Edited Transcript of UHAL earnings conference call or presentation 28-May-20 3:00pm GMT

RENO Jul 1, 2020 (Thomson StreetEvents) — Edited Transcript of Amerco earnings conference call or presentation Thursday, May 28, 2020 at 3:00:00pm GMT

Zacks Investment Research, Inc. – Senior Special Situations Analyst

* James R. Wilen

Wilen Investment Management Corp. – President and Chief Compliance Officer

Good day, and welcome to the AMERCO Fourth Quarter Fiscal 2020 Year-end Investor Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Sebastien Reyes. Please go ahead.

Good morning, and thank you for joining us today. Welcome to the AMERCO Fourth Quarter Fiscal 2020 Year-End Investor Call.

Before we begin, I’d like to remind everyone that certain statements during this call, including, without limitation, statements regarding revenue, expenses, income and general growth of our business may constitute forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain factors could cause actual results to differ materially from those projected. For a discussion of the risks and uncertainties that may affect AMERCO’s business and future operating results, please refer to Form 10-K for the year ended March 31, 2020, which is on file with the U.S. Securities and Exchange Commission.

I’ll now turn the call over to Joe Shoen, Chairman of AMERCO.

Good morning. Thanks for being on the phone with us. Much of what I have to say relates to the April and May time frames. As you all know by now, U-Haul is part of the critical, essential infrastructure in the United States. As such, we remained open through the recent pandemic, and we did the same in Canada. There have been and are still evolving many blows to the U-Haul organization. However, this is a disciplined group and we will work through matters as they become clear. Obviously, our self-move rental revenues were cut substantially. It has not yet returned to last year’s level let alone the levels we planned on. Today, I have many locations and some markets, where our self-move revenue and transactions are above last year. However, this is still the exception, not the rule.

Self-storage revenue has held up through March, April and May. This revenue, though, is below plan and could well deteriorate more. This is an evolving situation. Sales of moving supplies reflects our decreased moving business. Competitive responses by our self-storage competitors has too often been knee-jerk reactions to lower rates. With many markets arguably oversupplied, we should brace for continued rate pressure. Like other people in the vehicle business, sales out of our fleet were and remain far below what is necessary to roll the fleet over. This has tied up some cash. Automaker shutdowns and continued difficulty in restarting their enormous factories has created a temporary inability to acquire new fleet. That missed new fleet simply will not be caught up in the short term. However, this largely just kicks the can down the road and will increase CapEx sometime in the future. We have experienced similar disruption in the past and basically know what to do. However, at some point, we need the government to allow the economy to attempt to restart. Many of our other expenses were largely fixed in the short term. We have cut multiple expense categories, but in no case can measure with the drastic revenue declines, which we don’t believe will continue.

Of course, sales teams across the continent have scratched hard for new business. We have certainly found some. We plan to hold onto these new customers into the future. As you’ve heard before, we have a full complement of touch-free consumer-facing digital tools. These served us well in our self-move and self-storage business. Some of the customers who experienced these tools may prefer to use them going ahead. We’re leading the industry, I believe, in both our self-move and self-storage touch-free tools. And this experience has validated our multiyear investment in development and rollout of these tools. Our vehicle maintenance teams remained on deck over the recent months. As a result, our fleet is fully maintained and ready for more use.

In summary, U-Haul personnel have experienced trauma before. We have a committed focused management and operational team. I expect we will make the most of recent events, learn some lessons and make the best of this situation as the economy restarts.

With that, I’ll turn it over to Jason for some of the specific numbers for year-end.

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Jason Allen Berg, AMERCO – CFO [4]

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Thanks, Joe. Yesterday, we reported fourth quarter earnings of $6.24 a share as compared to $0.04 a share for the fourth quarter of fiscal 2019. In the fourth quarter of this year, we recorded an additional net tax benefit of $146 million. That’s $7.45 per share as we recognize the effects of the Coronavirus Aid, Relief, and Economic Security, or CARES Act. We feel another useful supplemental measurement is to look at our earnings excluding this item. This results in adjusted losses for the quarter of $1.21 per share. For the full year of fiscal 2020, we reported net earnings of $22.55 per share; in fiscal 2019, we reported $18.93. Also included in our fiscal year 2020 results was the CARES Act tax benefit. Excluding this benefit, our earnings per share for the full year in fiscal 2020 were $15.10. We have a reconciliation of this in our press release as well.

Before I go into some comments on the business, I want to provide some additional color regarding the CARES Act tax adjustment that I just mentioned. The CARES Act allows companies with net operating losses to carry those back up to 5 years, and it also made some other technical corrections that we’ve availed ourselves of. We have net operating losses that have previously been recorded in our deferred tax provision, assuming that we would use them in the future at today’s current 21% federal income tax rate. These tax losses were generated largely from our reinvestment activities used in growing the business. With the CARES Act now, which allows us to carry these losses back to years before the 2017 Tax Cut and Jobs Act, these losses are now valued and are being used at the previous 35% federal income tax rate. It’s this difference in rate that accounts for the majority of the unusual income tax benefit this quarter. We’ve isolated this EPS effect of the tax adjustments that you can evaluate our performance without it.

