Jones Lang LaSalle Inc (JLL) 2004 Q2 法說會逐字稿

Good day and welcome to the Second Quarter 2004 Earning Release Conference Call for Jones Lang LaSalle Incorporated. Today's call is being recorded. Any statement made about future results and performance or about plans, expectations, and objectives are forward-looking statements. Actual result and performance may differ from this included in the forward-looking statements as a result of factors discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2003, and in our other reports filed with the SEC. The Company disclaims any undertaking to update or revise any forward-looking statements. A transcript of this call will be posted and available on the Company's website within two today's of this call.

At this time, I would like to turn the call over to Mr. Stuart Scott, Chairman, for opening remark please go ahead sir.

Thank you for joining us for this review of our second quarter 2004 financial results. Joining on the call today is Lauralee Martin, our CFO.

Let me start by briefly reviewing the headlines for our second quarter. We achieved earnings ahead of our expectations for the quarter and ahead of our second quarter 2003 performance.

In local currencies, our revenues were more than 20% higher than 2003 reflecting stronger operating performance in all segments of the business and in improving global economic picture. As we announced last week, we have successive completed our search for our new Chief Executive Officer with the appointment of Colin Dyer, a proven leader of global high performance companies and an outstanding strategist. After Lauralee talks about our financial results for the second quarter and our outlook for the third quarter I will comment further on our CEO appointment, on market condition, and on our progress to-date in pursuing our strategy goals for 2004. Following that we will be pleased to take your questions. Let me now hand the call over Lauralee.

Thank you Stuart, and good morning to everyone on the call. As covered by Stuart we were very pleased with the momentum of performance in the second quarter. Year-over-year we had increased revenue and local currencies and improvement in margins in all of our reported operating segments. In discussing our result I will start first by covering the individual operating segment results and then I will discuss the consolidated results of the firm.

In the Americas revenue increased 15% for the quarter and 21% year-to-date. We have solid performance in our transaction businesses, improvement in the New York operations, and strong contributions from the hotels business. Our corporate solutions outsourcing business continues to grow, specifically with increased request for global RFPs from existing American multinationals clients. Year-to-date, we have secured 17 new contractual relationships across the corporate solutions platform of services, that's on track with last year which set a new record. We continue to emphasize the importance of account management and delivering the best strategy value of real estates to our clients.

Expenses increase were principally related to timing of incentive compensation accruals as operating expenses continued to be aggressively managed. As a result operating income was 7.7 million for the quarter and 6.8 million year-to-date. Europe had a significantly improved second quarter performance with revenues up 16% and 13% in local currencies for the quarter and year-to-date, respectively. This strong performance was driven primarily by our French operation which executed significant transaction in both leasing and capital markets resulting in revenues year-to-date double that of last year and also our hotels business which advised on the sale of the prestigious CIGA portfolio of luxury hotels. The English business continued to show improvement capitalizing on its strong market positions to take advantage of improving economic conditions. Offsetting this, we continued to experience very slow conditions in Germany.

Expense increased primarily due to timing of bonus compensation accruals, the result of stronger revenue as compared to last year. Operating income was 5.1 million for the quarter and 3.2 million year-to-date; both up significantly from the prior year. In Asia Pacific, revenues in local currencies were up 19% for the quarter and 15% year-to-date. We are starting to see operating leverage in the regions result, as expenses in local currencies increase 17% and 10% in the quarter and year-to-date, respectively. This operating leverage was achieved despite the timing of increased incentive compensation in the second quarter, the result of stronger year-over-year revenue performance. Revenues in the growth markets of India and North Asia were up more than 55% for the quarter and more than 45% year-to-date, realizing payback on the investments for growth we have made over the last several years.

