Vail Resorts Inc (MTN) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Adam Aron, Chairman and CEO of Vail Resorts, Inc. Mr. Aaron, you may begin.

Thank you, operator. Good morning everybody. Welcome to the Vail Resorts, Inc. fiscal 2003 third quarter earnings conference call and simultaneous webcast, both open to the public and the press at large.

I apologize for the brief delay in starting this morning, we were waiting for people who were furiously calling in in the last several minutes.

As you know, I'm Adam Aron, Chairman and CEO of Vail Resorts, Inc., joining me on the call here at our offices in the Vail Valley in Colorado this morning are Jim Donohue our Senior Vice President and CFO, and Leslie Roubos, our Director of Investor Relations and Corporate Financial Planning.

Earlier this morning, we released the earnings for our third fiscal quarter ending April 30, 2003. On today's call, I'd like to begin by giving you an overview of the third quarter financial performance for Vail Resorts, Inc. followed by an overview of how the company's positioned as we look to our fiscal 2004 which begins just seven weeks from now. At the conclusion of my prepared remarks, Jim and I will be happy to take any questions you may have.

Let's start with the fiscal third quarter and nine months ending April 30, 2003. I might mention that consistently for the past seven years we've used certain non-GAAP metrics to help us and you better understand our business. A full reconciliation of these non-GAAP metrics to GAAP can be found on our website, www.vailresorts.com, simply click on the investor relations tab and click on the regulation G compliance.

Suspecting that fiscal 2003 could be a difficult year, the management team of Vail Resorts, Inc. moved aggressively back in October of 2002 to reduce costs knowing that we might face the prospect and impacts of war, terrorism, a weak national economy and various crisis in the troubled U.S. airline industry, we reduced our budget expenses by $20 million of which $10 million represented actual year-over-year reductions when contrasted with fiscal 2002.

As I cautioned you during our second quarter earnings call on March 12th, visitation at our ski resorts had already slowed modestly in February as talk of war with Iraq escalated and while I reminded you then that in a mostly fixed cost business, any slow down in visitation can be painful at the bottom line, I also told you that there was simply no way of knowing the extent to which an actual war and its aftermath would soften our near term financial performance.

Unfortunately for the world, for our country and for our company, we found out. As you know, we issued a press release on April 29th stating that the war with Iraq indeed had a profound impact on our resort revenues and profitability during the third quarter. Although we had a considerable amount of momentum coming out of the first half of the fiscal year in which our resort visitation and our financial performance was robust, our fears of a war impacted slowdown became a reality.

As discussed with you on our March conference call, in January and February we were already seeing a small slow down in the bookings space for the month of March, typically the single busiest month of the ski season. As bombs started falling in Baghdad in the third week of March, typically one of our absolute busiest weeks of the year, visitation immediately softened at our ski resorts and hotels and stayed soft through the end of the ski season in late April.

To demonstrate the magnitude of the fall off, even though lift ticket revenues had been growing year-over-year by about 30% on a season-to-date basis through end February, lift ticket revenue at our five ski resorts was 1% lower this year in the month of March than last year, meaning that even with the tenth most visited ski resort in the nation, Heavenly, included in this year's March results, our five resorts produced less lift ticket revenue in March this year than our four Colorado resorts did last year.

Clearly, the war had a profound and aberrational impact. As a result, aggregate third quarter visits at our Colorado resorts were down 1% compared to the same period last year and the average realized effective ticket price, commonly referred to as ETP, for the quarter also suffered chilling 8% year-over-year decline for the quarter primarily the result of the war impacted March/April decline at our higher yielding destination out of state skier visits at our Colorado resorts.

When you see the magnitude of this delta in the visitation by out of state skiers in March, it's almost staggering. Our out of state destination business, which was running up a very healthy plus 9% year-over-year in skier visits through end January, was down a whopping 10% year-over-year in war impacted March. This slowdown in visitation by our most profitable guests carried forth across the board to weaken our ski school, mountain dining and retail rental businesses as well. All had been performing much stronger before the war talk intensified and before actual war became real.

