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Executives

Clive Warshaw – Chairman

Bob Boehm – SVP and General Counsel

Leonard Fluxman – President and CEO

Stephen Lazarus – CFO

Analysts

Steve Wieczynski – Stifel Nicolaus

Kristine Koerber – JMP Securities

Assia Georgieva – Infinity Research

David Katz – Oppenheimer

Joe Hovorka – Raymond James

Bob Simonson – William Blair

Steiner Leisure Limited (STNR) Q2 2008 Earnings Call Transcript July 31, 2008 11:00 AM ET

Operator

Thank you all for standing by. At this time, all participants are in listen-only until the question-and-answer segment of today’s conference call. This conference is being recorded, if you have any objections you may disconnect at this time. I will now turn your meeting over to Mr. Clive Warshaw. Thank you sir, you may begin.

Clive Warshaw

Good morning, ladies and gentlemen. Welcome to our second quarter 2008 financial results. I would immediately like to hand you over to Mr. Boehm who will read a short statement.

Bob Boehm

Thank you, Clive. Good morning. I’m Bob Boehm, General Counsel here at Steiner. During the course of this conference call, we will make statements that may be deemed to be forward-looking statements within the meaning of the Federal Securities Laws. 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 2007, and subsequent reports filed by us with the SEC.

Forward-looking statements should not be relied upon as predictions of actual results, subject to any continuing obligations under applicable law, we disclaim any obligation to disseminate after today any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any these statements are based.

Leonard Fluxman

Thank you, Bob. Good morning, ladies and gentleman, and welcome to Steiner Leisure 2008 second quarter earnings call. With me today, here in Miami, I have Stephen Lazarus, our CFO; Bob Boehm that you heard from; and Clive Warshaw who’s on the line as well.

I’m going to start as usual with an overall summary of the quarter followed by an analysis of the performance by business segment. I’ll then hand you over in typical fashion to Stephen Lazarus, our Chief Financial Officer, to give you a breakdown on specific balance sheet items, cash on hand, an update on stock repurchase summary to date, CapEx during the quarter, and other pertinent balance sheet data. We will also address guidance for the third quarter and the year and then turn it over for our regular Q&A session.

As a reminder to everybody who wasn't on the first quarter call, we have a contract with British Airways where we operate all their spas located at British Airway terminals in the UK and at Kennedy Airport, and in addition provide Elemis branded amenity bags onboard in Club World and we are going to be excluding the revenues and impact on cost of goods associated with this agreement in our discussion that follows.

So maybe now, total revenues for the second quarter grew 3% quarter-over-quarter. Gross profit grew 1% quarter-over-quarter while operating income declined 6% quarter-over-quarter. Our service margins declined 210 basis points to 18% while product margins expanded by 250 basis points to almost 31%, delivering gross margin of 22% which is 50 basis points lower than the second quarter in the prior year but up 30 basis points sequentially. Service margins declined primarily due to lower carry-on populations in our West Coast Schools from our August and October starts in the prior year which we discussed on our last conference call as well as the impact of the continued softening in the economic environment which has shifted some of the onboard spend to a higher service mix than the historical mix of product and service that we have reported. These are the primary drivers for the decline in operating margin of 80 basis points.

Overall, the quarter came in above our guidance which was $0.62 to $0.64 primarily by improved margin on product sales coupled with very decent leverage in our general and administrative expenses.

Our Cruise Ship Spa Division executed satisfactorily during the quarter in delivering total revenue growth from as far as 2% quarter-over-quarter. This reflects the tougher onboard spend environment as well as some of the negative impact of longer itinerary – longer cruises of seven-day which is the typical itineraries which are optimal for revenue. Average weekly revenue on all ships grew by 4% quarter-over-quarter; average weekly revenue from spa ships grew 2% quarter-over-quarter with non-spa ships declining by 2% quarter-over-quarter, primarily due to itinerary changes in the quarter. Gross staff per diems in all ships decreased 1% which is derived [ph] by gross staff per diems per spa ships declining by 1% and non-spa ships declining by 4%.

During the second quarter, we began operating three new, not new, but three Ibero Cruises vessels and during the next quarter, the third quarter, we begin operating the spas and fitness facilities on the new Carnival Splendor and on a smaller non-spa ship, the Prince Albert.

