U-Haul Holding Co (UHAL) 2006 Q4 法說會逐字稿

At this time I would like to welcome everyone to the AMERCO fourth quarter fiscal 2006 investor call. (OPERATOR INSTRUCTIONS). Ms. Flachman, you may begin your conference.

Thank you for joining us today, and welcome to the AMERCO year-end fiscal 2006 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-K for the year ended March 31, 2006, which is on file with the Securities and Exchange Commission. Participating in the call today will be Joe Shoen, Chairman of AMERCO, and I will now turn the call over to Joe Shoen.

Good afternoon. This is Joe. I'm speaking to you from Phoenix, Arizona. I also have Gary Horton, AMERCO's Treasurer, on the call, and Jason Berg, AMERCO's Chief Accounting Officer. We will all be available to answer questions.

For the year ended March 31st, net earnings available to common shareholders came in at $5.19 a share, compared to $3.68 a share for the same period last year. In short, this has been a good year for AMERCO.

Our two insurance companies' operating earnings improved from 12.7 million in losses in fiscal 2005 to 15.1 million in operating earnings in fiscal year 2006. These companies are on track for modest further improvement.

The U-Haul organization continues its business plan in both the self-move and self-store segments. In self-moving, we continue to experience a positive relationship and maintenance reduction associated with selling selected rental trucks and replacing them. The used truck resale market remains strong, and U-Haul is taking advantage of it.

A favorable debt market, combined with U-Haul's tax position, is causing our treasury department to recommend U-Haul buy outright more often than track lease new moving vans at this time. The increased first year depreciation charges on newly purchased trucks is expected to be substantially offset by maintenance savings on the related trucks that are sold. Despite an aggressive new truck acquisition program, our equally aggressive asset retirement program has to date resulted in negligible growth in the total truck fleet available for rent.

Self-storage continues the pace in owned, managed and affiliated results. We have significant construction or conversion projects in Miami, Lauderdale, D.C. Metro, North Seattle, New York City, Minneapolis, and the Bay Area. We are permitting in many other markets. Occupancy on both owned and managed sites continues to improve. U-Haul's systems discipline and referral network is affording U-Haul the best occupancy of any major player in the self-storage business. This July, U-Haul will complete its 60th full year in business. It is our plan to continue to build on this heritage of success.

I will now turn the call back to the monitor, and we will proceed with the question-and-answer session.

(OPERATOR INSTRUCTIONS). Jim Barrett.

Joe, could you talk about the profitability of the Company in the second half of the year that just ended? To what degree, even qualitatively, should we ascribe that to, among other factors, reduced truck maintenance as opposed to benign winter weather? Or to say it differently, to what degree did weather play a role in the results you put up over the last two quarters?

Weather played only a positive role. What happens in the fourth quarter particularly, Jim -- depending if the weather (indiscernible) mainly you're talking (technical difficulty) blizzard type circumstances, we can lose 5 to $7 million in topline revenue and not recover it. And of that, some very high percentage, 90%, something like that, just goes right through as a negative. There's no cost reduction (indiscernible) effect; in fact, there's a little bit of cost increase when we get bad weather. I would say it's (indiscernible) weather is impossible. We could have seen 5 to 7 million less and I wouldn't have considered it the winter from hell. Does that make sense?

It does. So in other words, if there's a bad storm, let's say, for argument's sake, in the Northeast over a given weekend, you might see a drop of 5, 6, $7 million in revenues?

That's what I would say. If you have the winter from hell, of course that would (technical difficulty) different thing. But I normally kind of, in my mind, just figure we're going to get clipped somewhere in the 5 million, plus or minus. And we really didn't get clipped [this winter].

I see. On an unrelated note, when I look at the degree to which you're refurbishing the fleet, how should shareholders look at that? Are you -- do you believe you're in the early stages of upgrading the fleet, the middle stages, late stages? How should one look at that?

(indiscernible) let's say as of today, not as of 3-31. Okay? Because we are hard at it. So as of today, I would say we are about maybe 30, 35, maybe a little higher than that, a little bit more than a third of the way into it. One of our main models we've done nothing with, and we don't start that for two weeks. So that's -- I see it as both numbers and models. You see it more in terms of numbers, so I'm trying to keep your thought in mind.

