Cushman & Wakefield plc Q1 2023 Earnings Call
Good afternoon, and welcome to the Cushman and Wakefield first quarter 2023 earnings conference call.
All participants will be in a listen only mode should you need any assistance. Please signal conference specialist by pressing Scott stocking a lot Bob to Xerox.
After today's presentation there'll be an opportunity to ask questions to ask a question press. The Star then one on your telephone keypad.
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This event is being recorded I would now like to run the conference over to Meghan Brown head of Investor Relations. Please go ahead.
Thank you and welcome to Cushman and Wakefield first quarter 'twenty to 'twenty three earnings conference call earlier today, we issued a press release announcing our financial results for the period. This release along with today's presentation can be found on our Investor Relations website at IR deck Cushman Wakefield dotcom.
Please turn to the page in our presentation labeled cautionary note on forward looking statements. Today's presentation contains forward looking statements based on our current forecasts and estimates of future events. These statements should be considered estimates only and actual results may differ materially.
During today's call, we will refer to non-GAAP financial measures as outlined by SEC guidelines reconciliations of GAAP to non-GAAP financial measures definitions of non-GAAP financial measures and other related information are found within the financial tables of our earnings release and the appendix of today's presentation.
Also please note that throughout the presentation comparisons and growth rates are to the comparable periods of 2022 and in local currency unless otherwise stated for those of you following along with our presentation. We will begin on page four.
And with that I'd like to turn the call over to our CEO John Forrester.
Thanks, Megan and thank you to everybody joining our call.
So that's all I want to thank all our employees around the world to continue to deliver outstanding service and value to our clients through such fluid times.
The first quarter as anticipated experienced similar trends to the fourth quarter of 2022.
The significantly lower transaction activity versus the prior year, but continued strength in our.
For property and facilities management business.
Fee revenue $1 5 billion and adjusted EBITDA of $61 million reflect the quarter's muted higher margin transactional activity, which we believe is currently sitting at or near trough levels.
The current macro environment remains complex with elevated inflation and interest rates as well as recent banking stress all contributing in fact to recessionary conditions in commercial real estate.
We expect the near term outlook remains challenging.
And increasingly complicated economic and real estate environment is resulting in ongoing flight to quality and we believe that diversified global service providers, a true scale like Cushman <unk> Wakefield.
Best positioned to successfully navigate through economic cycles for both clients and talent.
Turning to capital markets.
Capital continues to remain on the sidelines.
Banking industry volatility at the end of the quarter increased overall market uncertainty and further tightened lending standards.
However, Washington, this constrained environment, we are observing meaningful appetite from our clients to deploy capital when market conditions improve.
Meeting regularly with them to review portfolios discuss financing options and help strategically plan for the recovery.
To reiterate it is a matter of when not if deal volumes return.
We are allocating our resources to areas, where deals are happening and finding new areas of opportunity such as our recently created asset optimization practice focused on delivering investors and integrated tailored and strategic solution across underperforming assets.
On the leasing side consistent with our expectations total office leasing activity in the U S trended lower sequentially and year over year in the first quarter.
Okay pause have grown increasingly cautious in their leasing decisions on their own.
Looking for cost cutting opportunities.
The recession remain elevated and this hybrid work strategies continue to filter through.
Although we expect these headwinds to continue in the near term.
We also think it's important to note that the impact of more aggressive hybrid work models started nearly three years ago and as of today. There is still some 10.5 billion square feet of occupied office space globally.
This supports our view that although the office sector faces challenges it will remain a pre eminent asset class into the future.
It's critical to come company functionality and its sheer size will continue to create opportunities for all for them to execute on transactions and advise our clients through the ongoing evolution.
Notwithstanding this other larger asset classes will provide both growth and greater resilience.
In the industrial leasing sector industry fundamentals are strong with vacancies remain near all time lows and well below historical averages.
During the first quarter U S industrial tenants executed nearly 60 million square feet of deals in facilities built since 2020.
Representing just under half of the total.
Net absorption in Q1 did slow relative to the outsized growth experienced over the previous two years and although some moderation as expected we anticipate the industrial sector to remain healthy.
