Q1 2024 Cushman & Wakefield PLC Earnings Call
Operator: Good day, and welcome to the Cushman & Wakefield First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star again. Please note, this event is being recorded. I would now like to turn the conference over to Megan McGrath, Head of Investor Relations. Please go ahead.
Good day, and welcome to the Cushman and Wakefield first quarter 'twenty 'twenty four earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist.
By pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
To withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Megan Mcgrath head of Investor Relations. Please go ahead.
Megan McGrath: Thank you, and welcome to Cushman & Wakefield's first quarter 2024 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.cushmanwakefields.com.
Thank you and welcome to Cushman and Wakefield first quarter 'twenty 'twenty four earnings conference call.
Megan McGrath: Earlier today, we issued a press release announcing our financial results for the period.
Megan McGrath: It's really along with today's presentation can be found on our Investor relations website at IR.
Megan McGrath: Our cushman Wakefield dotcom.
Megan McGrath: Please turn to the page in our presentation labeled Cautionary Notes 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 Gap-to-Non-Gap Financial Measures, Definitions of Non-Gap Financial Measures, and other related information are found within the financial tables of our earnings release and the appendix of today's presentation.
Megan McGrath: Please turn to the page in our presentation. The cautionary note on forward looking statements.
Megan McGrath: Today's presentation contains forward looking statements based on our current forecast.
Megan McGrath: And it's a feature.
Megan McGrath: These statements should be considered estimates only and actual results may differ materially.
Megan McGrath: During today's call, we will refer to non-GAAP financial measures as outlined by S&P guideline.
Megan McGrath: 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.
Megan McGrath: Also, please note that throughout the presentation, comparisons and growth rates are to the comparable periods of 2023 and in local currency unless otherwise stated. And with that, I'd like to turn the call over to our CEO, Michelle MacKay.
Megan McGrath: Also please note that throughout the presentation comparisons and growth rates are to the comparable periods of 2023 and in local currency unless otherwise stated.
And with that I'd like to turn the call over to our CEO Michelle Mackay.
Michelle Mackay: In 2023, we spoke with you frequently about positioning ourselves in a thoughtful way for the recovery, and as you can see from our performance, the actions that we took in support of these words created strong first quarter results. Since the last time that we spoke, our teams have seized market opportunities, and we continue to strengthen our balance sheet, including our first optional prepayment of debt, as well as successfully repricing our 2030 term loan, reducing our annual cash interest cost.
Michelle Mackay: Thank you Megan.
Michelle Mackay: In 'twenty two 'twenty three we spoke with you frequently about positioning ourselves in a thoughtful way for the recovery and as you can see from our performance. The actions that we took in support of these words created strong first quarter results.
Michelle Mackay: Since the last time, we spoke our teams have seize market opportunities and we continue to strengthen our balance sheet, including our first optional prepayment of debt as well as successfully repricing, our 2030 term loan reducing our annual cash interest costs.
Michelle Mackay: We reported another quarter of global leasing growth and saw meaningful improvements in capital markets. We've had a couple of key wins in our services businesses in the last month alone as we continue to step away from less accretive services transactions. And importantly, we achieved these results while maintaining cost discipline, leading to an improvement of more than 100 basis points in adjusted EBITDA margins.
Michelle Mackay: We reported another quarter of global leasing growth and saw meaningful improvements in capital markets.
Michelle Mackay: We've had a couple of key wins in our services businesses in the last month alone as we continue to step away from less accretive services transactions.
Michelle Mackay: And importantly, we achieved these results while maintaining cost discipline, leading to an improvement of more than 100 basis points and adjusted EBITDA margin.
Michelle Mackay: Looking at the big picture, the year is generally progressing in line with expectations. On our last earnings call, I said that we were expecting a moderate initial reduction in rates sometime later in the year. Our view from the onset has been that the Fed was likely to remain cautious this year, and our strategy and budgeting decisions were made in accordance with that view.
Michelle Mackay: Looking at the Big picture the years generally progressing in line with expectations on our last earnings call. I said that we were expecting a moderate initial reduction in rates sometime later in the year.
Our view from the onset has been that the fed was likely to remain cautious this year and our strategy and budgeting decisions were made in accordance with that view.
Michelle Mackay: Our outlook and optimism for the recovery are strong, and we continue to position our business in a thoughtful way for this next stage in the cycle. Given the recent increase in rate volatility, I'd like to take a couple minutes to share our thoughts on how we view the relationship between the Fed rate cuts and our business. Because overall, we view the Fed rate cuts as an accelerator of certain parts of the business, but not the only avenue for transactional improvement.
Michelle Mackay: Our outlook and optimism for the recovery are strong and we continue to position our business in a thoughtful way for this next stage in the cycle.
Michelle Mackay: Given the recent increase in rate volatility I'd like to take a couple of minutes to share our thoughts on how we view the relationship between the fed rate cuts in our business.
So overall, we view the fed rate cuts as an accelerator of certain parts of the business, but not the only avenue for transactional improvements.
Michelle Mackay: Our first quarter results provide some insights into these dynamics, illustrating what happens when there is rate stability, economic optimism, a solid pipeline of deals, and strong teams armed with a clearly defined strategy. We expect that leasing, which is a particular strength of ours, will continue to benefit from global economic resiliency as we move through the cycle, and our diverse platform allows us to capture pockets of strength across regions and asset classes, as we have positioned ourselves to do for the past several quarters.
Michelle Mackay: Our first quarter results provide some insights into these dynamics illustrating what occurs when there is rate stability economic optimism a solid pipeline of deals and strong teams arms with a clearly defined strategy.
Michelle Mackay: We expect that leasing which is a particular strength of ours will continue to benefit from global economic resiliency as we move through the cycle and our diverse platform allows us to capture and pockets of strengths across regions and asset classes as we have positioned ourselves to do for the past several quarters.
