Q1 2024 Cushman & Wakefield PLC Earnings Call

Participants

Megan McGrath; Senior Vice President, Investor Relations; Cushman & Wakefield International Ltd

Michelle MacKay; CEO; Cushman & Wakefield International Ltd

Neil Johnston; Chief Financial Officer, Executive Vice President; Cushman & Wakefield International Ltd

Anthony Paolone; Analyst; JPMorgan

Alex Kramm; Analyst; UBS

Presentation

Operator

Good day and welcome to the Cushman & Wakefield's first-quarter 2024 earnings conference call. (Operator Instructions)
Please note this event is being recorded. And I would now like to turn 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 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, and 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.

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 that 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. And 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, and our business.
Because overall, we view the Fed rate cuts as an accelerator of certain parts of the business, but not the only avenue for transactional improvement. 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. And 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 supporting the company in interacting with our clients.
With that, I'll turn the call over to Neil.

Neil Johnston

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.
[Beginnings Brokerage], our leasing business, continued to experience stabilizing trends we reported in the fourth quarter, with 5% revenue growth. The growth from Q1 was again global in nature, with Americas leasing up 1%, and new leasing up 30%, and APAC leasing up 10%.
In the Americas, we saw particular strength in mid-sized 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 a 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 over 10% in the quarter.
In APAC, India continues to see healthy growth supported by durable mega trends 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. America's 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 [that as] spreads narrowed. In EMEA, buyer and seller expectations on pricing and values are we aligning, particularly in prime assets in better locations, and in APAC, office and industrial sales was strong, most notably in Australia, 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 flattish prior year, adjusting for the previously discussed contract change. In the Americas, services revenue declined 5%, or 1% excluding contract change. And in EMEA services, revenues declined 9%, as we continued to reposition our service 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. A first quarter use of cash is in line with historical working capital trends, including the annual payment of US 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 one month [term so far] plus 400, to one month [term so far] plus 375. 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 high incentive comp, as we focus on positioning the company for market growth. However, we did 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.

Michelle MacKay

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

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions)
Anthony Paolone, JPMorgan.

Anthony Paolone

Thanks. Good afternoon. First question is just looking at the first quarter margin, I know it's a seasonally slow quarter, and 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 of the businesses as hit the brackets you put around them?

Neil Johnston

Certainly, I think the reason we gave guidance on the first quarter was because we did have the cost program that rolled into 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 is essentially half driven by those cost savings, and the other half driven by the improvement in the leasing, the flow through of leasing.
As we look now, out 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 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 the growth in leasing, what's happening in capital markets, services, and so that is sort of how to frame that margins for the full year.

Anthony Paolone

Okay. So the first quarter seemed like it had a bit more than that, and it so, we basically kind of keep that in mind? Is that kind of the take away?

Neil Johnston

That's exactly right. Yes. It will all depend on the recovery.

Anthony Paolone

Okay. And then my second question is just in the services segment.
Yes, 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 have yet to win, versus where you put a high degree of visibility, in that you're just waiting for things to commence. And I guess along the same lines since you've been reworking that segment, do you think you'll make more EBITDA in '24 than you did in '23?

Michelle MacKay

Hi Tony, it's Michelle. Just to start off with services, I'm really excited about our positioning in services. And 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, and just to give you a little color, on where we're winning, what's happening. We're beginning to win business in marquee deals when it's important to the clients 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 then for the smaller clients, to your point around looks more speculative, those can transact more quickly in year.
And honestly, those are great deals. Those are critical clients to us, they're higher margin typically, and we treat them the way that the way that we do by bringing in our best practices from the entire Cushman brand to their experience.
So 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.

Anthony Paolone

Thank you.

Operator

Michael Griffin, Citi.

Great, thanks. I wanted to talk first about the leasing business, particularly on office. It seems like from what you're seeing on the ground, there, it's 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 products, or was that increase indicative of all quality of office being leased, including B and C commodity products?

Michelle MacKay

So I would say that in Q4 of last year, it was largely larger leases being cut, and higher-quality buildings. Now we're starting to see a mix in the combination of those same leases, but we're starting to see a mix-in 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 headcount, kind of in anticipation of that?

Neil Johnston

So Michael, you raise a great point, and that's exactly right. All of our -- or primarily, or the majority -- of our cost savings, are run rate savings that were incurred as we rolled out our cost savings program last year. Essentially, we have not announced any new cost savings programs for 2024.
Of course, we'll remain nimble. We always are looking for ways to become more efficient. But essentially, the $30 million of cost savings that I referred to is primarily the result of the actions we took last year. As we look to the back half of the year, we are very focused on growth, and making sure that we are well-positioned on both on the advisory side, and then also on the services side as we grow that is this in the back half of the year.

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

Neil Johnston

Thanks, Michael.

Operator

Alex Kramm, UBS.

Alex Kramm

Yes, hey, good evening, everyone. Just quickly, I guess, on the capital markets business, I mean, obviously good stability in the first quarter. Great to see.
But your tone on the second quarter, obviously a little bit more choppy. So given that seasonally, the second quarter is usually better, do you feel like this this year, could look a little bit worse maybe than the first quarter? Again, 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 just wanted to make sure I heard that right, or if you do think there's a higher level of uncertainty from year end, if you're reacting to that at all.

Michelle MacKay

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 volatility there.
But as you know, that moved to swing to the positive on a couple of key pieces of data, or as the market digests 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.

Alex Kramm

Okay. Fair enough. And then maybe very big picture just since we're here, you obviously, for the last few quarters, have talked about your strategic review and I think you've looked at all of the different kind of businesses.
So I know that stuff never gets finished, but do you feel like you've essentially completed the the biggest area of focus, and anything new that you can share some of the review, or is that still a still ongoing?

