Colliers International Group Inc (CIGI) 2016 Q1 法說會逐字稿

Welcome to the first-quarter investors conference call. Today's call is being recorded.

Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance, or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements are contained in the Company's annual information form as filed with the Canadian securities administrators and in the Company's annual report on Form 40-F as filed with the US Securities and Exchange Commission.

As a reminder, today's call is being recorded. Today is April 26, 2016.

And at this time, for opening remarks and introductions, I would like to turn the call over to chairman and Chief Executive Officer, Mr. Jay Hennick. Please go ahead sir.

Thank you operator. I apologize to everybody for the logistical delay here, but it was unavoidable. Good morning and thanks for joining us today for our first-quarter conference call. I'm Jay Hennick, Chairman and Chief Executive Officer. With me today is John Friedrichsen, our Chief Financial Officer. This conference call is being webcast and is available on the Investors Relations section of our website. A presentation slide deck is also available to accompany today's call.

Earlier today, Colliers International reported strong financial results for the seasonally slower first quarter. Revenues were $376 million, up 12% on a reported currency basis. EBITDA was $22 million, up 52%, and earnings per share came in at $0.19, up significantly versus the prior year. John will have more to say about our results in just a few minutes.

Operationally, revenue pipelines continue to reflect considerable activity across all service lines with generally stable conditions in most major markets with the exception of the UK as a result of the looming EU referendum.

We continue to focus on diversifying our revenue streams by service and by geography. During the quarter, we experienced strong internal growth, particularly in our outsourcing and advisory segment, which now represents about 43% of our total revenues.

Geographically, just over 50% of our revenue streams are generated in the Americas with the balance split between our European and Asia-Pacific regions on an annualized basis. Having a well-balanced and diversified business not only strengthens our global platform, but also provides better predictability as we continue to grow in the years ahead.

During the quarter, we completed a total of four acquisitions, significantly expanding our presence again in Florida, and strengthening operations in the UK, the Netherlands, and in Canada. Colliers International is one of a very few companies with a truly global brand and platform operating in an industry with massive growth potential. The market for commercial real estate services is greater than $150 billion annually, and the top five players have less than a 20% market share. Being one of the top-tier players in a rapidly growing industry provides us with countless consolidation opportunities on a global basis and for many years to come.

Our plan, as you know, is to double our size by 2020. We'll do that by growing our business internally at about 5% and adding about 10% of our prior year's EBITDA through acquisition on an average over the next five years. Part of this of course includes selective and strategic recruiting of highly capable and aspiring professionals who are aligned with our enterprising culture, which is the essence of Colliers.

Whether internal growth or acquisition, we always remain disciplined in our approach to create value for our shareholders. And if we accomplish our plan over the next five years as we have done in the past, you can put whatever valuation multiple on our shares you want at that time, and it will translate into significant incremental returns for our shareholders.

And now let me turn things over to John for a more detailed overview of our financial results. Then we will open things up for questions. John?

Thank you Jay. As announced in our press release earlier this morning and highlighted by Jay in his opening remarks, Colliers International Group reported strong consolidated financial results for our seasonally slow first quarter with solid contributions from most of our operations across our global platform. I will address our overall consolidated financial results for the quarter, our operating results by reporting region, as well as our capital usage and financial position, all of which relate to continuing operations.

So for our first quarter of fiscal 2016, consolidated revenues increased to $376 million, up 17% in local currencies from $336 million in the first quarter of 2015 with 7% of our growth generated internally and the balance from acquisitions. Total revenue growth for the quarter in our US dollar reporting currency was 12%. Adjusted EBITDA for the quarter totaled $22.2 million, up $14.6 million in Q1 last year, an increase of 60% in local currencies, and 52% in our US dollar reporting currency, while our margins grew to 5.9% compared to 4.3% last year. And our adjusted earnings per share came in at $0.19 compared to $0.10 per share reported last year in our first quarter, up 90% in US dollar terms, with FX negatively impacting our adjusted earnings per share in the quarter by $0.02.

Our adjustments to GAAP EPS in arriving to adjusted EPS are outlined in our press release issued earlier this morning and are composed primarily of non-cash charges that we view as largely unrelated to our operating results and are consistent with those presented historically.