Michelle Mackay: During the quarter, we saw continued solid growth in leasing across our global platform, with revenues up 5% for the second quarter in a row. And on the capital markets side of the business, activity in Q1 reflected transactions closing in the early part of the quarter, when there was more optimism over a potential first rate cut from the Fed. Although the recent uptick in rate volatility will most likely cause a pause in transaction volumes in Q2, the improvement that we experienced in Q1 gives us more confidence that global investment sales pipelines are solid, and investors are ready to engage when the time is right.
During the quarter, we saw continued solid growth in leasing across our global platform with revenues up 5% for the second quarter in a row.
Michelle Mackay: And on the capital market side of the business activity in Q1 reflected transactions closing in the early part of the quarter. When there was more optimism over a potential first rate cut from the fed.
Michelle Mackay: Although the recent uptick in rate volatility will most likely cause a pause in transaction volumes in Q2, the improvement that we experienced in Q1 gives us more confidence the global investment sales pipelines are solid and investors are ready to engage when the time is right.
Michelle Mackay: I'm pleased with our first quarter performance and the way in which our teams continue to execute and find opportunities across our segments and geographies. The clarity that the RESET strategy has given management is already paying dividends in a more cohesive and connected approach to the way that we operate the company and interact with our clients. With that, I'll turn the call over to Neil.
Michelle Mackay: I'm pleased with our first quarter performance and the way in which our teams continued to execute and find opportunities across our segments and geographies.
Michelle Mackay: The clarity that the reset strategy has given management is already paying dividend in a more cohesive and connected approach to the way that we are operating the company in interacting with our clients.
Michelle Mackay: With that I'll turn the call over to Neil.
Neil O. Johnston: Thank you, Michelle, and good afternoon, everyone. We were pleased with our first quarter results, which exceeded our expectations and guidance, with fee revenue of $1.5 billion, flat with the prior year, and adjusted EBITDA of $78 million, up 29% versus the prior year. Our adjusted EBITDA margin of 5.2% grew 117 basis points as we benefited from higher leasing revenue as well as the cost savings actions taken during 2023. Adjusted earnings per share for the quarter was breakeven, an improvement from the 4 cent loss a year ago.
Neil: Thank you Michelle and good afternoon, everyone.
Neil: We are pleased with our first quarter results, which exceeded our expectations and guidance with fee revenue of $1.5 billion flat with the prior year and adjusted EBITDA of 58 million up 29% versus prior year.
Neil: Our adjusted EBITDA margin of five 2%.
Neil: 117 basis points as we benefited from higher leasing revenue as well as the cost savings actions taken jewelry twice 23.
Neil: Adjusted earnings per share for the quarter was breakeven and have proven from a four cent loss a year ago.
Neil O. Johnston: By segment, key revenue declined 3% in the Americas, grew 3% in EMEA, and grew 8% in APAC. We saw margin expansion in both the Americas and EMEA due to strong leasing growth and our 2023 cost actions, while margins in APAC contracted slightly, due primarily to mix. Taking a look at our service lines, effective January 1, we have renamed the property facilities and project management service line to services. This change is in name only and has no impact on the composition of our service lines or our historical results.
Neil: By segment revenue declined 3% in the Americas grew 3% in EMEA.
Neil: In APAC.
Neil: We saw margin expansion in both the Americas and EMEA due to strong leasing growth and our 2023 cost actions.
Neil: Largest APAC contracted slightly due primarily to mix.
Neil: Taking a look at our service lines effective January one we have renamed the property facilities and project management service line to services.
Neil: This change is in name only and had no impact on the composition of our service lines.
Neil: Historical results.
Neil O. Johnston: Beginning with brokerage, our leasing business continued to experience the stabilizing trends we reported in the fourth quarter, with 5% revenue growth. The growth in Q1 was again global in nature, with Americas leasing up 1%, EMEA leasing up 30%, and APAC leasing up 10%. In the Americas, we saw particular strength in midsize office and industrial leasing, which grew in each of our subregions for the first time since the fourth quarter of 2022. In EMEA, we transacted on a large deal in Germany, which accounted for roughly a third of the leasing growth in that region.
Neil: Beginning with brokerage and leasing business continued to experience stabilizing trends, we reported in the fourth quarter with 5% revenue Brooks.
Neil: So Q1 was again global in nature with Americas leasing up 1% EMEA leasing up 30%.
Neil: Can you sing up 10%.
Neil: In the Americas, we saw particular strength in midsize office and industrial leasing which grew in each of our sub regions for the first time since the fourth quarter of 2022.
In EMEA, we transacted on a large deal in Germany, which accounted for roughly a third of the leasing growth in that region.
Neil O. Johnston: The remaining growth came from strength in all of our major asset classes, with office, industrial, and retail each up over 10% in the quarter. In APAC, India continues to see healthy growth, supported by durable megatrends in global outsourcing and data centers. Our capital markets revenue declined 1%, a meaningful sequential improvement over the 32% year-over-year decline reported in the fourth quarter of last year. America's capital markets revenue was down 7%, while EMEA and APAC revenues were up 12% and 52%, respectively.
Neil: The remaining growth came from strength in all of our major asset classes with office industrial and retail each up over 10% in the quarter.
Neil: In APAC, India continues to see healthy growth supported by durable Mega trends and global outsourcing data centers.
Neil: Our capital markets revenue declined 1%, a meaningful sequential improvement over the 32% year over year decline reported in the fourth quarter of last year.
Neil: Capital markets revenue was down 7%, while EMEA and APAC revenues were up 12% and 52% respectively.
Neil O. Johnston: In the Americas, we experienced a pickup in pipeline conversion early in the quarter, particularly in office transactions, as interest rates were relatively stable and bid-ask spreads narrowed. In EMEA, buyer and seller expectations on pricing and values are realigning, particularly in prime assets in better locations.
Neil: In the Americas, we experienced a pickup in pipeline conversion early in the quarter, particularly in office transactions as interest rates were relatively stable, but as spreads narrowed.
