Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Steiner Leisure Ltd. (NASDAQ:STNR)

Q4 2007 Earnings Call

February 28, 2008 11:30 am ET

Executives

Leonard Fluxman - President and CEO

Bob Boehm - SVP, General Counsel

Stephen Lazarus - CFO

Analysts

Steve Wieczynski - Stifel Nicolaus

Steven Martin - Slater Capital Management

Calvin Wilder - Minuteman Capital

Kristine Koerber - JMP Securities

Maria Slevin - Oppenheimer

Assia Georgieva - Infinity Research

Bob Simpson - William Blair

Joe Hovorka - Raymond James

Steve DeNichilo - Thomson, Horstmann & Bryant

Peter Tu

Operator

Good morning and thank you all for holding. I would like to remind all parties that you will be in a listen-only mode for the duration of the conference call. (Operator Instructions)

Today's conference is being recorded, if you have any objections you may disconnect at this time. Now, I'd turn the call over to Mr. Leonard Fluxman. Sir, you may begin.

Leonard Fluxman

Thank you, Sandy. Good morning, ladies and gentlemen, and welcome to Steiner Leisure's 2007 fourth quarter earnings call. Typically we'd have Clive do the customary opening greetings, Clive's on a ship in another time zone, so he unfortunately will not be joining the call.

So I'll turn it over to Bob Boehm, our General Counsel, to make the customary opening remarks.

Bob Boehm

Thank you Leonard, good morning. During the course of this presentation we will make statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our current views about future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those expressed or implied by such forward-looking statements.

Risks to which these forward-looking statements are subject are described in our Annual Report on Form 10-K for 2006, and our report for 2007 which will be filed no later than tomorrow, as well as in subsequent reports filed by us with the Securities and Exchange Commission.

Forward-looking statements shouldn't be relied on as predictions of actual results and, subject to any continuing obligations under applicable law, we expressly disclaim any obligation to disseminate after the date of any such statements, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based. Thanks.

Leonard Fluxman

Alright, thank you, Bob. I'll start as usual with an overall summary of the quarter followed by an analysis of performance by the business segments. I shall then hand you over to Stephen Lazarus, our CFO who is with me today, to give you a breakdown on specific balance sheet items, cash on hand, an update on our stock repurchase summary to date, CapEx during the quarter, as well as other pertinent balance sheet data.

And we'll also address guidance on some of these additional balance sheet items as well as guidance for the first quarter of 2008 and the full year. And then we'll turn it back over to you for our usual Q&A session.

Total revenues for the fourth quarter grew 11% quarter-over-quarter, gross profit grew 10% quarter-over-quarter, and operating income declined 4% quarter-over-quarter or was flat, excluding non-cash equity expense on a like-for-like basis.

Gross margin and operating margin declined 20 and 130 basis points respectively, primarily driven by the continued under performance of the East Coast School Division and other, accounting for the impact of annual increases in our cruise line rents experienced for the last set of renewals of our cruise line agreements in 2005.

Product margins were flat quarter-over-quarter. Net income increased 1% quarter-over-quarter on a like-for-like basis, excluding the incremental non-cash equity expense and the impact of the $1.8 million SAB 108 tax adjustment in the fourth quarter of 2006.

Our Cruise Ship Spa Division executed extremely well during the quarter. Total revenues from the cruise ship spa's grew 9% quarter-over-quarter, average weekly revenue on all ships grew by 5% quarter-over-quarter, average weekly revenue from spa ships grew 4% quarter-over-quarter with non-spa ships growing by 3% quarter-over-quarter.

Gross staff per diems on all ships increased by 3%, this is derived by gross staff per diems for spa ships increasing by 3% and non-spa ships increasing by 1%. During this quarter we began servicing NCL's Norwegian Gem and we will not commence service in the first quarter on any new ships for the entire first quarter. We'll have two ships coming in the second quarter.

Turning to the Resort Division, we saw some nice performance here. During the fourth quarter revenues increased 8% quarter-over-quarter, and average weekly revenues in resorts increased 10% quarter-over-quarter.

Our Products division produced good results growing their revenues by a clip of 38% quarter-over-quarter. And an update on where we're at in terms of our distribution into the department stores; as of December 31, 2007 we had expanded distribution into 44 Nordstrom stores in the United States and 17 stores in the UK, bringing the total store count including Bergdorf to 62 department stores. We expect to open a further seven Nordstrom stores in the US and six further stores in the UK by the end of 2008.

