WTW: Chapter 11? (4Q14)

Takeaway: Disaster guidance release + premature debt service talk = deteriorating setup in a name that will struggle to tread water moving forward.

KEY POINTS

  1. ANOTHER DISASTER RELEASE: WTW's 2015 guidance came in $0.40-$0.70, well below consensus of $1.43 and our bear-bull case EPS range of $0.71-$1.09.  Management guided to 2015 revenues of $1.2B (down -14% y/y), with the majority of that pressure coming from its core North America segment, which is expected to decline in the low-20% range.  The more important note is that the 2015 may wind up being WTW's worst winter selling season in its history.
  2. AIRING ITS DIRTY LAUNDRY: We're not sure why management chose to highlight its cash preservation priorities, and upcoming 2016 debt maturity, to a sleepy sell-side audience with a 3-yr track record of grossly overestimating its prospects.  The metrics that management provided were somewhat unsettling.   What were once whispers of a potential bankruptcy are now front in center on the street.  
  3. SILENT ON THE HEALTHCARE OPPORTUNITY: Not too much to add here since management didn't provide any incremental color on either the HUM deal or its Healthcare opportunity, which is central to its recovery plans.  Our thoughts here haven't changed.  We don't believe the actual opportunity is anywhere near its $300M estimate, but even if it is, it's small change relative to the $1.4B generated by its core business, which may be in secular decline.  
  4. CHAPTER 11? Still way too early to say, but it doesn’t seem like there is much management can do to avoid it.  Aside from all the anecdotal chatter on how WTW can’t keep up with a rapidly evolving industry, its financials tell a more tangible story.  WTW needs to aggressively invest in its business to return to top-line growth, but its massive debt load ultimately limits most of its options (see charts below).

 

ANOTHER DISASTER RELEASE

WTW's 2015 guidance came in $0.40-$0.70, well below consensus of $1.43 and our bear-bull case EPS range of $0.71-$1.09.  Management guided to 2015 revenues of $1.2B (down -14% y/y), with the majority of that pressure coming from its core North America segment, which is expected to decline in the low-20% range.  The more important note is that 2015 may wind up being WTW's worst winter selling season in its history.

 

WTW: Chapter 11? (4Q14) - WTW   1Q Selling Season 2015 3

 

2015 guidance is inclusive of its plan to cut $100M, but doesn’t include the associated $10M restructuring charge in 1Q.  Management didn’t provide specific 1Q15 EPS guidance, but suggested that it expects to produce “marginally profitable” operating income, but expects to produce negative EPS.  Management is essentially saying that it can’t cover its interest expense in 1Q15.

 

AIRING ITS DIRTY LAUNDRY

We're not sure why management chose to highlight its cash preservation priorities, and upcoming 2016 debt maturity, to a sleepy sell-side audience with a 3-yr track record of grossly overestimating WTW’s prospects (Note the disclosure came before Q&A started).  

 

Management provided the following detail, which are hard to draw any confidence from.  The basic math suggest that WTW is expecting to generate ~$90M in CFO in 2015, vs. the $232M it achieved in 2014.  Further, management painted a picture that retiring its 2016 debt may be a challenge.  

  • 2014 Ending Cash: $301M
  • 2015 CapEx: <$40M
  • 2015 Year-End Cash Target: >$350M
  • 2016 Debt Maturity: $314M (due in April) 
  • 2020 Debt Maturity: $2.4B

Now it’s all on the table; what were once whispers of a potential bankruptcy are now front in center on the street.  

 

SILENT ON THE HEALTHCARE OPPORTUNITY

Not too much to add here since management didn't provide any incremental color on either the HUM deal or its Healthcare opportunity, which is central to its recovery plans.  Our thoughts here haven't changed.  We don't believe the actual opportunity is anywhere near its $300M estimate, but even if it is, it's small change relative to the $1.4B in 2014 revenues generated by its core business, which may be in secular decline.  

 

CHAPTER 11?

2020 is still a whiles away, so way too early to say.  But right now, it doesn’t seem that there is much management can do to avoid it.  Aside from all the anecdotal chatter on how WTW can’t keep up with a rapidly evolving industry, its financials tells a more tangible story.  WTW needs to aggressively invest in its business to get out of its hole; particularly marketing (ad campaigns)

 

WTW: Chapter 11? (4Q14) - WTW   Revenue vs. Marketing 

 

However, increasing advertising spend may not be enough moving forward.  Member acquisition costs (marketing expense/new member) have skyrocketed since 2011.  WTW is now approaching the point where it is barely generating enough gross margin to cover its member acquisition costs.  

 

WTW: Chapter 11? (4Q14) - WTW   Chapter 11 v2

 

Right now, WTW's 2015 guidance is essentially calling for Interest coverage ratio of ~2.0x, which means it doesn't have a  ton of wiggle room, especially given its high fixed cost structure.  Any gamble on investments and/or promotions (e.g. price cuts) could come back to bite them.  

 

WTW: Chapter 11? (4Q14) - WTW   Interest Coverage

 

In summary, WTW needs to aggressively invest in its business to return to top-line growth, but its massive debt load ultimately limits most of its options.

 

 

Let us know if you have any questions or would like to discuss in more detail

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

Thomas Tobin

@HedgeyeHC 

 


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