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Steiner Leisure Limited (NASDAQ:STNR)

Q1 2009 Earnings Call

April 30, 2009 11:00 am ET

Executives

Clive Warshaw - Chairman of the Board

Leonard Fluxman - President and CEO

Stephen Lazarus - CFO

Analysts

Sharon Zackfia - William Blair

George Kelly - Stifel

Assia Georgieva - Infinity Research

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Now I will turn the meeting over to Clive Warshaw, Chairman of the Board.

Clive Warshaw

Thank you, very much. Good morning, ladies and gentlemen, and welcome to our first quarter's earnings call. I'm very pleased to have you all on the line. I'd now like to hand you over to Leonard Fluxman, who will go through the figures and continue the call.

Leonard Fluxman

Thank you, Clive. Good morning, everyone, and thank you for joining us this morning for Steiner Leisure's 2009 First Quarter Earnings Call. With me today, Clive Warshaw, our Chairman, and Stephen Lazarus, our Chief Financial Officer.

Before we get into our results and my comments about the current operating environment, I'd like to remind you that during this call we may make forward-looking statements within the meaning of the federal securities laws. These statements reflect our current views about future events; do not guaranty future performance; and are subject to risks or uncertainties, which may cause our actual results to differ materially from those expressed in or implied by such forward-looking statement.

Examples of these risks are described in our Form 10-K for 2008 and our other SEC filings. I'm going to start as usual with an overview of the business and results of the quarter followed by an analysis of the performance by segment. I'll then hand you over to Stephen Lazarus to give you the breakdown of specific balance sheet items, cash on hand, our stock repurchase summary to-date, CapEx during the quarter, and other pertinent balance sheet data that we typically give out on these calls.

We will also address guidance for the second quarter and for the full year and then turn it over for our regular Q&A session. The economic deterioration and negative consumer sentiment impacted our fourth quarter continued to challenge most of our business segments during the first quarter. Consequently, total revenues declined 14% quarter-over-quarter. Gross profit declined 16% quarter-over-quarter.

Our service margins held steady remaining flat at 19%, this is primarily attributable to better than expected performance of our school segment offset by lower service margin than our maritime and resort division. Product margins also declined by 70 basis points to 26% resulting in gross margin declining 50 basis points to 21%. Operating margins declined marginally by 30 basis points assisted by strong control over SG&A in the first quarter.

Our cruise ship spa division experienced another tough quarter combating the challenges of lower consumer demand for services and retail spend onboard. Guests continue to be very value focused and significant discounting continues to be part and parcel of consumer expectation and were needed to drive the demand for our facilities onboard. The largest challenge we still face once we get guests into the spa was getting them to purchase products. The level of retail products attachment to service is sort of a challenge in the first quarter.

Total revenue declined 15% quarter-over-quarter. The decline in revenues drove weaker productivity metrics across both our spa and non-spa ships. Average weekly revenue on all ships declined 12% quarter-over-quarter. Average weekly revenues from spa ships declined 14% quarter-over-quarter with non-spa ships declining by 22% quarter-over-quarter. Gross revenue per staff per day declined 17% and this was derived by revenue per staff per day for spa ships declining by 17%, and non-spa ships declining by 22%.

During the next quarter, the second quarter, we will commence operations on two new [Costa] vessels, both of which will spa ships and the new Seabourn Odyssey luxury yacht. Tuning to our Resort division. Our resort division continued to experience lower occupancies than they did a year ago, which continues to negatively impact revenues more so than the maritime model. The lower occupancies this quarter versus a year ago in some of the larger properties impacted our capture rates and resulted in the decline of revenues of 27% quarter-over-quarter.

Our average weekly revenue results declined by 20% quarter-over-quarter. The department store channel continues to be challenged by lower consumer spend and traffic. The weakened U.S., and the UK economies cause revenues in our products division to decline 24% quarter-over-quarter. At the end of the first quarter, we were in a total of 65 Nordstrom stores in the U.S., and 25 stores in the UK bringing the total to 91 department stores where Elemis products are sold.

Lastly, and most pleasingly, we turn to the Steiner education division which was the bright spot in the quarter. Revenues increased by 25% quarter-over-quarter primarily due to higher number of enrollments and increased student population at our schools this year versus last year at the same time.

We continue to be very satisfied with the positive turn around in the operations of our school group. Currently, we are still experiencing difficult times with visibility still challenging and limited. We continue to focus on being as cost conscious as possible while continuing to deliver superior guest service and experience in our maritime and resort spas.

Our balance sheet remains strong. There's still a strong cash flow and liquidity to whether the difficult economic environment. We do believe, however, that the environment in April has stabilized somewhat since the end of the first quarter. I will now hand you over to Stephen, who will go through some of the other balance sheet items, cash on hand and other details and guidance for the second quarter. Stephen?

Stephen Lazarus

Thank you, Leonard. Good morning, ladies and gentlemen. Firstly, as usual, I'll provide some details on first quarter of 2009 covering depreciation, capital spending, cash and our share repurchases. Depreciation and amortization for the first quarter of 2009 was $2.7 million broken down as $507,000 from below-the-line depreciation and $96,000 below-the-line amortization. Above-the-line depreciation was $2.1 million.