Michelle MacKay

No, I think that we're -- to your point -- it's always ongoing. But I think the first quarter performance shows that we're capable of executing on those priorities, and we did what we said we would do, and we're going to continue to do that, and be really intentional and opportunistic with it.
So just to reiterate, to strengthen the core, we reduced leverage and interest costs by repricing the term loan and paying down some tax and debt. We continue to operate with rigor, even though revenue is flat, we improved margin, and leasing is growing.
We're prioritizing better services contracts, and then a couple of references to walking away from less accretive deals. And that's an active way of managing the strategy. And you're going to continue to see us, no matter what the backdrop is here, in terms of the economy, take advantage of every opportunity.
So we're highly activated. I would say we're working differently than we have historically at a pace, unlike what the firm has seen before, with an awareness of exactly where we need to be focused at all times.

Alex Kramm

Okay. Very good. Thank you.

Operator

Ronald Kamdem, Morgan Stanley.

Hey. Just two 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, you know, 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 is that as one-timers and versus something that's sustainable going forward?

Neil Johnston

Yes. Great question, Ron. Look, we've been extremely focused on free cash flow, and it's starting to really pay off. And we started to see it, as you say, in the results.
You're absolutely right. This quarter this year versus this quarter a year ago, it was [95 and it goes] better. So great performance, primarily driven by working capital.
And so, as we look at that performance, I would say probably about 50% of it is timing and 50% of it is real actions that we took. So we were able, for example, in accounts receivable, to reduce our DSO from around 61 days to 59 days, or 58 days, actually.
And so we saw three days of improvement in the quarter. And so feel very good about about free cash flow as we look. We have not given full guidance for the year on free cash flow, but certainly feel like the start to the year has been a good one.

Great. And then my second one was just, I remember we talked about deleveraging and the potential for asset sales, and so forth. Any sort of update there? Is that still a plan? How has that gone? Thanks.

Michelle MacKay

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

Thanks so much.

Operator

Stephen Sheldon, William Blair.

Hi, you've got [Pat Mackley] on for Stephen today. Thanks for taking my questions. 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 here so on.

Neil Johnston

Sure. But as I think about it there are three 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 three, would have been flat for the quarter. Not where we want them to be, but certainly not declining [flatten,] and certainly get sort of the baseline.
And the second thing is, as you say, we are looking for accretive growth. This is more self-inflicted pain, this is 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 actually come back to us and said, actually, we would like for you to work. And so that is us looking at the portfolio and say we really, you know, we believe margins should improve in our service business.
And we've also seen that in Europe, we saw the services business in Europe was down. That's where we actually took a very hard look at our project management business and said, you know what, the contracts are not making money, and that's a short-term business. So it's much easier to work out more quickly. And we said if it's not making money, we'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 about capital allocation and reallocation. And then the third thing in services is very focused on our GOS global platform. We did have a couple of contract moves which we've seen the tail end of that early on in this year.
But as you look at the pipeline, there, we've seen some very nice [frame], and we've had some nice global wins in that business. So we are very excited about GOS as we look forward.

Okay, great. Thanks, Neil. 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?

Michelle MacKay

Sure. I mean, we're very focused on the allocation of capital, but we need to be making decisions, to your point, all the time about deleveraging and growth, and we're going to be doing both, right?
And 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 that best position to take advantage of the recovery.

Understood. Thanks, Michelle. Thanks, Neil.

Operator

(Operator Instructions)
Patrick O'Shaughnessy, Raymond James.

Hey, good afternoon. So obviously, rates have moved higher, but I think in concert with that economic growth, it 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 in your services businesses?

Michelle MacKay

Yes, I think that it's interesting because we're having this conversation, people who are really focused on the Fed cuts conversation. And even though that's obviously important, solid GDP performance is very correlated to leasing decisions, and decisions in our servicing businesses.
So if one prong is not firing, meaning if the Fed is not cutting, we do have the solid GDP prong, and what we're looking forward to is over the course of the next year or two, those two firing at the same time. And when they're more connected, you'll start to see much higher growth rates in leasing and capital markets together.

Got it. I appreciate that. And then I want to touch on project management. What's your outlook for that as 2024 progresses? And does improving leasing activity foreshadow improving project management down the road?

Neil Johnston

Yes, I think that's exactly right. We certainly will see an improvement there as adhesion starts picking up, and that should be some wind in our sails as we move to the back half of the year.

Perfect. Thank you.

Operator

Alex Kramm, UBS.

Alex Kramm

Yes, hey. Hello again. Just a quick follow up on my earlier capital markets question. I mean, I totally hear you on 2Q may be a little bit softer, but then still confident in the recovery. So maybe speak to that and maybe I've missed it. Can you maybe talk about the pipeline a little bit, how that's changed over the last quarter or so? To just get a sense for how the business is building for when we have a better environment? Thanks.

Michelle MacKay

Yes, I mean, the business continues to build, and 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. So I would say anything that's been in process is closing.
I think anything 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 four weeks long before the market resets, and the tone resets, and people really start to move forward again.

Alex Kramm

Okay. Anything in terms of quantitative? Some of your peers sometimes talk about the growth in the pipeline, any of that you can share with us, or not ready to?

Neil Johnston

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 all of our businesses we bought in the second quarter. It's still early in the second quarter, so really it's difficult to know exactly where it's going to be. But certainly, as Michelle said, pipelines have been good, and sequentially we feel good.

Alex Kramm

Fair enough. I'll follow up. Thanks.

Neil Johnston

Great. Thanks, Alex.

Operator

(Operator Instructions)
This concludes our question and answer session. I would like to turn the conference back over to Michelle McKay for any closing remarks.

Michelle MacKay

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.

Operator

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