Welcome to Cushman & Wakefield's First Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce Len Texter, Head of Investor Relations and Global Controller for Cushman & Wakefield. Mr. Texter you may begin the conference.

Thank you, and welcome to Cushman & Wakefield's First Quarter 2020 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 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 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 and definitions of GAAP to non-GAAP financial measures can be found within the financial tables of our earnings release and appendix of today's presentation. Also, please note that throughout the presentation, comparison and growth rates are to comparable periods of 2019, and are 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.

Thank you, Len, and thanks to you all for joining us today. This call is going to be a bit different than most earnings calls that we conduct. Some metrics and information we typically provide have little value at the moment in particular prior quarter data as an indicator of future performance. Other metrics, we don't usually discuss have significant importance at the moment. So we're going to cover those matters we think matter most. In our Q&A session, you are of course welcome to ask whatever you like and we will answer what we can. I want to begin today by recognizing and thanking our many thousands of Cushman & Wakefield colleagues, who have shown a level of bravery and courage commitment to their jobs, and our clients, which frankly is beyond anything any of us could have expected. While most of us spent the past almost two months in our homes with our families, these thousands of employees went to work each and every day taking care of the five billion square feet of buildings we maintain, on behalf of our many clients. Some of these facilities such as New York-Presbyterian Hospital were in the very epicenters of the worst this pandemic has brought to bear on the world. To each and every one of you, on behalf of our clients and every one of your 53,000 colleagues here at Cushman & Wakefield, thank you. You are an example for us all and your bravery and commitment will never be forgotten. I can speak from experience that sound advice and an ability to solve problems in a challenging and uncertain time is a critical differentiator to our clients. I believe this crisis will ultimately drive an increasing volume of activity to the big three firms CBRE, JLL and…

Thanks Brett and good afternoon everyone. Before covering our first quarter results and the trends we are experiencing in the business, I want to expand on a couple of items that Brett mentioned. First liquidity, our financial position is strong. We ended the first quarter with $1.4 billion of liquidity consisting of cash on hand of $380 million and a revolving credit facility of $1.0 billion. We had no outstanding borrowings on our revolver. We completed our IPO with a very strong financial position and since then, we have enhanced our liquidity most notably by increasing the capacity of our revolver to $1 billion late last year. Our liquidity position has been built to be more than adequate to fund our operational requirements and an economic downturn impacting our results. We therefore view part of our liquidity is available to fund investments such as infill M&A in the consolidating industry and we have seen in the past that such opportunities can come along at any time. In response to the current economic crisis, we have built several scenarios of the impact on our business in the short to medium term. These are updated with new data and assumptions on a regular basis. It is our belief based on our current scenarios that we have ample liquidity to withstand the impact of the current economic outlook. Furthermore, although we have suspended almost all investment in the short-term, we will stand ready to take advantage of attractive opportunities should they arise provided that our scenarios continue to be supportive. We would consider adding additional debt capital to further enhance our liquidity position to support our financial flexibility if markets become attractive. I would remind you that the period-end financial leverage covenant is only applicable to the company if we exceed $408 million…

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

Hey, thank you. My first question relates to the cost savings and the EBITDA margin brackets you gave -- I appreciate the incremental margin in the mid-20s that you highlighted. How do we think about the cost savings and whether that's kind of loaded into using that as a bracket, or is that phasing in of the $400 million kind of separate from that?

I'm going to let -- Anthony, this is Brett. Before I turn the call to Duncan, I do want to mention that during our prepared comments, we got some notes that we were not coming through clearly on this line. We apologize for that. I just want to remind everyone Anthony on the call that our script will be posted on our IR website in just a few minutes. So again apologize for the quality of the phone call. Duncan I'll let you handle that question.

Yes. Thanks, Anthony. So yes the answer is it's all in right? So that -- we talked about the annualized basis of $400 million of savings that is included then in that sort of mid-20s rule of thumb. So that is after taking account of those cost reductions.

Okay. And then how much -- like that $400 million like how much did you end up spending, or do you anticipate spending to achieve that? And is it the kind of number that should stick? Like for instance, if you had done that I don't know 18 months ago, would you've just added that amount of money to your 2019 EBITDA? Like how should we think about that?

