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Steiner Leisure Limited (NASDAQ:STNR)

Q2 2009 Earnings Call Transcript

July 30, 2009 11:00 am ET

Executives

Leonard Fluxman -- President and CEO

Stephen Lazarus -- EVP and CFO

Analysts

Steve Wieczynski -- Stifel Nicolaus

David Katz -- Oppenheimer

Assia Georgieva -- Infinity Research

Operator

Welcome; and thank you for standing by. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session during this conference. (Operator Instructions).

I will now turn the meeting over to your host, Mr. Leonard Fluxman.

Leonard Fluxman

Thank you, Sherry. Sorry about the late adjourning, we had some technical difficulties with the call.

Good morning, everyone, and thank you for joining us this morning for Steiner Leisure's 2009 Second Quarter Earnings Call. With me today are Stephen Lazarus, our Chief Financial Officer; and Clive Warshaw, who is joining us by phone, on reason that he's en route to Australia for the birth of his sixth grandchild. So, we won't have comments from Clive to start to call.

Anyhow, before we get into our results and my comments about the current operating environment, I would 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 guarantee future performance; and are subject to risks and uncertainties, which may cause our actual results to differ materially from those expressed in or implied by such forward-looking statements. Examples of these risks are described in our Form 10-K for 2008 and our other SEC filings.

I am 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 will then hand you over to Stephen Lazarus to give you the breakdown on specific balance sheet items, cash on hand, any stock repurchase activity in the quarter, CapEx during the quarter, and other pertinent balance sheet data. We will also address guidance for the third quarter and for the year and then turn it back over for our regular Q&A session.

The present economy continues to present challenges to consumer spend in most of our business channels, and while we see decent signs of stability, and in some cases sequential improvement, our larger business segments remained somewhat challenged during the second quarter.

Consequently, total revenues for the second quarter declined 13% quarter over quarter; gross profit declined 27% quarter over quarter; gross profit, excluding the negative impact of foreign exchange, declined by 13%, which is in line with our revenue decline.

Service margins improved by 120 basis points to almost 19%. This is primarily attributable to better-than-expected performance in our school segment, offset by lower service margins in our maritime and resort divisions.

Product margins declined by 12.3 points to 18%, negatively impacted by a 16% decline in the U.S. dollar against the British pound in the quarter, which negatively impacted cost of goods by $4.1 million. Product margin, excluding the loss from foreign exchange previously mentioned, declined by 70 basis points to 29%, delivering gross margin of 22%.

Included in G&A expense is a positive foreign-exchange impact of $1.9 million, without which admin expenses would have improved 90 basis points quarter over quarter. The upper mentioned were the primary drivers for the decline in operating margin of 70 basis points. Excluding the impact of foreign exchange in the quarter, operating margins improved 120 basis points to 10%.

Turning now to the individual segments.

Our Cruise Ship Spa division experienced another tough quarter, combating the challenges of lower consumer demand for services and retail spend. Guests continue to be very value focused and significant discounting continues to be part and parcel of consumer expectations and was needed to continue to drive the demand to our facilities onboard.

The largest challenge we still face is once we get guests into the spa, and getting them to buy retail products. The level of retail product attachment to service was further challenged in the quarter.

Total revenue declined 13% quarter over quarter. This decline in revenues drove weaker productivity metrics across the board, both in our spa and non-spa ships. Average weekly revenue on all ships declined 11% quarter over quarter; average weekly revenues from spa ships declined 14% quarter over quarter, with non-spa ships declining by 13% quarter over quarter. Gross revenue per day declined by 14% quarter over quarter, but pleasingly, it was noted that it improved 3% on a sequential basis, which is an encouraging sign of some lift in spend on a sequential basis in our onboard spas. This was derived by revenue per stop per day for spa ships declining by 4% and non-spa ships declining by 6%.

This quarter, we commenced operations on two Costa vessels, the new Seabourn Odyssey and we soon commence operations on Celebrity’s new Equinox.

