Earnings Call Transcript - CWK Q1 2020

Operator, Operator

Welcome to Cushman & Wakefield's First Quarter 2020 Earnings Conference Call. All lines have been muted to minimize background noise. Following the speakers' remarks, we will have a question-and-answer session. It is now my pleasure to introduce Len Texter, Head of Investor Relations and Global Controller for Cushman & Wakefield. Mr. Texter, you may begin the conference.

Len Texter, Head of Investor Relations and Global Controller

Thank you, and welcome to Cushman & Wakefield's First Quarter 2020 Earnings Conference Call. Earlier today, we issued a press release announcing our financial results for the period. This release can be found on our Investor Relations website along with today's presentation that you can use to follow along. These materials can be found at ir.cushmanwakefield.com. Please turn to the page labeled forward-looking statements. Today's presentation contains forward-looking statements based on our current forecast 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 and definitions of GAAP to non-GAAP financial measures can be found within the financial tables of our earnings release and appendix of today's presentation. Also, please note that throughout the presentation, comparison and growth rates are to comparable periods of 2019, and are in local currency. For those of you following along with our presentation, we will begin on page 5. And with that, I'd like to turn the call over to our Executive Chairman and CEO, Brett White.

Brett White, Executive Chairman and CEO

Thank you, Len, and thanks to you all for joining us today. This call is going to be a bit different than most earnings calls that we conduct. Some metrics and information we typically provide have little value at the moment in particular prior quarter data as an indicator of future performance. Other metrics, we don't usually discuss have significant importance at the moment. So we're going to cover those matters we think matter most. In our Q&A session, you are of course welcome to ask whatever you like and we will answer what we can. I want to begin today by recognizing and thanking our many thousands of Cushman & Wakefield colleagues, who have shown a level of bravery and courage and commitment to their jobs and our clients, which frankly is beyond anything any of us could have expected. While most of us spent the past almost two months in our homes with our families, these thousands of employees went to work each and every day taking care of the five billion square feet of buildings we maintain, on behalf of our many clients. Some of these facilities, such as New York-Presbyterian Hospital, were in the very epicenters of the worst this pandemic has brought to bear on the world. To each and every one of you, on behalf of our clients and every one of your 53,000 colleagues here at Cushman & Wakefield, thank you. You are an example for us all and your bravery and commitment will never be forgotten. I can speak from experience that sound advice and an ability to solve problems in a challenging and uncertain time is a critical differentiator to our clients. I believe this crisis will ultimately drive an increasing volume of activity to the big three firms CBRE, JLL, and Cushman & Wakefield, which each possess unique capabilities to serve clients in these unsettled times. In addition, we believe this pandemic will further accelerate the differentiation between these three large global firms and the rest. Perhaps most encouraging to us has been the differentiation we have achieved here at Cushman & Wakefield among the big three, due to our generally acknowledged global leadership position on the complex topic of how the global workforce returns to the workplace. Two weeks ago, we hosted a webcast to walk landlord and occupier clients through best practices from our almost 300-page manual on reopening the workplace. We expected a few hundred people on the call. And instead, we had over 12,000 callers representing over 8,000 companies. And of course, many of these companies and callers were likely current clients of our competitors who ended up turning to Cushman & Wakefield for advice and counsel. Despite the economic slowdown, there is still much work to be done. Businesses continue to run. Buildings are still operational and in need of maintenance, sanitation, and cleaning. And when the time comes, many places of work will reopen, resuming business in an environment that would feel like anything but normal. We have remained agile in our response to the pandemic and are uniquely positioned to lead recovery readiness efforts for our clients. We're applying our learnings from our experience in China, where we completed moving 10,000 companies and nearly one million people back into 800 million square feet of buildings we manage in China. And we are using those insights and best practices to provide our clients customizable, cost-effective solutions for returning to work. Additionally, we formed the Recovery Readiness Task Force of our top experts to lead the development of best practices, products, and partnerships to prepare clients for post-COVID-19 recovery, and the eventual return to the workplace. From our earliest days of creating the new Cushman & Wakefield, we built this firm on the learnings from the past, and specifically the learnings from the downturns of 2000 through 2002 and then the global financial crisis in 2008 through 2010. We focused on building a firm with a large amount of recurring revenues, strong liquidity, and a senior management team that have been battle tested to the best and the worst our industry has faced. Because of this, we built ample liquidity, including cash on our balance sheet and a large revolver, which we have expanded over time. We did this, so that when a black swan event occurs, as they will and do, we not only do not need to worry about liquidity issues, we have surplus liquidity, which we can deploy towards accretive and attractive investments. Finally, as we have clearly stated from our very first roadshow, we focus on operating margins and in turn expense management as a day-to-day practice. All of this, put us in a somewhat unique position in late March when the scale of this pandemic became clear. We had also just completed most of the actions related to our November 2019 strategic realignment and efficiency program where all the cost reductions are expected to be permanent. So while other firms are only recently beginning their plans on austerity, we began our plans months before the market turned down. And as I mentioned above, because this team has led three of the largest firms in this industry, the playbook on additional temporary and permanent cost reductions is well-known by us all and was implemented immediately. These reductions cover all the usual categories and span across the organization. These two large actions, the 2019 strategic realignment program and the additional austerity program are anticipated to have an annual impact of over $400 million. Although, there will be some ramp-up over time, we expect the impact of these actions