Now moving on to some comments on the business. Equipment rental revenue decreased 2% or about $11 million for the quarter. We finished the full year up $39 million, that’s about 1.5%. First, some positives from the year. We increased the number of retail locations as well as trucks and trailers in the rental fleet. Also, revenue for both our in-town and 1-way markets improved across trucks and trailers. However, in the fourth quarter, these improvements were more than offset by a reduction in the volume of corporate account rentals, along with the decline in overall rental activity during the second half of March due to the COVID-19-related stay-at-home orders. By eliminating some of the noise, and I’ll call the noise the last-mile business decline, the COVID-19 related decline, and we did have an extra day this February, our core moving revenues were closer to plus 3% in the fourth quarter and plus 2% for the year. Revenues this April for our-self moving equipment have experienced an approximate 30% decline.

Looking into May, the decline in equipment revenues has been improving. Capital expenditures on new rental trucks and trailers were $1.374 billion for fiscal 2020. Last year, in fiscal 2019, we invested $1.163 billion. While proceeds from the sale of retired rental equipment were $678 million, that’s up from $603 million in 2019. Our initial projection for rental equipment CapEx in fiscal 2021 contemplates a decrease in box truck cargo van and pickup spending. We are estimating just under $850 million, that’s before netting any sales proceeds against them. We’re also projecting a reduction in proceeds from the sales of rental equipment resulting in net fleet CapEx of approximately $460 million. Just to remind everyone, this year, that number was close to $700 million. This projection assumes reduced sales in April and may due to constraints on auction locations from the COVID-19. Proceeds from the sale of rental equipment were down right around $40 million in April of 2020 compared to April of last year.

Storage revenues were up over $12 million, that’s about 13% for the quarter. And for the full year, we were up 14% or $51 million. The growth in revenues is coming from units — the growth in revenues and units rented comes from a combination of occupancy gains at existing locations and from the addition of new facilities to the portfolio.

Looking at our occupied unit count at March 31 of this year compared to last year, we were up 49,300 more occupied rooms. This quarter, we took a look at facilities that had occupancy over 80%. As of March 1 of this year, we had 725 owned locations. That’s about 60% that were over 80% occupancy. Compared to last year at this time, it’s an increase of 48 locations. And the average occupancy at these 725 locations was up just slightly at a little over 90%. Our real estate-related CapEx for the year was $751 million, that’s down from $1.03 billion last year.

During fiscal 2020, we added 5,800,000 net rentable square feet, about 1.2 million of that came online during the fourth quarter. In April and May of this year, we have option to slow the development of new self-storage projects to preserve liquidity. We will calibrate our capital spending based in part upon the evolving effects of COVID-19. Operating earnings at the Moving and Storage segment decreased by $34 million for the quarter, resulting in a loss of $21 million. For the fiscal year, operating earnings decreased by about $97 million to $472 million.

I want to go through some of the expense highlights. Depreciation expense associated with the fleet increased $13 million for the quarter and $55 million for the full year as we continue to add new equipment to the fleet in fiscal ’20. We are seeing the rate of depreciation increase begin to trend back down. Depreciation on all other assets, primarily storage location assets, increased by $7 million for the quarter, $28 million for the full year. That’s largely a function of our self-storage development. Repair costs associated with the rental fleet experienced a $5 million increase for the quarter and for the full year were up $19 million. With the increase in the number of trucks in the fleet, preventative maintenance costs have gone up in relation. Additionally, during the quarter, we saw a higher count of trucks sold before the COVID-19 shutdowns, and that resulted in higher repair costs as we prepared those units for auction. Outside of depreciation and maintenance, other costs, including personnel, property taxes, liability and property insurance and freight and utility costs are the items that generated the bulk of the increases. In aggregate, they accounted for about $13 million of the increase in the quarter and a little over $101 million for the full year.

Towards the end of March and into April and May, COVID-19 has negatively affected our incoming cash flows through lower self-moving equipment rental revenues along with a near total reduction in equipment sales proceeds stemming from the closure of the commercial auto auctions. However, cash and credit availability to Moving and Storage segment has remained strong. At March 31, we had $498 million. And at the end of April, we had in excess of $400 million. In May, we’ve entered into a $200 million term loan to further strengthen our liquidity position in the short term.

With that, I would like to hand the call back to Sean, our operator, to begin the question-and-answer portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Ian Gilson with Zacks Investment Research.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [2]

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I have a series of questions. So the impact of the tax, is that a book entry? Or can you actually claim cash?

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Jason Allen Berg, AMERCO – CFO [3]

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Ian, this is Jason. We are — we have filed for refunds associated with the CARES Act. So for — we’ve amended our fiscal ’18 and ’19 returns. And those should result in — well, they’ve resulted in refund requests totaling $123 million. For our FY ’20 return, which we’re probably going to file sometime around October, we’re expecting a refund in excess of $250 million. And then we’ve also filed for a return of some cash that was former payments that we made that we’ve been applying against operating income, and that should result in about $109 million. So in total, we’re looking at somewhere north of $490 million in refunds.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [4]

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So when might we expect a check or checks?

