U-Haul Holding Co (UHAL) 2008 Q1 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the AMERCO first quarter fiscal 2008 investor call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I will now turn the call over to Miss Jennifer Flachman.

Thank you for joining us today and welcome to the AMERCO first quarter fiscal 2008 investor call. Before we begin I would like to remind everyone that certain of the statements during this call regarding general revenue, income, and general growth of our business constitute forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995, and certain factors could cause actual results to differ materially from those projected.

For a brief discussion of the risks and uncertainties that may affect AMERCO's business and future operating results, please refer to Form 10-Q for the quarter ended June 30, 2007, which is on file with the Securities and Exchange Commission.

Participating in the call today will be Joe Shoen, Chairman of AMERCO. I will now turn the call over to Joe.

Good morning. I am speaking to you from Phoenix. I have Jason Berg, our Chief Accounting Officer; Gary Horton, our Treasurer; and Rocky Wardrip, our Assistant Treasurer on the phone. And they will be available for questions after the call as I will be.

Obviously the results for the quarter are disappointing. The driver is topline revenue. The biggest cause is one way truck pricing and transaction. Despite what I believe to have been significant efforts by our team, one way truck pricing remains down.

We finalized development of a new rate setting system for the U-Haul Co. over the winter and spring and implemented it in July. It has significant capabilities beyond our prior system. However we are not yet managing to its potential.

I expect our performance to improve, but we are already more than halfway through the summer moving season. We are a little late.

I am told that budget has commented that underlying moving consumer demand is down. While it is well-known that housing is down, I cannot tell you that our pricing or one way transaction shortfalls are caused by the housing market. I can say that this is the least successful time I have experienced in revenue and pricing in U-Haul in 15 years. It is a tough market, in my experience.

As you are well aware, U-Haul has been up leading in replacing rental units at a very strong rate. We have put in roughly 40,000 trucks over the past 24 months. Our truck production is already funded to our fiscal year-end. With our fleet up, our one-way utilization is down. My attitude is that we are positioned to take share whether the market is up or not. One way or another we are in position to take share.

On the pricing front, I believe that the low one-way prices are due about 60% to our competitors' pricing and about 40% to our own management shortfalls. The problem is that they keep feeding the other. In other words they see us do what I will call management shortfall and price, then maybe they react to that and then maybe we react to their reactions. So it's a little bit confusing.

I will give you three examples that our current prices as of yesterday for a rental on August 15 out of San Diego going to Orlando which is 2600 miles allowed roughly, U-Haul's $1663; Budget's $1080 and Penske's $971. Our price is already competitive and they are just simply too low.

From San Diego to Pittsburgh, which is a similar amount of mileage -- 2600 miles -- we are at $1584, Budget's at $1822 and Penske's at $1646. In this case we are probably $100 or $200 back to where if we could get it, we would have managed better.

Third example is San Diego to Chicago. We are at $2222, Budget is at $596 and Penske is at $539. They are both way too low and we're $200 or $300 too high, probably. So, again there's tens of thousands of these kinds of prices. So I can't say this is a total representation but I think it represents some of the dilemma out there.

I was of the opinion Budget was done with what I will call ridiculous discounting in June. I am not so certain now. Price-cutting is always a kind of a he said, she said type issue. Everybody blames the other person.

My efforts are to stabilize one-way pricing at U-Haul and then the customer, hopefully, will respond to U-Haul.

In town, our transactions are up but Budget has come out with an $18.99 Monday through Thursday rate on round-trip rentals. It's begging for a response. We've kind of been identified for 20 years with the 1995 rental, but overall on the in town rental transactions we are up and we are seeing a positive variance in gross revenue in town.

Since last fall we also, as I indicated in our last call, have been designing and implementing approved computer-based truck inspection diagnostics -- diagnosis and repair program. This is kind of a progressive rollout. I expect this to lead to further efficiency and initially cost reduction.

We reported a slight maintenance expense reduction in June, which I attribute to our truck fleet replacement program rather than to productivity or cost improvements in the actual maintenance itself.

Self storage continues ahead. Our increases are due more than to income per square foot than increased rented square foot. The self storage market remains competitive and while it may be a little bit tougher than it was four years ago, it's about where I think everyone has expected the market to be and hasn't presented a lot of surprises.

U-Haul Company launched a sustainability initiative late last winter. Our customer expects U-Haul to be all over this and we are. As a small part of that effort we introduced an all electronic annual report and proxy solicitation process which probably affects some of you on this call. We are well into that effort right now and people at the Company are very positive about it.

Our annual meeting is set for August 20 and I strongly encourage attendance via the Web rather than burning more jet fuel to attend. Also it's August here in Phoenix and it's too hot to be here. So two good reasons not to be here.

We will webcast live and will have interactive capabilities. The meeting, of course, is open to all the shareholders. We believe we are one of a handful of public companies to utilize the electronic proxy option. Our feedback so far is positive and we would be very interested in hearing your reaction, either by logging onto our web site or contacting Jennifer Flachman.

On August 20, we are also hosting a live webcast analyst and investors conference just shortly after the shareholder meeting. This will be a first for us and while there will no doubt be a gremlin or two I expect this is going to be a good opportunity to expose investors to more members of our management team. I also expect to show investors an inside look at some U-Haul operations. I encourage you to attend. Jennifer Flachman will send out a press release with information on how to attend.

I thank you for your continued support and we will now go to the question-and-answer session.

(OPERATOR INSTRUCTIONS). Jim Barrett of CL King & Associates.

Could you give us a sense of history? You mentioned this market was as tough as you've seen in 15 years. Can you tell us what caused the tough market 15 years ago that was -- must have been the early '90s? What were the factors that explained the downturn and what were the factors that explained the recovery from that period?

