Below is the transcript of the conference call of Peak Resorts, Inc (NASDAQ:SKIS) held on Tuesday, January 6, 2015 at 9:00 am EST.
Peak Resorts, Inc (NASDAQ:SKIS) is a leading owner and operator of high-quality, individually branded ski resorts in the U.S. They currently operate 13 ski resorts primarily located in the Northeast and Midwest, 12 of which we own. The majority of their resorts are located within 100 miles of major metropolitan markets, including New York City, Boston, Philadelphia, Cleveland and St. Louis, enabling day and overnight drive accessibility.
Participants:
Tim Boyd, President and C.E.O. Peak Resorts.
Steve Mueller, Vice President and C.F.O. Peak Resorts.
Heather Wietzel, Peak Resorts Inc Investor Relations.
Dick Deutsch, Vice President of Business and Real Estate Development.
Operator
Good morning, and welcome to Peak Resorts, 2015, 2nd Quarter Investors Call, All participants would be in the listen-only mode until the question and answer session begins. This call is being recorded at the request of Peak Resorts. If anyone has any objection, you may disconnect at this time. I would now like to introduce Ms. Heather Wietzel. Ms Wietzel, you may proceed.
Heather Wietzel, Peak Resorts.
Thank you very much Dan. Good Morning and welcome to Peak Resorts’ first ever investor conference call following their initial public offering in November. I’m Heather Wietzel and I work with Peak on investor outreach activity. The company has filed its mutual 10-Q regarding results for the three and six months periods ending October 31, 2014, for the second quarter in the year today for the company’s 2015 fiscal year. These materials are available on the company’s website, if you have not yet seen a copy. On the call today from Peak’s management are Tim Boyd, President and C.E.O, Steve Mueller, Vice President and C.F.O. and Dick Deutsch, Vice President – Business and Real Estate Development.
After the accompanying details Tim and Steve will offer some thoughts on the results and Peak’s business strategy and outlook and then we will open the call for questions. But before I turn the call over to Tim and Steve I need to know on behalf of Peak Resorts, some of the materials that would be discussed today constitute forward-looking information in the meaning of the Private Security Litigation Act. Please see the release on the company’s SEC filings for information on the risk and uncertainty that may cause actual results to differ materially from the forward-looking information provided. The company is not responsible for transcripts of this call made by independent third party. Finally, reconciliation of non-GAAP information which is required by regulation G is provided with the release and also is available on the company’s website and in the company’s SEC filings. Yes, Tim.
Tim Boyd, President and C.E.O. Peak Resorts.
Thank you Heather. Good Morning and on behalf of all, I would like to thank you all for your interest in Peak Resorts. We are excited about having the opportunity to talk to investors on this type of a forum for the first time. I would like to begin with some initial remarks to hopefully add some additional color to the data provided in the documents issued yesterday. Additionally, I would like to discuss the business strategy and opportunities for Peak Resorts as we move forward. I would like to give a quick overview of Peak Resorts for those of you who are unable to see our road show presentation. Peak is the leading owner and operator in the day and the overnight drive segment of the ski industry.
We have 13 resorts that serve many of the major metropolitan areas in the Midwestern and the Northeastern parts of the United States. With the success and growing our company through acquisitions and organic growth, we will be paying an attractive qualified dividend with strong coverage ratios. Our release intends to have covered our second quarter and six months results for the fiscal 2015, ended October 31st. Now typically, May through October are clearly the quietest times of the year for our business and our results illustrate that. Because we are getting into the heart of our ski season we feel it is important to spend some time discussing operations during the first two months of our 3rd Quarter. Historically, 90% of our revenue is generated during the 3rd and the 4th quarters. Also even in the 3rd Quarter, January constitutes more than 60% of the revenue for that quarter. With that in mind, I would like to highlight a few items concerning the first two months of our 3rd Quarter.
We have introduced our new RFID direct-to-lift technology for season pass holders at our Midwestern resorts and it has been well received. Our EB-5 program for Mount Snow has continued its progression and we now have more than $19 million in escrow. Our seasonal product sales are up in excess of 11% over our five years average. All the resorts are now 100% open. Through the holiday period our eastern resorts are up 19% over their five years average in Ski business. However our total visits are down by about 8.5% due to the late opening of our Midwest resorts. The Midwest properties are actually better positioned to make up this type of early season deficit due to their closer proximity to the customer base.
