Cushman & Wakefield PLC
NYSE:CWK
Earnings Call Analysis
Q4-2023 Analysis
Cushman & Wakefield PLC
Michelle, the new CEO since July of the previous year, has taken a hands-on approach to revitalize Cushman & Wakefield. She has meticulously reviewed every business aspect, implemented long-term strategies not revised since their IPO in 2018, and emphasized data-driven decision-making for spendings and capital allocation, all for future growth. They've successfully lowered their debt burden through refinancing and are primed to further reduce leverage. Their actions have culminated in notable financial gains, hinting at a transformed and more resilient company.
2023 ended on a high note with $570 million in adjusted EBITDA, a remarkable leap from a near breakeven in the prior year, and $100 million in free cash flow. Cushman & Wakefield also boasted year-over-year leasing revenue growth across all reports, with a sturdy performance in the U.S., Europe, and APAC. Their service businesses saw a 3% revenue rise in 2023 and await more prosperity, having honed a deep understanding of these businesses and solidified a clear direction for enhancing long-term growth and profitability.
Despite a challenging macro environment, the company has sharpened its balance sheet and enhanced free cash flow efficiency, confidently navigating headwinds. Fee revenue in Q4 experienced a modest decline of 3% year-over-year to $1.8 billion while leasing revenues enjoyed a 5% growth. The company saw a 37% decrease in adjusted EBITDA margins year-over-year but remains committed to disciplined cost management. Free cash flow witnessed a substantial boost compared to the previous year, and with ample liquidity and a strong balance sheet, the company is prepared to manage future growth and recoveries.
Capital markets are expected to rebound later in 2024 with a more favorable interest rate environment. The $400 billion of dry powder in the market is a prelude to potential growth, and the leasing market is anticipated to be stable, with corporate occupiers continuing to engage with large office spaces. Significant opportunities are also forecasted in service businesses, suggesting a strategic impetus on organic, client-centric growth.
As the company journeys through 2024, there is a combination of headwinds such as inflation and increased incentive compensation balanced by their cost-efficiency drives. While not providing full-year guidance, the expectation is that these pressures will be largely but not entirely offset. Margin accretion in the latter half of the year will be critical and is expected to benefit from the recovery in brokerage activities.
With a strategic approach to leverage, the company aims to repay the $193 million term loan by August 2025, optimizing their leverage ratio as earnings pick up. They maintain a goal for a 2-3x leverage range and are confident in their financial strategies going forward.
The leasing market has demonstrated resilience, with Cushman & Wakefield closing larger and more concentrated transactions. While delayed decision-making has been noted in some occupier categories, those involved with Class A properties are active, contributing positively to the company's leasing operations.
After achieving $140 million in cost savings in 2023, the company is comfortable with their cost base entering 2024. With a focus on seeding growth and maintaining disciplined cost management, they are carefully navigating the shift from cost reduction to business growth without substantial new cost-cutting initiatives planned.
Performance within the property and facility management sectors met expectations, notwithstanding the modifications to contract accounting and slowdown in project management. Asia Pacific showed strong growth in this segment. Looking forward, the company concentrates on profitability, hoping to replicate the previous year's growth rate as they progress into 2024.
2023 was heralded as a foundation-strengthening year for Cushman & Wakefield, setting the stage for transformation and value-unlocking in 2024. The company exits this period with a fortified strategy for future growth, disciplined capital allocation, and an eager look towards the next earnings reveal.
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Welcome to the Cushman & Wakefield Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Megan McGrath, Head of Investor Relations for Cushman & Wakefield. Ms. McGrath, you may begin the conference.
Thank you, and welcome to Cushman & Wakefield's Fourth Quarter 2023 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 forecasts and estimates 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 in the appendix of today's presentation.
Also, please note that throughout the presentation, comparisons and growth rates are to the comparable periods of 2022 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, Megan. It's hard to believe this is just my third earnings call as CEO of Cushman & Wakefield given the pace of change since I became the CEO in July of last year. Since then, we've looked at every aspect of our business. We have updated and mapped out long-term strategic plans for the first time since the IPO in 2018, and we're using data to make tough decisions around spending and capital allocation, which will set us all up for future growth. And we took actions toward deleveraging with our 2 refinancing transactions last year, and we plan to begin the process of reducing our leverage later this quarter.