The toughest market I've been in before this one was Desert Storm I and everything stopped and no matter what we did we couldn't make it move and time healed it. I did a lot of analysis then trying to relate it to -- with a part of the country or a demographic group or something of that nature, but it was just an overall kind of a malaise.

This is attributable to the same thing at all. I -- as always when I see data of course I see all micromarkets. So I still see markets where we are up. I still see a budding market where we are up. In other words where I think it's pretty comparable demographics, income, that sort of thing.

So I would give you some examples. Phoenix Metropolitan area we kind of split it into a West and an East Phoenix market in our detailed reports. And East Phoenix has been consistently up for the last 12 weeks and West Phoenix has been consistently down. I look at that and say I have a better than average manager in East Phoenix and my personal West Phoenix is getting less than good results.

They've all got the same programs. Distribution is pretty close to the same. Distribution always affects revenue in our business. So that takes distribution out although even inside a big metro -- really Phoenix is 60 or 80 miles across depending where you measure it. But you can't have distribution imbalances in the Phoenix market.

But I don't think I can attribute it to distribution imbalances. I look at that -- so that's management differences. Now of course everybody has some version of the 80-20 rule. Everybody has some people who consistently outperform and if I say the only standard I have is everybody has to be in the 20s soon I will have no managers. That's just the truth.

But at the same time that takes me back and says, okay, it's a matter of management and that's our part of this task. So I go back to saying, okay, let's try to break it down and see is this how we are displaying our equipment? Is it how we are answering the telephone? Could it be the our pricing? Is it our distribution?

I have some areas of the country right now they have some distribution problems but I always have some distribution problems. I mean, there's always an area which had more equipment and always an area that has too much. And I don't think that I have distribution that's so bad it deserves comment. In other words, I think I have the normal problems in distribution right now.

I keep coming across rates. The rate I quoted you to Chicago is just -- it's the world gone wrong to have that much of a bearings between three legitimate competitors in the marketplace. Has the world gone wrong? Long-term it has a negative effect because the customer can't tell if a mid $500 price is a good price or a discount. They can't tell if my $2200 price is gouging or a fair price.

In fact I think we are both wrong. I think the real price is somewheres in the $1500, $1700 range. But we're both -- or all three of us are giving false expectations to the consumer and it confuses them. Confused people don't stay in a marketplace. They go someplace else that's not quite so confusing and it's not always economically driven. Sometimes people pay more just because it's less confusing or more certain, is how I express it to my crew.

I say the customer wants certainty and they don't know if they run a drug for $500 does that mean the truck is likely to have mechanical problems or is it a substandard second rate product? It's way too confusing for the customer to have price spreads like that.

So one of the virtues of the new system that we've programmed over the last year on pricing is I think I can take some of the knee-jerk reactions out of the pricing system and get kind of a shock absorber on it so to speak, which I think the customer will appreciate. Now how that is going to affect my revenue real near-term is not clear and I'm not sure but what maybe we did a good job in June but we just missed some things and will pick them up going ahead or whether there's a real problem I'm not going to get around.

I had been telling my people here on my team that we should see how the year is going to come out by the end of July. While those numbers aren't out what is is indicating to me is I've got to spend more time on cost reduction because I'm going to have a tight winter. So I need to focus on that. If I focus on it in a timely manner I will get my margins.

So I don't have a good explanation. I don't see a peer pattern. I don't want to tell you it's housing just because that's a popular excuse because everybody is using housing right now.

A competitor of yours used gasoline yesterday. Do you feel that's a valid comment?

Customers have asked about gas since it was $1 a gallon in my experience. So yes they are very aware of it and at some point you drive people out of the marketplace. Clearly on the in town rental, gasoline is less of a concern. In other words, relatively speaking they are going to spend $15 on gasoline there so they don't calculate it is my experience. So if it was gasoline it would impact one-way more than in towns, but I don't have anything anecdotally or substantially to tell me the gas is just killing these people.

You can go look at AAA releases where people are going to drive for vacation and everything. And the last release I heard was they didn't forecast vacation driving being down. That's as good an estimate of how consumers perceive it as anything I know. I don't have a barometer that tells me.

We have introduced some initiatives with the customers to speak to that issue because we definitely think it is on their mind. But to tell you that people are loath to drive over 500 or 600 miles because the cost of gasoline is driving them to distraction, I don't think so. When you put it in the whole scheme of things even if you pay $2200 to move to Chicago you either need to go to Chicago or you don't.

Right.

There's not a lot of joyriding in our business. So it's not a disastrous -- I mean the consumer doesn't want to pay $2200. I will be clear. They are I believe they are more in favor of about a $1700 price, but when it's $1700 you either need to move or you don't.

So I can't really tell you it's gasoline although, yes, people are concerned about it. Yes, we have a couple of initiatives to try to address that for people from whether it's just helping them estimate it to trying to help them drive better. I mentioned earlier that we launched a sustainability initiative and the people who are knowledgeable about this said that it's about 75% behavior modification and about 25% physical changes. And in driving your mileage, behavior modification, one of our trucks can change mileage 40%.

Now of course you today that in your car too and I'm not talking turning the car off at any intersection or you no extreme measures. I'm just talking being really gentle on the pedal, mobile fuel economy type. You remember the mobile fuel economy runs from the '60s?

Yes.

They used to say drive like there was an egg between your foot and the accelerator. When you do that you get a tremendous change of mileage enough to easily overcome the cost of the fuel. But of course you and I both drive on the freeway and we know that a lot of people are just stomping on it kind of just doing that.