Lastly turning to the Education Division, since our last call we have made a few leadership changes in our school group and we're seeing some success with these changes. As discussed on our third quarter call, we continue to focus on areas of opportunity for improvement in our East Coast schools and we saw modest improvement during the fourth quarter as we still continue to turn the corner to improvement.

We are cautiously optimistic about some of the forward indicators and statistics that we have seen thus far in 2008. We're not out of the woods yet, but we continue to focus on efforts to improving these schools.

I'll now hand you over to Stephen, who will go through some of the balance sheet data, cash on hand and guidance.

Stephen Lazarus

Thank you, Leonard. Good morning, ladies and gentlemen. Firstly, as usual I'll provide some details on the fourth quarter of '07, depreciation, capital spending, cash and our share repurchases, and then move on to 2008.

For '07 Q4 depreciation and amortization was $3.4 million broken down as $760,000 below the line depreciation, and $139,000 below the line amortization. Above the line depreciation was $2.5 million, and 2007 full year depreciation and amortization was $12.4 million. Capital spending in the fourth quarter was $4.2 million, taking 2007 capital spending to $19.3 million. Cash and investments at December 31 was $30.5 million, and as of today we have $22.9 million of cash on hand.

Since our last conference call through to February 22, we repurchased approximately 410,000 shares at a cost of approximately $16.7 million. To recap 2007, in June of '06 our Board of Directors authorized a repurchase program for up to one million shares, of which there were 308,000 shares remaining as of January '07.

We exhausted that authorization in the first half of '07 and then in July of '07 received a new authorization from our Board to repurchase an additional 1.5 million shares. Of these, we have approximately 460,000 shares remaining to be purchased.

Yesterday, our Board of Directors cancelled that authorization relating to those remaining shares and approved a new share repurchase plan, under which up to $100 million of Steiner shares can be purchased. The total number of shares repurchased in 2007 was approximately 1.37 million for $59.5 million.

These 1.3 million included approximately 37,000 shares, which were surrendered by employees of the company in connection with vesting of restricted shares, and were used by the company to satisfy payment of employee federal income tax withholding obligations upon the vesting of those shares.

Moving then on to our 2008 assumptions and guidance, our estimate of non-cash equity expense for 2008 using Black-Scholes for options and straight line for restricted and performance stock is an expense of $7.5 million.

Depreciation and amortization is estimated as follows. First quarter $3.2 million, second quarter $3.1 million, third quarter $3.2 million, fourth quarter $3.2 million for the full year at $12.7 million.

Capital spending is forecast in the first quarter at $3.3 million, $3.2 million in the second quarter, $1.9 million in the third quarter and $1 million in the fourth quarter. Full year is therefore at $9.4 million.

On the ship count number, cruise ships on average for 2008 in total 126, the first quarter is 128, second quarter 124, third quarter 127 and the fourth quarter 126. Broken down between spa ships and non-spa ships, spa ships in total 96, 96 in the first quarter, 94 in the second quarter, 97 in the third quarter and 97 in the fourth quarter.

Non-spa ships in total on average are 30, 32 in the first quarter, 30 in the second quarter, 30 in the third quarter, and 29 in the fourth quarter. Average resort spas for 2008 in total is 53, 53 in the first quarter, 52 in the second quarter, 54 in the third quarter, and 54 in the fourth quarter.

Based upon this, our forecasted guidance is as follows: For the first quarter we expect revenue to be in the range of $130 million to $132 million with Q1's earnings per share forecast at $0.55 to $0.57. Full year '08 guidance we're estimating revenue at $550 million to $560 million, with resulting earnings per share guidance of $2.70 to $2.80 for 2008.

We'll now move on to Q&A. Sandy, could you please open the call to questions? Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Steve Wieczynski. Please state your company name and you may ask your question.

Steve Wieczynski - Stifel Nicolaus

Stifel Nicolaus, good morning guys. First can you just give us some updates in terms of what you're seeing so far in January and February in terms of onboard spending patterns?

Leonard Fluxman

Sure. We came out pretty decently in January from what we saw in the cruise ships, February has shown some strong points and then softer points, overall we're still expecting to hold pretty well. There are definitely some pockets within each cruise line, depending on the itinerary, that are showing some kind of softness. We managed to that in terms of yield and the way in which we train, but from what we hear from the cruise lines we're probably holding amongst the onboard spend departments, from everything we've heard back, the feedback, we're holding pretty well.

Steve Wieczynski - Stifel Nicolaus

Got you. And then for the fourth quarter, do you have a breakdown basically of where your ships were sailing, kind of like a Europe versus Caribbean that type of thing?