Turning to our operating results, our $376 million of revenue for the quarter was comprised of $103 million in sales brokerage, up 10% in local currencies, with lease brokerage coming in at $113 million, up 11% in local currencies, over Q1 last year. Meanwhile, revenue from outsourcing and advisory services totaled $160 million, up 26% in local currencies with strong internal growth in workplace solutions, project management and property management. The more recurring revenues generated by our outsourcing and advisory services segment represented 42% of our overall revenues in the quarter, an all-time high share of total revenues, and up from 39% in Q1 of 2015.

Geographically, 56% of our revenues and 87% of our adjusted EBITDA was generated in the Americas in our first quarter with seasonal factors impacting the distribution in EBITDA. As the year progresses, we expect the Americas' share of revenues and adjusted EBITDA to rebalance for the percentage contributed for the full year of 2015, about 50% of total revenues and 43% of adjusted EBITDA with the balance split about equally between EMEA and Asia-Pac.

In the first quarter, revenues in the Americas totaled $211 million, up 18% in local currencies, with 4% internal growth and the balance from acquisitions. Lease brokerage revenues were up 8% in local currency versus last year, sales brokerage revenues up 19% versus last year, and outsourcing and advisory revenues up 32% in local currency, led by strong growth in product management, property management and consulting and appraisal in both US and Canada. Adjusted EBITDA came in at $21.6 million versus $13.3 million last year at a margin of 10.3% versus 7.3% last year.

Turning to EMEA, revenues of $99 million in the quarter increased 26% in local currencies with 19% internal growth and 7% from acquisitions. Lease brokerage revenues were up 9% over last year, while sales brokerage was up 26% and both service lines led by growth in Germany and Central and Eastern Europe. Meanwhile, revenues from outsourcing and advisory services increased 32% led by strong growth in our workplace solutions, mainly in France, and property management in the UK. Adjusted EBITDA was a loss of $600,000 compared to breakeven in Q1 of last year.

And finally, in our Asia-Pacific region, revenues came in at $66 million, up 2% in local currencies, but down 5% in US dollar terms. Strong growth in lease brokerage was offset by a decline in sales brokerage revenues with the latter decline primarily in Australia, but largely timing related. Outsourcing and advisory services -- or outsourcing and advisory revenues were up 7% in local currencies, primarily due to increases in project property management revenues in Australia and Asia. Adjusted EBITDA was $3.3 million, down from $5.9 million last year, primarily on account of revenue mix with our margin coming in at 4.9% versus 8.4% last year.

Moving onto our capital deployment balance sheet, in our inaugural quarter of 2016, capital expenditures totaled $4.2 million, up from $1.6 million last year in the first quarter and at a level in line with our estimated range of CapEx spend for the year, which we expect to be between $30 million and $33 million. We invested $36.4 million in acquisition activities during the quarter, up from only $4 million in Q1 of last year. And we improved our seasonally weak first-quarter cash usage from continuing operations to $43.1 million, a significant improvement from our cash usage in continuing operations of $94.8 million in Q1 of last year.

Our net debt position stood at $241 million at the end of the quarter compared to $145 million at year-end, which is typically the seasonal low point in terms of our debt level. And our leverage ratio expressed in net debt to adjusted EBITDA stood at 1.2 times, well below our expected level of about 1.5 times at the end of our seasonally weakest quarter of the year, despite the robust activity around acquisitions to start off 2016.

In terms of our financial capacity, cash on hand and committed availability under our revolver, we had over $250 million of liquidity at quarter end, a level ample to fund operations and other capital investments, including acquisitions needed to execute our growth strategy.

Looking across our global operations, our pipelines in most markets continue to reflect solid commercial real estate activity, comparing favorably to levels this time last year with some continuing market challenges in parts of Latin America, certain parts of Asia and, as previously mentioned, some degree of caution in the EMEA, primarily the UK, related to the upcoming referendum on the UK's continuance as a member of the EU. We continue to believe that low interest rates, accessible financing and generally stable supply and demand for commercial real estate in most markets bodes well for continued solid activity in sales, leasing, and other commercial real estate services for the balance of 2016.

That concludes our prepared remarks. I would now like to ask our operator to open up the call to questions. Operator?

(Operator Instructions). David Gold, Sidoti.

