Cushman & Wakefield - Q2 2023

Transcript

Operator (participant)

Head of Investor Relations for Cushman & Wakefield. Ms. McGrath, you may begin the conference.

Megan McGrath (SVP of Investor Relations)

Thank you. Welcome to Cushman & Wakefield's Second Quarter 2023 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.cushmanwakefield.com. 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. With that, I'd like to turn the call over to our CEO, Michelle MacKay.

Michelle MacKay (CEO)

Thank you, Megan. 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. 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. While I recently took the reins as CEO, I've been with the company for some time, and therefore I've been able to hit the ground running with the leadership team.

I want to thank all of them for their focus and hard work since I started. 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. 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: a highly diversified revenue mix, a resilient business model, and a strong financial position. We've got great bones here and a clear opportunity to excel. My goal, simply, is to significantly improve and build upon Cushman's already solid core.

As you can imagine, I'm going to leave no stone unturned in 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 with a strong liquidity profile. As a new CEO, I am taking a fresh approach, holistically reviewing our business while introducing a more data-driven methodology to the process. This includes a deeper evaluation of Free Cash Flow, margin profile, growth expectations, capital intensity, and core competencies for each business individually. 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 business's core strengths and better assess how each business line fits into our overall corporate strategy, with a focus on identifying new areas of growth and operating efficiencies. I have been extremely impressed with our leadership team's expertise and their cognitive flexibility in reassessing their individual businesses. As we go through this process, we want to foster a solution-oriented, entrepreneurial culture that allows us to compete and deliver the solve for our clients at the highest level. Markets move quickly, as do the demands on our clients, and we need to be able to sprint with them. Once our strategy is fine-tuned, we'll create a framework for decision-making based on that refreshed strategy. In fact, it's already in process.

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 has shown that simplifying our structure and reducing costs 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 definitively to our advantage. Ultimately, leveraging this 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. A refreshed capital allocation framework is the result of all of this work...

We recognize that growth is important in any industry, and we believe that business resiliency is paramount to ensuring the stability of long-term returns. We'll 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 lines 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, you'll hear more from me on the progress of our transformational work at Cushman & Wakefield.

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 conditions, engaged, and always looking to serve our clients. Now, I'd like to hand the call over to Neil for a review of our second quarter financial results.

Neil Johnston (CFO)

Thanks, Michelle. Good afternoon, everyone. Second quarter results were in line with our expectations, with solid sequential increases in Adjusted EBITDA and Adjusted EBITDA Margin. During the quarter, we maintained our strong focus on Free Cash Flow and will continue to prioritize our balance sheet as we move forward. Moving on to the details of the quarter. On the top line, revenue trends in the second quarter were 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%. PMFM revenue was up 3%, 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 continued to result in lower valuation activity.

Adjusted EBITDA for the second quarter of $146 million was down 44% versus prior year. Our second quarter Adjusted EBITDA Margin was 8.9%, a meaningful improvement from our first quarter margin of 4%. During the quarter, we successfully executed on our cost-cutting programs and were able to more than fully offset inflation and prior investments, realizing $49 million of savings in the first half of the year. In addition to our previously announced $90 million program, our teams have worked diligently to identify an additional $40 million in gross savings, bringing our expected 2023 in-year cost savings total to $130 million. To put these cost savings in perspective, this savings target represents roughly 10% of our 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 $0.22, a decrease of $0.41 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 PMFM, 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, an improvement over the past several quarters as leasing trends in APAC improved, most notably in Australia.

Our PMFM business in EMEA and APAC experienced slower performance in the quarter, primarily due to lower project management activity. The Adjusted EBIT declines in each of our regions were 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 saw an outflow of $100 million during the same period. Our teams remain highly focused on driving cash flow improvements through disciplined working capital management, and I'm pleased to report that we've 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 have no outstanding borrowings on our revolver, and Net Leverage was 4.3x at the end of the second quarter. Our debt profile is now more than 96% fixed on a net basis. We are focused on our nearer-term maturities and on 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 EBITDA Margins to be in the range of 9%-10%.

