Colliers International Group Inc (CIGI) 2017 Q2 法說會逐字稿

Welcome to the Second Quarter Year-end 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 forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Security and Administrators and the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded.

Today is Tuesday, August 1, 2017. At this time, for opening remarks and introductions, I would like to turn the call over to the Founder and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thanks for joining us for our second quarter conference call. I'm Jay Hennick, the Chairman and Chief Executive Officer. And with me today is John Friedrichsen, the Chief Financial Officer.

This morning -- this morning's conference call is being webcast and is available in the Investor Relations section of our website, and a presentation slide deck is also available there to accompany today's call.

Earlier today, Colliers International reported strong financial results for the second quarter, continuing the momentum from the first. Revenues were up 13%, 15% in local currency; adjusted EBITDA was up 13%, 16% in local currency; and adjusted earnings per share increased 21% over the prior year. Year-to-date revenues were up 13%, adjusted EBITDA up 19% and adjusted earnings per share, about 33% over the comparable period.

Before I turn things over to John for his financial report, I'd like to remind you that I intend to limit my prepared remarks so that we can leave as much time at the end of the call for questions.

During the quarter, we completed our fifth acquisition of the year, adding Colliers Minneapolis-St. Paul to further strengthen our operations in the U.S. Midwest. So far this year, we've added about $200 million in annualized revenues through acquisition, having spent about $80 million in the process.

As many of you know, we have a plan to double the size of our company by the year 2020. We're currently in the second year of the plan and so far, we're on track. However, achieving our 2020 plan will not be easy. We'll have to remain disciplined in our execution and be able to navigate changing economic and market conditions as we've done so well in the past. And we're highly motivated to succeed because unlike the others in the industry, this management team, including our high-quality professionals, own a significant equity stake in Colliers, creating perfect alignment with our shareholders.

Based on our results to date, acquisitions completed so far this year and our current pipelines, we're optimistic that 2017 will be another successful year for Colliers and another step forward in achieving our goal.

Now let me turn things over to John, and then we'll 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 second quarter of 2017. Solid contributions from our operations across our global platform.

My comments will be tailored to address our Q2 regional results, capital deployment and cash flow as well as our financial capacity and outlook for 2017 rather than reading the contents of our press release. But we'll follow the flow of the slides posted on our website that accompany our call.

Please note that my comments may reference non-GAAP measures such as adjusted EBITDA and adjusted EPS, both of which are outlined in our press release issued this morning as well as in the accompanying slide deck, and are composed primarily of noncash charges that we view as largely unrelated to our operating results for the quarter. References to revenue growth, including internal growth, are calculated based on local currency and also outlined in our press release issued this morning.

Our second quarter revenues of $544 million, up 15% over the prior year, were comprised of $172 million of Sales Brokerage, up 15%, while Lease Brokerage generated revenues of $174 million, up 16% over Q2 of 2016. But the most significant year-over-year change in the Americas due primarily to the impact of U.S. acquisitions completed in Northern California and Midwest earlier in the year.

Internal Brokerage revenues were down 1% versus a very strong comparative in Q2 2016. Meanwhile, revenues from Outsourcing & Advisory services totaled $198 million, up 13%, led by solid internal growth in consulting and appraisal and property management. More recurring revenues generated by our Outsourcing & Advisory services segment represented 36% of our overall revenues in the quarter compared to 37% in Q2 of 2016, a slight decrease in mix attributable to the impact of an increase in transaction revenues and acquisitions completed earlier this year.

Consolidated adjusted EBITDA was $59.6 million compared to $52.8 million last year, with our margin at 11% versus 10.9% in the prior year quarter.

Geographically, 59% of our revenues, 51% of our adjusted EBITDA, was generated in the Americas in our second quarter compared to 55% and 51%, respectively, last year, with the increase in the share of revenues bolstered by acquisitions completed in the U.S. earlier in the year.

Quarterly revenues in the Americas totaled $320 million, up 23% with 1% internal growth and the balance from acquisitions. Sales and lease brokerage revenue gains of 21% were driven by the impact of acquisitions in the U.S., offsetting a 3% internal decline in the region. Outsourcing & Advisory revenues were up 23% led by robust growth across all outsourcing and advisory service lines in the U.S. and Canada.

Adjusted EBITDA came in at $32.2 million versus $28.4 million last year, with margin declining slightly to 10.1% from 10.8% last year.

Turning to EMEA. Revenues of $119 million for the quarter increased 6% on flat internal growth. Sales Brokerage revenues were up 19% over last year, led by Spain and Central and Eastern Europe, along with a recently completed acquisition in Denmark.