For three consecutive quarters we have experienced year-over-year revenue improvement in the core markets of Honk Kong, which is benefiting from economic growth from the region. Operating income for the region was a modest profit of 1 million for the quarter bringing the year-to-date loss to 3.5 million. This compares favorably to the prior year-to-date loss of 4.9 million. LaSalle Investment Management continued to execute against its financial strategy of increasing in the annuity revenue category's advisory fees which were up 3% for the quarter and 9% year-to-date. The business continued to take advantage of strong real estate property values by selling assets on behalf of its client. As a result equity earnings increased 6.9 million for the quarter with associated incentive fees 1.2 million as the business achieved investment performance for clients over targeted levels. The majority of this transactions were anticipated to occur later in the year. However, the prices being achieved are higher than what was originally anticipated. Expenses for the group were up 19% in the quarter and 12% year-to-date in local currencies, with the most significant contributor being the timing of incentive compensation accruals year-over-year. Operating income was 7.5 million for the quarter and 10.1 million year-to-date as compared to the prior year of 1.4 million and 2.8 million, respectively. The firm overall reported net income of 5.1 million or 16 cents per diluted share in the quarter as compared to the prior year loss of 1.4 million or 5 cents per share. Included in the current year quarter are the planned expenses related to the redemption of 9% euro-note. The redemption cost impacted earnings negatively by 26 cents per share. As a result earnings excluding to redemption cost would have been 42 cents per share. Included in the prior year loss was a one-time charge for an abandonment of a property management system of 11 cents per share. Revenues for the quarter totaled 271 million and 494 million year-to-date, increase of 22% and 15%, respectively in local currency. Operating expenses were up to local currency 12% in the quarter and 10% year-to-date. Excluding the redemption cost for the euro-note interest expense was 3.6 million, down from 4.9 million in the prior year. The firm's debt is now financed with our bank facility at a significantly lower rate than the redeemed euro-note. As a result, we expect lower interest expense for the balance of the year. Net GAAP was nearly 60 million lower from the prior year second quarter, reflecting the strong cash generation of the firm's operation.

The effective tax rate for the quarter remained at 28% as compared to 34% in 2003. During the quarter, we continued to repurchase shares under our board-approved 1.5 million share repurchase program. We purchased just over a half a million shares in the quarter, bringing the year-to-date purchase to just about 800,000 shares. This repurchase program is used principally to offset dilution from employee compensation plans. We plan to continue the repurchase program in the third quarter.

This concludes my discussion of our first -- of our second quarter results. Our results continue to have a seasonal character with the majority of profits occurring in the second half of the year. Our second quarter performance benefited from the acceleration of transactions and plans, hotels and LaSalle Investment Management which had been anticipated to occur later in the year. However as I have covered in the quarter's results, we also had core improve fundamentals in our businesses worldwide. Therefore subject to economic trends continuing, we feel confident in our ability to deliver the current full year expectation of the analysts covering our performance which excludes the euro-note redemption cost. Now let me turn the call back over to Stuart.

Thank you, Lauralee. Before we take your questions let me talk briefly about our appointment of Colin Dyer, as Chief Executive Officer. I will then comment on market conditions around the world and about a number of highlight in our business during the quarter that demonstrate real success in our global strategy.

I'm excited with the firm's has secured the appointment of Colin Dyer, as CEO and I am confident that he will bring the highest caliber of leadership, financial and strategic skills to the firm. His experience with McKinsey and Company, with Courtaulds Textiles plc and it his current role and with WorldWide Retail Exchange demonstrate to us that his an entrepreneurial client-focused manager with global vision. He has deep public company experience in Europe and understand how to create and deliver shareholder value. Jones Lang LaSalle is a diverse global organization with the successful track record of hiring talented executives from outside of our traditional market, to complement the skills of our real estate experts. The Board and I are certain that this will be one further example and we wish Colin every success in his new role.

Let me turn now to our results for the second quarter and comment on the market environment in which we achieved such encouraging performance. US economy continues to demonstrator healthy growth with sustained strength and consumer confidence, productivity, jobs and corporate earnings. Demand for spaces is growing in all sectors that are most important to our business, office hotels, logistics and shopping center. Although interest rates have begun to rise, they remind historically very low, and transaction volumes in the second quarter were once again significantly higher than a year ago. The depth of capital waiting to be invested in real estate persuades us that no near term slowdown in activity levels is likely. Indeed recovery in equity market is causing many investor clients to be under-allocated in real estate and to seek further investment opportunities.

Asia continues to be enjoys growth in the back of the US recovery, Japan, in particular, is displaying real improvement in the highest first quarter GDP growth of G7 nations. Chinese growth has been managed to more cautious levels. This clearly has the potential to impact smaller markets in the region. Demand in the region’s office market continues to grow particularly, in Hong Kong the rental increases are still uneven. Hong Kong, Seoul and Tokyo remain the choice markets for investors.

The Australian economy also continues to show steady growth. In Europe, the UK, Spain, and Sweden continue to drive overall recovery offset by weakness in the core continental economies of Germany, Italy and the Netherlands. Encouragingly, the outlook for French growth has been revised upward in recent months, reflected in the recent performance of our French businesses as described by Lauralee.

Central and Eastern European economies are becoming increasingly important to overall European growth. In the real estate markets, this is evidence by increased cross-border investment notably in the last six months with the first wave of institutional investment coming in to Russia during that period.

