Cushman & Wakefield plc (NYSE:CWK) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good afternoon and welcome to the Cushman & Wakefield’s First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I’d now like to run the conference over to Megan McGrath, Head of Investor Relations. Please go ahead.

Megan McGrath: Thank you, and welcome to Cushman & Wakefield’s first quarter 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 on 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 4. And with that, I’d like to turn the call over to our CEO, John Forrester.

John Forrester: Thanks, Megan, and thank you to everybody joining our call. First, I want to thank all our employees around the world that continue to deliver outstanding service and value to our clients through such fluid times. The first quarter, as anticipated, experienced similar trends to the fourth quarter of 2022 with significantly lower transaction activity versus the prior year, but continued strength in our property and facilities management business. Fee revenue of $1.5 billion and adjusted EBITDA of $61 million reflect the quarter’s muted higher margin transactional activity, which we believe is currently sitting at or near trough levels. The current macro environment remains complex with elevated inflation in interest rates, as well as recent banking stress, all contributing in effect to recessionary conditions in commercial real estate.

We expect the near-term outlook to remain challenging. However, an increasingly complicated economic and real estate environment is resulting in an ongoing flight to quality, and we believe that diversified global service providers of true scale like Cushman & Wakefield are best positioned to successfully navigate through economic cycles for both clients and talent. Turning to capital markets. Capital continues to remain on the sidelines as banking industry volatility at the end of the quarter increased overall market uncertainty and further tightened lending standards. However, whilst in this constrained environment, we are observing meaningful appetite from our clients to deploy capital when market conditions improve and we are meeting regularly with them to review portfolios, discuss financing options and help strategically plan for the recovery.

To reiterate, it is a matter of when not if deal volumes return and we are allocating our resources to areas where deals are happening and finding new areas of opportunity. Such as our recently created asset optimization practice focused on delivering investors an integrated, tailored and strategic solution across underperforming assets. On the leasing side, consistent with our expectations, total office leasing activity in the U.S. trended lower sequentially and year-over-year in the first quarter. Occupiers have grown increasingly cautious in their leasing decisions and they’re looking for cost cutting opportunities as the odds of a recession remain elevated and as hybrid work strategies continue to filter through. Although we expect these headwinds to continue in the near-term, we also think it’s important to note that the impact of more aggressive hybrid work models started nearly three years ago, and as of today, there is still some 10.5 billion square feet of occupied office space globally.

This supports our view that although the office sector faces challenges, it will remain a preeminent asset class into the future. It’s critical to company functionality and its sheer size will continue to create opportunities for our firm to execute on transactions and advise our clients through the growing evolution. Notwithstanding this, other large asset classes will provide both growth and greater resilience. In the Industrial Leasing sector, industry fundamentals are strong with vacancies remaining near all-time lows and well below historical averages. The Industrial sector, like office continues to see a flight to quality. During the first quarter, U.S. industrial tenants executed nearly 60 million square feet of deals in facilities built since 2020, representing just under half of the total.

Net absorption in Q1 did slow relative to the outsize growth experienced over the previous two years. And although some moderation is expected, we anticipate the Industrial sector to remain healthy, supported by long-term secular growth trends such as e-commerce and consumer spending. Looking ahead, we continue to look for green shoots in both interest rate clarity and the macroeconomic environment. But at this point, we are not anticipating anything material this year. Regardless of the ultimate inflection point, the medium and long-term market opportunity for our business is substantial and we are positioning ourselves to achieve incremental market share gains when transactional activity resumes. Moving on to our Property, Facilities and Project Management business.

This continues to perform well and demonstrate its resiliency in the current environment, most notably in facilities and project management, which both achieved double digit growth in the quarter. Our PM/FM business has benefited both from the built-out of our global outsourcing capabilities to take share in this fragmented market as well as our diversification into asset classes such as multi-family and property management and life sciences and project management. Our new business pipeline remains strong, highlighting the long-term positive secular growth trends in this business even during a challenging time in the transactional market. In summary, there is no doubt that this is a challenging operating environment for all participants in commercial real estate.

