Q2 2023 Cushman & Wakefield PLC Earnings Call
Thank you for standing by.
Welcome to Cushman, and Wakefield second quarter 2023 earnings conference call.
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It is now my pleasure to introduce Megan Mcgrath.
Of Investor Relations for Cushman and Wakefield.
I Grant you may begin.
Thank you and welcome to Cushman and Wakefield second quarter 2023 earnings conference call.
Earlier today, we issued a press release announcing our financial results for the period.
It's really used along with today's presentation can be found on our Investor relations website at IR deck, Cushman and 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 period 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 Michelle Mackay.
Thank you Megan and thank you everyone for joining us today before I begin I'd like to thank our former CEO John Forrester for his leadership and dedication to this company and his assistance in making this transition as seamless as possible.
Neil will dive more deeply into the numbers shortly but looking at our second quarter. The key takeaway is this in challenging market conditions, we were able to quickly pivot and deliver strong financial results with sequential improvement in revenue EBITDA and margin.
Well I recently took the reins as CEO I've been with the company for some time and therefore had been able to hit the ground running with the leadership team.
I think all of them for their focus and hard work since I started and while we've got plenty of work ahead of us to help the company achieve its full potential I am very pleased with the start that we've made and I'm encouraged by what I'm seeing inside the business as we take a deeper dive into each of the business lines.
We're already fully underway with a full review of our operations, how we lead the business and identifying our strategic direction, while preserving the integrity and strength of what we've already built.
Finally diversified revenue mix, a resilient business model and a strong financial position.
We've got great bones here and a clear opportunity to himself.
My goal simply is to significantly improve and build upon cushman already solid core.
As you can imagine I'm going to leave no stone unturned, and making sure that we move expeditiously and decisively to grow this company and build confidence both in ourselves and also with our partners and key stakeholders.
My number one priority is ensuring that we are being great stewards of capital balancing investing for the future growth and maintaining a healthy balance sheet strong liquidity profile.
As the new CEO I am taking a fresh approach holistically reviewing our business, while introducing a more data driven methodology to the process.
This includes the deeper evaluation of free cash flow margin profile growth expectations capital intensity and core competencies for each business individually.
And here's a bit on how we're going to dig in.
We're reinforcing core and expanding our thoughts on growth.
Over the past several weeks I've met with the leaders from each of our businesses to review the businesses core strength and better assess how each business line fits into our overall corporate strategy with.
With a focus on identifying new areas of growth and operating efficiencies.
I have been extremely impressed with our leadership teams expertise and their cognitive flexibility in reassessing their individual businesses.
And as we go through this process, we want to foster a solution oriented entrepreneurial culture that allows us to compete and deliver the solve our clients at the highest level.
Mark has moved quickly as do the demands on our clients and we need to be able to sprint with them.
Creating a detailed framework to help internal decision makers make better and faster decisions with a keen focus on our core priorities will be paramount to achieving success.
We believe that by bringing more data and more information to our leaders in the field in a way that is easily digestible, we will create a knowledge based culture that will encourage decisions being made more closely to the business.
How we organize and run the company will be next on the list one of our main objectives. In this process is to simplify our business structure with an eye on strategic value to the company overall as well as long term return potential right size right structure for all markets.
Today, we announced 40 million of additional cost cutting measures for this year building upon the $90 million program, we had previously announced.
Our assessment is shown that simplifying our structure and reducing cost is not only necessary in light of the current market conditions, but also strategically advantageous.
We see this as an opportunity to create a more streamlined and agile structure for long term success.
We must also break down silos in the organization to facilitate and motivate and bring the entire enterprise to the table in every client conversation.
We don't want to bring one or two notes, we want to bring the entire orchestra.
We have truly dominant knowledge and expertise across the company that we need to bring out more definitive lead to our advantage.
Ultimately leveraging the thought leadership will enable us to be the preferred solution provider to all of our clients and better facilitate cross selling opportunities across the firm.
Our refreshed capital allocation framework is the result of all of this work.
We recognize the growth is important in any industry and we believe the business resiliency is paramount to ensuring the stability of long term returns will.