to be significant in the second quarter. These benefits are in addition to the expected reduction in fee-earner variable compensation expense and the reduced spend on materials, subcontractors, and direct-to-client labor that follow from lower revenue. In addition, we immediately adjusted our models on company performance. At Cushman & Wakefield, we run three models annually for the firm. Our downside case has always been built on metrics that approximated a rough midpoint between the GFC and the downturn of 2000 and 2002. Our base case is always our annual operating plan, and while our upside case isn't much of a focus in good years, it does set a range of possibilities should markets perform better than expected. We manage liquidity always against our downside case and our day-to-day expense and capital allocation against our base case. So when the downturn hit in March, we simply adjusted these models down. While we are not going to share the specific inputs to these models, we will say that the downside model sets a low point that we feel will not be hit. Think of it as a stress test of performance, cash flow, and liquidity. So our playbook is fairly simple. Test liquidity against a worst-case scenario that has a low chance of occurring, manage the business against a lower base case, hope for a more optimistic upside case to occur but never ever count on it. To put it clearly, we have a formula for financially managing our business that we feel is a distinct differentiator and competitive advantage for our company. Our approach is scientific, data-driven, and conservative. With that, let me speak again to our firm's liquidity. At the end of the first quarter, we had around $1.4 billion in liquidity on our balance sheet and recently expanded our revolver to $1 billion and repriced our term loan, saving over $13 million in annual interest expense. In summary, Cushman & Wakefield is a much stronger company than it or our two largest peers were in the global financial crisis with more than ample liquidity and a diversified revenue base weighted towards recurring revenues. Now I'll give some color on overall business activity and client engagement over the past month. First, let me begin with our biggest business by revenue, which is our property facilities and project management business or PM/FM, which represents almost half of our overall revenues. As many of you know, the services that comprise most of this segment are in many cases essential and required as part of the operation of a commercial building. For example, cleaning, security, and building maintenance are all functions that are required by building owners at all times. Additionally, as you know, these services are executed on a contracted basis with highly visible revenue streams. To-date, we have seen no negative material change on the renewal rates on contracts with our PM/FM clients. And in fact, Cushman & Wakefield is working with many of our larger global occupier services clients on strategic space planning for a return to work for their employees as quarantine restrictions around the world begin to lift. Our next largest business is our leasing service line, which accounts for approximately 30% of our total fee revenue. As we have noted in the past, we believe approximately three-quarters of aggregate leasing volume is represented by renewals of current leases. We have cited this in the past as have our competition to note that a significant portion of our overall leasing volume is highly visible in nature. Across our leasing business, we have seen deals that were in process slow, but not stopped, and some deals large and small continue to be completed. In periods of uncertainty, clients often prolong lease renewal decisions, which could delay but rarely cancel transactions. We can say with certainty that our leasing professionals remain in active dialogue with both real estate owners and occupiers on deals both for renewal and for new long-term space planning requirements. Lastly, let me speak to our capital markets and our valuation service lines, which represent the smallest proportion of our total revenue at roughly 15% and 8% respectively. In the short term, we expect capital markets revenues to be more impacted than leasing. We expect the second quarter to have the most significant impact on our capital markets business in terms of year-over-year decline with some sort of recovery in relative terms during the rest of 2020 and beyond. Now to give you some context on how recent events have impacted our results let me provide some color on trends in the first quarter. I'll begin by saying that our PM/FM and Valuation service lines all performed strongly over the first quarter. Leasing showed some weakness in March, but we were also covering a very strong first quarter 2019 for leasing both in the Americas and globally. Roughly half of the 2% decline in our first quarter revenues was driven by the deconsolidation of our PM/FM revenues in China as a result of setting up the Vanke joint venture. However, the joint venture was accretive to EBITDA in the quarter. Duncan will speak to this impact in more detail. Our brokerage businesses after a solid start to the year experienced sharp declines in March. Leasing revenue in March declined 28% and capital markets was down about 13% for the month. Certainly, a precursor for steeper declines to come. PM/FM, including the impact of the Vanke joint venture and valuation and others were up mid-single digits over last year in March. Finally, before I turn the call to Duncan to detail our financials, let me speak briefly to our 2020 outlook. As you saw from our earnings release, we are withdrawing our full year guidance given the lack of visibility to revenues. What we can provide are the following expectations: First, not surprisingly, we expect the second quarter to experience the sharpest relative decline in revenues versus prior year, especially in our brokerage service lines. We would expect the impact of capital markets to be higher than leasing in the short term. And we expect PM/FM to remain relatively stable during 2020. However, there is some room for optimism that the declines in future quarters will be less, although at this time, we do not know how this will play out. We can't tell exactly what the depth of the decline in revenues will be or how revenue trends will impact our mix, but as a rule of thumb and given our diversified business mix and decisive cost actions, we would expect the EBIT decline in 2020 as a percent of our fee revenue decline to be in the mid-20% range. We are confident in our company, our employees, and our ability to serve our clients no matter what the coming months may bring. Our actions have been fact-based and decisive and our financial strength is not in doubt. Our senior executive team has extensive experience in managing through downturns and Cushman & Wakefield will continue to play a strong leadership role in helping our clients and our industry manage through this period and into recovery. And with that, let me turn the call to Duncan to discuss our financial results in more detail.