So -- but we're well into it. What we haven't done is grown the fleet. I thought by now we would have grown the fleet a little bit. We got a little aggressive on sales. I'm not sure I'm -- sometimes you get too aggressive on something (multiple speakers) so you want to be -- we've got to try to balance this. I think sales got a little bit ahead of where I thought we would be, and actually caught me a little bit by surprise right now. So I might just taper that off and allow a few more trucks. In the summertime you would always like a few more trucks. So I think I could have held sales down just a little bit more without affecting maintenance very strong, and then sold those trucks, let's say, in September. So a few more trucks got put in the for sale category (technical difficulty) retrospect (indiscernible) in there. So as a result, we're sitting -- we are reporting on 3-31, I think, the same number of trucks we reported a year ago. Those are trucks available for rent. We don't report how many trucks are in the fleet because we have trucks that are still being introduced that are on our lots, and we have trucks that are being sold that are on our lots. That's not the number we report. The number we report is the active rental fleet. So, the active rental fleet has stayed about constant. And I had kind of thought we would have picked up 1000 trucks or 1500 trucks by now. So I guess that remains for us to do in the upcoming months.

Ian Gilson.

Looking at Oxford Life, were you stable at about this level of revenue? I thought we were going to sort of go out there and do a little bit of marketing.

I'm going to let Jason address that question.

We have a couple of programs going on at Oxford. One thing that we noted in the K is that we did do a small life insurance company acquisition here in the first quarter. That's going to add about 15 to 16 million of premium for the year. And then we do have a number of direct marketing programs that I would still call in the launch phase. So outside of that one acquisition, we're going to see still a small decrease in premium, with the profitability leveling off or increasing just slightly.

On the (indiscernible) is that now basically at the bottom? I noticed that you did not make a profit. Was there any distribution of capital from RepWest in the fourth quarter?

In the third quarter, we had a dividend from Republic Western to AMERCO. It was a non-cash dividend. We essentially just decreased intercompany balances.

Nothing in the [fourth quarter]?

No.

And basically, are we now at the bottom? Have we divested ourselves of all of the problems, contracts, and we're now just winding down a few more?

You never know that for a fact. Do I think we're there? Yes, I think we're there. But this is -- this property and casualty insurance, Ian, is a rough game. And there will be a blip, and our hope or our expectation is that a favorable blip and an unfavorable blip will be about the same likelihood of occurrence, and so they'll cancel each other out over a two or three-year period. Depending on what assumptions you make for what the portfolio can earn, of course, a percentage point variance there could make a tremendous difference. And I think when they're doing their calculations and trying to figure where we are, they're assuming earnings of somewhere in the mid-4% range, which should be a conservative assumption. And so I believe that there's a little bit of upside in all of the forecasts they work out with me. They're hedging that just a little bit, which I think is prudent that they do.

The thing has been scrubbed pretty hard, but you just don't know in that kind of business, and that's the reason we shouldn't be in it. But it's been scrubbed awfully hard. The actuaries are the most comfortable they've ever been with everything. So I think the answer to your question is yes. What we should see from here is steady or up. But we might get a blip. I would expect a blip in a quarter. I wouldn't say might; I would expect a blip in the quarter. I wouldn't expect a blip in a year.

(indiscernible) question. What is the best rating on Oxford at the moment?

B+.

(OPERATOR INSTRUCTIONS). Eric Rothmann.

I was curious about the decision to shift a little bit more from leasing to buying trucks, and what's driving that decision and so on.

How about Gary, you and I speak to it. Gary has said for years -- and Gary, you say it better than I do -- that really a lease is interest and depreciation; it's not really anything different. And the reason we leased (indiscernible) he pretty consistently said over the years was because it had an additional tax advantage; we could essentially sell the depreciation and yield more than if we kept the depreciation. And our tax position has shifted over the last 18 months. And it now is very arguable, of course -- depending on everybody's rates, which Gary is very active in that -- that purchasing is more net-present-value advantageous.