Well yes, it's a mix of things, right? So if you go back remember on our Q4 earnings call and Investor Day we talked about the permanent cost reductions we're doing as part of the strategic realignment. And I think we made disclosure of what we expect there's kind of the cost to achieve for that to be in the 8-K around about that time. I've forgotten exactly what we disclosed around that. But it was a significant amount of money according to sort of achieve those savings as you might expect severance and things of that nature. A lot of the savings we're now putting in place in response to the crisis we faced it includes things like reducing travel and entertainment, reducing events. I think I went through a list of furloughs and staff compensation cuts and part-time work. And so there isn't actually frankly a great deal of cost to achieve associated with a lot of that. On the other hand it's some of those costs are the kind of costs that are somewhat activity driven. So as activity returns some of those costs might come back. So a little bit of that is directly in response to the fact that we're running essentially a business that's facing lower revenue so we're responding to that. So it's a different nature of cost. So it's less of a -- it's a different sort of cost action in that respect.

Okay. And then just last question for me. Can you give some sense as to how much of sales and leasing for you all is driven by, say, the office business versus industrial versus, say, retail?

Sure. I'll be happy to handle that. So if you look at the company and I'll just give you Americas, because that's by far the biggest business. About 56% is office; 18% industrial; a very small amount 6% is retail; 5% is land; and then about 15% would be multifamily sales.

Okay. Thank you.

And those numbers are for the Americas, just saying that.

Yes.

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

Thanks for taking the questions. I just wanted to clarify on the cost. I guess, maybe just stepping back, could you give us a sense, if we look at sort of cost of services and the G&A. Can you give us a sense of truly what is sort of variable? I mean, commissions obviously move. But I know there are differences by geography, where maybe there's a more fixed pay versus commission in, say, Asia or parts of Asia. So can you give us a rough sense, if you just break it out percentage-wise, like, truly what is variable versus what is fixed? And then apart from just natural cost coming down, because of lower activity, what other steps can you take assuming you just see depressed activity for a prolonged period this year?

Duncan, why don't you hit the regional -- hit the question on the regional commission rate. Have you want to hit that? I'll take the second piece.

Yes. So, obviously, a lot of the disruption we're expecting to see this year is going to be around brokerage service lines. And brokerage service line compensation does vary, as you mentioned, by region, by business and it does vary a bit in the U.S. It's substantially all commission-based systems. So, obviously, those commissions come down as revenue comes down. It's essentially a variable cost. In Europe and certain parts of Asia, there's a profit share-type arrangement for a lot of the fee owners. So, again, as profit essentially gets reduced by lower revenue. We would expect profit share to be reduced as well. So that's kind of a variable -- it doesn't come down as much as revenues, it comes down with sort of profit that they share in. So that's how that gets reduced, but, obviously, that's going to get reduced substantially as revenue comes down. And then there are other commission arrangements, different kinds of arrangements, some salary and bonus type arrangements, rather smaller in nature. But generally speaking, those people who are kind of facing brokerage type revenues and reductions in that brokerage type revenue, we might expect to see then that that kind of cost is going to come out with that revenue, right? And then obviously we have some other costs in our PM/FM service lines, a lot of PM/FM is going to be frankly fairly stable over the year, but there will be some pockets where it goes up, some pockets where it goes down. In the areas where it's coming down there's a lot of direct client labor. There'll be consumable products. There'll be passed-through labor, third-party labor that's passed through. So that's all going to come out when the revenue comes out. So, that kind of -- there's a lot of cost depending on how much revenue comes out. There'll be a lot of direct cost comes out with that. When it comes to the cost actions we're taking, with respect to the $400 million of annualized savings we talked about, that is all coming out of what you might think of as fixed in the context, if it's not variable, right? Now some of it's -- some of its semi fixed, some of it is sort of fixed, right? So, obviously, there's a lot less activity around marketing, around travel and entertainment, around events. I mean, one could think of some of that as coming out, one could think of that as activity driven and somewhat semi-variables, semi-fixed in nature. But that's coming out as part of that $400 million of annualized we're talking about.