Duncan Palmer, CFO

Thanks, Brett, and good afternoon everyone. Before covering our first quarter results and the trends we are experiencing in the business, I want to expand on a couple of items that Brett mentioned. First liquidity, our financial position is strong. We ended the first quarter with $1.4 billion of liquidity consisting of cash on hand of $380 million and a revolving credit facility of $1.0 billion. We had no outstanding borrowings on our revolver. We completed our IPO with a very strong financial position and since then, we have enhanced our liquidity most notably by increasing the capacity of our revolver to $1 billion late last year. Our liquidity position has been built to be more than adequate to fund our operational requirements and an economic downturn impacting our results. We therefore view part of our liquidity as available to fund investments such as infill M&A in the consolidating industry and we have seen in the past that such opportunities can come along at any time. In response to the current economic crisis, we have built several scenarios of the impact on our business in the short to medium term. These are updated with new data and assumptions on a regular basis. It is our belief based on our current scenarios that we have ample liquidity to withstand the impact of the current economic outlook. Furthermore, although we have suspended almost all investment in the short term, we will stand ready to take advantage of attractive opportunities should they arise, provided that our scenarios continue to be supportive. We would consider adding additional debt capital to further enhance our liquidity position to support our financial flexibility if markets become attractive. I would remind you that the period-end financial leverage covenant is only applicable to the company if we exceed $408 million of borrowings on our revolving credit facility, that is 40% of the borrowing capacity, which we also don't expect to occur. Second, cost actions. On our year-end earnings call in February, we announced actions focused on strategically realigning our business. A significant pillar of this was focused on driving operating efficiencies in both employee and non-employee costs. By the end of March, we had completed a substantial portion of these actions which we confidently expect to produce benefits starting in the second quarter ramping throughout 2020 and reaching full run rate benefit in the first half of 2021. As you would expect from us, as soon as it became apparent that the COVID pandemic would impact our businesses outside of China, we developed plans and took actions to reduce costs over and above our previously disclosed program. These have included an almost total reduction in travel and entertainment and events, reduced spend on third-party suppliers, imposition of furloughs and part-time work schedules in impacted businesses, and executive and staff compensation cuts. Taken together, we expect that our cost actions will exceed $400 million in annualized impact and that the impact discreetly in the second quarter will be more than $75 million. In addition, we will of course see a lot of costs come out as revenues decline across different service lines and geographies. These will include broker commissions, fee-earner profit shares, direct client labor, and materials, and third-party subcontractor costs. We have also taken steps to reduce our capital and other investment spend. We are not currently investing in infill M&A as no attractive targets are currently available, although we did announce four deals early in the first quarter pre-crisis with substantially all the capital deployed in PM/FM service lines. With that backdrop, on page eight, we summarize our key financial data for the first quarter. Fee revenue of $1.3 billion was down approximately $52 million or 2% as compared to last year. Over half of this decline was attributable to the deconsolidation of our PM/FM business in China as a result of the joint venture we formed with Vanke Services. On 6th of January 2020, the company formed a new asset services joint venture with Vanke Service, a leading Chinese real estate provider. This joint venture has more than 1,000 commercial property and facility management projects in over 80 cities across Greater China with more than 20,000 employees. The company owns a 35% interest in this joint venture and accounts for its investments using the equity method of accounting. This JV was accretive to adjusted EBITDA in the quarter. In the first quarter, PM/FM growth was in the mid-single digits including the impact of the Vanke JV. This growth, as well as our growth in our Valuation and other services line, helped to offset weakness in our brokerage businesses where leasing was down 18% and capital markets 4% versus prior year. First quarter adjusted EBITDA of $70 million was down 19% as compared to prior year, primarily due to lower leasing and capital markets fee revenues most notably in March, partially offset by the early impact of some of our cost reductions. Moving on to pages nine and ten where we show fee revenue growth rates by segment and by service line. As I mentioned, our leasing and capital