Turning to the Resort division. Our division continued to experience lower occupancies than they did a year ago, which continues to negatively impact revenues more so than our maritime model. Lower occupancy this quarter versus a year ago in some of the larger properties impacted our capture rates and resulted in a decline in revenues of 25% quarter over quarter. Our average weekly revenues in resorts declined as well by 22% quarter over quarter.

The department store channel continued to be challenged by lower consumer spend and traffic. The weekend US and UK economies caused revenues in our products divisions to decline by 29% quarter over quarter, although a large part of that decline was attributable to weakening in some of our export markets. At the end of the second quarter, we were in a total of 65 Nordstrom stores in the United States and 25 stores in the UK, bringing our total to 91 department stores, including both those in account.

Lastly, and most pleasingly, we turn to the Steiner Education division, which was the bright spot in the quarter. Revenues increased by 28% quarter over quarter, primarily due to higher number of enrolments and increased student populations at our schools this year versus last year at the same time. We continue to be encouraged and satisfied with the positive turnaround in the operations of our school division.

Clearly, we are still experiencing difficult times with limited visibility, challenging consumer spend, which has limited top-line expansion in this quarter. We continue to focus on being as cost conscious as possible, while continuing to deliver superior guest experience and service in our maritime and resort spas.

Our balance sheet remains strong. We have strong cash flows and liquidity to weather these difficult times. We do believe that the environment has stabilized somewhat since the end of the first quarter.

I will now hand this call over to Stephen, who will go through some of the other balance sheet items, cash on hand, share repurchase activity, and guidance for our third quarter and the year.

Stephen?

Stephen Lazarus

Thank you, Leonard. Good morning, ladies and gentlemen.

First, as usual, I will provide some details on the second quarter of 2009, covering depreciation, capital spending, cash, and our share repurchases.

Depreciation and amortization for the second quarter of 2009 was $2.8 million, broken down as $538,000 below-the-line depreciation, and $106,000 below-the-line amortization. Above-the-line depreciation was $2.1 million.

Our estimate for the third quarter is for the depreciation and amortization at $2.9 million, with below-the-line depreciation at $657,000 and below-the-line amortization at $100,000. Above-the-line depreciation is expected to be $2.1 million.

Capital spending in the second quarter was $700,000, and is expected to be $800,000 in the third quarter. Cash and investments at June 30 was $47.9 million, and as of today, we have $51.8 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 June 30 was $193.9 million.

Moving on onto our guidance. We are decreasing our full year revenue guidance range from our prior guidance of $495 million to $520 million, to $480 million to $500 million of revenue.

For earnings per share, we are increasing the bottom of our prior range from $2.00 to $2.10 and maintaining the high-end at $2.30. So our full-year guidance for EPS is $2.10 to $2.30.

For the third quarter, we expect revenue to be in the range of $122 million to $127 million, with Q3 earnings per share estimated at $0.55 to $0.60. Due to the volatility of the US dollar versus the British pound in the last quarter, and the impact that that can have on our earnings, we are also assuming, in this guidance, a US dollar to British pound exchange rate of $1.65.

We will now move to Q&A. Sherry, if you could please open the call to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions).

Our first question comes from Steve Wieczynski of Stifel Nicolaus. Your line is open.

Steve Wieczynski -- Stifel Nicolaus

Yes, good morning, guys. I guess I wanted just -- if you could dig a little bit more into the revised guidance in terms of the top-line reduction.

Leonard Fluxman

Even though we are seeing sort of sequentially, revenues are somewhat flattish; which, if you go back to last year, you can see it almost mirrors the same trend line. On a going forward basis, the third quarter typically is going to be stronger, but we really haven't seen sufficient strength in consumer spend in all of our segments to keep top-line guidance where it is at. We are taking up the bottom end of the EPS guidance and obviously holding it on the top end with strong cost control. I mean, to the extent that onboard spend improves or any of the other channels for revenue opportunity expansion increases, clearly we will surprise on the upside. But I think with the current trend as it is, it is prudent for us to guide at those levels.

