a price increase on the 17 foot truck and you can not get one on the 10 foot truck. But, it gets very specific.

As some of you know, we, now 18 months ago did our generation one of a new pricing system, then last May we did generation two of a new pricing system. This is a very critical function for us at all times. We are now six months or so into the generation two of the new pricing system, and we're starting to see some of the benefits that we thought we were building into it. It's a very complicated apparatus, and we are just learning how to do it, and I think that helped us a little bit over the last several months, but there is more room there if we can master it, and if we can keep the other competitors from becoming suicidal in their pricing.

So, there is not a simple answer to it. There is not an index. People don't price off an index or have a leading model or something like that in this business, so that, if I knew their rate from Phoenix to Albuquerque, I could then basically calculate their other rates. The models don't work like that, so it's very difficult to say a general rule of what is pricing.

What we do is, we continually check pricing, and we get almost a scatter diagram of data, and then we start to form opinions, kind of which way is the cloud moving, because it doesn’t move like a line.

Michael Millman - Soleil Securities

Budget is small enough, why do you care what their price is?

Joe Shoen

First of all, they're small, but not in every market. This all breaks down into the sub-markets. So I will pick on Portland, Seattle, Budget is a very viable, and could be a dominating competitor in the Portland, Seattle market.

If you left things kind of go the way they want to for six months, I would say Budget could outperform us in the Seattle to Portland market, and maybe in the Seattle to, what's that town in western Washington? It's Spokane. The same thing would be said of Penske.

All these break down into submarkets and then they also break down into models. So, it does matter, and then, I think additionally, the customer wants to know, and the customer thinks we have a monopoly almost. So they are always wondering if we're kind of the guy like the guy at the ballpark, which is we're getting $4 or $5 for a hot dog, the fair price of which is $0.99. They are always wondering this, and we are always kind of fighting this perception. And, so, we right or wrongly, we have a strategy of trying to maintain pricing discipline.

So for an instance, if it got down to where we had one truck left in Phoenix, we would rent it for within 10% of the price or we would rent it if we had 100 trucks at Phoenix. Penske would quadruple the price. They would price straight to demand. That last truck in Phoenix would go for $4,000, and that’s a policy they have, and they follow it, and I presume it works good for them. We do not do that.

Michael Millman - Soleil Securities

But, they make money.

Joe Shoen

They make money, we make money too. Okay, I mean if you look over a twenty year period, of course, their figures aren't published, but, if you take the Budget, Ryder and all their predecessors, on a long-term deal, we have done a lot better than they have. They have had difficultly just existing. One quarter doesn't make the whole year, one year doesn't make the whole business. That's just kind of the nature of this business. I don’t know other businesses, because I don’t have anything to do with them. But, that's the nature of our business. We're making money, we are definitely making money, and if you look at EBITDAR or cash flow, which is what we've always point to, that's a lot less. It's not the end of the whip. Those numbers modulate a lot closer, and that's a good indicator of what's the fundamental economics.

Gary Horton

Michael, one of the things that you have to look at on prices, and what I was trying to get across is, you have to price for the imbalance of inventories, and we at any given time have, I don’t know, because we have got all the different models of trucks, all the different models of trailers, they all fit in within a group. Then what you have is 15,000 locations, and you have prices one way to virtually everywhere.

Periodically, not periodically, but what you're doing constantly is going through and looking at your price from Phoenix to Reno, Phoenix to Albuquerque out of here. Then you are looking at the size of the truck. You're actually going through and modifying your pricing. So being able to go and just price it, raise the price, it's not that simple because of all the different prices that you have. If you are not careful, and you end up with a 10% imbalance in rentals out in the end, by the end of the year, you will have all of your inventory in one place and you will be out in the other. That's what you have to do, you have to price to the market, you price to the supply and the demand.

Michael Millman - Soleil Securities

Thank you. Very helpful.

Operator

There are no other questions at this time. Joe, do you have any closing remarks?

Joe Shoen

Well, I thank everybody for their continued support. We are going to have our Annual Shareholders meeting. We are going to do a virtual analyst meeting at the same time. It will give you a chance to see a few other people from U-Haul. In the interest of sustainability and being green, I am recommending you not buy an airplane ticket, but instead, you use 30 or 60 minutes of bandwidth on your computer to attend the meeting. We will try to be responsive. I know we lost audio for a few minutes last year when we tried it. We think we won't lose audio this year for a few minutes.

But, we are getting better at doing this, and I think it's, I am real excited about it, and I think it was positive for us last year, and I look forward to be positive again this year. So, I am sure Jennifer has sent out some kind of notice, or if she hasn’t, she soon will, letting you know the specifics of how to log on. But, I would look forward to anyone's participation who wanted to in that conference. I think that's everything. Thank you all very much.

Operator

This concludes today's conference call. You may now disconnect.

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