You can see the impact of the changes that we've made in our 2023 results. We generated $570 million in adjusted EBITDA and $100 million of free cash flow up from essentially a breakeven number in 2022. And we're not done. We made extraordinary strides last year in a short period of time, operating with rigor, executing with speed and urgency and never settling, continuing to drive the business forward, and we haven't come this far to stop now.
Every day, we are working to improve our financial position and flexibility and to create momentum both internally and with our clients so that we are poised to capitalize when the market inevitably rebounds.
We've already started to see some green shoots. In the fourth quarter, leasing revenue grew year-over-year in all 3 of our reported regions due to growth in large office and industrial deals in the U.S. and strength in Europe and APAC. Our services businesses remained resilient, growing revenues at 3% in 2023 on top of double-digit growth in 2022. But as I've mentioned before, we are not satisfied with this level of growth. But thanks to the detailed strategy work we completed last year, we're entering 2024 with a better understanding of each of our services businesses and a clear focus on strengthening both long-term growth and profitability.
Now people have been asking about our view on 2024. Let me start with capital markets. As a long-time real estate investor, I know it's not only the absolute level of interest rates that matter, although it's important, but what also matters is the shape of the yield curve. With the inverted curve that we have today, people are hesitant to borrow and lend law. Once the Fed begins to cut rates, which seems likely to happen later this year, we expect the yield curve to begin a process of normalizing. This should help people get more comfortable about taking 5-, 10- and 15-year risk, providing a pathway to a more active market.
And while we anticipate a moderate initial reduction in interest rates later this year, we do feel closer to the restarting of capital markets activity than we have in some time. So even before the Fed cuts, there is accretive, profitable opportunities for us to pursue.
Every week, we hear about more funds being raised for real estate investments. There is roughly $400 billion of dry powder in the market waiting to deploy. And even in distress, there's opportunity for Cushman & Wakefield. Our new real estate optimization team helps our clients evaluate, monitor, and address potentially stressed or distressed assets.
Now moving on to leasing. We expect stable to modest growth in this segment in 2024, supported by a solid level of lease expirations. And even with many companies implementing hybrid work, there's 10.5 billion square feet of occupied office space globally.
And finally, we see significant opportunities to organically expand our services businesses, thanks to our global scale and client-centric strategy. We remain disciplined and focused on accretive growth. For example, we recently won a long-term contract with a large global financial services company. They weren't looking for the biggest services provider but for a thoughtful partner to help create and execute innovative solutions designed specifically for them, which is why they chose Cushman.
And in another recent win, the deal never went to RFP. We won on our reputation, our relationships and our ability to handle complicated situations. Through our commitment to streamlining our cost structure, enhancing our balance sheet and cash flow, and strengthening our client-facing initiatives, we are poised to create meaningful value as the market returns to growth.
We will never settle. We're often seen as the scrappy challenger in this market, out thinking others, brave in our decision-making and advice. The people of Cushman & Wakefield proudly lean into today's market challenges because we don't run away from our clients' biggest challenges, we run to them.
And with that, I'll hand the call over to Neil.
Thank you, Michelle, and good afternoon, everyone. While the macro environment in 2023 was persistently challenging, we proactively enhanced our balance sheet strength and flexibility, prudently cut costs and improved our free cash flow conversion through better working capital efficiency, all of which position us well for a market recovery. . For the fourth quarter, fee revenue was $1.8 billion, a 3% decrease from the prior year. PM/FM revenue was up 1% or up 3.4%, excluding the contract change we discussed last quarter. This change will continue to impact the first half of the year, resulting in a roughly $50 million headwind to fee revenue but no impact to EBITDA.
Leasing revenues grew 5% versus prior year, the first positive result we have reported in this segment since third quarter 2022 as we saw improved results in each of our reported regions. Capital Markets revenue declined 32% in the fourth quarter as transactional markets continue to be impacted by interest rate volatility and uncertainty.
Valuation and other was down 4%, a sequential improvement in the year-over-year trend. Adjusted EBITDA for the fourth quarter was $213 million, down $7 million from the prior year. Despite the decline in revenue, our adjusted EBITDA margin of 11.8% was essentially flat year-over-year, reflecting our commitment to cost discipline. Adjusted earnings per share for the quarter was $0.45, down $0.01 from the prior year.
Turning to our segment results for the quarter. In the Americas, we saw a 10% year-over-year decline in brokerage revenues with capital markets revenue down 36% and leasing revenue up 2%. We are encouraged by the fourth quarter performance in leasing as we successfully executed an increased number of large office and industrial deals.