Steve Wieczynski -- Stifel Nicolaus

Okay. So another way I guess to ask it, has July deteriorated or is that pretty much stable from what you sold in May and June?

Leonard Fluxman

No, July is actually a little better than June. But that is in line with where we are guiding based upon what we are seeing in our onboard maritime stock spend and result spend, which are two big segments.

Steve Wieczynski -- Stifel Nicolaus

Okay. And then --

Leonard Fluxman

It is not deterioration, in that spend activity.

Stephen Lazarus

Yes, I think you also have to remember that we haven't changed our revenue guidance since the beginning of the year. Obviously, our expectation at that point in time was that in the second half, we were hoping things would begin to see some sort of lift in consumer sentiment, et cetera. We haven't seen that and we have to reflect that in our revenues update.

Steve Wieczynski -- Stifel Nicolaus

Okay. And Stephen, can you do the ship breakout for the remainder of the year?

Stephen Lazarus

Yes. For Q3 of 2009, non-spa ships 25; spa 101 or 100.6 on average, total is 125. For Q4, non-spa is 23; spa is 100 for a total of 123. So on average, it is going to take the full year on spa to 25.5, 26; and non-spa to 98.

Steve Wieczynski -- Stifel Nicolaus

Do you have any idea where 2010 will kind of play out, or is that still too early?

Leonard Fluxman

In terms of the ship count?

Steve Wieczynski -- Stifel Nicolaus

Yes, exactly.

Leonard Fluxman

I thought were asking about the revenue guidance here.

Steve Wieczynski -- Stifel Nicolaus

Well, that too, if you have it.

Leonard Fluxman

Yes, okay.

Stephen Lazarus

We haven't done the detailed ship count numbers. I guess, you and I, we know, everybody knows kind of what is coming on line here, we know which of those ships we are going to be getting, et cetera, but no, we haven't done it yet by quarter, taking into count dry docks, et cetera, to get the average numbers, not yet.

Steve Wieczynski -- Stifel Nicolaus

Good. And then last question, back to Leonard I guess; was there any impact positively from the H1N1 this quarter?

Leonard Fluxman

You know, there probably was some positive impact just because there are more sea days. I don't think it is material at all. I mean, what was encouraging to me was that if you look at sequential quarters, we saw average revenue per week on spa ships trend upwards. We saw the revenue first office and training up. Well, that is a good sign of things stabilizing and slightly improving. In the third quarter, we hope to continue to see that. We are watching our staff counts on both ships as closely as possible, and either downsizing or upsizing based upon demand. So our maritime division is watching all of those metrics as closely as they can, as well as making sure that we are not understaffed. It is a work in progress, but I am encouraged to see those two metrics moving positively.

Steve Wieczynski -- Stifel Nicolaus

Okay, great. And then maybe one more, if I could. Just give us an update in terms of your balance sheet, I mean, by the end of the year, you are probably going to be what -- almost $60 million in cash with no debt. So can you remind us of what your outlook is and what do you plan on doing with the excess cash at this point?

Leonard Fluxman

We continue to explore opportunities brought to us on a weekly basis and it is amazing how many opportunities that are out there, given we are a cautious group of guys, we are highly selective. There could be expansion opportunities going forward. We haven't settled on any, but we continue to be vigilant to see if anything comes about. That being said, we have done what we said at the beginning of the year, we are going to hoard cash and make sure that we remain very liquid. We have got more than $80 million of liquidity now, to the extent that we continue to move and sustain the kind of results that we have yielded this year.

And no other opportunities come to the table, both in terms of more acquisitions in schools or other kinds of opportunities. Then we will have to look back and say where should we then look to return cash to shareholders? Is that through continued repurchase of our stock, or through some other opportunity?

Steve Wieczynski -- Stifel Nicolaus

Okay, great. Thanks, guys. Good quarter.

Leonard Fluxman

Thank you.

Operator

Our next question comes from David Katz of Oppenheimer. Your line is open.