I suppose if there's any good news in all of this, it is that we were running so strong before March and war impacts should not be recurring next ski season. On a positive note, the Heavenly acquisition, which took place in May of 2002, has proven to be a great success and has out performed even our own expectations.

As you may recall, we bought Heavenly at a bargain price and thanks to our management, operating and marketing strategies, skier visits rose in double digits compared to last year when the resort was under different ownership and year-over-year lift ticket revenue had double-digit growth for the quarter as well. As a result of the Heavenly acquisition, third quarter revenue for our mountain segment grew 9.6% year-over-year however excluding Heavenly, same store revenue, at the four Colorado resorts, declined 6%.

Mountain EBITDA rose 1.4% year-over-year in the third quarter, but again, excluding Heavenly, same-store mountain EBITDA declined 14.2% for the three-month period, a direct reflection of the war affected decline in March skier visits at our Colorado resorts.

In summary, our mountain segment was performing very well in the beginning of the ski season but as the country approached war and then actually went to war, mountain revenues and profits were sorely affected. Heavenly was strong, but visitation in ETP was negatively affected in the month of March at our Colorado resorts and unfortunately, the hostilities in Iraq adversely affected not only our ski resorts but our lodging segment as well.

The U.S. lodging industry which was already suffering from a poor economy and continued after effects of terrorism was dealt an especially hard blow from war a half world away to which Vail Resorts was not immune. Group and corporate business continued to be soft, and both the RockResorts branded and Vail Resorts nonbranded owned hotels saw similar trends to the ski resorts as the outbreak of war became apparent.

Bookings slowed in both ADR and occupancy sell below last year's levels at our hotels for the month of March. Lodging revenue for the quarter decreased over 7% compared to last year, and we saw a $2.5 million decline in lodging EBITDA. $400,000 of this EBITDA loss was due to our share of the losses of the Ritz-Carlton Bachelor Gulch at the net income line, the remainder of the lodging falloff was due to the above mentioned declines in war impacted March ADR and occupancy.

And as a reminder, since we are using the equity income accounting method, for our minority interest joint ventures, some $1.7 million in interest and depreciation expense at the Ritz-Carlton was recorded in the quarter on Vail Resorts lodging EBITDA line which is a measure that typically is calculated excluding interest and depreciation, for your information.

Let me provide you as well with some operating statistics for the third quarter for our owned hotels. RockResorts owned hotels saw an increase in occupancy in the third quarter of some 8% with an occupancy rate this quarter this year of 70%, up five points from the 65% occupancy for the same period last year. The average daily rate, however, of $217 was down $23, or 9%, from an ADR of $240 for the comparable period last year.

Again, as we reiterated in our second quarter earnings call, this reflects our conscious strategy to reduce prices as need be to drive occupancies into our hotels during these difficult times. As a result of these strategies, rev par growth declined 3% in the quarter.

Interestingly, RockResorts managed properties performed well with both modest increases in occupancy and increases in ADR. As disappointing as this is to us, we are buttressed by some almost amazing relative performance. It is our understanding that our year-over-year rev par improvement at all 10 RockResorts for the period January 2003 to March 2003 exceeded the year-over-year rev par performance of Ritz-Carlton, Four Seasons, Marriott, Starwood and Fairmont, the RockResorts strategy, even in its infancy is bearing fruit.

Results for our lodging properties that do not carry the RockResorts brand, which for the most part are concentrated at the base of our Colorado ski resorts, were less than encouraging with occupancy totaling 68%, down five points from the 73% occupancy the year before. Despite the fact that the average daily rate for these properties increased $3 year-over-year, from $166 to $169, rev par was down 6%. Without trying to sound like a broken record, the war impact on ski visitation is the same cause for the weakness in ski-based village lodging.

In summary, just as the U.S. ski industry was quite directly affected by the Iraqi war in March, so too was the U.S. lodging industry and so, too, was Vail Resorts. Looking at both our mountain and lodging segments combined, total resort EBITDA for the quarter was $104.9 million or 1.1% unfavorable to last year, excluding the Heavenly acquisition and our share of equity income of the Ritz-Carlton joint venture, resort EBITDA actually fell 14.3%.