Turning to the Resort Division, revenue has increased 2% quarter-over-quarter and our average weekly revenue results increased by almost 8% quarter-over-quarter. Despite the continuing softening in the U.S. and UK economies, our product division continued to grow and their revenues grew by almost 13% quarter-over-quarter. As of today, we had expanded distribution into 58 Nordstrom stores in the U.S. and 19 stores in the UK, bringing the total store count to 78 department stores. We anticipate rolling out a further six stores in the United States and three more in the UK by year end.

Lastly, turning to Steiner Education Division, our revenue has decreased 3% quarter-over-quarter primarily from the lower prior year carrying population on our West Coast Schools. Our East Coast schools came in ahead of our forecast for the second quarter which as you recall was the troubled segment last year and we continue to tweak initiatives and we hope that we continue to see some of the positive impact on our long-term results from these divisions.

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

Stephen Lazarus

Thank you, Leonard. Good morning, ladies and gentlemen. Details on the second quarter of 2008 are as follows: Depreciation and amortization for the second quarter was $3 million broken down as $718,000 below the line depreciation, and $160,000 below the line amortization. Above the line depreciation was $2.2 million.

Our estimate for the third quarter is for depreciation and amortization of $3.2 million with below the line depreciation at $800,000 and below the line amortization at $160,000. Above the line depreciation is expected to be $2.2 million. Capital spending in the second quarter was $1.5 million and is expected to be $2 million in the third quarter. Net cash at June 30 was $24.3 million and as of today, we have $31.8 million. We did not repurchase any shares since our last conference call and therefore have $85.3 million remaining from our February 2008 share repurchase plan authorization.

Moving then on to our guidance, we are reaffirming and maintaining our full-year guidance of revenue in the range $550 million to $560 million with earnings per share guidance of $2.70 to $2.80. For the third quarter, we expect revenue to be in the range of $142 million to $144 million with Q3 earnings per shares estimated at $0.69 to $0.71.

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

Question-and-Answer Session

Operator

At this time, we will open to a Q&A. (Operator instructions) Steve Wieczynski, your line is open for question, simply state your company name.

Steve Wieczynski – Stifel Nicolaus

Yes, good morning, Stifel Nicolaus. Couple of question for you guys. First, how is the current environment kind of looking, as you look out past the second quarter into July, has it gotten softer or is it stronger?

Stephen Lazarus

Steve, actually, July seems to be holding as – I mean July is typically a pretty descent month for us. The ships are well positioned and well entrenched into their itineraries right now. So we’re not seeing softness in July following what we have seen in June. It’s holding nicely and in some cases, a little better than June itself.

Steve Wieczynski – Stifel Nicolaus

Got you. Can you, as you normally do, kind of run through the new ships you expect for ’08?

Leonard Fluxman

Sure. As I mentioned, we have just got on the Carnival New Splendor which has an incredible spa, kind of similar to the spa that we introduced on Costa ships and we also just took – we took the Eurodam into service as well and we began operations on that so that in the very end of the second quarter, so that will impact the third quarter for full quarter. Princess introduces the Ruby Princess in the third quarter, kind of like mid to late November and as you may recall, we took the Independence in the second quarter. We also added, as I mentioned, three small Ibero cruises which is market expansion for us. So, that is kind of the new capacity that came in as well as the small (inaudible) ship.

Steve Wieczynski – Stifel Nicolaus

So, year-end number should be somewhere around – looks like 128? Is that right?

Leonard Fluxman

Yes, provided that there are no unforeseen drydocks. As you may recall, we report everything on average but the absolute number will be closer to that. Yes.

Steve Wieczynski – Stifel Nicolaus

Okay. And then, do you have a number for ’09 or do not give that yet?

Leonard Fluxman

Not at this point. Some of the ships may be pulled out of service, not yet announced, etc. so we typically would not be able to give you that kind of visibility right now.

Steve Wieczynski – Stifel Nicolaus

Got you. Is there any update on the Solstice class?

Leonard Fluxman

We’re working hard on it. All I can say is that we are in very – we have been in a prolonged discussion with them and we hope to be able to do something imminently as – just things take longer than one usually hopes.

Steve Wieczynski – Stifel Nicolaus

Okay. Got you. And then, one more question on the guidance. It looks like – if you did $0.61 and $0.68 in the first two quarters of the year, it looks like you expect a significant kind of fall off towards the back half of the year. Is that conservatism or you are seeing some softness, do you expect softness on the onboard spend?