market service lines were down 18% and 4% respectively for the quarter. This decline was driven by activity in the month of March and largely in our Americas and EMEA segments. Globally leasing was down 28% in the month of March, similarly capital markets was down 13% globally in the month of March, principally in our EMEA and APAC regions. Offsetting these trends was growth in our PM/FM service line. Within PM/FM, facility services represents just under half of this service line's fee revenue. In facility services, we typically self-perform or subcontract a variety of services through our major operations in both the Americas and APAC. This business generates solid cash flow on a stable revenue stream and on an annualized basis typically has low single-digit growth. Fee revenue growth in facility services was 8% for the first quarter driven by new business wins and expanded scope in some contracts. The rest of our PM/FM service line which comprises our occupier outsourcing property management and project management operations grew at a low single-digit rate and a low double-digit rate excluding the impact of the revenue contributed to the joint venture in China. With that, we will start a more detailed review of our segments starting with the Americas on page 12. Fee revenue in our Americas segment was down 1% for the quarter, lower leasing activity down 20% was partially offset by PM/FM, capital markets, and valuation and other, which were up 9%, 5%, and 7% respectively. In our leasing business, we lapped a very strong quarter in 2019 in which first quarter growth was 21%. Substantially all of the decline in leasing revenue was in March. Within our Americas PM/FM service line, our facilities services operations represent a little over half of our fee revenue. Facility services fee revenue was up low double digits from growth at existing clients and new business wins. The rest of the PM/FM service line grew at a high single-digit rate. Growth in capital markets of 5% was principally driven by the continued momentum of recent broker investments that began positively impacting our results in the fourth quarter last year. Americas adjusted EBITDA of $64 million was down 8%, primarily due to the impact of lower brokerage revenue. Moving on to EMEA on page 13. Fee revenue increased 5% led by double-digit growth in our PM/FM service lines, which was up 25% as well as our valuation and other service line, which was up 6%. Partially offsetting these trends were our capital markets and leasing service lines which were down 16% and 14% respectively. Adjusted EBITDA was a loss of $3 million, a deterioration of $3 million, principally due to lower brokerage revenue in March. Now for our Asia Pacific segment on page 14. Fee revenue was down 14%, principally due to the impact of the joint venture formation in China as well as lower leasing and capital markets activity of 12% and 42% respectively. Capital markets was down primarily due to a slowdown in activity in Hong Kong. Putting aside the impact of the joint formation in China, PM/FM grew roughly at a high single-digit rate for the quarter. PM/FM represents roughly two-thirds of the fee revenue for the segment. Facilities services operations in APAC were down 5%. Adjusted EBITDA of $10 million was down 44% for the quarter, primarily due to the impact of lower brokerage revenue. Turning now to page 15. In summary, the COVID-19 pandemic has disrupted global economic activity on an unprecedented scale. The near-term business outlook environment remains highly uncertain and we have limited line of sight to revenue trends, especially in our brokerage business. As such, we are withdrawing our guidance for 2020. We expect the most severe year-over-year declines to be in the second quarter as the trend we saw in March in our global brokerage service lines continues. The order of magnitude of the decline is unclear, but we would generally expect the decline in capital markets to be higher than that in leasing. Based on various economic forecasts, we would expect the degree of year-over-year brokerage revenue declines in later quarters to be less severe than that in the second. PM/FM represents roughly half of our total revenue and is expected to be relatively stable during 2020. As you can imagine, it is hard to predict the trajectory of revenue with all that is going on. However, using our different scenarios and baking in the significant cost actions we have taken to mitigate the revenue declines we expect to see in the near to medium term, we think that as a rule of thumb adjusted EBITDA could decline in 2020 as a percentage of fee revenue decline by an amount in the mid-20s. This depends on a variety of factors, as you can imagine including the severity of revenue declines, timing of a recovery and the mix of businesses affected over time. As Brett said, you can be confident that whatever the pandemic outcome and economic impact we will continue to focus on the welfare of our employees, supporting our clients, the financial strength of our company and our profitability both in 2020 and for the long term. And with that, I'll turn the call back to the operator for the Q&A portion of today's call.