The financial statement presentation varies a little bit from the pure economics. So depending on how you want to argue it, if you just argued one truck or one group of 10 trucks and you did nothing else, then I would say that leasing has a near-term more positive effect on the income statement. And so -- but that's not why we ever did lease and it's not why we're not leasing. But I know you're very financial statement-driven, and so I want to make sure I touch on that. Gary, is there something you'd like to add to that?

Really what's happening now is when you look at -- we are a full taxpayer. Our cash pay is we're paying 35% fed, about 3% state. And if you factor in the provincial tax in Canada, that would raise the state and provincial to about 3.3. But we've got a plan that where we could get back at a point in time to (indiscernible) if we buy more than we presently have worked out. So we are kind of always going through lease versus buy, looking at the tax advantages -- excuse me. But then what you want to do is look at the components also of availability, and look at pricing. Because at some point in time, a lot of the leasing companies will come back and pay more for the use of the depreciation than may be we can get credit for taxes. And then what you will do is you'll push to lease. It's a fairly close calculation between the two, but it can swing either way. And we're just looking at the availability and ways of which we would be able to finance it either way as we go forward.

So most of the activity here, clearly, is on the margin. At what point do you expect -- I guess how much do you expect to be able to shift the fleet from bought to leased? (multiple speakers) or is it just the next thousand trucks are more likely to be leased than bought?

I would say the next thousand trucks are more likely, if you're looking into actual (indiscernible) versus leased. And I would say that probably is -- that number could be multiplied a few times. The real key is having availability for the trucks. One of the key things that you have to look at which adds a little bit is when you add the new trucks, you have the depreciation and the lease and the tax calculation, but then you also have the maintenance and repair that comes in, and the revenue per unit. So it's not as simple as just saying, I'm going to buy it or I'm going to lease it. And what you're doing is looking at the market as far as (indiscernible) to make the choice. And (indiscernible) you're in the best of all positions you would have availability to do your entire fleet by lease or your entire fleet by buy. But generally that does not happen.

I might be a little more specific. I think it would be safe to figure the next 5000 trucks are going to be leased. Gary said you could be multiply that -- I mean bought, be bought. The next 5000 trucks will be bought. We're buying trucks right now.

I think we had some disclosure statements that basically showed that we have loans in place basically to do that, or facilities that we just entered into.

And then on the resale side, you mentioned the market has been strong. What sort of typically is the salvage value of one of these trucks? And is there anything in particular that's been driving that resale market?

[You're out at] about 20% of acquisition costs is about what a truck is worth at the end of the day. Maybe 18 to 22% kind of -- there's a little bit of a range. Obviously, when we sell a truck it goes to an end user. It doesn't go to a dealer, it goes to a small landscaper, a small plumber, people who have -- may have one, two or three trucks, not what a Ford dealer would consider a fleet user. And there's just a lot of activity at that level in this economy still.

Joe, you might also mention, because you really look towards the older trucks, that we do have a very active market on fairly new pickups and vans that we basically go out in the market, and we're in that market every year.

(technical difficulty) every year we'll sell 5000 pickups and vans, or better, that are a year old. That's another slice of the market. We have -- used trucks is a very active thing for us. And unlike a lot of people in the rental business, we typically don't have buyback guarantees or trade-in commitments. We typically buy, use and sell ourselves. And we like that. You can argue it both ways. We like being in that position.

[Scott Sullivan].

Congratulations on a great quarter. A couple of questions if I might. First on pricing power within the moving and storage area, if you could comment on that going forward.

Storage is a very site-specific market. So you might get -- if the product was identical, and it seldom is identical, but if the product was identical, you could see easily a 15% difference in a five-mile radius. So it's very site-specific. And as we say in the K, you get a competitor who lacks common sense, they could conceivably move next door to any single site and lower the market rate 30, 40%. That's -- that once in a while happens; it's a catastrophe. So the pricing power in the self-storage market has a tremendous amount to do with location and the services offered the customer at that location.