Our EBITDA margin guidance is based on the following full-year assumptions: low to mid-single digit revenue growth in PMFM, and approximately 20% revenue declines in brokerage. That concludes the financial review. With that, I'll turn the call back over to Michelle.

Michelle MacKay (CEO)

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 and 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 am 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. With that, operator, let's open up the line for Q&A.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from Anthony Paolone from J.P. Morgan. Please go ahead.

Anthony Paolone (Executive Director)

Great, thank you. It looks like a lot of your guidance brackets are pretty comparable to last quarter, but Michelle, you'd 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?

Michelle MacKay (CEO)

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% Free Cash Flow conversion.

Anthony Paolone (Executive Director)

Okay. Then just in PMFM, you know, I think the, the, APAC looked like it sequentially kinda dropped, and the quarter was 2%. You kept your guidance for the full year, for, for PMFM. Just wondering, like, how visible that is, and if there's anything just to, to note in that business, just as we look to the 1/2.

Neil Johnston (CFO)

Yeah, sure, Tony. You know, 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 perform. In the first quarter, in Asia Pacific, specifically, we did have significant project management work that was short-term in nature. It boosted that growth in the first quarter a little bit. Second quarter was right in line with our full year assumptions in that low to mid-single digit growth rate. We still feel very confident in our guide for the full year on services and like the business and its resiliency.

Anthony Paolone (Executive Director)

Okay, if I need to sneak one more in, just as we start to think about the fourth quarter, which is, you know, tends to be the biggest quarter. You know, anything you're seeing in terms of either green shoots or on the flip side, particular risks, you know, to kinda get to the numbers, to, to get you into your, your guidance brackets?

Michelle MacKay (CEO)

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. We all know the Capital Markets performance is highly correlated to interest rates and markets in general, right? There's probably one more rate move, followed by a period of no change and then cuts. We're directionally feeling particularly good at this moment.

Anthony Paolone (Executive Director)

Okay, thank you.

Michelle MacKay (CEO)

Yep.

Neil Johnston (CFO)

Thanks, Tony.

Megan McGrath (SVP of Investor Relations)

The next question comes from Alex Kramm of UBS. Please go ahead.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Yeah, hey, good evening, everyone. Maybe just starting on the incremental cost cuts, can you dig a little bit deeper in terms of what you're really attacking here? Then, you know, how much of the 40 incremental is, is permanent versus temporary, or, or maybe remind us in general, where you see permanent versus temporary in the whole 130 now?

Neil Johnston (CFO)

Sure, Alex, I, I can take that question. As we look at the 130 in total, about 20% of that is temporary. 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. We'll see $130 million of in-year savings. That's actually $160 million on a run rate basis. Then, you know, of that, 20% is temporary. In terms of where the savings are, they are primarily infrastructure and overhead costs. As, as we said, it's, it's roughly 10% of our general and administrative costs, our G&A costs. It includes severance, it includes lease terminations, it includes external consulting costs, software costs.

It's really a full review of the business, right sizing it for the environment which we're seeing right now.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Okay, great. Then maybe, just coming back to the, to the updated guidance, the, the 20% down in brokerage, I don't, I don't think you, you gave a number there in the first quarter. Just maybe, talk a little bit more broadly how, how that view has changed. I know someone just asked about the fourth quarter, and I know there's a lot of uncertainty there, but, like, how, how, how have your overall expectations for the, for the year changed here in brokerage?

Neil Johnston (CFO)

Yeah, you know, they haven't really changed. As we said in our first call, we did see a delay in brokerage from the first, first quarter to similar results in the second quarter, and it came in right in line with what we expected in the quarter. I want to be very specific about our guidance. It's really focused on the margin being in that 9%-10% range. We have said that, you know, we, we see that 9%-10% range given brokerage at, at the 20% level. That is currently what we're seeing. Obviously, that will change over time, but as I said, very focused on margin more than giving any form of revenue guidance for the full year.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

All right, great. Maybe I'll sneak one more in there as well. Quick one here. On the PMFM margin, I know you don't give specific margins on-

... that business, but we know it's obviously the lowest, across the company. You know, can you, you know, with, with some of the cost savings that you've, you've, announced here and also the scale you're still gaining that business, are you actually expanding margins there? Any, any color how that, the margins have trended in that business line in particular?

