Earnings Call Transcript - MTN Q3 2021

Operator, Operator

Good day, and welcome to the Vail Resorts Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rob Katz, CEO. Please go ahead.

Rob Katz, CEO

Thank you. Good afternoon, everyone. Welcome to our fiscal 2021 third quarter earnings conference call. Joining me on the call this afternoon is Michael Barkin, our Chief Financial Officer. Before we begin, we remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings, and actual future results may vary materially. Forward-looking statements in our press release issued this afternoon with our remarks on the call are made as of today, June since 2021, and we undertake no duty to update them as actual events unfold. Today's remarks also include certain non-GAAP financial measures. Reconciliations of these measures are provided in the table included with our press release, along with our quarterly report on Form 10-Q we filed this afternoon with the SEC and are also available on the Investor Relations section of our website at www.vailresorts.com. So with that said, let's turn to our fiscal 2021 third quarter results. Given the continued challenging operating environment as a result of COVID-19, we are very pleased with our overall results for the quarter and for the full 2020-2021 North American ski season. Results continued to improve as the season progressed, primarily as a result of stronger destination visitation at our Colorado and Utah resorts, including improved lift ticket repurchases relative to the fiscal 2021 second quarter results. Excluding Peak Resorts' total visitation at our U.S. destination mountain resorts and regional ski areas for the third quarter was only down 3% compared to the third quarter of fiscal 2019. Whistler Blackcomb's performance continued to be negatively impacted by the continued closure of the Canadian border to international guests, including guests from the U.S., and was further impacted by the resort closing earlier than expected on March 30, 2021, following a provincial health order issued by the government of British Columbia. Whistler Blackcomb's total visitation for the third quarter declined nearly 60% compared to the third quarter of fiscal 2019. While visitation and revenue trends improved throughout the quarter, our ancillary lines of business continue to be significantly and negatively impacted by COVID-19-related capacity constraints and limitations, particularly in food and beverage and ski school. We maintained disciplined cost controls throughout the quarter and continue operating our ancillary lines of business at reduced capacity. Now I would like to turn the call over to Michael to further discuss our financial results and fiscal 2021 outlook.

Michael Barkin, CFO

Thanks, Rob, and good afternoon, everyone. As Rob mentioned, we're very pleased with our overall results for the quarter and for the full 2020-2021 North American ski season. As a reminder, in the prior year, we announced the early closure of the 2019-2020 North American ski season for our ski areas, lodging properties and retail rental stores as a result of the COVID-19 pandemic beginning on March 15, 2020. These actions had a significant adverse impact on our results of operations for the third fiscal quarter of 2020. Additionally, the ongoing COVID-19 pandemic and the resulting limitations and restrictions on our operations continued to have an adverse impact on our results for the third fiscal quarter of 2021. Net income attributable to Vail Resorts was $274.6 million, or $6.72 per diluted share for the third quarter of fiscal 2021 compared to net income attributable to Vail Resorts of $152.5 million or $3.74 per diluted share in the prior year. Resort reported EBITDA was $462.2 million in the third fiscal quarter, which compares to resort reported EBITDA of $304.4 million in the same period in the prior year. The increase was primarily due to strong North American pass sales growth for the 2020-2021 ski season, including the deferral impact of approximately $120.9 million of pass product revenue and $2.9 million of related deferral costs from the third fiscal quarter of 2020 to fiscal 2021 as a result of the passover credits offered to 2019-2020 North American pass product holders as well as improved non-pass visitation due to the company operating for the full U.S. ski season in the current year with particularly strong demand at our Colorado and Utah destination resorts. Resort-reported EBITDA margin for the third quarter was 52%, exceeding both the prior year period of 43.9% and fiscal 2019 third quarter of 50.2%. These results reflect our rigorous approach to cost management as well as a higher proportion of lift revenue relative to ancillary lines of business compared to prior periods. Now turning to our outlook for fiscal 2021. Net income attributable to Vail Resorts, Inc. is expected to be between $93 million and $139 million for fiscal 2021. We expect the resort-reported EBITDA for fiscal 2021 will be between $530 million and $570 million, and we expect the resort-reported EBITDA margin for fiscal 2021 will be approximately 28.9% using the midpoint of the guidance range. Our guidance assumes all of our operations are open and aligned with current health and safety protocols and capacity restrictions. Current demand trends continue. We experienced normal weather conditions throughout the Australian East season and North American summer season, and there is no impact from potential COVID-19-related shutdowns or lockdowns. The guidance specifically assumes no impact from potential demand or operational disruptions associated with the current lockdowns in Victoria, Australia. We continue to maintain significant liquidity. Our total cash and revolver availability as of April 30, 2021, was approximately $2 billion, with $1.3 billion of cash on hand, $419 million of U.S. revolver availability under the Vail Holdings credit agreement and $203 million of revolver availability under the Whistler Credit Agreement. As of April 30, 2021, our net debt was 2.8x trailing 12 months total reported EBITDA. We remain confident in the strong cash flow generation and stability of our business model, and we will continue to be disciplined stewards of our capital with a focus on high-return capital projects, continuous investment in our people and strategic acquisition opportunities. While we are not reinstating the dividend this quarter, we remain committed to returning capital to shareholders, and our Board of Directors will continue to closely monitor the economic and public health outlook on a quarterly basis to assess the appropriate time to reinstate the dividend. I'll now turn the call back over to Rob.