Against this background of stronger market conditions, our businesses remained focused in all regions and securing major instructions and continuing to build client relationship that will deliver sustained growth.

I want to comment briefly on a number of our success in the second quarter that reveal the quality of business underpinning our revenue and income growth. I believe they demonstrate our progress and establishing Jones Lang LaSelle as the chosen real estate to leading clients around the world.

Our hotel business completed one of its largest ever assignments advising the Blackstone Group and Colony Capital, on the sale of the highly prestigious Subway Group of four leading hotels in London to a private Irish client. Assignments of this class firmly demonstrate that our hotels group is the worlds leading advisor in this sector.

In our European business we advises one of the largest French property companies on its acquisition from its Edinburgh-based Standard Life of a Paris portfolio of five office buildings totaling 91,000 square meters for a 308 million euros. The portfolio was introduced on a confidential basis. And the purchase of the French Holding Structures was concluded off market. Since 2000, our French capital markets team has been involved in three portfolios sales by Standard Life with the total value of more than 580 million euros.

In the Americas Wind River the market leader in device software optimization has appointed Jones Lang LaSalle to provide presentation services for its global portfolio across 62 offices world wide. We were selected ahead of competitors because of our extensive experience with technology clients and for our truly global network of professionals.

Finally, LaSalle Investment Management build upon its first quarter activity for CalPERS in Mexico. With the acquisition of a portfolio of 53 industrial and office properties from G. Accion for $300 million on behalf of an international consortium led by CalPERS. We believe this to be the largest real estate transaction ever completed in Latin America. And it was made possible by the unique combination of LaSalle Investment Management’s client relationships and global platform and the local expertise and resources of our first class Mexican office. These are some of the prestigious assignment and instructions secured by the firm in the second quarter, which underpin our pursuit of growth and earnings and market share in 2004.

As Lauralee has explained, we remain consciously optimistic about the remainder of the year and expect that we'll have further success to record in the third quarter. Now we would like to open the call for your questions. Operator, would you please explain the process.

If you would like to ask please press "*" then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roaster. Your first question comes from line of David Gold with Sidoti & Company.

Hi, good morning.

Hi David.

Hi David.

One thing - as - just - perhaps you can get a little bit better sense you can't - you spoke a little bit on what the favorable market conditions and some trends actions that moved forward during the year and noticed clearly we can look at the equity earnings and see some portion of that but it sounds like there are some and - from clients and from some of the other businesses. Can you give us a little bit of a better sense of sort of a breakdown of let’s call the upside, how much of that you would attribute to businesses improving and how much of that you’d attribute to business moving forward and then to the extent that’s true because its long [one] question, but sort of basically how much of that we can make up fourth quarter or make me bit of [inaudible]. I think you get the sense of what am I trying to get there?

David, let me, you looked on the management as an example and I think it will give you some color, you know if you look at the timing of both transactions, probably about 80% or so, we would have anticipated to be to have occurred sometimes during the course of the year and they happen to accelerate into the second quarter. Now, the balance of that was not anticipated on the other hand, but normally happens, you anticipate other transactions and they may fall-out, and so we are always keeping that balanced. If things stay robust, it’s possible that things get -- people are planning to do a year from now could be pulled forward, it’s still always early to call. As you know, one of the reasons we always still reflect caution in the middle of the year, year-to-date we’re still in a loss number the second half of the year is the--is when we play the game and right now momentum feels very much in our favor, but there is a good part of the year left to go.

Okay, I guess sort of [inaudible] there. You know, the comment both on the release and you can hedge that you are comfortable with analysts' estimates, [which I guess], consensus as of yesterday was call it a $1.35 you’d estimates by 31 cents for this quarter, is that to say that during the second half of the year, you'd basically expect or you’d look for, you know, call a 30 cents less in the fourth quarter?

You are asking for much more specific guidance than obviously you know we are going to give, I think the answer is, you know, the analysts’ projections is clearly having a very strong fourth quarter. The firm typically has a strong fourth quarter, however we have had transactions move forward that we had anticipated to occur in that fourth quarter, so there's going to be a balance and as we get to the end of next quarter, we have pretty clear line of sight, sort of four months out and so that’s how we still at this point of the year reflect caution. We do have core fundamental improvements in our markets around the world. There is now question, and you know even if you take with our investment management transactions, we had prices in many cases better then what was anticipated which resulted in incentive fees. If that market place continues that bodes very well for the firm, but again it’s early to call.