Just on the things you do, as it -- if this becomes a more pronged. First, I got to say, just to add on to Duncan's comments, even in those jurisdictions where we have fee earners paid salary and then a profit share south what they do there, is they will move those salaries down as well. So each region -- they certainly don't move in lockstep and I can't tell you that 50% of every brokerage dollar is going to go away. That is a case in the U.S., actually more than that. But in Europe, for instance, they will move down salaries on fee earners, just as if it were a bit of a commission. So these numbers are very, very significant. Not -- we're not going to give you numbers, because we don't know if they'll be in that bucket, because they depend on revenue decline. But certainly you could imagine that bucket being equal to or greater than the $400 million we talked about in explicit cost actions. And then, as you think about duration here, we have already -- through the work that we started in November of 2019, we already -- and to our great benefit, already did a very significant realignment of the company. That work is not done. There are many more projects associated with that project that we expect to commence and complete over the next couple of years, regardless of the duration of this downturn. So the point I'm trying to make you is this, is that we have always been -- and you know this we have always been very, very vigilant around running this business with a proper cost structure and that is going to be the case good market and bad. So whether the duration of this downturn is two quarters or eight quarters, our efforts around those cost-management issues are going to be relatively the same. Certainly, last point I'll make, if the world went to hell in a hand basket, like it did in the GFC, there are a number of other measures that you can take that are temporary. But at the moment, we don't see that as being the case.

Okay. Fair enough. And then, I guess just -- you talked - I mean you mentioned and I guess in the release also that, you're well prepared to eventually take advantage of any opportunities that may arise when they do arise in terms of M&A. Can you maybe just give us a little bit more color in terms of priorities by maybe businesses, business types? What would you be focused on, let's just say, six months from now, so coming out of this and you're looking to grow externally?

Sure. Well, there's -- it's a great question and it's a bit of a complex answer. So let me first begin by saying that our priorities for the company have not changed. And we have been very focused, as you know, on continuing to build out first our recurring revenue business lines such as property management and facilities management. And certainly, if a high-quality property management business came to market today or in six months or in a year, we'd be very interested in that business regardless of market cycle. But then there are opportunities that are generational. And I remember when I was running another firm in this industry back into GFC, we got through the GFC and put a lot of work into that. And shortly after we began coming out of GFC, a generational opportunity arose, which was the Dutch government asking ING to dispose of their real estate investment management business which manages $65 billion of AUM. We did not expect to see that coming ever. It was an opportunity that was very attractive to us and it transformed the asset management business at that other firm. So it's impossible to say what will come from this downturn. If anything, the longer the downturn lasts, the more opportunities will come from distress. If it's a fairly short downturn maybe very few. Certainly, the distress would come from the usual places. So businesses in our industry that are only capital markets businesses are going to get hammered. And those businesses, we don't know what capital markets revenues are going to do. But certainly, at least for a short period of time they could be very, very low. So we're watching those. Businesses that don't have a lot of recurring revenue so brokerage companies that are in the marketplace they're going to feel the pain much, much worse than the big three firms. Well, we'll be watching those firms carefully. But the primary priorities for the company haven't changed. We love the recurring revenue businesses we would be interested in asset management. If something particularly attractive came at great pricing probably won't, but you never know. And then, if there's real distress in the marketplace, and we can buy very cheaply, some folks that are on the ropes we would look at those probably across all of our business lines.

Great. And then just last one, if I may. It's an early debate and one which will probably take a while to play out. But this whole work-from-home experience and the potential impact to how people and employers use their office space and maybe impacts the property management. Just any early or high-level thoughts based on conversations you may have had with some of your key tenants?

Sure. So it's interesting Vik this is a very fluid conversation. I would tell you that, in the early days all of six, seven weeks ago many companies and many CEOs were talking about the fact that they were surprised at, how well they were able to operate their companies with all of their employees or most of their employees working from home, which then led to the immediate, I think visceral reaction of gee, if this works this well this way, why don't I leave some of these people at home and cut my footprint. That conversation has changed demonstrably. It's changed for a couple of reasons. The first is that as those same CEOs, and those same businesses begin to work with their real estate department internally, or advisers like us what they realized was it to create the – an acceptable floor plan in two weeks or three weeks from now, they can't accommodate half of their current employees. I have one CEO tell me, he's said Brett – of a very large bank. He's said, Brett right now our math, our people tell us we would need to double our global print to put people in our firm back to work. He said, we're not going to do that. We say we may have to take additional space and we're looking at some of the vacant WeWork space and some other things. But what we're going to do is rotate our employees through the building and we may have no more than 25% or 30% of our workforce in a building at any given time, but very few of that workforce will be at home permanently. I think that is analogous to what generally people are talking about in the market. Certainly, we have all learned over the last eight weeks that the productivity of people at home right now is much higher, I think than any of us thought it would be. But I do not believe that it's fundamentally changed the view of large corporations that there are very big benefits and larger benefits to the synergy of having people work in the same proximity, the synergy that comes from that. My guess is that, you will see an incremental impact on office usage. I think it will be in the single digits. But what we are going to see is a very, very different way in which that space gets used. The number of people that are in that space at any given time, those things are changing for sure.

