Cushman & Wakefield Ltd (CWK) 2024 Q3 法說會逐字稿

Good day and welcome to Cushman and Wakefield's third quarter, 2024 earnings conference call. (Operator Inatructions) Please note this event is being recorded.

I would now like to turn the conference over to Megan McGrath, Head of Investor relations. Please go ahead.

Thank you and welcome to Cushman and Wakefield's third 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 forecast and estimate 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, comparison 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.

Thank you, Mehan. This quarter, we continued our track record of successful execution against our goals. Driving top line growth in targeted investment areas continuing to deliver strong free cash flow conversion and focusing on value creation through deleveraging and seeding for growth.

This quarter also marks an inflection point across many areas of our business. Over a year ago, we began to make strategic targeted investments in leasing informed by our view on the most promising opportunities across asset classes and geographies. These investments have translated into clear and measurable results.

The third quarter marks our fourth consecutive quarter of year over year leasing growth and our highest leasing growth since Q2 2022. We have also reported the first quarter of capital markets growth in the Americas since the second quarter of 2022.

We are seeing a broadening of capital markets activities in the market and increased optimism amongst buyers and sellers. The fed rate cut in September and actions by the central bank outside of the US have been important. First steps in the revitalization of the capital markets. The further easing of monetary policy should continue to catalyze growth in the coming quarters. We also achieved an important milestone in reducing our leverage.

In October we fully extinguished our roughly $200 million in 2025 debt maturities as we had pledged to do well ahead of schedule. This was made possible by the outstanding work of our global teams to drive free cash flow, solidifying our balance sheet and improving our cash flow were key early priorities in our strategy to position the company to take full advantage of future growth opportunities.

And we executed on this priority six months ahead of plan, looking forward, leverage reduction will continue to be an important part of our capital allocation strategy. But as we shared with you last quarter, we have already begun accelerating our growth investments as we pivot to more offense.

Now I'll turn the call over to Neil for a review of the financials and then I'll come back to share a bit more about how we are positioning strategically for the future.

Thank you Michelle and good afternoon everyone. Our third quarter results highlight improved momentum in several areas of our brokerage business as well as our continued commitment to strengthening the balance sheet and protecting margins as we accelerate our growth investments.

Turning to our quarterly results fee revenue for the third quarter increased by 3% year over year, leasing revenue increased for the fourth consecutive quarter. And we experienced positive capital markets, revenue growth in the Americas for the first time since the second quarter of 2022 adjusted EBITDA of $143 million declined 5%.

Driven primarily by the impact of our recent services divestiture as well as roughly $20 million in higher compensation costs compared to the prior year on a year-to-date basis. Adjusted EBITDA of $360 million is up 1% last year adjusted EPS of $0.023 is $0.02 higher than last year, benefiting from interest and tax savings.

Taking a closer look at our service line results. Our leasing business continues to perform at a high level with revenue growth of 13% in the quarter. Leasing strength remains largely global in nature. America's leasing was up 16% with double digit growth in both office and industrial APAC leasing grew 13% driven primarily by strength in India and Japan EMEA leasing while down 8% in the quarter remains up 5% for the year which we believe is indicative of a relatively stable market in capital markets. We saw a return to growth in the Americas for the first time in nine quarters with revenue up 2%. We experienced growth in office industrial and retail transactions during the quarter.

Overall sentiment has improved in the past several months and while some market uncertainty persists we feel confident that we've passed the floor in US capital markets activity looking internationally, EMEA capital markets revenue declined 5% as the market continues to experience some lumpiness on the road to recovery year to date. EMEA capital markets revenue has grown 3%. As fundamentals continue to improve. Gradually.

A capital markets revenue declined 44% principally due to the deal timing and strong third quarter. In the prior year, our pipelines in this region remain strong, supported by positive secular trends and we expect to rebound in activity for the region in Q4 turning to services revenue growth was up 1% excluding the impact of the divestiture or down 2% as reported in line with our expectations.

In APAC services revenue increased by 6% as facility services and project management in India and Australia continued their momentum spurred by investment into the region. In EMEA we've continued to focus on margin by restructuring our fixed price design and build business. Our transitional work on that business is essentially complete and we expect to return to growth in the fourth quarter.