It should be noted that we are just getting started into the mid of our season which runs all the way into April. With this being a small snap shot and the bulk of the season still in front of us, our view of the ski season is still that it is more of a marathon than a sprint. We have spent almost $50 million in the last five years on major infrastructure upgrades at our existing resorts. These have included snow making, droving and look projects. We finished the last of these this summer with the $3 million snow making upgrade at Mount Snow, Attitash and Wild Cat. These infrastructure upgrades typically have 30 to 40 year lives.Our new shareholders will now realize the benefit of having these major capback infrastructure upgrades finished for our existing portfolio, which will now allow us to return to our normalized maintenance cap-backsnumber of approximately 5% of our revenue.
That capbacks number obviously can change if we have future development opportunities and/or acquisitions. In terms our acquisition opportunities, I believe it is important to know that we have a proven track record in our ability to make successful acquisitions. We intend to continue to concentrate our efforts in the day and the overnight drive segments of the ski industry where we have historically been very successful. We are the only public company to operate primarily in this space and we believe we can continue to grow our portfolio through acquisitions. With the success of our recent IPO we have significantly lowered the cost of our capital and have traded a potential currency with our stock. We have also unencumberedfive of our properties to allow us to have more liquidity if needed. All these factors combined should facilitate our ability to do more acquisitions. With that, now I would like to turn it over to Steve for some clarity on some additional financial items.
Steve Mueller, Vice President and C.F.O. Peak Resorts.
Thanks Tim. Good Morning, and let me add my thanks to all of you for joining us today. As Tim noted, I am going to discuss results for the first six months of our fiscal year and also provide some details regarding the ways in which we have used the IPO proceeds to enhance our financial position. Six months revenue is up about $600,000. This was primarily a result of our summer business with increased visits to our resorts. But not only did we have an increase in admissions revenue, we also saw a nice increase in food & beverages and retail sales. We did install a new zip rider at Attitash this past year. Unfortunately, we did not get it completed until September, so this year will not show significant contribution from that zip rider, but we would expect a very nice contribution in fiscal 16. Our resort expenses increased as a result of compensation and related expenses, primarily resulting from wage increases to our full-time employees that were implemented in the fall of 2013. 2014 saw the full effect of those wage increases. In addition workman comp, rates are higher this year.
General administrative expenses increased by approximately $400,000 as a result of increased legal fees related to litigation and an increased other professional fees – the ones related to the IPO. The IPO costs are capitalized and will be used to offset the proceeds from the IPO. Our Income Tax provision is based on the anticipated income tax rate for fiscal 2015. We do not expect to have a significant income tax cash payment because of our intervals in fiscal 2015. The capbacksexpense for the six months was $6.3 million, $1.8 million related to the Attitash zip rider and additional $2 million related to the snow making improvements we did at our Attitash, Wild Cat and Mount Snow resorts. I am happy to say that the snow making improvements we made at Wild Cat allowed us to open Wild Cat as the first resort in New England, top to bottom, this year. We still believe our capbacksfor fiscal 15 will be between $8 million and $10 million. The major capbacks projects that we need at our current resorts will be completed in fiscal 15 and we believe that going forward capbacks rates for the existing resorts will be between 4% and 5% of revenue.
At October 31 the restricted cash balance on our balance sheet primarily was the result of funds held in escrow for our EB-5 investors. Those are the funds that they have invested with us that we are holding until we are able to break that escrow. We are also happy to say that we were able to use the proceeds of IPO to pay down approximately $76 million worth of our debt. Our reduction in interest expense is the result of a debt payment as approximately the same amount that we are anticipating in our annual dividend to be. We, also in our release, have done a calculation of our weighted average shares as they stand, based on today’s share count. We thought that would be helpful. As to the 3rd and 4th quarters’ items, as Tim mentioned, we do approximately 90% of our revenue in the 3rd and 4th quarters. Our revenue is also, pretty evenly, split between those two quarters. In addition, as Tim mentioned, January on average has an excess of 60% of our 3rd Quarter revenues.