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Jason Allen Berg, AMERCO – CFO [5]

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Well, those were filed in April. So if you were to give the Internal Revenue Service the 90-day service expectation, that would be sometime in August or September. In the meantime, what we’ve done is we’ve worked out a deal with several of our banks in our lending group, where we’ve essentially borrowed about $200 million against those refunds currently. And then as we receive those refunds, we’ll pay down that loan.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [6]

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Okay. Given the necessity of conserving cash, wouldn’t it be an advantage to you to lease trucks rather than buy them?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [7]

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As you know, Ian, we’ve done both over the years, and we’ve done a variety of leases. We are — continue to explore that. And I don’t know the current status of where we are, but we’re going to still push for the best net cash — best net cost to us. We don’t yet see this as a situation where getting 100% financing is necessary. They’re still — we’re still optimizing. Let’s see what Jason says to the same question.

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Jason Allen Berg, AMERCO – CFO [8]

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Sure. Our basic borrowing program for equipment is the equity out is anywhere from 0% to 30%. So we’re continuing to mix that. The current liquidity position that we’re in isn’t something where we need to stress that. Our fleet — our assistant treasurer responsible for fleet has already reached out to our lending groups to speak to them about if we needed to borrow at a higher loan-to-value, that option is available with many folks. But right now, it doesn’t have to be at the top of our list of things to do.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [9]

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Okay. The storage business, I would have thought would have been less volatile than the truck rental business, particularly in face of the fact that people can’t move things out of storage at — as easily as they could have earlier. So has storage not been impact as much as truck rental?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [10]

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I think that’s a fair thing to say in the short run, Ian. However, a bunch of people, as you know, are stressed, a big percentage of the population. So as things evolve here further, we’ll either get some delinquencies or more move-outs. And it’s — we’re, of course, doing everything we can to give terrific customer service to retain these people as tenants. But you’re right. The people have been impacted, but the visibility of that impact may be deferred. And we’ll have to see how that develops. I can’t give you — we don’t have a forecast that’s a usable forecast. And again, we’re going to stretch to try to keep these people in through top-quality service. And I expect we will retain the vast majority of them.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [11]

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Okay. With the fact that the sale of trucks and the deferment of moving new trucks into the fleet, shouldn’t maintenance expenses decline somewhat?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [12]

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Well, actually, probably not. They probably will go up because maintenance basically varies linearly with the age of a vehicle. So what will actually happen, we’ll end up keeping some vehicles longer than we had intended to. So their expense — their repair expense per mile, Ian, will probably try to creep up. So — and that’s been our experience over the last 40 years is you can do what you want to, but maintenance varies linearly with mileage, which equates to age, in that we’re going to see some vehicles not be sold out of the bottom of the fleet because there’s no market for them. We can rent them fine, but they probably will bump maintenance a little bit.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [13]

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Okay. Hertz U.S. has declared bankruptcy, that includes Budget. Have you noticed or do you think that this would probably help U-Haul truck rental?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [14]

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Well, actually, the Hertz organization is separate from the Budget. The Budget organization is connected with the Avis organization. And they last I saw were very solvent, they were out executing new financings at kind of a higher rate. But we’re not planning on any big capital markets issues. If we have an advantage of where our competitors are right now, it’s because they’re still reeling from this, and they’re not providing the level of service that the customer demands. And we’ve doubled down on service and we’re going to give the customer what they want in the hopes of retaining those customers or even perhaps gaining some more customers.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [15]

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Okay. And going back to Jason, did you say that April was down 30% in truck rental revenue?

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Jason Allen Berg, AMERCO – CFO [16]

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Yes, correct.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [17]

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And May showed some strength, I presume that is compared sequentially rather than year-over-year.

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Jason Allen Berg, AMERCO – CFO [18]

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Year-over-year is down about half of what we saw in April. So maybe it’s trending somewhere around 12% to 15% for the first half of it.

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Operator [19]

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(Operator Instructions) Our next question will come from Jamie Wilen with Wilen Management.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [20]

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Sometimes necessity is mother of invention, and glad to see that you’re altering your capital allocation program. Sometimes, it’s good to plant the seed, sometimes it’s good to harvest. And I’m glad we’re taking this pause to reevaluate and maybe slow the expenditure so we can harvest more of the profits. What is your plan for self-storage as you move forward?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [21]

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Well, of course, long term, we’re committed to the self-storage market, Jamie. There’s been, as I’ve spoken of in the past, considerable expansion in the product in specific markets. And I don’t know where you live, but you can see whatever is in your area. But most of the country has experienced a lot of new product, and much of that new product is still coming online. So I don’t think anybody really knows what’s going to happen with demand. We have a bunch of projects that are in process, and we will — our plan is to complete them. But — so I think short-term that we’ll have more product come online, and then it will kind of stop coming online. I don’t know what’s going to happen in the overall industry. But I think that it won’t be too different from us, in that a lot of new product is still going to come online. And as I said in my prepared remarks, we’ll probably put pressure on rates because many of these people are new to the industry, arguably overfinanced, and they’re going to make the mistake that many people do, which is now cut your prices in the face of this, and they’re basically going to cut their throats. I don’t want them to injure us in the process. So we’re doing what we can, but there’s going to be some rate pressure, and I think that’s going to have the inevitable effect on earnings for people because these projects are basically huge fixed cost projects. The variable cost is really personnel, utilities and property taxes. So there’s going to be a pause in the self-storage business, would be my best guess. Of course, we don’t intend to pause, and we’re up even in March and April and May. We have no intention of pausing renting up rooms, but we’re pausing building more of them. So hopefully that works out well. But I don’t think anybody has a real fix on what’s happening. I’m in stores — I was in a store yesterday, we’re at 99% occupancy. The woman who manages it said, “God, get me more rooms, I could rent more rooms.” Well, I’m unlikely to go spend another $1 million and get her more rooms. I’m probably going to just enjoy being at 99% for a few big years.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [22]