Great. Thank you so much.

Our next question comes from the line of Josh Lamers from William Blair. Your line is open.

Great. Thanks. So obviously, the impact of COVID on leasing and sales was felt in APAC for most of the quarter. So I'm wondering, if you would say that, the results there is sort of a good proxy for sales and leasing outlook in other regions, or is there a difference in maybe product diversification or regional coverage that would cause the difference in results there versus other countries or regions?

I'm sorry. So you're asking -- I'm sorry you're asking did – ask the question again. I'm not sure I'm following.

Yeah. Yeah. Yeah. So just to put it more basically. Just wondering, if we can use kind of APAC sales and leasing results as sort of a dye or proxy for other regional outlooks in the coming quarters, or whether there's a difference in product exposure, property exposure or regional coverage in that region that might cause a difference in results?

Yeah. I think...

Do you want me to take that?

Sure. Go ahead.

So I think where you're going is, if China is recovering first maybe we can use that as a future indicator of what might happen in the rest of the world. Is that kind of the question?

Well, the results that was sort of – that were experienced in the first quarter right recognizing that China for the most part APAC in general COVID impacted results there throughout the first quarter as opposed to just the tail end March, or it was felt in the Americas. So I'm just wondering, again, I know it's probably too early to tell, but just trying to get a gauge for maybe how pipelines look for leasing and sales on the region and so on?

So, yeah. Okay. So I'll give – I'll chip in and Brett can chip in. I think look so APAC in Q1 in leasing capital markets, I don't think, you should really read across too much. One of the big impacts for example in Q1 in APAC in capital markets is that last year, we had an incredibly strong Hong Kong Q1. And obviously, Hong Kong doesn't do COVID, has gone through a lot of disruption in the second half 2019, and that obviously has disrupted capital markets in the first quarter on a relative basis to the first quarter of last year. So I don't really think you can read across too much in terms of trends in leasing capital markets, as to what they'll be. Having said that, I think what we said about trends in the world generally in leasing and capital markets probably apply to all regions at least in the short term, which is we're expecting to see Q2 be a bad quarter in terms of like comping to last year, it got a really severe downturn with what's going on in GDP. And we would expect that to be probably most of it in the second quarter, probably also to be a decline in the third quarter, but maybe slightly less. So right now, I think we're expecting Q2 to be really bad worse than we saw in March in – generally, speaking, I think it's fair to say in April, we also saw trends probably 40% plus globally in leasing and capital markets decline versus last year. I think that's probably reflective of some of the trends, we saw seen this month, which obviously is worse than we saw in March. So that's probably a better data point for you. Nothing to mentioned about APAC in Q1, I know you're referring to brokerage, but just to make sure you understand, one of the reasons – yet, probably the only reason really why Property and facilities management looks like it was down is because of the Vanke JV. And as we said in the script, actually, if you excluded that Property and facilities management in the first quarter was up probably in the high single digits.

Yeah. The only thing to add to that, I think it'd be more helpful -- by the way that's exactly right. Duncan gave you a great look into APAC. What I would -- if you were me, we're building models and trying to figure out the shape of this downturn and recovery. You're going to be far better served, looking at the available public data for CBRE and JLL 2008 through 2010. And where I would point you to would be the sequential declines in investment property sale, revenues and leasing revenues over that period of time. And here's -- first of all no one knows what second quarter is going to look like. And certainly no one knows what third fourth quarter and the next year's first few quarters will look like. At the moment, I think, there is a decent consensus view, which again could change tomorrow that the depth of this downturn across those same business lines and all the business lines that these businesses carry could be similar, but the duration should be much shorter. So that downturn in GFC at seven quarters of sequential capital markets declines, you had six quarters of sequential leasing declines. We don't at the moment see that in this downturn. We see something materially shorter than that. But the sequential quarter-over-quarter declines or year-over-year declines by quarter of those revenue lines there's not a lot of justification to think that leasing is going to behave much differently. Capital markets this time around could do better because of the massive amount of stimulus to the system, which has created liquidity. And also the banking system right now is in terrific shape. We don't have a seizure of the global capital markets like we did then.