As expected, real estate revenue and real estate EBITDA were up year-over-year as we closed on many homesite lots in Breckenridge, Red Sky Ranch and Bachelor Gulch in the third quarter of fiscal 2003 and throughout fiscal 2003. We're still having an excellent real estate run this year, and the nine months year to date real estate EBITDA still exceeds all real estate EBITDA that was reported for the full 12-month year in fiscal 2002.

Obviously, we are disappointed with the quarter, as prior to March, Vail Resorts was on a pace to achieving a record year financially. Everything is relative, I suppose, the troubles of much of the world's travel industry, especially U.S. airlines, is far worse than what Vail Resorts experienced some might even argue we held up quite well given the degree to which consumers were scared away from venturing far from their living room sofas in the face of war.

No matter the positive performance by Vail Resorts on a relative basis, we are indeed disappointed. We worked very hard to reduce costs, and to drive revenues and were performing quite well until the war and its reality reeked its havoc upon us.

Looking beyond the numbers, though, there were several successes and highlights worth noting this year that do continue to position Vail Resorts extremely well for a better future and I cannot stress to you how optimistic we are for fiscal 2004 that is but two months away. As reported by various trade organizations, it looks as though the entirety of the U.S. ski industry this year might enjoy a record in skier visits across the nation.

As for us, Heavenly had a 13% increase in year-over-year skier visits, in our four Colorado ski resorts, posted their second most skier visits ever, war or no war, second only to their record year during the 2000-2001 ski season just before 9/11.

Most notably, Beaver Creek had a record year, surpassing 718,000 skier visits, beating its previous best ever year of about 675,000 skier visits by a wide margin. Undoubtedly, a major reason for Beaver Creek's success was the opening of the new and we believe glorious Ritz-Carlton Bachelor Gulch which we conceived and of which we own 49%.

Vail, our flagship resort, finished the year for only the fourth time ever with skier visits over 1.6 million, up almost 5% from the year before. And of course, it regained its status as "Ski Magazine's" number 1 ranked ski resort in North America.

Although skier visits were down slightly at Breckenridge, lift ticket revenue was an all-time record high for Breckenridge due in no small part to the successful opening of the new Peak 7 terrain, a 30% expansion of intermediate terrain that is bound to lead to further increases to business at Breck in the future.

And our new management team made head way at Keystone with improved guest satisfaction ratings and a bold new plan for the future of the resort. Much of this plan will be implemented this summer in time for the fiscal 2004 ski season, leading us to be optimistic about Keystone's prospects for growth in the years ahead.

As for the lodging division, we are excited about the new 20-year management contract, RockResorts was granted at the Cheeca Lodge and Spa. Cheeca is one of the premier hotels, if not the premier hotel in the Florida Keys and we were awarded this contract without having to put up any money to be an equity investor. This is very positive news as it demonstrates that others respect our RockResorts strategy and return on capital is infinite, of course, when you have return but have no invested capital.

Our real estate business is yet another bright note. The quarter and year to date have been a good one as the affluent real estate market held strong. In the quarter, we closed the sale of 17 single family homesites in Breckenridge and are sold out on all that we have taken to market there at an average selling price of approximately $550,000 per lot which we believe is a record for Breckenridge.

We also closed the sale of the only two remaining Bachelor Gulch homesites in Beaver Creek at a price approaching $2 million each. During the year, we sold and closed another dozen homesites at Red Sky Ranch for an average price of $740,000, we're over 80% sold out in single-family lots at Red Sky Ranch. And in the quarter, we contracted to sell two parcels of land on or adjacent to Beaver Creek mountain for a combined profit approaching $15 million, most of which we expect to realize in fiscal 2004.

Numerous real estate development projects moved along quite well in the entitlement and government approval process, which assures us a pipeline of intriguing projects for years to come.

And there's still more good news. In our retail business, we successfully negotiated a four-year extension of the current SSV joint venture operating agreement and successfully folded in our Heavenly retail operations to our SSV joint venture. As a result, our retail business will continue to operate with the expertise of its talented current management at least through July of 2007.

Importantly, just this week, the company also successfully completed a new multi-year revolving credit line agreement. Our bank group not only has given us a new $325 million revolving line through June 2007 with current borrowings at libor plus 2.50 but also has syndicated a $100 million 5 1/2 year so-called traunch B term loan in the institutional market at libor plus 2.75.