Rob Katz, CEO

Thanks, Michael. We're very pleased with the results for our season pass sales to date with guests showing strong enthusiasm for the enhanced value proposition of our pass products, driven in part by the 20% reduction in all pass prices for the upcoming season. Pass product sales through June 1, 2021, for the upcoming 2021-2022 North American ski season increased very significantly as compared to the sales through June 2, 2020, for the 2020-2021 North American ski season due to the lack of any spring sales deadlines in 2020 as a result of COVID-19, making the year-over-year comparison to the spring 2020 results not relevant for performance trends. Compared to sales for the 2019-2020 North American ski season through June 4, 2019, pass product sales for the 2021-2022 season to June 1, 2021, increased approximately 50% in units and 33% in sales dollars. Pass product sales are adjusted to include Peak Resorts’ pass sales in both periods and eliminate the impact of foreign currency by applying an exchange rate of $0.83 between the Canadian dollar and U.S. dollar in both periods for Whistler Blackcomb. As a reminder, pass product sales for the full selling season through December 6, 2020, as compared to the full selling season through December 8, 2019, increased approximately 20% in units and approximately 19% in sales dollars. Relative to season-to-date pass sale products, we saw very strong unit growth with our renewing pass holders and even stronger unit growth in new pass holders, which includes guests in our database that previously purchased lift tickets or passes that did not buy a pass in the previous season and guests who are completely new to our database. We saw our strongest unit growth in our destination markets, particularly in the Northeast and also had very strong growth across our local markets. Compared to the period ended June 4, 2019, effective pass price decreased 10% as compared to the 20% price decrease we implemented this year. We believe this highlights how our lower pricing has increased the propensity of pass holders to spend a portion of the new discount to purchase higher-valued pass products. We expected that the price reduction would result in higher pass renewal rates, increased trade-up to higher-value passes and drive incremental guests to our network. We are encouraged that each of these trends is evident in the season-to-date pass sales results, which we believe supports our expected results for next year as well as the expected long-term benefits of increasing guest lifetime value. The pass results exceeded our original expectations due to the impact of the 20% price reduction. However, we still have the majority of our pass selling season ahead of us, and it is not yet clear if these trends will continue through the fall. We will provide more information about our pass sales results, including comparisons to pass sales results for the 2020-2021 North American ski season in our September 2021 earnings release. In addition, we are very pleased that ongoing sales of the Epic Australia pass, which ends on June 15, 2021, are up approximately 43% in units through June 1, 2021, as compared to the comparable period through June 4, 2019, representing significant growth following the acquisition of Falls Creek and Hotham in April 2019. Given the recent COVID-19-related lockdowns in Victoria, Australia, we will be monitoring any impacts on the Epic Australia pass sales. Our commitment to reinvesting in our resorts and the guest experience remains one of our highest priorities. As previously announced this summer and fall, we will be completing several signature investments subject to regulatory approvals. In Colorado, we are moving forward with a 250-acre lift-served terrain expansion in the signature McCoy Park area of Beaver Creek, further differentiating the resort's high-end family-focused experience. We also plan to add a new 4-person high-speed lift at Breckenridge to service the popular Peak 7, replace the Peru lift at Keystone with a 6-person high-speed chairlift and replace the Peachtree lift at Crested Butte with a new 3-person fixed-grip lift. At Okemo, we plan to complete a transportation investment, including upgrading the Quantum lift from a 4-person to a 6-person high-speed chairlift and relocating the existing 4-person Quantum lift to replace the Green Ridge 3-person fixed-grip chairlift. These investments will greatly improve uplift capacity, further enhance the guest experience and complete our $35 million capital plan for the season. We remain highly focused on investments that will further our company-wide technology enhancements to support our data-driven approach, guest experience and corporate infrastructure. As part of these efforts, we are continuing to invest in resources and technology to improve our customer service experience, including significant staffing increases in our call centers and self-service technology that will provide our guests the ability to better manage their own accounts. We will also continue to invest in ongoing maintenance capital to support infrastructure across our resorts. As we head into next year, we know that talent and staffing will be critical for our success, as it always is. And we have announced that we will be raising our minimum entry wages in Colorado, Utah, Washington and California to $15 per hour while also making material increases in the entry wages of our Eastern resorts, which will be set based on their local market dynamics. This will be our largest discretionary investment in operating expenses this year, which we believe will be offset by a portion of other savings we will carry from this year into next year. As we transition to summer operations at our North American resorts, I would like to take a moment to thank all of our employees for their passion and tireless dedication to delivering a safe and exceptional experience to our guests during the full 2020-2021 North American ski season, despite the incredible challenges of the COVID-19 pandemic. I'm deeply grateful for the commitment our teams continue to demonstrate throughout these unprecedented circumstances. At this time, Michael and I would be happy to answer your questions. Operator, we are now ready for questions.