In the Americas services revenue was up 3% excluding the divesture or flat as reported facility services and property management grew while project management declined as office expansion and renovations continue to be delayed. We remain highly focused on re-accelerating growth in our services platform. In 2025 change of cash flow free cash flow for the quarter was $187 million versus $174 million. In the third quarter of last year. Our year to day free cash flow continues to compare favorably to 2023. Improving by $146 million. And our training 12 month free cash flow has grown by approximately $100 million.

Our free cash flow improvements this year have enabled us to execute on our deleveraging plan. Well ahead of schedule as well as begin incremental investments to accelerate growth for 2025 and beyond.

During the quarter, we repaid $50 million of term loan debt due in 2025 and subsequent to quarter end, we repaid the remaining $48 million fully extinguishing our 2025 maturities. We also completed another successful repricing of $1 billion of terminal debt due in 2030 lowering the applicable interest rate by 50 basis points.

Lastly, moving to our full year outlook on the revenue side, we're raising our 2024 leasing revenue growth expectation to mid single digit growth from low to mid single digit growth primarily based on the third quarter's strong performance. We continue to expect capital market revenue to improve sequentially and expect fourth quarter revenue growth of approximately 20% in services.

We continue to forecast flat organic revenue growth in 2024 with the target of returning to mid single digit growth in 2025 on cash flow. We expect to finish the year within our previously stated 30% to 40% free cash flow to EBITA conversion target for reference that translates to a roughly 80% free cash flow to adjusted net income conversion.

In conclusion, we are extremely pleased with our continued execution against our strategic priorities. At the beginning of the year, we outlined our 2024 financial strategy to reinvest cost savings into the business, protect margins and position the company for growth year-to-date adjusted EBITDA margins are up slightly brokerage revenue is up 3% and free cash flow has expanded by over $145 million.

We completed three debt repricings this year and fully prepaid our 2025 debt maturities solidifying our balance sheet as we focus the company on growth with that, I'll turn the call back over to Michelle.

Thanks Neil. Many of you have asked for more detail on the outcomes of the strategic work we have engaged in over the past year. I thought I'd give a few examples to help demonstrate the drivers of our recent success as well as where we see opportunity.

What you'll hear is that the themes of our work have been interconnectivity and rigor. And when we combined investment dollars with analytics, accountability focus and an empowered team, we are winning.

For example, our multimarket account team has seen incredible success this year, partnering with our internal data analytics and services teams to provide unmatched integrated services to mid-size companies that are looking for advisory solutions and brokerage execution. Our RFPS are up over 50% in this year.

Internally, part of our roughly $145 million improvement in free cash flow this year came from identifying opportunities to improve receivables collections. We created cross functional brokerage and finance teams which broke down internal silos to get the work done.

Additionally, we are making targeted investments to connect talent, data and technology across our platform to drive both efficiencies and revenue opportunities.

For example, we have identified opportunities for meaningful labor management improvements especially in our services businesses, strengthening these capabilities allows us not only to better manage costs but also enhance our global platform offerings with a focus on talent. We have already achieved a 260 basis points improvement in top talent retention over the past year.

Looking forward, our capital allocation priorities will be focused on three main categories, one funding and fueling our brokerage business while leaning into the capital markets recovery, two accelerating services, revenue and profitability through organic investments and tuck in acquisitions.

And three, we will continue to deleverage opportunistically in balance with our growth objectives. As a company, we continue to mature and with a more diligent and focused operational mindset, we are uncovering opportunities to fully optimize our operations and go to market strategies.

This in turn is creating optionality for growth and we are more energized than ever about where we can drive this business in the future.

Now I'll turn the call over to the operator for your questions. Operator?

We will now begin the question and answer session to ask a question. (Operator Instructions)

Stephen Sheldon, William Blair.

Hey, thanks and really nice results here. I wanted to start with a clarification question on 20% growth for capital markets in the fourth quarter. Is that year over year growth or sequential?

Yeah, that's year of the year growth.

Okay. Great. Just want to make sure. And then in services you know, I think you talked last quarter about confidence about getting back to mid single digit organic growth next year in 2025. So just curious, what's your level of confidence? Now, how has that changed? And what are some of the factors that investors should be thinking about that will help you get to drive that acceleration?