Supported by long term secular growth trends, such as e-commerce and consumer spending.
Looking ahead, we continue to look for green shoots in both interest rate clarity on the macro and economic environment, but at this point, we're not anticipating anything material this year.
Regardless of the ultimate inflection point the.
The medium and long term market opportunity for our business is substantial and we are positioning ourselves to achieve incremental market share gains when transactional activity resumes.
Moving onto our property facilities and project management business.
This continues to perform well and demonstrate its resiliency in the current environment, most notably in facilities and project management, which both achieved double digit growth in the quarter.
Well P. M. F. M business has benefited both from the Buildout of our global outsourcing capabilities to take share in this fragmented market as.
As well as our diversification into asset classes, such as multifamily and property management and life Sciences and project management.
Our new business pipeline remains strong highlighting the long term positive secular growth trends in this business, even during a challenging time in the transactional market.
In summary, there is no doubt that this is a challenging operating environment for all participants in commercial real estate.
However, our global capabilities deep expertise and operational efficiency will continue to steer us through the near term headwinds and more importantly allow us to emerge with strength and improved market positioning.
Now I'd like to turn the call over to Neil to discuss in more detail our financial performance Neil.
Thank you John and good afternoon, everyone.
First quarter fee revenue of $1.5 billion declined 10% versus prior year.
Adjusted EBITDA of 61 million was down 71%, that's a record first quarter 'twenty to 'twenty two.
And adjusted earnings per share for the quarter was a loss of four cents a decrease of 52 cents versus prior year.
Our revenue performance in the first quarter, reflecting continued weakness in capital markets, which were down 50% similar to the decline experienced in the fourth quarter of 2022.
Leasing revenue declined 19% versus the prior year. This decline was against a strong first quarter of 2022 when leasing revenue was up 58% versus first quarter 2020 one.
Office leasing activity declined as occupiers continue to delay decision, making and reduce capex spend.
That's real sector performed relatively well.
I guess the challenging prior year comparison.
Performance in our P. M. S. N service offering was strong with P. M. F M in total up 8%, especially in our facilities management and project management businesses.
Valuation and other declined 12% in the quarter as the slowdown in transactions resulted in lower valuation activity.
The decline in adjusted EBITDA was principally driven by three main components first the most significant component was the decline in high margin transactional brokerage business as well as our greystone joint venture, which experienced lower multifamily lending volumes.
Second the operating expenses in the quarter were higher year over year due to inflation and prior year investment rep from the high growth environment of early 2022.
We are focused on our cost initiatives and as we move through the balance of the year. We expect these inflation and investment impacts to moderate and to be fully offset by cost actions.
Lastly, we experienced roughly 10 million in discrete headwinds in the quarter, primarily from the non recurrence of government subsidies in our APAC business versus the prior year as well as foreign currency headwinds.
In terms of our cost saving plans, we achieved approximately $21 million of cost savings in the first quarter and are currently on track to achieve full $19 million cost saving target in 2023.
The current environment, we are further tightening our spending on discretionary costs.
Excluding additional items that will allow us to operate more efficiently.
Turning to our segment results for the quarter in the Americas, we experienced declines in brokerage across all asset types due to the higher interest rate environment and macroeconomic headwinds. These declines were most prominent in the office sector declines in brokerage were partially offset by continued resiliency in P. M. S N most notably.
And facilities and project management.
Adjusted EBITDA decline was principally driven by the lower brokerage activity lower contribution from greystone and the impact of prior year cost inflation and investment in the business.
EMEA and APAC, both saw similar declines in brokerage as the Americas, while our PMA business in the apex segment continued to perform well specifically in facilities and project management.
The lower fee revenue brokerage in each segment was the primary driver of the decline in adjusted EBITDA.
Additionally, in APAC, the non recurrence of the government subsidies received in the prior year also contributed to the year over year decline.
Moving to our balance sheet and cash flow. We ended the first quarter with an operating cash outflow of $222 million. This level is in line with historical first quarter working capital trends and reflect typical seasonal patterns in our business.
Given the seasonality our full year cash flow performance will depend highly on the size and timing of any market recovery in the latter half of the year.