Leonard Fluxman

Yes predominantly in the fourth quarter ships will have transitioned back from Alaska as well as the Mediterranean, except for those that stay full time in the Med and there's definitely a creep in the number of ships that are not coming back on a quarter-by-quarter basis and stay full time in the Med. But for the most part the ships would have been in the Caribbean basin after October.

Steve Wieczynski - Stifel Nicolaus

Got you. And then finally going to the schools, what have you guys kind of seen in terms of trends in the enrollment environment. With where the economy is right now, are people quitting their jobs and going to school or is it just the opposite? And then how have the retention rates been for graduates?

Leonard Fluxman

Thus far, when we spoke last time we only had September behind us. We are seeing some positive enrollment trends on our East Coast schools again. Even inclusive of what you've seen here in January retention seems to be on the up trend as well. So, at least all the metrics that I've been looking at over the last six weeks continue to show the turn here. So while we haven't seen all the numbers for both months, at least from a top-line perspective, we're seeing some encouraging signs.

Steve Wieczynski - Stifel Nicolaus

Okay great, thanks guys.

Operator

Our next question comes from Steven martin. Please state your company name and you may ask your question.

Steven Martin - Slater Capital Management

Slater Capital Management. Guys, you had great revenue growth, gross profit held in a tough environment, can you give us a little more detail and you did some on why the admin and salary and payroll taxes combined were up almost 21%?

Leonard Fluxman

Sure. Steve?

Stephen Lazarus

Yes. I think it's a function of -- a lot of it is supporting retail and distribution expansion opportunities that we've been pursuing. Coupled within that is obviously headcount additions and expenses related to that, some incremental advertising and promotion spend related to that as well. And included in there is some bad debt expense goal from the school group that we have had to absorb. So those are the primary drivers.

Steven Martin - Slater Capital Management

What do you do in '08, given the tough revenue environment, to holding that expense growth?

Stephen Lazarus

Well clearly on the school side it's a different equation and we have had a lot of focus on retention and getting the students to finish classes so that we are hoping to see a decline in the bad debt expense in that particular arena. We are looking on the headcount side and being very, very disciplined with regards to any new additions, even with regards to filling additions that may open up through attrition.

We're going to be very, very disciplined in that arena as well. We're trying not to go down the path of having to cut folks that will drive revenue and make those short-term decisions, but we're certainly going to be very focused on trying to hold the line in terms of new headcount additions.

Leonard Fluxman

Yes and in addition to that in the fourth quarter particularly towards post Thanksgiving, certainly some of the department stores that we were in, they were a little softer in demand and sell through than I think everybody had anticipated. Coupled with that was the additional spend and investment in marketing dollars that may not have had the return or bang for the buck that we have spent which elevated costs in the fourth quarter.

Steven Martin - Slater Capital Management

So does that mean we'll get some of that back going forward?

Leonard Fluxman

One would hope so, given the climate that we're in today. I think without a crystal ball I don't really have a sense of what kind of consumer slowdown there is at present and to what extent that would impact particularly on the retail side. I think we just don't have enough data behind us yet.

Steven Martin - Slater Capital Management

Alright, and one other question. With the stock count this low is it possible Leonard that you think about not continuing to sell shares?

Leonard Fluxman

I don't think anybody is selling shares right now.

Steven Martin - Slater Capital Management

Okay. But I mean you have all year long and I was wondering if there's --.

Leonard Fluxman

I don't know who, if you're talking about within the open window would any executives be selling shares or are you asking me personally?

Steven Martin - Slater Capital Management

You personally.

Leonard Fluxman

I have no intention of selling shares this quarter.

Steven Martin - Slater Capital Management

Okay thank you very much.

Operator

Your next question comes from [Calvin Wilder]. Please state your company name and you may ask your question.

Calvin Wilder - Minuteman Capital

[Minuteman Capital]. I've got two questions. One, can you provide a little more detail on the slight decline in ship count in 2008? Is that a seasonal thing that's normal? Or are you expecting to lose any contracts on a few of those ships or spa's next year?

Leonard Fluxman

No not at all. In fact let me explain that, it's a very good question. It's probably the first time since I can remember that we've actually had a net decline here in the ships and it's partly due to ships that are transferring. We have two ships that are transferring out of the Royal Caribbean fleet, Royal Caribbean International, transferring to their affiliate Pullmantur for which we do not have contracts. That's not to say we will not try and have dialog with Pullmantur to see if we can help them with the operations of their spa group. So that accounts for two of the ships going out.

Pacific Star, which is a Princess ship, is being sold to Star Cruises. Carnival Celebration is transferring to Ibero Cruises, which is jointly owned by Carnival. Orient Line or the Orient Marco Polo will be out of service and the new owner has not yet been announced to our knowledge.

