This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: We expect the growth to be a little more muted than we've seen throughout the year in the fourth quarter. And then also, you know, a lot of our PMFM business is in Asia Pacific. And so there will be some FX headwinds there. So, you know, overall, we feel very good about the business. We expect to see that, you know, up nicely this year and expect, you know, strength going into next year.
spk02: Okay. Has there been any appreciable change to just the pipeline and RFPs and things of that nature?
spk00: Tony, this is John. No, the nice momentum we've seen in our general PM and FM markets businesses across the world in the last two to three years continues at the same sort of rate. We have a really good win rate. We have a really good retention rate. That's actually showing up in the numbers in this quarter and year to date. And as Neil says, we continue to think that that will move on. Traditionally, in recessionary times, It's the recurring revenue businesses that can actually do pretty well as corporates try to reduce their own cost base applied to real estate, so through outsourcing. And we totally expect that to continue with the volatility that's surrounding the macroeconomy at this point. Okay.
spk02: And on China, can you maybe put some framework around just how big a business that is for you all? Because I understand the drag, but I feel like it's come up a bit more in your commentary than maybe some of your peers have.
spk00: Happy to. Happy to. Again, it's John here, Tony. We've long been a leader in real estate services in China. And the way our business is structured at this point, you might remember we did a joint venture with Banky Services, I think over two years ago now, where we placed our recurring revenue business with that market leader. So the structure of that means that we only see a flow through of EBITDA. So when that is down a little, it just hits us straight on the EBITDA line. And of course, largely the transactional business within greater China is extremely muted through the full year, likely through the full year now, as we see very little activity. Now, ultimately, what is a headwind to us this year becomes a tailwind once released. So we are optimistic about the overall real estate fundamentals there. But in terms of revenue, it isn't material. Because ultimately, we have this extremely large recurring revenue business in APAC, in Asia Pacific, which drives the business, particularly in terms of volatility, to continued pleasing growth.
spk02: Okay, got it. And then my last one is on the cost. And if I will get just your third quarter, OpEx was, you know, $315 million. Thereabouts was up, I think, 4% year over year. Is that kind of the area that you would target to try to protect margins? And I think, John, you had mentioned trying to reduce cost commensurate with the volume declines. We're just trying to understand how hard or not that may be, just if it's got to come out of that line because the other costs are pretty much already variable. Or maybe I'm looking at it wrong.
spk01: Tony, I think I think you've got it right. You know, about 45% of our costs, as you know, are variable. So those will move and those will just move with revenue about 40% of the costs are semi variable. That's where we are. We have already. initiated cost controls. Those are discretionary spend, things like T&E, things like marketing, that sort of thing. And so you will see some savings there already actioned. And then about 15% of our costs are more fixed. And that's where, you know, those costs take longer. That's where, you know, those are the costs that we'll address as we go into next year. But as you think about costs, it really is those variable costs that will come down very quickly with the drop in revenue.
spk02: Okay. And those percentages you just gave, that's across total, both cost of services as well as OpEx, not just that OpEx line, I assume.
spk08: That is absolutely right. You are. Okay. You're right. Okay. Thank you.
spk06: Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.
spk05: Great, thanks. Maybe we can go back to John's comments on the office leasing demand. It seems, from your outlook, like it's still pretty solid. Do you have a sense from your occupier clients, are they taking more space or less space? And do you notice if they're looking for anything different when they're making these decisions?
spk00: Michael, thanks. I'm happy to elaborate on that because some of the things we've been talking about for a while now truly showed up in Q3. It was a really solid month for us, sorry, quarter for us in leasing. But that really highlighted the fact that as an organization, we tend to focus on higher quality assets globally. So the flight to both quality in terms of Class A and then within Class A highly sustainable assets real estate meant that that was a highly traded asset class in leasing in the quarter. Far more muted, I believe, through the levels B and C. So there, flight to quality. And within that, the lease terms being signed by occupiers are back to pre-pandemic norms. So therefore, there's a commitment from the occupational market to see office as important as it was before the pandemic. Now, In terms of the amount of space, we are in this evolving environment of more hybrid use of space. And ultimately, at this point, we are seeing some occupiers in some sectors looking at slightly lesser takes. But I'd remind everybody on the call that ultimately, our revenue relies on deal volume and the dynamic of change in the market, not specifically the amount of space in total utilized. And one final point, which is, The vast majority of cities around the world are back to very similar pre-pandemic norms, both in desk utilization and the type of net absorption that we're seeing. But there are some very notable major global cities which just happen to be very visible in terms of that tends to be where many headquarters are located. There's London, New York. San Francisco, where long commute times and other challenges have meant that actually there's a more dynamic office leasing market going on at this point. But I think finally what I would say is that we're seeing some considerable construction cost increases coming through the market at this point, which makes the viability of new development quite difficult, which will see a focus on the refit of the B and C portfolios sitting in the market. So actually, they will come through as highly sustainable once capital has been allocated to those assets. which will release up a more aligned supply to demand. Because at this point, there actually isn't enough high-quality, grade-A, highly sustainable assets globally to satisfy corporate demand.