Sure. I'm happy to take that Stephen. Look, we, we continue to feel very good about the accelerating growth based on what we see in each of our businesses. The best way to think about it is sort of break it up into each of the pieces and that hopefully will help you understand exactly where we're working. So, one of the key components is facilities management. This is our last largest business in the APAC region and is very strongly on a year-to-date basis.

That's up 7% and that business continues to perform very well. We're expanding our client base there in all the regions. And as an example, we are the largest facilities management provider in singapore, which is one of our key markets. If we look at our facility services business that too is growing, it's growing in the low single digits. But we feel very confident we can grow that organically as we look forward, we've done a lot of work on establishing healthier contracts in that business and we started to feel the impact now and our business development pipeline there is strong.

The other business that we are most excited about is our global occupier services business. That's had some really nice wins recently. And we see a lot of potential in fully integrating our businesses with the GLS business. That business is more longer term. So that will take longer to translate the winds into the positive revenue growth, but certainly an area that we are very, very focused on and we can see a nice, nice growth path there.

And then property management and project management, those have slowed a little bit more than expected this year. It's primarily in multi-family and it relates also to project management. We that business, the project management side of the business tends to be shorter term in nature. And so that will give us a lift as we start seeing stronger leasing and capital markets.

And then our project, our property management business is a business that has just done exceptionally well and the pipelines there are also good. So overall, we see tremendous opportunity in the services business. And as we look at pipelines 2025 will be a key year for that growth to start happening.

Ronald Kamden, Morgan Stanley.

Hey, I had the same question on the capital markets 20% growth maybe asking it a different way. Because I think it does imply some sort of acceleration here. Just what is it? Is it the pipeline, is there a larger deal in there? Is there a geography just sort of any color on how, you know, one month into the quarter? That 20% sort of came about would be helpful.

Yeah. So as we look at capital markets, you know, we're looking at the pipeline, we're looking at basically the deals that are starting to come through as you know, it takes sort of 2 to 3 months just for that business to really develop. And as we look at the building momentum there, we feel very good about what we see in all regions.

And I would say, as we said in the past where we're expecting this to be a long multi-year recovery in capital markets. In our last earnings call, I referred to it as waterfall effect with the market producing more and more velocity and volume over time.

Okay, great. And then my second question was just going to be on sort of just looking for high level commentary on the margins. You know, you talked about sort of mid single digit services growth and the capital markets recovery, just high level. Are you guys thinking about margins impact sort of any differently as those businesses sort of perform? Thanks.

Yeah, sure. So, you know, this year, we've been very focused on protecting our margins as we sort of move through the recession. So as we came through the beginning of the year, we guided what we said was basically we were going to offset any inflation with cost out. We've now progressed from that. We started to see the business turn. We really are feel like we're at the bottom of the cycle.

And so we are at this point not giving any guidance on '25 but the way to think about the business is as the brokerage business comes back, the incrementals, there are very strong, but those incrementals certainly in the near term will be slightly below what we've seen before as we reinvest in the business. And so once again, as we go into next year, certainly on in the year, we'll defend our margins.

But we'll also be looking to invest some of that opportunity to make sure that we are well positioned for growth. We think the cycle is going to be a lower one and so we want to be very, very well prepared for it as we go through the year.

Anthony Paolone, JP Morgan.

Thank you. You know, maybe Neil staying with you on the margin item I have in my notes from last quarter that the third quarter numbers would be negatively impacted by some comp expenses on the margin side. I think to the tune of, I think over 150 basis points, can you maybe help us just update like what the impact ended up being and how to think about 4Q in the full year at this point?

Yeah, good question, Anthony. So we guided to roughly $20 million to $30 million of headwind and we actually saw the low end of that $20 million and we and the teams did an excellent job of basically matching costs to ensure that we held margin. We'll probably see a little bit more in Q4, not at the same level, probably in the $5 million to $10 million range, so not really as material for Q4.

Okay, great. That's helpful. And then I guess on the leasing side going to like mid single digits, if I just do some of the math there, it suggests that 4Q leasing revenue would be up, you know, basically mid single digits as well. And so I guess my question is, you know, how should we think about maybe what normalization and leasing looks like was the third quarter just outsized and that number comes down now or, you know, is there more room to go and just trying to put some brackets around that?