The Norwegian Cruise line announced that Pride of Aloha in May of '08 will transfer also to Star Cruises. And the QE2 Cunard will move out of service and become a floating hotel in Dubai as of November '08. So that accounts for some of the movement.

Calvin Wilder - Minuteman Capital

Okay great.

Leonard Fluxman

No, its not a loss of contracts et cetera, it's just ships being around, sold or transferred to affiliates with which we do not have contracts at present.

Calvin Wilder - Minuteman Capital

With some of the major cruise lines announcing capacity increases next year are you being conservative in the guidance and assuming you're not going to pick up contracts in those new ships? Or is there upside to this guidance or is this what you really expect to have in terms of ship counts next year?

Leonard Fluxman

We'll be adding four ships this year. As I've said, two will come in during the second quarter, we'll also expect to take delivery of one of the Holland America and one of the Princess ships later in the year.

Calvin Wilder - Minuteman Capital

Okay, and then one more question with regard to the $100 million stock buyback. That represents about twice your annual net income, you've always had a very strong balance sheet with no debt on it. I'm wondering as far as timing or aggressiveness of the stock repurchase. Are you planning to use any leverage to be more aggressive with the stock repurchase or should we assume this $100 million lasts you a few years to complete, even with the stock at its current levels?

Leonard Fluxman

$100 million is probably a little under two years free cash flow of the company, but what we're looking at is, depending on where the stock stays and how aggressive we want to be, we may utilize part of our line of credit at times to go into the market and buy back stock.

Calvin Wilder - Minuteman Capital

Great. Thank you very much.

Operator

The next question comes from Kristine Koerber, your line is open. Please state your company name.

Kristine Koerber - JMP Securities

Hi, JMP Securities, a couple of questions. First of all, looking at the guidance you're targeting basically mid single-digit growth on the top and bottom line. Is it essentially macro driven, fourth quarter was actually a pretty good quarter.

Stephen Lazarus

Yes it is primarily macro driven, Kris. I think if you look at the indicators that we're seeing even versus the first quarter, there is a sense of some softening. So we don't know what's going to happen, we base on what we see and what we're hearing from other folks in retail and in some of the locations that we have spas. And so yes, we are looking at an anticipation of a slowdown macroeconomically.

Kristine Koerber - JMP Securities

So you're being conservative at this point just because of the uncertainty?

Leonard Fluxman

Yes, I mean there is some uncertainty in terms of discretionary spend and how that rolls forward across so many different cruise lines as well as into sort of department store spend and we're really not sure right now. There's also the anniversary up tick of some margin degradation in some of our cruise line agreements, which we typically talk about at this time. Some of that is slightly incentive based and so we'll have to see how we do against those.

Kristine Koerber - JMP Securities

Okay. And land-based resorts, these had some issues last fall, is everything back on track for the most part with the land-based resorts, the timing of some of the openings and slowdown at some of the resorts?

Leonard Fluxman

Yes I think our fourth quarter was definitely a better executed one for the Resort Division, I was much happier with their execution overall. We've also made some changes in terms of some of the properties, we've also dropped a property or two where we have felt that the economics do not support continuation as well as trimmed some of the workforce in certain areas. And so I think that Resort, as we move here into the first quarter, is certainly poised to start returning to the levels we'd like it to produce.

Kristine Koerber - JMP Securities

Okay. And then lastly, the Nordstrom Spas, if I recall correctly, you're going to get into some Nordstrom Spas. Where do you stand with that?

Leonard Fluxman

Kristine, we're in one spa right now. We recently presented to Nordstrom with senior management here at the latest Aventura store opening, which went fantastically for the brand and we have great exposure there. I think we are very happy with our presentation. Typically they take a few weeks to digest it and then come back to us with feedback and so we're hopeful right now, but we have nothing sort of to announce at this point. But based upon the feedback we got, it was positive, but until they give us the green light, we're on hold.

Kristine Koerber - JMP Securities

Alright, thank you.

Leonard Fluxman

Welcome.

Operator

The next question comes from [Maria Slevin]. Please state your company name. You may ask your question.

Maria Slevin - Oppenheimer

It's Oppenheimer. I just have a follow-up regarding your guidance. Do you view the bottom end of the guidance as what you would see as a worst case scenario decline in the economy?

Stephen Lazarus

I think based upon what we know today, that's what we would hope to be the bottom. However we don't really know. If the economy gets significantly worse, it could get worse, based upon what we know now, we feel that is a reasonable number that could get better or it could get worse.

Maria Slavin - Oppenheimer

Okay and one more. I just wanted to see if you can remind us if you have any contracts expiring in 2008?