Hi, good morning. Terrific showing. Just a couple of quick questions really specific to Asia-Pacific, which is the only spot that was maybe a little slower than we had thought. Just broadly there, what -- the question really is what can you do other than just waiting at this point for the environment to come back? Are there any other steps that one can take to accelerate things?

First of all, it is first quarter, and I want to remind everybody that, seasonally, it is a lull quarter, so I wouldn't read too much into the results for the first quarter. I don't think it's indicative for the year what activity levels in both Asia and then Australia and New Zealand. Market conditions are solid and we expect these businesses to contribute in line with what they have historically contributed to the entire business. Timing, as I mentioned, around sales brokerage, particularly in Australia, but that would be the only thing that would be noteworthy with respect to the reported results and our expectations for the balance of the year in that region.

Perfect.

The only thing I would add to that, David, is that, over the past 12 months, we have made a concerted effort to enhance our management team in Asia, beginning with the CEO, who has now been in the seat just under a year, but also new leads in places like Hong Kong and Singapore, both long time coming and both exceptional executives, one of which was with us historically and has come back much more experienced in her role in Singapore. So, we are quite excited about reshaping the next couple of years in Asia, and that's building on a base that has been pretty good. So you know, it is the first quarter, as John said, but there's been a lot of activity in Asia, also some focus on strategic investment there in a couple of different areas. So, we need some time to execute on some of these things, and put some points on the board, so to speak. But Asia is in hand. We are comfortable with what we have there, and you will hopefully continue to see some changes in the months and the year to come.

Perfect. Thanks. Just one other, Jay. I think about the current environment with a little bit of uncertainty, given the potential for interest rate increases, and no different probably than a year ago. But how are we thinking about acquisitions at this point, globally?

We are a little different than most. We look for uncertainty to capitalize, and (multiple speakers) that for many years. So, in some respects, in a strange way, we hope for a little bit more uncertainty because it gives us an opportunity to capitalize on some potential targets that we are already talking to, but may have an expectation of value that is slightly more than we think is prudent to pay, or it may be in a region where we need to be in. And we need to pull the trigger but we don't want to do it in a -- in a -- acting too quickly as a result.

So the market conditions I think are quite stable around the horn. John mentioned a couple of weaker spots. But rates are low. Debt capital is available. Real estate is a growing asset from the standpoint of institutions and sovereigns who want to own real estate. All of that continues to feed the marketplace. And although we are finding an abundance of acquisition opportunities, I think we'd find a few more or will be able to complete a few more if there was a little bit less stability in the marketplace. I don't know if I answered your question, but I tried to give you a sense of how we think of these things.

That's perfect. Thank you. Thank you both.

Stephen MacLeod, BMO Capital.

Thank you. Good morning. I just wanted to circle in on the EMEA and Asia-Pacific markets. You mentioned you had some revenue mix impacts in the quarter. And I'm just wondering if you can go into a bit more detail as to where that came from and whether it's expected to continue or is it kind of one-time in nature on a relative year-over-year basis?

Revenue mix, I guess a couple of points. Obviously, in Europe, a significant increase in our outsourcing and advisory business, which tends to carry a lower margin just because of the nature of the business and some of the flow-through revenue. So that is something we've spoken about previously. And to the extent that the growth in that business is outsized relative to our other revenue sources, I'm not saying it's going to be, but that would have an impact on margins. But notwithstanding that, our margins we are very comfortable with in EMEA and are going to continue to drive growth there and do what we can to enhance.

With respect to the Asia-Pacific, I mean we talked a little bit about mix and timing, and that really relates primarily to our Australia business where we've got some services we provide around residential development. And that business was a little bit slower in the first quarter. We could see an impact of that on the balance of the year, but we fully expect that any shortfall there will be offset by increased activity actually on the more traditional commercial broker side. So don't expect there to be anything meaningful there in terms of continuing impact.

Okay, great. And then just drilling down on the US, on the Americas I guess, you saw very good growth in the outsourcing and advisory business. Is that coming from recent acquisitions that you've done, or is that just more selling of more demand for that service? I'm trying to figure out what the drivers are of that, particularly in the Americas.

