Earnings Call Transcript - UHAL Q4 2020

Operator, Operator

Good morning and thank you for joining us today. Welcome to the AMERCO Fourth Quarter Fiscal 2020 Year-End Investor Call. Before we begin, I'd like to remind everyone that certain of the statements during this call, including without limitation, statements regarding revenue, expenses, income and general growth of our business may constitute forward-looking statements within the meaning of the Safe Harbor provisions of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Certain factors could cause actual results to differ materially from those projected. For a discussion of the risks and uncertainties that may affect AMERCO's business and future operating results, please refer to Form 10-K for the year ended March 31, 2020, which is on file with the U.S. Securities and Exchange Commission. I will now turn the call over to Joe Shoen, Chairman of AMERCO.

Edward Shoen, Chairman

Good morning. Thanks for being on the phone with us. Much of what I have to say relates to the April and May timeframe. As you all know by now, U-Haul is part of the critical essential infrastructure in the United States. As such, we remained open through the recent pandemic and we did the same in Canada. There have been and are still evolving, many challenges to the U-Haul organization. However, this is a disciplined group and we will work through matters as they become clear. Obviously, our self-move rental revenues were cut substantially. It has not yet returned to last year's level, let alone the levels we've planned on. Today, I have many locations and some markets for our sell-through revenue and transactions are above last year. However, this is still the exception, not the rule. Storage revenue has held up through March, April and May. This revenue though is below plan and could well deteriorate more. This is an evolving situation. Sales of moving supplies reflect our decreased moving business. Competitive responses by our self-storage competitors have too often been knee-jerk reactions to lower rates. With many markets arguably oversupplied, we should brace for continued rate pressure. Like other people in the vehicle business, sales out of our fleet were and remain far below what is necessary to roll the fleet over. This has tied up some cash. Automaker shutdowns and continued difficulty in restarting their enormous factories have created a temporary inability to acquire new fleet. That mist of new fleet simply will not be caught up in the short term. However, this largely just kicks the can down the road and will increase CapEx sometime in the future. We have experienced similar disruption in the past and basically know what to do. We are at some point, we need the government to allow the economy to attempt to restart. Many of our other expenses were largely fixed in the short term. We have cut multiple expense categories, but in no case commensurate with the drastic revenue declines, which we don't believe will continue. Of course, sales teams across the continent have scratched hard for new business, we have certainly found some. We plan to hold on to these new customers into the future. As you've heard before, we have a full complement of touch-free consumer-facing digital tools. These served us well in our self-move and self-storage business. Some of the customers who experienced these tools may prefer to use them going ahead. We're leading the industry, I believe, in both our self-move and self-storage touch-free tools. And this experience has validated our multiyear investment in the development and rollout of these tools. Our vehicle maintenance teams remained on deck over the recent months. As a result, our fleet is fully maintained and ready for more use. In summary, U-Haul personnel have experienced trauma before. We have a committed focus management and operational team. I expect we will make the most of the recent events, learn some lessons, and make the best of the situation as the economy restarts. With that, I'll turn it over to Jason for some of the specific numbers for year-end.

Jason Berg, CFO

Thanks, Joe. Yesterday, we reported fourth quarter earnings of $6.24 a share as compared to $0.04 a share for the fourth quarter of fiscal 2019. In the fourth quarter of this year, we recorded an additional net tax benefit of $146 million, that's $7.45 per share as we recognize the effects of the Coronavirus Aid, Relief and Economic Security or CARES Act. We feel another useful supplemental measurement is to look at our earnings excluding this item. This results in adjusted losses for the quarter of $1.21 per share. For the full year of fiscal 2020, we reported net earnings of $22.55 per share. In fiscal 2019, we reported $18.93. Also included in our fiscal year 2020 results was the CARES Act tax benefit. Excluding this benefit, our earnings per share for the full year in fiscal 2020 were $15.10. We have a reconciliation of this in our press release as well. Before I go into some comments on the business, I want to provide some additional color regarding the CARES Act tax adjustment that I just mentioned. The CARES Act allows companies with net operating losses to carry those back up to five years and it also made some other technical corrections that we've availed ourselves of. We have net operating losses that have previously been recorded in our deferred tax provision, assuming we would use them in the future at today's current 21% federal income tax rate. These tax losses were generated largely from our reinvestment activities used in growing the business. But the CARES Act now, which allows us to carry these losses back two years before the 2017 Tax Cut and Jobs Act. These losses are now valued at or are being used at the previous 35% federal income tax. It's this difference in rate that accounts for the majority of the unusual Income Tax Benefit this quarter. We've isolated this EPS effect of the tax adjustments so you can evaluate our performance without it. Now moving on to some comments on the business. Equipment rental revenue decreased 2% or about $11 million for the quarter. We finished the full year up $39 million, that's about a 1.5%. First and positives from the year. We increased the number of retail locations as well as trucks and trailers in the rental fleet. Also, revenue for both our in-town and one-way markets improved across trucks and trailers. However, in the fourth quarter, these improvements were more than offset by a reduction in the volume of corporate account rentals along with the decline in overall rental activity during the second half of March due to the COVID-19 related stay-at-home orders. By eliminating some of the noise, and I'll call the noise the last mile business decline, the COVID-19 related decline. And we did have an extra day this February. Our core moving revenues were closer to plus 3% in the fourth quarter and plus 2% for the year. Revenues this April for our self-moving equipment have experienced an approximate 30% decline. Looking into May, the decline in equipment revenues has been improving. Capital expenditures on new rental trucks and trailers were $1,374 million for fiscal 2020. Last year, in fiscal 2019, we invested $1,163 million. While proceeds from the sale of retired rental equipment were $678 million. That's up from $603 million in 2019. Our initial projection for rental equipment CapEx in fiscal 2021 contemplates a decrease in box truck cargo van and pickup spending. We are estimating just under $850 million that’s before netting any sales proceeds against them. We’re also projecting a reduction in proceeds from the sales of rental equipment resulting in net free CapEx of approximately $460 million. Just to remind everyone, this year that number was close to $700 million. This projection assumed reduced sales in April and May due to constraints on auction locations from the COVID-19. Proceeds from the sale of rental equipment were down right around $40 million in April 2020 compared to April of last year. Storage revenues were up over $12 million, that's above 13% for the quarter, and for the full year, we were up 14% or $51 million. The growth in revenues and units rents comes from a combination of occupancy gains at existing locations and from the addition of new facilities to the portfolio. Looking at our occupied unit count at March 31 of this year compared to last year, we were up 49,300 more occupied rooms. This quarter we took a look at facilities that had occupancy over 80%. As of March 1st of this year, we had 725 owned locations, about 60% that were over 80% occupancy, compared to last year this time increased to 48 locations. And the average occupancy at these 725 locations was up just slightly at a little over 90%. Our real estate related CapEx for the year was $751 million, that’s down from $1.3 billion last year. During fiscal 2020, we added 5,800,000 net rentable square feet, and about 1.2 million came online during the fourth quarter. In April and May of this year, we’ve opted to slow the development of new self-storage projects to preserve liquidity. We will calibrate our capital spending based in part upon the evolving effects of COVID-19. Operating earnings at the Moving and Storage segment decreased by $34 million for the quarter, resulting in a loss of $21 million. For the fiscal year, operating earnings decreased by about $97 million to $472 million. I want to go through some of the expense highlights. Depreciation expense associated with the fleet increased $13 million for the quarter, $55 million for the full year, as we continue to add new equipment to the fleet in fiscal ’20. We are seeing the rate of depreciation increase beginning to trend back down. Depreciation on all other assets, primarily storage location assets increased by $7 million for the quarter, $28 million for the full year. And that’s largely a function of our self-storage development. Repair costs associated with the rental fleet experienced a $5 million increase for the quarter and for the full year were up $19 million. With the increase in the number of trucks in the fleet, preventative maintenance costs have gone up in relation. Additionally, during the quarter, we saw a higher count of trucks sold before the COVID-19 shutdowns. And that resulted in higher repair costs as we prepared those units for auction. Outside of depreciation and maintenance, other costs including personnel, property taxes, liability and property insurance, and freight and utility costs are the items that generated the bulk of the increases. In aggregate, they accounted for about $30 million of the increase in the quarter and a little over $101 million for the full year. Towards the end of March and into April and May, COVID-19 has negatively affected our incoming cash flows through lower self-moving equipment rental revenues along with a near total reduction in equipment sales proceeds coming from the closure of the commercial auto auctions. However, cash and credit availability to the Moving and Storage segment has remained strong. At March 31st, we had $498 million and at the end of April, we had in excess of $400 million. In May, we’ve entered into a $200 million term loan to further strengthen our liquidity position in the short term. With that, I’d like to hand the call back to Shawn, our operator, to begin the question and answer portion of the call.

Ian Gilson, Analyst

Good morning. I have a question regarding the impact of the tax. Is that a book entry or can you actually claim cash?

Jason Berg, CFO

Ian, this is Jason. We have filed for refunds related to the CARES Act. We have amended our fiscal '18 and '19 returns, which should yield refund requests totaling $123 million. For our fiscal year '20 return, which we plan to file around October, we are expecting a refund exceeding $250 million. Additionally, we have filed for the return of some cash from previous payments that were applied against operating income, which should result in about $109 million. In total, we are anticipating refunds of over $490 million.

Ian Gilson, Analyst

So when might we expect the check or checks?

Jason Berg, CFO

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

Ian Gilson, Analyst

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

Edward Shoen, Chairman

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

Jason Berg, CFO

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

Ian Gilson, Analyst

Okay. And the storage business, I would have thought would have been less volatile than the truck rental business. Particularly in the face of the fact that people can't move things out of storage as easily as they could have earlier? So, storage not had been impacted as much as truck rental?

Edward Shoen, Chairman

I think that's a fair point in the short term, Ian. However, many people are currently under stress, representing a significant portion of the population. As the situation evolves, we may experience some delinquencies or increased move-outs. We are doing everything possible to provide excellent customer service to keep these individuals as tenants. You're right that people have been affected, but the full visibility of that impact might take time to emerge. We'll have to monitor how this situation develops. I can't provide a reliable forecast at this time, but we will strive to retain these tenants through high-quality service, and I believe we will keep the majority of them.

Ian Gilson, Analyst

Okay. With the fact that the sale of trucks and the deferment of moving new trucks into the fleet could maintenance expenses declined somewhat?

Edward Shoen, Chairman

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

Ian Gilson, Analyst

Okay. Hertz US has declared bankruptcy. That improved budget. Have you noticed or do you think that this would probably help you hold truck rental?

Edward Shoen, Chairman

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

Ian Gilson, Analyst

Okay, and back to Jason, did you say that April was down 30% in truck rental?

Jason Berg, CFO

Correct.

Ian Gilson, Analyst

Or May show some strength. I presume that is compared sequentially rather than year-over-year.

Jason Berg, CFO

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

Jamie Wilen, Analyst

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

Edward Shoen, Chairman

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

Jamie Wilen, Analyst

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

Edward Shoen, Chairman

Jason, do you have a number on that?

Jason Berg, CFO

We allocated nearly the same amount for spending as last year, which was $750 million. To break it down, deals in escrow have significantly decreased compared to the previous year, with 23 deals currently in that status. We've postponed the closing dates on these deals to assess how the market is responding. From fiscal 2019 to fiscal 2020, the acquisition of new properties has dropped by about $320 million. If we were to finalize all our ongoing projects, that total would exceed $900 million, but it will be distributed over several years. Therefore, we have enough work planned for the coming years, and we've been reducing our input. Essentially, our pipeline of projects is down by roughly $350 million to $360 million compared to a year ago.

Jamie Wilen, Analyst

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

Jason Berg, CFO

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

Edward Shoen, Chairman

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

Jason Berg, CFO

5.8.

Edward Shoen, Chairman

I don't have a precise number yet, but we likely added about a million square feet between March 31st and June 15th. It will be very close to that. These projects will come online and hopefully begin to rent out. We have a number of near-term completions, and additional projects will come in over the next three quarters, but we won't be adding to our overall pace. I wish I could provide a definitive figure, but I can't. As Jason mentioned, we will proceed cautiously. It's important to note that we had already slowed down even before the pandemic. It takes time for that change to ripple through, and now we have an inventory that we can either build out or hold. We're not facing a critical situation, and as a shareholder, you won't see increased expenses since they are already incorporated into our current financing costs and property taxes, which aren't expected to change significantly.

Jamie Wilen, Analyst

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

Edward Shoen, Chairman

I don't think it's being seriously considered right now. It's been a long time since we last focused on that. While it's true that most of our locations, except for a couple, are strong in self-storage and moving, I don't see much urgency in pursuing this in the near term. I understand the concept and the various ways we can evaluate the entire company, but that's not out of the question. I wish I had a clearer answer for you. I have a better sense of what you're looking for, but I really don't have that answer.

Jamie Wilen, Analyst

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

Edward Shoen, Chairman

I’ll let Jason to speak to profitability.

Jason Berg, CFO

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

Edward Shoen, Chairman

So, I would say, Jamie, that this is still a growth program, and similar to our self-storage program, this growth is expected to exceed the growth of the truck rental industry. We are continuing to invest in this area because we believe it is a wise use of capital. It’s not placing a significant strain on our resources, but we will keep investing. We believe we are consistently enhancing our position. We have received very positive feedback from customers, and it doesn't appear to be negatively impacting our truck rental business in any significant way. There may be a slight effect, but in some respects, it actually complements the truck rental service. Therefore, I think this program is definitely viable. It has seen increases throughout the past year and particularly over the last couple of months, which is expected for a growth program. Just like self-storage, it should continue to outpace the truck rental business, and we look forward to seeing that trend continue.

Jamie Wilen, Analyst

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

Edward Shoen, Chairman

We conducted significant business with Amazon, but the equipment damage costs outweighed the revenue we generated, which created a challenging situation. Amazon rents a large number of equipment pieces from contractors who are not direct employees of Amazon and they tend to be harsh on the equipment. We have recently negotiated an agreement with Amazon where they will cover the costs for any damage to the equipment, allowing us to rent to them again. However, during the period we weren’t renting to them, they established partnerships with other businesses. I’m not aware of how those companies are performing financially, but we were at a loss with Amazon. If we engage in any future business with them, it will be under conditions that ensure we can make a modest profit. Meanwhile, we continue to have a good working relationship with UPS and FedEx, which allows us to earn reasonable profits. Unfortunately, Amazon was a major challenge for us as they consistently returned our equipment in poor condition, leading to losses in our transactions with them.

Jamie Wilen, Analyst

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

Jason Berg, CFO

We expect depreciation for both the fleet and real estate to increase through 2021, but the rate of increase has been slowing each quarter. Based on the current fleet plan, I anticipate that it will level off by the end of fiscal 2021 on the fleet side.