Okay, that’s fair. And then just lastly, I’ve noticed US, your corporate outsourcing is up 20%, I was curious if you can comment a little bit on [inaudible] P&G is in there, how are your arrangements progressing there and if you can give us any sense of a contribution for that?

Lauralee Martin Well first of all the relationship with P&G is excellent. We're now past the transition and into operating with them and you know we’re very pleased with everything that we are seeing. We do not give profit contribution go for a client purposes, they don’t want us to [buy] what they are paying and also we start that we’ll be advising on all clients, but you know that’s the business, the facility business which we anticipate and continue to grow at healthy double-digits It’s a business that we know we contribute significantly to our client EPS growth in their core businesses as well as helping them. Not have real estate be a distraction to the results they can focus on there core operation, but we also believe that with good advise we can make their real estate more strategic and actually add value to that. So that is the business that we didn’t quite articulate, but is you know, double-digit growth and we anticipate that continuing. I also mentioned in Corporate Solutions the 17 new contractual relationships, that covers the gamut of transactions. So, we may have in our 10 o'clock presentation group, a client that would sign an agreement that we represent them in all their transactions. In our project and development business we may have a client that says for my multi-site renovation you represent us in all of that work. You know last year was a record for us; 17 new at this point in the year is clearly on track with last year, and the momentum and backlog feels good. So again that is a strong growth business for us, not just this year but go forward.

Prefect, okay thanks a lot.

Your next question comes from line of Matt Ostrower with Morgan Stanley.

Good morning. Lauralee could you just be a little bit more specific, when you talk about transaction it seems like you are talking both about and sort of capital market transactions where you are selling in assets and brokerage transactions. I just wanted to be clear you know like for example when you are talking about the investor occupy your services businesses by geography you talk about transactions you know going up 11% in terms of number of transactions and 17% by in terms of square feet in the Americas, this is just one example, that refers specifically to brokerage, is that correct?

That’s specific in the press releases related to New York, and I think you have seen comments in the Wall Street journal announced for about at this point of time New York appears to be one of the strongest recovering marketplaces. So that is principally going to be as you explained it in the brokerage arena.

Okay and the transactions you were referring to in answering the previous question a lot of those transactions that you are talking about getting pulled forward, I just wanted be clear are those capital market transaction you are talking about or brokerage transactions or both?

They are both.

Okay, could you give some senses I know it's sort of a qualitative question, but could you give some sense of you know what amount of this surprise is related to capital markets transactions that are happening earlier. Is that only the lion share of what happened to your -- to provide the upside in the quarter, or was it sort of evenly spread between capital markets and brokerage or only brokerage that’s recovering?

If we look at the French business, it was about two-thirds capital markets, one-third leasing. So it was, you know, a healthy mix of both. And if you again -- going back to New York, it was primarily leasing. So I think it's going to depend on the part of the world. In LaSalle Investment Management, it would be -- the offset to that is in that capital markets because they are selling transactions. So we continue to see the trading activity around assets very robust in the world.

And, is there any differentiation in the US itself?

No, we had, as you know our U.S. capital markets business is a smaller business for us. Our largest capital market business is in Europe. So in the U.S. it's principally going to be leasing brokerage.

Okay, and then just a sort of, in the historical context a bit. When was the last time you saw this kind of acceleration in transaction volume? How, -- some things got pulled forward so much? I guess my question is, is this related to, you know if we try to think about it in terms of an economic recovery, is this, how much do you relate this to an economic recovery, or how much of it is pure happens down?

It has to do with an economic recovery but it also -- a big part of it has to do with the weight of capital in the market assets allocated to real estate, and that is something we haven’t seen for a long time. This fundamental change in the capital markets interest in real estate investment and then in broadening their attention to the asset category

Okay great and then in terms of transactions, brokerage transactions in the United States. Is the recovery there happening in your mind mainly in the central business district type markets or in suburban or both?

It's important not to make generalizations about the whole nation because this -- the conditions are quite different from one place to another. Washington DC and New York City are very different than downtown Chicago, for example, which is still not showing rental growth or not showing the kind of improving market that we are seeing in Washington and New York?

And is there any generalization you can make about, you know renewal versus new leases and the new lease volume growing up materially or --?

Only city-by-city.

Okay, so it is hard to generalize about that. Alright, thank you very much.

Your next question comes from line of William Marks of JMP Securities.

Hi, thank you good morning Stuart, good morning Lauralee.

Good morning.

I -- actually most of my question have been answered, but I am a little bit confused and I think from the last question and maybe you just answered it, but in your press release you say on the our outlook, your company is going from an accordance with the current expectations of the -- this is for -- you are comfortable with the full year numbers, right now, is that what you are --?