Operator, Operator

We'll take our first question from Shaun Kelley with Bank of America.

Shaun Kelley, Analyst

I just wanted to start on, obviously, the pass sales. Rob, there are a couple of data points in there that were really interesting. I wanted to start with the product mix, if you could talk a little bit about the meaning of sort of that effective price statistic you gave, the 10%, and how that sort of lines up versus the kind of down 17% gap that we see. Is there a sort of a like-for-like difference in that? Or could you just help explain that a little bit more clearly?

Rob Katz, CEO

Yes. When you calculate the percentages, if our units increase by 50% and we reduce the effective pass price by 10%, the resulting revenue increase is 33%. This reflects how the numbers add up. What we observed was anticipated: customers moving from lower-priced products to higher-priced ones. We noticed a significant rise in what I would refer to as net trade-up. Each year, some customers upgrade from one pass product to another or downgrade to a lower-priced pass product upon renewal. This year, there was a notable increase in that net figure, which was not surprising, and it helped mitigate the impact of the 20% price reduction and the associated revenue decline.

Shaun Kelley, Analyst

Got it. And just the other question I have is the sort of cadence on the balance of the season from here. Sometimes you give a little color, but it's obviously very early in the period that we have remaining. Could you just help us think through some of the puts and takes on kind of what's coming when you think about the sort of bigger deadline that you had set last September, the introduction of some of the new products, and that has made things a little bit more back-half loaded. Just kind of how should investors sort of be prepared for these numbers to balance out across the season? And then specifically, your remark on the majority of the pass selling season ahead of you. Is that just a comment in days like literally, there's the majority of the day left? Or is that in terms of relative to your historic mix, you actually sell more than the majority of your products in the remainder of the period?

Rob Katz, CEO

Yes. I haven't counted today, but I believe it is both potentially. Historically, we tend to make more pass sales after Memorial Day than before. However, on balance for the season, last year we had a significant sales push in September due to a deadline that wasn't exactly Labor Day. When we report our September results, we will largely be comparing against last year. Last year's sales in September were driven by credits that expired, providing a strong incentive for renewing pass holders. This September, there will be a price increase and benefits from spring pass sales, but these might not be as compelling as the credits from last year. Therefore, our comparison will not be perfectly aligned as we reach the end of September. The new products we've introduced should help improve the second half of the season, particularly the limited resort option on the Epic Day Pass. Last year, we saw increased business with the Epic Day Pass as most purchases typically happen in the fall. So, there is an opportunity as we head into that season. Additionally, the price reduction in the spring generated a lot of enthusiasm, and its impact on sales—whether for renewals or new customers—will become clearer as we progress through the fall. There are trends influencing sales in both directions as we continue into the selling season.