As a part of our efforts to improve efficiency and performance. Our teams are focused on driving cash flow improvements through disciplined working capital management.
From a capital allocation standpoint, we are currently prioritizing spend in three areas cash to achieve our cost takeout targets focused talent acquisition in high growth markets and high growth sectors and.
Investments in our services businesses, we continue to see significant long term market opportunity.
Overall, our financial position remains strong with $1 $6 billion of liquidity, consisting of cash on hand of $460 million and availability on our revolving credit facility of $1 $1 billion.
We had no outstanding borrowings on our revolver and net leverage was three seven times at the end of the first quarter our.
Our debt maturities are long dated and our debt profile is more than 70% fixed on a net basis.
Finally, moving to our outlook the macroeconomic environment remains highly uncertain market participants continue to await further clarity on both interest rates and the economic outlook challenging both leasing and capital markets activity.
Given these factors we anticipate the following.
Our recurring revenue P. M. S. N business is expected to provide continued stability in this environment generating low to mid single digit revenue growth in 2023, well those first quarter results came in above this expectation the growth rate of existing business will naturally normalize as we lapped the launch of new business wins in the prior year.
In addition, beginning in the second quarter of this year a change in the gross contract Reimbursable from one of our facility services contracts.
The lower fee revenue of about $19 million on an annualized basis with no impact on total revenue or adjusted EBITDA.
And brokerage consistent with our previous comments, we expect trends in the second quarter of 2023 to resemble the previous two quarters as we've seen no material shift in the market. Although we expect brokerage to remain under pressure in 2023, we are maintaining a strong position to benefit from a market recovery in 2024.
As a result of these expectations, we expect full year adjusted EBIT margins to be in the range of 9% to 10%, which incorporates our view of a mild recession in 2023 with no significant recovery in brokerage this year.
As macroeconomic trends improve in the brokerage business experienced some meaningful recovery, we expect to see our full year margins trend back upwards, both through revenue growth and cost efficiencies. We now anticipate an adjusted effective tax rate of 28% for the year.
That concludes the financial review with that I'll turn the call back to John .
Thanks Neil.
You've likely seen the announcement, we made this evening about my decision to retire from Cushman and Wakefield after over 35 years at the company. It's been a true honor to lead the business and I'm incredibly proud of what we've all built and accomplished together.
This really is a special place with so many of the most talented people in our industry and I've thoroughly enjoyed working with all these special people both of his colleagues and his friends.
But over the past months as myself and the management team have contemplated the company's next stage of evolution and growth strategy.
Clear to me that the person, making the decisions in the CEO seat today must be the person guiding and accountable for those strategies far into the future.
And as I think about cushman and Wakefield bright future.
Not be leaving the company in better hands with Michelle Mackay as CEO .
Michel and I have worked together since our IPO in 2018, when she became a board member more closely over recent years as Michelle agreed to become our Chief operating officer.
I'm confident that our long experience in commercial real estate and our commitment to the values and unique culture of Cushman <unk> Wakefield will Shepherd the company forward drive continued growth and shareholder value at the company.
Now I'll turn it over to Michelle.
Thank you and John I want to be the first person to personally. Thank you for your leadership and collaboration over the past several years.
Packs that you've made on the business at large but the impact that you've made on the careers and lives in an untold number of people will inevitably be part of your legacy.
I'm excited to take on the role of CEO of Cushman and Wakefield in July So, let's talk about the future.
Don't require time to integrate into cushman and Wakefield as you probably know I joined the board about five years ago right. After the company went public and have been inside the company for more than three years I have the great fortune of stepping onto the foundation that many dedicated and talented people have built the foundation is strong and will allow me the ability to reassess.
And reconfirm what is the core business, ensuring that we're spending our time, our money and our energy where it makes sense today and more importantly for the future.
This assessment will of course leads to an evaluation of our growth model for the future and aligning our capital allocation model and balance sheet Accordingly.
I expect a continued focus on the high growth and resilient services business as part of this plant with brokerage is a key driver.
I look forward to speaking with all of you as we map out the future of Cushman and Wakefield and now I'll turn the call back to the operator, and we'll be happy to take your questions.
Okay.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset.