So we are trying to respond to our customers and say if it's a big deal to you, here's how to resolve it. We don't have hydrogen fuel trucks or some kind of new technology but you can make a heck of a difference in it if you just change your own driving habits. So I don't have a simple cause and effect but I can tell you it's a tough market.

What is my response? My guys need to pick it up. My gals and guys need to pick it up. We need to do a better job and that's the only answer I can come back to and we are going to have to hit expenses pretty hard. Because whenever your topline has a very variance, if you can't bend the topline you've got to start pending all those underlying lines and so okay, that's the task. So I need to be on that.

Within U-Haul your operating expenses are up 4% in spite of all the new trucks. Is it reasonable near intermediate terms that number should be flattish because of reduced truck payments or is it just inherent inflation in that number?

I think it should be flat or down. Now you've got to look at the funky depreciation deal which you can do with Jason or Rocky on that, but yes I think it -- there's no question it should be down because you're -- basically whenever you put a new truck in and you sell an old truck you immediately exchange variable cost for fixed cost. In other words finance and depreciation and move them on the different lines.

Now we've had the advantage of a pretty good interest rate environment but Rocky and the treasury crew put together on our financing has been I would say, historically, at or better than our cost of funds. So we should see a little delta really due to the total expense reduction due to the cost of funds not because we didn't do some maintenance or that a new truck is cheaper.

Trucks cost about the same to drive no matter how long you keep them. The difference is whether it's a fixed or variable expense. So -- but we have an interest rate or a financing advantage that should accrue to us. And the total maintenance line you should see drop because you are paying more in depreciation and financings.

And I haven't -- I didn't see the drop in maintenance in the first quarter that related to improved efficiencies. I believe we will get some certainly by December, which will be our third quarter. Whether we will get them, whether they will be visible in the second quarter I don't have a projection. I kind of right now have had my guys driving on getting them rather than giving me an accurate forecast of what they think it will come out. I just says "get 'em."

It will be some amount lower but whether it -- that's a big number and whether it will be enough of a percentage that will be real visible or not I am not going to predict. Of course, the new trucks -- always new trucks are more expensive, but there's legitimate improvements in motor vehicles. I'm sure you see it in your own vehicle.

If you don't get a lemon, the darned things just run better and while it's popular to bash Detroit my experience is that they've made significant improvements in their vehicles over the last 10 years. We are getting more mileage out of the motor presently than we did 10 years ago hands down. There's no doubt about it.

Now the parts are more expensive when you have to replace them by about three times, but so I can't tell you what the exact trade-off is because you have to buy in newer equipment obviously but it's not all bad news. There is some positive news in what they've done with vehicles. And I think to a certain extent the automakers deserve some modest amount of credit although my job is to beat them up. They have done a little bit there.

So in summary I don't think you're going to see a big decline in or a visible to you decline in maintenance in the second quarter. You may see one in the -- it may be big enough that you can see it in the third quarter. And I don't think that it's -- I don't think it should remain flat.

In other words I think there is bona fide absolute gain is going to come through on that line and they will be hopefully not totally eaten up by either finance -- by finance cost. And you figure the depreciation and normalize that how best suits your judgment.

Ian Gilson, Granite Investment Research.

Joe, could you go through for me the new computerized program for maintenance? How what you keyed on and how it is implemented by the independent dealers?

Sure. Every location that rents a U-Haul does so by logging onto an Internet connection. So they basically rent off a bank of servers that U-Haul maintains or controls. As a result, every location in U-Haul has the same information at the same time.

So let's say that -- and you are talking about an independent dealer so we will put him in a smaller town just for fun. We will say a dealer in Sierra Vista, Arizona. A small town in southern Arizona with a growing retirement community. We will say that the dealer receives a truck in. The computer will -- when the dealer begins to put the equipment number or the license plate in, the computer will immediately reference our maintenance database and say whether the truck either had a reported problem in route or is due for scheduled maintenance.

The dealer is then asked to do a review of the truck and should any of a number of areas, should the truck fall short the dealer is asked to enter that data also. So now we have, has it had a problem in route? Is it due for scheduled maintenance? Is there an observable defect in the equipment?

And as soon as that truck is fully received in, everybody in U-Haul know about it. So let me give it a couple of different scenarios.

Let's say it comes in and it took a stone in the windshield and the dealer sees it has got a cracked windshield. In Sierra Vista we would have some -- we have a person who monitors all that information for southern Arizona. That person would dispatch a local windshield company under a contract to go fix the windshield. It ought to be fixed in 24 to 48 hours. And the dealer will be happy and everyone will be -- it will be a seamless transaction.

Let's say that the truck is in the window of scheduled maintenance and normally scheduled maintenance has a window of roughly 510 miles before and 500 miles after maintenance is due. So if the maintenance is due at 15,000 miles the computer will start alerting you at 14,500 and our schedule considers it allowable that it is not performed until 15,500.

So there is a 1,000 mile window which in the summer could be a three-week window and in the winter it could be a five-week window, statistically, more or less. So the -- on scheduled maintenance what the computer is been going to do is suggest that the truck be routed towards a maintenance center because, in a smaller community like Sierra Vista, we don't have a Company maintenance center. We prefer to do scheduled maintenance at our locations.

So if that truck was in southern Arizona, the computer would prompt it routing towards a maintenance center; and then we have a group of about three people out of Tucson, Arizona, who monitor that information and they will likewise attempt to intervene and tag a rental to a maintenance center to that truck. That maintenance center could be as far away as Dallas or Denver or as close as Phoenix. It kind of depends where the customer is going and where the mileage window of the truck is.

Again that would all be within what we would call a normal parameter.

Now can the dealer ignore the recommendation? If he's under pressure to rent that truck out?

Can he override it?

Yes.