We will be taking a more intentional and holistic approach to capital allocation as it relates to our updated strategy across all of our businesses with the knowledge that investment capital allocated to our business line is not free and we must evaluate returns accordingly.
Lastly, the health of our balance sheet and our liquidity profile will remain a top priority and as we fine tune our strategy. We will continue to look to improve our capital structure over time.
Over the upcoming quarters Youll hear more from me on the progress of our transformational work Cushman and Wakefield.
But before we move on I'd like to thank all of our employees for their hard work and dedication during my transition to the CEO role, but also every day.
Our people are up for the challenges presented by today's market condition engaged and always looking to serve our clients.
And now I'd like to hand, the call over to Neal for a review of our second quarter financial results.
Thanks, Michele and good afternoon, everyone.
Second quarter results were in line with our expectations with solid sequential increases in adjusted EBITDA and adjusted EBITDA margin during.
During the quarter, we maintained our strong focus on free cash flow and we'll continue to prioritize our balance sheet as we move forward.
Moving onto the details of the quarter on the top line revenue trends in the second quarter was similar to what we saw during the first quarter second quarter fee revenue of $1 6 billion declined 14% versus the prior year with capital markets revenue down, 48% and leasing revenue down 20% PM FM revenue was up three.
With particular strength in our property management and facility services businesses.
Valuation and other declined 13% in the second quarter as the slowdown in transactions continue to result in lower valuation activity.
Adjusted EBITDA for the second quarter of 146 million was down 44% versus prior year and our second quarter. Adjusted EBITDA margin was eight 9% a meaningful improvement from our first quarter margin of 4%.
During the quarter, we successfully executed on our cost cutting programs.
Which are more than fully offset inflation and prior investments realizing $49 million of savings in the first half of the year in.
In addition to our previously announced $19 million program. Our teams have worked diligently to identify an additional 40 million in gross savings, bringing our expected 2023, India cost savings total to $130 million.
To put these cost savings in perspective, the savings target represents roughly 10% of annual G&A expenses, while our cost out programs are in part a response to today's operating environment. More importantly, they are positioning us to be more efficient and to achieve better long term margins when transactional volumes recover.
Adjusted earnings per share for the quarter was 22, a decrease of 41 versus prior year.
Turning to our segment results for the quarter in the Americas, a year over year decline in brokerage of 32% was partially offset by continued resiliency in P. M. S N, which grew 4% most notably in property and project management.
The declines in brokerage were across most asset types due to the higher interest rate environment and macroeconomic headwinds.
EMEA experienced a similar decline in brokerage to the Americas, while APAC reported flat brokerage trends and improvement over the past several quarters as leasing trends in APAC improved most notably in Australia.
F N business in EMEA and APAC experienced slow performance in the quarter, primarily due to lower project management activity.
The adjusted EBIT declines in each of our regions with principally driven by lower brokerage activity with the Americas also experiencing a lower contribution from greystone.
Free cash flow for the second quarter was an outflow of $27 million. This compares favorably to the prior year, which sold at 100 million during the same period.
Our teams remain highly focused on driving cash flow improvements disciplined working capital management and I'm pleased to report that we have generated positive free cash flow on a trailing 12 month basis, even during this period of lower earnings.
Overall, our financial position remains strong with $1 $6 billion of liquidity consisting of cash on hand of $502 million and availability on our revolving credit facility of $1 1 billion we.
We had no outstanding borrowings at or above our net leverage was four three times at the end of the second quarter our.
Our debt profile is now more than 96% fixed on a net basis. We are focused on our near term maturities and optimizing our debt profile within current market conditions.
Finally, moving to our outlook the guidance we provided on our previous earnings call is essentially unchanged and we continue to expect full year adjusted EBIT margins to be in the range of 9% to 10%.
EBITDA margin guidance is based on the following full year assumptions low to mid single digit revenue growth in P. M. S N at approximately 20% revenue declines in brokerage.
Concludes the financial review with that I'll turn the call back over to Michelle.
Thanks, Neil in summary, our second quarter results were solid demonstrating the focus of our team and the stability and resilience of our business Cushman has a strong and stable foundation, a growing platform to build upon for the next leg of our growth strategy.
As someone who has spent decades in the commercial real estate industry I am confident in our ability to drive sustainable improvements in our business model and truly believe in this company's long term opportunities.
I'm energized by the challenge of taking the helm and I look forward to working with all of our stakeholders to accelerate our results and capitalize on this opportunity.
And with that operator, let's open up the line for Q&A.
Thank you.
We'll now begin the question and answer session.
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We will pause for a moment as callers trying to keep.
Our first question comes from Anthony Pallone from J P. Morgan. Please go ahead.
Oh, great. Thank you. It looks like you are out of your guidance brackets are pretty comparable to last quarter, but Michelle you had mentioned free cash flow conversion as being one of your focal points can you maybe just talk about where you see that shaping up for the year at this point and whether there was any change on that front.
Yeah, I think that we are in a place where we can still move a couple of levers to better our free cash flow conversion, including days outstanding tax and a couple of other levers that we have at our disposal.
Our goal has always been to reach a range around 30% of free cash flow conversion.
Okay.
And then just in P M at Fam.
Yeah, I think the APAC with break it sequentially kind of dropped in the quarter was 2% you've kept your guidance for the full year.
For for P. M. F. M. Just wondering like how visible that is and if theres anything just to note in that business just as we look to the second half.
Yes sure Tony.
The growth rate varies from quarter to quarter in our services business, mainly due to the timing of contracts and certain AD hoc work that we performed in the first quarter in Asia Pacific specifically.
Did have significant project management work that was short term in nature. So it boosted that arose in the first quarter a little bit second quarter was right in line without putting your assumptions in that low to mid single digit growth rate. So we still feel very confident in our guide for the full year on services and liked the business.
And its resiliency.
Okay, and if I could just sneak one more in just as we start to think about the fourth quarter, which as you know tends to be the biggest quarter you know anything youre seeing in terms of either green shoots or on the flip side particular risks are.
To kind of get to the numbers to get you into your your guidance brackets.
We're feeling really good we're encouraged by the building pipeline I mean, it's still too early to call an inflection point, there's been a lot of focus on capital markets and recovery in capital markets. In particular, so we believe it's a question of when not if.
And we all know the capital markets performance is highly correlated to interest rates and markets in general right and there's probably one more rate moves followed by a period of no change and then cuts.
So we're directionally feeling, particularly good at this moment.
Okay. Thank you.
Yep. Thanks.
Thanks Jay.
The next question comes from Alex Kramm of UBS. Please go ahead.
Yeah, Hey, good evening, everyone, maybe just starting on the incremental cost cuts can you dig a little bit deeper in terms of what youre really attacking here and then you know how much of the 40 incremental is permanent versus temporary or maybe remind us in general where you are where you see permanent first.
And the whole 130 now.
Sure Alex So I can take that question. So as we looked at 130 in total.
80% of that is temporary but obviously as we go into next year. If we don't see conditions improve we can always hold out and not let those temporary costs come back into the business.
C $130 million of India savings, that's actually a $160 million on a run rate basis.
Of that 20% is temporary.
In terms of where the savings are they are primarily infrastructure and overhead costs.
As we said, it's roughly 10% of all.
General and administrative costs, our G&A costs.
Severance lease.
Lease termination.
External consulting costs.
Where it costs, it's really a full business.
Right sizing up suddenly environment, what you're seeing right now.
Okay, Great and then maybe just coming back to that does the updated guidance at the 20% down in brokerage I don't I don't think you gave a number there in the first quarter. So just maybe talk a little bit more broadly how how that's U S changed I know someone just asked about the fourth quarter and I know, there's a lot of uncertainty there but.
How are how how are your overall expectations for the full year changed here in brokerage.
Yeah, you know they haven't really changed as we said on our first call. We did see a delay in brokerage from the first quarter two similar results in the second quarter and it came in right in line, what we expected in the quarter.
What would be very specific about guidance its really focused on the margins being in that 9% to 10% range. So we have said that we see that 9%, 10% range given brokerage at the 20% level that is currently what we see obviously that will change over time.
But as I said very focused on larger and more than giving any form of revenue guidance yeah.
Alright, great and maybe I'll sneak one more in there as well a quick one here on the P. M. F. M margin I know you don't give specific margins on that business, but we know it's obviously the lowest across the.
Company.
Can you.
With with some of the cost savings or do you feel.
Announced here and also the scale you're still gaining that business is are you actually expanding margins there any any color how that the margins have trended in that business line in particular.
CDW services business in particular has a standard margins over the last five years, but part of the margins in some of the other businesses are connected to your transaction volume. So they have a base level of margin that always silvers forest, but some of the upside in that margin is related to transactions.
Right fair enough. Thanks, guys.
The next question comes from Doug Harter of Credit Suisse. Please go ahead.
Oh, Thanks, we talked to you you mentioned that you're starting to see some of the pipeline building.
Building now for for transaction revenue can you just give a little more detail as to kind of what you're seeing and you know kind of Oh, what it will take to kind of actually get those transactions across the line.
Sure, it's really compelling and I think that the buildup is from the fact that investors and lenders are trying to figure out the market but.
As I said, a little earlier when I was answering Tony because we probably have one more rate move in the pipeline here. We think that there is going to be a sorry of capital markets. Late this year into early next year and at that point then it's just a discussion around how the dam breaks if you will if it breaks.
The small pieces or breaks all at once.
Great and I guess, just with the cost cuts that you that you've undertaken you know kind of how do you think about your ability to you know to benefit from.
From from that damn braking.
Yeah look it's always discretion, what you cost cut and what you keep N.
We were very focused on ensuring that we would be able to take advantage of the recovery in the markets. When we went through this process.
Great. Thank you.
Yeah.
The next question comes from Michael Griffin of Citi. Please go ahead.
Great. Thanks, Michel you talked in your opening remarks about looking at your returns accordingly across business lines are there any business lines in particular that screen is more attractive to invest in now and any color you can give around that would be helpful.
Okay.
Look we've just started the process in earnest and we're going to take our time to complete it well so in order to really answer your question in depth, we need some time here because we're going to do a deep dive and a heavy scribe down but what I can tell you is there are some trends in general that stick out to me and they play across many of the business.
And the organization health care related trend data center related trends things along those lines.
Great. Thanks, and then you noted in the release that the decline in leasing its been primarily attributed to lower office activity is that office overall is that commodity office. You know how are you seeing trends and more of that class a trophy product in and anything you can expand on there would be helpful.
Sure and we have a research piece that came out on Bloomberg last week speaking to the year over year net absorption rates in that class a space, which in many markets has been positive what's interesting for us is that most of the conversation in commercial real estate today is around the office sector and we have a deep history in this.
As you probably noticed the clients are engaging with us as advisors and not just deals yours and that's the evolutionary path that we want and beyond but as a reminder, we don't traditionally work in the bottom 30% of any asset class. So you will find us mainly in class a and class b product.
Great. That's it for me thanks for the time.
Yeah.
The next question comes from Stephen Sheldon with William Blair. Please go ahead.
Hey, Michelle Aneel you have mapped file are gone for Stephen Sheldon. Thank you for taking my questions I wanted to circle back on the P. F. M segment can you walk us through what would drive you to hit either the high or low end of the guidance range and then how are you thinking about potential growth looking out to <unk>.
24.
Sure you know when we look at services like the Great thing about this is the fact that it has low contracts, it's resilient and there was a base level of activity, which is the year end and yeah Ross what we do see in the services business has a certain amount of AD hoc work that comes along with those service contracts.
Apple Joint Covid, we had co two names.
In the northeast, we will do snow removal and things like that so to hit the high end services range wed.
We'd expect to see.
A significant amount of AD hoc work, we don't plan for that.
Certainly that is something that would drive us to the high end.
Right, Yeah, and then on the growth front, we've continued to make investments in our services businesses are wood wood.
I'm, assuming that we are going to have solid growth going into 2024, but as you can imagine this will be part of the evaluation process that we're going through with the strategy refresh.
Got it that's helpful color. Thank you for that and then to clarify on brokerage does the brokerage guidance assume any pickup in transaction volumes from an improving macro.
We don't see a meaningful recovery in the fourth quarter, we do see a sequential improvement as we move through Q3 into Q4 Q4 was naturally a very big quarter because of the annual nature of that business.
Our guidance does not contemplate any fast.
Recovery in the market.
Got it. Thank you and then one more for me what is broker retention look like given the persistently challenging market conditions and do you feel well staff for a faster than expected market recovery if that were to occur.
Yeah look I think that we are in and particularly educated seat when it comes to a broker retention and I know, there's some headlines out there monthly negative it affects a little bit more traction than the actual back if we have an individual or a group that's been working for US we have somewhere between five to 10 years the final.
History on that individual or team and we know of their enterprise positive or negative. So we have perfect information when we make a decision about who to offer retention to and do not to offer retention too. We also have a bit of a mix shift happening in the organization over the last five years and so people with.
Certain skill sets become more or less valuable over that period of time and we are very much focused on retaining those individuals that will be part of future growth of the organization.
Alright, that's helpful. Thank you both I'll jump back into queue.
The next question comes from Ronald Camden of Morgan Stanley . Please go ahead.
Hey, two quick questions for me. Thank you for the guidance updates about the Incrementals were really helpful. On the first one is just on the 9% to 10%.
EBITDA margin I bet, you reiterate it.
You know you talked about the 130 million updated targets for cost cutting.
$60 million annualized is there a way to sort of break out how much that cost cut is contributing to the margin guidance and the reason I ask is is all else equal as that as those costs annualize do they become a tailwind for margins in <unk> and 'twenty four.
Where I'm trying to get to.
Yeah Ron.
This $30 million is already concentrated in our guidance as we said on our first quarter earnings call. We had a reaction of $19 million and there were more actions in the pipeline. We really are just giving the numbers on this call. The initial 40 minutes to get to the 130 million.
While the cost guidance doesn't drive anything above our range. This year. It does make us more efficient so depending on the timing of the brokerage recovery and the extent of that recovery.
Brokerage comes back we will see higher margins to be sold before the efficiency measures.
Helpful.
And then just following up on the cash conversion question on the on the EBITDA.
And you know I'm looking at the the cash flow statement.
And still you know I think to 38 million down in the first quarter, maybe can you talk to so accrued compensation was negative again this quarter, but can you talk through what is one time or what seasonal because I'm just trying to get my arms around sort of the working capital in the first half of this year trying to understand how that's going to trend for the rest.
Yeah.
Okay.
Yes, so if we look at working capital in the first half of the year was driven primarily by the fact that we were paying out bonuses and commissions from last year at a higher level that we are accruing. This yes.
Causes a little bit of timing I think what you're really trying to get to is what's the cash conversion for the full year.
We encourage you to look over a period of time, if you look at the trailing 12 on a trailing 12 month basis, all free cash flow should keep was neutral.
The down cycle, and then we'll see that grow.
Brokerage comes back at the high basket. So the extent of our free cash flow and cash flow conversion will depend on the timing.
And the significance of the brokerage recovery as we move through the end of this year into 'twenty one.
Helpful. Thank you that's it for me.
The next question comes from Patrick O'shaughnessy of Raymond James. Please go ahead.
Hey, good afternoon.
As you conduct your strategic review and you identify incremental growth opportunities would you expect that capitalizing on those opportunities could require incremental company capital.
Yes, I Wouldnt anticipate that there are scenarios, where we need incremental capital, but given our cash position I think we are in a particularly strong position to use our own cash.
Got it okay. Thank you and then the earnings release today, I mentioned, an $11 million servicing liability fee in connection with amending and extending the account receivable securitization.
Neil maybe you can just walk through kind of what is the value of that accounts receivable securitization program to Cushman <unk> Wakefield.
And what was the nature of the the charge today.
Sure.
Al securitization facility basically renews itself every couple of years. So this is just normal renewal off the program. It provides us a $200 million.
A basically think of it as like a a.
A revolver, whereby we use that AR securitization facility to manage working capital through the first half of year and then when these pads in the back half of the year and then the following year, Okay, let's just use it to manage seasonal.
The seasonal nature of the business.
Got it thank you very much.
As there are no more questions from the phones.
Includes the question and answer session and today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
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