David Katz -- Oppenheimer

Hi, good morning. I wanted to follow up Steve's question about ship counts for next year. And I know you are still going through some of that. We do all get some visibility about how many new ships are kind of entering the industry. But just directionally speaking, right, is there any thought you can share or any visibility you might have about in aggregate the number of ships sort of leaving the universe of potential spa ships for you?

Leonard Fluxman

This is Leonard, Dave. I think as you take a look at the numbers that we have mentioned before, we see most of our cruise line partners adding ships next year and the count on ships that we have contracts with, eight. Eight ships potentially come on on average during the year, and I said on average because it doesn't impact the absolute number the same way, depending on when they come on time, et cetera. There could be a few non-spa ships going out of service or moving to other affiliates, which we don't serve. So the numbers are sort of in flux right now, and together with that, don't discount the fact that we continue to look for more market share. So have already announced what we can announce if and when we secure those opportunities, that there are some opportunities out there that we continue to look at with interest.

David Katz -- Oppenheimer

Okay. All right, that helps a little bit. Has there been a change in terms of booking your spa appointments online for Carnival versus how it was in the past, and is that something that might affect your business one way or the other? I assume it is positive.

Leonard Fluxman

It is interesting, you right about that, because we were actually looking at sort of that model very closely in terms of trying to identify what people like to book in advance, how we can manage yield effectively, positively, to impact the revenue in the right way and not diluted with over-discounting on the wrong day. So if you see certain tweaks in it, it is definitely a work in progress and we are trying to evolve the pre-booking system in terms of positive yield management. It is early days right now, Dave, but we think ultimately, it is a positive thing to the experience that you limit the choices and manage yield.

David Katz -- Oppenheimer

All right. Okay. Just one final one. The newer class of ships that are coming on, is there some dynamic in there where they can perhaps have a higher amount of staff or require a higher amount of staff initially, what we see in other facets of our coverage -- initially, new products like that can be overstaffed and profitability or yield can be a little bit lower. Is there anything for us to consider in there?

Leonard Fluxman

We have learned every time we bring a new ship out, what is optimal staffing. We also have to be very cognizant that we have standards of service to keep to with the cruise lines. And so, we cannot under-staff, certainly on brand-new ships with halo effect in terms of expectations from passengers and the cruise lines. We want to make sure that we are optimally staffed. While we bring ships out, with probably higher staff than existing, we are always able to tweak those numbers to make sure that any overstaffing is snatched as soon as we can. But you have to remember that ratings are just as important as revenues to the cruise line. And so we have to be very cognizant of making sure that guest’s service standards are constantly met.

David Katz -- Oppenheimer

Okay, thanks. That is all I have.

Leonard Fluxman

Thank you, Dave.

Operator

(Operator Instructions).

Our next question comes from Assia Georgieva of Infinity Research. Your line is open.

Assia Georgieva -- Infinity Research

Thank you and good morning, guys. A couple of quick questions. Product margin seems to be quite strong, this is the foreign exchange. Is there anything specific, is that sustainable, or did I model conservatively?

Leonard Fluxman

I don’t see you model, Assia, so I am not sure what you modeled, but let us just say that the FX impact of $4.1 million on cost of products, when you back that out, depending on what you looked at, that was really -- clearly, there has been -- we are down 29% with our export business, probably more compressed than any of our other channels. And that is because it is kind of like -- the impact of compression and consumer spend is moving across the globe. It starts here and then seems to move everywhere else at a slower rate, but it has got to parts of Asia, it has got to Australia and South Africa, areas in which we have decent distribution and that is why that number picked up. It was a little worse than we had anticipated, but margins (inaudible) themselves outside of should not surprise anybody.

Assia Georgieva -- Infinity Research

And I actually was surprised a little bit to the positive (inaudible). I need to model more carefully, I guess.

Another question, I was looking at non-productivity, and it has been coming down for -- not only over the last six months, is that partly due to the three ships that our friends at Prestige Holdings no longer have with Steiner.