Our estimate for the second quarter is for the depreciation and amortization at $2.7 million with below-the-line depreciation at $600,000 and below-the-line amortization at $100,000. Above-the-line depreciation is expected to be $2 million. Capital spending in the first quarter was $600,000 and is expected to be $1.1 million in the second quarter. Cash in investments at March 31 was $31.7 million and as of today, we have $31.6 million of cash on hand and $30 million available on our line of credit.

We did not repurchase any shares since our last conference call; and therefore, continue to have $50.5 million remaining from our February 2008 share repurchase plan authorization. Total shareholders equity as of March 31st was $177.7 million. Moving in on to our guidance. We are maintaining our full year revenue guidance of $495 million to $520 million; and for earnings per share we are increasing the bottom of the range from $1.95 to $2.00 to account for Q1 and maintain the high-end of $2.30, so our full year EPS guidance is $2.00 to $2.30.

For the second quarter, we expect revenue to be in the range of $115 million to $120 million with Q2 earnings per share estimated at $0.50 to $0.55. We will now move to Q&A. Jo Ann, if you could please open the call to questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Sharon Zackfia from William Blair.

Sharon Zackfia - William Blair

Hi. Good morning. I guess, a couple of questions. You indicated that trends had stabilized in April or you've seen some signs of that. Does that go for both services and product attachments so far in April?

Stephen Lazarus

What we're seeing though is kind of the run rates across a couple of different cruise lines, definitely stabilizing or should I say having improved over our March run rates. Clearly, we still haven't finished the month, but so far we have seen at least stability where even as changed through February and March we saw some areas or some cruise lines where our run rates were even declining in March. We have not seen that trend reoccur through the start of April.

Sharon Zackfia - William Blair

Is it too early for you to tell how some of the rerouting for the Mexican cruises and the general kind of swine flu issue is affecting your business?

Stephen Lazarus

Yes. Definitely, Sharon. Typically it will take a couple of weeks to bake in. However, anything that gives us another sea day, typically is a positive take away, not a negative takeaway, so adding another sea day to an itinerary is not a negative for us.

Sharon Zackfia - William Blair

OK. I think that Royal Caribbean and [its sister next] Carnival have both talked about expectations for maybe some passenger mix due to Europeans over the summer. Is that a negative for you? My understanding was that Europeans might spend a little bit less onboard. I'm just curious to see your thoughts on that.

Stephen Lazarus

It's specifically depending on the mix of Europeans. You could see some different spend patterns. It’s really, itinerary by itinerary, cruise by cruise without really knowing that mix in advance, it would be hard for us to really call that.

Sharon Zackfia - William Blair

OK. Last question. I was a little surprised that salary and payroll was so low in the quarter. Is that a good run rate to use and did you do some rationalization of labor force or what went into that number?

Stephen Lazarus

We definitely have, and we certainly started initiating some reduction in force throughout the company towards the end of the fourth quarter. The impact of that is obviously being seen here in the first quarter. We believe sort of the run rates here, and across both administrative and salary some nice reductions. We are definitely not adding any new workforce. There are no incremental salary changes, where we can reduce workforce we have. So I would say a reasonable run rate on salary and payroll for the rest of the year is around about $9.7 million to $10 million each quarter.

Operator

The next question is from George Kelly of Stifel. (Operator Instructions).

George Kelly - Stifel

Hi, guys. Just a couple questions. First, if you'd give the breakout quarter-by-quarter for the number of ships that you'll be on going forward?

Stephen Lazarus

Yes. The forecast for that is now as follows. For the second quarter, non-spa ships 26, spa ships 97, for a total of 123; in the third quarter, non-spa ship 27, spa ship 100, for a total of 127; in the fourth quarter, non-spa ship 26, spa ship 100, for 126 total.

George Kelly - Stifel

OK. Great, and then one other question. Are you guys seeing onboard, is it a different kind of customer that's cruising right now? Do you think that's a fundamental change that'll go forward or do you think it's just the same customer bases are spending less?

Stephen Lazarus

I think there are definitely some changes. Some of the discounting is growing in on the lower end passengers. I'm not sure how significantly different they are to the historical passenger mix, but clearly the passenger onboard no matter whether they are repeaters or first timers, their spending patterns have changed, and that's clearly why sort of the top line has been under pressure again here in the first quarter. It varies across different cruise lines obviously.

Operator

The next question comes from Assia Georgieva of Infinity Research.

Assia Georgieva - Infinity Research

Good morning, guys. Good job on the marketing side, given how difficult the environment is. I have just basically three questions. On the Maritime division, it seems that over the last four days you have picked up 20 extra sea days, 11 just at the Carnival brand.

How much of an impact could that have in the current quarter? It should be quite helpful, I would imagine. It also seems that going forward itineraries would be modified to try to replace some of the Mexican ports of call with other ports so you might not get as much of a pickup, but still incrementally this should be more favorable to you. Leonard, do you think that's something that you're waiting to see how it shapes up or are you including that in the guidance?