Lease Brokerage revenues were up 10% led by strong leasing activity in Germany and France. Meanwhile, revenues from Outsourcing & Advisory services increased 1%, led by strong internal and acquisition-related growth in the U.K., offset by a 19% decline in our workplace solutions services in France, related to a strong comparative quarter of lower margin turnkey revenues. Adjusted EBITDA in the region was $17.3 million compared to $17.1 million last year at a 14.6% margin, same as last year.

And finally in our Asia Pacific region. Revenues came in at $105 million, up 3%. Solid growth in Outsourcing & Advisory was offset by a small decline in Sales Brokerage compared to a very strong Q2 2016. Lease Brokerage contributed a modest increase of 2%.

Activity in Q2 was the opposite of that experienced in Q2 last year, with strong activity across all service lines being driven by China and Hong Kong and our other Asian markets offsetting a modest decline in Australia and New Zealand revenues against a very strong comparative to Q2 of 2016. Adjusted EBITDA was $12.9 million, up from $10.5 million last year with our margin coming in at 12.3% versus 10.3% last year.

Moving to our capital deployment and balance sheet in our second quarter of 2017, capital expenditures totaled $13.8 million, up from $6.5 million last year, much of which was related to the relocation of our downtown Toronto operation from premises which we had occupied for over 25 years.

Our significant investment in our downtown Toronto workplace represents a strong commitment to creating a highly-collaborative and attractive workplace environment for our most important assets: our people. We expect to generate a strong return through enhanced productivity, offering superior employee and client collaborative space, and attracting the best talent in the greater Toronto area, North America's 4th largest commercial real estate market.

For the full year of 2017, we expect to continue to invest $40 million to $45 million of total CapEx across our operations.

Turning to acquisitions, we invested $27 million in acquisition activity during the quarter, most of which relates to our expansion in the U.S. Midwest compared to $14 million in Q2 of last year.

We generated strong operating cash flow for working capital investment of $50 million, up 12% over Q2 of last year, and $61 million after working capital in the most recently-completed quarter, more than twice the comparative amount in Q2 of 2016.

Our net debt position stood at just over $300 million at the end of the quarter compared to $243 million at the end of Q2 last year, with our leverage ratio, expressed in net debt to pro-forma adjusted EBITDA, at 1.3x compared to 1.2x at the end of the prior year quarter. While we continue to benefit from low interest rates, with an average interest rate on our debt outstanding of 3.1% in Q2, we fixed a portion of our floating interest rates on $100 million of our debt for 5 years at 3.4%, which contributed to the increase in our average interest rate from 2.5% the prior year quarter. While this represents a slightly higher rate of interest, it rebalances our mix, fixed versus floating rate on our debt, and was a prudent move given the expectations of a modest rise in market interest rates going forward.

In terms of our financial capacity, with cash on hand and committed availability under our revolver, we had over $350 million of liquidity at quarter end, a level ample to fund operations and our capital investments, including acquisitions under 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 at this time last year, but with improved visibility in the U.K. given the Brexit decision is now over a year old. With geopolitical risks in other major European markets moderating and generally stable, low growth economic conditions accompanied by a favorable interest rate and lending environment, the key elements are in place to support steady activity in sales, leasing and other commercial real estate services for the balance of 2017.

As a result, our outlook for the year remains largely unchanged, including our expectations for low double digit percentage growth in revenues in local currencies, adjusted EBITDA margin in line with 2016 and low double-digit percentage increase in adjusted earnings per share growth.

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

(Operator Instructions) Your first question is from the line of Frederic Bastien with Raymond James.

So, so far this year, your recent acquisitions have been contributing significantly more than what we had built into our forecast. So just wondering if there are any businesses that are exceeding the expectations you had set at the time of their acquisition?

I didn't understand that question. But John, if you did?

Yes, I think if I reiterate the question, it's around expectations with respect to the contribution of acquisitions. And what those acquisitions, which we completed a lot of them earlier in the year, are contributing. I would say that pretty much across the board our acquisitions are contributing at a level which we expected or slightly better. And that's certainly contributed to our growth in the first half of the year.

Yes. I would add to that, Fred, that so far this year, we've met our acquisition target for the full year based on the 5 acquisitions that we've completed so far. And as John said, we're very pleased with the results from each one of them. So to the extent that acquisitions are an important part of our long-term planning, obviously, we're very pleased with the results.

That's great, I appreciate that. And you also had exceeded my expectations earlier in the year. As we look ahead, just curious which regions and/or service lines you're most excited about on the M&A front?