Americas PM/FM revenue increased 1% or 4.6%, excluding the impact of the contract change. Americas adjusted EBITDA of $139 million declined 16% or $24 million versus prior year, with $14 million of the decline attributable to our Greystone joint venture as FHA volumes remained under significant pressure in the quarter. We continue to believe that long-term fundamentals in the multifamily market are compelling, and we expect results in this business to stabilize in 2024.
EMEA brokerage revenue declined 1% in the quarter, with capital markets down 26% and leasing up 13% with particular strength in the U.K. PM/FM revenues was down 11%, primarily reflecting lower project management activity due to reduced CapEx budgets as well as our focus on driving profitable growth. Adjusted EBITDA in EMEA grew 48% with adjusted EBITDA margins up 670 basis points, driven by the change in mix to higher-margin leasing revenue as well as tight cost discipline.
Our APAC region reported another solid quarter with leasing revenue up 14% and Capital Markets up 5%, driven by strong growth in Southeast Asia and India. Valuation other was down 4% and PM/FM grew 7% and as property, facilities and project management all performed well in the quarter.
Now turning to our full year results. For the full year 2023, we generated fee revenue of $6.5 billion, a 10% decrease over the prior year. Capital markets declined 41%, leasing was down 12% and valuation and other was down 11%. Partially offsetting these declines, PM/FM revenue grew 3% for the full year, supported by strong growth in facilities management and property management.
We achieved adjusted EBITDA of $570 million, a 37% decrease from 2022 with adjusted EBITDA margins of 8.7%. Adjusted earnings per share for the year was $0.84.
Turning to cash flow. We generated $101 million of free cash flow for the full year compared with a $2 million use of cash in 2022. I am very proud of our team's work to improve free cash flow generation. It took a global effort and significant cost functional cooperation to increase our working capital efficiency and deliver these strong results. We remain committed to deleveraging and expect to begin debt repayments later this quarter.
Our balance sheet is secure. Following our 2 refinancings in 2023, we have no significant funded maturity until 2028, outside of the $193 million turn loan due in 2025, which we expect to repay with cash on hand. At the end of the quarter, we had $1.9 billion of liquidity, consisting of $800 million of cash on hand and $1.1 billion available on our revolving credit facility. We had no outstanding borrowings on our revolver, our net leverage was 4.3x, and taking into account our interest rate hedges, 93% of our debt is currently fixed rate.
Finally, moving on to our outlook. For the first quarter, we expect revenue to be relatively flat year-over-year with a slight improvement in sequential brokerage trends and modest services revenue growth as we focus on driving profitable growth in that business. We expect to achieve a slight year-over-year improvement in EBITDA as last year's cost actions are expected to more than offset first quarter cost increases.
We are not providing full year guidance today, but I'd like to give you some color on how we are currently thinking about the headwinds and tailwinds for the year. We do expect trends in capital markets to improve throughout 2024. However, sustained growth is unlikely to occur before the second half of this year when we anticipate a more conducive interest rate environment. We expect the leasing market to be relatively stable for the year and for our services business to grow at a similar rate to 2023.
On the cost side, we anticipate some cost pressure in 2024, driven by normal inflation as well as higher incentive comp as we focus on positioning the company for market growth. We expect these cost headwinds will be mostly offset by our cost efficiency initiatives.
In conclusion, in 2023, we solidified the balance sheet and significantly improved free cash flow, ending the year with positive momentum. We are financially well positioned for growth, margin improvements and further capital structure enhancements once consistent market growth returns.
And with that, I'll turn the call back over to Michael.
Thanks, Neil. 2023 was the year that we strengthened our foundation, building on Cushman's 100-plus years of history to begin writing the story of our next century. 2024 will be another transformational year for us as we see future growth opportunities continue to execute for the long term, drive discipline in our capital allocation and maintain our focus on unlocking meaningful value in the company.
Now I'll turn the call over to the operator to take your questions. Operator?
[Operator Instructions] Today's first question comes from Anthony Paolone with JPMorgan.
I guess my first one. Just I wanted to clarify, Neil, like when you talk about services fee revenue, what all is included in that bucket? Because I guess what I'm trying to understand is just kind of where the '24 revenue picture rolls up to just given the 3 bullets here in your outlook?