Operator, Operator

Thank you. Your first question comes from Anthony Paolone from JPMorgan. Your line is open.

Anthony Paolone, Analyst

Hey, thank you. My first question relates to the cost savings and the EBITDA margin brackets you provided. I appreciate the incremental margin in the mid-20s that you highlighted. How should we think about the cost savings—are they factored into the margin brackets, or is the $400 million phasing separate from that?

Brett White, Executive Chairman and CEO

I'm Brett. Before I turn the call over to Duncan, I want to mention that we received feedback indicating that our audio was not clear during our prepared comments. I apologize for that. I also want to remind everyone that our script will be available on our Investor Relations website shortly. Again, I apologize for the phone call quality. Duncan, I'll let you take that question.

Duncan Palmer, CFO

Yes, thanks, Anthony. The answer is that it's all included. We discussed the annualized savings of $400 million, which is factored into that mid-20s guideline. This is after considering those cost reductions.

Anthony Paolone, Analyst

Okay. How much of the $400 million did you actually spend or do you expect to spend to achieve that? Is this a figure that is likely to remain stable? For example, if you had done this 18 months ago, would you have simply added that amount to your 2019 EBITDA? How should we approach this?

Duncan Palmer, CFO

It's a mix of factors. Referring back to our Q4 earnings call and Investor Day, we discussed the permanent cost reductions as part of our strategic realignment. We have noted expected costs in our disclosures related to achieving those savings, which involved a significant amount of money, including severance and similar expenses. Many of the savings we're implementing in response to the current crisis involve cutting travel and entertainment costs, reducing events, and implementing various furloughs and staff compensation cuts. There isn’t a substantial cost to achieve in many of these areas. However, some costs are linked to activity levels, meaning they may return as business activities increase. Overall, our cost management is a direct response to lower revenue, reflecting a different nature of cost actions compared to before.

Anthony Paolone, Analyst

Okay. And then just last question for me. Can you give some sense as to how much of sales and leasing for you all is driven by, say, the office business versus industrial versus, say, retail?

Brett White, Executive Chairman and CEO

Sure. I'll be happy to handle that. So if you look at the company and I'll just give you Americas, because that's by far the biggest business. About 56% is office; 18% industrial; a very small amount 6% is retail; 5% is land; and then about 15% would be multifamily sales.

Operator, Operator

Your next question comes from the line of Vikram Malhotra from Morgan Stanley. Your line is open.

Vikram Malhotra, Analyst

Thanks for taking the questions. I just wanted to clarify on the cost. I guess, maybe just stepping back, could you give us a sense, if we look at sort of cost of services and the G&A. Can you give us a sense of truly what is sort of variable? I mean, commissions obviously move. But I know there are differences by geography, where maybe there's a more fixed pay versus commission in, say, Asia or parts of Asia. So can you give us a rough sense, if you just break it out percentage-wise, like truly what is variable versus what is fixed? And then apart from just natural cost coming down, because of lower activity, what other steps can you take assuming you just see depressed activity for a prolonged period this year?

Brett White, Executive Chairman and CEO

Duncan, can you address the regional commission rate question? I'll take the second topic.

