At the NASJA meeting I got to meet personally with Rusty on April 11 after the meeting with NASJA members April 10.
My questions regarding June (It's reopening next season and will have a replacement for J1 and more snowmaking by 2015-16) and Mammoth's overall focus were answered at the Wednesday meeting. With regard to the latter, in 1999 we heard mostly about Mammoth's ambition to become a destination resort. This time we heard more about Mammoth focusing on its SoCal customers and families in particular. Rusty views Mammoth's SoCal competition not as other ski areas but the beach, other outdoor sports, organized sports for kids, etc. The destination ambition is still there, but MMSA's first priority is to get the SoCal numbers up to where they were in 2005 and 2006.
For my private meeting I gave Rusty the chart in the above post and asked the questions I've posted here and on Mammoth Forum about debt service vs. revenue dependent upon cooperative weather.
That history really starts with the run of subpar seasons starting in 1987 (evident on the chart) which finally reached a crisis in 1991. In February 1991 Mammoth was on verge of default and had significant layoffs. Rusty was involved with that and worked to restructure Mammoth so that more costs would also be variable with revenue and profitability was significantly improved.
The sale to Starwood in 2006 was at the top of the market in terms of both resort assets and banks willing to lend for private equity deals like this. As a general rule it's financially desirable for these deals to be financed with debt and Rusty says he had no input on that. His job is to manage Mammoth both financially and as the resort we all know.
We have all read of these projections based upon prior good years to which skiace alluded. Rusty says that they also estimate what a down year might look like. Note on the chart that 2006-07, right after the Starwood purchase, was a bad year. While Mammoth did close June at the end of January that season, no debt covenants were breached and there were no layoffs or forced management decisions by the lenders.
Note on the chart that 2006-07 is only a slightly better snow season than 2011-12 and 3 others a bit worse than that. While the snow was only slightly worse in 2011-12 the skier visits (and revenue) were quite a bit worse. Rusty mentioned two reasons why 2011-12 ended up worse than the "down year" estimate.
1) Rusty believes that because 2001-12 started so poorly for most of the West, that attracted a lot of negative press that induced many skiers to write off the season prematurely. Rusty said Mammoth's Christmas business was down only modestly while January and February business declined precipitously. This despite Mammoth getting 50 inches of snow in late January, which opened ~75% of the mountain with decent conditions until the next big storm at the end of February opened the rest.
2) Mammoth subsidizes the winter flights. Those did not exist in 2007 and the 2012 subsidy ended up being $3.5 million. FYI the 4 flights from LA and SF are doing well enough this season to need no subsidy, while the San Diego flight has a modest subsidy and only the Orange County flight is not doing that well. Going forward Rusty wants the ski area not to be the only source of the airport subsidy. It's obviously not desirable to have a component of your cost structure which varies inversely with your revenue.
As we know a covenant was breached in 2012 that contractually required the actions Rusty made. This year is at least a normal year from a revenue standpoint with the strong early season, and in average or better years Mammoth is quite profitable. This has resulted in substantial amortization of the Starwood purchase debt from 2006, and furthermore Rusty refinanced that debt in 2010. The new debt structure is very complex but in aggregate averages a 6 1/2 % interest rate.
Rusty's mindset in general is to reinvest Mammoth profits in the mountain to keep it up to date and modernize older facilities. The $11 million budgeted for June upgrades would all be funded by profits from operations.
Rusty manages a balancing act among the "expected projection," the "down year projection" and the desire to reinvest in the facilities. I asked what would have happened if the January-March snowfall of 2012-13 had occurred in November-January instead, ensuing upon 2011-12. Rusty candidly said that in an extreme scenario there would be a cash call from the private equity partners in order to prevent foreclosure. In the chart above you can see that the consecutive 1975-76 and 1976-77 seasons are probably the only historical case of that extremity.
My original view is that all of the seasons in the 40 or below range on that chart, roughly 15% of them, would produce a revenue crisis like last year. Rusty believes it is much rarer than that as evidenced by 2006-07. We could all debate what was or was not unique about last year, but I'm now inclined to believe that the "crisis" scenario is somewhat less likely than I might have believed earlier. With continuing amortization of the debt perhaps that risk declines over the long run.
