Cushman & Wakefield Ltd. Q1 FY2024 Earnings Call

Good day, and welcome to the Cushman & Wakefield First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Megan McGrath, Head of Investor Relations.

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.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 in the appendix of today's presentation. 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.

Thank you, Megan. 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 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 costs. 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. Importantly, we achieved these results while maintaining cost discipline, leading to an improvement of more than 100 basis points in adjusted EBITDA margin. Looking at the big picture, the year is generally progressing in line with expectations. On our last earnings call, I said that we are 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. 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 of minutes to share our thoughts on how we view the relationship between the Fed rate cuts in our business. Overall, we view the Fed rate cuts as an accelerator of certain parts of the business, but not the only avenue for transactional improvements. 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 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. 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. 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. 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 are operating the company and interacting with our clients. With that, I'll turn the call over to Neil.

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 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 $0.04 loss a year ago. By segment, fee 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 had no impact on the composition of our service lines or our historical results. Beginning with brokerage, our leasing business continued to experience 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 midsized 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 one-third of the leasing growth in that region. The remaining growth came from strength in all of our major asset classes with office, industrial, and retail each up of 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. Americas Capital Markets revenue was down 7%, while EMEA and APAC revenues were up 12% and 52%, respectively. 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. In APAC, office and industrial sales were strong, most notably in Australia, where we've made some recent growth investments. We're encouraged by these results, but acknowledge that the recent increase in interest rate volatility is likely to cause a short-term reversal of 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 rate stability is achieved. Turning to Services, revenue was 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 the contract change. 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'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 and a return to at least a mid-single-digit growth rate in 2025. 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. As 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 Term Loan B due in 2025, reducing the outstanding balance to $143 million. In addition, subsequent to quarter-end, we repriced $1 billion of Term Loan B due 2030, reducing the applicable interest rate by 25 basis points from 1 month SOFR plus 4.00% to 1-month term SOFR plus 3.75%. The net impact of these actions is expected to reduce annual cash interest expense by roughly $6 million. Finally, moving to our outlook, we continue to expect the 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 higher 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.

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 promised to all of our constituencies that we will continue to push ourselves to evolve at a rapid pace, never content, and never settling. Now I'll turn the call over to the operator for your questions. Operator?

The first question comes from Anthony Paolone with JPMorgan.

First question is just looking at the first quarter margin. I know it's a seasonally slow quarter, and I 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 bracket you put around them?

Tony, I think the reason we gave guidance on the first quarter was because we did have the cost program that rolled into our 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 margin improvement, it was essentially half driven by those cost savings and the other half driven by the improvement of leasing the flow-through of leasing. As we look now for the rest of the year, as we said on our full year outlook, we do expect the remaining cost actions to basically offset inflation and the cost increases. So the margin expansion that we will get in the back half of the year is tied primarily to operating leverage. So as you think about the year, think about growth in leasing, what's happening in capital markets and services. And so that is sort of how to frame up margins for the full year.

Okay. So the first quarter seems like you had a bit more than that, and it's sort of basically kind of keep that in mind. Is that kind of takeaway?

That's exactly. Yes. Yes. So it all depends. It depends on the recovery.

Okay. And then my second question is just in the Services segment. I guess you're still looking for 2% 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 yet to win versus where you put a high degree of visibility and that you're just waiting for things to commence? And I guess, on 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?

Tony, it's Michelle. Just to start off with Services, I'm really excited about our positioning in Services. 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, to give you a little color on where we're winning and 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 scaled 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 will play into next year. And for the smaller clients, to your point around what's more speculative, those can transact more quickly in the year. 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. 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 scaled to do it, but you've got to be agile to do it as well.

The next question comes from Michael Griffin with Citi.

Great. I wanted to talk first about the leasing business, particularly on office. It seems like what you're seeing on the ground there is probably a little bit better than the negative headlines we've seen out there. I just want to get some clarity. Are the deals in your pipeline mainly geared toward that kind of Class A trophy product, or was that increase indicative of kind of all quality of office being leased, including B and C commodity products?

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 of smaller tenants, still in high-quality buildings, however, but smaller leases in the first quarter of this year.

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. You say you're balancing those initiatives relative to other increased costs. But if we think that 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 increasing head count kind of in anticipation of that?

Michael, you made a great observation. That's absolutely correct. Most of our cost savings are ongoing savings that we achieved as part of our cost savings program introduced last year. We haven't announced any new cost savings programs for 2024. However, we remain flexible and are continuously seeking ways to enhance our efficiency. The $30 million in cost savings mentioned is mainly due to the measures we implemented last year. As we look towards the second half of the year, our primary focus is on growth and ensuring that we are strategically positioned on both the advisory and services sides as we expand our business.

The next question comes from Alex Kramm with UBS.

Just quickly, I guess, on the capital markets business. I mean, obviously, good stability in the first quarter. Great to see but your tone in the second quarter, obviously, is a little bit more choppy. So given that seasonally, the second quarter is usually better, do you feel like this year could look a little bit worse than the first quarter? Any visibility specifically on 2Q would be great. And then related to that, you seem as confident as you were a quarter ago about the second half recovery. Obviously, a lot of things have changed. So maybe I 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?