Operator, Operator

We'll take our next question from Ben Chaiken with Credit Suisse.

Ben Chaiken, Analyst

On M&A, you experienced significant growth in the past, not just from returning customers, but likely from new geographies as well. Does this shape your perspective on M&A in any noteworthy way? Specifically, are there any regions that seem more or less attractive after reviewing the recent data from 15 units?

Rob Katz, CEO

We believe that the insights we've gathered from our current results support our previous approach to pass sales. As you noted, in past M&A activities when entering new markets, we typically inherit the historical pass sales of those resorts, which we then aim to grow beyond. We've observed this trend in most of our acquisitions. This success is partly due to our selective market choices, allowing us to identify where we can have a significant impact with a local resort and understand the existing market dynamics. While not every resort we consider guarantees similar results, we approach each situation thoughtfully. Therefore, our results so far reinforce our established strategy. Our approach to M&A remains consistent; we are actively seeking opportunities in various markets that we believe will create value, but we will maintain a disciplined focus and pursue only those opportunities that we believe will truly make a significant difference.

Ben Chaiken, Analyst

Got you. Okay. That's helpful. I just felt like there was a lot of strength from passes sold in the Northeast. I just didn't know if that made you even more convinced about that region or not, that's kind of where I was going with it.

Rob Katz, CEO

I mean, yes, I would say we certainly have a lot of conviction on the geography. At the same time, yes, I think we also have a lot of resorts in the geography. So I think we're always looking at which resort would be additive versus just looking at where we see the incremental opportunity. And it doesn't mean that you should buy more resorts in exactly the same geography. So in our minds, right, it's important to be selective. And so yes, there's no doubt that we have a lot of conviction about the Northeast and the mid-Atlantic, for that matter. And we feel like they've added to our efforts greatly. And at the same time, yes, we've got to pick the right opportunity.

Ben Chaiken, Analyst

Got you. That's super helpful. And then one more question, if I may. It seems there was significant strength in both returning pass customers and new pass holders. Regarding the new pass holders, could you break this down? Specifically, how many were entirely new to the database compared to returning old pass customers or those who converted from single day to pass? If that wasn't clear, I can try to rephrase it.

Rob Katz, CEO

No, no, I understand. And obviously, yes, we have that data, and we have that insight, but we're not providing specifics on that. But I would say, I think we saw, yes, a lot of strength across all of those pieces, right? So I think we saw strength on lapsed pass holders. People who once were pass holders for us coming back. I think we saw strength on people who were lift ticket buyers previously, either last year or before that. I think we also saw strength what we might call prospects, somebody who's not in our database. So I think that a lot of strength in new, which was terrific to see especially in the spring because, typically, you see more of that strength in the fall. And so it's great to see it here, whether some of that, again, like I said earlier, was pulled forward or will be additive to what we do in the fall, it's not yet clear. But either way, it's a positive for us because we always want to move folks as early into the selling cycle as we can.

Operator, Operator

We'll take our next question from Jeff Stantial with Stifel.

Jeff Stantial, Analyst

I wanted to follow up on the question right there on the new pass holders base. Specifically on the customers that are completely new to your database, just curious, what have you learned about this new cohort as they enter the database? Are there any interesting differences here versus the existing pass holder base? Just any high-level color there would be helpful.

Rob Katz, CEO

Yes, at this point, we are not going to share specific breakdowns on demographic details of those individuals, but I can say that the strength we've observed has been quite broad-based. We are likely to have more information by the end of the selling season and possibly even more insights as we move through the season and monitor how their behavior develops over time. So for now, there isn't anything specific to share, but I want to emphasize the overall robust strength we have seen in this new group of customers.

Jeff Stantial, Analyst

Okay. Great. Understood. And then for my follow-up, I recognize this likely depends in part on how the past selling season trends this year, but I wanted to just get some initial thoughts on how you might think about pricing for the Epic Pass next season and beyond. Now that you've sort of reset the baseline with a 20% cut, do you think that you might return to more ratable, call it, mid-single-digit price inflation moving forward on this new lower base? Or do you think based on some of your recent learnings that something more tempered might better drive this next level of advanced commitment conversion?

