Cushman & Wakefield plc (NYSE:CWK) Q3 2023 Earnings Call Transcript

Cushman & Wakefield plc (NYSE:CWK) Q3 2023 Earnings Call Transcript October 30, 2023

Cushman & Wakefield plc beats earnings expectations. Reported EPS is $0.21, expectations were $0.2.

Operator: Welcome to the Cushman & Wakefield Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please note, this event is being recorded. It is now my pleasure to introduce Megan McGrath, Head of Investor Relations for Cushman & Wakefield. Ms. McGrath, you may begin the conference.

Megan McGrath: Thank you, and welcome to Cushman & Wakefield’s third 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. And with that, I’d like to turn the call over to our CEO, Michelle MacKay.

Michelle MacKay: Thank you, Megan, and thank you, everyone, for joining us this afternoon. I’m excited to kick off my second earnings call as CEO. Before we get into the numbers, I’ve often been asked what differentiates me as a leader. And the answer is simple, I have a bias to action. And you can see that in what we’ve accomplished during the third quarter. We made significant progress transforming our capital stack as we refinanced $1.4 billion of our 2025 term loan. This initial move has pushed out our maturities and will reduce the company’s leverage by approximately $200 million in 2025. There was strong interest in the offering, it was well oversubscribed with more than 100 lenders in our term loan and more than 125 lenders in our bond.

Additionally, we are ahead of schedule on our $130 million cost-out target for this year. The strong execution contributed to the sequential increase in our Q3 adjusted EBITDA margin of 9.4%. Our Q3 adjusted EBITDA performance of $150 million outpaced our Q2 performance despite softening market conditions as we continue to make choices that are in the company’s long-term interest, regardless of the macro environment. It’s true uncertainties remain, and we saw the transaction markets take another pause in mid-August when rates moved higher. But even as transactional markets were idle during the quarter, we were not. We stayed focused, taking the deliberate actions I just discussed to improve our balance sheet and reduce our cost structure. What’s really clear is that we have the right people, processes and capabilities to deliver for our clients, employees and investors.

We’ve done the things that we need to do to stabilize the business, which puts us in the seat to make prudent and disciplined investments to ensure that we can capitalize on opportunities as they arise for the future. Now let me share some more detail on where we are in our strategic review and, more importantly, our go-forward strategy. As I previewed on our last earnings call, over the past several months, we have completed a very thorough assessment of our business segments, including detailed financial and capital allocation reviews, rigorous scenario planning and long-term secular and industry analysis. These activities were part of a strategic roadmap we have created, and I’ll share a bit more of that roadmap with you today. The debt financing, cost-out efforts and strategic reviews that we executed on during the third quarter comprised of the first phase of our strategic roadmap, strengthening our core.

I feel very good about what we’ve accomplished in a very short period of time, enabling us to move to the next stage, creating flexibility and optionality. This means putting our company in the best possible position, both operationally and from a balance sheet perspective, to make investments at the right time in the cycle. To this end, we are focused on reducing our absolute level of leverage. As I noted earlier, we announced our intention to pay down the remaining balance of the term loan of $193 million, and we are developing a plan for further incremental debt reduction over the next several years. At the same time, we will also invest in compelling organic growth opportunities in both services and brokerage. As part of this plan, we remain committed to hiring and retaining with the ability to flex our spending as appropriate.

This will help ensure we’re properly staffed, both now and as the markets recover, so that we capitalize on future growth opportunities. We expect to achieve these balance sheet and investment goals by improving our internally generated free cash flow, which Neil will expand on in a moment, and by identifying and monetizing small non-core assets. We believe that this sharpened focus on the optimal balance between reducing debt and accelerating growth will be a long-term driver for shareholder value. The final stage in our roadmap is all about sustainable long-term growth. We intend to achieve this by continuing to diversify our revenue and drive market share gains through a differentiated, agile and client-centric strategy. This means further partnering with our clients to help drive their business forward.

We’re not just hiring brokers but arming these brokers with proprietary data, analytics and insights. One example of how we’ve recently levered the power of the Cushman platform is a mandate that we’ve won with a large global EV company by creating a cross-functional team from advisory services, technology and business development. We brought the client a bespoke solution informed by our unique expertise and perspective and the knowledge of a full spectrum of professionals. When we do that, I’ll bet on our team against anyone else’s. We are also using our analytical capabilities to develop a view on where this company and our clients should be positioned five to 10 and even 20 years down the road. We are looking closely at mega trends in the built world, factors such as technology, urbanization, geopolitics, climate change and demographics, and layering these mega trends into distinct real estate subsectors across the stages of a typical real estate cycle.