Stephen Lazarus

In 2008, I don't -- we have Seaborne, which we're in discussions with right now for renewal. The only ones that are coming up sort of in the second quarter of '09 would be Disney and MCL.

Maria Slavin - Oppenheimer

Okay. And when do you start those discussions?

Stephen Lazarus

Everyday.

Maria Slavin - Oppenheimer

Okay. Thank you.

Stephen Lazarus

Seaborne, we're underway.

Maria Slavin - Oppenheimer

Okay.

Stephen Lazarus

We're in dialogue with the other two folks already. However, these negotiations typically really sort of get quite serious probably six months within the window. So we're probably a little out of the window for '09, but that's not to say we haven't started at least pointing in that direction and discussions regarding the renewal.

Maria Slavin - Oppenheimer

Okay. Thank you very much.

Stephen Lazarus

Welcome.

Operator

Our next question comes from Assia Georgieva. Your line is open, please state your company name and ask your question.

Assia Georgieva - Infinity Research

Infinity Research, Leonard good morning. You and your management team have done such a great job given the tough and competitive Maritime business. You have also shown that your product is of the quality that a pretty discerning retail chain would actually like to carry it. Yet again, going back to the West Coast Schools Division, what is there that can possibly be done in terms of enrollment, in terms of maybe taking some of the management mix from the Utah schools to turn this around?

Leonard Fluxman

Yes, just clearly we're learning and picking up some core strengths from the Utah or West Coast schools. They've got a very sophisticated call center that we will ultimately leverage across the entire platform. We are also making some curriculum changes now, coming up sort of middle to the end of the second quarter in terms of bringing the East Coast schools more in alignment, which should help us leverage some of that expertise in '08.

Assia Georgieva - Infinity Research

And with some of the changes that have happened at the top of the management chain. Is it easier to actually combine the two entities?

Leonard Fluxman

Sorry, I didn't hear the last part of the question Georgieva.

Assia Georgieva - Infinity Research

Whether it's easier to combine the two entities, given that there have been some top-level changes at the East Coast school?

Stephen Lazarus

They're not -- you can't sort of integrate them completely because they have different start programs, they are slightly different sized, the start methodology that we've adopted, which will commence with the curriculum change in the second quarter, we believe should yield positive results for the East Coast schools and we have more of a linear start program on the West Coast schools.

So I think with the decisions that we put in place, the changes that we've engineered here going into the second quarter, we're hopeful that the alignment of some of the issues at curriculum level and some of the staff that supports retention and student services will be more aligned and effectively give us as best an integrated playing field for both school groups.

Assia Georgieva - Infinity Research

Okay. And one unrelated question, and I thank you for your helpful answer. MCL has pulled the second ship out of inter-Hawaii service and you obviously served on those while they were under US jurisdiction. That should be helpful to your results given that two of the three ships are out of inter-Hawaii service. Is that a fair statement?

Stephen Lazarus

We're encouraged that it's coming back into -- one of the ships goes to Star Cruise, which we don't serve. But the other one coming back into other itineraries could lead to some -- offer some kind of upside. Once it gets into the itinerary that they've selected, we can comment further.

Assia Georgieva - Infinity Research

Okay. Excellent, thank you so much.

Stephen Lazarus

Welcome.

Operator

Our next question comes from Bob Simpson. Your line is open, please state your company name.

Bob Simpson - William Blair

William Blair. Good morning.

Stephen Lazarus

Good morning.

Bob Simpson - William Blair

Couple of questions on the schools. Number one, did they lose money in the fourth quarter and was that a larger loss than in the fourth quarter of the prior year?

Stephen Lazarus

They did lose money in the fourth quarter, but they didn't lose as much money as they lost in the third quarter.

Bob Simpson - William Blair

Did they lose money in the fourth quarter a year ago? Was that a negative swing or a neutral swing or -- ?

Stephen Lazarus

I'm checking for you now, Bob. You want to go on with another question?

Bob Simpson - William Blair

Sure.

Stephen Lazarus

And come back to that?

Bob Simpson - William Blair

Has there been partly an issue with -- that some of the other vocational schools had with the uncertainties regarding funding for students? Has that had an impact on the operation as well?

Leonard Fluxman

No, we've made our calls and we believe we're comfortable with the funding that we have in place with Sallie Mae and then we have not been put on notice that any of the student loan type programs for the courses that we teach right now are presently in jeopardy of not being funded.

Bob Simpson - William Blair

Okay. And have you a search ongoing for a new President?