Sure. I'm very bullish for 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 the 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 how we think is for a strong market recovery.

Okay. Fair enough. And then maybe a very big picture, just since we're here. Like you obviously, for the last few quarters, have talked about your strategic review, and I think you've looked at all the different kind 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 anything new that you can share of that review? Or is that still ongoing?

No, I think to your point, it's always ongoing. However, the first quarter performance demonstrates our ability to execute on those priorities. We achieved what we committed to and will continue to do so, being deliberate and seizing opportunities. To reiterate, we showed strength in our core operations; we reduced leverage and interest expenses by repricing the term loan and paying down some debt. Despite flat revenue, we maintained rigor in our operations, improved our margin, and saw growth in leasing. We are focusing on better services contracts and I've mentioned before that we are willing to walk away from less profitable deals. This is a proactive approach to managing our strategy. You will continue to see us capitalize on every opportunity, regardless of the economic backdrop. We're highly engaged and working differently than we have in the past, at a pace that the firm hasn't experienced before, with a constant awareness of where we need to focus.

The next question comes from Ronald Kamdem with Morgan Stanley.

Just 2 quick ones. So one, starting with the cash flow statement, and I sort of appreciate the comments in the press release. It seems like there's certainly a greater focus on free cash flow. It seems like cash from operations, you said it was 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 on the cash flow? How much of that is onetime versus something that's sustainable going forward?

Yes, great question, Ron. We've been very focused on free cash flow, and it's starting to show in our results. The first quarter of this year saw an improvement of $95 million compared to the same period last year. This strong performance was mainly driven by our working capital management. I would attribute about half of this improvement to timing and the other half to genuine actions we implemented. For instance, we managed to decrease our Days Sales Outstanding from around 61 days to 58 days, resulting in a 3-day improvement this quarter. We feel optimistic about free cash flow moving forward. While we haven't provided complete guidance for the year regarding free cash flow, we believe the start of the year has been quite positive.

Great. My second question is about the deleveraging efforts and potential asset sales we discussed earlier. Can you provide any updates on that? Is it still part of the plan, and how is that progressing?

Yes. We do have 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. I would say that in the latter half of the year, we'll be able to give you an update on that.

The next question comes from Stephen Sheldon with William Blair. Patrick McIlwee is on for Stephen today.

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? 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 that kind of low single-digit growth guidance?

Sure. Pat, as I think about it, there really are 3 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 3% would have been flat for the quarter. Not where we want them to be, but certainly not declining, flat, and that's sort of the baseline. The second thing, as you say, we are looking for accretive growth. This is more self-inflicted pain, it's probably the best way to describe it. 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. So in certain cases, we've actually worked for contracts and those clients have come back to us and said they actually would like it to work. That is us looking at the portfolio and saying we need margins to improve in our Services business. We've also seen that in Europe. We saw the Services business in Europe is down. That's where we actually took a very hard look at our project management business and said if contracts are not making money, and that's a short-term business, it's much easier to walk away more quickly. We said it's not making money, you're not going to do that work. We're going to drive profitable growth because every bit of growth takes resources, and it's all of our capital allocation and reallocation. The third thing in Services is focused on our GOS global platform. We did have a couple of contract needs. We're still seeing the tail end of that early on this year. But as you look at the pipeline there, we see very nice strength, and we've had some nice global wins in that business, so we're very excited about GOS as we look forward.

Okay. Great. And then just more quickly. So you pushed out your debt maturities 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 leaning more towards debt repayment or M&A in this environment?

Sure. We're very focused on the allocation of capital, but we need to be making decisions all the time about deleveraging and growth. We're going to be doing both, right? 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.

Your next question comes from Patrick O'Shaughnessy with Raymond James.

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 an improving growth outlook driving client behavior and leasing and your Services businesses?

Yes. I think it's interesting because we're having this conversation with people who are focused on discussions about Fed cuts. While that's certainly important, strong GDP performance is closely linked to leasing decisions and our servicing businesses. If one aspect isn't strong, such as the Fed not cutting rates, we still have a strong GDP aspect. What we hope to see over the next year or two is that these two factors align. When they are more connected, we can expect to see significantly higher growth rates in leasing and capital markets together.

Yes, I think that's exactly right. We certainly will see an improvement there as leases start picking up. That should be somewhat in our sales as we move through the back half of the year.

The next question comes from Alex Kramm with UBS.

Just a quick follow-up to my earlier Capital Markets question. I mean, I totally hear you on 2Q maybe a little bit softer, but then still confident in the recovery. So maybe to speak to that, maybe I've missed it. Can you 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?

Yes. I mean the business continues to build. 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 in here in terms of pipeline, and it's just about decision-making. I would say anything that's been in process is closing. I think anything that would have been under consideration to start or transacting 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 4 weeks long for the market resets and the tone resets and people really start to move forward again.

Look, Alex, what I can say is that we expect sequentially the second quarter to be bigger than the first quarter. So that sort of puts almost a floor on what we've been thinking about in the second quarter. It's still early in the second quarter, so it's really difficult to know exactly where it's going to be, but certainly as Michelle said, plot lines are looking good and sequentially, we feel good.

This concludes our question-and-answer session. I would like to turn the conference back over to Michelle MacKay for any closing remarks.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.