He can go both ways. The dealer can ground it for any reason or the dealer can unground it. Now so, is there a judgment involved? Absolutely. Because the dealer is there and sees it.

I don't know what to say but if the dealer is there and sees it -- a tire is a very common thing. Let's say the tire appears to have a flat spot or something on it. The dealer could override that or not, depending upon what the circumstances are.

My normal experience with dealers is that they tend to be a little phobic and they are more likely to ground it for something that, in my judgment, I wouldn't ground it for. But you get the gamut. You have people involved so you get the gamut.

Ordinarily the dealer is not that motivated surprisingly to do something that is a little risky in order to improve their gross revenue. They don't really -- they're not -- they are just not that motivated. I mean a sloppy dealer is a sloppy dealer. That won't matter whether the truck is well maintained or not. That same dealer likely won't will clean the cab out either; and most of the focus at that level, really, is on cleanliness and fluids rather than on real maintenance because there are very few real maintenance issues that are showstoppers.

In other words kind of like in your own life. If your brakes squeak, they will work fine for another 1,000 miles. They're just going to squeal. And similar thing's in our truck and almost every parameter we have has a fail safe built into it as do the Federal and State standards. They all say, you need a certain tread depth. Well that tread depth is enough that we don't but we could sell those tires to people who would continue to use them.

In other words the tire is still a very useful tire at that tread but it gives a margin. And so everybody builds a margin and in the case of -- let's say you had someone who was not a responsible person running the rental counter, well, that's where your margin is going to come into play.

David Post. (inaudible) Capital.

I've got a question about spending on [U-Car] share. The new service that you're offering. Can you give us an idea, how much you are spending on that? And then longer-term what your expectations are for the business?

That is a terrific question. I appreciate it. We put in about 150 cars which probably cost let's say, they cost $15,000 each. So barring a major calamity, your risk is in the nature of 10% of that amount. That kind of make sense?

In other words, the cars have value, you can sell them.

And 150 cars is such a small amount of cars we could liquidate the fleet in a week and nobody would know what happened in the car business. So as far as that, it's a very modest investment. What we're doing is we are probing that market and trying to learn about our own truck rental business at the same time we are exploring car sharing.

To really operate in that business we'll have to spend about $2 million in systems. That's a seat of the pants estimate. I don't have a hard estimate on that.

Is that capital spending or operating?

We normally expense the book of that. I believe once a year, the accounting types look at our IT money and see if there is any part that is required to be capitalized. I know my direction to them is expense as much as you can, however, there are certain rules that you can't just expense everything.

So if we spent $2 million and they solve the program had some vitality they probably would capitalize some modest amount of that. But the bulk of that -- I'm looking at Jason to see if he nods his head -- the bulk of that will be expensed in the period. Should we spend it -- we haven't spent that money yet. We are trying to make our mind up on it. Okay?

The car share phenomenon has a lot to do with presorting and prequalifying drivers. And it has a lot to do with why the distributed methods of going to market. We already are on the wide distribution treadmill, compared to our competitors. So if you put -- Penske has 3,000 or 4000 locations. I'm not sure how many. We have 15,000.

So wide distribution is kind of right up our alley. Prequalification of customers is kind of like a fond dream that myself and other people in this business have had. If it could prequalify the customer or even potentially sort customers by risk categories and either charge them a different rate or a different insurance or some differential fee, then we might be able to the in the business.

If you look at the car share guys they are renting to what the car rental industry considers underage drivers. And, likewise, U-Haul rents to what the car rental industry considers underage drivers. So there's something for us to learn and see if they have learned a better -- perhaps something we can learn from them -- on how to sort the driver of Universe and thereby lower our overall expenses or maybe even increase our income.

So Hertz and Avis need not feel threatened. They have single locations I think that have more cars than we do. But if you get down into the real -- the consumer interaction of process, I think there is a lot for us to learn.

And finally these people have done an excellent job on persuading the public that they are part of the solution to sustainability rather than the problem. As an industry -- well, as a company U-Haul needs to also be positioned that way in the mind of the consumer. In other words, rent a truck and you are likely to be reducing the CO2 output in your community.

Now I won't bore you with the whole thing, but I may go through it at the analyst meeting. We have pretty convincing semi science I will call it that several of the things we do cause a relative improvement in the production of carbon dioxide and whatever else you want to pick as the demon of the day. Right? Carbon dioxide is kind of the poster child for being a problem in your community.

So the U-Car share exposes us to a group of basically competitives or other people in the industry. I wouldn't call them competitors because there's not enough people out there right now that they bounce into each other very much, but it puts us in with people who have done a very, very successful and I think correct presentation of their product as being part of the solution not part of the problem.

What part of the country are you from?

San Francisco Bay area.

Well that's a classic deal. San Francisco has about all the traffic that San Francisco wants and if the people in San Francisco think that the next time U-Haul opened a location it increases the congestion and whatever else you want to call it, they are just not that keying on a whole concept.

If, on the other hand, we could communicate like the Car Share people do, the Car Share people have the people in San Francisco convinced that if they add X three or four Car Share vehicles to reduce the total fleet of San Francisco by 12 or 15 vehicles. And that's considered a big positive and I think that is one of the reasons people participate in car sharing is that it's an objective of theirs.

So are you saying that essentially in the business you are going to experiment with for the next several years and there's really no material revenue opportunity until you have more of this under your belt?

Absolutely. 150 cars you won't be able to see and we won't report separately unless we just do it anecdotally. There is a market out there that is a heck of a market. My primary business is the U-Haul truck rental business and I remind me of that myself about every morning. But there's a lot of analogies, a lot of similarities and this is an emerging markets and we owe it to our shareholders to be familiar with it. I have had many people in the land use planning and regulation business or university type people tell me that U-Haul has been in the truck sharing business for years and it's never understood it.