Leonard Fluxman

It has really more -- it has more to do with the impact on the higher end business, where actually the wealthy and the luxury segment is holding back far more on retail spend than sort of the mass markets. Very interesting, but I don’t think that is any different than what we are seeing on the high street with some of the bigger brands in terms of retail experience, et cetera. There is a lot more discretion in the luxury segment than we are seeing out in the mass market.

Assia Georgieva -- Infinity Research

Well, that does seem surprising.

Leonard Fluxman

It is surprising, but the numbers in terms of occupancies, some of the longer cruises have certainly been challenging and down this year. So the numbers, in terms of average revenue per week, I am not surprised by it.

Assia Georgieva -- Infinity Research

And would you like to elaborate as to what happened with those vessels and whether you expect any changes or new developments?

Leonard Fluxman

Yes, it is Oceana that you are talking about and the CEO, he wants a big brand on this ship and we believe -- I'm not sure who it has been or what is here -- I think it is just a land-based brand that they are looking to onboard versus our brand.

Assia Georgieva -- Infinity Research

So this is not something that might be temporary or expected -- this is something we should model --

Leonard Fluxman

Clearly, we respect every decision that our partners make, to the extent that you make a choice of brand over revenue or experience over revenue or both, brand and guest experience. I mean, who knows what can happen. We have seen things change, haven't we in the past?

Assia Georgieva -- Infinity Research

Sure, we have, yes. But it was on a more limited basis at the tight level than taking what we would be their entire fleet, even though small, but still seems to be a pretty drastic change, so --

Leonard Fluxman

These are things beyond our control and people are looking for brand recognition to drive people to make bookings versus the continued reliability of the Steiner franchise onboard. I can’t manage that process and things come and go.

Assia Georgieva -- Infinity Research

Okay, I think that is fair. And one more question, again returning to your strong cash generation. You alluded to hoarding cash at the moment, considering the various opportunities of returning that cash to shareholders. Is the dividend something that you may consider more today than you did a year ago?

Leonard Fluxman

I am being consistent with remarks that I have made on a lot of prior calls. You know, we have got $52 million of cash, and growing for the year. We definitely have been acquisitive in our school group, we continue to look for those acquisition opportunities and there are indeed some out there. And other opportunities come to my attention and to Stephen's attention constantly, as you can imagine in this environment. You know, we are trying to take a look and look to what is out there that is of interest that can be strategically important to Steiner going forward and I think we are just biding our time and looking at the right opportunities before we decide the dividend program is our only choice.

Assia Georgieva -- Infinity Research

Do you think that the resorts business might make more sense, especially in terms of the profitability and other terms you might get in this environment?

Leonard Fluxman

The resort business is challenged primarily right now because of low occupancies and it is much more impacted than the maritime model, as we have said in the last two quarters. I think to the extent -- I think there was a report out there. I mean, we are not expecting those kinds of occupancies to return to the levels that were present in the first quarter of April. It needs the next 6 to 9 months, unless something dramatically changes with consumer and the spend environment. So yes, that model will remain challenged. We have cut the fat out as much as possible; you can see that on the cost side of our business. In terms of looking for the right opportunities to be additive in resorts, there are opportunities out there. We have continued to evaluate all of them.

Assia Georgieva -- Infinity Research

And in terms of negotiating power, do you think that today you may have more or given the lowered occupancies, you are not going to take a risk by expanding that division?

Leonard Fluxman

We are always looking at the right opportunities. I mean, there is not just a lot of the development spend going on in hospitality, resort area right now because of credits. So it is not like there is a flurry of activity of spa building going on there or hotels, adding spas or refurbishing spas. So I think the environment right now is kind of sort of a stamp-fill in terms of development. Clearly, some of the hotels will add as they grow their franchises and our guys are constantly out there looking for development opportunities around the world.

Assia Georgieva -- Infinity Research

Okay, all right. Thank you so much and again good job, especially on the cost side. I was pretty impressed.

Leonard Fluxman

Thank you, Assia.

Operator

At this time, we have no further questions.

Leonard Fluxman

All right, thank you, Sherry. Thank you everyone for joining us on our second quarter call. We look forward to speaking with you again on our third quarter conference.

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