Cushman & Wakefield PLC

NYSE:CWK

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to Cushman & Wakefield's First Quarter 2019 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce Bill Knightly, EVP of Investor Relations and Treasurer for Cushman & Wakefield. Mr. Knightly, you may begin the conference.

[Bill Knightly, executive]

Thank you, and welcome again to Cushman & Wakefield's First Quarter 2019 Earnings Conference Call. Earlier today, we issued a press release announcing our financial results for the period. This release can be found on our Investor Relations website, along with today's presentation pages that you can use to follow along. These materials can be found at ir.cushmanwakefield.com.

Please turn to the page labeled 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 may refer to non-GAAP financial measures as outlined by SEC guidelines. Reconciliations of GAAP to non-GAAP financial measures are found within the financial tables of our earnings release and Appendix of today's presentation. I'd like to remind you that the company uses fee revenue, adjusted EBITDA, adjusted earnings per share and local currency to improve comparability of current results and to assist our investors in analyzing the underlying performance of our business. You will find definitions of these non-GAAP financial measures and more detailed financial information in the tables of today's earnings release and the Form 8-K and our annual report on Form 10-K. In addition, I would like to note that throughout the presentation, comparisons and growth rates are to the comparable period of 2018 and in local currency. For those of you following along with our presentation, we will begin on Page 5.

And with that, I'd like to turn the call over to our Executive Chairman and CEO, Brett White.

[Brett White, executive]

Thank You, Bill, and thank you all for joining us today. I'm pleased to report we continue to see good momentum in our business with strong double-digit growth in fee revenue and adjusted EBITDA in the first quarter. Our sustained strong performance is a result of our continued focus on our top growth priorities and an environment that remains favorable for real estate services. As a reminder, here are our areas of strategic focus: revenue and share growth through the delivery of differentiated and best-in-class service to our clients, strategic recruiting and infill M&A to continue to expand our strong global platform, leveraging our strength in our large and growing recurring revenue businesses and continued margin growth through operational discipline.

By these measures, the first quarter was a good continuation of the momentum we experienced throughout 2018. We saw double-digit growth at the top and bottom lines in the first quarter growing fee revenue by 13% and adjusted EBITDA by 19%, led by strong performance in our leasing and in our property facilities and project management service lines. We also continued our focus on margin improvement through operational efficiency. Duncan will speak to the first quarter results in a bit more detail later.

In addition to our strong financial performance, I'd like to share a few other notable highlights in the quarter. In March, we announced a secondary offering of shares from some of Cushman & Wakefield's principal shareholders. Further detail and documentation around that offering can be found in our Investor Relations site.

Our leading global brand continued to earn strong third-party recognition in the first quarter of 2019, including being named again as the #2 Global Commercial Real Estate Brand by the Lipsey Company, receiving top honors for real estate outsourcing by IAOP and being recognized by Forbes as the Best Employer for Diversity. We're proud of these designations because they provide further evidence that we're building an organization that provides value to our many stakeholders, including our clients, our people and our shareholders.

In the first quarter, we continued to expand our global platform through infill M&A. As we mentioned earlier on our fourth quarter call, we acquired Quality Solutions, Inc., QSI, in January to expand our facility management capabilities across the North American markets. We're pleased to report that the integration of the QSI business continues to run smoothly and that the business is performing well.

In addition, in the first quarter, we also acquired Smith Brothers Group, a facilities services business in South Australia, which will continue to expand our recurring revenue business in that important market while building on our strong occupier platform. Global Occupier Services saw strong momentum in the quarter winning new mandates as large corporates continued to choose Cushman & Wakefield for their real estate outsourcing. For example, we were awarded in the first quarter a new assignment to provide integrated facilities management for a leading financial services organization approximately 5 million square foot global real estate portfolio. We won a new contract with Bank of the West to provide integrated facilities management for their 3.7 million square foot portfolio, and we were awarded a new assignment with Hewlett-Packard Enterprise to provide transaction management, strategy and lease administration for their entire global real estate portfolio.

In addition, our leasing and capital markets businesses continue to win and execute large assignments in the first quarter. A few represented examples would include: A very recent announcement that Cushman & Wakefield represented WarnerMedia and AT&T in their approximately $2.2 billion sale-leaseback to the related companies in a transaction that should close in the second quarter. We represented Rockpoint Group in securing a $400 million loan for an 815,000 square foot New York property. We represented USG Corporation in securing a 220,000 square foot lease for the company's global headquarters in Chicago. We advised Zurich in the purchase of a 5-office property portfolio in Madrid from Blackstone. And we brokered the sale of Ascot Raffles Place Singapore at a sale price of $260 million, which represents one of the largest hospitality deals in that market in recent years.