Duncan Palmer, CFO

Certainly. A significant portion of the disruptions we anticipate this year will impact brokerage service lines, where compensation varies by region and business, especially in the U.S., where most systems are commission-based. As revenue declines, so too will the commissions, making this a variable cost. In Europe and parts of Asia, many fee owners operate under profit-sharing arrangements, meaning their profits will likely decrease alongside reduced revenue. This profit share doesn't decline as steeply as revenue but is still affected by it. Additionally, varied commission structures, including some salary and bonus setups, are in place, albeit they represent a smaller fraction of the costs. Generally, those dealing with brokerage-related revenues will see their costs align with the revenue decline. In our Property Management and Facility Management service lines, we expect stability overall, but some areas will fluctuate, with certain costs tied to direct client labor and consumables varying with revenue changes. Regarding the $400 million in annualized savings we've mentioned, these will predominantly stem from fixed costs, though there are semi-fixed elements as well. There will be reduced activity in marketing, travel, and events, contributing to these savings, which we categorize as semi-variable and semi-fixed as we look at the overall cost structure.

Brett White, Executive Chairman and CEO

Regarding the activities you mentioned, if this situation persists for a longer duration, I want to emphasize what Duncan said. In areas where we have employees earning a salary plus a profit share, salaries will also be adjusted down accordingly. Each region operates differently, and I can't assure you that 50% of every brokerage dollar will disappear; this is particularly true in the U.S., where it could be even more significant. In Europe, for example, salaries for fee earners will be cut similarly to how commission structures would be adjusted. These figures are very noteworthy. We won't provide exact numbers since we can't predict their impact at this time. However, it is reasonable to expect that potential adjustments could equal or exceed the $400 million we previously discussed in specific cost measures. Regarding the duration of this downturn, we have already undertaken substantial restructuring efforts that began in November 2019, and that work continues. There are many more initiatives tied to this project that we plan to begin and complete in the coming years, regardless of how long this downturn lasts. The crucial point is that we've always prioritized maintaining a sound cost structure for the business, and that will be true in both favorable and adverse market conditions. So, whether this downturn lasts two quarters or eight, our focus on cost management will remain consistent. Lastly, if we were to face a significant crisis, similar to the 2008 financial collapse, there are several temporary measures we could consider. However, currently, we do not anticipate such a scenario.

Vikram Malhotra, Analyst

Okay. Fair enough. You mentioned that you are well prepared to take advantage of any M&A opportunities that may arise. Can you provide more details about your priorities in terms of business types and what you will focus on in about six months as you look to grow externally?

Brett White, Executive Chairman and CEO

Sure, that's a great question, and the answer is a bit complex. First, I want to emphasize that our company priorities remain unchanged. We continue to focus on expanding our recurring revenue business lines like property management and facilities management. If a high-quality property management business were to become available, whether now or in the future, we would be very interested, regardless of the market cycle. There are also generational opportunities that arise. For instance, when I led another firm during the global financial crisis, we worked hard to navigate through it, and right after, a major opportunity emerged when the Dutch government asked ING to sell their real estate investment management business managing $65 billion in assets. We didn't anticipate that, and it significantly transformed our asset management business. It's difficult to predict what this downturn will bring. The longer it lasts, the more opportunities may arise from distress. If it’s brief, there might be few. Typically, distress will come from usual sources. Firms reliant solely on capital markets may suffer significantly, and we are uncertain about future capital market revenues, which could drop considerably for a time. We are monitoring these firms closely. Companies with little recurring revenue, like brokerage firms, will likely feel the impact much more severely than the larger firms. However, our main priorities remain unchanged. We are committed to the recurring revenue businesses and would consider attractive opportunities in asset management if they arise at favorable prices, even if that seems unlikely. Additionally, if there is true distress in the market, we would consider acquiring firms at low prices across all our business lines.

Vikram Malhotra, Analyst

Great. And then just last one, if I may. It's an early debate and one which will probably take a while to play out. But this whole work-from-home experience and the potential impact to how people and employers use their office space and maybe impacts the property management. Just any early or high-level thoughts based on conversations you may have had with some of your key tenants?

