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Company Visit: Carlson Wagonlit Travel

Analyst

A. DRAY Published on

Transportation

27th January 2010

S&P Moody’s

Transparency Score

SR Credit Rating

SR Credit Outlook

Index of Liquidity

Unsecured Recovery

Subordinated Recovery

CCC+, Negative B3, Negative

2/5

B

Stable

3 years

0%

0%

The company should resume growing in 2010 We visited Carlson Wagonlit Travel (CWT) on 25th January 2010. We met Marc Karako, CFO of the group headquartered in Paris. The meeting focused on (i) a description of the business model of the company, (ii) a review of FY 2009 and how they managed the downturn and (iii) an update on the guidance for 2010. As both traffic and transactions sharply fell from October 2008 to May 2009, CWT decided to cut its headcount and other spendings. This resulted in a decrease in the cost base by 16% in 2009 and a resilient level of EBITDA margins. Following our analysis on Q3 09 results and this meeting with Mr Karako, we think the company will continue to follow the positive trend seen since June 2009 in 2010. The positive trend will not only be there for the top line, we also expect the company to increase their capital expenditure and to resume acquiring small targeted companies. Following the acquisition of Navigant in 2006, CWT became #2 in North America (behind American Express) and kept its role of global leader with 7% of the global market. The travel management industry is highly fragmented. The four leading companies own 19% of the global market shares. In 2009, no acquisitions were performed. We have therefore revised upward our forecasts for Q4 2009 and 2010. Hence, we change our outlook to stable from negative.

Revenue model US $ million

Revenue Growth personnel expenses In % of sales operating leases In % of sales other operating income other operating expenses In % of sales EBITDA adjusted EBITDA Margin

Carlson+Navigant Pro forma FY dec 31 2006 1 639 na 1 042 63,6% 83 5,1% 2 331 20,2% 185 11,3%

CWT Audited FY dec 31 2007 1 837 12,1% 1 130 61,5% 80 4,3% 384 20,9% 244 13,3%

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CWT Audited FY Dec-31 2008 1 922 4,6% 1 229 64,0% 77 4,0% 385 20,0% 232 12,0%

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CWT forecast FY dec 31 2009 e 1 527 -20,5% 939 61,5% 66 4,3% 298 -19,5% 225 14,7%

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CWT forecast FY dec 31 2010 e 1 603 5,0% 986 61,5% 72 4,5% 313 -19,5% 232 14,5%

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CWT forecast FY dec 31 2011 e 1 659 3,5% 1 022 61,6% 75 4,5% 325 -19,6% 237 14,3%

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CWT forecast FY dec 31 2012 e 1 716 3,4% 1 047 61,0% 77 4,5% 336 -19,6% 256 14,9%


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COMPANY VISIT What is the rationale for the pressure on prices seen over 2009? 96% of CWT’s sales are derived from transactions with companies (B to B) and 4% from leisure travels. The leisure segment consists of revenue generated from travel agencies in three countries: France (35 agencies), Canada and Belgium. The revenue generated by the company consists in commissions on traffic. Out of this revenue, 60% comes from the customer and 40% comes from the supplier (ie: the airline and/or the Global Distribution System (GDS) such as Amadeus, Galileo, Sabre or Worldspan). Actually, the revenue corresponds to an average fee of 7% of the traffic registered (4% from revenue derived from clients and 3% from revenue derived from suppliers). Over 2009, the pressure on prices mainly resulted from two reasons: •

The technical decrease in commissions on airline tickets for instance due to reduced prices of the underlying ticket.

The need to renegotiate some contracts as several clients decided to put out to tender their historical contract with CWT. Usually, contracts are renegotiated every 3 years but some contracts are renegotiated every year and some other every 5 to 7 years.

Review of FY 2009: Managing the downturn In 2009, CWT had to face up to the slump in traffic and transactions that started in Q4 2008. Over 2009, the cost base has been reduced by 16%. The bulk of the this decrease in costs results from reduced headcount. Staff costs account for c. 70% of CWT’s cost base. While the company recorded $189m of cost savings over the first nine months of 2009, we think there may be some upside in the cost savings achieved in Q4 09. Hence, we estimate the EBITDA for the full year 2009 to be higher than initially thought. The chart below shows the YoY percentage change in traffic and transactions as of October 2009. Mr Karako confirmed that the YoY change in December 09 was positive.

Regulation & Environment


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COMPANY VISIT Review of FY 2009: Capital structure As part of the amendment requested under the Senior Facilities Agreement approved by the senior lenders on June 5, 2009, the group made $15m of voluntary prepayment as of September 2009. Besides, the company's shareholders had to either directly buy back Carlson Wagonlit B.V. Senior Floating Rate Notes due 2015 on the market for an amount between $40m and $75m or inject cash in CWT which would, in turn, buy back its own debt on the market for the same amount. Mr Karako said that in December 2009, the shareholders finally injected the cash in CWT but no bonds have been repurchased for the moment. There is no deadline for the bond buy back for CWT but this cash amount is exclusively dedicated to this usage. The decrease in payables to employees and suppliers will result in a net inflow in working capital over Q4 2009. However, there will probably be a reversal in 2010.

Guidance for 2010: CWT will resume growing - CWT’s business is closely linked to the GDP. According to Mr Karako, the growth is generally twice the GDP growth rate. For 2010, current forecasts estimate the GDP growth to +3%. - The underlying growth will be clear in North America, Asia Pacific and Latin America. However, EMEA remains “unclear”. - CWT does not plan to sell its travel agencies. This business (4% of total revenue) is less cyclical and it generates cash. - CWT only pays dividends to the minority interest.