Well, as I think through the pipeline of current deals that we're looking at, we continue to be focused more on the EMEA and the U.S. than Asia. Although we have one or two things in Asia that have some interest. So from our perspective -- and one of the great things about having a global brand and wide network is we have great management teams on the front lines. They help originate transactions to the extent that we don't from here. And most importantly, they are now quite experienced at integrating those acquisitions wherever they may be.

So we're focused primarily on those markets that are major markets where they'll be meaningful to the overall organization, originating transactions at one market, transferring them to another market. So generally speaking, the acquisition pipeline is good and I think there's not one that makes me more excited than the other. Acquisitions is just part of our long-term growth plan.

Okay, cool. And if I look at, I guess, the key markets that you're operating in right now in the U.S. and Europe, are there any cities in particular where you feel you're subscale and you would like to increase your presence?

Well, that's a very good question. My natural reaction is we're subscale everywhere. So there's an opportunity in every city to add a service, to add a line, to strengthen an existing service area. But I would say that if you wanted to drill a level deeper, I would say, although our business in France is a good business generating good profitability, when we bought it, we knew that we had to fill out our service transaction business more so than our project management workplace solutions business. So there's big opportunities there.

We did add a big -- a very big asset management business in France that's bear -- that's borne some nice fruit. We're very excited about some of the things that are happening in Germany. Bringing that business together is one that's really taken us to another level in Germany. We've opened up some smaller offices that would still be considered large markets within Germany. So those are 2 markets that are interesting. And we have -- we're optimistic, I guess, about some of the Nordic regions and what they could be doing for us longer term. So the EMEA is a very exciting spot for us.

Your next question is from Stephen MacLeod with BMO Capital Markets.

I just wanted to ask about the performance in 2 specific regions and maybe a little bit about the outlook?

Can you speak up a little, Steve?

Oh yes, sure. Just wanted to ask about 2 specific regions and the outlook. So in terms of the Americas, you noted that you saw a bit of a slowdown on the brokerage side. And I'm just wondering if you've seen that accelerate at all through the -- what you're seeing in Q3 so far and what you expect through the end of the year?

I think our pipelines reflect very good activity in the Americas. So I think we're looking at a bit of an uptick in terms of our internal growth expectations relative to where we've been so far this year.

Okay, that's helpful. And then in Europe, I would've expected margin performance to be a bit stronger just given the fact that your -- you had a weaker -- or you were comping a very strong outsourcing and advisory period from last year. Was there anything on the brokerage side that led to margins being not quite as strong as maybe you would've expected given the mix change?

It does come down to the comp from last year. And because we have a relatively broad coverage in multiple markets within EMEA, with somewhat different characteristics around transaction profitability, we were comping some very strong activity last year. It was a very good quarter for us on the brokerage side. It just came from different markets and at a slightly less margin than we experienced last year. So even though we had a better, more favorable mix because of a reduction in our lower margin turnkey revenues, the -- when you look at the entirety of the performance, we ended up with a flat margin. But we still, in terms of looking forward, have very solid pipelines and expect to have very profitable transaction-related revenues in the balance of 2017.

Okay. Okay, that's great. And then Jay, you mentioned in your prepared remarks just some -- you mentioned you have improved visibility in the U.K. Or John, maybe it was your comments. And I'm just wondering if you can give a little bit of color as to what you're seeing in the U.K. market kind of 1 year post the Brexit announcement?

I think what we're seeing is a pretty solid market, robust activity. There was a period last year, which you'll recall, and which was reflected in our results in Q3, where there was such an elevated level of uncertainty post Brexit. And a surprise at the results of that vote, that it was a lot of waiting and seeing. Which, as we finished the year last year, our activity level certainly increased. And we've seen pretty good activity through the first part of this year. That's market. And then we continue to build significant momentum and, throughout the U.K. particularly in London, around our existing business, both in the transaction and outsourcing advisory side, including the benefits of some smaller acquisitions that we'd done earlier in the year or late last year, have the impact this year. So I would say overall, quite positive. Notwithstanding the fact that there's lots of chatter about continuing Brexit discussions, which we expect are just going to be a fact of life over the next couple of years.

Your next question is from Brandon Dobell with William Blair.

Maybe one for John to start out with -- or maybe both, actually. As you guys think about the longer-term trajectory towards 2020, given what has been solid operating leverage in the first half of this year, how do we think about kind of a multi-year view on EBITDA margins, John? Especially, in light of I think of the comments in the slide that you guys expect it to remain consistent year-on-year yet first half was up. Just trying to reconcile those kind of puts and takes around margins for you guys.