However, our global capabilities, deep expertise and operational efficiency will continue to steer us through the near-term headwinds and more importantly allow us to emerge with strength and improved market positioning. Now I’d like to turn the call over to Neil to discuss in more detail our financial performance. Neil?

Neil Johnston: Thank you, John, and good afternoon, everyone. For the first quarter fee revenue of $1.5 billion declined 10% versus prior year. Adjusted EBITDA of $61 million was down 71% versus a record first quarter 2022 and adjusted earnings per share for the quarter was a loss of $0.04, a decrease of $0.52 versus prior year. Our revenue performance in the first quarter reflected continued weakness in capital markets, which were down 50% similar to the decline experienced in the fourth quarter of 2022. Leasing revenue declined 19% versus the prior year. This decline was against a strong first quarter of 2022 when leasing revenue was up 58% versus first quarter 2021. Office leasing activity declined as occupies continued to delay decision making and reduced CapEx spend.

The industrial sector performed relatively well but was lower against the challenging prior comparison. Performance in our PM/FM service offering was strong with PM/FM in total up 8%, especially in our facilities management and project management businesses. Valuation and other declined 12% in the quarter as the slowdown in transactions resulted in lower valuation activity. The decline in adjusted EBITDA was principally driven by three main components. First, the most significant component was the decline in high margin transactional brokerage business, as well as our Greystone joint venture, which experienced lower multi-family lending volumes. Second, the operating expenses in the quarter were higher year-over-year due to inflation and prior year investment wrap, from the high growth environment of early 2022.

We are focused on our cost initiatives and as we move to the balance of the year, we expect these inflation and investment impacts to moderate and to be fully offset by our cost actions. Lastly, we experienced roughly $10 million in discreet headwinds in the quarter, primarily from the non-recurrence of government subsidies in our APAC business versus the prior, as well as foreign currency headwinds. In terms of our cost saving plans, we achieved approximately $21 million of cost savings in the first quarter and are currently on track to achieve the full $90 million cost saving target in 2023. Given the current environment, we are further tightening our spending on discretionary costs and are actioning additional items that will allow us to operate more efficiently.

Turning to our segment results for the quarter. In the Americas, we experienced declines in brokerage across all asset types due to the higher interest rate environment and macroeconomic headwinds. These declines were most prominent in the Office sector. Declines in brokerage were partially offset by continued resiliency in PM/FM, most notably in facilities and project management. The adjusted EBITDA decline was principally driven by the lower brokerage activity, lower contribution from Greystone and the impact of prior cost inflation and investment in the business. EMEA and APAC both saw similar declines in brokerage as the Americas, while our PM/FM business in the APAC segment continue to perform well, specifically in facilities and project management.

The lower fee revenue and brokerage in each segment was the primary driver of the declines in adjusted EBITDA. Additionally, in APAC, the non-recurrence of the government subsidies received in the prior year also contributed to the year-over-year decline. Moving to our balance sheet and cash flow. We ended the first quarter with an operating cash outflow of $222 million. This level is in line with historical first quarter working capital trends and reflects typical seasonal patterns in our business. Given the seasonality, our full year cash flow performance will depend highly on the size and timing of any market recovery in the latter half of the year. As a part of our efforts to improve efficiency and performance, our teams are focused on driving cash flow improvements through disciplined working capital management.

From a capital allocation standpoint, we are currently prioritizing spend in three areas: cash to achieve our cost takeout targets, focused talent acquisition in high growth markets and high growth sectors and investment in our services businesses where we continue to see significant long-term market opportunity. Overall, our financial position remains strong with $1.6 billion of liquidity consisting of cash on hand of $460 million and availability on our revolving credit facility of $1.1 billion. We had no outstanding borrowings on our revolver and net leverage was 3.7x at the end of the first quarter. Our debt maturities are long dated and our debt profile is more than 70% fixed on a net basis. Finally, moving to our outlook. The macroeconomic environment remains highly uncertain.