Neil: In EMEA and seller expectations on pricing and values are realigning, particularly in prime assets in better locations.
Neil O. Johnston: And in APAC, office and industrial sales were strong, most notably in Australia, where we've made some recent growth investments. We are encouraged by these results, but acknowledge that the recent increase in interest rate volatility is likely to cause a short-term reverse of trends in the second quarter as the market adjusts. Ultimately, however, our first quarter results provide us with increased confidence that transactions will return to the market in greater volume when flexibility is achieved. Turning to services, revenue is down 3% or flat with the prior year, adjusting for the previously discussed contract change. In the Americas, services revenue declined 5%, or 1%, excluding contract change.
Neil: APAC office and industrial sales with strong most notably in Australia what is it.
Neil: Made some recent growth investments.
Neil: We're encouraged by these yourselves, but acknowledge that the recent increase in interest rate volatility is likely to cause a short term reverse just trends in the second quarter as the market adjusts.
Ultimately however, our first quarter results provide us increased confidence that transactions will return to the market in greater volume when rates stability is achieved.
Turning to services.
Have any of this down 3% or flat with prior year adjusting for the previously discussed contract change.
Neil: So this is revenue declined 5% or 1% excluding contract change and in EMEA. So this is kind of 90%.
Neil O. Johnston: And in EMEA, services revenue declined 9%, as we continue to reposition our services portfolio for profitable growth. In APAC, our services business was strong, up 7%, driven by solid growth in project management and facilities management. Overall, we are pleased with the momentum we are seeing in services. We have recently had some notable new business wins, and our new business pipeline is strong. As we previously discussed, while our focus on margin and accretive growth is resulting in some near-term revenue headwinds, we expect to see a re-acceleration of growth in the second half of this year and a return to at least a mid-single-digit growth rate in 2025.
Neil: We continue to reposition our portfolio for profitable growth.
Neil: And APAC all citizens business was strong.
Neil: Up 7% driven by solid growth in project management and facilities management.
Neil: Overall, we are pleased with the momentum we are seeing in services. We have recently had some notable new business wins and our new business pipeline is strong.
Neil: As we've previously discussed while our focus on margin and accretive growth is resulting in some near term revenue headwinds, we expect to see a reacceleration of growth in the second half of this year.
Neil: And our return to at least a mid single digit growth rates in 2025.
Neil O. Johnston: Turning to cash flow, free cash flow for the quarter was a use of $136 million. This compared favorably to the first quarter of 2023, where free cash flow was a use of $231 million. The first quarter use of cash is in line with historical working capital trends, including the annual payment of U.S. bonuses, and reflects typical seasonal patterns in our business. We continued our progress on strengthening the balance sheet. During the quarter, we repaid $50 million of Terminal B due in 2025, reducing the outstanding balance to $143 million.
Neil: Turning to cash flow free cash flow for the quarter was a use of $136 million.
Neil: This compared favorably to the first quarter of 2023, where free cash flow was a use of 231 million.
First quarter use of cash is in line with historical working capital trends, including the annual payment of U S bonuses.
Neil: Typical seasonal patterns in our business.
Neil: We continued our progress on strengthening our balance sheet during.
Neil: During the quarter, we repaid $50 million of 10 might be due in 2025, reducing the outstanding balance to 143 million.
Neil O. Johnston: In addition, subsequent to Quarter End, we repriced $1 billion of Terminal B to $2030, reducing the applicable interest rate by 25 basis points from one month SOFR plus $400 to one month term SOFR plus $375. The net impact of these actions is expected to reduce annual cash interest expense by roughly $6 million.
In addition, subsequent to quarter end, we priced 1 billion up 10, there'd be 220 city, reducing the applicable interest rate by 25 basis points for one month's sofa plus 400 to one most churn so surpassed 375.
Neil: The net impact of these actions is expected to reduce annual cash interest expense by roughly $6 million.
Neil O. Johnston: Finally, moving to our outlook, we continue to expect that sustained growth in capital markets is most likely to begin sometime in the second half of this year, contingent upon a more conducive interest rate environment. We expect the leasing market to be relatively stable for the year and for our services business to grow at a similar rate to 2023. On the cost side, we continue to expect cost increases, driven by normal inflation and high incentive compensation, as we focus on positioning the company for market growth. However, we do expect our cost efficiency initiatives to mostly offset these cost headwinds within the year. With that, I'll turn the call back over to Michelle.
Speaker Change: Finally, moving to our outlook.
Speaker Change: We continue to expect the sustained growth in capital markets. It's most likely to begin sometime in the second half of this year contingent upon a more conducive interest rate environment.
We expect the leasing market should be relatively stable for the year and for our services business to grow at a similar rate to 2023.
Speaker Change: On the cost side, we continue to expect cost increases driven by normal inflation and higher incentive comp as we focus on positioning the company for market growth.
Speaker Change: However, we do expect our cost efficiency initiatives to mostly offset these cost headwinds within the year.
Speaker Change: With that I'll turn the call back over to Michelle.
Michelle Mackay: Thanks, Neil. Over the past quarter, we've witnessed an incredible commitment and loyalty to us from our clients, lenders, investors, and our people. We promise to all of our constituencies that we will continue to push ourselves to evolve at a rapid-fire pace, never content and never settling. Now, I'll turn the call over to the operator for your questions. Operator?
Michelle Mackay: Thanks, Neil over the past quarter, we've witnessed an incredible commitment and loyalty to us from our clients lenders investors and our people we promise to all of our constituencies and we will continue to push ourselves to evolve at a rapid fire pace never content and never settling.
Operator: Now I'll turn the call over to the operator for your questions operator.
Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key.
Speaker Change: Thank you we will now begin the question and answer session to.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.
Operator: If at any time your question has been addressed, and you would like to withdraw your question, please press star then. Also, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Anthony Paolone with J.P. Morgan. Please go ahead.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: Also please limit yourself to one question and one follow up.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
The first question comes from Anthony Polone with J P. Morgan. Please go ahead.