Leonard Fluxman

I think it's pretty much baked into the guidance. Assia, as I said in a previous question from Sharon, anytime an additional sea day is added and customers or guests onboard are OK with that, which they'll have to be under the circumstances. It technically bodes well and is a positive as you're suggesting.

For us to quantify that and say it's another 30 or 32 days and here is the impact takeaway from that would be very difficult for us to do. Overall, all I can say is, any one of the Mexican ports are typically very popular for guests to go shore side. There are a number of short excursions and shopping experiences. So having them onboard versus shore side should be a positive takeaway for us.

Assia Georgieva - Infinity Research

Because there might be a budget already allocated for short excursions, which at this point they can't spend on that, so they might actually try to use the spa a little bit more?

Leonard Fluxman

We hope so.

Assia Georgieva - Infinity Research

OK.

Leonard Fluxman

We certainly hope so.

Assia Georgieva - Infinity Research

The reason why I'm asking whether this is in your guidance is because this is such a fluid situation and changing day-by-day. So I imagine it's very difficult to predict how much of a benefit you would have from those extra sea days, but do you think a substantial number of them are being added to most itineraries so that should be helpful. Let me ask you another question that’s you segued me into it. If occupancy declines on a hypothetical 10% on the ship, how much of a decline do you think that would be in terms of spa occupancy levels?

Leonard Fluxman

Occupancy and capture rates in our spa don't move around as much as a 10% decline in occupancy verses occupancy and results that drops 10%. Typically within that kind of variable, I would see very little, if any changeup in occupancy or capture onboard the ship.

Assia Georgieva - Infinity Research

So even if occupancy declines, but you get sea days, the net --

Leonard Fluxman

The net-net is probably a positive so.

Assia Georgieva - Infinity Research

OK. Well, that is good to know. Secondly, for the product division, it has done so well for such a long time. We saw decline in Q4, a slightly larger decline in Q1. Do you have any visibility or expectations what Q2 might bring whether it is 25% decline, less, more?

Leonard Fluxman

No, I really don't. I mean that's why my remarks included a comment. There is limited visibility. That's certainly one of the channels that it's pretty tough for us to tell what the second quarter is going to end up with. We're seeing challenges on a worldwide basis. I mean some of our export channels that are much fluid and growing rapidly in at least the first three quarters of '08 continue to slow down here at the end of '08, '09 to the extent that the consumer returns back into department stores, no different than the lack of traffic or the diminishing traffic in department stores that everybody is experiencing across the board. I think it will be a very tough number for us to lock down for you.

Assia Georgieva - Infinity Research

If you look at January, February, March and then April, do you see a trend in terms of your revenues on the product side or it varies?

Leonard Fluxman

It will vary because there is so much in that mix today, where maybe before five to eight years ago, we were only in one channel, which was salons and spas in the UK and maybe e-commerce to a lesser extent. Today, we cross so many other different channels, all of which could behave differently. So I think it would be very hard for us to say there's any kind of trend in that whole group.

Assia Georgieva - Infinity Research

OK. This obviously is the great time for the school division to have such a strong turnaround. Enrollments are continuing to be good, I imagine including these east coast school division?

Leonard Fluxman

Absolutely. We've certainly seen substantial and sustainable for the first three months here, improvement not only the east coast, but our west coast schools have performed nicely as well. We're seeing margin improvement at all the school levels. We still believe there's room to improve on the east coast. There are some campuses that we're still working on. The good news is that the positive trend has continued here early in April. Our west coast schools will have a start coming up in May and thus far we're satisfied with where the enrollments at least that we've got in queue lined up for that start.

Assia Georgieva - Infinity Research

Am I correct in thinking of the school division as very much a fixed cost operation where when you get additional enrollments, therefore revenues, profitability grows a lot more than the actual revenue side?

Leonard Fluxman

It's definitely a model which gives you leverage because of its fixed cost nature. So when you're performing well on your enrollments and admissions and your retention rates are good, definitely once you get through those inflection points, it is all positive contribution.

Assia Georgieva - Infinity Research

OK. In the quarter operating profit from that division was in the $2.5 million to $3 million range. Am I within the range?

Leonard Fluxman

You're close. You'll see it in the quarter broken out specifically for you.

Assia Georgieva - Infinity Research

Would you say it's closer to $2.5 million?

Leonard Fluxman

Assia, it's very close. It's very close to your number, yes. You're right. You're very, very accurate.

Assia Georgieva - Infinity Research

On the lower-end or at the higher-end?

Leonard Fluxman

On the lower-end.

Assia Georgieva - Infinity Research

OK. That is helpful. Thank you, again. Hopefully you see some helpful trends going forward.

Leonard Fluxman

Hopefully. Thank you.

Operator

We have no questions in the queue at this time.

Leonard Fluxman

Thank you, Jo Ann, and thank you everyone for joining us on the first quarter call. We'll see you on our next call. Bye-bye.

Operator

Thank you. This now concludes today's conference.

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