Leonard Fluxman

It is okay and I think, in the next six months, the fact that we are holding our guidance is not suggesting that we’ve seeing a deterioration from anything that we have seen even in the second quarter which certainly was a top quarter, but I think we executed well. The third quarter typically is a solid quarter for us and the fourth quarter is – it has got some good products. It has got Christmas in there but then again, the first part of the fourth quarter in maritime seems typically not sort of right season aside of the Christmas and New Year week, so I don't think we are saying anything different than we have ever said before in terms of how we look at the back end.

Steve Wieczynski – Stifel Nicolaus

Okay. Got you. Maybe if I can throw one last high-level question in here. When you look at the cost of new ship builds now and you are seeing a lot of the major carriers or cruise line start to slow down their CapEx spending as we get out towards 2011 and 2012. How do guys kind of look at that as you look out over the next couple of years, the spending will slow down, the number of new ships kind of slows down as well. What are your thoughts there?

Leonard Fluxman

This would not be first or last time we see some kind of a slowdown in build programs and we have seen build programs slow down sometimes just because of – they build quickly in two or three years and added a lot of capacity or because they are currency-impacted or whatever the other constraints are. I think, in years, where we have seen the industry and you can look at '05 and '06 where capacity was not added as quickly as prior years, Steiner still continued to grow. Capacity in and of itself is always good for us and new ship visibility and build programs definitely help, but that is not to say we can't grow with the existing capacity which will not get cannibalized by new capacity additions as quickly perhaps as it has done historically. So, I do not look at it as a total negative. I look at it sometimes, if '12 and '13 are years in which there is a little bit of compression on the capacity additions, it is not a total negative for Steiner.

Steve Wieczynski – Stifel Nicolaus

Okay, great. Thanks, guys. Good quarter.

Leonard Fluxman

Thank you.

Operator

Our next question is from Kristine Koerber, please state your company name.

Kristine Koerber – JMP Securities

JMP Securities. A couple of questions, first of all, the products revenues actually were pretty solid during the quarter. Are you doing anymore discounting? What is going on to drive the product sales?

Leonard Fluxman

Actually, we are not doing any more discounting. Product sell-through in most of our channels was descent although as a I had mentioned onboard, we see a shift more – we have seen a shift in the quarter more to the purchase of services as opposed to product itself. But, in the rest of our distribution channels, in our products was descent and not through discounting at all.

Kristine Koerber – JMP Securities

Okay. And then can you comment on your recent acquisition of the Connecticut Center for massage therapy. Does this acquisition – do you need to do any work to the schools that you acquired or is this kind of like the Utah school that you purchased?

Leonard Fluxman

No. They are very, very well run schools. They’ve been around for a considerable period of time in the region. We believe it is a quality brand and has a tremendous reputation in Connecticut and in the industry itself. It’s accredited by similar associations to the ones that we have with in Utah [ph] and in Florida as well. They've got decent infrastructure. They've got strong leadership and most of that leadership will be coming along with us and we are very excited about it because this provides us an opportunity to ultimately leverage our infrastructure that we've built and that we’ve taken to another level since we bought Utah. So, we look at this as a very positive addition to the existing pool of campuses that we have.

Kristine Koerber – JMP Securities

All right, thank you.

Leonard Fluxman

Welcome.

Bob Boehm

Operator, are there any further questions in the cue?

Operator

Thank you. Our next question comes from Assia Georgieva. Please state your company name.

Assia Georgieva – Infinity Research

Good morning, this Assia with Infinity Research. Congratulations on the 12 MindSpa on Carnival Splendor, it is indeed quite something. Leonard, I wondered if you had looked at those couple of partnerships that they have (inaudible) cabins and how that impacts your weekly revenue at the large spa ships?

Leonard Fluxman

Costa does an incredible job with their spa cabins, in pre-selling them and selling them with the associated spa opportunities and sort of spa add-ons. And they're really being today’s leader in the spa cabin offering. The Splendor has been modeled upon the success story of Costa and I’m sure you were onboard. It’s a beautiful spa, the Splendor, absolutely gorgeous and we hope to continue the strength of the product that we have seen on Costa. Costa, with the three of the ships that offer the same spa, have just been absolute homeruns for us.

Assia Georgieva – Infinity Research

Would you be able to quantify that and possibly give us some occupancy percentage?

Leonard Fluxman

No, we wouldn't do that. Quite frankly, I don't even have the data to say what the absolute impact on our spa has been just from the eighty or so cabins that exist on Costa. But certainly the way in which we help create with Costa the experience, how they've augmented the spa, both from Costa's execution and our execution of partnering with them in just being an absolute homerun. We are very, very excited about it.