There's no -- I don't think that you can say that there's a market pricing power out there. We generally, obviously, favor rates going up. And most of the people from the marketplace generally favor rates going up. There's one exception; there's an operator in the Central Valley of California who holds rates down, is one tough son of a gun competitor, and maybe has 50 locations, and enjoys a near monopoly because of their obsession. They're kind of I would say -- obsessed would be a polite word -- their obsession with being the value provider. They in essence keep all the major players out of the market. So that's the only place that I am aware of where one vendor of the storage product actually has pricing power. And it's a very -- the reason I'm aware of it is so specific. Other than that it's going be somebody is on an island (indiscernible) a city that has extreme zoning regulations, and so they have some pricing power in a small radius, a two or three mile radius.

In the truck rental business, there's a little more opportunity there. Of course, we favor, in the truck rental business, seeing the rates float up over time. We attempt to do that vis-a-vis the major players in the business. It's a little bit compounded by the fact that pricing is also used to facilitate distribution of equipment. Because of the one-way nature of the fleet, and our competitors have a similar opportunity, they may end up with too few or too many trucks in an area, and then that would affect pricing. And it would not be at all unusual to see a 50% or greater swing in pricing that related to distribution, not really to what I will call the market rate or the sweet spot in the market. And as Ian or Jim would, I'm sure, tell you, we've seen the last 24 to 30 months has been a relatively good, in a historical sense, pricing opportunity in the do-it-yourself moving/truck rental business. It hasn't always been that way. And because of that I wouldn't say it will always be that way. I'd like for us to see, and I think it's responsible for us to attempt to price up a little bit, because costs do creep up and the consumer expects to pay reasonable justifiable cost increases. So we are for them going up over time, although on a 10-year line, the last 30 months have been pretty good months for everybody in the industry.

Sure. Dovetailing off that question, given the just exceptional brand that you have and low costs associated with promoting that brand -- you see it on CNBC everyday, I guess -- do you lever off that relative to some form of vertical integration, pricing incentives? For example, if I'm moving from city A to B, and I'm using your trucks and I'm going to be using your storage, is there an economic advantage to that as opposed to me shopping the best price for my storage end of the business?

Ordinarily, yes. Ordinarily we will give you a storage discount, as well as give you certainty. And certainty is a value to the customer. They know that there is going to be a room, where it is, and they know the general quality category they're going to get into. So just like a chain hotel does -- gets some value for just certainty, you kind of know what it's going to be. We get that, and we also provide a discount in conjunction with a change of address move like that. So I think your answer is yes. Is that the big driver, or how would I evaluate the dollar value of the discount versus the certainty?

Or the loyalty.

I think there's a great amount of value in the loyalty and certainty. I think it's more than the price advantage, but I don't have a scientific way to prove that for a fact. If you've been following us, you know we've spent a lot of effort internally to continue to develop what we call our affiliate program, which is to allow us to extend that into submarkets where we don't have a storage presence. We're running about 1050 owned or managed U-Haul locations, and there's at least room for four or five times that many outlets in submarkets.

And so while we continue and we will continue to build or buy, we're -- we believe very strongly that we -- that there's a legitimate customer value created by offering that affiliation into a sub-market. And I encounter that routinely. There's not a certain scientific thing I can give you, but I get it anecdotally at least once a week. I run into another submarket where consumers have indicated a willingness to extend our brand, but we don't have an offering in that submarket that we can put them to in a seamless fashion. (inaudible) seamless I mean they can go on the Internet and put themselves in (indiscernible) and they can go to every one of our stores. Right now, where I'm able to -- where I've been able to implement effectively on my affiliates, you could go to a U-Haul location that is not a company store that has no storage -- in other words, our very most basic location -- and that person can book you right on through into storage at an affiliate in a distant location.

Is that done through eMove, or is that something separate?

It's seamless on the computer. Once they've logged on to -- every one of our locations, dealers -- our company-operated locations operates on a Web-based system. Once they get on that Web-based system, they can seamlessly transfer. They don't even see the difference between eMove and U-Haul at that point. They have a customer, the customer is sending their child to college in some town in Ohio, and U-Haul does not have a company operation. Their computer, they just say, find storage and location, and the Company computer indiscriminately uses geographic tools to locate storage, irregardless of ownership or management. And then that person is able to seamlessly book the transaction, I mean run the credit card. And that's a very -- potentially a very powerful tool in serving the customer better.