Rob Katz, CEO

Yes, we viewed the pricing decision this year as a unique opportunity and felt it represented a significant change aligned with our data analysis. We believe that in the long run, having a consistent approach to pricing is more sensible. Looking back over the last 12 years with the Epic Pass, that was certainly our strategy. This year's pricing decision does not change that perspective; rather, it was based on solid data and we sensed a need for a reset. While we aren't making any commitments about future pricing, it’s important to understand that our decision this year does not steer us away from our long-term goal of providing greater pricing stability for our guests and our product.

Operator, Operator

Our next question comes from Brandt Montour with JPMorgan.

Brandt Montour, Analyst

My first question is about the competitive landscape. It seems that we all assume Icon won't match your price cut. The retention data you have is quite strong. Do you think you are gaining market share from their system, possibly losing some at the high end, or just slightly on the margins? What do you make of the data?

Rob Katz, CEO

Very hard to tell. I think there's been an opportunity over the last number of years that as Icon came into the market, I think the pass market grew quite a bit, and I think it was a real positive for the overall industry. And I'd like to think that, obviously, our decision this year ultimately will bring even more people into the pass market, providing more stability to the overall industry. And after Icon came in and launched, we continued to see very strong growth in pass sales in our own products. Obviously, we have no insight into how they performed this year. So I think what I would say, we feel good. I think we feel like we made real progress in almost every category that we were hoping to and aligned with all of the strategies and opportunities that we felt were there when we first launched the new approach. And so we feel good at all about that, but yes, it's hard for me to comment on market share dynamics because I'm not aware of their trending.

Brandt Montour, Analyst

Okay. Regarding the balance sheet, you have $1.3 billion in cash. What are the priorities for this excess cash? What does the Board need to see before reinstating the dividend? Is it temporarily constrained or linked to potential M&A opportunities, in terms of maintaining substantial reserves? How should we consider this?

Michael Barkin, CFO

Yes. Thanks. I think our capital allocation priorities continue to be quite consistent, which is continuing to reinvest in the business. And in our comments, Rob outlined some of the ways in which we're investing in the resort and technology in the coming year, which we'll continue to prioritize. I think, certainly, second is strategic investment opportunities. And so we do feel like we will continue to be aggressive on acquisitions, as Rob said. And I think we also feel like with the current state of the balance sheet and the liquidity that we have and the access to the capital markets, we certainly have a lot of flexibility to pursue those acquisitions. So feel like we're in a very comfortable spot with that. And I think as I mentioned earlier, we're going to be focused on the dividend as we look at the outlook. And obviously, we feel very good about the business' performance and the outlook, as we've described it, but we'll continue to monitor that with the Board as we go into the next quarters and evaluate that relative to the dividend.

Operator, Operator

We'll take our next question from Chris Woronka with Deutsche Bank.

Chris Woronka, Analyst

I guess given where you appear to be on volume, given your initial pass sales update, and I know it's early, and you have a lot more to go, but it sounds like it's well ahead of your own internal expectations. Is there any refreshed thoughts about having to move to some kind of more permanent reservation system? Or any other thoughts on how this is going to impact capacity next season?

Rob Katz, CEO

Yes, it doesn't really change our view. Assuming nothing changes with COVID-19, we're not planning to implement a reservation system for accessing our mountains. We are optimistic about the experience for next year. We have numerous initiatives in progress, which we will discuss further in the fall regarding better capacity management, stemming from lessons learned over the past year. It's important to note that much of the growth we're experiencing comes from individuals who previously held paid lift tickets or are renewing their passes. We're also seeing an increase in customers upgrading to higher value passes. Additionally, we notice that pass holders tend to spread their visits throughout the season, particularly during key periods. There are limits regarding lodging and other factors, but we observe that pass holders often adjust their vacation plans, even around Christmas, shifting their visits to various dates. These adjustments are very beneficial for us and present great opportunities. We believe this approach is advantageous for the resort, the ecosystem, and the community as it helps to distribute capacity more evenly throughout the season. We feel very confident about this and are looking forward to enhancing the experience for next season with new lifts and process improvements, ensuring it will indeed be a memorable experience, which is our commitment every day.

Chris Woronka, Analyst

Okay. Great. And you've obviously given pass holders a really nice value proposition on lift ticket, but any opportunity to take pricing on some of the list pricing or menu pricing on things like ski school or dining given how strong the consumer and the economic environment should still be in the fall?

