Reducing Leverage by Leveraging Cash Forecasts

WW International, formerly Weight Watchers, has been a powerhouse in the wellness industry for decades. The business has changed over its 56 years; for two-thirds of its members, digital tools have replaced the in-person meetings the company was built around. Still, the business’s primary revenue driver remains subscriptions to its flagship weight-loss and wellness program.

In 2017, WW was starting to gear up for the launch of a major program innovation, but first the company needed to re-evaluate its debt situation. Its earnings before interest, tax, depreciation, amortization, and stock-based compensation (EBITDAS) totaled $258.7 million for 2016, and it owed $2.021 billion on an institutionally held term loan. The loan had an attractive interest rate, but it would come due in April 2020, which meant that in two years it would be a short-term liability. WW also had a $50 million revolving credit facility.

The WW team saw that having a leverage ratio above 7x was clouding perceptions of the company’s potential. “We wanted to invest in the future of the business,” says Jarod Greenblatt, vice president of financial planning and analysis (FP&A) and assistant treasurer. “We had plans for important innovations, and we didn’t want the debt overhang to get in the way of that.”

“Our leverage had been a bit high for years,” adds Corey Kinger, vice president of investor relations. “We had frequent communication with our debt holders for several years leading up to 2017, with the intention of refinancing at the first good opportunity.”

Management made refinancing the debt to extend maturities a priority for 2017 so that the organization could spend 2018 focused on its new customer program. The company set a short-term goal of reducing its leverage as quickly as possible, including partially paying down the term loan. Greenblatt, who had recently taken on responsibility for treasury, recognized that the treasury group needed a much clearer view of cash flows throughout the organization.

“We didn’t have a very accurate liquidity forecast to base decisions on,” Greenblatt says. “We knew our cash balances, obviously, but we didn’t have insights into what was coming so that we could optimize our use of cash.” That changed when Greenblatt took over the function. “The integration of treasury/cash management and FP&A really benefits the company on both sides,” Kinger says.

“With my FP&A background, I understood how important forward-looking estimates are,” Greenblatt concurs. The treasury group started building out a complex model in Microsoft Excel that would produce weekly forecasts of upcoming cash flows. “The goal was to understand how much cash we had on hand and how we could repurpose it, whether to pay down debt or use it on some kind of strategic transaction,” Greenblatt says.

The resulting spreadsheet-based model pulls in data on actuals from the company’s enterprise resource planning (ERP) system, as well as specifics on timing of payables from its accounts payable (A/P) system. It also utilizes a revenue model WW had previously built to understand when cash would be coming in. “We already had all this data, but we weren’t utilizing it for cash management and liquidity management,” Greenblatt says.

To gauge the effectiveness of the new forecasts, Greenblatt’s team began reporting each week on how actuals compared to the prior week’s forecast. Senior management relied heavily on these reports in making capital structure decisions, and within the first quarter after the new forecasting process was launched, WW was able to make its first incremental reduction of the term loan, paying down $75 million.

The company’s business performance was improving, and it was chipping away at its leverage ratio. The treasury group began coordinating with a cross-functional team to determine how to present the company’s financial story to prospective lenders, shareholders, and credit ratings agencies.

The team maintained their practice of holding quarterly discussions with the ratings agencies, where they pointed out that WW was reducing its leverage ratio and that the business was growing as well. “Convincing lenders and ratings agencies that the improvements were sustainable required ongoing dialogue with executive leadership and a deep understanding of the business,” Kinger says. “This dialogue, along with our continued business improvement, led to two ratings upgrades from Moody’s and one upgrade from S&P during 2017. Needless to say, this strengthened our position heading into the refinancing.”

At the same time, Greenblatt and WW’s CFO, Nick Hotchkin, worked to build a syndicate of five banking partners that would support the company’s refinancing. “We already had strong relationships with two of these banks, but we spent a lot of time building relationships with a few new banks,” Greenblatt says. “We let them know right away that our intention was to refinance the debt and we wanted them all to be a part of it. Over the course of 2017, we met with them regularly to understand what options were available to us as the business continued to perform well.”

On its November 2017 earnings conference call, management introduced a long-term objective of bringing net debt down to 3.5 times EBITDAS, a reduction of more than half. Shortly thereafter, the company launched the refinancing process; Hotchkin and the company’s CEO participated in the roadshow. Communication was key. So was the company’s improved cash forecasting capability. “The storytelling, demonstrating the improvement we were seeing, was critical to helping everyone—debtholders, shareholders, and ratings agencies—understand that these were realistic aspirations,” Kinger says.

All the process changes and communication paid off. In November 2017, WW completed a leverage-neutral refinancing of its term loan and revolver. It ended up with a new $1.54 billion variable-rate term loan due in 2024, $300 million in senior notes due in 2025, and a $150 million revolving credit facility that expires in 2022. The extended terms removed the 2020 debt overhang and the pressure of an impending need to refinance, which enables WW to focus more energy on operations and innovation. In addition, the increased size of the revolver provides greater financial flexibility.

See also:

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• How Treasury Can Support ‘Unprecedented’ Growth

Greenblatt says the key to success in this type of project is to “strike while the iron is hot.” Companies need to carefully lay the groundwork in advance, then stay carefully attuned to the right opportunity. “Business can always turn,” he points out, “and you never know if the market will continue to be there. Make sure you understand your liquidity and cash flows, understand when your debt is due, and understand what refinancing opportunities are available to you at any given time. When there is a great opportunity for your company, take it.”

Take it—and then keep looking for additional opportunities. “We continue to reduce our cost of debt,” Greenblatt adds. “Since the start of 2018, we’ve prepaid part of the refinanced debt, and we’ve recently entered some interest rate hedges. It’s not a project that will end; we have a mentality of continuous improvement of our leverage ratio.”