spk05: Gotcha. I really appreciate the color there. And then maybe just one other one on cross-selling across business lines. I know you've talked about this being a focus in the past and Just with the capital market side of the business seemingly pretty muted for the near term, does that make cross-selling opportunities harder, and how would you plan to address that?
spk00: The services provided by organizations like Cushman & Wakefield play to the full suite of needs of our clients. So I think you're focused on the investor owner there. When there's a lack of activity in terms of trading and sales in capital markets, owners tend to double down on the quality of the income streams they have from their occupiers. So they get very focused on the retention of those tenants, the provision of high-quality services to them. but to focus on the provision of really high quality property management skills, particularly in the return to office that we're seeing at this point, but across all asset classes. So, yes, there is a sort of a doubling down on the ability for us to sell our broader set of services to occupiers – sorry, to owners who are likely to be holding their assets a little longer at this point. I'd also just highlight, of course, that whilst there may be a muted level of actual capital markets deals in terms of sales going through at this point – The need to refinance continues at the lick of recent years. So that's where we can also provide our capabilities. It's not just in the equity sales side of the business, but it's also in the debt refinance opportunity. And that will continue through this next period.
spk08: All right. That's it for me. Thanks for the time.
spk06: Our next question comes from the line of Steven Sheldon with William Blair. Please proceed with your question.
spk04: Hi, thanks. You've got Pat McAleon for Steven's team today. So I think generally we expect just short of 10% of office leases to come due each year or somewhere in that ballpark. But given that that can has been kicked down the road a bit with some of these shorter term leases, do you think you've been seeing some of that pent up demand or those pent up leases flow through or is that still largely to be seen?
spk00: No, I think we're in a relatively normalized period part of lease renewals or relocations by the occupiers. Yes, there was that period in the pandemic where they kicked one or two years. And I think with the volatility that we're seeing in the market now and a general approach towards caution by most corporate occupiers globally, there may be more cans being kicked actually over the next couple of years, particularly as organizations settle on what they think the future of the office truly is. But that's sort of in the system of our revenues now. And whilst we don't expect leasing to be immune from falls in global GDP, because there's a high correlation in particular to GDP and job growth, we do think that this element of short-term renewals and also pre-pandemic long lease norms that we're seeing will continue.
spk04: Understood. Okay. And then switching gears, with Greystone, you've now got a bit more exposure to the multifamily and DCM side of things, which you just touched on briefly. But in the prepared remarks, you had said that performed relatively in line with expectations. I just want to ask if you can talk a bit more about how that business performed in the quarter and maybe specifically towards quarter end, what you saw there.
spk00: So, yeah, the prepared remarks were very clear about it performing as we'd expected in the quarter. We're now three quarters into our ownership relationship with Greystone. Our teams are really beginning to gel and go to market together. We have found that has been a very positive experience. sales proposition for us and we're beginning to grow market share in that equity debt market totally in the US multifamily so we're very pleased with the acquisition with the teaming that we're doing with the Greystone team and ultimately as part of our plan to be the primary multifamily full-service provider in the market in the US at this point but globally in the future
spk08: Okay, that's great. That's all for me. Thank you.
spk07: As a reminder, to register for a question, press the 1-4.
spk06: Our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Please proceed with your question.
spk03: Hey, good evening. So year-to-date, your operating cash flow is negative $195 million. Obviously, there's some seasonality in cash taxes that you had to pay for last year's earnings. But how are you thinking about cash flow over the remainder of this year and then probably more importantly for 2023?