Yes, it's a combination. We've got an existing business which is principally located in Canada, operates in Canada, which has been very, very strong and just growing internally. And then you will recall we did an acquisition centered in the Northeast US, and that's contributed very well and performed better than expectations.

Great. And then you also saw -- I was surprised to see that coupled with an increase in margins in the Americas, considering the O&A business is a little bit lower margin. So are you seeing improvements in the cost base, or are you just leveraging kind of that fixed cost -- your fixed cost structure at the moment to get (multiple speakers)?

More are leveraging the fixed cost structure. Obviously, a lot of investment has come into this North American business, the US in particular, and we are getting some benefits from that generating profitability to cover some of those fixed costs.

Okay. That's great. And then just one final sort of housekeeping question on the corporate costs. So they were down year-over-year. Is that, what we saw in Q1, kind of a good run rate to expect for the rest of the year, or do you expect this to tick higher as the year progresses?

I think our corporate costs will increase as we go beyond first quarter. Typically, the pattern has been that variable compensation will, to the extent we grow the business, will result in an increase in costs as we get towards the end of the year and have more visibility around where we expect the year to be. So we will see some increased costs in that category. That would be the primary driver around cost behavior or costs.

Okay. That's great. Thank you very much.

Brandon Dobell, William Blair.

Good morning guys. In the release, and you talked a little bit about it in your remarks, I think, Jay, call it -- let's call it the major markets, or larger markets, seems stable. So I guess the presumption would be you've got nonmajor markets that are providing a majority of the growth, and it sounds like kind of across all service lines. Maybe a little more color there in terms of your handful of large markets, what you're seeing there in the service lines versus small markets, and if the pipeline looks or feels any different heading out of the first quarter in those, kind of if you split it between large and not large, I guess.

So, when I look at -- just to clarify, when I talked about stable markets, I'm thinking about the market itself, real estate transactions taking place in major markets. We saw nice growth in our major markets, meaning we believe we are taking share from our competitors in those major markets. But the market itself is pretty stable.

And then when we look at our pipelines relative to the prior year, we are slightly better pretty much across the board, which is consistent with still growing in major markets. So we are seeing a lot of that, but we are also seeing growth in secondary markets, principally in the United States, more so I would say, I'm looking at John, I think, market by market, secondary market by market in the US seem to be doing better than secondary markets in the EMEA and Asia. So although we are experiencing secondary market growth, it seems to be US-related right now, meaning that there is more capital being invested in real estate in the United States, primarily I think in part foreign capital, and that's driving some of the activity in the secondary market. So hopefully that gives you some more color.

Yes, yes, that's helpful. And if you guys -- I'm sure you've got metrics, or I don't know, targets for how some of the more recurring parts of the business are driving transactional revenue or vice versa, let's call it cross-sell/upsell, whatever term you want to use, how do we think about the impact of that this year? And how is that effort -- are those efforts tracking relative to your expectations?

I'll try that, John, you may have some insight on that. We have, as you can see from the numbers, spent a lot of time focusing on changing the mix from transactional to non-transactional for some of the reasons that you commented on and several more that we think help our overall platform. Cross-selling those services I would say we've really just scratched the surface, because some of those more recurring services are newer, for example the project management businesses that John talked about, workplace solutions in France, all of which create opportunity. But I would say we really have not capitalized on them in any major way.

But one of the things that is part of that segment for us is property management, which has grown beautifully and quietly within that category over the past couple of years. This year, again, we are seeing great growth, enhanced profitability, and increased share. And that is an area where we have capitalized on from the standpoint of cross-selling because it's a more mature category for us. It's something that our offices are consistently looking for in terms of encouraging clients to take a look at existing real estate that they might have. It might mean there might be an opportunity to refinance that real estate, there might be an opportunity to enhance the value of it in some way, and there may be an opportunity to sell it because the market is right for a sale on that particular asset.

So those three areas are areas that we are focusing on. It is translating into increased investment sales. As you can see, that number is up nicely this year for us. It's increased -- it's impacting leasing, but it's also impacting some of the other things I just talked about.

John, did you -- you were (multiple speakers)

The only other thing I would say is, look, the whole cross-selling, whether it's service line or by region, is a key focus of the Company. It is one of our top five metrics that gets looked at on a monthly basis and sort of revisited quarterly on dashboards that we use to operate the business. So it's well communicated within the organization. We do have -- our objective is to drive that growth as we expand our platform. Obviously, the opportunity is significant. I still think that we've only really begun.