Before pressing the case to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Your first question comes from Anthony <unk> from J P. Morgan.
So he's got it thank you.
Thank you.
First our best wishes, John and congratulations Michelle.
My first question is I was going to be a bit more mundane I wanted to ask about expenses.
Neil the the $90 million that you are targeting I think you mentioned actioning some additional items as well or was that part of the 90 or.
Is there more coming beyond that I guess it was a little confused by the comment.
Yes sure.
Our guidance assumes a full 19 can take hours.
Provided we are currently evaluating additional cost measures.
At this point I can't quantify that at all.
Concentrate what additional cost measures.
Given we are already halfway through the year the impact on India will be sending us it certainly will provide run rate savings and efficiency.
Our next year.
Okay.
And then in the margin guidance that you provided so it sounds like the $90 million in there, but can you maybe just talk to I don't know that you gave us.
Our guidance number for margins last quarter, I can't recall, but what's what's kind of really changed in terms of your thinking and and to get to that 9% to 10% margin I know the brokerage businesses.
You know more more difficult right now, but just what else may be changed in your in the calculus there.
Yes, I think Tony Hawk, our guidance is very consistent with what we gave last quarter. The only change is we believe that the recovery in brokerage will be slightly delayed probably delayed by a quarter. So you know in our guidance, we are not assuming a meaningful recovery in brokerage through the year.
Naturally we do have easier comps as we move into the especially the fourth quarter. So the European experience will will will be a lot better.
We look at the second quarter, we sort of assuming the brokerage will be at a similar level to the first quarter.
Okay, and then just last one.
Any comments you can provide on just thinking about capex for the year and any thoughts on free cash flow conversion or anything we should be thinking about there as we.
Think about EBITDA for me down.
Oh, no the cat our free cash flow that we saw in the first quarter was very consistent with normal seasonality in the business as you well know as we move through the year.
Certainly.
Cash outflow for that.
Other cases with the back half, but yeah. We are still we still maintain our target of free cash flow conversion of 20% to 30%.
But naturally with brokerage thing Youtube.
We did not expect to see that this year, we will see that in the medium term secondly, we see brokerage recover for the back half of it yeah.
A lot will depend on how quick T brokerage recovers.
Generally the trends, we expected very consistent with what we've seen historically.
Okay. Thank you.
Thanks Darren.
Thank you. Your next question comes from Stephen Sheldon from William Blair.
Please go ahead.
Hey, everyone you have Matt <unk> on for Stephen Sheldon. Thank you for taking my questions to start here in the event. The return to office movement starts to lose subtraction do you see that dampening demand for things like janitorial services and P. F M segment overall.
Thanks for the question.
Very good question ultimately, we believe at the moment.
And our forward forecast.
The pretty strong recessionary decision, making.
It's driving.
The main performance in offices in particular.
So the hybrid.
Turning to work trying to see how to price.
Pricing to the.
The market as we see it the additional services other than brokerage the project management facilities management service Costco along with volume.
Again, what I would say that the office market is a massive sector.
I think the relative size of that sector versus others is misplaced as we talk about the headwinds sitting in an office.
We are seeing very strong growth.
Our social business at this point.
Growth a lot of it comes from winning new office contracts, So I still see cushman, Wakefield and companies like Cushman Wakefield actually growing.
Office.
Exposure.
Year on year quarter on quarter going forward, even with the margins any individual occupy it might be just pulling a little bit back on that range.
How much space they have within their portfolio that rationalized that.
Rationalization is ongoing and has been now for as I said in my prepared remarks, maybe three years.
Got it that's helpful color. Thank you and then somewhat as a follow up on office leasing are you still seeing that flight to quality narrative hold off where tenants are looking to lease higher quality office space to encourage their employees to come back in or tenants starting to shift there.
Focus to reducing cost given the challenging macro environment that persists.
Both of your.
Reservations are actually all both accurate because what we are seeing is that those.
Deals are all happening she couldn't gateway cities around the world.
Very large market shares the deals we're seeing already plus a best in class ESG qualified space.
And then what you'll see is ultimately than the <unk>.
Rest of the market.
We're not as exposed having tougher time so yeah.
I think both of those components within your questions Russell probation to offer at this point.