And so the answer is absolutely we're levering off that. Is it making us a bunch of money? No. But you know, I believe that day will come. And the harder we work now, the sooner that will come. So I'm not predicting a date or anything, but I think it's just a principal of business and we need to be doing it.

Clearly that productivity only enhances the brand, I'm sure.

Right.

Next question, relative to the fact that you're 35% or so done with the replacement process, could you comment on the fleet truck pricing environment? Obviously, Detroit is having its own issues, and truck sales have certainly slacked off. Is there an advantage for you to garner there?

That's a good question. They're not giving them away, if that's what your question is. And because we are a (technical difficulty), we don't ask for a trade-in at the end and we don't ask for a buyback. That's mainly where everybody kind of plays who is (technical difficulty) down the road, because the manufacturer wants to book a full-priced sale in the current period. And they always -- if they're going to give something away, they always give it away in a subsequent period.

Are they bought locally or are they bought centrally?

We buy everything centrally. And we deal (technical difficulty) levels (indiscernible) General Motors and the Ford Motor Company. And we have -- I'll say this. It's real easy to get their attention now. You couldn't get their attention five or six years ago. You were competing with a horde of full-price SUV buyers. And so you would struggle to get attention at the very highest levels from those companies. It's not obvious perhaps to you, but there are subtle differences in the vehicles we acquire that we believe make them significantly more appropriate for our uses. And getting those subtle refinements in the vehicle requires the go-ahead at the highest levels in these car companies, because once they set an option list, that's -- they just are loathe to change anything today.

And so when we come to them and we say, well, we want this part common on two sizes of trucks, we know it will work, we know you don't normally do that, but we know it all fits. Let's do it, gentlemen. There's -- you need to have the go-ahead from the highest levels in order to get engineering and production and everybody on board. And we have that today, and I think that's -- the value of that isn't seen just in the acquisition price, I think it will be seen in the operating costs and the serviceability of the unit over a period of years.

Talk a little bit more about the fleet, and I'm not sure if this is an appropriate metric, but capacity. Obviously, you've got very envious -- enviable storage occupancy rates and capacity there. Can you extrapolate anything relative to the national moving fleet, where you have a specific number in mind where you might have not so many trucks or vans idle, where you might be at sort of a maximum capacity level?

We're not there today. That's a compilation of hundreds of numbers. But in my opinion we're not there today. In my opinion we have room for more transactions, and I'm exhorting my operating people to go out and get them. I think -- I'm one of these people there's always more opportunity around the next corner; that's my mindset. But I think it's -- I'm not being totally ridiculous, telling our guys you've got the same number of trucks but you've got a bigger opportunity; I want you to do something with it. And that's if you were sitting in our operational meetings here now, you'd hear me beating that drum. Okay. Truck number is the same, but real opportunity is greater, and I expect you to do better. So we're kind of in that push and pull right now on the operating end. They're whining that they don't have more trucks, and I'm saying you have effective more days; go get it done.

Right. But is there a -- are you halfway there, three-quarters of the way?

We're a lot more than three-quarters of the way. You're dealing with small percentage points on a given truck (multiple speakers)

Just [manicuring]. Okay.

You're always hoping for the big breakthrough. But this is -- these are small changes. They have a great economic effect, but they're small changes.

So what percentage of your fleet might be (technical difficulty)

Wednesday of this week, today?

Yes.

How many trucks won't rent today. That's a wonderful question. A wild guess. I'll give you a wild guess. Half of them won't rent today. Between maintenance and being the middle of the week, I could be -- but I mean that's always the problem. And then of course, take the middle of the week in February, it probably could be more than half of them don't rent midweek in February. Now, that's just the very nature of our business.

But on a weekend, obviously --

Weekend it just flip-flops, and the consumer perceives we're under-fleeted. I'm always looking at we have a pocket here and a pocket there; let's go use it. And there's more ways to resolve that than just say -- it's a lot finer metric than how many rentals did you do, okay? It's a much -- we get much -- much more subtle distinctions of that in how we measure this.