Sure, Tony. So essentially 3 areas: property management; facilities management, which in facilities management will include our CWS business, which is the more janitorial; and then the project management. And then finally, project management.
If we think about '23, it was really project management where we saw the decline, especially in the fourth quarter. Facilities Management and property management were strong. But certainly, as CapEx budgets got constrained during the year, it was the more ad hoc property management, which declined.
As we look to 2024, particularly in the first quarter, we are hyper focused on accretive long-term growth. And so if we look at our service contracts, which are historically long term and recurring, what we really are focused on is how we improve the profitability over the long run.
So services remains a key focus area for us. We are focused on delivering high-quality, differentiated service. And so what that may do is pressure the margin certainly early in the year but ultimately lead to strong accretive growth as we move through the back half of the year and into 2025.
But if I just try to take what you've put out here in noting sort of the cost headwinds, some of that you'll offset, I mean should we take the outlook to be if you're running a fairly flattish top line, that margins will be flat, maybe even down a little bit? Just trying to get to the sensitivity on margins.
Sure. So if we look at margins, I think we've got to break the year into 2 halves. Obviously, a lot of the margin will depend on how we see brokerage coming back. As we know, when we see brokerage come back, that's when we really will see the margin accretion.
If we think specifically about the first quarter, what we do expect to be able to drive approximately 100 basis points of margin improvement in the first quarter as we see a net benefit of our '23 cost savings. And then if we look to the full year, we expect that net benefit to reverse as we lap some of that '23 cost action.
Taking a look at our longer-term view, the work we did on the cost side in '23 has set us up well for margin accretion when brokerage comes back, but that will depend on the speed of the recovery.
The next question comes from Ronald Kamdem with Morgan Stanley.
So I guess my first question was just on the thinking about sort of the cash flow conversion. Maybe can you just provide some context of how 2023 closed out in your view? And how you're thinking about cash flow conversion as we're going into 2024, even if it's a first half, a second half breakdown, curious how you guys are thinking about that.
Sure. Absolutely, Ron. So as I said on the call, we were exceptionally pleased with the work that our teams did to drive free cash flow in 2023. And that certainly has positioned us well as we go into '24 to be able to use that capital in the most accretive manner.
Several factors drove the positive outcome, but it was primarily working capital. And if we look at what the contributors were in working capital, about half of it was from the natural release of working capital as the business slowed. The other half was really driven by our internal focus and initiatives.
So as we look into 2024, it's those initiatives, which were already put us in a good place through '24. I do not expect to see the same level of natural release that we saw in '23 as the business strengthened. And in fact, as we -- we will continue to focus on free cash flow conversion. It is a very high priority, but you can expect us to use our balance sheet to drive growth, especially as we start seeing those green shoots in the back half of the year.
And then just going back to the 1Q outlook, which was super helpful. You talked about sort of a slight increase in adjusted EBITDA. I think you mentioned sort of 100 basis points and basically margin gains versus last year. I guess if we roll that forward a little bit, thinking about the back half of the year, how should we be thinking about sort of the year-over-year comp on EBITDA, right, because presumably, there is some sort of recovery coming in the back half of the year. But it sounds like depending on the margin outlook, EBITDA could be flat, could be slightly up. Like as we roll forward, what should we be keeping in mind for the EBITDA trajectory compared to '23?
Yes. I think, Ron, I think the question you're really asking is on the cost side, how we're thinking about the costs. We'll make assumptions on the revenue side, and I'll leave that to you. We're not providing full guidance.
But as we think about the costs for the full year, we are balancing some headwinds and some tailwinds. As with most companies, we are facing some inflation, particularly in the first half of the year. And in addition, we will see some of our incentive comp come back certainly as performance improves.
So what that means is we certainly will offset all of our cost increases in the first half of the year. But as we look back over the year, we will mostly offset our increases, but not completely. And so margin accretion in the back half will really be driven by that recovery in brokerage, depending on the timing and extent of that.
The next question is from Michael Griffin with Citi.
Neil, maybe just a question on the balance sheet and leverage. I know it's still above kind of the historical range that you're looking to get it in. But if the expectation, and maybe I read this wrong, is for EBITDA to be flat on a year-over-year basis. I guess, what's it going to take to get that leverage metric down to a more comfortable level?