This provides us with a combined debt financing as needed of up to $425 million and we were able to do so under quite favorable terms including more liberal covenants than we enjoyed in our most recent revolving line.

Exciting things are happening at our resorts this summer as well. The grand opening of the Greg Norman designed golf course at Red Sky Ranch near Vail and Beaver Creek is set to occur at the end of this month together with a Tom Fazio course, which was rated one of the top 10 new golf courses to open in the United States this past year by "Golf Magazine" as well as with a new Chuck Cook Golf Academy, we believe Red Sky Ranch has instantly become the premier vacation resort golf experience in the Rocky Mountains.

We are equally excited by the summer cultural advances in the Vail Valley which should also drive summer visitation. This summer, our hotels and lodges in Vail and Beaver Creek in particular will benefit from the decision of the New York Philharmonic, the Dallas Symphony and Chicago's prestigious Steppen Wolf Theater Company to make the Vail Valley one of their summer homes.

For the first time in years, American Airlines has launched daily summer 757 jet service nonstop to Vail's nearby mountain airport from its Dallas hub which can only help us more this summer. As for the cost side of our business, as I previously mentioned, we did, in fact, achieve the $10 million of cost savings we said we would get way back in October.

Now, let's turn our attention to fiscal 2004 which begins in a short seven weeks. There's a glimmer of hope that the underlying national economy will materially strengthen. Our elected leaders who talked so much about war in the Middle East during fiscal 2003 now appear to be investing their personal reputations and professional credibility into achieving peace in the Middle East instead.

American Airlines did not go into bankruptcy, and United Airlines may come out of bankruptcy and it is helpful to us that these two airlines, which are the two largest feeders for our resorts, will have significantly lower labor costs, which may enable airfares to come down or stay down.

But hoping for the best does not take the place of planning for the worst. In the past 20 months, we have whacked about $20 million out of our permanent operating cost structure, half achieved in fiscal 2002, and half in fiscal 2003. We're getting quite good at cutting costs without alienating our employees or lessening the guest experience for our visitors and given a world of uncertainty, we believe it is time for us to cut costs yet again.

So, our senior officers have been meeting intensively for about two months to review how we can achieve yet another extensive cost savings effort. All areas of our business are being reviewed in order to yet again improve the company's permanent cost structure.

As of today, our management team has specifically line by line identified over $17 million of year-over-year expense savings for fiscal 2004 and we have every confidence that by the time we complete our fiscal 2004 budget, by the end of this month, by the end of June, we will have identified at least $25 million of actual year-over-year expense savings. And while $25 million of expense savings represents about four points of margin improvement, who said we should stop there? Interestingly, in one of our most creative efforts yet to further reduce costs, we have involved fully 400 of our top managers as allies of the cost-cutting effort above and beyond the $25 million figure.

We have dangled up to $2 million in increased salaries to some 10,000 of our rank and file employees company-wide, as a special reward if, but only if the 400 top managers can achieve savings goals well above this $25 million figure. Expense reduction has become a central element of our strategy for fiscal 2004 and we believe we have broad buy-in by hundreds of our top managers to this effort.

Most importantly, with the programs we have identified to date, our employees will be pleased to learn we do not expect to implement sweeping company-wide layoffs and our guests should take comfort that we simply will not compromise the world class vacation experience and excellent guest service we proudly offer and for which Vail Resorts literally has achieved world renown.

To summarize all that I've said, the first first half of the year was strong, but as we cautioned in March, the escalating talk of war and actual outbreak of war adversely affected our revenues and profits. With that said, the war has ended as has our ski season and we see no reason at this point to change the guidance we issued on April 29th.

As for next year, we still have great resorts, a superb market leadership position, a talented management group and dedicated employees, a strong balance sheet, and above all else, we're cutting costs like crazy. As I mentioned before, I do not think Vail resorts could be better positioned for the years ahead and we are very optimistic about what might be our financial performance in fiscal 2004.

At this juncture, Jim and I would be happy to answer any of your questions.