Last question, just sort of a 10,000 feet question. Do you sort of attribute a lot of your success recently, beyond the effective management, to the changes sort of, I guess, structurally in the housing market, a lot more rental and a lot more moving around, with prices doing what they're doing?

I have never put much stock in the housing market. And every time someone asks me that question I think I'm going to tell them that, and I'm going to get my comeuppance, because something is going to smack us. I've never put much stock in the housing market one way or the other. My belief, my experience is that people move because of life events. And the reflection of the housing market is more -- is a small part of those life events. We bought a new home. That is a life event. But more likely the life event is my wife bore a child, or we retired from the workplace, or we graduated from school. So there's a lot of drivers, and we've never seen a macro correlation between housing starts or apartment starts and gross revenue.

Would I rather have a [heated] housing market than an unheated housing market? Of course I would. We have to -- we're getting some marginal amount of it because you buy a house, maybe you go buy two sofas and a chest of drawers, and you rent a trailer from us to grab them. There's a lot of ancillary activities. Or maybe you do a bunch of landscaping, so you rent a trailer from us to go pick up a bunch of mulch. There's a lot of ways we participate in that that aren't change-of-address residential uses. So we'd much rather see a buoyant economy. But if you tried to take our topline and do any correlation over a three or five-year period to the housing indicators, we've never successfully done a correlation there.

Fair enough. Last question. Any -- I hate to use the word guidance, and I know you don't give it -- but any ranges of growth expectations or goals that you might have that you could share with us?

Probably not. I think what I said in response to Jim, which is (indiscernible) a few more trucks up for sale or sold right now than I would now with 20/20 hindsight. But you don't change that in one day. So I've probably shorted myself a little bit of revenue here. I'm seeing some maintenance savings. But I think I might have -- I don't have any doubt I could yield a little more topline if I had a few less trucks sold or in the for-sale category today. But that's -- that's kind of a balance. So to that extent, I'd pull back just a little bit in the near term. That's where I've put myself; it's just a fact. Am I taking steps to kind of go out of that? Sure. But it's a very -- these are gradual processes. You don't just declare 2000 trucks sold. It's a gradual thing. I'd like to have had 1500 more trucks than I have here today in the rental fleet.

Great job. Congratulations.

[Gideon Bernstein].

Great quarter. I've got some questions on uses of cash. It's pretty clear that you're investing in the fleet, and the cash flow from the Company has been improving. Is there anything that the Board has discussed about either a dividend policy for the common shareholders, or share repurchases, considering the insider activity has been pretty strong on buying stock. Is the Company thinking about it at this level as well?

That's a good question. What I would say is of course I've heard that kind of talk. As far as what I would call substantial, I would say no. And the discussion -- the subject has come up, but not in what I would call a substantial way. In other words, we had a task force on it or something of that nature. So yes, the Company's Board of Directors is conscious of both. But no, they don't have me on an assignment to come back with a recommendation, which results in a de facto recommendation of not doing it.

In the past, if you looked at our history, and went back four or five years in the past, we have had share repurchase mandates or allotments from the Board. And we've done it, never on some kind of a -- never enough that it really moves any numbers much, but in kind of an indiscreet manner. So I wouldn't rule that out. If you want to just know my opinion, I wouldn't hold my breath for a common dividend.

You'd rather buy more trucks than grow the Company?

I'd rather grow the Company. I'm still -- I've still got years ahead of me, and that would be my druthers. And I think the market is there.

Ian Gilson.

Just a last question on the structure of the truck fleet. How much do we have on pickup as a percentage of total fleet (indiscernible)?

Pickups is going to be, I'm going to say, 1400 vehicles. Vans -- let me just write the number down so I don't get it all wrong.

I think it's a little bit higher. (multiple speakers). In that fleet, because we just expanded that, we have about 6000 total [van pickups].

I think it's 6000 and trending up. But if we had 1800, that would put 4200 in vans, and I think that's more representative of the split. I don't know that we've published a number on that, and that's kind of off the top of my head. But the pickups is the minor part of what we call the pickup van market. The pickup isn't our main thrust; the van is our main thrust.

So we're not putting any great emphasis on the [one-day] market?