I've tried to understand their input on that and I think there's some validity to that whole presentation. And I think if we did a better job of communicating that we would see our total U-Haul truck transactions go up.

I've got one more question that is on expenses overall. If I look at operating expenses which are before depreciation, in the last two quarters they rose about 5% year to year, as one of the prior questioners noted. That is after the last three years or so where operating expenses fell between 3 and 4% every quarter. So we seem to have a short-term trend here, rising expenses after a longer-term trend of falling expenses where your operating expenses fell from about 68% of revenues to 55% in counter of 5.

So I'm wondering are we on a move back to maybe the average level of operating expenses to revenues? Something with a 6 in front of it? 60, 61, 62% over the next three or four years? Or are there certain things you can do to keep it down at the current level?

Some things are -- vehicle licensing goes in that. Vehicle licensing varies with how many trucks you introduce. In most jurisdictions, a new truck pays (technical difficulties) versus a truck that is two or three years old.

So some things -- that's built-in. We are in the same place everybody is on utilities or -- and that is kind of our metaphor for energy costs, because we don't buy an outstanding amount of hydrocarbons elsewhere. So the utility expense is basically a retreat at every location we have. We are trying to do an organized retreat, but we are getting hammered on utility expenses. Property taxes are probably doing about what they are doing in your community, which is they are playing catch-up to try to get the government its part of what they view as a real estate boom in the last five or six years. So property taxes is probably in organized retreat.

Go to G&A -- there's always room in G&A, and I would expect I will get some headway there.

Overall personnel -- unless you can get efficiencies, you can't pay people -- you can't really pay them the same, but you certainly can't pay them less than you did in the prior year.

Healthcare is a tough nut. We paid a lot of healthcare increases in the last 12 months. I think we will moderate that some for the next 12 months, but it's long-term an increasing item.

Maintenance is a grand opportunity to apply a little bit of science, and we are doing that. But I don't have a forecast that I can save it, but it's a lot of things that you think are kind of ridiculous.

For instance, if we have a waterpump fail at 65,000 miles and we replace it, we also replaced the antifreeze, because that's the process. Ordinarily, at 75,000 miles we'd replace the antifreeze, but if the computer can prompt the person and says don't replace the antifreeze, we just replaced it 10,000 miles ago and the stuff is good for like 50,000 miles. But if the computer can communicate that effectively, I will save several tanker trucks full of antifreeze and also stop introducing them into the supply chain to have to be disposed of.

So there's a bunch of what might look to you as very small gains, but in the aggregate could be a significant amount of money that I believe can come from the maintenance line, but as I told Ian, I don't have a hard forecast. So I think you have to say our expenses have to go up, and if we don't drive the top line you are going to see compression in margins. So we haven't driven the top line through the end of the first quarter, which is -- you can see that. I think we let expenses float up a little munch. We can drive them back down, but it's likely to compress margins and we need to keep pushing to drive the top line.

Now, we have got the top line moving on what we call intown truck rentals, but we don't have it going on one-ways and one-ways is a huge component of our overall truck rental line. So until I get that moving, I think it's reasonable to compress margins. But I wouldn't forecast that out three years. That's not been my -- if we can't move truck pricing in three years, we have got some serious issues, systemic issues.

I don't see that. I see we are going to get through this, and I think as I believe we broke out -- I hesitate, but I think we broke out that back in December we were probably down a little bit on intowns as well as on one-ways, and we turned that around. So there's some -- I believe we can manage, and that would be my belief. We can manage around it and that's my job to do it.

So you think operating expenses over the next, whatever, two, three, four quarters might not rise as much as the 5% in the last two but maybe 3 to 4%?

Yes, as a percentage of the top line. That is how you are calculating them, and it's because of two things. The top line went up and the operating expense went up. Short run, I think I can maybe drive a couple -- little bit out of expenses and every day I'm driving on the top line. I don't have the solution yet, but I will find a solution.

Just for clarification, I'm referring to just the absolute -- the year-to-year change in the absolute number, not as a percent.

Oh, okay, year-to-year change. Okay, well then, it has to go up a couple of percent, just because of utility costs -- hire everybody and rehire them all. People get paid more over time; it's inexorable.

I think you would want us to. You don't want us to -- if we have people who will stay around for three years and not get an increase, well, there is something wrong with them. There's something else going on that is a more complicated problem. So yes, I think you are going to have to see absolute increases in the very near term in the next quarter for two, and I think you'll see a continued decrease in maintenance.

We had some decreases in maintenance if you went back. I can't off the top of my head, but three or four quarters, we had some decent decreases, largely relating to the flipout of the fleet. That's very much dependent on how fast we are selling trucks. I think you can kind of think it's a secret. You can look at what our absolute fleet is in numbers now versus prior quarters, and you can make some assumptions and figure out how fast we are selling trucks. Do we release that number, Jason?

What was that?

Our truck sales.

No.

We don't release that number, so I don't want to just blurt it out. But you could do little bit of math and you can see that we could sell trucks a little faster and it wouldn't be hurting my feelings. When you sell a truck, your maintenance expense on it is zero.

So we continue to ramp up on truck sales, but I've obviously introduced trucks faster than I've sold them. So to that extent, you could say I'm behind on selling trucks. As we sell them, their maintenance, their license, their insurance expenses evaporates. So you get a very positive double whammy if you can manage the fleet a little tighter.

Ian Gilson can probably recall, we did a nice job of that kind of right in the 2000, 2003 area. We got a nice decrease in the fleet and were able to keep revenue up. Well, that is where you really get margin, utilization gains.