Sure. All right. Well, thank you very much for the response. And then just quickly, you touched on the expanded conversations that you're having with owners and occupiers. And so I'm just wondering, if you can comment on a bit more on what you're seeing as far as top of the funnel lead generation in the outsourcing business? And is there any way for you to frame that level of increased demand relative to, kind of, past couple of quarter growth or prior growth experience?

I think the way to -- it's very hard to do that, but I can at least give you some guidepost. What tends to happen in a downturn like this is that there's very little churn in those contracts. Think about it this way, if you're -- pick your favorite owner and you have a property management contract with your provider that is coming up for a relook in July, it's not likely you're going to change providers. It's just not now. Also in the property management space, most of those contracts tend to turn over when a building sells. And so for a while, it's not going to be much of that either. So what does that mean? It means that contract loss by the big players, the big three should be quite low. However, if you're a big building owner or if you're a large corporation there's hired firm for facilities management or property management. And let's say you didn't hire one of the big three. And now you're looking at smaller less well-capitalized firms, it's not unlikely that you might make a change now and there's always a flight to quality in these downturns. That's why I referenced at the beginning of our call tonight there is always a flight to quality. And then there will be those firms that look to cut costs by outsourcing for the first time. And that really answers your question, which is we're going to see, I believe over the next -- as this plays out a change of contracts from smaller less, well-capitalized competitors to the big three, we're going to see very little churn in our contracts and theirs, and we will likely see some providers begin to outsource, some components of their footprint for the first time. Our people at the moment -- look we're still at lock at home right? So really there's very little going on in conversations around letting out new business. But as the days go on, as people get back into the offices, we should be able to give you a better answer on that on the next quarter's call.

Okay. Thank you for your time.

You bet.

[Operator Instructions] Your next question comes from the line of Doug Harter from Credit Suisse. Your line is open.

Thanks. Obviously, knowing that the EBITDA number is uncertain at this point, but I guess how should we think about cash flow and the differences between EBITDA and cash flow for the remainder of the year?

Duncan?

That's a good question. Thanks. So we'll try to help you with on EBITDA, I start with EBITDA. We try to help you with an EBITDA, which is obviously a big driver of cash flow is with that decremental and we don't really know what revenue is going to do, but we're trying to give you some sensitivity for how you can think about that. In terms of how to go from that to free cash flow or the elements of cash flow, generally speaking working capital in the company is -- goes up with revenue. So I guess what working capital goes down when revenue goes down. So we should see across the year working capital as a source, generally, speaking of cash flow. We've cut down CapEx capital expenditures from our normal 1% to 1.5% of revenue. That's obviously been cut to the barebones now. Many things that are, absolutely essential being done. So, I would expect that to be less than usual. We've also -- we're currently suspended in because there's no attractive targets in infill M&A. So we're not re-spending money on investment right now, which is obviously a reasonably significant amount of cash flow that we normally spend. Our interest rate expense, we reduced that from last year. I think from memory, about $13 million by repricing our debt in January by 50 basis points and we would expect cash taxes this year to be quite a lot less than we otherwise would have seen given the profit before tax is probably going to be less. So generally speaking, those all helps. The other thing, we're seeing is there are a lot of benefits coming through just in terms of schemes that governments around the world are putting in place that help companies to get different deductions and mainly on the tax side and payroll tax type side where there's been different countries around the world have provided incentives and benefits and stuff, which is able -- companies are able to take advantage of. So generally speaking, I would say that there's -- while the EBITDA is a primary driver, obviously of cash flow a lot of things, we're taking action on in terms of all those items, I just mentioned, are sources So it actually ameliorates the impact on cash flow for the year, which I think is one of the reasons why in all our scenarios, we feel very comfortable that we have ample liquidity and really not seeing that as being, a particularly big driver this year from a sort of a liquidity point of view. And it gives us a lot of confidence that we can continue to see that as a source of financial strength going forward.

Great. And just is there any kind of M&A that, that you had kind of previously announced, that still will need to be kind of paid for that hasn't already closed? Just anything else on cash usage from that perspective?

Not really. No, we always have a little bit of deferred consideration from prior years. In our deals, we typically do a lot of deals where there's maybe earn-outs or deferred consideration there might be some of that this year but not in a very material context.

Great, thank you.

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

Thank you very much. I appreciate everyone calling in. We look forward to talking to you in three months. Hopefully, we'll have a lot more data and insights at that time. Everyone stay well and stay safe. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.