Great. Thanks, that's it for me I'll jump back in the queue.
Thank you again, if you have a question. Please press Star then one.
Your next question comes from Ronald Camden from Morgan Stanley .
Please go ahead.
Great Congrats John and Michelle just a quick one on the on the EBITDA guidance, which I think you sort of quantified this quarter.
You know clearly there is you know if you did sort of 4% in one Q.
Just trying to get a little bit more of color of.
What assumptions are going into it to get to that nine to 10 by the end of the year. So I understand brokerage is staying pretty depressed, but what are some of the other pieces to get you to that 9% for the time to 10 for the full year.
Yes, sure look as we look at that as as you know in the business is very seasonal first quarter is by far our smallest quarters such as the base revenue in the first quarter is is it's a lot less than the rest of the year and so as we constantly yeah.
We feel pretty good about getting to that 9% to 10% margin you will naturally see the margin improve as the base business the natural business in the quarter increases all the way to go.
The fourth quarter.
We always see our highest margins and the most revenue.
The only difference this year I think is that we will have more of our earnings in the back half of the year at the front of the sit and even last year, where we had record growth in the first half of the yes, it's slightly different.
But I'm pretty consistent with historical trends in the industry.
Just to reiterate one point ultimately.
Whilst the revenue growth.
Quarter on quarter through the year.
Actually proportionately along the cost shows up in Q1.
And that's why margins are always be be more muted at this point and we have confidence that they will grow.
That's true.
Great and then my second question you know obviously you go onto the castle statement.
I fully appreciate the seasonality in <unk> of course, but maybe some comments on what that EBITDA to cash conversion looks like as you're going through the year.
<unk> would be helpful. Thanks.
Yes sure.
Cash outflow in the first half of the.
It's very difficult to calculate.
Our cash conversion ratio is.
I'll tell you behind the focus on free cash flow.
We're very pleased in the first quarter of all the work we're doing around working capital we saw a nice improvement in our receivables.
That of course is muted by the brokerage.
We see some good trends there and our working capital.
As we move through the year once again, the cash as I mentioned cash flow conversion.
<unk> be in that 20% to 30% range, but certainly in the medium run this brokerage comes back.
That's what we expect to be.
Yes.
Excellent that's it for me thanks, so much.
Okay.
Thank you once again, if you'd like to ask a question. Please press Star then one on your telephone lifestyle name to be announced.
Your next question comes from Michael Griffin from Citi.
Please go ahead great. Thanks.
Great. Thanks, Congrats again, John pleasure, working with you and Michelle Congrats to you as well maybe piggybacking on Ron's question. There just on more of a leverage question I'm curious if you do annualize that run rate you get to a pretty elevated leverage level talk about seasonality in the back half of the year that makes pretty sense of it if I'm, putting a number around it right. So it's three.
Kevin last 12 months you know what do you think that number is a good run rate for going forward and any commentary around that.
Yes Hello.
EBITDA, we expect leverage to be in the low fours by the end of the property next 4142 range.
That will then once again come down.
Roes in that brokerage comes back.
So we feel pretty comfortable.
Clearly leverages higher than we'd like it to be our goal is always to be in that two to three times.
But naturally as we move through the cycle, we'll see that leverage go up.
But feel very good feel certainly good about all maturities as you can.
We amended and extended a billion dollars of October .
Which we pushed off switch study so feel good about our maturities and feel very good about our liquidity. So while leverage is a little higher than we'd like.
Feel like the balance sheet.
He is in very good shape.
And you'll just a reminder on that that it was it was so for plus 375 right.
No the sofa $3 25 gotcha.
Got you Okay. That's helpful.
And then maybe just one on the transition looks like John will stay on as CEO till the end of June and advisor until the end of the year I'm, just curious John or maybe Michel if you can add any comments ground.
So the board's discussion obviously Michelle on your prepared remarks, you said, let's talk about the future. So it seems like youre there here, but I'm just curious if there were any conversations about strategic alternatives kind of stuff like that and how this came to be the right resolution for shareholders.
It's Michelle I will answer. Thank you for your question I think as John said in the conversation we've been having about the future of the company, we realized that we probably need to post assessment board.