spk01: Yeah, sure, Patrick. You're right. In the third quarter, we actually had – Positive cash flow, $38 million. Our cash flow, as you know, is always seasonal. We see an upflow in the first half of the year, and then we see the inflow in the back half of the year. This year was a unique year in that we had three things which impacted cash flow. The first, as we've said throughout the year, was the significantly higher bonus and commissions. that we paid out tied to 21 performance. So those, the big performance, especially in December, got paid out this year. So that was a drag on cash flow this year. We also had some NOLs roll off, so our cash taxes are slightly higher. And then with the increase of our PMFing business, there was an abnormal timing mismatch of some reimbursable payments and receivables, so that had a negative working impact. So the majority of the difference really is timing-related this year. As we look to next year or over the cycle, our cash conversion rate remains in that 30% to 40% range. Cash flow this year will be lower. Cash flow last year was significantly higher. And then as we go into next year, once again, we remain very focused on cash flow and cash flow conversion.
spk03: All right, that's helpful. Thank you. And then APAC, Is there a path back to double-digit adjusted EBITDA margins given the cost actions that you're taking?
spk00: I think the most likely path back will be to be a pickup in transactional business across APAC and the reopening in particular of Greater China. As I say, we have a very large-scale PMFM business out there. So driving up to double digits doesn't come necessarily from within that service line alone. We do need the mix issue to come back with transactions. Given so much of our business out there is actually PMFM, therefore largely labor applied to client sites, there isn't a huge amount of OPEX. We had this question earlier. There isn't a huge amount of effects applied to that business, but we're being very cautious on where we find cost opportunities across the whole business, and APAC is not immune to that.
spk08: All right. Understood. Thank you.
spk06: Our next question comes from the line of Ronald Camden with Morgan Stanley. Please proceed with your question.
spk09: Hey, just a couple quick ones. Back to the cash flow question. You know, I think you talked about sort of the seasonality year to year or I guess some of the differences year to year. I mean, when you take a step back, what's the sense of what's the annual run rate of the operating cash flow we should be thinking about historically on the business and so forth, right? Granted that 2021 and 2020 are sort of odd years, but sort of in your mind, what's that number usually trends to?
spk01: Yes, I think if you take the average of the two years, you're getting pretty close to a 25% to 30% cash conversion rate based on adjusted EBITDA. And that is the target that I would use over the long run. I think it's, as I said, a lot of this year's cash flow was timing. You saw the very significant, I think last year was higher than expected, as we've said. So that's probably a good guide as you look forward to the business.
spk09: Okay, great. And then just going back to some of the comments on 4Q, I've got the PFFM at flat. Maybe you can remind us again what you were thinking for leasing and and sort of any color commentary there in terms of that year-over-year growth? I think I missed that.
spk01: Yeah, sure. You know, at this point, given the significant uncertainty we're seeing as we move to the fourth quarter and the fact that December is such a big month, we are not providing specific guidance around brokerage. What we are saying is that we expect it to be down significantly. And then we've also given guidance around the margin we expect, given the fact that we are going to be extremely cost-conscious and cost-focused and protecting that margin. So you will see the brokerage, which obviously has a higher flow-through, we'll do our best to protect margin against that. But it's very difficult to fight that mix. And so, you know, that's what's impacting the margin.
spk09: Great. And then just my last question is I think the commentary on office was really helpful. Maybe as you think about some of the other sort of verticals, industrials, apartments, you know, even hotels, whatever, maybe I'd love some commentary on, you know, views there, how those are performing, you know, opportunities there as well. Thanks.
spk00: I'll deal with the very large asset classes. I think if you look about logistics, as I said in the commentary or the taped piece, that the quarter was still very strong in logistics and industrial leasing generally with only 1% vacancy rates in the U.S., So we do think that that is likely to continue, certainly through the long term. Retail is showing a very robust response to what has been a long-term change in the amount of physical retail required by the world, and we continue to see pleasing growth in retail leasing service line, although it is from a significantly lower base level. than historically. But I think the real story is in the evolving nature of the newer asset classes. I touched on the growth we've seen so far this year in life sciences. I could point to similar pleasing growth that comes through from the work that we do in data centers and other secular growth areas. So in a way, in the same way that for offices it's wrong to make a generalization because you need to look at the quality of the office, the sustainability level of the office, potentially the location of the office, Most asset classes need to be discussed in a more granular level. But on the whole, as I said, leasing in that quarter three showed up very nicely for us, reflecting the strength of the brand and our position in global markets. But we do not expect it to be immune from the impacts on GDP that are flowing through the macro economy at this point.
spk09: Great. Thanks so much.
spk06: There are no further questions at this time. I will now turn the call over to John Forrester for closing remarks.
spk00: Just to say thank you for everybody for joining us here today and, of course, for all of those clients and our team members listening. Thank you for your ongoing support at Cushman & Wakefield. We look forward to continuing our relationships with all of our clients and, of course, all of our great talent.
spk08: Thank you.
spk06: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
Disclaimer