Yeah. So, you know. Leasing as you know, is a big part of our revenues is something which we feel, which we've been saying now we got five quarters of strength in leasing. So it really drove great performance. The Americas alone were up, we did have some big deals in the quarter which also helps and contributed. And, you know, there is lumpiness as we go through the quarters, we've always said to look at an individual quarter is probably not the way to look at it over the longer run.

And so, you know, certainly feel good about how our leasing revenue (inaudible).

Michael Griffin, Citi.

Great, thanks. Just wanted to go back and get some more color kind of on the transaction activity and in the market and what you're seeing, can you give us a sense if maybe buyer and seller expectations are converging or if a lot of these deals are mainly kind of debt maturity and distress driven.

And then I note that you noted in the release kind of about the Gravestone joint venture volumes declining as a result of the tighter lending conditions. I would think that, you know, debt capital availability would be important if you're going to see increased transaction activity. So how do you kind of marry the expectation for a transaction activity pick up with what seems like, you know, some tightness in the debt markets.

Okay. So I'm going to start with this and then I'll hand it over to Neil. In terms of market and market fundamentals, we continue to be optimistic about recovery. The fed move in September was a really important first step for us. There is an enormous amount of pent up demand waiting and we believe we are positioned exactly where we need to be to handle that in the future fed rate cuts which we know we probably have one coming this week.

Mean that floating rate debt is going to continue to get cheaper with all else equal, that should help some deals across the finish line, especially as we go into year end and year end pressure and may help alleviate some others of debt service challenges that they've been having.

And I think most importantly, at least symbolically, the rate cut signals that better days are ahead for commercial real estate because it means that policies become slightly less restrictive, which is a step forward to more supportive financial conditions for the economy. And by extension, more supportive conditions for leasing and capital markets.

And lastly, you know, these incremental rate cuts which we anticipate. One in November and one in December is going to help move some of this drive powder off the sidelines because again, it signals that the commercial real estate sector is likely at the cut of the next growth cycle. And what we've seen is a real step forward in the investor mindset from risk off to risk on.

And then Neil, did you want to talk a little bit about gravestone?

Certainly happy to talk about gravestone or what we're seeing in the multi-family markets. Gravestone. As a result of the change in lending policies at the GSCS, we have seen some tightness in lending in that space. But, we're seeing opportunity in multi family. We basically had a very strong month of originations in September saw that.

And so it signals that certainly there may be opportunity coming at the same time. It's one month and that's not a trend. So multifamily remains an area we're watching closely. We feel very good about it in the long run. It's a key strategic space for us, but certainly we do expect a little bit of lumpiness as we move through the back of the year and into next year.

Thanks. I really appreciate the context there. And then Michelle just going to those three priorities you laid out kind of at the end of your prepared remarks. I appreciate it kind of the additional insights there. But as you think about those three, you know, I know you've done work on the leverage side, really improving the balance sheet and cash flow. But if the first two priorities in terms of pivoting the growth, you know, are really what's going to be a catalyst. Could you see leverage, maybe stay elevated relative to the historical levels if it makes sense to grow the enterprise?

Yeah, I don't anticipate increasing leverage. I would say that just to give you a little more context around the capital allocation. And I know that you all have been asking for more context for quite some time.

I want to speak a bit about how we're changing the way that we're approaching investments here because it's not just about how we're allocating, it's about the way we're making decisions. So we spent the last year allocating our capital with what I'll call surgical precision a practice that we're going to continue doing.

And I've changed three components surrounding making investments here. I've changed the actual investment process. I've changed the criteria for investments and I've changed the post close management of made investments. And now we're high on our list on our capital allocation is growth in global capital markets and advisory on hold. And that's going to come in the form of adding to our talent pool and our systems with an eye to what the future holds for the industry, not what the past represents.

Second in capital allocation we're going to be making as you've seen us make the right long term choices for our services business to ensure continued growth. And we're not going to be patching things for the bandit to fix them. So I'm talking about some basic blocking and tackling here, labor management systems, instilling great operating practices, cross pollinating best practices across services business.