A lot of it will depend on mix between outsourcing and advisory and where we are acquiring or generating revenues in the transaction side market-by-market. This year, we called for a moderation and relatively flat margins compared to last year in part due to the nature and profitability related to acquisitions, which we believe this year and the impact that they will have in the overall business. But our expectation going forward, as part of this -- our 5-year plan or the 2020 plan, which we're in right now, would see modest accretion in the overall margins. More or less keeping the balance between outsourcing and advisory and transaction-related revenues, leasing and sales brokerage pretty consistent with where we are today.

So in other words, as we increase our business and benefit from some scale in various markets -- and the U.S. is probably the most significant opportunity for us, we would see a modest increase of our margins such that in the terminal year of our 5-year plan, we would see additional increase in margins of between 50 to 100 basis points.

Okay, that's helpful. And given the difficult comparison in the first part of the year here in the outsourcing business, anything in the back half of the year that we should be aware, whether it's EMEA outsourcing or something else, that creates kind of a project or timing-driven comparison issue?

No, nothing of note. I would say that in Q3 of last year, in terms of comparisons, we worked through a challenging quarter in the U.K, which then we saw it rebound subsequently in the fourth quarter. So we'll be comping that, which is I guess the benefit to us this year. But throughout the rest of the region, there is nothing noteworthy that would impact our comparatives.

Okay. And then given your success for the last several years in acquiring the affiliates in the U.S., if we look at the available affiliate revenue or system revenue out there just from the U.S., how do we think about what those affiliates look like in terms of either service mix, types of businesses they are, transactional versus outsourcing and advisory? Or how do we think about the opportunity there to keep acquiring affiliates in the U.S. in particular, but maybe it's a broader comment about the U.S. and the EMEA.

Yes, Brandon. It's -- as I reflect on the existing pipeline, very few are affiliates. So I would say that as I look forward, affiliates -- affiliate acquisitions will be small. Of course, we'll do them from time to time if it makes sense. We're also looking at the potential to expand our affiliate program in secondary cities. And -- but the acquisitions tend to be commercial real estate firms that are 1, 2 or 3 in their markets in our traditional-type brokerage, whether -- very few of which are affiliates today, so they're strengthening our existing operations in different markets.

And our pipelines also include additional service lines or expansions of current service lines, like project management and asset property management, which all augment our overall base business but wouldn't necessarily be affiliates. So I would say that the -- that going forward, the affiliate program, although there, we basically acquired most of the ones that we'd like to acquire size.

Your next question comes from the line of Mitch Germain with JMP Securities.

Congrats on the quarter. Jay, just -- I want to just follow up on Brandon's comments about the acquisition pipeline. You said it was not full of a lot of affiliates. You talked about pipelines being pretty good. I'm just curious, you had the Welsh deal announced, I think it was early April. Nothing since then. Is -- anything to read in terms of that lag? Or do you think things will pick up at the back part of the year?

So, I mean, we did 5 between January and the last announcement, which exceeded our target for the year. So we're very comfortable if we stop here, that we've met our acquisition target. Having said that, we have a full pipeline of opportunities and when they come through, who the hell knows. As you know, because you've been in the game a long time, it's a function of price and quality of business and geographic region. So they happen when they happen. I wish you could program them to have 2 in the third quarter and 2 in the fourth quarter and so on. But it doesn't usually work that way.

I totally understand. I guess, I'm really more curious, has there been a change in the pricing environment?

I would say in some respects, yes. But it's a change in the price environment in larger transactions, bigger assets and in tangential -- probably a bad word, but service lines like property management, I'd see -- I would say that there's some pricing increases there. Probably justified, frankly, because of the recurring nature of those businesses. We're seeing a little bit of that in the project management space, again, long-term revenue streams, et cetera. But in core brokerage, sort of decent-sized businesses, by and large, in the segment.

Your next question comes from the line of Michael Smith with RBC Capital Markets.

Just as a follow-up to the last question. So I know that acquisitions, your pipeline is pretty full. You've already sort of exceeded your target for the year and who knows when they close. But are you feeling good that you're going to add to -- going to get some deals across the finish line this year?

(Laughter) Am I feeling good? I'm always feeling good. I'm optimistic that we'll add some more deals before the end of the year, yes.

Okay. And maybe you could -- can you give us some color or your intentions for your (technical difficulty) and in people to grow the operations that way to fill out service lines? I know you've done that in the Americas last year. Any plans -- what are you thinking about that avenue of growth?