Our expenses in the 3rd and 4th quarters are not evenly split as the revenue is. This is because of generally low power usage in the 4th Quarter. About 55% of our 3rd and 4th quarter expenses are incurred in the 3rd Quarter. In addition approximately 65% of all of our expenses are incurred in the 1st, the 3rd and the 4th quarters. Our interest expense in the 3rd Quarter will not be fully reflective of the interest savings because of the timing of our debt pay down. I am going to turn it back to Tim now, to close briefly before questions and answers.
Tim Boyd, President and C.E.O. Peak Resorts.
Thank you Steve. Basically, we believe, with the successful implementation of our IPO, Peak Resorts is now poised to move to a new level of growth. Our portfolio offers close proximity to our customer base, strong and stable pre-season sales and a large percentage of the beginner skier market which translates to a greater usage of all our different services. With an attractive dividend, a lower cost of capital, more liquidity and a large landscape of acquisition targets, we believe Peak has the ability to offer its shareholders a significant value. We believe all these factors combined represent a bright future for Peak Resorts. With that, I would like to turn it over to Dan now for Q & A.
Operator
We will now begin the questions-and-answers session. To ask your question, you may press * then 1 on your touch-tone phone. If you are using a speaker phone, please pick up your hand set before pressing the key. If at any time your question has not been addressed and you would like to withdraw to your question, please press *, then 2. At this time, we will pause momentarily to assemble a roster. Our first question comes from Barton Crockett of FBR Capital Markets. Please go ahead.
Barton Crockett, FBR Capital Markets.
Ok. Great. Thanks for taking the question, and, I guess the first thing I wanted to ask about was a little bit more color on what you have seen historically with the kind of varied ability of the Midwest skiers, tighter weather, so you say that in the first two months you are down and that is because you open a little bit late in the Midwest but January is the big part of the quarter. Reminiscences of the past when you have gotten a late start, the big Midwest resorts, and then, done really well on the quarter just because people have showed up, I think, you may have had an incident. Martin Luther King weekend at Mad River – I was trying to think what you talk historically about? Your ability to make up these type of shortfalls that we are saying right here.
Tim Boyd, President and C.E.O. Peak Resorts.
Yeah, yeah, that’s basically true. The Midwest resorts generally have a window of opening that is really a lot wider than the Northeastern resorts. That window can be anywhere from the 10th of December all the way until the first week of January. Last year, for instance, it was an early opening for our Midwest resorts, most of them got opened in the December 10 to 12 range. This year those resorts are in the later of that range. Most of them got opened towards the last day of December.
But generally, the Midwestern resorts are better positioned to overcome these early season deficits and the reason for that is that generally when you have a sluggish start you have a certain amount of pent up demand and all the Midwestern resorts are day operations, and because they are day operations and they are in close proximity to the customer base, they have the ability to have a more robust weekday business, they have a stronger program business which consists of schools and clubs and of course we have night skiing at all those operations. So basically, the Midwest resorts have a much better opportunity, or, they have more opportunity to make up that early season deficit than an overnight, drive or destination resort would, that has to rely primarily on the weekends.
Barton Crockett, FBR Capital Markets.
Ok, but just a follow up on that. In the past, have you seen a deficit of this magnitude, in the first couple of months, turned around and actually be flatter up by the end of the quarter?
Tim Boyd, President and C.E.O. Peak Resorts.
Yes, absolutely. Sometimes it is not by the end of the quarter but certainly by the end of the ski season, that the resorts have rebounded. We have had openings as late as Martin Luther King weekend in the Midwest in past years and still come out with a flat season at those resorts.
Barton Crockett, FBR Capital Markets.
Ok. Alright. That’s great. And then another thing you can help me here is that I think you had some real kind of energy cost issues particularly in Vermont, particularly, I think, around this time of the year was the polar vortex. Could you tell us, you know, what you are saying now in terms of energy costs and also what you are saying in terms of cost saving benefits from the more efficient snow making equipment both on the energy and the labor side?
Tim Boyd, President and C.E.O. Peak Resorts.
Well, first of all, up to this point we have not seen the energy spikes that we saw last year, and, personally for us, the snow making upgrades that we have made in New England with the lower energy guns have enabled us to complete the vast majority of our snow making already in the northeast. So, we are in a very good, strong position going forward in terms of our energy saving with our snow making for the rest of the season because, not only have those guns helped us on the energy side, but we basically made a lot of those guns stationary which allowed us to open up our terrain much quicker this year at our northeastern resorts. So, we are going to cruise benefits of not only having the snow making done out of the way earlier but will be left susceptible of those energy spikes.