This helps us to understand where in each cycle each sector sits and identify segments that we believe will be disproportionately benefited in terms of both growth and resilience states. This valuable proprietary analysis led by our independent research team is only one example of how we are positioning the company to be opportunistic while continuing to provide independent, data-driven and highly tailored advice and solutions for our clients. It’s clear to me that companies who will win in today’s complex built world are those that can provide owners and occupiers expert data-driven advice and solutions as well as flawless execution. Our best-in-class analytics, and the strength of our newly integrated team, positions us not only to uniquely meet that need, but also to gain share in a highly fragmented market.

As you can see, over the past several months, we have made significant strides in fine-tuning and beginning to execute on our plan. We are pushing hard to create a more agile, resilient and efficient Cushman & Wakefield that anticipates market trends and captures first-mover advantage where and when it really matters. We will share more details each quarter as we pursue these goals. I view this process as an ongoing evolution of the company as we solidify our position as a premier global advisor in the built world. And as I finish, I’d like to thank all of our employees for their continued hard work as we navigate through this uncertain operational environment. You impress me every day with your drive and dedication to go the extra mile for our clients.

And now I’d like to hand the call over to Neil for a review of our third quarter financial results.

Neil Johnston: Thank you, Michelle, and good afternoon, everyone. For the third quarter, we reported a sequential increase in both adjusted EBITDA and adjusted EBITDA margin despite a sequential decline in revenue. This demonstrates our commitment to enhancing profitability through our continued focus on driving cost efficiencies in our business. During the quarter, we also made significant progress on improving the strength and flexibility of our balance sheet and saw improvement in free cash flow with enhanced working capital efficiency. Moving on to the details of the quarter. On the top line, while transactional markets remain challenged, we saw an improvement in year-over-year brokerage trends as we began to lap the difficult market conditions which began in late summer 2022.

Third quarter fee revenue of $1.6 billion declined 11% versus the prior year with capital markets revenue down 33%, leasing revenue down 16% and PM/FM revenue down 1%. We mentioned on our first quarter earnings call that due to a change in the gross contract reimbursables at one of our facility services contracts, our PM/FM fee revenue would be reduced by roughly $90 million on an annualized basis with no impact on total revenue or adjusted EBITDA. Excluding the impact of this change, PM/FM revenue was up roughly 2% in the quarter. Valuation and other declined 18% in the third quarter as the slowdown in transactions continue to result in lower valuation activity. Adjusted EBITDA for the third quarter of $150 million was down 27% versus prior year, and our third quarter adjusted EBITDA margin was 9.4%.

During the quarter, we continued to benefit from our previously announced cost savings programs. We have realized $98 million of gross savings year-to-date and expect to end the year slightly ahead of our previously communicated $130 million target. We believe we’ve taken the appropriate level of cost-cutting actions to right-size the business for the current environment and the near-term recovery period. I’m pleased with our team’s execution on these actions, and we will continually pursue ways to operate more efficiently and profitably regardless of the operating landscape. Adjusted earnings per share for the quarter was $0.21, a decrease of $0.22 versus prior year. Turning to our segments for the quarter. In the Americas, we saw a 26% year-over-year decline in brokerage revenues and a 1% decline in PM/FM.

Excluding contract change, PM/FM revenues in the Americas grew 2.5%. The declines in brokerage were across most asset types, principally due to the higher interest rate environment and macroeconomic headwinds. EMEA experienced a 14% year-over-year decline in brokerage revenues. Leasing revenue was down 5%, but year-over-year trends improved sequentially as our teams were able to successfully execute several large deals during the quarter. Capital markets revenue remained under pressure, down 32%, and EMEA PM/FM revenue was up 4%. Our APAC region reported a solid quarter with brokerage revenue up 15% year-over-year as we experienced growth in several countries, including Australia, India and Japan. Our PM/FM business at APAC was down 2%, primarily due to lower project management activity.

Adjusted EBITDA declined in the Americas and EMEA, principally driven by the lower brokerage activity, while EBITDA in APAC grew 44% driven by the improvements in capital markets. As previously mentioned, we saw a significant improvement in free cash flow. Free cash flow for the third quarter was $174 million versus $38 million in the third quarter of 2022. On a trailing 12-month basis, we generated $152 million of free cash flow compared with $40 million a year ago. During the third quarter, we refinanced the majority of the remaining $1.6 billion of our Term Loan B due 2025 with a combination of $1 billion of new Term Loan B due 2030 and $400 million of secured notes due 2031. We expect to repay the approximately $200 million of remaining Term Loan B due 2025 with cash on hand.