Stephen Lazarus

We have somebody on board right now that is helping us that comes from a significantly larger school group, he's already been on board a couple of weeks. We're working very closely with him and some of the changes that we're making right now have been inspired by him and then we're too early here to say whether we have found the right person, but at least our initial feelings and the rapport that we have with him as well as his rapport with the school group is positive.

Bob Simpson - William Blair

Is he an employer or a consultant?

Stephen Lazarus

He's a consultant right now.

Bob Simpson - William Blair

Okay.

Stephen Lazarus

Going back to your question, the '07 loss was slightly larger than the '06 loss.

Bob Simpson - William Blair

Okay.

Stephen Lazarus

In the fourth quarter.

Bob Simpson

Right.

Stephen Lazarus

Okay.

Bob Simpson - William Blair

And then on the two ships that Royal is going to move to Pullmantur, you said you don't have agreements with Pullmantur, but would somebody else bid on those or do you have some reason to believe that you could keep them? I mean I assume they would not simply sail the ships without a spa?

Stephen Lazarus

I don't think they're sailing without a spa, Bob. I think right now, we have had some discussions with them. I think there's a lot of internal reorganization from what we understand right now and I think once they get their hands around these two ships coming over, hopefully we can have more fruitful discussions.

Bob Simpson - William Blair

Okay. The margins in the fourth quarter, the gross was fine, the SG&A, and you talked, Stephen, both of you have talked a little bit about it. If that larger loss, the loss in the schools -- does that, if you pull the schools out of the fourth quarter, would the pressure on expenses have been -- or the expense ratio have been significantly lower than what it was? The question is, are the schools having a disproportionate impact on the reported expense ratio in the fourth quarter as opposed to the gross?

Leonard Fluxman

I wouldn't say significantly disproportionate. They certainly impact some of that SG&A line. As Stephen had mentioned, we certainly had spent some -- we had made investment both in marketing and payroll on sort of the retail and spa side. So clearly, that's outside of the school group.

The gross margin line clearly is impacted by schools continuing to un-deliver, but that was clearly better on a sequential basis. In addition to which, in the gross margin line, there's the fourth quarter ratchet up of some of the cruise line incremental rents.

So overall, some of the leverage that might have come up through over-execution, but at the school level could have offset some of those costs as well as some of the softness that we saw in the department stores in the fourth quarter towards the end didn't have the return we'd hoped, certainly for the investment that we made. And clearly in certain areas, and even in the UK, that kind of caught us a little off-guard.

Bob Simpson - William Blair

Yes, last question on the resorts. You ended this 2007 with 54 units and you're going to have 50 -- does it change this year? I think you said 53, so it actually comes down. Now maybe one I'm looking at is actual one is average, I'm not sure. But there doesn't seem to be any growth. Do you have -- when you get a management contract as supposed to a build out, do you count that in the number of units that you serve? Or do you only do the ones where your own dime is in the -- ?

Leonard Fluxman

We count them all, Bob, Steve.

Stephen Lazarus

We count both Bob. It is on average. There are some smaller spas, particularly in Taipei that we will no longer be serving in the first quarter of '08.

Bob Simpson - William Blair

Okay. So how many new units are you anticipating for '08?

Leonard Fluxman

In '08, we have three that we've announced that will be coming into service.

Bob Simpson - William Blair

Okay. And how many -- the CapEx that's associated with those three?

Leonard Fluxman

It's included in the guidance.

Stephen Lazarus

Yes, there are smaller ones, Bob.

Leonard Fluxman

Included in the guidance of 9.4, smaller investments.

Bob Simpson - William Blair

Okay. So they're not a couple of million dollars apiece?

Stephen Lazarus

No.

Leonard Fluxman

No.

Bob Simpson - William Blair

No. Just one. Very good. Thanks a lot.

Stephen Lazarus

You're welcome.

Operator

Our next question comes from Joe Hovorka. Your line is open, please state your company name and ask your question.

Joe Hovorka - Raymond James

Thank you. Raymond James. A couple of quick questions. First one, the share count that you're using for your '08 guidance, what is that?

Stephen Lazarus

16.1 million.

Joe Hovorka - Raymond James

16.1?

Stephen Lazarus

Yes.

Joe Hovorka - Raymond James

Okay. Can you give us the segment profitability for the full year? Or do you have that yet before the case file?

Stephen Lazarus

Call back tomorrow, you can see us.

Joe Hovorka - Raymond James

Tomorrow? Okay, great.

Regarding the softness that you're seeing out there, can you talk a little bit about the differences in the segments? Are you seeing more softness, let's say, in cruise versus land spas versus products? And specifically, on the cruise lines, Carnival had talked about having softness in their costs in Carnival brands. Did you see any kind of difference in high-end versus low-end brands on the cruise lines that you're seeing a difference in trends?