Now turning to Page 6. You'll see our dashboard on the global real estate market, which continued to reign favorable for commercial real estate services. These are among the primary metrics we monitor to assess commercial real estate supply and demand and to provide a foundation for our business forecast. You can see demand for real estate remains strong. Global GDP remains solid. The IMF is currently forecasting global GDP growth at 3.3% and 3.6% for 2019 and 2020, respectively. Supply metrics are generally on pace with demand.

In summary, we remain very pleased with the continued momentum in our business. Our strong first quarter performance coupled with continued favorable economic conditions is a very good start to 2019.

Duncan Palmer, our Chief Financial Officer, will now discuss our financial results and share more on our outlook for the year.

[Duncan Palmer, executive]

Thanks, Brett, and good afternoon, everyone. To start let's turn to Page 8, which summarizes our key financial data for the first quarter.

As Brett said, we continued to deliver strong operating results. Today, we reported 2019 first quarter fee revenue of nearly $1.4 billion, an increase of 13%. We reported double-digit growth across each of our 3 segments. First quarter adjusted EBITDA was $88 million, up 19%. Our adjusted EBITDA margin of 6.4% represents a 45 basis point increase. Margin expansion was driven by strong revenue performance and continued focus on operating efficiency. First quarter adjusted earnings per share was $0.10. Adjusted earnings per share performance was driven by strong operating results and lower interest expense. Recall we paid off our second lien in the third quarter of last year.

Moving on to Pages 9 and 10 where we show fee revenue growth rates by segment and by service line. Our leasing service line and property facilities and project management service line, which we call PM/FM, grew particularly strongly in the quarter with all 3 segments growing double digits. Globally, leasing grew 19%. Americas leasing grew 21%, representing strong performance across our key markets. Globally, our PM/FM service line grew 18%, in part driven by the acquisition of QSI, which Brett mentioned earlier. We're very pleased with the progress we have made to-date on the integration of this acquisition.

Within PM/FM, facilities services represents just under half of the fee revenue. In facilities services, we typically perform or subcontract a variety of services through our major operations in both the Americas and APAC. This business generates solid cash flow on a stable revenue stream, and on an annualized basis typically has low single-digit growth. Fee revenue growth in facilities services was 10% in the first quarter. The rest of our PM/FM service line, which comprises our occupier outsourcing, property management and project management operations, grew at a strong double-digit rate. We expect continued double-digit revenue growth in the PM/FM service line overall in 2019.

With that, we will start a more detailed review of our segments starting with the Americas on Page 11. Our Americas segment grew fee revenue 11%. Growth was driven by leasing and PM/FM, which were up 21% and 16%, respectively. Within our Americas PM/FM service line, our facilities services operations represent a little over half of our fee revenue. Facilities services fee revenue was up low double digits from growth at existing clients and new business wins. The rest of the PM/FM service line grew at a strong double-digit rate. We expect double-digit growth in this service line in 2019. Our Americas valuation and other service line was flat for the quarter. Americas adjusted EBITDA of $70 million was up 13%, and adjusted EBITDA margin was 7.5%. Adjusted EBITDA was driven by the strong revenue performance as well as management's continued focus on operating efficiency.

Moving on to EMEA on Page 12. Fee revenue increased 22%. This was driven by double-digit growth across all of our service lines. Our PM/FM service line in EMEA represents less of our overall segment than in the other 2 regions and grew 38% in the quarter. Capital markets leasing and valuation and other grew 19%, 11% and 14%, respectively. Adjusted EBITDA was around breakeven for the first quarter, an improvement of $9 million.

Now for our Asia Pacific segment on Page 13. Fee revenue grew 14%. PM/FM, leasing and valuation and other all performed strongly, growing 19%, 10% and 18%, respectively. PM/FM represents roughly 2/3 of the fee revenue for the segment. Facilities services operations in APAC were up 3%. The rest of the PM/FM service line grew in the strong double digits.

Capital markets in APAC was down due to a very strong first quarter in 2018, which included 1 very substantial transaction in Hong Kong. Adjusted EBITDA of $18 million was down 9% for the quarter. The benefit of strong revenue growth was more than offset by the tough comparison established by the substantial capital markets transaction in Hong Kong, which I just mentioned.