Assia Georgieva – Infinity Research

And just turning more specifically to this quarter, productivity is down. To what extent would you attribute that to the fact that about 25% more capacity is sailing in Europe and I think in the past you have stated that Europeans do not spend as much onboard, including at the spa, relative to North Americans?

Leonard Fluxman

I don't think I can pinpoint it directly to a European consumer versus a U.S. consumer. It's certainly a lot of U.S consumers taking advantage of not having to be exposed to the Euro when they go and take a vacation on one of the cruise ship, and it’s full of tremendous value preposition, not just spending it on land and I think the ships have certainly seen the fruits of that comparison. In and of itself, one thing that can generally, as I said, lead to a slightly lower spend on longer cruises in areas that the ships have not been historically and so we love seven-day cruising. When it starts to get beyond 12 and 14-day cruising, it can impact the spend because generally the spend of a 14-day and seven-day is typically – it compresses itself up to about seven or eight days.

Assia Georgieva – Infinity Research

And is that the reason for the larger decline at the non-spa ship?

Leonard Fluxman

Some of the non-spa ships and a lot of non-spa ships tend to be even in the luxury segment, the spend itself can be challenged by itinerary changes. Yes.

Assia Georgieva – Infinity Research

Would you also update us on your progress with MSC? It has been a long-term project so –

Leonard Fluxman

There has been no further change in our relationship or agreement. Actually our revenues are up year-over-year on the ships. We have a decent operating relationship with MSC but we have had no further discussions with regards to new capacity at this point.

Assia Georgieva – Infinity Research

And you’re on how many ships on tour?

Leonard Fluxman

One.

Assia Georgieva – Infinity Research

On one?

Leonard Fluxman

One MSC, one of their ships, yes.

Assia Georgieva – Infinity Research

Could you also discuss briefly the improvement in land-based weekly revenues? Is that in North America? Is it mostly aviation staff which obviously suffered quite a bit a couple of years ago?

Leonard Fluxman

Certainly, we’ve tweaked a couple of things within the division. We’ve had decent first quarter and second quarter last year. We have to be cognizant as we look at the hotel and hospitality industry as to what their occupancy levels are going to be like. So I want to be cautious and conservative, I think it’s what you call me sometimes. But I really just want to make sure that we are going to still get to capture going into the back half, that we hope to get in order to continue some of the improvement that we’ve seen in this division.

Assia Georgieva – Infinity Research

And is there a region that that you’ve seen most of the improvement, again, in North America, Asia? I imagine it is probably in the larger spas in North America.

Leonard Fluxman

Yes, it's really the larger spas that impact – really, I mean, when those spas are operating well, the impact is far more considerable than anything that could happen in Asia which is because of their ship size, yes.

Assia Georgieva – Infinity Research

Sure. And last question and a follow-up to Kristine's question on your acquisition. Given that the enrollment increases about 15%, can we expect about $7 million in revenue per year and what is your margin expectation for just the Connecticut acquisition?

Leonard Fluxman

Well, the revenue expectation in ’09 is going to be slightly north of $5 million for the school group in three campuses.

Assia Georgieva – Infinity Research

For 2009?

Leonard Fluxman

Sorry, $5 million not $7 million. I think you mentioned $7 million?

Assia Georgieva – Infinity Research

Yes.

Leonard Fluxman

No. It is slightly up of $5 million. We have some opportunities in there. They only have right now three spas per the year. We’ll probably bring that more in line to five spas curriculum of Utah. We'll certainly leverage as much of the infrastructure we have there to improve existing margin. But, that will take us six to nine months to start to see the fruits of that. So while it’s going to be minimally accretive in ‘08, clearly to the extent that we bring them in line with things that are working now in the school group, obviously there is opportunity in ‘09.

Assia Georgieva – Infinity Research

And your targets in terms of operating margin?

Leonard Fluxman

Our target in operating margins has always been as we’ve said on the call, they can be depending on the campus 15% to 19% operating margins, but they do defer by jurisdiction. But that's certainly where we’re trying to target those margins to get to.

Assia Georgieva – Infinity Research

That sounds good. Thank you so much, Leonard.

Leonard Fluxman

Captain’s margin, captain’s margin, Assia.

Assia Georgieva – Infinity Research

As opposed to operating margin?