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Okay. A couple of questions. What are your estimated self-storage capital expenditures in current coming — the current fiscal year?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [23]

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Jason, do you have a number on that?

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Jason Allen Berg, AMERCO – CFO [24]

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Well, we provision pretty much what we spent in the previous year. So this last year, we spent $750 million on that. I would say that our existing — I’ll break it down into a couple of pieces. So deals in escrow were down significantly from the prior year. I think we have like 23 deals that we have sitting out in escrow. We pushed back the closing dates on those just to see how the environment reacts. But acquisitions of new properties fiscal ’19 to fiscal ’20 are down about $320 million. Now we have — if we were to complete everything that we currently have and would like to work on and complete, that number is a little over $900 million, but that’s going to be spread out over several years. So we have work to take us several years from now, and we have been slowing the input. So I think apples-to-apples, probably our pipeline of projects to work on is down probably about $350 million to $360 million from this time last year.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [25]

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So your CapEx versus the $750 million in 2020, you expect it to be what in 2021?

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Jason Allen Berg, AMERCO – CFO [26]

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Well, it’s opportunistic. We — when we set out, I kind of set out a cash and availability plan that we could spend up to $800 million on the current capital plan. And then that will get adjusted up or down based upon the availability of opportunities and what we’re seeing. Right now, we’re — we pushed back or slowed down about $110 million worth of development. So that slowdown over the next couple of months is probably going to lead to a decline in how much we spend this year. It’s going to be spent at some point, it just might not fall into this fiscal year.

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [27]

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Again, use the — so what we’re actually doing is we’re completing everything we’ve got in the ground, we have concrete and (inaudible). We’re completing all of that at this time. And then no new starts until we see where things are. And it’s everybody’s guess, we’re going to act rationally on that just because we could sit on the property. We have a whole bunch of undeveloped sites, but we can sit on those. They’re already baked into our current expense ratio. In other words, the property taxes, and that’s already all baked into the capital cost. It’s all baked into what you’ve been seeing. So that will get no worse and we’ll just see how this property comes on. Jason, how many square — we did 5.1 million last fiscal year?

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Jason Allen Berg, AMERCO – CFO [28]

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5.8 million square feet.

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [29]

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5.8 million square feet. And I don’t have a firm number yet here today, but we probably put in 1 million square feet between March 31 and, I’ll say, June 15. It’s going to be real close to that. So those projects will come online and hopefully start renting up. So we have a lot that’s, what we are going to call, it’s near term going to get completed. And then we’ll have other stuff kind of flow in on the next 3 quarters, but we won’t be fueling the fire there. So I wish I had a hard number I could give you, but I really don’t. I think what Jason says is we’re going to act prudently, but what this is doing, and it’s been doing for some months is we’d already turned this down before we had the pandemic. And so it takes a while for that train to slow down now. And we have an inventory that we can — or we can build out or we can sit on. We’re not in a disastrous situation. And as a shareholder, you won’t see increased expenses because they’re all basically rolled into our current financing costs and our current property taxes. And those aren’t going to change 2% or 3% or something, not much.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [30]

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Joe, given that REIT’s value relatively fully occupied self-storage facilities at a very high level, and we obviously don’t get credit for our facilities that do that. As you say, we’ve got — whatever the number was 600 or 700 facilities that average over 90%, what would be the thought of packaging up 50 to 100 very productive facilities and realizing full value for them by selling a package to the REITs, who obviously traded very low yields, borrow for very little and are willing to pay up for those properties and to be able to do that and then continue to reinvest in programs where we have much greater upside.

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [31]

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I don’t see it being under serious consideration at this time. It’s been a number of years before we did a real hard work up on that. The — of course, the — applying the ointment there is, is that — had in all these locations, but 2 or 3, they are — if they’re big in self-storage, they’re also big and you move. That’s applying the ointment in. So I don’t think that near term, there’s much of a push to try to do that, that I’m aware, the more or less the concept and aware of various ways you could even REIT out the whole company, that’s not beyond the pale. So I wish I had a better answer for you. I know more of the answer is you’re looking to hear, but I really don’t have that answer.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [32]

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Okay. I would hope you’d look somewhat in that direction to consider it in the near future. On the U-Box program, how did that fare within this whole process? Was that profitable in the past fiscal year? And what is your current outlook for the business?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [33]

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I’ll let Jason speak to profitability.

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Jason Allen Berg, AMERCO – CFO [34]

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Yes, it was profitable. It was in absolute dollars and a slight improvement on kind of our internally calculated margin number. It was a plus this year. And we’ve seen strong growth in revenue even during what’s happening right now.