So I'm not fighting for utilization gain presently. Presently, I'm just fighting to get a revenue gain. But as soon as I get a revenue gain, then I'll go back to fighting to do it with fewer trucks, and that opens margin back up.

[Max Heckler], [Goodwill Associates].

Just a quick question on your buyback program. It looks like you were active again in the quarter, and if I can remember correctly you have roughly 30 million of additional availability under the program. I wondered if you have any plans about a new program adding to that buyback size? Any comments at all about your buyback program?

Gary Horton?

Thank you. I look at the buyback program, we will be in the market buying from time to time. Even though I have not talked to the Board yet to get a further authorization to buy back more, I will undoubtedly look at that, and over the next quarter or so, and potentially ask for more money to buy back our stock.

On the actual fleet size itself, and I guess the overall capacity, I think if we look at Penske and Budget, you see they have been rather aggressive in de-fleeting, not only recently but probably as early or as late last year. It sounds like you guys are still actually adding capacity. I wonder if you could talk a little bit qualitatively about why you're growing the fleet size, if in fact that is true, and if de-fleeting now or reducing your capital expenditures now wouldn't be a proper reaction to the environment you're seeing?

There's a couple of questions there. The reason we are growing the fleet is because sales are a little slow, to a great extent. Again, Jason, what numbers have we released on relative fleet size? Can you give me a --?

We do that at the end of every year. Last year, we said 100,000 trucks.

What did we say this year?

That was (multiple speakers).

3/31/07. What did we have for the prior? Do know what it was a year ago?

(inaudible).

96,000. So we showed a delta of 4,000 units and that's enough to impact overall margins. I would say that maybe 2,000 of that was slow sales and 2,000 of that was a little bit of aggressive expansion. When you put trucks in -- you may remember this call about this time last year, we told you we were actually short trucks in the midsize line.

So a truck is not a truck is not a truck is kind of part of the problem. You are trying to balance this between, in our case, four major subfleets in the one-way truck market. So last year, we told you gross was off, because we were down in medium-sized trucks, and I would say that was very much a factual bit of information.

So we are growing trucks a little bit, because we are selling them a little slower than we are buying them, and sales will eventually catch up. You want to always be putting some money in the truck fleet. If you go back historically, we had an 18 or 24-month -- I won't call it a compelled reduction in truck acquisitions here in -- about three or four years ago.

So we are doing a little bit of catch-up there, and just getting the total number of -- kind of the total age profile of the fleet a little bit more in a sweet spot. We very well could now, if we wanted to, reduce new truck introductions. In other words, we are somewheres in that vicinity and it's a thing we normally discuss.

We are committed, I think, reasonably speaking, four to six months in advance. So it's not like you can -- or that we would just turn it on and off like a faucet. But as we get into the October timeframe, we will do a -- typically, we do kind of an overall recap and try to re-forecast out the next four or five years. A truck acquisition is, at the minimum, a four or five-year commitment in our experience and maybe longer than that. So we will look at it, and that's a reasonable thing to bring up.

Can I ask you what the average age of your fleet is now?

I've never had that statistic and I don't know. We put in, as I said in the call, about 40,000 trucks over the last 24 months. The year prior to that, we might have put in 15,000 or 18,000. That's just a guess. But 40,000 plus or minus 500, if I'm correct. So my guess of 15,000 in the prior year could be off.

I would say our 40,000 over the last 24 months, if you looked at it historically, is an accelerated rate. So we could back off to a normal rate and it would be a back-off right now. I don't know exactly how that will trickle through the financial statements. Probably positively. Because of the way we are doing so much purchased rather than leased, it probably would affect it positively, but I'm not so sure it would be a huge effect. I think the bigger effect is to drive sales harder.

Can I add one comment to that also -- is that buying decisions today are for moves that will be made three, four, five years in the future. You always have to keep that in mind strategically, that there are from time to time slowdowns in the number of people that move in total, but you have to look out in the future, because of the mobility patterns of the United States and what it has been over the past 10, 20, 30 years.

Myron Levin, Los Angeles Times.

I just wanted to ask what changes, if any, have you made in recent months to enhance customer safety and improve inspection and maintenance programs? Also, were any of the changes influenced by issues that have been raised by the Los Angeles Times?

I'm glad you brought that up. As you are probably aware, and we have communicated to your editors, we have had a tragedy basically occur with the L.A. Times. They've told our customers -- or their readers, some of whom are our customers or potential customers -- that some about of sway when towing a trailer is normal. That's about like telling my kid it's okay to lick his fingers and stick them in a socket. It's a travesty that that occurred.

I feel I did my level best to inform you people of the truth. You chose to run a line of bologna and lies that have been propagated by the plaintiffs' bar for 20 years. So I've spent significant time trying to recommunicate to my employee base, and through them to our customers, without naming you specifically, that that's bullshit.

The biggest thing I asked you to communicate was when people tow, they should reduce their speed, load heavy in front and wear their seat belts. I think that's a minimum amount of honest information that could be communicated to the customer, and I would say that that's the information that needed to be communicated to the customer. Communicating the opposite, that some amount of sway is normal, is quite to kill a certain number of people and maim a certain number of people. Lying is a terrible tragedy, but again, I don't run your business.

Well, as you know, we repeated your advice to people that tow over and over again in those stories.

Well, you didn't. I beg to differ. I missed it. I missed it. I read your stuff, I think, pretty carefully. (multiple speakers).

I will be glad to show you all the times that we did.

Excuse me. This is an earnings call, and not a form for public talking about papers. I would at least like to give the shareholders the opportunity to ask questions.