Turning now to Page 14. In summary, we are delighted with the performance of our businesses as we start 2019. The overall global economy continues to be conducive to growth across our businesses. Our momentum is good, and we expect to continue to grow profitably in 2019.

On our last call, we provided guidance that we expect 2019 adjusted EBITDA to be in the range of $685 million to $735 million. While I caution against extrapolating too much from results in the first quarter, which is the lowest contributor to the year overall, we are on track consistent with our full year 2019 guidance.

With that, I'll turn the call back to the operator for the Q&A portion of today's call.

[Operator]

[Operator Instructions] Your first question comes from the line of Anthony Paolone from JPMorgan.

[Anthony Paolone, analyst]

My first question is if you can talk about just what you're seeing in the environment for capital markets folks given what's kind of been happening on the M&A front with a couple of the larger shops there, and how that plays into your either recruiting or infill acquisition strategy?

[Brett White, executive]

Sure. And hi, Anthony. First of all, I think it's become clear to everyone that the capital markets business where we compete has clearly moved to -- and the good business has clearly moved to the full-service platform. And I think that we all realize it as the years had gone by, having the ability to talk to investor, owner clients about everything involving their asset, not just an equity trade, is a distinct competitive advantage for the firms that can offer these full services. What we saw in the market announced a while back is just another indication of that very clear dynamic. So what does that mean for us?

It's terrific. It makes it, frankly, easier to retain and easier to recruit the best talent because the market has spoken about which platforms are going to win and which platforms are going to lose, and we are clearly on the winning side of that ledger. The capital markets remain active. First quarter is small numbers, and I wouldn't draw too many conclusions from the first quarter. But certainly, the activity that we're seeing is good. We were very pleased with what we saw out of EMEA in their first quarter. And as I mentioned in the prepared comments, we closed an extremely large transaction in New York -- or we are closing, I should say, an extremely large transaction in New York that shows that even the largest transactions are active in the marketplace. So at the moment, we think pricing is -- seems reasonable to buyers and sellers. The 10-year is projected to be under 3% this year and next year. It's a good environment, Anthony.

[Anthony Paolone, analyst]

Okay. And then my other question is as it relates to tariffs, if that were to become more prominent headwind economically around the globe, where do you think we'd see that first in your business either by business line or geography?

[Brett White, executive]

So the threat of tariffs, and actually tariffs themselves have been in the market now for a while. And as we mentioned last year when this question came up and I'll just reiterate today, we haven't seen any impact on our business either in greater China or anywhere else for that matter really based on the existence of increased tariffs or the threat of increased tariffs.

I think that probably the impact of tariffs long term, Anthony, is going to be more insidious than me being able to say, look at China or look at the West Coast of U.S. or Australia, I think the -- a long-standing environment of steep tariffs would just lower GDP growth in many places and we would probably see that come through on the leasing numbers more than anywhere else. But I just want to underscore that this is not a new thing. It's been in the market now for some time. The threats have been in the market for some time, and at the moment, we see no impact.

[Operator]

Your next question comes from the line of Vikram Malhotra from Morgan Stanley.

[Vikram Malhotra, analyst]

You had quite amount of strength and momentum on the PM/FM side. It's certainly something you've talked about in the past. Just sort of wondering as you look forward, can you talk about incremental opportunities from here in terms of maintaining the momentum? And then also just the cross-sell opportunity, that seems something you've emphasized in the past as well. I'm just curious sort of how that could impact the other business lines.

[Brett White, executive]

Sure. So as it pertains to momentum, look, I think that for our firm and for the industry as a whole, this trend on the corporate side of continuing to outsource core activities around their real estate footprint is not going to change. And that trend, as we talked about before, clearly benefits the large 3 players -- or the largest 3 players in this industry, and it benefits them differentially. So we are happy to operate in an environment where corporates every day make the decision to outsource either for the first time or more of their real estate activities to either us or our 2 larger competitors.

Cross-selling at Cushman & Wakefield, we're in the early days here, and we are beginning to mine the opportunities across the platform to cross-sell all of the services to all of the other services. I've mentioned before and I'll underscore again, every business line we have definitionally has the opportunity to provide cross-sell opportunities to every other business line in the firm. It's very, very important to our model that, that be true. I think it's fair to say that it will always be true. We won't invest in businesses, buy businesses or build businesses that can't support the rest of the family of businesses that we have here at Cushman & Wakefield.