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [35]

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So I would say, Jamie, on that, that’s still a growth program. And like our self-storage program, it’s going to — its growth is going to outpace the growth of the truck rental industry. And we are continuing to invest in that. We believe it’s prudent investments. It’s not a huge strain on capital, but we’ll continue to invest there. And we think that we’re improving our position constantly. We have a very good response from the customer. It doesn’t seem to erode our U — our truck rental business in a measurable amount. I’m sure there’s some modest amount of it, but it complements it in some ways, too. So I think it’s clearly a viable program. It had increases all through the last year and had increases in the last couple of months. So now — but it ought to because it’s a growth program. Just like self-storage, it should outpace the truck rental business. And I would look for it to continue to do so.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [36]

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Okay. Also, Joe, you mentioned that corporate accounts were down in 2020 and in the fourth quarter. Could you detail a little bit about why and what’s your outlook in that direction?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [37]

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Sure. We did a lot of business with Amazon. They cost us more in equipment damage than they generated revenue, totally abusive situation. We — Amazon rents very, very many piece of equipment to contractors. They aren’t actually Amazon personnel. They’re very abusive to equipment. We recently reached an agreement with Amazon, where they would backstop the damage on that equipment. And under those circumstances, we would rent to them. Of course, during the period where we could not rent to them, they formed other business relationships. And so now whether those people are losing or making money, I have no knowledge, but we were losing money with Amazon. And if and to the extent we do any other business with them, it will be where we can make a modest profit. At the same time, UPS and FedEx continue to do business with us, and they’re both pretty straight up organizations. And we make some modest profitability doing business with them. But Amazon was the elephant in the room, and they were just simply bringing our equipment back, so be it, but we were losing money on the overall transaction.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [38]

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Okay. And lastly, accounting-wise, depreciation expense moving forward, are you should be relatively flat in 2021 versus 2020 even with the reduced expenditures?

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Jason Allen Berg, AMERCO – CFO [39]

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We’re still going to see that. We’re still going to see depreciation on — for both the fleet and for real estate increase through 2021. But I think the way that it’s heading each quarter right now, it’s been coming — the rate of increases have been coming down. So based upon the current fleet plan, I would suspect that it’s going to flatten out by the end of fiscal ’21 on the fleet side.

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Operator [40]

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Our next question is a follow-up from Ian Gilson with Zacks Investment Research.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [41]

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The automakers have had problems and essentially closed down most of their facilities and both — some of them up to do other work than making cars or trucks. If we get a second wave or flattening out instead of a declining count of patients, will you meet your unit number projections or will that go down? And if you reduce the trucks purchased in 2020, what does that do to depreciation?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [42]

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That’s a very complicated question to give you an accurate answer to. If the automakers reclose their plants, in other words, they get them started, then they shut them down, we will lose that amount of forecasted production. Ordinarily, we are not forecast to get a lot of production in the last quarter of the calendar year. We usually have heavy production now, which is why we suffered for a big lack of new equipment coming in. So it wouldn’t impact us nearly as much as it has in the quarter we’re in right now. But certainly, it would impact us. And then what will happen, Ian, is that at some point, you have to replace the vehicles. If we don’t replace them this year, we’ll have to replace in the subsequent year. So it’s going to bump in some way the amount of money we have to spend in subsequent years, assuming our customer transactions remain large enough to accommodate that fleet.

I mean, it’s not beyond the pale, there could be a permanent reduction in the economy. I see these numbers for every single market. And there’s markets that have been savaged. You can figure out who they are if you watch the TV. It’s the politicians who simply are enforcing some sort of an authoritarian state on the consumer and the consumer is shut down, totally done, done, gone. Now I go to another place like Utah, Utah, everybody is doing business, U-Haul is doing fine, but they have a different government orientation. So I have no idea what will happen other than revenue will decline if we have another partial or full shutdown of the economy in the fall, the revenue will decline, there’s no question about it. And revenue decline, a bunch of expenses won’t decline and profits will get smacked. So of course, we’ve reduced some costs, but those costs aren’t to the nature of 30% or 50%, which is what we saw business — we saw a 30% decline overall. I think Jason quoted 30 — what percent you said, Jason?

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Jason Allen Berg, AMERCO – CFO [43]

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In April, 30%.

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [44]

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30% in April. So our expenses don’t go down 30%. Our depreciation actually went up. So I mean, it’s a real negative leverage problem. So we’re not going to run out of cash, but such an event like that would slaughter profitability in the short run.

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Jason Allen Berg, AMERCO – CFO [45]

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Ian, this is Jason. To your question about what it would do to depreciation, just so far, what’s happened to date with the cancellations of orders due to the plant shutting down, depreciation will probably continue. The increases will become less and less each quarter. I would suspect towards the end of this year and then probably into the next fiscal year, we will see probably a decline in what we call gain on the disposal of equipment as we’re selling older units. Without buying the new pickups and cargo vans, we’re holding that fleet longer than we typically do. So we will see the gain on the disposal of those units begin to trend down a little bit the longer that we hold them.