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Financial Statements & Forecasts Income Statement US $ million

Revenue personnel expenses operating leases other operating expenses depreciation and amortization Goodwill Amortization Restructuring & Integration Cost Total interest expense other gains and losses, net share of profit of associates net interests income tax Net Income Gross margin EBITDAR reported EBITDAR adjusted EBITDA reported EBITDA adjusted EBIT reported EBIT adjusted

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CWT Audited FY dec 31 2007 1 837 1 130 80 384 89 25 12 99 2 3 99 12 31 323 300 311 232 244 117 130

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CWT audited FY dec 31 2008 1 922,0 1 229,2 76,6 384,7 96,6 21,5 97,2 0,8 2,0 97,2 38,6 21,3 308,1 286,6 308,1 210,0 231,5 113 135

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CWT forecast FY dec 31 2009 e 1 527 939 66 298 60 34 56 96 3 96 10 8 290 178 234 169 225 75 131

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CWT forecast FY dec 31 2010 e 1 603 986 72 313 60 34 15 91 3 91 5 40 305 275 290 217 232 123 138

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CWT forecast FY dec 31 2011 e 1 659 1 022 75 325 60 34 83 3 83 2 65 312 302 302 237 237 143 143

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CWT forecast FY dec 31 2012 e 1 716 1 047 77 336 60 34 79 3 79 1 87 333 323 323 256 256 162 162

Cash Flow Statement Fund From Operation change in WC CFO Adjusted CFO Capital expenditure asset sale asset acquisition company acquisition ( net of sale ) purchase of financial asset Cash flow from investing activities

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FY 2007 107 19 88 88

FY 2008 90 43 133 133

FY 2009 e 66 34 32 32

FY 2010 e 121 25 96 96

FY 2011 e 135 7 143 143

FY 2012 e 154 8 161 161

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43 1

-

39

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27 3

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36 5

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39

-

40

-

72

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39

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6

-

25

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20

-

20

-

114

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79

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30

-

56

-

59

-

60

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3

-

3

-

3

-

3

-

3

-

3

dividends Shares buy back equity issuance bank debt use bank debt redemption bond new issue Other borrowings/(repayment) exchange rate fluctuations financing cash flow

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total cash flow

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50 8

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4

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34

-

50

-

30

-

63

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13 35 29

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19 8

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40 15 12

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53

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33

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66

26

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10

-

13

18

51

35


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Financial Statements & Forecasts Balance Sheet Total asset Goodwill Intangible Assets Property & equipment Receivables Cash in hand financial assets other asset Payables Shareholder Equity Reported debt other liabilities operating lease & other adjustments total adjusted debt net reported debt net adjusted debt

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FY 2007 1 957 571 179 75 859 185 25 62 969 344 1 161 171 334 1 495 975 1 309

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FY 2008 1 862 547 171 57 815 201 55 16 958 338 1 101 142 177 1 277 900 1 077

FY 2009 e 1 842 526 151 60 753 191 60 100 862 300 1 042 238 200 1 242 851 1 051

FY 2010 e 1 859 510 135 72 808 178 75 81 892 262 992 238 200 1 192 814 1 014

FY 2011 e 1 945 485 120 87 855 229 85 85 945 200 962 238 205 1 167 733 938

FY 2012 e 1 998 460 105 103 879 264 90 97 978 116 899 238 210 1 109 635 845

FY 2008 76% 3,18 91 12% 1,4 2,4 2,9 1,4 3,5 3,9 4,7 8% 4,6% 4,7% 10,9% 12,0% 16,0% 7,0% 6,3% 8,8% 42% 223% -142 -27 155 173

FY 2009 e 73% 3,51 2 3% 0,3 2,3 2,7 1,4 4,5 3,8 4,7 0% -20,5% 4,3% 11,0% 14,7% 15,3% 8,5% 2,8% 9,2% 28% 54% -109 -26 180 206

FY 2010 e 69% 3,87 57 9% 1,1 2,6 4,5 1,5 3,5 3,5 4,4 6% 5,0% 7,6% 13,6% 14,5% 18,1% 8,6% -15,4% 9,2% 29% -14% -83 -19 184 203

FY 2011 e 64% 4,69 101 15% 1,7 2,9 5,7 1,7 3,1 3,1 4,0 11% 3,5% 8,2% 14,3% 14,3% 18,2% 8,6% -32,6% 8,6% 29% -3% -91 -20 188 208

FY 2012 e 59% 7,27 118 19% 2,0 3,2 6,6 2,0 2,6 2,5 3,3 14% 3,4% 9,0% 14,9% 14,9% 18,8% 9,4% -74,5% 8,8% 29% -1% -99 -21 187 208

Ratios total adjusted debt / total asset Net adjusted debt / Shareholder equity Free Cash Flow adjusted CFO / net adjusted debt adjusted CFO / gross interests EBITDA / gross interests EBITDAR / lease adjusted interests EBIT / gross interests Net adjusted debt / EBITDAR Net reported debt / EBITDA Net adjusted debt / EBITDA FCF/ Net adjusted debt Revenue growth FFO before WC margin EBITDA margin adjusted EBITDA margin adjusted EBITDAR margin adjusted EBIT margin ROE interests costs Depreciation rate Tax rate Working capital Working capital days Receivable days Payable days

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FY 2007 84% 3,81 42 7% 0,9 2,5 3,9 1,3 4,2 4,0 5,4 3% 32,5% 5,8% 12,6% 13,3% 16,9% 7,1% -8,9% 9% 35% -62% -110 -22 171 193

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SPREAD RESEARCH’s latest reports on Carlson Wagonlit Travel 2nd Dec 2009

Q3 2009 Results

CWT stabilization in progress + Financial Model

3rd Sept 2009

Q2 2009 Results

CWT slashes its cost base

8th June 2009

Q1 2009 Results

CWT waiver is approved

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