Rob Katz, CEO

Yes, we price all our products independently. Many of these prices are determined at the resort level, taking into account the unique dynamics of each location. Even if we occasionally adopt a more aggressive pricing strategy in certain areas, we aim to maintain a consistent approach to price increases. We believe this is crucial, as we want to avoid large fluctuations. While some products, like hotel room rates, can vary frequently depending on the season and other factors, we generally prefer to be cautious with other products. In a strong economic environment, we might be a bit more assertive, but we don't want any significant changes that could negatively impact the overall consumer experience.

Operator, Operator

We'll take our next question from Patrick Scholes with Truist Securities.

Patrick Scholes, Analyst

A couple of questions here. In light of Mount Snow now instituting paid parking for parking lots that were formally free for the upcoming season, I have 2 questions in this regard. Will you be expanding the paid parking initiative to other resorts? And along those lines, will there be any other initiatives for parts of the ski experience that may have been free in previous seasons, which could now become a tack-on charge for the skier visits?

Rob Katz, CEO

Each of our resorts conducts its own assessment, particularly regarding pricing. With parking, we believe it can be an important factor for certain resorts at specific times to help manage capacity. Ultimately, we want to encourage carpooling and alternative transportation when possible. Some of our resorts have implemented paid parking at the base, while others have not. Increasingly, we're seeing not just our resorts but also many communities adopting paid parking, a trend that's evident in various cities. For us, parking is not a significant revenue source and does not materially impact our overall financial performance or company valuation. It's primarily a tool used by local resorts to manage capacity effectively, and we evaluate it on a resort-by-resort basis.

Patrick Scholes, Analyst

Okay. I guess what I was more meaning that this is sort of a new tack-on charge. Will there be other tack on charges for this coming season that you're working on, not just that resort, but items that maybe had, again, in the past been free for usage?

Rob Katz, CEO

Every resort evaluates its own circumstances and makes essential decisions to manage its unique capacity. We aim to communicate any changes as early as possible when they arise. However, these changes are not significant to our overall performance and are not part of our corporate strategy; they are localized, made on a case-by-case basis. Regarding parking, we have various approaches; some resorts may introduce a parking fee to manage capacity, while others will continue to offer free parking. We assess each situation individually.

Patrick Scholes, Analyst

Okay. I was just curious if this was some part of like the macro strategy to make up in the discount pass price by adding on additional items.

Rob Katz, CEO

No, unfortunately, that's not the approach we're taking. We are focused on the various factors we discussed earlier regarding how we manage pass prices.

Patrick Scholes, Analyst

Understood. And then just one quick question here. You had mentioned instituting a $15 minimum wage at some of your resorts. What was the comparable wage last season for those resorts? How much percentage?

Rob Katz, CEO

Yes. Some of the resorts, particularly in California, probably had the highest wages. Washington was slightly below California. In Colorado and Utah, our lowest entry wage was around $12 to $15 an hour. This represents a significant increase for those two resorts. In the East, the increases will vary by resort, but there will also be notable increases in the non-entry wages.

Operator, Operator

We'll take our next question from David Katz with Jefferies.

David Katz, Analyst

Congratulations on the quarter. You've made significant progress regarding passes. I wanted to discuss mergers and acquisitions, particularly the international aspect, as it comes up frequently about Europe or Asia, a topic we've been discussing for quite some time. What are the key considerations or barriers to entry, aside from just identifying the right partner and price, to gain some international exposure? Additionally, how might this impact your domestic or North American business?

Rob Katz, CEO

I think many people might overlook this, but there were similar challenges with M&A in the U.S. 10 or 20 years ago. We have been disciplined and diligent about this, and I believe we have made significant progress. The same applies internationally, where there are unique challenges due to local connections and national pride tied to many resorts. It's crucial for us to find the right partner or seller for these resorts, ensure we are the suitable buyer, and have a solid plan moving forward. We've also been quite active in the U.S. and Australia over the past decade. While we have been engaged in these conversations, they haven't been as prominent as some opportunities we're currently pursuing and integrating. Then COVID struck, but I believe we still have a significant opportunity emerging from it. This area remains critical for our strategic direction, especially since there are specific opportunities still available in North America, although fewer than five years ago. We aim to focus on this area and I am confident we will achieve our goals, being disciplined with our capital and time. Regarding incrementality, pursuing opportunities in Japan would provide immediate benefits by strengthening our connections between Australia, Japan, Canada, and the U.S., offering a robust boost. In Europe, while the visitation patterns aren't the same, the market is considerably larger. Therefore, the long-term prospects in Europe appear strong, but it will take time to establish a unique platform there, with some overlap with the U.K., U.S., and even parts of South America and other growing economies. So, we remain focused on these opportunities, although they haven't been as prioritized over the last couple of years.