Michelle MacKay (CEO)

Our C&W Services business in particular, has expanded margins over the last five years. Part of the margins in some of the other businesses are connected to transaction volume. They have a base level of margin that always delivers for us, but some of the upside in that margin is related to transactions.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

All right. Fair enough. Thanks, guys.

Operator (participant)

The next question comes from Doug Carter of Credit Suisse. Please go ahead.

Doug Carter (Equity Research Analyst)

Thanks. You talked you, you mentioned that you're starting to see, you know, some of the pipeline, building, you know, for, for transaction revenue. Can you just give a little more detail as to, to kind of what you're seeing and, you know, kind of, you know, what it will take to kind of actually get those transactions across the line?

Michelle MacKay (CEO)

Sure. It's really compelling, and I think that the build-up is from the fact that investors and lenders are trying to figure out the market. 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 thawing of Capital Markets late this year into early next year. At that point, then it's just a discussion around how the dam breaks, if you will, if it breaks in small pieces or breaks all at once.

Doug Carter (Equity Research Analyst)

Great. You know, I guess just with the cost cuts that you've, that you've undertaken, you know, kind of how do you think about your ability to, you know, to, to benefit, you know, from, from that dam breaking?

Michelle MacKay (CEO)

Yeah, look, it's always discretion, what you cost cut and what you keep in. 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.

Doug Carter (Equity Research Analyst)

Great. Thank you.

Megan McGrath (SVP of Investor Relations)

The next question comes from Michael Griffin of Citi. Please go ahead.

Michael Griffin (VP and Equity Research Analyst)

Great. Thanks. Michelle, you talked in your opening remarks about looking at your returns accordingly across business lines. Are there any business lines in particular, that screen as more attractive to invest in now? Any color you can give around that would be helpful.

Michelle MacKay (CEO)

Okay. look, we've just started the process in earnest, and we're going to take our time to complete it well. 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 scrub down. 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 lines in the organization. Healthcare-related trends, data center-related trends, things along those lines.

Michael Griffin (VP and Equity Research Analyst)

Great, thanks. Then you note in the release that the decline in leasing has been primarily attributed to lower office activity. Is that office overall, is that commodity office? You know, how are you seeing trends in more of that Class A trophy product, and anything you can expand on there would be helpful.

Michelle MacKay (CEO)

Sure. And we had 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 deep history in this space, as you probably know. The clients are engaging with us as advisors and not just deal doers, and that's the evolutionary path that we want to be on. 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.

Michael Griffin (VP and Equity Research Analyst)

Great. That's it for me. Thanks for the time.

Operator (participant)

The next question comes from Stephen Sheldon of William Blair. Please go ahead.

Matt Filak (Equity Research Analyst)

Hey, Michelle and Neil, you have Matt Filak on for Stephen Sheldon. Thank you for taking my questions. Wanted to circle back on the PMFM segment. Can you walk us through what would drive you to hit either the high or low end of the guidance range? How are you thinking about potential growth looking out to 2024?

Neil Johnston (CFO)

Sure. You know, when we look at services, the great thing about service is the fact that it has long contracts, it's resilient, and there is a base level of activity, which is there year in and year out. What we do see in the services business is a certain amount of ad hoc work that comes along with those service contracts. For example, during COVID, we had COVID cleanings. Up in the Northeast, we'll do snow removal, things like that. To hit the high end of the services range, we'd expect to see a significant amount of ad hoc work. We don't plan for that, but certainly, that is something that would drive us to the high end, right.

Michelle MacKay (CEO)

Yeah. On the growth front, we've continued to make investments in our services businesses, so would, would, assume that we are going to have solid growth going into 2024. As you can imagine, this will be part of the evaluation process that we're going through with the strategy refresh.

Matt Filak (Equity Research Analyst)

Got it. That's helpful color. Thank you for that. Then to clarify on brokerage, does the brokerage guidance assume any pickup in transaction volumes from an improving macro?