Are you talking about recruiting?

Yes.

Yes. Recruiting is an area that pricing has gone up in. The previous caller asked about acquisitions, and I'd say strike zone acquisitions are, give or take, the same. But recruiting of key professionals and their teams in strategic markets has gone up, generally by lesser firms that are trying to steal away a team to create a level of expertise in a given market. You don't really see it from Jones Lang or CB. They will be strategic from time to time but they're always looking at the return on their investment. And so we're actively recruiting and finding, from time to time, that we're up against, I'd call it, a lesser firm. I don't mean that in terms of quality. I mean it in terms of having a mobile platform and being able to execute on a global basis.

And our teams, our business leaders, market leaders, all know that if somebody wants to join us, they're joining us for the right reasons. We have a high quality company that could execute anywhere globally. And we fundamentally believe that if that professional and his team join us, they'll not only be able to do better in personal terms because they have fulfillment on a global basis, with better systems and process to offer their clients. But if it's about money and their -- that the option is to go to a firm that is not at our level, we won't compete with that, especially when we're not getting a decent return on invested capital. And our return has to be higher than on acquisitions. So we've been pretty disciplined along the way there. So hopefully, that gives you some color around the direction our teams are operating.

(Operator Instructions) Your next question comes to the line of Marc Riddick with Sidoti & Company.

I wanted to touch on -- a lot of my questions have already been answered by some of the things that you've already covered fairly well, so I appreciate that. But I did want to touch a little bit on some of the current views on some of the major markets versus maybe some of the secondary markets. And what you're seeing there, maybe what your expectations are for the remainder of the year, particularly in the U.S. and Canada?

Well, these will be very general. Are you talking U.S.-specific?

Generally, yes. That's a good place to start, I guess. Yes.

Yes. So we're finding major markets very strong. Flattish growth given that they have been strong for a long time. There's a lot of secondary markets that have been enjoying some very good growth. I'll give you some names that people haven't heard about for a while. Places like Detroit, Michigan, and other markets that are emerging like that. Very interesting. I'm not sure that the lease rates are where they will ultimately be, but there's a lot of activity and there's a lot of movement of corporates into some of those areas where it's just cool for the millennials to be there.

And startups and a variety of other things we're seeing. We're seeing in some markets -- let's use New Jersey as an example. We're seeing some emptying of suburban office buildings as corporates relook at space in more cooler areas. And so there's a lot of that going on. But I would say that the secondary markets are strengthening for us. It doesn't really move the needle yet but it's starting to. And it's great to see activity in those markets beyond where they have been historically.

And interestingly, Colliers leads in most of those, let's call them nonmajor markets. So we would be 1, 2 in most of those markets. So we're actually -- we actually have a unique perspective in those areas and it's quite nice to see.

Okay, that's great to hear. I was wondering about -- I wanted to touch on one of the comments in the -- not the prepared remarks, in the press release, I guess, regarding the average transaction size. I was wondering if you had any sense that the slight -- I guess, it was a slight year-over-year reduction in average transactions. As whether that was -- I mean, that you viewed as being specific to you? Or sort of general to the industry?

I don't know if it's specific to us, Marc, quite frankly. I mean, it's only -- it is a quarter versus last year. Some of it may be around some of the activity -- acquisition activity that we've done, with perhaps some focus on the acquired companies on slightly smaller transaction sizes. But I don't have with me the overall perspective of the market. I'm not sure there's great market data on transaction activity. I know that there are some data services that tend to focus on the larger transactions, but I'm not sure there's good visibility on the number of smaller transactions. But I don't think it's anything that's particularly structural or necessarily something that's going to repeat for us, but it was a factor in our second quarter versus last year.

Okay, I appreciate that. And then one last one for me. And admittedly, this might be a little bit of a squishy kind of question to ask but I'll ask it anyway. I wanted to get a sense of kind of where you felt you were on the 5-year plan as far as branding efforts? And kind of how comfortable you were with the progress that you've made so far and then some of the things that you might want to (technical difficulty).

Yes, we have -- somebody's got a lot of static on the lines here. I don't know who that is but we lost the last part of your question.

I guess, really, just sort of -- just wanted to get an update on (technical difficulty)

I guess it was you because we lost you (laughter).

There are no further questions in the queue at this time. I will turn the call back over to you, Mr. Hennick.

Okay, thank you. Ladies and gentlemen, thanks for joining us for the second quarter conference call. We look forward to speaking to you again in September and continuing to execute on our plans. So thanks for joining us. Have a great day.

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