Operator, Operator

Our next question comes from Laurent Vasilescu with Exane BNP Paribas.

Laurent Vasilescu, Analyst

I wanted to follow up on Patrick's question with regards to the minimum wage increase. Curious to know what you're seeing in the labor market. Is there enough talent out there to hire? And do you anticipate that the U.S. border will reopen and you can potentially hire foreign talent as well for the upcoming season?

Rob Katz, CEO

I believe the labor market is currently quite challenging. In some ways, this was the case even before COVID. As we emerge from the pandemic, we are starting to see some of these issues resurface. For us, it’s definitely a concern during the summer, though it is less pressing than it is in the winter months. We are optimistic about resuming our J-1 Student Visa program and the H-2B program for certain positions as we did previously. At the same time, we are committed to enhancing our recruiting efforts in the U.S., an essential focus even during the staffing challenges we faced prior to COVID. We have been working on improving our competitiveness and recruitment strategies that proved beneficial in the 2019 and 2020 ski seasons. We plan to continue leveraging these efforts next year, and we recognize the importance of offering a more competitive entry wage and even higher wages to attract talent. Therefore, we are not only focused on acquiring talent but also on securing the best talent available and staying ahead of current trends.

Laurent Vasilescu, Analyst

Very helpful. As a follow-up, I wanted to ask about Australia. I believe your guidance assumes no impact from the lockdown. I'm curious to know, with operations on the ground there, what you're observing with your three resorts in Australia? Why was there no impact factored into the guidance for the fourth quarter? Additionally, regarding unit growth, I understand the passes were up 43% on a two-year comparison. Is there anything interesting you could share about that, particularly the breakdown of the consumer? Is it similar to what you have seen in the U.S. so far?

Rob Katz, CEO

Yes. I would say, one, I think Perisher opened. And so I think we're seeing good enthusiasm and engagement in New South Wales and the Sydney market to Perisher. And so I think feeling very good about that. I think it's hard to say. Obviously, I don't want to prejudge what's going to happen in Victoria and in the Melbourne market, but they did relax some of the restrictions for the rest of the state outside of Melbourne. And right now, we are planning to open on schedule. Of course, it's, yes, subject to as things unfold there, but we're optimistic. I think we feel like there's a good opportunity for us to have a very good season across all 3 resorts. And I think the broad-based strength. So I would say that, obviously, with that kind of unit growth, we're seeing growth across lots of just markets and consumer segments. And yes, I feel good. I think it's similar in some ways to the pent-up demand that you have here. I think we also were a bit very competitive in terms of the way we price our products in Australia, like we are here. And obviously, the border in Australia is closed. So travel outside of Australia is more limited. And so we're anticipating stronger domestic travel for the country, at least for the time being.

Operator, Operator

We'll take our next question from Paul Golding with Macquarie Capital.

Paul Golding, Analyst

The first question I have is around ancillary services coming back. I'm just wondering if you could give some color on how the experience, either for dining or other ancillary services, has been maybe more efficient or the user experience has been digitized? Just trying to get a sense of what margin impact could look like, conscious of the ancillary services being lighter through COVID, but margin this quarter coming in where it was. And then I have a follow-up on labor after that.

Rob Katz, CEO

Yes, it's important to keep in mind that part of this year's margin improvement was due to our disciplined approach to costs. Additionally, we performed well in our highest-margin area, which is lift tickets, while facing challenges in our lower-margin sectors. Our ancillary businesses are actually all high-margin, even if they generate lower margins compared to ticket sales. We’ve learned a lot, especially about our dining and SMB businesses, and we plan to implement several improvements as we move into next year, focusing on profit efficiency rather than just cost efficiency. The reservation system we used for most of our dining locations last year provided us with valuable insights that we can leverage, even if we don't use that system in the same way again next season. We feel positive about this. We also noticed that the ski school business faced capacity limitations and missed opportunities, such as class sizes and lunch with instructors. Although these were challenges for the guest experience this year, the overall experience is now much closer to historical standards. There are useful insights to take away, but the large disruptions in food and beverage affected these areas significantly.