Okay. Maybe John, sticking with you for a second, given how margins have progressed so far this year, and let's leave the corporate expenses out of it for a second, but just regional margins, how do we think about the back half of the year progressing? Is there anything that is going to I guess change the trend dramatically, or is there a step up or step down in spending in the back half of the year that we need to think about relative to last year's second-half margins?

We had a strong finish last year on a margin basis. And I won't get into anything specific. We are not obviously providing guidance here, but we did finish the year strong last year in terms of market impact. We feel very good about the business and where we are heading this year. I think we set out expectations as part of our Q4 call for 2016 which would see margins in line with where our margins were last year. We still largely believe that to be the case.

What we have seen since then is somewhat of a moderation around FX. And given the significant amount of revenue and ultimately EBITDA we generate outside of the US, a continuing weakening of the US dollar, which we've seen so far this year, could possibly impact the markets.

Okay, got it. Thanks guys.

Frederic Bastien, Raymond James.

Thank you. Hi guys. Based on your last response, do feel better about 2016 than you did two months ago?

I would say we feel better about it, yes, but I think it is going to be -- it's going to be probably in the as good kind of range as last year. And for us, it's gaining share, enhancing the acquisition activities we've got planned. It's perhaps getting the benefit of currency changes. Last year, we were significantly impacted on the downside from currency changes, so this could be the year where we are not as impacted. So, I would say the same feel as last year now is what our prediction would be on base business. Sort of high single digits internal growth would be great, acquisitions approaching 10%, plus the other things I talked about. So generally a good growth year for the Company.

Perfect. Can we get a bit more color on this WPM Groep acquisition that you completed in February? How much revenue and margin should we expect from it?

It's revenue, euro, about EUR10 million, EUR12 million of revenue, margins in the EUR10-ish million range. We believe that there are -- we are integrating that with our existing management platform in the Netherlands together, together with our existing management and the rest of our business in the Netherlands, we are now number two or three in the country. And we believe that there is lots of opportunity to leverage the managed portfolio into an asset light potential business line for us as well as obviously incremental revenue streams from leasing and other things that we like, project management, that we might do for those properties.

Okay, thanks. My last question, I guess you mentioned, with respect to M&A, the uncertainty in the market is actually an environment that you actually like in terms of your approach to M&A. Has your pipeline changed materially as well if you compare it from where it was maybe at the beginning of the year?

That's a good question. I would say yes. We've got a very, very robust pipeline. I would say that it's a business as usual kind of pipeline for us, but there is a lot of activity, and it's well-balanced on a global basis, which makes it better for us because the integration aspect can be better managed than focusing entirely in one area or another.

And I'm very proud of the evolution of our management teams in each of our regions because they've done acquisitions now for a number of years, and they've done them around the world. So, the process of finding, negotiating, diligencing, and then executing on the integration of acquisitions is something that I think is one of the parts of our secret sauce here at Colliers and it will continue to pay huge dividends in the years to come.

Great. Thank you.

Stephanie Price, CIBC.

Good morning. Just sticking with the acquisition pipeline, can you talk a bit about how you're filtering that pipeline and what regions and business lines are most attractive to you right now?

I won't really talk about regions.

Fair enough.

I won't really talk about regions. But you know, we, unlike some of our peers, we have -- we now feel that we have a well-balanced global platform that's now completed whereas, in past years, it was much of a build story for us. But although we have sort of boots on the ground in virtually every market we would like to be in with one or two exceptions, we do have service line gaps. And it's a constant let's call it challenge/opportunity for us to find opportunities, targets, that fit in and help to strengthen our business in different geographic regions. So, the example of property management in the Netherlands, our platform was 30% of the targets platform. Now we have a very, very big platform.

Same opportunities in Australia.

I would say, in Asia, two or three of our property management platforms are well smaller than they should be and seeking other opportunities to grow those again are additional opportunities for us.