Brett White, Executive Chairman and CEO

Sure. So it's interesting Vik, this is a very fluid conversation. I would tell you that, in the early days all of six, seven weeks ago, many companies and many CEOs were talking about the fact that they were surprised at how well they were able to operate their companies with all of their employees or most of their employees working from home, which then led to the immediate, I think visceral reaction of, gee, if this works this well this way, why don't I leave some of these people at home and cut my footprint? That conversation has changed demonstrably. It's changed for a couple of reasons. The first is that as those same CEOs, and those same businesses begin to work with their real estate department internally, or advisers like us, what they realized was to create an acceptable floor plan in two weeks or three weeks from now, they can't accommodate half of their current employees. I have one CEO tell me, he's said Brett – of a very large bank. He said, Brett right now our math, our people tell us we would need to double our global print to put people in our firm back to work. He said, we're not going to do that. We say we may have to take additional space and we're looking at some of the vacant WeWork space and some other things. But what we're going to do is rotate our employees through the building and we may have no more than 25% or 30% of our workforce in a building at any given time, but very few of that workforce will be at home permanently. I think that is analogous to what generally people are talking about in the market. Certainly, we have all learned over the last eight weeks that the productivity of people at home right now is much higher than I think any of us thought it would be. But I do not believe that it's fundamentally changed the view of large corporations that there are very big benefits and larger benefits to the synergy of having people work in the same proximity, the synergy that comes from that. My guess is that, you will see an incremental impact on office usage. I think it will be in the single digits. But what we are going to see is a very, very different way in which that space gets used. The number of people that are in that space at any given time, those things are changing for sure.

Vikram Malhotra, Analyst

Great. Thank you so much.

Operator, Operator

Our next question comes from the line of Josh Lamers from William Blair. Your line is open.

Josh Lamers, Analyst

Great. Thanks. So obviously, the impact of COVID on leasing and sales was felt in APAC for most of the quarter. So I'm wondering if you would say that the results there are sort of a good proxy for sales and leasing outlook in other regions, or is there a difference in maybe product diversification or regional coverage that would cause the difference in results there versus other countries or regions?

Brett White, Executive Chairman and CEO

I'm sorry. Could you please repeat your question? I'm not sure I'm following it.

Josh Lamers, Analyst

Yeah. Yeah. Yeah. So just to put it more basically. Just wondering if we can use kind of APAC sales and leasing results as sort of a dye or proxy for other regional outlooks in the coming quarters, or whether there's a difference in product exposure, property exposure or regional coverage in that region that might cause a difference in results?

Duncan Palmer, CFO

Yeah. I think where you're going is, if China is recovering first maybe we can use that as a future indicator of what might happen in the rest of the world. Is that kind of the question?

Josh Lamers, Analyst

Well, the results that was sort of – that were experienced in the first quarter recognizing that China for the most part APAC in general COVID impacted results there throughout the first quarter as opposed to just the tail end March, or it was felt in the Americas. So I'm just wondering, again, I know it's probably too early to tell, but just trying to get a gauge for maybe how pipelines look for leasing and sales on the region and so on?

Duncan Palmer, CFO

So, yeah. Okay. So I'll give – I'll chip in and Brett can chip in. I think look so APAC in Q1 in leasing capital markets, I don't think, you should really read across too much. One of the big impacts for example in Q1 in APAC in capital markets is that last year, we had an incredibly strong Hong Kong Q1. And obviously, Hong Kong doesn't do COVID, has gone through a lot of disruption in the second half 2019, and that obviously has disrupted capital markets in the first quarter on a relative basis to the first quarter of last year. So I don't really think you can read across too much in terms of trends in leasing capital markets, as to what they'll be. Having said that, I think what we said about trends in the world generally in leasing and capital markets probably apply to all regions at least in the short term, which is we're expecting to see Q2 be a bad quarter in terms of like comping to last year, it got a really severe downturn with what's going on in GDP. And we would expect that to be probably most of it in the second quarter, probably also to be a decline in the third quarter, but maybe slightly less. So right now, I think we're expecting Q2 to be really bad worse than we saw in March in – generally speaking, I think it's fair to say in April, we also saw trends probably 40% plus globally in leasing and capital markets decline versus last year. I think that's probably reflective of some of the trends, we saw seen this month, which obviously is worse than we saw in March. So that's probably a better data point for you. Nothing to mention about APAC in Q1, I know you're referring to brokerage, but just to make sure you understand, one of the reasons – yet, probably the only reason really why Property and facilities management looks like it was down is because of the Vanke JV. And as we said in the script, actually, if you excluded that Property and facilities management in the first quarter was up probably in the high single digits.