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Ian Trevor Gilson, Zacks Investment Research, Inc. – Senior Special Situations Analyst [46]

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Okay. You said that the orders were canceled. Does that mean you will have to reorder at a later date?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [47]

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Well, there’s no way we can. They can’t build that many. And until we can sell trucks, we can’t afford that many. So it’s kind of an unhappy coincidence. They can’t build them, and we don’t have any money to buy them because we can’t sell the existing ones. Now we expect that market to improve, and we see signs of it, and we’re not frozen with fear yet. But until we can sell the older units, it’s imprudent for us to bring in new units, and we’re not going to do that. So it’s anybody’s guess. And Ford and General Motors have been trying to restart their plants. And if you follow in the press, they get somebody tests positive for COVID, they send the whole place home for day or 2. Well, I’ve never run an automotive plant, but I can’t imagine you can open it for a day, shut it down for a day and get any production to speak of. The last week, I believe I’m correct in saying that they told us they built 2 trucks for us. That’s not quite what you would call production, okay? In other words, they do that like every 20 minutes normally. So the volume of trucks that we would be getting this time of the year is just drastically cut and with negative consequences as far as I can tell, for all involved, it’s got to be hurting the automakers, it’s definitely hurting us. And as Jason alluded to, when we ultimately do sell these vehicles, they’re going to sell for less because they’re going to be older and have more miles and values very linearly with age and mileage. So we’ve continued to depreciate them. So we’re not caught in a trap there. So we continue to depreciate, and we try to watch that carefully because the last thing you want to do is find out your upside down in your fleet. So we are not presently upside down in our fleet. We don’t intend to get there. But we’ll do that by varying the depreciation rate if circumstances dictate that.

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Operator [48]

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And now our next question will come from Craig Inman with Artisan Partners.

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Craig Inman, Artisan Partners Limited Partnership – Portfolio Manager [49]

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Can you hear me? One of the issues with this business is always — you’re always trying to manage the fleet in certain locations because of migration out of areas into other areas. With the pandemic, has that changed? Has that created any problems with stacking up trucks anymore? I mean, has that become another issue down the line?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [50]

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Craig, I’ll try to take that. Certainly, it has, and it’s changed the timing. So we’ll just take students, for an instance. Ordinarily, this time of year, we’d just see a deluge of student moves. But what actually happened is some of them went away entirely and some of them occurred 6 weeks ago. So we can’t quite sort that out to say, what are we going to be down this weekend compared to last year. We know that the big schools are already all let out and have been let out for some time. Yet, there’s a residual business coming through. The schools are now doing phased move-outs, so they’re contacting students and saying everybody in X building or whatever has to move out on the 27th of May. And so then we see a little bump in transactions in that specific market. So it’s caused a lot of dislocations. We also, this time of the year, see a lot of second home type end-of-school year thing. And that again is real mushy. I think that here in Arizona most of the grade schools broke this last Friday. So we, with a little luck, will pick up a little business, but how many people are going to go up to their second home, I can’t predict.

On the other hand, we got a bunch of people who had second homes, we’ll say, in Maine or New Hampshire, and they got out of New York and Connecticut 6 weeks ago. So there’s a whole bunch of tiny disruptions. To say that, that overall has put us in a worse or a better situation, I would say it’s about normal amount of dislocated fleet. It’s not gotten horribly worse. But that’s the day-in, day-out problem we have is managing that to a certain — I have some optimists here who think because the students are moving out in a smoother way that we’ll get more business, and I hope they’re right. But this is very — it’s new to us. Some of the flows we’ve recognized very well, but the timing is different. And so how this will kind of work into the summer, I got no idea. And then we’re going to have strange flows going into the fall because already a bunch of the universities have noticed that they’re going to move in at different rates.

And so that, even if all the COVID and everything goes away, in August, we’re going to have some carryover effects that we are certainly thinking of and trying to anticipate, but we don’t really know what they’re going to do. But yes, it’s — there’s been a huge difference in where people move. Very strangely, we’ve seen more — we’ve seen less disruption in long distance moves and more disruption in short distance moves. And maybe the short distance moves are more elective, maybe the long distance moves were totally need-driven. I really — I don’t have an absolute take on that. But normally, we do a phenomenal amount of short-term moves, short distance moves. And they’re coming back up. They’re not where they used to be, whether they’ll come back up that — whether by the end of June, this will be looking a little bit more like last year? I can’t tell. And as I said in my prepared remarks, I have some places that are up over last year. There — these are people making bonuses, okay, which, of course, I want to pay. They’re salespeople and their business is up. Well, it means there is business out there. But if you get into New York, New Jersey, Connecticut, Boston, hang on, it’s — those are — what’s happening there is maybe — I don’t know where you live, but in those areas there, they’ve severely shut down the economy and people are literally afraid. I’m in Arizona. In Arizona, this week, it almost seemed like normal traffic. Atlanta has come back well for us; Northern Florida has come back well; Southern Florida, still in a struggle. So there’s a lot of different activity. We’re trying, of course, to capitalize. Any time we see a flow in our favor, we’re trying to push that flow. And that’s just trying to be nimble and be responsive. You could argue that if we could really execute perfectly, we’d use some of these disruptions to better distribute the fleet. And that, of course, is the mandate I’ve given to people who have that job, but it’s a little easier said than done.