That's what we were saying.

Okay the 4-K, because it made it sound like in the press release that may be you are comfortable with the second half numbers, obviously there is a big difference so I can understand why there has been the questioning because now that indicates second half is going to be a lot lower than second half last year?

What we are trying to avoid giving guidance. And if we starting talking about our comfort with this or that quarter, that's starting to get close to guidance.

Okay I understand. The -- let me ask you what was the actual EPS absent the Euro Notes for the quarter?

42 cents you are saying if we exclude that?

I’m sorry.

The Euro Notes impacted it by 26 cents.

Okay, that's the number we should be thinking about, based on your outlook thereabout, right?

What we have done is tried because all of you covering us haven’t ignored the cost of the redemption.

Right.

We kept that out there. The reason we do clarified in the press release is, for those that may not be familiar with the story, your -- the First Call consensus doesn’t track with GAAP, because the Euro Notes fall not as a one-time charge, they fall in the normal operating results for the firm.

Right, okay, but so -- I mean, for the purposes of your qualitative comment, you mentioning -- related to a loss of 20 cents in the first quarter and 42 cents in the second, so year-to-date earnings are what 22 cents?

You know what I might suggest where was -- actually it sounds like you -- we need to go through your model with you, that may be we’d take it offline.

Okay, that's fine, yeah. Okay, thank you.

Again, to ask a question, please press "*" then the number "1" on your telephone keypad. Your next question comes from the line of Joel Gomberg with William Blair.

Good morning.

Good morning.

Good morning Joel.

Maybe you guys can talk a little bit about your outlook for allocating your cash flows and capital now that you have paid down the Euro bond facility and maybe give some flavor on to see paying down that credit facility, are you going to look to buy back stock or are you looking at co-investments and maybe a talk little bit about capital expenditure as well.

Let’s touch first on co-investment. Clearly we loved have the firm’s money go out in for co-investment, because it helps us grow our fund business and some of our larger separate account relationships in terms of those that we can have an incentive performance with them. But obviously, it’s been difficult to get the money faster than what it’s been coming back because we have been selling assets. But we do believe that with the number the things going on in the firm whether we look at the -- a second Asia recovery fund, launching of our logistic fund in Japan the recent addition of the Mexico transaction all of those will take co-investment capital and we will start to see that money go out and you know the equity earnings are attractive, the incentives are attractive, but more importantly the core asset management deeds that come with that growth are very much attractive in terms of the annuity business. So we will be emphasizing that. CapEx remains very much in line. Year-to-date we’ve spend a little over $12 million. We've had talked to you about some of the you know -- we’ve run about $20-$25 million number, so we’re on track and other than technology there are generally not a lot of items in that that we spend money on. We have definitely announced that we’re going to continue our share buyback program and we still have 700,000 shares left under the Board approval that we would like to complete. And then we will be evaluating as we look at what the year looks like going forward whether it make sense for the firm to start thinking about the dividend, the attractiveness of a dividend is not only it seems to be something that investors as you know are starting to seek, but because of our European and Asia presence, there is a number of investors that would like to be in the stock that aren't because we don't give a dividend and we think that would bring some robustness to the shareholders base.

Are you comfortable with your debt-to-equity level now, the credit facilities were [at that] and interest rate is pretty attractive?

We're actually slightly below what we’ve always said was our target and in our current bank line facility we're paying LIBOR plus 1.5 and I believe that we will shortly be meeting covenants that will reduce that rate, so we continue to see opportunity even for a lower rate. So that’s make the rate at this point of time less than 4%, which says we really should be putting it to other uses other than paying down debt.

All right okay and then could you talk about the co-investment where do you see that this year versus last year just to give some sense?

Well we gave guidance that we hoped it would be a net $40 million possibly I can tell you right now I don't think that will happen again because we've been liquidating assets faster. So, we're still hopeful that it would be you know sort of $20-$25 million net number that means we get money out, but we are getting money back. But it will be down from the earlier guidance that we gave you.

Lauralee, what was it last year, do you know just for comparison?

I will have to get back to you on that.

Great job. Thank you for your response.

Again to ask a question please press "*" then the number "1" on telephone keypad. At this time there are no further questions, Ms. Martin, Mr. Scott, are there any closing remarks?

Thank you operator. If there are no more questions, we will draw this call to a close. Thanks everyone for participating today. And we look forward to talking to you again after the third quarter.

Thank you, ladies and gentleman. This concludes today's conference call. You may now disconnect.