Neil Johnston (CFO)

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 is naturally a very big quarter because of the annual nature of the business. Our guidance doesn't contemplate any fast recovery in the market.

Matt Filak (Equity Research Analyst)

Got it. Thank you. Then, one more for me. What does broker retention look like given the persistently challenging market conditions? Do you feel well-staffed for a faster than expected market recovery, if that were to occur?

Michelle MacKay (CEO)

Yeah, look, I think that we are in a particularly educated seat when it comes to broker retention. I know there's some headlines out there, mostly negative, that have picked up a bit more traction than the actual fact. If we have an individual or group that's been working for us, we have somewhere between five to 10 years of financial history on that individual or team, and we know if they're enterprise, positive or negative. We have perfect information when we make a decision about who to offer retention to and who not to offer retention to. 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.

We are very much focused on retaining those individuals that will be part of future growth of the organization.

Matt Filak (Equity Research Analyst)

All right, that's helpful. Thank you both. I'll jump back in the queue.

Operator (participant)

The next question comes from Ronald Kamdem of Morgan Stanley. Please go ahead.

Ronald Kamdem (Managing Director)

Hey, two quick questions from me. Thank you for the guidance, updates. I thought the incrementals were really helpful. The first one is just on the 9%-10% EBITDA margin that you reiterated. You know, you talked about the $130 million updated targets for cost cutting and $160 million if it's annualized. Is there a way to sort of break out how much that cost cut is contributing to the margin guidance? The reason I ask is, all else equal, as those costs annualize, do they become a tailwind for margins in 2024? That's where I'm trying to get to.

Neil Johnston (CFO)

Yeah, Ron, the $130 million is already concentrated in our guidance. As we said on our first call, quarter earnings call, we had already actioned $90 million, and there were more actions in the pipeline. We really are just giving the, the numbers on this call, the additional $40 million 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. Depending on the timing of the brokerage recovery and the extent of that recovery, as brokerage comes back, we will see higher margins than we saw before the efficiency moves.

Ronald Kamdem (Managing Director)

Helpful. Just following up on the cash conversion question on the, on the EBITDA. You know, I'm looking at the, the, the cash flow statement and still, you know, I think $238 million down in the 1st quarter. Maybe can you talk to... Accrued compensation was negative again this quarter. Can you talk through what is one-time or what's seasonal? I'm just trying to get my arms around sort of the working capital in the 1st half of this year. Trying to understand how that's going to trend for the rest.

Neil Johnston (CFO)

Yeah. If we look at working capital in the 1st half of the year, it was driven primarily by the fact that we were paying out bonuses and commissions from last year at a higher level than we are accruing this year. That, that 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? You know, I would encourage you to look over a period of time. If you look on a trailing 12-month basis, our, our Free Cash Flow basically was neutral for, during the down cycle, and then we'll see that grow as brokerage comes back at the high margins.

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 2024.

Ronald Kamdem (Managing Director)

Helpful. Thank you. That's it for me.

Operator (participant)

Once again, if you have a question, please press star then one. The next question comes from Patrick O'Shaughnessy of Raymond James. Please go ahead.

Patrick O'Shaughnessy (Equity Research)

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?

Michelle MacKay (CEO)

Yes. I would 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.

Patrick O'Shaughnessy (Equity Research)

Got it. Okay, thank you. Then the earnings release today mentioned an $11 million servicing liability fee in connection with amending and extending the Accounts Receivable Securitization. Neil, maybe you can just walk through kind of what is the value of that Accounts Receivable Securitization program to Cushman & Wakefield, and what was the nature of the, the charge today?

Neil Johnston (CFO)

Sure. That AR securitization facility basically renews itself every couple of years. This was just a normal renewal of the program. It provides us a $200 million. Basically, think of it like a revolver, whereby we use that AR securitization facility to manage working capital through the first half of the year, we repay it in the back half of the year, the following year, again, we just use it to manage the seasonal nature of the business.

Patrick O'Shaughnessy (Equity Research)

Got it. Thank you very much.

Operator (participant)

As there are no more questions from the phones, this concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.