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Craig Inman, Artisan Partners Limited Partnership – Portfolio Manager [51]

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Okay. That’s good color. And then on the truck side, with — if you can’t get new trucks from Ford and GM and the auctions are — are the auctions still closed?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [52]

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Yes. They’re starting to open virtually. The largest — I think they’re the largest, Manheim furloughed over 10,000 people, and their stated intent is to attempt to not reopen, to transfer to a virtual business, change their whole economic structure. Well, during that time, sales have just collapsed. Now whether that’s because of the virtual format or a whole bunch of other factors, I could only guess. I have no — we see what we’re able to move on a daily basis. And that’s just — it went to just almost 0 for a couple of weeks. Now it’s slowly creeping back, but it’s nowhere near. I would say it’s less than 12% or 15% of what we would have expected. Jason would you…

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Jason Allen Berg, AMERCO – CFO [53]

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Yes, at the most.

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [54]

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Yes, it’s a drastic decline. Now we watch it every day, and we — every swap and we see a little glow and we kind of encourage each other and all that. But when the money finally comes into Jason, it’s disappointing. So I don’t know what’s going to happen with the auction business. And I don’t know if you’ve ever been to one, but they — it’s a big social event as well as a sales event. And so there’s a whole bunch of people who have their business social activity built around this, but they’re all rubbing shoulders with each other. It’s hustle-bustle and if people are unwilling to be in that environment, compare it to an open air market or something, people may not be willing to be back in that environment. If that happens, it’s going to change the whole auction industry. And Manheim is making the right bet. I have no idea what’s going to happen.

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Craig Inman, Artisan Partners Limited Partnership – Portfolio Manager [55]

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So if we have a scenario where the auctions are — if they are back on line, but a little slower and you can’t get trucks from Ford and GM, does that put too much pressure on being able to sell trucks to raise cash in this environment? I mean, how do we look at in operation…

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [56]

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We’ll just — we’ll slow way down. The truck gets a little bit older. We spend a little bit more money on depreciation. And we’ve done that. Our fleet is in, far and away, the best condition it’s been in my working life, far and away. I would say there’s no comparison. I’m caught up on all maintenance. Every preventive maintenance is on schedule today. My truck, my fleet is newer than it’s ever been. It has less mileage than it’s ever had. If there’s to be a time where we have this problem, today is the day, and we have been building towards this as a — because these things always happen. I’m a real big believer in 7 good years followed by 7 bad years. And I think there’s a log history to that trend. So I’m always trying to put something away just because it’s going to happen. In this case, we’re sitting there right with this fleet. The fleet has got common parts. We know how to maintain them. We have all our support systems totally operating. And if we had to go 2 years without a single addition, we’d go 2 years without a single addition; now I would rather not because then you’d be a little long in the tooth, but we could go 2 years easily, and the consumer would never see a difference. They would have the same reliability to the truck, they would appear the same as modern as they need them to appear. So I’d go 2 years. Now that’s not my choice, I don’t think that’s going to happen. But if that’s happened, if that’s where this is going to go, we’ll go that way with it.

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Craig Inman, Artisan Partners Limited Partnership – Portfolio Manager [57]

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Yes. And with the — that’s good — I mean, that’s good to know. And with the revenue trends, though, if they overall remain weak and the auctions are closed, do you — and you want to build the self-storage for the stuff that’s already in the ground under construction, do you need the proceeds if you were shrinking the fleet some for cash flow purposes?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [58]

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No. We don’t need them. I mean this is the guy who’s never going to turn down a dollar, okay? So — but do we need them in order to proceed ahead? No. But Jason constantly monitors that. And this is a week-by-week process with him. I don’t know, Jason, if you want to give some color to that. But he’s on me like whatever, he wants to know constantly where we are because he has to wonder what’s going to happen.

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Jason Allen Berg, AMERCO – CFO [59]

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Craig, this is Jason. I think — I’m not sure if I’m reading more into the question or not. But the auction proceeds aren’t used for general operations. They’re typically used just as capital to buy the next round of trucks. So if the next round of trucks aren’t being purchased, then the auction proceeds aren’t that necessary. So for us, I would say that if the auctions were to stay shut down for another 6 to 9 months, or we get closer to a 2-year hold period on the pickups and cargo vans, then it will become more of a capital planning issue as we’d have to work through some issues in our revolving facilities for holding the trucks more than 2 years. But at least for the next year or so, that’s not something that we need in order to fund operations.

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Craig Inman, Artisan Partners Limited Partnership – Portfolio Manager [60]

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Yes. That’s what I meant, just more from a cash flow planning perspective, if you’ve got a top line pressure, OpEx isn’t that — as flexible and you want to build the self-storage, just do you have enough cash if you can’t raise proceeds from selling trucks. I think you wouldn’t be — you don’t need them to — for cash flow purposes, if you’re not ordering new trucks.

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Jason Allen Berg, AMERCO – CFO [61]

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Yes. We had — essentially, we had kind of a onetime use of cash from this whole freeze up. So when auction sales stopped, we still had several thousand trucks in the pipeline to be delivered. So we did pay for trucks that were in the pipeline. And we didn’t have the auction proceeds for those. So April had kind of like a onetime use of cash to buy trucks that didn’t have auction proceeds to offset it, but we were able to deal with that outflow, and it hasn’t been a problem.