As John talked about project management in North America, we do a great job in -- sorry, in the US, we do a great job in Canada. We do a great job in Western Europe, primarily because of the acquisition we did in France a year and a half ago. But those are all good opportunities for us to expand our business, diversify our revenue streams, create more recurring and long-term revenue streams around C-suite real estate services. And if we are in front of our clients providing exceptional advice at times when they are spending significant capital, it puts us in the catbird seat to help them with other types of transactions. So there's just a lot going on in a lot of different places, and that's one of the great benefits that I try and articulate when I talk about Colliers and the opportunities in the years to come. The consolidation opportunities in this industry are just vast.

And when you think about the -- you mentioned property management -- the revenue coming from the outsourcing and advisory services, is there a target that you are working towards? Is that part of recurring revenue as a portion of your total total revenue?

Recurring revenue in this business is interesting because 43% of our revenue would be coming from out sourcing and advisories in a good number. Some of our peers would include things like leasing, which is in many ways a recurring item. It occurs every five years, or 10 years, depending upon how often you renew the lease.

If you added leasing to our outsourcing and advisory, we have 75%, 80% of our business is "recurring" or repeat. And there's a lot of justification for that because, in order to continue to serve clients, you must maintain a relationship, when you're doing leasing work for a client that we are always taking on additional space, getting rid of some space. And so there's no target per se in mind. It's as much as we can get. But we are feeling today that we are well-balanced in outsourcing and advisory, and leasing is becoming an increasingly more important part of our business for obvious reasons.

Great. Thank you very much.

Anthony Zicha, Montreal -- Scotiabank Montreal.

We are in the Zs, right, so the last one on the call. So pretty much all of the questions have been asked, but just I'd like to know if you could give us some color on the competitive landscape in North America and EMEA. You're doing a great job in winning market share, but what are the competitors doing?

It's very competitive in North America, probably more so in North America than anywhere else. You know, we have two exceptional peers in CB and Jones Lang. They do a great job. They work hard. They do the right things. We try to follow them in terms of ideas, and learn where we can. And then there is two or three others that are in the game. Obviously Cushman & Wakefield is in the process of doing a very large three-way merger which I think is going to take still time for it to work its way through. And then there's two or three other smaller players that don't really have a global platform, are more North American-focused, and will pretty much stay in North America. It would be very, very difficult for them to go anywhere else. So there's really only four names that matter on a global basis, and Colliers being one of them. And it is very competitive. It's a competitive market for market, and everybody is looking to fill gaps and everybody is looking to recruit key professionals that help take their business to the next level. So, it is a very dynamic industry right now.

Okay. And just a bit of color on the UK to give us some better understanding with the Brit exit or potential exit. If it is successful, if it goes through, how would it impact your business? What would happen to the marketplace?

I think, Anthony, nobody has an answer to that question, and I'm not going to offer one up. All I would say is that if the unexpected I think at this point was to happen and the UK decided to go on its own, make no mistake about it, there would be a day after and everybody would wake up and then figure out what to do. Clearly, there would be a lot of work required to ensure that the appropriate trade pacts are put in place, which would be of course beneficial to everybody else in Europe as well as the UK. So, that would be a process to work through over time.

At the end of the day, I think the UK is still looked at as a very significant and robust economy in and of itself, a key part of Europe. And whether or not there's a formal arrangement or not, who knows. I think, at this point, the polls would suggest that it's probably -- (technical difficulty) still a possibility.

Our business is focused completely on opportunities that we see in this marketplace. Our UK business has grown substantially. That story has been well told since 2012 when we acquired that operation. We've done I think a tremendous job. Tony Horrell and his team have done a remarkable job in really reestablishing Colliers International as a major player in London and the rest of the UK. We have high hopes for growing both the London business and outside of London in the rest of the UK where there is significant spend and infrastructure and growth being -- taking place currently in the UK and our investments in whether it's Birmingham or Manchester, Leeds, in those markets present tremendous opportunity for us as well down the road. So whatever happens in the UK, I'm sure it will be very short-lived. And long-term, an exceptional place for us to have a business and to continue growing.

Thanks Jay.

Right. And we don't have any further questions in the queue at this time.

Thank you, ladies and gentlemen, for joining us on today's call, and we look forward to our next call after the June quarter. Thanks again and have a good day.

Ladies and gentlemen, this concludes the first-quarter investors conference call. Thank you for your participation and have a nice day.