Anthony Paolone: Alright, thanks, good afternoon.
Anthony Paolone: Thanks, good afternoon. My first question is just looking at the first quarter margin. I know it's a seasonally slow quarter, and don't want to make too much of it, but as we think about 2024, should we think about that 100 or so basis points of margin expansion as being the right order of magnitude if the businesses hit the targets you put around them?
Anthony Paolone: First question is just looking at the first quarter margin I know, it's a seasonally slow quarter and don't want to make too much of it but as we think about 'twenty 'twenty four should we think about that 100 or so basis points of margin expansion as being the right order of magnitude of the businesses hit the bracket you you put around them.
Neil O. Johnston: Tony, I think the reason we gave guidance for the first quarter was because we did have the cost program that rolled into savings in 2024. So in the first quarter, we had $20 million of savings, which did more than offset the cost increases we saw. So if we look at that marginal improvement, it was essentially half driven by those cost savings and the other half driven by the improvement in leasing, the flow through of leasing.
Anthony Paolone: Okay.
Speaker Change: Tony I think the reason we gave guidance on the first quarter was of course, we did have the cost program.
Speaker Change: Savings in 2024, and the first quarter, we had $20 million of savings.
Speaker Change: Which paid off more than offset the cost increases we saw so if we look at that margin improvement. It was essentially half driven by those cost savings and the other half driven by.
Speaker Change: These statements these thing.
Neil O. Johnston: As we look now ahead for the rest of the year, as we said in our full-year outlook, we do expect the remaining cost actions to basically offset inflation and cost increases. So the marginal expansion that we will get in the back half of the year is tied primarily to operating levels. So, you know, as you think about the year, think about growth in leasing, what's happening in capital bonds, and services. And so that is sort of how to frame up Marston's year.
Speaker Change: As we look now on all the rest of the year as we said.
Speaker Change: But we do expect.
Speaker Change: The remaining cost actions basically offset inflation and the cost increases so the margin expansion that we will get in the back half is.
Speaker Change: Tied primarily to operating leverage.
Speaker Change: So.
Speaker Change: As you think about the way I think about closed.
Speaker Change: Who was it leasing.
Speaker Change: With a catheter box services.
Speaker Change: So that that is sort of how to frame up.
Speaker Change: Yeah.
Neil O. Johnston: Okay, so the first quarter seems like it had a bit more than that in it, so to basically kind of keep that in mind, is that kind of the takeaway? That's exactly right.
Speaker Change: Okay.
Speaker Change: The first quarter seemed like it had a bit more than that it's sort of basically kind of keep that in mind is that kind of okay.
Neil O. Johnston: Yes, yes, it all depends. We know it depends on the economy.
Speaker Change: Yes, yes, it all depends.
Speaker Change: Totally.
Anthony Paolone: Okay, and then my second question is just in the services segment. Yeah, I guess, you know, you're still looking for two to 3% growth in 2024. For the full year, I'm wondering how much of that is speculative in terms of contracts that you still have yet to win versus, you know, where you have a high degree of visibility and that you're just waiting for things to commence. And I guess along the same line, since you've been reworking that segment, do you think you'll make more EBITDA in 24 than you did in 23? Thank you.
Okay and then my my second question is just in the services segment.
I guess, you're still looking for 2% to 3% growth in 'twenty 'twenty four for the full year I'm wondering how much of that is speculative in terms of contract suite and start yet to win versus you know where do you put a high degree of visibility and that you're just waiting for things to come ads and I guess, along the same one since you've been reworking.
Speaker Change: That segment.
Speaker Change: Do you think you'll make more EBITDA in 'twenty four and you did in 'twenty three.
Speaker Change: Hi, Tony and pushed out and just to start off with services I'm really excited about our positioning in services and as we've said in prior quarters. We're hyper focused on accretive long term growth in that business. So as you know we've been fine tuning our strategy here and expect to be back to our long.
Michelle Mackay: Hi Tony, it's Michelle.
Michelle Mackay: Just to start off with services, I'm really excited about our positioning in services, and as we've said in prior quarters, we're hyper-focused on accretive long-term growth in that business. So, as you know, we've been fine-tuning our strategy here and expect to be back to our long-term growth rate in the mid-single digits in 2025. In the GOS business, and just to give you a little color on where we're winning, what's happening, we're beginning to win business in marquee deals when it's important to the client that we're balancing being globally scale And we've had a couple of key wins this year.
Speaker Change: Some growth rate in the mid single digits in 2025.
Speaker Change: In the Tos business and just to give you a little color on where we're winning what's happening we're beginning to win business and marquee deal. When it is important to the client that we're balancing being globally scale, but also having agility and we've had a couple of key wins. This year. Some of them will play into revenue later in the year and some of them.
Michelle Mackay: Some of them will play into revenue later in the year, and some of them will play into next year. And then for the smaller clients, to your point around what's more speculative, those can transact more quickly this year. And honestly, those are great deals. Those are critical clients to us. They're higher-margin, typically, and we treat them the way that we do by bringing in our best practices from the entire Cushman brain to their experience.
Speaker Change: And we'll play in next year, and then for the smaller clients to your point around the more speculative those can transact more quickly in year and honestly those are great deals as a critical finding its July they're higher margin typically and we treat them the way that the.
Speaker Change: Way that we do by bringing in our best practices from the entire Christian brain to their experience. So what we're finding now is there's a real shift large or small in the U S business.
Michelle Mackay: So, what we're finding now is there's a real shift, large or small, in the GOS business in particular, to clients that really want to be given advice on areas such as ESG and workplace solutions, and you've got to be scalable to do it, but you've got to be agile to do it as well.
Speaker Change: This is in particular, it's the clients that really want to be given advice on areas, such as ESG and workplace solutions and you've gotta be scaled to do it and you've got to be agile to do it as well.
Thank you.
Speaker Change: The next question comes from Michael Griffin with Citi. Please go ahead.