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Craig Inman, Artisan Partners Limited Partnership – Portfolio Manager [62]

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Okay. And then I got to hop in just a second. But on the self-storage side, rates, which is a key component of the in-place rents because of shelter-in-place orders, are you all seeing rate pressure because of similar dynamics?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [63]

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Downward rate pressure, exactly. And we’re not the first one to flinch in that circumstance, okay? My guy who manages rates is little — he’s not the one that’s going to take the high-die, okay? And so of course, the answer with the customer is, is it worth whatever, let’s just say, $50 a month, is it worth it to move? Well, that has a — $50 is $50 and times 12 months, it’s $600. And so you could see a person who would say, if I can get $50 cheaper, I’m going to move and $50 would be an extreme rate cut, maybe 35%, let’s say. So in that case, we’re trying to sell on service. And I would say our service is right up at the top. I won’t say our service is the best because it varies by manager by location. Our service is the best it’s ever been in U-Haul’s history, and I believe our combination of security, ancillary services and locations helps us be able to address rate issues in a way other than simply matching rates. But there’s going to be some recent entrants, and you probably know more than I do about apartment rents or multi-family rents or some other real estate process, but when there’s a oversupply, there are some people who are financed in a real high leverage rate, and they’re underoccupied, I’m seeing these knee-jerk reactions, well, let’s drop our rate 50%, see if that helps; well, it’s not going to help. You’re going to go out of business because you can’t survive even 1 year at 50%. If you fill the whole place, you still would be making a cost of capital. So I don’t know of all their financing, but there’s a typical bunch of people that are out there on 1- and 2-year financings at full cost. And if they dump rates, they’re essentially transferring titles, that’s how I view it. And but it will damage us as they go through that process, and they’ll damage some other people in the business. So I can’t — I don’t control them. But again, you’ve seen it, no doubt in some other from real estate, like apartment of what happens. And hopefully, where we see it, it will be contained to a specific market, nobody will — nobody who’s a nationwide or a large footprint competitor will take a knee-jerk reaction. We would hope that those people would be — have a more long-term perspective, and — but we’ll see, we’ll see.

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Operator [64]

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And now our next question will come from Jamie Wilen with Wilen Management.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [65]

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Given your outlook for the auctions and the ability to get new equipment, would you expect your fleet size to diminish in this fiscal year?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [66]

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No. Because precisely because there’s no — the only way to get the fleet smaller to sell them. And if we don’t get a sales market, it’s not going to get smaller. Now Jason talked about, we picked up some extra trucks, and I’ll have a number that would be wrong. Let’s just say we picked up 1,500 extra trucks in late March and early April. Those are kind of a millstone around our neck. We have a program to attempt to deploy them in marginal markets to see if we can — what we can get for income on them. But that is changing easily weekly as we start to regain the business. So my bet is we’re going to shrink the fleet a little bit, but I don’t know if we’ll be able to shrink it before September or October because the sale market — there’s just no point in going into the market and dumping your prices. The sales we’re getting now are full price sales, and that’s our intention. There’s no reason for us to go trash the used truck market. We’re a big player in that market. We don’t need to go trash that market. We have good merchandise. I think if the auctions were running, this might have been an opportunity because the factories have been shut down and so there’s — the supply is down. I’ve read several articles that said that dealers are begging for pickups. Dealers buy a lot of our pickups and vans, clean them up, put them on their lot as low mileage used cars that are still available for standard bank financing. So if we were able to — if that market existed, we’ve made some sales to dealers because, of course, we know these people, and we can deal direct and go around the auction, but they’re still constrained because in some states, they made them close the car dealership industry. And so they really haven’t seen their business. I have a couple of dealer friends. A couple of my dealer friends are starting to see business where the government has lifted these orders. So say in Arizona, I’ve seen dealers in Arizona do better, almost the last year’s level. Now whether that’s some pent-up demand, it’s a really murky picture. So one of my friends, he did 30 trucks on Saturday maybe 3 weeks ago, and he said that was exactly what we would have hoped for a year ago. Now — but was that people who should have bought in March? And he doesn’t know and I don’t know.

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James R. Wilen, Wilen Investment Management Corp. – President and Chief Compliance Officer [67]

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If the resale market continues to open up, would you like to reduce the fleet size a bit to increase utilization going forward?

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [68]

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Absolutely, in specific model.

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Operator [69]

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This will conclude today’s question-and-answer session, and I would like to turn it back over to management for any closing remarks.

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Edward Joseph Shoen, AMERCO – Chairman of the Board, President & CEO [70]

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Okay. This is Joe. Thank you very much. I appreciate your attention, your question, and we’re going to obviously learn a bunch of new things over the next — between now and the next earnings call. And I expect we’ll make as good out of the fact circumstances as anybody can make out of the fact circumstances. Sebastien, any closing comments?

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Sebastien Reyes, AMERCO – Director of IR [71]

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Thanks for your support. We look forward to speaking with you again in August.

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Operator [72]

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The conference call has now concluded. Thank you for attending today’s presentation, and you may now disconnect.

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