Market participants continue to await further clarity on both interest rates and the economic outlook, challenging both leasing and capital markets activity. Given these factors, we anticipate the following: our recurring revenue PM/FM business is expected to provide continued stability in this environment, generating low to mid-single digit revenue growth in 2023. Although first quarter results came in above this expectation, the growth rate of existing business will naturally normalize as we lap the larger new business wins of the prior year. In addition, beginning in the second quarter of this year, a change in the gross contract reimbursables of one of our facility services contracts will result in lower fee revenue of about $90 million on an annualized basis with no impact on total revenue or adjusted EBITDA.

In brokerage, consistent with our previous comments, we expect trends in the second quarter of 2023 to resemble the previous two quarters, as we’ve seen no material shift in the markets. Although we expect brokerage to remain under pressure in 2023, we are maintaining a strong position to benefit from a market recovery in 2024. As a result of these expectations, we expect full year adjusted EBITDA margins to be in the range of 9% to 10%, which incorporates our view of a mild recession in 2023 with no significant recovery in brokerage this year. As macroeconomic trends improve and the brokerage business experiences a more meaningful recovery, we expect to see our full year margins trend back upwards both through revenue growth and cost efficiencies.

We now anticipate an adjusted effective tax rate of 28% for the year. That concludes the financial review. With that, I’ll turn the call back to John.

John Forrester: Thanks, Neil. You’d likely seen the announcement we made this evening about my decision to retire from Cushman & Wakefield after over 35 years at the company. It’s been a true honor to lead the business and I’m incredibly proud of what we’ve all built and accomplished together. This really is a special place with so many of the most talented people in our industry, and I’ve thoroughly enjoyed working with all these special people, both as colleagues and as friends. But over the past months, as myself and the management team have contemplated the company’s next stage evolution in growth strategy, it became clear to me that the person making the decisions in the CEO seat today must be the person guiding and accountable for those strategies far into the future.

And as I think about Cushman & Wakefield’s bright future, I could not be leaving the company in better hands than with Michelle MacKay as CEO. Michelle and I have worked together since our IPO in 2018 when she became a Board member and more closely over recent years as Michelle agreed to become our Chief Operating Officer. I’m confident that her long experience in commercial real estate and her commitment to the values and unique culture of Cushman & Wakefield will shepherd the company forward, drive continued growth and shareholder value at the company. And now I’ll turn over to Michelle.

Michelle MacKay: Thank you. And John, I want to be the first person to personally thank you for your leadership and collaboration over the past several years. The impact that you’ve made on the business is large, but the impact that you’ve made on the careers and lives of an untold number of people will inevitably be part of your legacy. I’m excited to take on the role of CEO of Cushman & Wakefield in July. So let’s talk about the future. I don’t require time to integrate into Cushman & Wakefield. As you probably know, I joined the Board about five years ago, right after the company went public and have been inside the company for more than three years. I have the great fortune of stepping onto the foundation that many dedicated and talented people have built.

The foundation is strong and will allow me the ability to reassess and reconfirm what is the core business, ensuring that we’re spending our time, our money and our energy where it makes sense today and more importantly, for the future. This assessment will of course lead to an evaluation of our growth model for the future and aligning our capital allocation model and balance sheet accordingly. I expect a continued focus on the high growth and resilient services business as part of this plan with brokerage as a key driver. I look forward to speaking with all of you as we map out the future of Cushman & Wakefield. And now I’ll turn the call back to the operator and we’ll be happy to take your questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Anthony Paolone from JPMorgan. Please go ahead.

Operator: Thank you. Your next question comes from Stephen Sheldon from William Blair. Please go ahead.

Operator: Thank you. [Operator Instructions] Your next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead.

Operator: Thank you. [Operator Instructions] Your next question comes from Michael Griffin from Citi. Please go ahead.

Operator: Thank you. Your next question comes from Patrick O’Shaughnessy from Raymond James. Please go ahead.

Operator: Thank you. [Operator Instructions] As there are no further questions at this time, this does conclude our question-and-answer session. I’ll now like to turn the conference back over to Mr. John Forrester for any closing remarks.

John Forrester: Thank you all for joining us today. Michelle, Neil and the rest of the team, look forward to speaking with you again at our second quarter earnings call.

Operator: Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.