Great. Thanks, I wanted to talk first about the leasing business, particularly on office. It seems like Youre seeing on the ground there was probably a little bit better than the negative headlines we've seen out there.
Operator: The next question comes from Michael Griffin with Citi. Please go ahead.
Michael Anderson Griffin: I just want to get some clarity. Are the deals in your pipeline mainly geared toward that Class A trophy product, or was that increase indicative of all quality of office being leased, including B and C commodity products?
Michael Anderson Griffin: Just wanted to get some clarity is the are the deals in your pipeline, mainly geared toward that kind of class a trophy product or you know was that increase indicative of kind of all quality of office being used including BMC commodity product.
Michelle Mackay: So I would say that in Q4 of last year, it was largely larger leases being cut in higher-quality buildings. Now we're starting to see a mix-in, a combination of those same leases, but we're starting to see a mix-in of smaller tenants still in high-quality buildings, but smaller leases in the first quarter of this year.
Michael Anderson Griffin: So I would say that in Q4 of last year. It was largely larger leases being tightened higher quality buildings now.
Michael Anderson Griffin: Now, we're starting to see a mix and a combination of those same leases, but we're starting to see a mix of smaller tenants.
Michael Anderson Griffin: High quality building software, but smaller leases in the first quarter of this year.
Michael Anderson Griffin: Gotcha. That's helpful.
Speaker Change: Got you that's helpful. And then maybe just on the cost savings initiatives. I think you still had kind of some of that flowing into the first quarter.
Neil O. Johnston: And then maybe just on the cost savings initiatives, I think you still had kind of some of that flowing into the first quarter. You say you're balancing those initiatives relative to other increased costs. But, you know, if we think that, you know, the capital markets business is going to improve materially in the back half of the year, wouldn't you want to be staffing up and then increasing headcount, kind of in anticipation of that?
So you're you're balancing those initiatives relative to other increased costs, but you know if we think that.
Speaker Change: The capital markets business is going to improve materially in the back half of the year wouldn't you Wanna be staffing up and increasing head count kind of in anticipation of that.
Michael Anderson Griffin: So Michael, you raise a great point, and that's exactly right. Primarily, the majority of our cost savings are one-way savings that were incurred as we rolled out our cost savings program last year. Essentially, we have not announced any new cost savings programs for 2024. But, of course, we'll remain nimble. We are always looking for ways to become more efficient. But, essentially, the $30 million of cost savings that I referred to are primarily the result of the actions we took last year.
Speaker Change: So Michael you raise a great point, because that's exactly what I'm all about primarily the majority of our cost savings or run rate savings that were incurred as we rolled out our cost savings program last year, essentially we have not announced any new cost savings programs or 'twenty 'twenty four of course.
Speaker Change: We always are looking for ways to become more efficient, but essentially the $30 million of cost savings that haven't started to do this is primarily the result of the actions. We took last year as we look to the back half of it yeah.
Speaker Change: We are very focused on growth, but making sure that we are well positioned.
Speaker Change: On the advisory side, and then also on the services side I see actually.
Speaker Change: That's especially.
Michael Anderson Griffin: As we look to the back half of the year, we are very focused on growth and making sure that we are well-positioned both on the advisory side and then also on the services side as we grow that business in the back half of the year.
Speaker Change: Yeah.
Speaker Change: Great. That's it for me extra time.
Speaker Change: Thanks, a lot.
Speaker Change: The next question comes from Alex Kramm with UBS. Please go ahead.
Alexander Kramm: Yes, Hey, good evening, everyone. Just a quickly I guess on the capital markets business I mean, obviously good stability in the first quarter great to see.
Operator: Great, that's it for me. Thanks for the time.
Alexander Kramm: But but your your tone on the second quarter, obviously, a little bit more choppy. So given that seasonally the second quarter is usually better did you do you feel like this is you could look a little bit worse, maybe than the first quarter get any visibility specifically into Q would be great and then related to that you know you use.
Alexander Kramm: The next question comes from Alex Kramm with UBS. Please go ahead.
Michelle Mackay: Yes. Hey, good evening, everyone. Just quickly, I guess, on the capital markets business. I mean, obviously, good stability in the first quarter. Great to see. Obviously, a lot of things have changed, so maybe just wanted to make sure I heard that right. Or if you do think there's a higher level of uncertainty from here and if you're reacting to that at all.
Alexander Kramm: I'm as confident as you were.
Alexander Kramm: Quarter ago about the second half recovery, obviously, a lot of things have changed so maybe just wanted to make sure that I heard that right or if you do think there's a higher level of uncertainty from here and if you are reacting to that at all.
Michelle Mackay: Sure, I'm very bullish on the recovery, and that point of view hasn't changed. But the current outlook is for some short-term pullback in capital markets as the mood of the market has changed significantly in the last couple of weeks. I think we've all witnessed volatility there. But, as you know, that mood can swing to the positive on a couple of key pieces of data or as the markets digest data. But like, let's not lose the plot line here, calling what happens next quarter might be interesting, but our long-term view, which is how we work and what we think is for a strong market recovery.
Speaker Change: Sure I'm very bullish about the recovery and that point of view hasn't changed but the current outlook is for some short term pull back in capital markets as the mood of the market has changed significantly in the last couple of weeks I think we've all witnessed volatility there, but as you know that major swing to the positive on a couple of key people.
Speaker Change: As the data or as the market digests data, but like let's not lose the potline here, calling what happens next quarter might be interesting, but our long term view, which is how we work and how we think it's for a strong market recovery.
Michelle Mackay: Okay, fair enough. And then maybe, very big picture, just since we're here, you obviously, for the last few quarters, have talked about your strategic review, and I think you looked at all the different kinds of businesses. So I know that that stuff never gets finished, but do you feel like you've essentially completed the biggest area of focus? And is there anything new that you can share about that review? Or is that still ongoing?
Speaker Change: Okay Fair enough and then maybe very big picture just since we're here like you obviously for the last few quarters, you've talked about your strategic view and I think you've looked at all the different kinds of businesses.