And then we initially.
And I can't share any.
As an example, with you today, but we're going to be focused on mapping out. The next 10 years in the company and that's the goal.
Great and then just a clarification for John when you took over at the beginning of 'twenty. Two I think from the gentleman who is the current chairman was the plan always more of a interim kind of thing I mean, you've been there for 35 years. That's a that's a fantastic career, but was it all just kind of your thought that you weren't going to be in the role for five or 10 years.
I've always been very consistent in discussing this with anybody's pencils isn't.
Ultimately.
Leaders, who take big decisions need to be around.
Those decisions out and be accountable for.
The contemporary.
Leadership is important.
Because it's very dynamic industries, such as real estate services industry.
That really just gives color there too.
Amortization is very diligent on Sirius.
Its succession planning.
Since we went public and Michel joined our board.
This day today as always there's always going to occur at some point.
And I'll, just reiterate what Michelle said.
Timing is really based on the fact that we've done already.
Majority of losers required to push this company through.
Very solid positive recession, we are in as an industry.
And then actually decisions now are about future direction and grow the company.
And to the extent, it's a very we believe this is a great industry to be in.
Secular growth trends that we see our ability to drive many of those trends of grow accordingly.
She always taking over time with that forward focus is very important in how we operate.
Okay.
Well, great. That's it for me and congrats to you Bob.
Thank you.
Thank you. Your next question comes from Patrick O'shaughnessy from Raymond James. Please go ahead.
Hey, good evening can you provide an update on the status of your partnership with we work obviously, it's no mystery that we work has been struggling so kind of curious about how the effort is going of you partnering with them.
Hi, This is John I'll take that.
There's this disconnect actually as to how we work we work in.
Issues.
Al you mentioned that actually our relationship has been highly positive.
Let me focus into the two strategic areas that we made our investment job one was to partner with we work in major client pursuit that is ongoing and has been successful and we believe we will continue to be successful.
And secondly, where we have become.
Key supplier therefore.
Therefore clients, we work in helping them with.
Running the real estate services within that portfolio. So those two aspects are ongoing remained healthy.
How we think about our relationship.
Great I appreciate that.
Can you provide your outlook for the Greystone joint venture over the remainder of the year would you expect that to roughly track the rest of your brokerage business or would you expect multifamily to maybe rebounded a little bit more robustly.
We certainly do expect sectors like multifamily like industrial too.
Rebound faster to see it.
It didnt improve more quickly.
Other sectors that's for sure.
And the.
Can I focus for us more on the strategic proposition that.
The joint venture we have with.
Itself is becoming more fundamentally important and valuable small company every day.
The joint mandates that were working on the shelf.
Market share gains that we're making I actually irrespective of very short term one quarter snapshot.
It makes us feel very good about.
Incremental volume on performance that this relationship has going forward quarter by quarter this year and into the future.
Great. Thank you and then maybe one last one if I could.
How is the environment in terms of attracting and retaining retaining brokerage talent.
And in a backdrop, where you know it looks like things are going to be lean for an extended period of time.
How does that impact.
What that environment looks like.
Ken This is John .
The market for high talent doesn't actually correlate to the ebb and flows say brokerage revenues already any service line revenue okay.
Great people are always in demand.
And in particular those that are.
Areas, where potentially oranges, our industry sees of us to rebound.
Or higher growth prospects in the future. So everyday believes is across our organization come into the office very important in the office and they are thinking about both the retention and the recruitment of talent.
And that's no different today than it was 12 months ago 24 months ago.
One thing we are seeing though is that the overall inflation being driven through.
In non written you're facing business is becoming more muted more milk far more manageable, let's say in Q1 last year. So we are seeing some benefits at the slowdown in the overall labor markets and reduced attrition as well as lower inflation.
Great. Thank you very much.
Thank you once again, if you have a question. Please press Star then one.
As there are no further questions at this time. This does conclude our question and answer session I would now.
I'd like to turn the conference back over to Mr. John <unk> for any closing remarks.
Thank you all for joining us today are Michelle Neal and the rest of the team look forward to speaking with you again at our second quarter earnings call.
Yeah.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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