Brett White, Executive Chairman and CEO

Yes, to add to that, I think it would be more helpful. Duncan provided a great overview of APAC. If you were in my position, working on models to understand the downturn and recovery, you would be better served by looking at the public data for CBRE and JLL from 2008 to 2010. Focus on the sequential declines in investment property sale revenues and leasing revenues during that time. Firstly, it's uncertain what the second quarter will look like, and no one can predict the third, fourth quarters, or the first few quarters of next year. Currently, there seems to be a consensus that the depth of this downturn across similar business lines may be comparable to past downturns, but the duration should be much shorter. The downturn during the Global Financial Crisis had seven quarters of sequential capital markets declines and six quarters of sequential leasing declines. We don’t anticipate that happening this time; it appears to be substantially shorter. However, the sequential quarterly or year-over-year declines in those revenue streams do not suggest that leasing will behave differently. This time, capital markets might perform better due to the significant stimulus provided to the system, which has enhanced liquidity. Additionally, the banking system is in excellent condition, preventing a freeze in global capital markets as we experienced previously.

Josh Lamers, Analyst

Sure. All right. Well, thank you very much for the response. And then just quickly, you touched on the expanded conversations that you're having with owners and occupiers. And so I'm just wondering, if you can comment on a bit more on what you're seeing as far as top of the funnel lead generation in the outsourcing business? And is there any way for you to frame that level of increased demand relative to, kind of, past couple of quarter growth or prior growth experience?

Brett White, Executive Chairman and CEO

I think it's challenging to determine, but I can provide some guidance. Typically, during a downturn, there is minimal churn in contracts. For example, if you're a property owner with a management contract due for review in July, you're unlikely to switch providers right now. Additionally, most contracts in property management change hands when a building is sold, so there won’t be much turnover for a while. This means that major players, like the top three companies, will likely face low contract losses. However, if you own a large building or are a corporation using a management firm and haven't chosen one of the big three, you might consider changing to smaller firms, which are less established. In downturns, there is often a tendency to seek higher quality services. This is why I mentioned at the start of our call that there is always a flight to quality. Some firms might also look to cut costs by outsourcing for the first time. Over the coming period, I expect to see a shift in contracts from smaller firms to the big three, and little churn in our contracts or theirs. We may also see some companies start outsourcing various aspects of their operations for the first time. As for our current situation, we are still mostly working remotely, which means not much is happening in terms of new business discussions. However, as we return to offices, we'll be in a better position to provide updates in our next quarterly call.

Josh Lamers, Analyst

Okay. Thank you for your time.

Brett White, Executive Chairman and CEO

You bet.

Operator, Operator

Your next question comes from Doug Harter from Credit Suisse. Your line is open.

Doug Harter, Analyst

Thanks. Obviously, knowing that the EBITDA number is uncertain at this point, but I guess how should we think about cash flow and the differences between EBITDA and cash flow for the remainder of the year?

Brett White, Executive Chairman and CEO

Duncan?

Duncan Palmer, CFO

That's a good question. Thanks. To start with EBITDA, which is a significant driver of cash flow, we acknowledge the uncertainty regarding revenue. We're working to provide some sensitivity for you to consider. Generally, as revenue increases, working capital in the company also rises, and conversely, it decreases when revenue falls. Therefore, we anticipate working capital will generally serve as a source of cash flow throughout the year. We have reduced capital expenditures from our typical 1% to 1.5% of revenue to the essentials only, so I expect this to be lower than usual. Currently, we are not engaging in infill M&A due to a lack of attractive targets, resulting in less cash flow normally allocated to investments. We have also lowered our interest expense compared to last year, which I believe has decreased by about $13 million following a 50 basis point repricing of our debt in January. Additionally, we expect cash taxes this year to be significantly less due to a lower profit before tax. Overall, these factors contribute positively. We're also benefiting from various government schemes worldwide providing different deductions, mainly on the tax and payroll tax sides, which companies can take advantage of. While EBITDA remains the primary driver of cash flow, the actions we're taking in these areas should help mitigate the impact on cash flow this year. This is why we feel confident that we have sufficient liquidity and do not foresee it as a major concern for us this year, reinforcing our financial strength moving forward.

Doug Harter, Analyst

Great. And just is there any kind of M&A that, that you had kind of previously announced, that still will need to be kind of paid for that hasn't already closed? Just anything else on cash usage from that perspective?

Duncan Palmer, CFO

Not really. No, we always have a little bit of deferred consideration from prior years. In our deals, we typically do a lot of deals where there's maybe earn-outs or deferred consideration there might be some of that this year, but not in a very material context.

Operator, Operator

There are no further questions at this time. Mr. Brett White, I turn the call back over to you.

Brett White, Executive Chairman and CEO

Thank you very much. I appreciate everyone calling in. We look forward to talking to you in three months. Hopefully, we'll have a lot more data and insights at that time. Everyone stay well and stay safe. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.