And what you can see is that employing this very rigorous approach, the implications were very positive for our free cash flow already. And the third area, which is what's been the focus of this year, which you know, well, is reducing leverage. And frankly, I think we hit it out of the park starting that virtuous cycle of rightsizing our leverage.

And as importantly, reducing that cost, we were priced three times this year. And the great thing about having this as a target of our capital is that every time we execute here, you accomplish your goal with 100% certainty and you know exactly what the financial impact is going to be. But in no case, do we foresee increasing our leverage as we're growing.

(Operator Instructions) Alex Kramm, UBS.

Yes. Hey, good evening everyone. Maybe you just touched upon this a little bit, but you made a comment earlier around on the servicing side services side also being more focused on the margin if I heard you correctly. So can you just talk about what that entails? Is it gaining more scale? Is it maybe a little bit a bit more focused on pricing? Is it maybe a change in competitive dynamic? Where do you think you can get margin upside in that business? And how quickly do you think you can achieve that?

Yes. Sure. Alex. It's a great question. We've been very focused on that over the past six months, particularly in EMEA where we had a design and build business, which is essentially a fixed where we have a lot of fixed price contracts. We've looked at that business and we've said, if we're not making money, we shouldn't be doing the work. And so in EMEA you have seen services down, but I'll tell you that either related to that revenue has actually been up, that work is essentially complete.

So you'll see growth starting to happen in Europe, but that was the one area. And then within the US in a number of our services businesses, we've looked at our contracts and we've said, you know, profitability on those contracts is really critical. Most of the work is now done. We feel very pleased with the work we've done and we're now starting to once again, really focus on the top line and that will lead to more accretive growth as we go forward.

Okay, great. And then just maybe coming back to capital allocation. I think when you prepare to mark, you mentioned M&A only in the context of the services business small tons. I think if I remember you correctly, Michelle, but like you just also talked about the capital markets advisory business. So is that also an area for M&A or how do you think about M&A generally in particular, as you just said, leverage probably stay at these levels.

Yeah. The door is always open for M&A it could be an advisory or services. But I think in particular with regard to advisory for us right now, we are doing a lot of investing in the data and analytics in the capital markets business in particular. And we're also on the hunt for new talent and advisory as well.

Peter Abramowitz, Jeffrey.

Hi, thank you. I think in Neil's comments, he mentioned just some delays and things on the project management side which I know tends to be a little bit sensitive to the macro and kind of confidence from from customers there. So just wanted to ask, is there anything thematic that we should take away and what's been causing customers to delay those projects and, and how to think about when that might [ease].

Yeah, there's nothing really. Thematic there. We have just seen particularly in the office space, some delays and buildouts. It, really is essentially we believe just a function of sort of a more secured market. We feel like the tide is turning there and we are focused in that area.

But we've just seen some projects that have been canceled that are sort of down on that business, we feel confident going forward. And we're starting to see those pipelines build and projects get executed, but that really, there's nothing thematic. It really is just a function of the space we're in and some of the projects we were working on.

Okay. That's helpful. And, then I think Michelle, the, the term you've used is sort of a waterfall function in terms of the capital markets recovery. So you already would seem to be indicating a significant acceleration if you're expecting 20% in the fourth quarter.

So, I guess, you know, should we expect potentially further acceleration as we get into 2025? I know, your peers mentioned a week or two ago that they're sort of thinking about it as a gradual recovery. So just curious in that context, you know, how you are thinking about 2025 from a capital markets perspective as you sort of build out your budget and think about the year ahead.

Yeah, I mean, we've always talked about it as a gradual recovery. I've spoken quite often about how we invest in things over the long term and we expect a long term recovery. So our base case, as it relates to capital markets assumes the fed is going to continue to cut rates by 25 basis points in November and December followed by gradual rate reductions until they bring that rate back down to around the 3% range toward the end of 2025.

We also believe the 10 year yield is going to hover in this 4% to 4.5% range for the foreseeable future, putting a more normalized interest rate curve into place which is all positive for CRE but when you think about that, we're talking about that process happening over the next year.

This concludes our question and answer session. I would like to turn the conference back over to Michelle Mackay for any closing remarks.

Thank you everyone. For participating in our call today and we look. Forward to speaking with you next quarter.

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