Stephen Lazarus

Joe, there are so many different itineraries within each of those cruise lines that speak any kind of softness. Yes, there is and some of it could be by virtue of the way in which they're selling that particular itinerary, the demographic onboard. So there are certain itineraries that are probably under more pressure than others, depending on the cruise line. Did you say Costa that was soft?

Joe Hovorka - Raymond James

Yes, Carnival specifically said that the Carnival brand and the Costa of brand.

Stephen Lazarus

Yes. Costa for us so far has been fantastic. I mean, we've probably got Italians onboard spending in US dollars while the ships are over here. So for us, year-over-year right now, we're not showing the same kind of trend at all.

Joe Hovorka - Raymond James

Okay. And then in regards to the cruise lines versus the other stuff. Is it softer or there you've softness in land-based spa or cruise school -- not school, but products equally?

Leonard Fluxman

We probably cover a much wider demographic at sea than we do on land in Nordstrom, in a way in which we're out in their 44 stores and then some of the spas. It's mixed depending on which part of the country you're in.

Joe Hovorka - Raymond James

Okay. But you wouldn't say that cruises are softer than the other two segments?

Leonard Fluxman

Not from what I've seen thus far.

Joe Hovorka - Raymond James

Okay. And then last question, just looking at your revenue guidance for the first quarter of '08, could you have average weekly revenue at either land-based to ship spas and then non-ship spas flat or down in the quarter?

Leonard Fluxman

I think we've continued to execute very well here, third and fourth quarter, there was a prior trend where we were sort of trending down. Clearly that metric, to the extent there is consumer spend compression, it's hard to say. We're hoping to sustain the kind of levels we're at, but right now, we're not really seeing a complete trend of three months here in the first quarter. I really can't speak to where that's going to land.

Joe Hovorka - Raymond James

Okay. But the guidance would seem to imply that it's kind of flattish, making the assumption on what happened to schools and happened to the products that -- is that fair? I mean, should that -- how we should be thinking about at least in the first quarter?

Stephen Lazarus

Flat versus Q1 of the prior year or versus sequentially?

Joe Hovorka - Raymond James

Q1-over-Q1, year-over-year.

Stephen Lazarus

I think it's a mix, Joe, because we pulled it up by segment, there may be some that we're thinking of down depending on the geography or the type of brand. But a global assumption on up or down is more challenging for us to commit to.

Joe Hovorka - Raymond James

Okay, great. Thanks guys.

Stephen Lazarus

Okay.

Operator

We have one more question, one moment. It comes from Steve DeNichilo. Your line is open. Please state your company and you may ask your question.

Steve DeNichilo - Thomson, Horstmann & Bryant

Hey, guys. Thompson, Horstmann and Bryant. How are you doing?

Leonard Fluxman

Good. How are you?

Steve DeNichilo - Thomson, Horstmann & Bryant

Good. Just a quick question about CapEx here. I see down kind of meaningfully year-over-year. Can you talk about it a little bit?

Stephen Lazarus

Yes, the biggest piece in '07, obviously, was the Atlantis pull out. So you just see '08 getting back to a more normalized level. Remember, that was $15 million plus an additional amount that would get refunded that went out primarily in '07 to the Atlantis new spa.

Steve DeNichilo - Thomson, Horstmann & Bryant

Okay. That makes sense. Also on the guidance, if we could get a little bit more detail, at least directionally, on revenue per staff per day trends that you're expecting in '08 to get to your numbers. I mean I'm looking at '07 versus '06 in the fourth quarter and the spending trends do not appear dire to say the least, steady. So can you help us understand when you said that you are baking in a certain amount of slowdown in your guidance, I mean, how much of the slowdown are you expecting?

Stephen Lazarus

If you look, I mean I think overall in '07 versus '06, on a gross staff per diem basis, the number fluctuates. Remember that we've talked often about that number and stocking on board and how that may or may not impact. So I think we are expecting perhaps on that metric in and of itself a slight decline.

Steve DeNichilo - Thomson, Horstmann & Bryant

A slight decline. Okay. And is that based on indications you've seen in the first quarter already? Or this is just you guys?

Leonard Fluxman

No, we've certainly only got 30, 40 days of cruising and a lot of the numbers back in. And as I said before, certainly if we judge on the front part of January, even the latter part of January, we're just looking at some of the middle trends here in February that we're seeing, where there is a little softness in certain itineraries, but then again we've just had President's Day weekend, and there should be a pickup this week as well.