Michael, look, if we think about '23, we had a very strong free cash flow year. So that's given us a lot of flexibility and optionality as we look at '24. Leverage is clearly a key priority. And as I said on the call, we will begin repaying debt at the end of the quarter. Our intent is to pay down the $193 million that is out on the 25 term loan by August of '25. But the exact timing will depend on how we see that recovery. We are fairly optimistic about the year. And so we will see leverage come down naturally as EBITDA improves.
We ended the year at 4.3x, which was right in line with what we guided to. And our long-run target remains intact. We would like to operate in that 2 to 3x, but naturally leverage is driven by 2 things: debt and EBITDA. And so as we see that recovery in EBITDA, that's where we really see the decline in leverage. Yes, I'll just add, we very comfortable at these levels. We feel like we're in a good place.
And then maybe just a broader question about the leasing market. It seems like results in the fourth quarter were better than what expectations were going into it. I mean, are you seeing a more concerted effort for these occupiers of particularly office real estate to make decisions around leasing?
I mean, we've heard, I guess, more on the REIT side, that large occupiers are still kind of delayed in making these big decisions. So has anything changed there? Or has the time from first interacting with the broker to assign the lease, is that still pretty long relative to historical levels?
Michael, this is Michelle. Let me unpack that for you. Net-net, leasing is looking really solid for us, and it's a global strength at Cushman & Wakefield. It has been driven by the performance that we've seen, has been driven by larger office and industrial deals. And if you look at 2023, the average deal size for us did increase in office in particular, so we are seeing a lot of those larger, more concentrated transactions.
And in the U.S., in particular, we saw strength in the Northeast markets, the Tri-State, the Midwest. And in Europe, I would call out the U.K. And in APAC, I would call out India. So we're feeling pretty optimistic about leasing going forward in 2024.
To your question about occupiers making decisions. I think the type of occupier that we are dealing with and the Class A product that we tend to work in has really driven that kind of performance because those occupiers are making decisions.
[Operator Instructions] The next question comes from Steve Sheldon with William Blair.
You've got that Pat McIlwee on today. So my first question. It sounds like you're essentially at your targeted run rate for the cost saving initiatives at this point. I just wanted to ask if you'd be able to quantify the impact of those initiatives in the quarter and if you feel that you're still at an appropriate run rate heading into 2024? Or if there are any areas you're still looking at for additional efficiency.
Yes. So we are very comfortable where we are at cost efficiency standpoint. '23 was the year when we really set our cost base. Our target was to take out $130 million of cost. We achieved $140 million. So we feel good about what we achieved and just very proud of what the teams did throughout the world in achieving those cost savings.
We are now at a pretty good place. So now we're sort of turning our attention on how we start seeding growth in the company as we look forward, obviously, depending on what we see happening in the brokerage markets. That $140 million will have a carryover impact of about $30 million, which we'll see primarily in the first half of the year.
We'll continue to be very prudent on cost. Cost management is clearly a focus and a discipline that we're very good at over time and we'll continue. At this point, we are not planning any specific cost initiatives like we did in 2023. But at the same time, there are always levers that we can pull, but we are turning our attention more to seeding growth.
And then just quickly, can you provide any additional color on the -- some of the underlying trends within PM/FM or services and specifically what exactly is driving some of that weakness you saw? I think you said it accelerated a bit in the fourth quarter. Just what's going on there broadly.
If we look at services. Services performed right in line with our expectations and our guidance for the full year. The one adjustment you have to make is for a single large contract, where we changed the win which we are accounting for that contract. That's about $50 million in '23 and about $50 million in '24.
So if you exclude that contract, which really just changes the way our gross net revenue is reflected but does not change the EBITDA or the profitability of the contract, we grew our services business at 4% for the year, which is right in line with our guidance.
We expect similar performance in '24. If we look at where we saw it, essentially, it was in the project management, where we saw a slight slowdown, but property management and facilities management were very strong, and we saw particularly strong growth in Asia Pacific, where we have large services businesses, and those businesses performed well.
On the project management side, and certainly, as we look at making the business more efficient, that was really what drove the decline in services in EMEA. A very, very healthy look at the business and really a long-term focus, as I say, to drive long-term accretion.
So as we look in the first and second quarter, we'll continue to focus on profitability and expect to achieve the same level of growth in '24 as we achieved in '23.
At this time, we are showing no further questions. This concludes our question-and-answer session. And I'd like to turn the call back to Michelle MacKay for any closing remarks.
Thank you, operator, and thank you, everyone, for dialing in today. We look forward to speaking with you again on our first quarter earnings call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.