As you prepare for your questions, I need to point out that the comments made during this conference call, other than the statements of historical information, are forward-looking statements that are made pursuant to the Safe Harbor provisions in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected projected.

Listeners are cautioned not to place undue reliance on the forward-looking statements which speak only to the dates here of such risks and uncertainties include but are not relative to; general business and economic conditions, failure to achieve anticipated cost savings and anticipated operational efficiency or conversely, adverse consequences from cost reductions, competitive factors in the ski and resort industries, failure to successfully integrate acquisitions, uncertainties in issues in the restatement of earnings including the change in accounting for the revenue of club membership fees or the SEC investigation of same, the impact of the September 11, 2001 terrorist attacks to the travel industry on the company, or additional terrorist attacks, uncertainties or impacts of the threat of war, actual war, continued or worsening economic slowdown, the impact SARS or similar unforeseen global events, expenses or adverse consequences arising from current or potential litigation against the company, implications arising from the implementation of FIN Number 46 and other such new FASB governmental rulings or interpretations and the weather.

Investors are also directed to other risks in documents filed by the company with the Securities and Exchange Commission. We're now ready to take your questions. Operator?

Thank you, Mr. Aron. If you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Again, at this time if you have a question, please press the 1 key. One moment for questions. Our first question comes from Will Marks of JMP Securities. Please go ahead with your question.

Good morning, Adam and Jim and others. A question on, maybe starting with just pricing, lift ticket pricing. Do you plan to increase prices of all at any of your resorts in '04?

Yes, we do, Will. Good morning, by the way. We raised prices this year and we very effectively did so.

If you -- when you look at Vail resorts this year, this is so much the story of the two-half football game, the first half was the normal world, the economy wasn't great but it was a normal world and the price increases that we put in took hold and visitation was strong. Second half obviously is the war and March. I would anticipate that we will take price increases for next year, we've already taken about a 9% increase in the prices of season passes that we sell and the season pass market is a healthy 20 to 25% of our total annual revenues.

Additionally, there are a variety of ways to raise prices, the one that most people focus on is what is our single-day window price. But we have a variety of prices underneath the so-called window price and even if we were not to raise the window price, we could put in place very healthy increases in the prices of the so-called discounted lift tickets which do account for something like 80% or more of all lift tickets that we sell, that includes season passes and so there will be price increases.

We haven't actually finally decided the degree to which we will raise every price but on a mixed basis, I'm sure we'll see a healthy increase even if we were not to take an increase in the single-day window lift ticket price. But again, I would expect we would take modest increases there as well.

Okay. And you would include Heavenly, you're just making a general statement there, right?

Actually, Heavenly is the resort where I think we can take the healthiest price increase. Visitation was strong this year, we're investing about $10 million of capital into Heavenly this summer to further upgrade lifts and restaurant facilities. There was great reaction to the quality improvements that we put in place at Heavenly last summer for our first ski season and Heavenly is considerably underpriced by more than 15% compared to our Colorado resorts. So, there should be a lot of room in Heavenly.

Okay, great. And just switching gears on the lodging side, can you help me understand what the strategy is now going forward? Are you looking to buy assets, you know, I'd like to think that you've got some good operating leverage going forward which things do recover, maybe you can touch on that?

Well, even though our rev par performance year-over-year was better than some of the, you know, most impressive leading brand names, our actual earnings in our lodging division are not that impressive because they were so heavily impacted by the issues facing the whole U.S. lodging industry.

There's enormous operating leverage in our hotel business at our Keystone resort, for example, in the first six months of the year, we did have increased revenues and we had something approaching a 65% flow-through of incremental revenues to the EBITDA line, which shows you how quickly the lodging business EBITDA can improve as revenues continue to come back.

We are looking to expand RockResorts. We do believe that our initial strategies are bearing fruit, as I said before. We would be willing to buy hotels but we were just able to secure a new 20-year management contract on the Cheeca Lodge without having to buy it and I think it's more likely that we'll be fishing around for what are called "sliver equity" deals where we'll buy only a small piece of the hotel and get a management contract.