Gary, I appreciate that, but I think it is also material. Because at the end of the day, one of our expenses, of course, is if we harm someone on the highway, we are going to pay for doing that harm, and it is very material that we do not harm our customers, and in fact is material to our long-term success that people view U-Haul as a safe as well as an economical way to transport their family and their goods. So it is very, very important to us, and I think it's equally important to the shareholders. But I agree we don't need argument in front of the investors.

Alan Miller, Los Angeles Times.

I would like to ask if at this point, you are satisfied with the maintenance inspection of the equipment generally?

Well, there's really no answer to that, because it's not -- as I spoke with Ian, there's no one simple answer. It's not a monolith. (technical difficulty) always an area to improve, and that's why people have their jobs (technical difficulty) yesterday, the objective is always to improve (technical difficulties) no matter what we had yesterday (technical difficulties) satisfied and I think that (technical difficulties) I have my job.

Have you taken steps in -- other than obviously you've talked about the new computer diagnostics system. Any other steps in recent months to improve the inspection and maintenance?

I'm sure there's been steps, and every day there's steps, whether it's training an individual or (technical difficulties) other form of communication (technical difficulties) customer, the dealer or the U-Haul person (technical difficulties) ongoing thing (technical difficulties) ongoing thing and we basically (technical difficulties) taking steps.

You mentioned training. Have you increased training in any way, increase the number or nature of classes that are offered for employees or dealers?

Over the last year and a half, certainly (technical difficulties) that's pretty -- again, that's pretty normal, though. You might be able to say that over the last 10 years, and it would be an equally true statement. So absolutely, we are (technical difficulties) doing that, and (technical difficulties) of course the automakers are (technical difficulty) diagnostics that they actually clip the vehicles with. So the average vehicle actually carries as much computer diagnostic equipment as a Class A mechanic (technical difficulty) have in his shop 10 years (technical difficulties) such as you probably saw (technical difficulties) Apollo 13, it had the computing power roughly of a(technical difficulties) very, very modest personal computer. The same thing has happened in the automotive business. They pack more computer and diagnostic power in a car today than was imaginable 20 years ago, and then existed in a professional maintenance facility 10 years ago. So all of us as consumers or business people are benefiting from those improvements.

One last question. You had mentioned that the new computer diagnostics system was being progressively phased in, that you'd started in the fall. Has that been completely phased in now, and if not, when do you expect to complete that process?

It's a process that will never end, because what it is it is a constant feedback process. So as in any good system, there's a feedback inherent in the process. So it will never be completed for that reason. Every time you introduce a new model or variant truck, you come across or a trailer or any piece of rental equipment, you come across new profiles and those go into the system and intent to update it. So again, it's just kind of a continuing process.

Ian Gilson, Granite Investment Research.

Joe, when you talk about adding trucks to the fleet, you mean just new trucks; you don't need mean that additions, correct?

Well, the number between 96,000 and 100,000 is net. So when I say 40,000, I'm saying that's gross.

Yes, now what is happening to the price of used trucks?

We are in two markets with the used trucks. One is the one-year-old pickup and van market, and the other is, let's say, the 10 or 12-year-old six-wheel-truck market.

The 10 or 12-year-old six-wheel truck market is fairly stable. It's a cash market, and the activity or lack of activity of the new car and truck dealers has no impact on it.

The other market, which is the one-year-old pickup and van market, is very much relates to overall auction markets and to programs that dealers and automakers have going. We have been, I think, steady in our margin in that pickup and van market over the last 12 months. There could be a little reduction in margin in that, and you can see that with just kind of -- by looking at the Saturday or Sunday paper. They are a little bit tighter on that.

Some of you who follow the car rental people would know more about this than I do, because of course, General Motors I think at least has stepped way, way back on program vehicles. They also eliminated a fair amount of -- and I apologize, I can't remember if these are pickup or van -- production capacity, which may hold the margins up or may be a sign that they are going to go ahead and let margins compress. They don't share that with me.

So in the two markets, there are very much different operating factors. The pickup and van market could be a little more volatile than the older six-wheel truck market.

(OPERATOR INSTRUCTIONS). Ross Haberman, Haberman Fund.

I've got just two or three quick questions. The storage business -- could you talk about pricing there, what you are seeing? If you talked about it, I'm sorry, I missed it. Generally, what you are seeing in prices and what's your thought on occupancy?

I will first speak about our business. Our business is up. It's largely based on income per room. Because we've added a little bit of capacity, that calculates to a small decline in occupancy, but I wouldn't read into that anything that has to do with demand.

With our several competitors that publish somewhat comparable information, a couple of people have said they'd had a slip in occupancy, but I'm not sure if they also had an increase in capacity and whether it's an absolutely reduction in rooms rented or it's a ramp-up issue. When we publish occupancy, we don't do a same-store; we do all stores. So if I add capacity, it immediately affects my occupancy.

In the occupancy arena, what I have seen as being the biggest drivers are service and the self-storage business is more than just simply a series of interconnected garages today. People want to see services like security, delivery acceptance, temperature/humidity controls and these are valued added that are what is distinguishing the income per square foot that various competitors are getting in the marketplace.

We did okay on that trailing 12. In other words, we have been able to step up our service enough to justify with the customer that they pay a little bit more for the product.

Four or five years ago, we might have got a pricing increase just because. In other words, we are the landlord and rates are going up. I don't think that has been the environment for the last 30 months. I think for the last 30 months, if you told that to a customer, they'd say, great, I'll move across the street or next door where there's a competitor.

But at the same time, if you are able to communicate to the customer a service increase, they are willing to purchase more services, as you see in a lot of businesses. That's not something special to the self-storage business. There's always concern in that marketplace about capacity, and I guess maybe the silver lining of the current constriction in credit is fewer people will put new storage locations in the ground.