Leonard Fluxman

Operating margin after we’ve taken out the corporate overhead.

Assia Georgieva – Infinity Research

Which includes marketing?

Leonard Fluxman

Which includes marketing, yes.

Assia Georgieva – Infinity Research

Okay. And when it comes down to the corporate margin, what would you say that is?

Leonard Fluxman

Increase. When we spoke about the Utah schools on the acquisition there, we targeted them to be north of 10% on an operating margin basis. Certainly, in line if not better than margins that we experience elsewhere in our portfolio.

Assia Georgieva – Infinity Research

Okay. All right. Thank you so much, Leonard, again.

Leonard Fluxman

You’re welcome.

Operator

Thank you. Our next question is from David Katz. Please state your company name.

David Katz – Oppenheimer

Oppenheimer. Good morning. I just wanted to follow up one comment that jumped out at us in the results and it was the gross margin on services and I think there was some commentary about mix in there. Could you provide a little color as to what that means exactly?

Leonard Fluxman

Sure. Without getting into specifics, I mean, that would obviously relate to different relationships across the board and the number of cruise lines, and mix of each of those cruise line agreements into the total number. Depending on where revenue is being generated more successfully than others and the nature of agreement itself as to how we pay rent for services or we pay rent for products, that mix can impact your margin and it did so in the second quarter. As you see, a higher shift towards service revenue versus product, that can impact and compress your service margin.

David Katz – Oppenheimer

Okay. And as we look out the next couple of years, can you just bring us up-to-date on when you have any potential re-negotiations coming up in any bunches?

Leonard Fluxman

I think we’ve mentioned before the Norwegian Cruise Lines will come up in middle of – May of ’09 and then we have contract renewals. Disney comes up as well in ’09. Those are the two big ones in ’09. Outside of that, the contract for Royal Caribbean, Celebrities sort of January 10 and principally nothing else prior to that.

David Katz – Oppenheimer

Got it. Okay. Thank you very much.

Leonard Fluxman

Welcome.

Operator

Thank you. Our next question is from Joe Hovorka. Please state your company name.

Joe Hovorka – Raymond James

Thanks. Raymond James. Most of my questions have been answered, but I guess housekeeping ones. What was the equity at the end of the quarter?

Leonard Fluxman

Hold on.

Joe Hovorka – Raymond James

And then the other question, I guess, while your looking is the Ibero cruises, those ships, are they in the spa category or non-spa category?

Leonard Fluxman

The smaller ships are very – sort of (inaudible). It is a complete Spanish brand.

Stephen Lazarus

But much smaller ships – some of them, they may do some work to improve this.

Leonard Fluxman

But, we took over the existing operations that they ran themselves. Sorry, just going back to your equity question, Stephen, what was it?

Stephen Lazarus

$185 million, Joe.

Joe Hovorka – Raymond James

185, okay. And then, just one more on the Ibero ships.

Leonard Fluxman

Joe, the Grand Mistral is like a 1200-passenger ship, the Grand Celebration 1486 and Grand Voyage is 830. Some of these ships we have serviced before under different brand names like the Mistral was actually a festival ship that they acquired.

Joe Hovorka – Raymond James

Right.

Leonard Fluxman

The Mitral spa; that's not a spa ship.

Joe Hovorka – Raymond James

Got it. And when were they added in the quarter? It was this quarter or the second quarter?

Leonard Fluxman

Very late in the second quarter, so they weren't in for a full quarter – late in June.

Joe Hovorka – Raymond James

Got it. Okay. Thanks guys.

Leonard Fluxman

You’re welcome.

Operator

Thank you. Our next question is from Bob Simonson. Please state your company name.

Bob Simonson – William Blair

William Blair. Good morning. Stephen, you have given in the past the guidance on the ships and breakdown on what you expect on average ships outstanding with Ibero and some of these other changes. I've got on spa ships 97 for the third and the fourth quarter. I’ve got 30 non-spas in the third and 29 in the fourth, and 54 resorts in both the third and the fourth quarter. Can you update that – if I made a mistake?

Stephen Lazarus

Yes. Of course. So on the ship count in total, for the third quarter on average, we are expecting 131 – 130 in the fourth quarter to take it to 129 for the year. Spa ships, I think you heard it right, 97, 97. And then non-spa is 34 primary additions being now there is Ibero cruises, plus the Prince Albert, and then 33 in Q4.

Bob Simonson – William Blair

Okay. And the resorts?