This moves our nearest significant funded debt maturity to 2028. The refinancing did not meaningfully increase our overall borrowing cost and our debt remains approximately 93% fixed. Overall, our financial position remains strong with $1.7 billion of liquidity, consisting of cash on hand of $588 million and availability on our revolving credit facility of $1.1 billion. We had no outstanding borrowings on our revolver and net leverage was 4.5 times at the end of the third quarter. Finally, moving on to our outlook. For the full year 2023, we anticipate our PM/FM revenues to grow in the low single digits. We expect brokerage revenues for the full year 2023 to be down 20% to 25% compared to our previous guidance of down 20%. Due to this reduced expectations for brokerage revenues, we now expect to be near the low end of our previous adjusted EBITDA margin guidance range of 9% to 10% for the full year 2023.

Looking ahead into next year, given the recent move higher in interest rates and continued uncertainty around Fed actions, we expect that a market recovery in brokerage may be delayed until the second half of 2024. Despite current market conditions, we believe the work we’ve done throughout 2023 on driving free cash flow, achieving cost efficiencies and strengthening our balance sheet, positions us extremely well financially to navigate the upcoming year. That concludes the financial review, and now I’ll turn the call back to Michelle.

Michelle MacKay: Thanks, Neil. I’m proud of what we’ve accomplished during the third quarter and the work we are doing to position the company for the future. We will continue to control what’s within our reach with a focus on creating flexibility and optionality in this next stage. I am confident that our go-forward strategy will position the company for long-term sustainable growth. And I look forward to sharing our progress with you each quarter. And now I’ll turn the call over to the operator to take your questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question today is from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone: Great. Thank you. I guess my first question relates to the plan you outlined to find incremental cash to reduce debt over the next few years. I’m wondering if you could expand on that a bit and just maybe put some brackets around order of magnitude and what sort of assets do you see CWK having right now that could be monetized. Like, are these businesses? Are there investments on the balance sheet that could be sold? Just wondering if you can give a little more detail on all that.

Michelle MacKay: Sure. I think the best way to think about our long-term target for leverage is between the 2% to 3% range. And we plan to get there through a combination of debt paydown and EBITDA growth. Our goal is to demonstrate a balance between the two and the way that we’re allocating capital. So we want to both be reducing debt and investing in growth, right? This is not an either/or conversation. And I think what’s important for everybody to understand is that we’re committed to reducing our debt level over time as we grow the business because we believe this is the optimum path to generating strong shareholder returns. In terms of monetization, I think before I talk about that, I just want to speak to the fact that monetization can take place in a variety of forms.

It’s not always an all-out sale of a business or an entity. And what I can say about that is, because of the way the company was built through a series of mergers and acquisitions, there are components that were brought into the entity that are not necessarily strategic or core. And we’re not going to outline or speak what they are or to them directly today, but I can tell you that they are small in size and they wouldn’t necessarily meet the long-term growth profile of the company.

Anthony Paolone: Okay. Thanks for that. And then just my second question, Neil, I think you mentioned coming in at or a little bit above $130 million cost-saving target for ’23, and you felt like that is kind of where you’d end up and felt good about that. But just wondering, if the business stays challenged into ’24 or maybe goes longer before we see much recovery, do you have other levers you could pull there? Are there other cost saves that could be contemplated?

Neil Johnston: Tony, at this point, we feel like the $130 million that we’re targeting is the appropriate level to not only ensure our margins in this year 2023 but also through 2024 in terms of what we are forecasting, and that contemplates a marked recession. We are always focused on efficiencies. So there are always additional levers that we can pull. We always are improving the operating ability of the business. I think the easiest way to think about it is, in that $130 million of savings, about 20% are temporary costs which we took out of the business in 2023, things like travel, marketing, those types of costs. If we did see the market continue to run at the same sort of levels all the way through to next year, then obviously, we would hold back on allowing any of those costs to come back into the business. And then that cost savings on a permanent basis would increase from about $130 million to about $160 million for the year.

Operator: The next question is from Alex Kramm with UBS. Please go ahead.

Alex Kramm: Yes. Hey, good evening, everyone. Maybe starting first on the PM/FM business, maybe it’s a little nitty-gritty here. But, I know you had the contract change, but if I look at your updated outlook, Neil, I don’t think you mentioned it, but I think the low single-digit expectation is a downgrade to your prior expectation from, I think, low to mid. So just curious what else has changed in that business. Is churn increasing? Are the sales cycles just longer? So maybe just talk about that business because it seems like you lowered expectations there slightly.