So as we think about Cushman & Wakefield, or as you think about us and you think about the industry, those firms that have full services platforms globally are going to benefit from the trends in the marketplace permanently. And we're seeing the benefit of those trends now, but we should see continued and more benefit from this family of services as we get better and better at cross-selling across our platform.

[Vikram Malhotra, analyst]

Okay, great. And then just second question on the margin front. You referenced sort of operating leverage and you gave us the EBITDA guidance. I'm just sort of wondering relative to your own internal expectations, have anything changed on the margin front? And should we be aware of -- can you remind us of any nuances intra-quarter in the remainder of the year.

[Duncan Palmer, executive]

Yes, it's Duncan. I think on the margin front, I think what we've said, and I think what we continue to believe, is that we are very focused and will continue to be very focused on growing margin, really, on a -- and we think of it on a year-over-year basis because of the seasonality of the business. I think intra-quarter stuff is not particularly a good way of looking at it. But on an annual basis, we've improved margins, turning the page 2014 to '18, roughly 400 basis points, I think. And while I'm not sure we'll do it at that kind of clip going forward, we do expect to see margin expansion this year.

We factored that in, we did see some margin expansion in the first quarter year-over-year, that's good to see. I would expect us to see margin expansion in the year. So really, it was kind of in line with what we had expected to see, and what we'll continue to drive operating efficiency, we'll continue to drive getting good incrementals, more incremental revenue. We'll continue to get operating leverage as we do infill acquisitions. We did 6 last year. We've done QSI this year. They should all contribute to margin expansion over time.

[Operator]

Your next question comes from the line of Stephen Sheldon from William Blair.

[Stephen Sheldon, analyst]

First on QSI facilities, it sounds like the integration is progressing. Curious if you can provide some more detail on that process. And then additionally, roughly how much of the revenue acceleration in PM/FM in the quarter was driven by the inclusion of QSI?

[Duncan Palmer, executive]

Yes. So the integration's going well. I mean as you'd expect, the businesses -- the business -- when we buy businesses like that, we try and bring it as quickly as we can into our operations, into our systems, into our financial systems. Make sure that the business and its flow and its momentum continues uninterrupted by transaction. The management team is brought onboard and that we have a successful transition of clients and make sure that goes well and that's all going well right now. And so we're very pleased with that. Good momentum, and feel very optimistic about how it will contribute to our numbers.

Obviously, we'll be looking for some benefits from that, maybe some synergies from that as the year progresses and as we progress over time, and that will continue to be our focus. We haven't disclosed specifically, as I'm sure you're aware, in exactly how much revenue or EBITDA we expect to see from QSI this year. We did talk about it I think on the last call as being probably at the higher end typically of the multiples that we expected to pay. But in terms of first quarter, we haven't disclosed specifically how much it is. But you can see from this very strong growth we saw in the PM/FM service line overall, and you can assume that some of that was driven by QSI in the Americas. It's mainly obviously an FM-oriented business.

[Stephen Sheldon, analyst]

Got it. Okay. And then the follow-up within leasing. Can you talk some about how the pipeline there looked as of the end of the quarter? And just with more challenging comparisons there over the next few quarters, how are you thinking about potential growth in leasing?

[Brett White, executive]

Sure. This is Brett. I would start to answer that question by saying we're in a very good moment now in this industry. And that benefits of course everybody. But when you think about our primary business lines around the world, virtually every one of them showed double-digit growth in the quarter. And that's a very, very good operating environment.

Leasing is a critical business for us and for our competitors because so much of what we do, and the other business lines depends on an active leasing market. As you saw in our leasing business, we had exceptionally strong growth in the first quarter across our leasing business. The -- and what I would say is without talking about pipelines because I really don't want to do that, I would say that those dynamics we saw in place, we talked about throughout 2018 continue at pace and in place through the first quarter of 2019 and through the month of April. So we're quite pleased with the durability of the leasing business and we're pleased with what we see ahead of us in leasing across all 3 geographies.

[Operator]

There are no further questions at this time. Mr. Brett White, I turn the call back over to you.

[Brett White, executive]

Terrific. Thanks everybody for your time. We look forward to talking to you at the end of the second quarter.

[Operator]

This concludes today's conference call. You may now disconnect.