We're putting emphasis on it, but it appears that there's more opportunity in the van. It's been our experience in our fleet, the relative size of the two fleets indicates that the van is the better -- we've had more success renting the vans than the pickups.

Joe, just to add to -- and Ian -- we also have our 10-foot truck, which is one step up from that, which is a small truck. So, I think we're adequately serving that market. And if not, what we basically do is we trend up and add more units into it.

[Jeff Wertham].

I also noticed in the 10-K that your self-storage space and rooms had grown fairly dramatically over the last year.

What statistic (multiple speakers) a private [mini] storage portfolio, about 60 locations. And I think that added 3.5 million square feet and I'm going to say 35,000 rooms, something like that.

Are you looking for other opportunities to grow the self-storage business?

Absolutely.

[John Kurtee].

First off, could you give us some guidance or goals in terms of what your capital spending will be this year for your two main categories, the self-moving equipment rentals and then the self-storage? You mentioned a number of cities where you were either building new projects or expanding existing ones. Just trying to get a rough idea of what your capital spending will be.

I'm going to ask Jason and Gary to respond to that, and if I don't agree I'll jump in.

Just going through the K references a $340 million expectation for next year for capital spending on the fleet.

And then on self-storage, it so much depends on what you actually get where you can get going and what you can spend. What do you say, Gary, to $50 million?

I'm going to guess it's somewhere in the $50 million. And again, as you said, we are opportunistic. But I would say (indiscernible) it's probably $50 million. That should be a reasonably conservative estimate. I think when you look in total, you're somewhere close to $400 million in CapEx.

And that $50 million, plus or minus on the self-storage side, would increase your capacity by what percentage either in terms of rooms or square footage or number of facilities?

Good question. Let's see.

I think it's about 500,000 (indiscernible) at 50 million.

That would be my guess.

That's using -- and again, that's averages of averages (multiple speakers)

At 500,000 square feet. So you could put that over the square foot. This will be -- when we're saying this, we're talking pretty much entirely about owned. And so when you make the fraction, the owned fraction is smaller. I don't know what it says in the present K for the owned. Jason, do you have the number?

That's 9.6 million square feet.

9.6 million square foot. (indiscernible) 500,000 at 9.6 here; 5%.

It also looks like you had a very nice increase in your average occupancy rate, up over 5 points. You talk about what you did to help drive that from a marketing perspective, or what was going on in the markets to help drive that. And then as we come into the new year, I'm assuming we shouldn't be looking for that kind of a large of an increase again.

Where we're -- operationally what I've been telling people for the last 12 or 18 months is we're looking to operate at the 90% level. We know it's possible, it's just operationally challenging to do so. But we know that that's an achievable level. It may be impossible to achieve a higher level than that on a portfolio-wide basis, but I'm not yet spouting off on that subject. So 90% is where I have all my operational people baselined. So if you're below 90 you're in trouble, and if you're above 90 you're in the safe zone. And as a result, you'll see we're tending towards the 90% number, and I can't just keep increasing that for no good reason. So that's why in my opening address I said this is very hard -- this is based very much in systems and in our referral network, which I think are unique to our system, or to the U-Haul brand. And as a result, it's my belief that we're operating at, and will continue to for some time operate at a higher occupancy rate than any other major player. There's significant obstacles in any business to increasing a standard. But I think we're going to get it at a 90% standard. I'm convinced of it. And I don't think our competitors can say that with a straight face.

At the same time, I'd caution you -- most people, when they cite the statistic, do it on square foot rented. When we cite the statistic, we do it on number of rooms rented, which is a tougher metric, because we have a bias towards smaller rooms than our competitors. So I would tell you that my 86 is higher than the competitors' 86 out of the box. But we believe that that's a more meaningful way to be evaluating. It's how we evaluate all our zone people and our operational people, so we pass it on in how we report to investors.

Scott Sullivan.

I wondered if you'd just comment on the difference in, perhaps looking forward, suggested growth rates between the self-storage and the self-moving, which might be growing faster.