Speaker Change: I know that that stuff's never gets finished but do you do you feel like you've essentially completed the biggest the biggest area of of our of our focus and anything new that you can share or that review or is that still are still ongoing.
Michelle Mackay: No, I think that we are, to your point, it's always ongoing, but I think the first quarter performance shows that we're capable of executing on those priorities, and we did what we said we would do, and we're going to continue to do that and be really intentional and opportunistic with it. So, you know, just to reiterate, to strengthen the core, we reduced leverage and interest costs by repricing the term loan and paying down some debts. We continue to operate, you know, with rigor. Even revenue is flat.
Speaker Change: No I think that we're to your point, it's always ongoing but I think the first quarter performance shows that we're capable of executing on those priorities and we did what we said we would do and we're going to continue to do that and be really intense on opportunistic with it. So you know just to reiterate the strength in the core we reduced.
Speaker Change: Average interest costs by repricing of the term loan and paying down some taxes that we continue to operate with rigor even though revenue was flat we improved margin in leasing is borrowing we're prioritizing better services contracts I've made a couple of references to walking away from less accretive deal nothing active way of managing the strategy.
Michelle Mackay: We've improved margin, and leasing is growing. We're prioritizing better service contracts. I've made a couple of references to walking away from less accretive deals, and that's an active way of managing the strategy, and you're going to continue to see us, no matter what the, you know, the backdrop is here in terms of the economy, take advantage of every opportunity. So we're highly active. I would say we're working differently than we have historically at a pace unlike what the firm has seen before, with an awareness of exactly where we need to be focused at all times.
Speaker Change: And Youre going to continue just yeah no matter what the you know the backdrop. It is here in terms of the economy take advantage of every opportunity so well highly activated I wouldn't say, we're working differently than we have historically.
Speaker Change: Unlike the bombed before with an awareness of exactly where we need to be focused at all times.
Alexander Kramm: Okay, very good. Thank you.
Speaker Change: Okay very good thank you.
Operator: The next question comes from Ronald Kamden with Morgan Stanley. Please go ahead.
The next question comes from of Ronald Camden with Morgan Stanley. Please go ahead.
Ronald Kamdem: Hey, just two quick ones. One, starting with the cash flow statement, and I sort of appreciate the comments in the press release. It seems like there is certainly a greater focus on free cash flow. It seems like, you know, cash from operations, you said it was a..., a net use, but it almost seemed like a $100 million Delta versus a year ago. So I guess my question is really, can you talk about what drove such a great performance in the cash flow? How much of that is one-time versus something that's sustainable going forward?
Ronald Kamdem: Hey, just two quick ones. So one starting with the cash flow statement and I sort of appreciate the comments and the press release. It seems like there is certainly a greater focus on free cash flow I'm. It seems like you know cash from operation. He said it was a.
Ronald Kamdem: I would not use but it almost seem like $100 million delta versus a year ago. So I guess my question is really can you talk about what drove such a sort of a great performance on the cash flow how much of that as one timers are versus something that's sustainable going forward.
Neil O. Johnston: Yeah, great question, Ron. Look, we've been extremely focused on free cash flow, and it's starting to really pay off, and you're starting to see it, as you say, in the results. You're absolutely right.
Speaker Change: Yeah, Great question, well look we've been extremely focused on free cash flow and it's starting to really pay off and we're starting to see a as you say and the results you're absolutely right. The first quarter of this year.
Neil O. Johnston: The first quarter of this year, compared with the first quarter a year ago, it was $95 million better. So, great performance, primarily driven by working capital. And so, as we look at that performance, I would say probably about 50% of it is timing, and 50% of it is real actions that we took. So, we were able, for example, in accounts receivable, to reduce our DSOs from around 61 days to 59 days, or 58 days, actually.
Speaker Change: Last quarter, you don't go to satisfy some of those that are.
So great performance, primarily driven by working capital.
Speaker Change: And so as we look at that performance I would say probably about 50% of it is timing.
Speaker Change: It is real actions that we took.
Speaker Change: So we were able for example in accounts receivable to reduce.
So from around 61 days to 59 days.
Speaker Change: Actually and so we saw three days of improvement in the quarter I still feel very good about our free cash flow absolutely look we are not giving full guidance for the year on free cash flow, but certainly feel like the start to the yes.
Neil O. Johnston: And so, we saw three days of improvement in the quarter, and so feel very good about free cash flow as we look. We have not given full guidance for the year on free cash flow, but certainly feel like the start of the year has been a good one.
Speaker Change: Good luck.
Ronald Kamdem: And then my second one was just, I remember we talked about deleveraging and the potential for asset sales and so forth.
Speaker Change: Great.
Then my second one was just I remember, we talked about deleveraging ended up the potential for asset sales.
Speaker Change: And so forth any sort of update there is that is that still a plan here that ties that go on.
Neil O. Johnston: Any sort of update there? Is that still a plan? How's that going? Yeah, we do. We have a couple things going on with that.
Speaker Change: Yeah, we do we give a couple of assets out in the market that is still the plan. We have identified several smaller assets in the organization to consider for sale and I would say that in the later half of the year, we'll be able to give you an update on that.
Neil O. Johnston: Yeah, we do have a couple of assets out in the market that is still to plan. We have identified several smaller assets in the organization to consider for sale, and I would say that in the latter half of the year we'll be able to give you an update on that.
Speaker Change: Thanks, so much.
Operator: The next question comes from Stephen Sheldon with William Blair. Please go ahead.
Speaker Change: The next question comes from Stephen Sheldon with William Blair. Please go ahead.
Patrick James McIlwee: You've got Pat McIlwee on for Steven today. Thanks for taking my questions. So, first one, I just wanted to dig in on this a little bit more. I know you've talked about it, but even adjusting for the contract reimbursables, it looks like service revenue came in a touch light this quarter. I mean, can you just talk a bit more about what's driving this repositioning of the platform? You know, if it has to do with asset turnover at all, if you're seeing any competitive pressure, or what exactly is driving that, and then how you might expect the rest of the year to play out so you can achieve it? kind of low single-digit growth guidance here.