It's just too early to say if that's a trend. That trend's not based on what we're seeing for a full quarter. At least it's only based upon where we're expecting ships to be, which itineraries in the different cruise lines that appear to be having challenges. So I think it's just too early to call right now.

Steve DeNichilo - Thomson, Horstmann & Bryant

Okay, and just a final question here. So you guys bought back about $55 million in stock in 2007, correct?

Stephen Lazarus

$59 million, yes.

Steve DeNichilo - Thomson, Horstmann & Bryant

Right, okay. And now you have a new $100 million authorization. I mean with the stock at $30, 11 times the mid-range of your guidance, 10% free cash flow yield, I mean, if you weren't going to get aggressive now when you were buying stock in the 40s, I mean, when would you get aggressive? Can you help us understand that?

Leonard Fluxman

Well we certainly have -- with regard to what we did in the fourth quarter, we basically had a plan with a daily purchase limit on it.

Steve DeNichilo - Thomson, Horstmann & Bryant

Yes.

Leonard Fluxman

We're back in the market Monday, when we were in window. And to the extent we can be very aggressive, we will be.

Steve DeNichilo - Thomson, Horstmann & Bryant

Okay. Great, alright. Thank you very much.

Operator

We have another question from [Peter Tu]. Your line is open. You may ask your -- announcing your company and ask your question.

Peter Tu

Hello. Good morning. This is Peter Tu from (inaudible). How are you?

Leonard Fluxman

Good. How are you?

Peter Tu

Good. I know that visibility for this year is already poor, so to speak. I know that we were talking about some weakness, but it's difficult to say. In a way, this may not be fair, but just thinking about 2009, trying to get an understanding of the process. At one point in time would you know how many ships are going to be coming your way, how many ships -- how many companies you might be talking to?

Talking about the growth for 2009? You may know this already, if you expect the growth to slow near term, but 2009 should be okay? Or if you don't have any details like that, if there's a long term earnings growth rate or revenue growth rate that you aspire to?

Stephen Lazarus

We do have great visibility with regard to ships that we have under contract. If you look at the industry as a whole, they're probably certainly as regards the -- we've addressed the '08, we will get four ships in '09. The industry as a whole in two, three, four, five, six, seven, eight ships again. It's probably a little bit more in ten, in 11, there's five ships and then there's some ships coming in 11 and 12.

To the extent our contracts extend out to those dates, they typically are part of that contract. And so the visibility into '09 for us is really good with the partners that we have contracts with.

Peter Tu

Yes.

Stephen Lazarus

So we're pretty sure about what we're going to be getting over the next two years and to the extent the contracts are coming up for renewal, hopefully those will be part of the process. We can't comment, obviously, on the renewal process it only commences in '09 right now. But if you look at our track record, we've been reasonably successful, call it a 90% success rate in renewal.

So we hope to get a majority of those ships coming into service. There are certain cruise lines within that build program that I mentioned that we have not served and we always try and get what we're not serving as part of the capture. So we'll wait to see.

Peter Tu

Okay. Great. And then as a follow-up to a previous question, with regard to the schools. Have you talked about what percentage of your students, if any, are subprime in terms of the loans they have?

Stephen Lazarus

No. We've --.

Peter Tu

I guess the question there is, because I know with some of the other post-secondary education schools, the issue has been with Sallie Mae and their troubles lending to students of subprime quality.

The particular segment that our students loan from hasn't fallen into the same type of categorization of loans that have been discontinued by these lending organizations. But while they may indeed be students who one might consider to be of lower risk or lower credit worthiness rather and higher risk, in and of itself, the loans that have been available to our students historically in terms of the programs remain available.

Peter Tu

Okay, great. And just the last question, talking about contract visibility, as contracts expire and than talks begin for renewals, what is the flavor of your conversation like? Is it usually, is it on a more macro basis as to what the demand is going to be for the ships? People going on cruises? Or demand for your services or is it pricing? Are there certain key issues that you would think are critical when talking about renewal of contracts?

Stephen Lazarus

We've been having these contracts for many, many years, these discussions. I mean they focus primarily around pricing. Really to the extent that you can bring any of those other factors to the table, we try. But principally it's around pricing and capacity.

Peter Tu

Okay, great. Thank you very much.

Stephen Lazarus

Welcome.

Operator

At this time, we have no further questions. (Operator Instructions)

Stephen Lazarus

Alright. Thank you very much for listening to our fourth quarter call, and we'll speak to you again after our first quarter. Bye.

Operator

Thank you. That does conclude today's conference call. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Steiner Leisure Ltd Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts