Q3 2004 Vail Resorts Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, ladies and gentlemen, and welcome to the 2004 third quarter conference call for Vail Resorts. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during today's conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, Monday, June 14, 2004. I would now like to turn the conference over to Mr. Adam Aron, Chairman and CEO of Vail Resorts. Please go ahead, sir.

ADAM ARON, CHAIRMAN, CEO, VAIL RESORTS, INC.: Thank you very much, operator. Good morning, everybody. And welcome to the Vail Resorts fiscal 2004 third quarter earnings conference call and simultaneous webcast, both open to the public and press at large.

As you know, I'm Adam Aron, Chairman and CEO of Vail Resorts. I'm in New York City this morning doing television and press interviews to get the word out about our fantastic third quarter financial results.

Joining me on the call this morning are Jeff Jones, our Senior Vice President and Chief Financial Officer and Leslie Roubos, our Director of Corporate Financial Planning and Investor Relations.

Earlier this morning we released our earnings for the third fiscal quarter ending April 30, 2004. Earnings that exceeded management's expectation as we closed out the 2003/2004 ski season in grand style.

On today's call, I'd to like to begin by giving you an overview of the record financial results for Vail Resorts for the third fiscal quarter followed by some comments about the remainder of the 2004 fiscal year and beyond. In addition, I'd like to conclude by giving you some color on our recent press releases in which we announced that we have officially kicked off an array of redevelopment projects in Vail Village and Vail's LionsHead. I'll also discuss some of our other Real Estate initiatives. At the conclusion of my prepared remarks, Jeff, Leslie and I will be happy to take any questions you may have.

Before we do so I want to remind you that in conjunction with the SEC rules regarding the use of non-GAAP financial measures we use the termed "reported EBITDA" to report earnings for each of our operating segments, namely Mountain, Lodging and Resort. Resort, as you know, is the combination of the Mountain and Lodging segments, as well as Real Estate.

Reported EBITDA for the Mountain, Lodging and Resort segments is defined as segment net revenue less segment operating expense plus segment equity investment income. Real Estate reported EBITDA is defined as Real Estate net revenue, less Real Estate operating expense plus gain on transfer of property plus Real Estate equity investment income.

A full reconciliation of all these non-GAAP measures to GAAP can be found in our press release and on the Vail Resorts.com Web site in the Investor Relations Section under the Regulation G Compliance tab.

Let's turn to the some might say sizzling fiscal third quarter results covering the three months ending April 30. As I mentioned earlier, the financial performance for the quarter exceeded our expectations as we experienced record third quarter Resort revenue and record third quarter Resort reported EBITDA.

Now it's certainly true that last year's third quarter should have given us an easy comparison due to the Iraqi war occurring during the busiest month of our ski season last year. But nature did us no favors this year, especially in March, which experienced abnormally warm temperatures, melting existing snowfall and well below average new snowfall.

Press accounts have March being the warmest and driest since longer than any of us on this call have been alive. As a result, many of our competitors in Colorado struggled mightily as the ski season should have been hitting its peak.

Indeed our own third quarter skier visits were actually down almost 2% below last year's third quarter skier visits. So our performance in this year's third fiscal quarter turned out to be a lot more than just enjoying an easy comp.

Thankfully in the quarter Vail Resorts skillfully managed pricing increases, skier visit mix changes, Lodging yield management techniques and cost containment efforts that all allowed us to post record financial results for our Resort segment for the third quarter.

Turning specifically to our ski resorts, our Mountain segment, Mountain revenue increased 11.1% as compared to last year's third quarter, despite the 1.9% drop in total company skier visits. The drop in skier visits was almost entirely due to a measurable decrease in local and front range skiers all of whom reside in Colorado.

But remember these are the guests who, for most part, purchased more than 125,000 of our season passes. This is but another affirmation of our strategy to get Coloradoans to ski on season passes instead of on day tickets and in the process take day-to-day changes in weather conditions out of the equation.

While Coloradoan skier days were reduced somewhat, nonetheless, the lift ticket dollars we collected from those same people actually increased because we already had their money in the bank as of last November. The increase in season pass sales booked in the third quarter was coupled with an increase in visits from higher spending destination skiers, meaning those of our customers who reside throughout the United States, an increase in international visitors, due in part to the favorable currency exchange rate and a whopping 12% increase in our average realized prices known as Effective Ticket Price or ETP.

This price growth due both to actual absolute price increases and to mix changes. In total, this all translated to an approximate 10% year-over-year increase in lift ticket revenue for the quarter.

Beaver Creek, which is having another record year, was the one of our resorts which showed an increase in both skier visits and ETP for the quarter. While skier visits grew 4% over last year at Beaver Creek in the third quarter, Beaver Creek's ETP for the quarter was up an extraordinary 24%.

And while the other four resorts had slightly fewer skier visits, year-to-year in the quarter they each saw an increase in ETP as well. Average ticket prices at Vail for the quarter were up 11%, Breckenridge's ETP was up 8%, Keystone was up 12%, Heavenly's ETP was up 9%.

Non-lift ticket revenues grew a healthy 12.3% year-over-year in the quarter, also benefited from pricing increases and from the increasing numbers of higher spending destination skiers. This latter metric includes ski school revenue which is up 5.5%, dining revenue up 9.6%, retail revenue up 8.4% and miscellaneous ancillary Mountain revenues up 40.9%, albeit on a small base.

As a result, revenue for the Mountain segment increased $23.3 million over last year's third quarter revenues. Certainly not bad, especially considering snowfall at our resorts was well below average during March, the absolute peak month of the ski season.

This just confirms that thanks to our unique array of assets, strategies and management sophistication, Vail Resorts is not nearly as snowfall dependent as some outside observers may think. Every bit as important are previously announced and previously discussed efforts to cut costs while keeping product quality high, clearly have been successful.

Mountain expenses for the third quarter grew just $8 million. Primarily due to increased labor costs associated with company-wide annual wage increases for all of our employees and given the improved financial performance and accrual for the expectation that bonuses will be earned under the management incentive compensation program for the company's 400 most senior managers.

Variable expenses resulting from increased revenue and general inflation added to the costs. But these were offset to …