You've got that mckelvey on for Stephen today, Thanks for taking my questions. So far.
McKelvey: First one I just wanted to dig in on this a little bit more I know you've talked about it but even adjusting for the contract reimbursable.
Stephen Sheldon: It looks like service revenue came in a touch light this quarter I mean can you just talk a bit more about what's driving this repositioning of the platform you know if it has to do with <unk>.
Stephen Sheldon: Asset turnover at all if youre seeing any competitive pressure.
Stephen Sheldon: Or what exactly is driving that and then how you might expect the rest of the year to play out. So you can achieve that.
Stephen Sheldon: Kind of low single digit growth guidance here.
Neil O. Johnston: Sure, um... But as I think about it, there really are three things driving it. First of all, remember, we did have that contract change. That accounts for about $25 million in the quarter. So our services overall, instead of being down three, we're going to be flat for the quarter. Not where we want them to be, but certainly not declining flat, and certainly that's sort of the baseline. The second thing is, as you say, we are looking for creative growth. This is more self-inflicted pain, is probably the best way to describe it.
Stephen Sheldon: Sure.
Stephen Sheldon: But if I think about it there really are three things driving that first of all remember we did have that contract change that accounts for about 25 million in the quarter. So our services overall instead of being down where you would've been flat for the quarter, not where we want them to be but certainly not declining blacks and.
Stephen Sheldon: With that sort of a baseline.
Stephen Sheldon: The second thing is as you say we are looking for accretive growth. This is more self inflicted pain is probably the best way to describe it we looked at what our contracts we're looking at our margins.
Neil O. Johnston: We're looking at our contracts. We're looking at our margins. We have found that the services we provide clients are prepared to pay for.
Stephen Sheldon: We have found that the services, we provide clients are prepared to pay for certain cases, there's actually more for contracts on those trials have actually come back to us and said that actually we would like it to work.
Neil O. Johnston: So in certain cases, we've actually gone through the contracts, and those clients have actually come back to us and said, no, actually, we would like you to do the work. And so that is us looking at the portfolio and saying, you know, we need margins to improve in our services business. And we've also seen that in Europe. We saw that the services business in Europe was down. That's where we actually took a very hard look at our project management business and said, you know what?
And so that has us looking at the portfolio and say Hello.
Stephen Sheldon: This is largely shaped cruise ships.
Stephen Sheldon: And we've also seen that in Europe, we saw that the services business in Europe was down that's where we actually took a very hard look at our proxy advisory business and says you know what the contracts.
Neil O. Johnston: If contracts are not making money, and that's a short-term business, so it's much easier to walk out of it more quickly. And we said, if it's not making money, we're not going to do that work. We're going to try profitable growth because every bit of growth takes resources, and it's all about capital allocation and reallocation. And then the third thing in services is very focused on our GRS global platform. We did have a couple of contract moves.
Stephen Sheldon: Contracts are not make money and Thats a short term so it's much easier to.
Stephen Sheldon: More quickly when we say, it's not make money, we're not going to do that work.
Stephen Sheldon: Profitable growth because every bit of growth taking resources and it's all about capital allocation and reallocation and then the third thing and services is very focused on that.
Bob.
Stephen Sheldon: We did have a couple of contract moves.
Neil O. Johnston: We're sort of seeing the tail end of that early on in this year, but as you look at the pipeline there, we've seen very nice strength, and we've had some nice global wins in that business. So, very excited about GRS as we look forward.
Bob: The tail end of that.
Bob: This year, but if you look at the pipeline that we see very nice strength and we've had some nice global ones in that business are very excited about about G O S.
Patrick James McIlwee: Okay, great. Thanks, Neil. More quickly, so you pushed out your debt majorities to 2030 last year. So with this capital structure and liquidity that's looking pretty solid at this point, can you just share any thoughts on what you feel the best use of that liquidity will be, whether it's leading more towards debt repayment or M&A in this environment?
Speaker Change: Okay, great. Thanks, Neil and then just.
More quickly so you pushed out your debt maturities to 'twenty 30 last year. So with this capital structure and liquidity, that's looking pretty solid at this point can you just share any thoughts on what you feel the best use of that liquidity will be whether it's leaning.
Speaker Change: Leaning more towards debt repayment or M&A in this environment.
Neil O. Johnston: Sure. I mean, we're very focused on the allocation of capital, but we need to be making decisions, to your point, all the time about deleveraging and growth, and we're going to be doing both, right? And that's what you saw us do in the first quarter. I'm not going to share any specifics with you on how we're going to be allocating that capital, but I want you to understand that we're not just having a deleveraging conversation here. We're having a growth conversation here and making sure that we're investing enough to put ourselves in the best position to take advantage of the recovery.
Speaker Change: Sure I mean, we're very focused on the allocation of capital, but we need to be making decisions to your point all the time about deleveraging and growth and we're gonna be doing both right and that's what you saw during the first quarter I'm not going to share any specifics with you on how we're going to be allocating that capital, but I want you to understand that we're not too.
Speaker Change: Having a deleveraging conversation here, we're having that conversation here and making sure that we're investing enough to put ourselves in a bit.
Speaker Change: Best positioned to take advantage of the recovery.
Patrick James McIlwee: Understood. Thanks, Michelle. Thanks, Neil.
Speaker Change: Understood. Thanks, Michele Thanks Neal.
Speaker Change: Yeah.
Operator: Again, if you have a question, please press star then 1. The next question comes from Patrick O'Shaughnessy with Raymond James; please go ahead.
Speaker Change: Again, if you have a question. Please press Star then one.
The next question comes from Patrick O'shaughnessy with Raymond James. Please go ahead.
Patrick James McIlwee: Hey, good afternoon. Obviously, rates have moved higher, but I think in concert with that, economic growth has generally remained resilient, and recession fears, at least for now, seem to have abated. To what extent is an improving growth outlook driving client behavior and leasing and your services businesses?
Patrick James McIlwee: Hey, good afternoon.
Patrick James McIlwee: So obviously rates have moved higher but I think in concert with that economic growth has generally remained resilient and recession fears at least for now seem to have abated to what extent is improving.
Patrick James McIlwee: Growth outlook, driving client behavior, and leasing and services businesses.
Michelle Mackay: Yeah, I think that there is, it's interesting because we're having this conversation with people who are really focused on the Fed cut conversation. And even though that's obviously important, solid GDP performance is very correlated to leasing decisions and decisions in our servicing businesses. So if one prong is not firing, meaning the Fed is not cutting, we do have the solid GDP prong. And what we're looking forward to is over the course of the next year or two, those two firing at the same time. And when they're more connected, you'll start to see much higher growth rates in leasing and capital markets together.
Patrick James McIlwee: Yeah, I think that there is interesting because we're having this conversation with people who are really focused on the bed type conversation and even though that's obviously important solid GDP performance is very correlated.
Patrick James McIlwee: And decisions in our servicing businesses. So if one prong is not firing meaning if the fed is not cutting we do have the solid GDP problem and what we're looking for and she was that over the course of the next year or two close to firing at the same time and when they're more connected you'll start to see much higher growth rates and leasing.
Patrick James McIlwee: In capital markets together.
Neil O. Johnston: Yeah, appreciate that. And then I want to touch on project management. What's your outlook for that as 2024 progresses? And does improving leasing activity foreshadow improving project management down the road? Yeah, I think that's it.
Speaker Change: Got it I appreciate that and then I wanted to touch on project management. What's your outlook for that is 2020 for progressive and does lease improving leasing activity for shadow improving project management down the road.
Speaker Change: Yes, I think that's exactly right, we certainly will see.
Neil O. Johnston: Yeah, I think that's exactly right. You know, we certainly will see an improvement there as usage starts picking up. And, you know, that should be reflected in our sales as we move through the back half of the year.
Speaker Change: Terrorists as he should start picking up.
Speaker Change:
Speaker Change: It should be similar than ourselves.
Speaker Change: The back half.
Speaker Change: Perfect. Thank you.
Operator: The next question comes from Alex Kramm with UBS.
Speaker Change: The next question comes from Alex Kramm with UBS. Please go ahead, yes.
Alexander Kramm: Yes, hey, hello again. Just a quick follow-up to my earlier capital markets question. I totally hear you on 2Q, maybe a little bit softer but still confident in the recovery. So maybe to speak to that, maybe I've missed it, can you maybe talk about the pipeline a little bit, how that's changed over the last quarter or so, to just get a sense of how the business is building for when we have a better environment? Thanks.
Yes, Hey, Hello, again, just a quick follow up to my earlier a couple of markets question I mean, I totally hear you on how to queue you know.
Alexander Kramm: It maybe a little bit softer, but then still confident in the recovery. So maybe speak to that maybe I've missed it can you maybe talk about the pipeline a little bit how that's changed over the last quarter or so so just get a sense for how the business is building for when we have a better environment. Thanks.
Michelle Mackay: Yeah, I mean, the business continues to build, and I was out in one of our offices this past Friday. The capital markets people are really focused, and there's a lot of volume here in terms of pipeline, and it's just about decision making. So I would say anything that's been in the process is closing. I think anything that would have been under consideration to start or transact in the last couple of weeks is probably put on hold for a bit, but I just want to reiterate when I say that there's a pause, that pause could be four weeks long before the market recesses and the tone recesses, and people really start to move forward again.
Speaker Change: Yeah, Yeah, I mean, the business continues to build and I was out in one of our offices. This past Friday at the capital markets people.
Speaker Change: Are really focused and there's a lot of volume in here in terms of the pipeline and it's just about decision, making so I would say anything that's been in process of closing.
Anything that would have been under consideration just stop.
Speaker Change: Art or transacting in the last couple of weeks it probably put on hold for a bit but I just want to reiterate when I say that there is a pause that pause before was born.
Speaker Change: The market resets and the tone restarts when people really start to move forward again.
Alexander Kramm: Okay, and anything in terms of quantitative, some of your peers sometimes talk about the growth in the pipeline. Any of that you can share with us, or not ready to?
Speaker Change: Okay and anything in terms of quantitative some of your peers, sometimes talk about the growth in the pipeline any any any of that you can share with us or we're not ready to.
Neil O. Johnston: Look, Alex, what I can say is that, sequentially, the second quarter to be bigger than the first quarter. So that sort of puts a flaw in what we've been thinking about for the second quarter. It's still early in the second quarter, so really it's difficult to know exactly where it's going to be. But certainly, as Michelle said, our plans haven't been good, and sequentially, we feel good.
Look what I can say is that we expect sequentially the second quarter to be bigger than the first quarter.
Speaker Change: So that sort of puts a.
Speaker Change: Almost a flaw.
We bought in the second quarter, it's still early in the second quarter. So it really is.
Speaker Change: It's difficult to know exactly where it's going to be certainly as Michelle said pipeline typically good and sequentially we feel good.
Alexander Kramm: Fair enough. I'll follow up. Thanks.
Fair enough I'll follow up thanks.
Operator: Great. Thanks, all.
Speaker Change: Right.
Speaker Change: Uh huh.
Michelle Mackay: Again, if you have a question, please press star then 1. This concludes our question and answer session. I would like to turn the conference back over to Michelle MacKay for any closing remarks.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Michelle Mackay for any closing remarks.
Operator: Thank you, Operator, and thank you, everyone, for dialing in today. We look forward to speaking with you all again on our second quarter earnings call.
Michelle Mackay: Thank you operator, and thank you everyone for dialing in today, we look forward to speaking with you all again on our second quarter earnings call.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].