Paul Golding, Analyst

And then on labor with the current backdrop, just wondering if the bulking up on customer-experienced staff, is that more a transitory trend where you're going to plateau just because of how many new pass members you're onboarding and the COVID disruption? Or is that something that you see just for the business just sort of sticking around long-term?

Rob Katz, CEO

Yes. I believe our commitment and investment will remain strong. We're not going to regress to our previous state because we were indeed understaffed and had fewer resources in many areas. Last year was particularly challenging due to the complexities involving credits, COVID, and the unique Epic coverage situation. However, it's clear that we fell short in certain areas, which is a mistake we must address. Moving forward, I hope we won't encounter the same level of complexity, as conditions should stabilize. Nevertheless, we performed well during the last selling period, with a strong influx of activity and excellent response times on both the phone and chat. This suggests a positive outlook as we proceed, and we aim to maintain our position well within industry standards and best practices. We are committed to this effort.

Operator, Operator

We'll take our next question from Ryan Sundby with William Blair.

Ryan Sundby, Analyst

Rob, could you provide an example of a resort that has faced poor weather conditions for several seasons? Considering the challenges Whistler has encountered over the past year and a half, such as border restrictions and early reservation cancellations, do you have any concerns about returning to that resort next year or in the future? Additionally, do you see any potential developments or increased interest in the resort over the next couple of seasons?

Rob Katz, CEO

Yes, I have no concerns at all. I believe Whistler is one of the most spectacular resorts in the world, offering an unparalleled experience and a long history. We feel very positive about the opening of the border and, of course, good weather, although we did face border restrictions that impacted travel. This year's snow quality was certainly better than last year's. We are quite confident in Whistler's long-term future, its resilience, and the strength it will continue to demonstrate. It's not just about the mountain; it's the largest ski mountain in North America, and the vibrancy and uniqueness of the community are major attractions for visitors. The access for people from markets outside the U.S., especially Asia and Australia, remains unchanged. Before COVID, we were also making good progress in Mexico and South America. Whistler is truly one of the gems in the world, and I have no concerns that it will lose momentum once we move past the current challenges of COVID.

Operator, Operator

Take our next question from Alex Maroccia with Berenberg.

Alex Maroccia, Analyst

First question pertains to the resumption of the capital projects you outlined. There's plenty of headlines about supply chain and employment constraints these days. Have you seen major price increases in material and labor costs that can impact the CapEx assumptions you outlined earlier this year? And then do you think it could impact your budgeting for next year?

Rob Katz, CEO

Yes, I believe the dynamics you're mentioning are valid and we're monitoring them. However, I do not foresee them significantly affecting our overall budget for this year. Looking ahead to next year, it's possible, but we won’t know until we reach that point. Ultimately, we remain committed to aggressively reinvesting in our resorts. Coming out of COVID, there will continue to be opportunities for us to enhance lift in restaurants, add new terrain where feasible, and improve the overall experience. If we encounter some inflation, it may have an effect, but it won't prevent us from making these investments.

Alex Maroccia, Analyst

Okay. Understood. That's helpful. And then secondly, a less discussed topic is your real estate segment. Obviously, the housing market is pretty robust right now, and many of your mountain communities are seeing impressive price increases. Is it possible to see a bit more opportunistic strategy with the real estate portfolio in these types of cycles?

Rob Katz, CEO

We are optimistic that the current strength in these markets will benefit our initiatives. We have several projects where we have sold land to developers, and these developers are in the process of securing approvals or starting construction. We believe the existing market conditions will significantly support this progress. Additionally, if there are more projects that align with our strategy, we can leverage the current market to connect with new developers. While we do not plan to enter the development business ourselves, we recognize the importance of continued investment in affordable housing. This remains a critical issue for many of our communities, and although there may be debates about the specifics of certain projects, we are committed to investing capital in this area. We also aim to focus on developing affordable employee housing to ensure our resorts remain livable and accessible to a diverse population.

Operator, Operator

Thank you. At this time, I would like to turn the call back over to Rob Katz for closing remarks.

Rob Katz, CEO

Thank you, operator. This concludes our fiscal 2021 third quarter earnings call. Thanks to everyone who joined us today. Please feel free to contact me or Michael directly should you have any further questions. Thank you for your time today, and goodbye.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.