If they do that, well then about 16 months from now, there will be a little less aggressive expansion of capacity, and so maybe in a couple of submarkets, I might get a little bit more of an increase. I couldn't forecast that in a reliable way, but I haven't seen any marked increase in people offering their locations for sale or distressed sellers. We, I think somewhat aggressively, review what's for sale in the business, because of course we not be in the market for it. There's a little bit more motivation on the buyer's part, but still not enough to get us to buy much right now.

So I think there's still good room in the marketplace. We certainly are not expensing anything there like we are in truck rentals. Again, storage relates to this whole residential market, and I wish I had direct connects like I talked with Jim Barrett about earlier. One of the reasons I'm hesitant to really make a prediction is I'm achieving some success with my residential consumers in the storage business, and there's some relationships between that and the moving business. So it gives me pause to think that there's still room in the marketplace for us to expand our top line.

I don't think capacity has ever been an issue nationally. But it's always and issue locally, because if somebody bills across the street from you, it's an issued. I don't care if the market is underbuilt or not. They are likely to aggressively price for the first year and a half or two until they get some occupancy, and thereby depress your income or possibly even steal some of your customers with some kind of a promotion.

So capacity is always an issue, but the storage market has been very resilient for the last 30 years. It keeps absorbing the capacity. Always, there's an end to all good things, and so it will be with storage someday.

We break the storage market down into many submarkets, and then we try to estimate available square foot in that submarket and then occupancy. There's some national people that publish their own numbers; some of the storage magazines do. If you looked over and over kind of any four or five-year trend, it's continually absorbed capacity, and a lot of people -- I'm not the only one -- and the storage business, of course, keep searching for the underserved markets, hoping to get a 5% or 10% premium for three or four years till capacity catches up.

So that's always going on, and there's some still underserved markets in the self-storage business, I think beyond any shadow of the doubt. Whoever can get in there will do well, and so to a certain extent, I maybe welcome a little bit of tightening on credit, because that will keep some marginal people from putting some projects in that maybe aren't well thought through.

Have you been looking around to buy more facilities, as opposed to build, and what's sort of the pricing scheme today for people who are looking -- not that you are jumping at their offers, but what's sort of the going prices today?

Well, they're all --

Either per square foot or per square room or multiples of cash flow?

They are all looking for REIT multiples of cash flow, and they all want to do that based on forecasted cash flow at normalized, which I think is bologna, because there's a lot of work to get there. But there's all kinds of places that are 40% occupied that are forecasting 85% or 87%, and then they want to sell it to you for maybe 17 times, 16 times earnings and I go, well, that's fascinating, but we are not real interested.

That's what they say is going to be a normalized after they get up to that 80%.

Well, they are thinking that they're a REIT. In other words, all these people -- I won't say all these, but most of the people who are self-storage owners read business literature, and they are reasonably financially sophisticated people. So when they see a REIT multiple, they do an idea of what they think would be their free cash flow and they put a multiple on it, and of course that's what their expectation is. At those numbers typically, there's no room for our shareholders to make a return. So generally speaking, we look at the project hard and don't buy it.

That's about a six or seven cap (multiple speakers) cap, you might say?

Yes, a six cap I think is what everybody thinks they ought to get, and I don't think it's justified. But what it's really doing is stopping transactions. But some people have to have a transaction, because either their age or their life plans take them out of that particular business. When they do, every once in a while we get one.

We probably have three or four places in escrow today, but we are not under a mandate where I need representation in the market so that I have enough mast to support a management team. I have a management team in the market, and all of this is -- these are marginal transactions. So if I don't like it, we just won't do it.

That being said, we have done some conversions in the last 12 months. We've done some ground-up, and we've bought some places, and we will continue to do that. At our investor analyst meeting at the 20th, I will have Carlos Vizcarra, who runs our real estate operation there, and he is really a person who can speak very specifically. He eyeballs every one of these. I only see the ones he recommends. He sees the whole -- I believe he personally reviews -- maybe after he had an analyst do it, but I believe he personally reviews every offering for sale we get. So he could give you a lot better specifics on that, and I would encourage you to see if you could log onto that and put those same questions to him and maybe get a little more detailed answer, or a little more helpful answer.

Just a quick numbers question for Rocky. Rocky, could you give us the amount of cash and debt just at the parent level, leaving out SAC, please?

For the parent and its legal subsidiaries?

Yes, please. Well, I should say leaving out the insurance companies, because you don't have access to those, really.

Okay. As far as the cash? Effectively, at June 30th, the cash and cash equivalents at Moving and Storage were $153.6 million. Additionally, we had $196.3 million that was in a purchase account as part of the fleet securitization, which will be absorbed for fleet purchases by next March, and the credit availability was $238.3 million under our credit lines.

Again, the debt leaving out SAC?

It's $1,582,000,000.

Ladies and gentlemen, we have reached the end of the allotted time for the questions and answers. I will now turn the call over to Mr. Joe Shoen for closing remarks.

Again, I thank you all for participating in the call. I would like to put a plug in for our webcast of the annual meeting, and more so for our investor presentation on the 20th. It's an opportunity for me to get people in front of you who, either because I'm too cheap or their time is not available enough, that you normally don't get to see. So I think it would be kind of a positive thing, and I'm proud of all the people on the management team. I think they will give you an accurate reflection of who we are. It remains to you to evaluate whether you like it or not, but I think it will be a good chance, and the technology looks very promising here, and I think it is going to be a very good chance for people to get a good look at the inside of the Company without having to sleep in a hotel that night.

So again, I thank you very much, and look forward to talking to you at the annual meeting.

Thank you. This concludes your conference. You may now disconnect.