Barton Crockett, FBR Capital Markets.
Ok, and then I guess the final thing here is, I think, it is a little bit of kind of questioning and perhaps some confusion around. The interest expense tied to your ETR facilities. I was thinking you could just explain so everyone kind of gets it out here at the public forum. What you see in terms of the interest costs tied to those ETR facilities, you know, this year, next year? Where you can see in terms of trend in that over time?
Tim Boyd, President and C.E.O. Peak Resorts.
Steve, can you handle that?
Steve Mueller, Vice President and C.F.O. Peak Resorts.
Sure. This year, you obviously see ultimately a decrease in the interest expense in total. There are escalators in those agreements. They are tied to the lower cost of living factor, 1.015. So, for instance, on the debt that would go forward, that over a three year period might mean about $300,000 increase in the interest costs.
Barton Crockett, FBR Capital Markets.
Ok. Alright. I guess we leave it there. Thank you very much.
Operator
Our next question comes from David Loeb of Baird. Please go ahead.
David Loeb, Baird.
Good Morning Gentlemen. I think I have some pre-interview. Tim, the law suit settlement, was that the law suit that was mentioned in the perspective.
Tim Boyd, President and C.E.O. Peak Resorts.
Yes, it was David.
David Loeb, Baird.
Ok. So, that’s now totally gone unnoticed. There is nothing in the queue about other significant law suits. So, I guess that’s all behind you?
Tim Boyd, President and C.E.O. Peak Resorts.
Yes, that’s correct.
David Loeb, Baird.
Ok. And on the EB-5 it looks like you are on track, is there anything that’s made you kind of change your thoughts about when the escrow can be released or when you might get started.
Tim Boyd, President and C.E.O. Peak Resorts.
Dick, you want to answer that?
Dick Deutsch, Vice President – Business and Real Estate Development.
Sure, I am happy to. David, I think we are on track. We think that escrow will be released based on the United States Immigration Service approving our first investor’s petition. We don’t have any control over that but we have been told that it could be in April, May or June. At that time escrow would be released and construction on our west like project, our new water reservoir would then be started. Tim, I think previously mentioned that we have $19 million in escrow which relates to 38 investors, who have signed subscription agreements at this particular time and we continue to promote and host investors at our properties and give investment seminars about the project.
David Loeb, Baird.
Great. Very helpful. Thank you. One house-keeping and then I got a one more big picture question. Steve, I know I haven’t asked for this before but is there any way that you guys can provide either actual or per forma results for the last year for the 3rd and 4th quarters, just to kind of help us model this. But I do appreciate the commentary you gave earlier to help us model this. But is there any way you can give us previous years’ prior to reporting those quarters.
Steve Mueller, Vice President and C.F.O. Peak Resorts.
David, before we release those we really need to get the auditors through them also, because I don’t want to put out numbers to you that would be different than would be in the quarterly results. So, let me work on that for you.
David Loeb, Baird.
Ok. And then finally, Tim, can you just talk a little bit about your acquisition appetite? How you view your cost of capital versus where you see acquisition yielded? What the market is like? Is there a lot out there that is available for you to look at for potential acquisitions?
Tim Boyd, President and C.E.O. Peak Resorts.
Yes. We believe that the landscape is very fertile for us in the acquisition arena, especially in the day and the overnight space where we operate. We think there are a lot of potential targets out there and of course based on our historical performance we have every reason to believe that we can take advantage of that and we don’t see any impediments in terms of our ability to do that. We really believe that we created an environment with the IPO that will actually enhance our ability to make these acquisitions by what I discussed earlier in terms of our lower cost of capital, having our five additional properties unencumberedto add liquidity to us which we believe is going to give us more of an ability to make these acquisitions going forward.
David Loeb, Baird.
Great. Thank you.
Operator
Our next question comes from Ian Zaffino by Rick Faulkner. Please go ahead.
Rick Faulkner – Ian Zaffino.
Hi Guys. This is Rick Faulkner for Ian. I just had a follow up EB-5 financing. It sounds as if you are saying that, well, I mean, basically there are two projects in mind. It does not sound like you need financing for both to begin construction on the first. Am I right?