Or alternatively, we're intrigued at the notion of using a modest amount of mezzanine loan capability to help the owners of a hotel renovate it perhaps, where we may not have equity but have interest-bearing debt from the property and secure a management contract for a long-term as well.

So we are looking around, there is opportunity in the upscale hotel business to expand and we are active in the various properties that may turn over control.

Okay, great. Thank you, Adam.

Thank you,.

Thank you and our next question comes from Steven Rosenthal of Numora. Please go ahead with your question.

Good morning. Can you give me more detail on where the cost-can you saying, at least the 17 million that you've sort of already identified, could be coming from, just so we can understand that better?

Absolutely. Last year, we spent $49 million as a company on sales and marketing expense.

I've been a marketing guy my whole career and it's our view that with the strength of our brands we can drive revenues in a better economic climate and a climate of, you know, without hostilities abroad with a lesser budgeted marketing and sales amount. We are going to try to reduce our sales and marketing expenditures by about almost 10%, $4 million or so.

In addition to that, we think we can achieve almost $4 million of improvements in our health plan expenses through a variety of programs, including tightening up which of our part-time and seasonal employees who work a few hours for us are titled to health benefits.

We are investing a considerable amount of capital at the Keystone Ski Resort this summer to improve our snow-making system to make it one of the most advanced snow-making systems in the nation. This will allow us to save a considerable amount of maintenance expense, at least a half million dollars or so, in maintaining the previous snow-making system.

It is a much looser labor market than it once was. Just three, four years ago the want ads in the mountains were 20 pages thick and we were in a run away wage market, it was very difficult to attract employees. We were successful in staffing up our company but nonetheless we had to be very aggressive with wages for new hires. We had to have a lot of employee housing beds to be able to accommodate potential new employees to our company.

You know, that is a different world than the world we are in today. It is a much looser labor market. There is not the wage pressure that there used to be. We probably do not need as many employee housing beds as we once did. Put that all together, there's probably $1.5 million of savings there.

There are a host, I mean, just a countless number of $20,000 savings here and there. We really did have our dozen most senior officers meeting six, eight hours a day, two, three days a week for a couple of months looking through our budgets line by line and our actual expenses line by line by line, and while something as small as an $18,000 savings doesn't sound like a lot, when you find a hundred or 200 of them, they add up. There are so many trivial examples.

We believe if we just tighten up on cell phone usage by our employees we can save $150,000. It just goes on and on and on. But we have found an appreciable amount of savings, as I have said.

And I would point out that in the last couple of years, we set out to get cost savings, we announced that we were going to get a certain amount, and we got that certain amount of cost savings. I'm not giving you some pie in the sky, well, we hope we can get cost savings of X but we'll actually deliver Y. We have a track record, now, that when we identify cost savings, we bring those savings in.

Great. My second question, you answered it, sort of half of it, but regarding Heavenly, would you say the integration is complete? Is there more to be done other than just regular capex to bring it up to date? But is there more to be done integrating it into the rest of the company?

In terms of, as you characterize your question, I would say it's been fully brought into our company. We have a great management team which has been in place for the whole of the last ski season. They obviously know what they're doing.

The margin strategies that we said we were going to take to the Northern California market we took last year. They were a big success, including a tripling of season pass sales. Interestingly, we reduced complementary skier days at Heavenly by like a third, which is a dramatic reduction. Which again since they don't pay very much, that's a good thing.

And you know, I can't think of much else that would have to occur in what you would describe as integration. Having said that, the facilities at Heavenly were quite sub par which we bought the resort. They did have the benefit of the brand-new gorgeous gondola and the brand new gorgeous Heavenly Village, but much of the rest of it was sub par. We invested money to clean it up last summer.

We announced when we bought it, we thought we would spend 40 million in capex over five years but they thought we could grow the cash flow by something like two-thirds.

This summer at Heavenly we're going to spend about $10 million, we're going to it put in our first new high speed quad lift which should really make skiing on the California side a much nicer experience. We're going to continue to renovate and improve restaurants at Heavenly, clean up parking lots at Heavenly.

So I don't know if that's normal capex or exciting capex because we think that we can push the cash flow growth so dramatically for the incremental capital that we're spending. But I assume your question was more directed at what operational snafus might we have from integration and they are all behind us.

Great, that helps me out. Thanks a lot, guys.

Thank you. And again, if you have a question at this time, please press the one key. I am showing a follow-up question from Will Marks from JMP Securities. Please go ahead.

Yes, just I wanted an update on Winter Park if there's any, a quick update on the lawsuit?

There's no update on which I can go public at the moment.

InterWest is going to get in a position to be marketing the Winter Park Ski Resort for next ski season. We know that, we expect to be competing against combined Copper Mountain, Winter Park initiatives. The -- we have been in talks with InterWest about how we might settle the lawsuit we filed vis-a-vis what we believed was their breach of their Keystone joint venture obligations.

If we were to settle the case, we would do so in a way that we found positive and beneficial for us. But I'm not in a position to announce where we are on that score at the moment.

Okay. Thanks, I appreciate it.

Thank you, Will.

Thank you. And our next question comes from Todd Breseback of Wagner Asset Management. Please go ahead.

I was wondering if you could explain why the tax rate is climbing, it was almost 50% in the first quarter?

Yeah, this is Jim.

There are two reasons, actually three. The first one is primarily the club initiation fees, which as you know for book, we have to amortize over 30 years, and for tax, we take them as collected.

The second reason is we have a low level but some level of comp expense which is not deductible for tax purposes, and if we had hit our earnings targets, it wouldn't have meaningfully changed our tax rate. But because the quarterly earnings is so low, it had an impact. And those are reasons the tax rate is higher.

What would be a reasonable rate going forward?

We target about 41 to 44% and we're confident if earnings go to where we expect them to, that would be the tax rate.

Okay. Stepping away from the quarter for a second, can you talk about from kind of a big picture perspective, how important is free cash flow in how you run the business and how you think about the business going forward for the next several years, what is the free cash flow generating power of this company?

It's a very important question. We think about it all the time and you really have to -- our EBITDA will be what it will be, right? Our interest expense is really well known. So the great debate is what should the capex level be.

I think that to have a solid understanding of what the free cash flow of the business is, you have to split our capex number into two numbers. The 30 to $35 million or so of maintenance capex, which is a real and hard and good number for you to use, and the balance of the capex that we are investing, I would say that in maintenance capex you're spending and on capex above maintenance capex, you're investing.

In our case to the extent that you see any capex, in excess of $35 million, that capex has been vigorously defended and justified internally to achieve a 20% cash on cash unlevered. We could drop down to the third $5 million level with literally no pain, literally no pain. The resorts would stay as beautiful and in good shape as they are today. They would look fresh and clean and competitive.

So, when I look at the free cash flow of the business, I sort of look at it using that maintenance number and then separately we're deciding how to invest or if we should invest another $50 million or so, and if so, where.

Do we not invest that money at all? Do we invest that money in acquisitions or do we invest that money in our own resorts in ways that we believe will drive incremental cash flow at quite acceptable returns? If we become convinced that the investments we are making in our own business do not pan out, we'll stop making those incremental investments.

So, I believe that anything above 35 of capex is totally discretionary on our part and that it is important for us to delever, we have traditionally run our company in a very conservative way financially. And so blending all of those issues is kind of the art of management in our board, you know, discuss all the time.

Thank you.

Thank you. And our next question comes from Misa Dudley of Credit Suisse First Boston.

Backing the arithmetic out of your mountain EBITDA number, I get about 19.9 million for Heavenly, that's without the fourth quarter which I imagine cuts into that number. Could you give us an idea of what you expect Heavenly to produce in EBITDA vis-a-vis last year?

Well, we have not traditionally broken out EBITDA by resort in our public filings. And so probably a bad idea for me to start now. But let me just say this: When we bought Heavenly, we said that it had between 14 and $16 million of EBITDA for a full 12-month year.

Okay.

And your arithmetic is good for the first three-quarters and we do believe that with the kind of visitation increase we saw at Heavenly this year, we are going to see an increase in EBITDA that is quite meaningful at Heavenly year-over-year. But you are also correct that the fourth quarter for Heavenly is usually a modest loss quarter. Because there are not too many people skiing at Heavenly in July. So, sorry I can't be more specific than that, but I've given you enough parameters that you can get close on your own.

Is part of Heavenly's number is in any item other than the mountain EBITDA in terms of resorts and lodging and all of that?

No, it's all in the mountain segment.

And the last question, I imagine that they were somewhat hit by the war, too, although it's more of a drive-in market?

Absolutely. It wasn't fear of flying, it was like sticking to your living room couch. And I don't want to reiterate all the comments I made in the prepared remarks, but we are so enormously frustrated.

If you looked at where this company was in December and January and February we were right on track to producing, by a wide margin, the finest year financially this company's ever had. And the war undid us. But such is life.

As I said, I guess the good news is even in a weak economy and given the other traumas that the travel industry is facing, Vail Resorts looked pretty strong until the actual shooting began. And since -- I I think that shows the underlying power of an appeal to consumers of that which we offer as well as our strategies and market leadership positions.

How was the snow this year versus last year?

The snow was good all year long. But I'm beginning to come -- not beginning, I have come to the conclusion that snow is the great red herring for those of you who cover us.

For something like 10 years, we had data that showed our revenue and cash flow was really not dependent upon snowfall. We had past snowfall for two years in a row in fiscals 1999 and 2000 and people got spooked that snow mattered.

I think what we concluded is that snow is like a threshold effect. If we have enough snow to run our business well, then we can, in fact, succeed no matter how within the variance the snow is. If we fall below that minimum threshold to conduct our business, snow becomes a problem. But I don't think that snow was a great impetus for our success in fiscal 2001, which was the best year in the history of our business, or even in fiscal 2003, prewar.

We just need enough to sort of go about and do our thing and more often than not, we have it. But the snow was not particularly good at Heavenly in the early season, the snow was not particularly good at Keystone all year long. The snow at Vail and Beaver Creek was fine. But as I said, I don't think that's what makes us or breaks us.

I think it causes an excitement factor. For example, I ordered cross country skis because we had 10 inches of snowfall and never used them.

I grant you that, it certainly does create excitement and to the extent that good, early season snowfalls, you know, the buzz starts early. You know, I remember that there was -- I've been here seven years, there was a season that we had no snow early and great snow in January and February and I call all my friends back East in January and February and they were saying "I hear you have no snow".

And there were other seasons where we had very good snow early and it didn't snow for two or three weeks and January was getting thread bare and I would call my friends back East in January and they would say "I hear the snow's great". So there really is a disconnect between the perception of snowfall and the actual snowfall.

Right.

But the only other thing I might mention is that half--I told you we had sort of a bold plan to restore growth at Keystone which is Colorado's fourth most visited ski resort. And half of that capital, almost $5 million, is being invested in snow making to improve the snow service.

We're also improving grooming at Keystone by a third. We're also putting in an enormous new terrain park for snowboarders. So there's much good to report on that score.

Great, thank you very much.

Thank you.

Thank you and I'm showing no further questions at this time.

Operator, we've done this for about 28 quarters, and twice when I've been told there are no more questions, when there have been only been four, I've been called afterwards by a dozen people who said they had a question and couldn't get through.

So can you make sure you do whatever it is with your little system to make sure if anyone has a question, they can ask it?

Yes. If you do have a question at this time, again, please press the one key on your touch-tone telephone. One moment for questions.

And at this time, I'm still showing no questions from the audio.

Let me make this final comment.

As we look at fiscal 2004, which is obviously the center of our focus, as I said before, we have identified a dramatic amount of cost savings that represents four points of margin improvement for the company year-over-year and yet keeps employee morale high and keeps our guests happy with the quality of the service and the experience that we offer.

I have every confidence in the world that we will, in fact, deliver $25 million of expense reductions, actual hard year-over-year expense reductions as we look at fiscal 2004 against fiscal 2003. We're going to try to beat that number. There are offsets, of course.

We do have inflation, we will have variable expenses for increased volumes of visitation. But obviously if we can continue to offer a great guest experience and save $25 million or more out of our cost structure, that positions us very well for fiscal 2004.

We thank you for listening, and I'm sure we'll be seeing many of you in the months and year ahead. Thank you all.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time and have a nice day.