Stephen Lazarus

The resort spas, we'd be 54, 54.

Bob Simonson – William Blair

That's still okay?

Stephen Lazarus

Yes.

Bob Simonson – William Blair

You talked about the smaller size or Ibero ships. In the most recent quarter, your revenues, your average weekly revenues on a non-spa ship were about $16,000. Are they much different than that?

Stephen Lazarus

We really need to see them in for a full month before we can really say what they get to settle down with. It's slightly different passenger profile to what we have served before, until we really had I would say 30, 60 days experience on the revenues, until they stabilize, may be slightly different.

Leonard Fluxman

With that being said, the Mistral has got a nice spa. They have been nice little ships. I mean, we are happy with what we are seeing thus far, but we are just going to tweak the program and see what is working, what is not working, and then we will let you know how it goes on the next quarter.

Bob Simonson – William Blair

Okay. And follow up on the Solstice, it was always my opinion that you’ve got in fairly early on the planning of a spa on a new ship?

Leonard Fluxman

Yes, we do. Yes, we have influenced a lot of the design. We have influenced a lot of the creative. We have been very involved in the programming. It has been a very good experience thus far. We'd love to have been able to share with you where we are at right now, but we’re still in discussions.

Bob Simonson – William Blair

When you say discussions, for the contract?

Leonard Fluxman

Yes. Solstice was never a part of it because it was expected to come in – because it really comes in towards the end of a contract. So therefore, it was held out as some of the agreements typically hold out ships that fall within the last part of the operating agreement.

Bob Simonson – William Blair

Okay.

Leonard Fluxman

So, this is not unusual. I tried to push for having something to announce but the lawyers will be lawyers and what can I say?

Bob Simonson – William Blair

Okay. And is it that same process going on with Oasis? Was that left out as well? Is that something you will negotiate?

Leonard Fluxman

Yes. Oasis would have been left out as well because it falls towards to the end of the road Caribbean contract, so we will start talking to them on that one I’m sure in the not to distant future.

Bob Simonson – William Blair

Have you had any inputs on how big, how long, what it should have in it, what you can do differently or design?

Leonard Fluxman

We do all of that and we have been very involved in the design and staffing and experience and so, yes, we participated in that quite heavily.

Bob Simonson – William Blair

Okay. Just an update, any new retailers you’re talking to? Is there anything before Christmas or –?

Leonard Fluxman

No. I don’t think expect a new name to be in the mix there. We have got a slew of names in the UK. Any one, two names here in the U.S. but no – no major names that we are in discussions with right now.

Bob Simonson – William Blair

Okay. And in the resorts, on the weekly activity in the first quarter of last year, you had declines in the first, a modest one on the second quarter, and then it strengthened in the second half. Does that suggest that the very good resort productivity in the first half you had might not be sustained in the second half or do the comparisons not make that much difference?

Leonard Fluxman

No. There is seasonality and we might not be able to sustain the same sort of run-ups that we have had just I mentioned before. There is seasonality in that business and certainly the second quarter tends to run-up and the third quarter tends to be softer just because they are softer a month after the summer, September being probably the slowest month of all.

Bob Simonson – William Blair

Okay. Last question, there was the issue of profitability in the schools going into the second half of the last year and there were somewhat of disappointment. Were they profitable in the first and second quarters of this year?

Leonard Fluxman

The group, yes.

Bob Simonson – William Blair

The school group?

Leonard Fluxman

Yes.

Bob Simonson – William Blair

Okay. In both quarters?

Leonard Fluxman

In both quarters, yes.

Bob Simonson – William Blair

At or above or below your expectation?

Leonard Fluxman

Certainly, the East Coast Group is – in fact both groups are above our forecast. So, we are happy with where we have come to – I mean the West Coast School certainly was impacted as I said by – under sort of the carrying populations from starts in the prior year August and October starts, which impacted ’08. But, right now, we are in that season right now which is an important part of next year’s revenue and starts that will fall in August this year. We are happy with what we have got sort of in the Q.

Bob Simonson – William Blair

All right, good. Thanks a lot.

Leonard Fluxman

Thank you.

Operator

Thank you. At this time, I am showing no further questions in the queue. (Operator instructions)

Leonard Fluxman

Thank you, Cindy. Thank you, ladies and gentlemen, for joining us on the second quarter call. We look forward to talking with you sooner on our third quarter call.

Operator

Thank you. This concludes today’s teleconference. You may disconnect at this time.

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