Dick Deutsch, Vice President – Business and Real Estate Development.
This is Dick. You are correct. In the way that we have our project structured, the first $30 million will go to the construction of the West Lake water project and the next $22 million would be for infrastructure work and the construction of a new base lodge at our Carinthia part of Mount Snow.
Rick Faulkner – Ian Zaffino.
Ok. Got it. Thanks.
Operator
Again, if you have a question please press * then 1. Our next question comes from Jim Young of West Family Investments. Please go ahead.
Jim Young, West Family Investments
Yeah Hi. You have mentioned on some resort bases that you are up by 11% over the average of last five years. Could you break that up between volume and pricing?
Steve Mueller, Vice President and C.F.O. Peak Resorts.
This is Steve. The majority of that is pricing. I would say probably two thirds of that is pricing. The remainder is volume.
Jim Young, West Family Investments
OK. And then, could you explain what is the benefit of this new direct-to-lift RFID technology to your business?
Tim Boyd, President and C.E.O. Peak Resorts.
Well, basically, right now it is for season pass holders. It gives them the ability to bypass our ticket windows and go directly from their cars to our lifts. But the longer term benefit of this technology is that we think that we would be able to grow this into an ability for our regular customers to buy lift tickets in other parts of our services in the future right off the web, where they would be able to get direct access to our resorts too again without going to a ticket window.
Jim Young, West Family Investments
Ok. Then lastly. This is a follow up to the question with respect to your energy costs. Could you just clarify again, how much on average, over the last five years or so, do you spend on your energy, given where oil has declined precipitously over the last three months? How much of the benefit do you see being realized in this ski season, 2015?
Tim Boyd, President and C.E.O. Peak Resorts.
Well. Our energy costs generally run around 9% or 10%of our revenue. The oil issue is going to be interesting for us this year. Number one, we think we are going to benefit from it on the customer side obviously because with not spending as much money on their tank they would be able to spend more money at our resorts. But it is also going to benefit us on the cost side. We do run a large fleet of snow-cats across our entire portfolio. All of those machines run on diesel and the lower cost of diesel is obviously going to have a benefit to us going forward this season on our cost of running that fleet.
Jim Young, West Family Investments
Could you give us some sensitivity?
Tim Boyd, President and C.E.O. Peak Resorts.
It’s hard to say right now. In the terms of the diesel fuel, it’s in the, probably I would say 300,000 to 400,000 gallons a year across our fleet total. On the power side, it is still a little hard to say because we are still so early in the season but we fully expect to have some pretty significant savings, especially over the last year.
Jim Young, West Family Investments
Ok. Great. Thank you.
Operator
Our next question is a follow up from Barton Crockett of FBR Capital Markets. Please go ahead.
Barton Crockett, FBR Capital Markets.
Ok. Great. Thanks for taking the question again. I wanted to follow up on the commentary about the season pass. You know, you said, it was up 11% over a five year average. Can you get us a sense of what that is year over year? I mean, I don’t know if the last year was also above the five year average?
Tim Boyd, President and C.E.O. Peak Resorts.
This year, it is about 3% to 4% over the last year. And most of that is pricing.
Barton Crockett, FBR Capital Markets.
Okay. And then another question on your pricing, I think you guys are looking to run mid single digit kind of growth in your average lift ticket, pricing and average pricing of other services. I was just wondering if that’s correct and if there is any sense of whether,, other mountains are doing something similar and any early sense of the ability to actually see this kind of pressing step.
Tim Boyd, President and C.E.O. Peak Resorts.
Barton, we have mentioned in the road show. We have given directions to all our resorts this year to blend a 5% increase in pricing. We have not gotten any push back this year from those price increases. When we look at our competition in various markets, our pricing is not above any of those others.
Barton Crockett, FBR Capital Markets.
Ok. Great. Thank you.
Operator
Thank you. The questions-and-answers session has now ended. I would now like to turn the call over to Mr. Tim Boyd. Mr. Boyd, you may proceed.
Tim Boyd, President and C.E.O. Peak Resorts.
Yes, I would like to thank everybody for participating in our first call today, and I look forward to these in the future as we go forward with Peak Resorts. Thank you very much.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