Ian Gilson, Analyst

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

Edward Shoen, Chairman

Ian. That's a very complicated question to give you an accurate answer to. If the automakers re-close their plants, in other words get them started, and then they shut them down. We will lose that amount of forecasted production. Ordinarily, we're not forecast to get a lot of production in the last quarter of the calendar year. We usually have heavy production now, which is why we've suffered for a big lack of new equipment coming in. So it wouldn't impact us nearly as much as it has in the quarter we're in right now. But certainly it would impact us. And then what will happen, Ian, is that at some point you have to replace the vehicles. If we don't replace them this year, we'll have to replace them in the subsequent year. So it's going to bump in some way the amount of money we have to spend in subsequent years, assuming our customer transactions remain large enough to accommodate that fleet. I mean, it's not beyond the pale that there could be a permanent reduction in the economy. I see these numbers for every single market, and there are markets that have been savaged. You can figure out who they are. If you watch the TV, it's the politicians who simply are enforcing some sort of authoritarian state on the consumer and the consumer they shut down, totally done, gone. Now go to another place like Utah, everybody's doing business. Utah was doing fine, but they have a different government orientation. So I have no idea what will happen if other than revenue will decline if we have another partial or full shutdown of the economy in the fall; revenue will decline. There's no question about it. And revenue declined a bunch of expenses won't decline, and profits will get smacked. So, of course we've reduced some costs, but those costs aren't of the nature of 30% or 50% which is what we saw in business. We saw a 30% decline overall and Jason quoted or 30% what percentage, Jason?

Jason Berg, CFO

In April, 30%.

Edward Shoen, Chairman

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

Jason Berg, CFO

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

Ian Gilson, Analyst

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

Edward Shoen, Chairman

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

Operator, Operator

And our next question will come from Craig Inman with Artisan Partners. Please go ahead.

Craig Inman, Analyst

Hey, can you hear me? One of the challenges in this business is managing the fleet in specific locations due to migration trends. With the pandemic, has that created any problems with accumulating trucks? Is that becoming another issue we need to address?

Edward Shoen, Chairman

There have been significant changes in our operations due to shifting migration patterns. Typically, at this time of year, we notice a steady movement of students. However, this year, some students have moved away entirely while others moved weeks ago, making it difficult to predict our numbers for this weekend compared to the same time last year. Many large schools have already finished their terms and are going through phased move-outs. We're seeing increased transactions in markets where schools are notifying students of specific move-out dates, which has caused notable disruptions. Additionally, this time of year often brings a lot of secondary home transactions, which are not as straightforward. For instance, in Arizona, many schools concluded their sessions last Friday, and while we hope to see an uptick in business, it's uncertain how many people will head to their second homes. Conversely, people with second homes in places like Maine or New Hampshire left earlier. Overall, the disruptions in our operations are about what we would expect, neither drastically improving nor worsening the situation. Managing these daily changes presents ongoing challenges. Some are optimistic that a smoother student move-out process could lead to increased business, and I share that hope. However, the timing of trends is unfamiliar to us, and we have no clear idea of how this will play out over the summer or into the fall, especially since several universities are starting their move-ins at different times. Interestingly, we're noticing less disruption in long-distance moves and more in short-distance moves, potentially indicating that short-distance moves are more elective while long-distance changes are necessity-driven. Normally, we handle a high volume of short-distance moves, and while those are starting to return, they are not at previous levels. I can't predict whether they'll rebound to last year's levels by the end of June. As I mentioned earlier, some markets are actually performing better than last year, which is encouraging since it means there's business available. However, areas like New York, New Jersey, Connecticut, and Boston face ongoing challenges as their economies have been significantly impacted, causing apprehension among residents. In contrast, Arizona seems to be returning to normal, with improving traffic and business returns in places like Atlanta, while Southern Florida continues to experience struggles. We are making every effort to utilize any positive shifts we observe and adapt our strategies accordingly. Ideally, we would leverage these disruptions to improve our fleet distribution. This is a task I’ve assigned to the team, but it requires careful execution and is easier said than done.

Craig Inman, Analyst

Okay. That's good information. Regarding the truck side, are new trucks from Ford and GM unavailable, and are the auctions still closed?

Edward Shoen, Chairman

Yes, they're starting to open virtually, and I believe they are the largest. Manheim furloughed over 10,000 people, and their stated intent is to transition to a virtual business, which has changed their entire economic structure. During that period, sales have significantly declined. Whether this is due to the virtual formats or a variety of other factors, I can only speculate. We are monitoring what we can sell on a daily basis, and for a couple of weeks, that activity nearly stopped. It's gradually picking up now, but it's still only about 12% to 15% of what we would have anticipated, Jason.

Jason Berg, CFO

Yes. At the most.

Edward Shoen, Chairman

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

Craig Inman, Analyst

If the auctions are back online but operating more slowly and you can't get trucks from Ford and GM, does that create too much pressure on your ability to sell a truck or generate cash in this environment? How do we handle this in operation?

Edward Shoen, Chairman

We will slow down as our trucks age, which means we will spend more on depreciation, and we've accepted that. Our fleet is in the best condition it's ever been during my career, and there's simply no comparison. I'm on top of all maintenance, and every preventative measure is up to date. My fleet is newer and has lower mileage than ever before. If we had to face any issues, now would be the time, and we've been preparing for such scenarios because they always occur. I believe in a cycle of seven good years followed by seven bad years, which has a historical basis. That's why I consistently set aside resources for when challenges arise. Currently, our fleet has compatible parts, and we know how to maintain them. Our support systems are fully functional. If we needed to go two years without adding new vehicles, we could manage that without affecting consumer experience. The trucks would maintain their reliability and modern appearance. While I hope we don't reach that point, if necessary, we can adapt accordingly.

Craig Inman, Analyst

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

Edward Shoen, Chairman

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

Jason Berg, CFO

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

Craig Inman, Analyst

Yes, that's not I meant just more from a cash flow planning perspective. If you got a top-line pressure, OpEx isn't that as flexible and you want to build the self-storage just do you have enough cash, if you can't raise proceeds from selling trucks.

Jason Berg, CFO

Yes, we had, essentially we had kind of a one-time use of cash from the full freeze up. So when auction sales stopped, we still had several thousand trucks in the pipeline to be delivered. So we did pay for trucks that were in the pipeline, and we didn't have the auction proceeds for those. So April had kind of like a one-time use of cash to buy trucks that didn't have auction proceeds to offset it. But we were able to deal with that outflow and it hasn't been a problem.

Craig Inman, Analyst

Okay. And then I can hop into a second. But on the Self-Storage side rates which are a key component of the in-place rents because of shelter-in-place orders. Are you all seeing rate pressure? It's because of similar dynamics.

Edward Shoen, Chairman

We are experiencing downward pressure on rates. We’re not the first to respond in this type of situation. The person managing our rates is cautious and not inclined to make drastic cuts. If a customer perceives a value, let’s say $50 a month is worth moving for them. That adds up to $600 over a year, and if they find someone offering $50 cheaper, they might switch. A $50 reduction would be quite significant, around a 35% cut. In such scenarios, we focus on selling our service. I would argue our service is among the best it has ever been in U-Haul’s history, although it can vary by location and management. Our combination of security, additional services, and strategic locations allows us to navigate rate pressures beyond just matching competitors' rates. However, I’m aware that some recent entrants into the market may not be managing their finances well, leading to an oversupply situation. They might respond impulsively by slashing rates by 50%, which ultimately could jeopardize their business, as they wouldn’t survive even a year operating at such a loss. I’m not familiar with all their financial arrangements, but many are likely locked into short-term financing at full rates. Aggressively cutting rates can result in them losing their business. The impact of these actions could be damaging both to them and to us, but it's beyond my control. We hope that this situation remains localized and that larger competitors will not react impulsively. We prefer that they adopt a longer-term view, but time will tell.

Jamie Wilen, Analyst

Now, our next question will come from Jamie Wilen with Wilen Management. Please go ahead.

Edward Shoen, Chairman

Okay. This is Joe. Thank you very much. I appreciate your attention and your question. We are going to learn a lot over the next earnings call, and I believe we will manage the circumstances as well as anyone can. Sebastien, do you have any closing comments?

Operator, Operator

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

Operator, Operator

The conference call has now concluded. Thank you for attending today's presentation. And you may now disconnect.