I think self-storage is going to outpace over the next six months. That's -- after that, it depends how much project we've been able to bring either online through building or online through acquisition. Because the storage opportunity, you know, it's -- you can't rent a storeroom if you don't own it. And once we get at 90%, I'm not sure I can go to 93% or some number like that. So I think we reported an 86 and change or something for the 12 months. 87.9; Jason just corrected me. We reported 87.9. And I believe we will finish the 12 months we're in now with a good increase over that. But that was about five points up; five points up (technical difficulty) 87.9 puts you at 93. I'm certainly excited about 93, but I'm not telling you (technical difficulty). I don't want to confuse you. So I'm going to bring some more capacity in. We have the ability to rent the rooms if we have control of the rooms so we can rent them.

But in terms of growing the fleet versus growing capacity in the storage (technical difficulty)

The storage side is immense. We're a small fraction of the market in the storage business, and in the truck rental business we're a significantly larger fraction. So you just -- and the absolute dollars -- significantly larger absolute dollars in the truck rental business. So you're bringing in 30 or 40 more million on the storage business is a big deal. 30, 40 million in the truck rental business isn't such a big deal.

How do the margins compare between the two?

God only knows, I think, is the truth. We rent and -- rent trucks and storage out of the same locations. So that's a hotly-debated question. If I knew the answer to it, I would own a lot more of one than the other. They're both profitable, and they interrelate. So if you ask McDonald's, they might tell you they make a lot more money on the sodas than they do on hamburgers. But yet they wouldn't sell any soda if they didn't sell hamburgers. Do you know what I mean?

I have all my program managers all claim their program is the most profitable program in the Company, and my storage program manager is consistent in that. He also says it's the most profitable part of the Company. But I really -- I think it's -- it's a moot point because of the way we go to market. And what I spend most of my time doing is -- are we profitable in each segment? And the way we actually run is we run P&Ls by location. That's where I do most of my work. If I was at a location, I would have a very highly developed opinion as to whether our truck rental, our hitch installation, our box sales and our storage, if each segment is profitable and if it's pulling it's fair share; in other words, are we balanced in our marketing approach? Are we selling the right amount of boxes, given our other levels of business, or where is our business opportunity? And it's kind of running that whole mix that results in the margin that you see in the financial statement.

So the numbers you see are very much, of course, the result of a big blending of several factors. But again, that is how we go to market, so I don't think blending is an inappropriate thing. And in the macro sense, it's hard for me to break the numbers apart successfully. But at a given location, I could break that down for you in five minutes. I have locations that are losing money at storage, and I have locations that are losing money at truck rental. With this many locations, I've got all sorts of varied stages of development. So I'm not -- I won't tell you that everything is perfect in the land of Oz, because it never is. But we are -- I have no question that we generate positive gross margin in every major line of business. We don't have a line of business that's not generating positive margins. How to say each one relates to the other in a fair manner, I don't really have a way to say that that I think is definitive.

Fair enough. And the large jump in property management fees, I imagine that's attributed to the merger or acquisition you made?

It's partially that, and it's partially because we put some incentive fees in our most recent management contracts. So our older contracts are mainly 6% fixed fees. And so we put some incentive fees in some of the more recent contracts, which allows U-Haul to, if it performs above a certain metric, make more than that. And we've got some incentive payments, I think, really for the first time this year in any measurable amount. And those incentives actually impacted that very favorably, too. When we did it, we had no idea how it would really work out. You think you do, but you don't know. We actually got some good incentive fees, so that was -- we were very pleased with that.

Relative to the storage space, do you have a typical cookie-cutter sort of blueprint plan, or do sort of tailor it to the local or specific real estate location?

We have a cookie-cutter plan, but you always end up tailoring it, either because of unique shape or topography; or, and maybe most likely, local land use planners are just obsessed (multiple speakers) what you do. So you go in with what you want, and then you just start negotiating.

Ladies and gentlemen, we have reached the allotted time for questions and answers. Mr. Shoen, are there any closing remarks?

I'd like to thank everyone for their continued support. We have a group of people here who are attempting to do their best, and I will try to keep them motivated to do that. We have generally good relations with our customers, and I expect their continued support. So again, I thank you for yours and look forward to talking to you in the near future.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.