Cushman & Wakefield Limited (CWK) Earnings Call Transcript & Summary

Welcome to Cushman & Wakefield's 2020 Investor Day webcast. [Operator Instructions] Today's presenters will include Executive Chairman and CEO, Brett White; CFO, Duncan Palmer; and Len Texter, Head of Investor Relations and Global Controller for Cushman & Wakefield. It is now my pleasure to introduce Len Texter. Mr. Texter, you may begin your conference.

Good morning, and welcome to Cushman & Wakefield's 2020 Investor Day webcast. Before I -- before we get started and hand the call over to Brett and Duncan, I just wanted to touch base on a couple of housekeeping items. First, as you know, 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. Also, second piece of housekeeping, today's presentation, we'll be referring to non-GAAP financial measures. Definitions and reconciliations of GAAP to non-GAAP can be found in the appendix today. So before we get started, in case you have not already done so, please go to our website, Investor Relations, ir.cushmanwakefield.com. Download the presentation, and you can follow along with today's discussion. So with that, go ahead and please turn to Slide 2, I believe, it's the start point. And I'll go ahead and hand the call over to Brett, who will kick us off. Brett?

Thank you, Len, and thank you, everyone, for joining us today on our 2020 Investor Day. Well, a lot has changed since we scheduled this meeting some time ago, and being sensitive to the many, many travel restrictions being placed probably on most of you and certainly, most of our clients and the folks in our firm, we made the decision last week to move this from New York as an in-person meeting to a telephonic meeting. So I'm joined here in Chicago by Brad Kreiger, Len Texter, and we will have on the phone for question and answer, John Forrester. And of course, Duncan will follow me as soon as I finish my prepared remarks. I should also say that because we're doing this telephonically, we've made the decision to remove from the presentation, sadly, what would have been some of the more fun elements, which were the presentation to you by various members of our company leading initiatives out in the field that we thought you would find interesting. But frankly, they don't translate well telephonically. There's things we want to show you. In our next Investor Day, you'll get a heavy dose of representation from our folks doing really wonderful things out at the field level. So with that, let me start in on our slides, and I'll begin with Slide 4, and I will tell you as I'm moving through the deck. Slide 4, all of you have seen before, but let's just say that at this point in our evolution, Cushman & Wakefield is truly a leader in the commercial real estate services industry on a global basis. Our brand is recognized as one of the top 2 brands in the world in this space. And many publications in many surveys rank us top or near the top of our industry on a variety of metrics that we find very important. You'll notice in the lower right corner of the page, our square footage under management has grown quite a bit. And that almost 5 billion square feet has been significantly underpinned through our Vanke joint venture, which we completed in China earlier this year, bringing almost 800 million square feet of property under management. I'll go to Slide 5. And this is our strategic road map. And again, just covering this briefly, we think about our strategy in 4 primary areas. First and foremost, client experience. This is a client-centric organization that delivers the value of the enterprise to each and every engagement we have. Operational excellence. As you know, we have a highly disciplined focus on profitable growth combined with operating efficiency. Data and analytics. We leverage our robust technology platform and our key strategic partners through technology both inside the firm and to our clients. And finally, a high-performance culture: attract, retain and develop the best people. Underpinning each of these key strategic imperatives are many, many discrete initiatives and programs that drive these through the business. There's not time today to go through those and at a later date, we'll begin giving you pieces of this as time permits. Let's go to Page 6. Industry fundamentals continue to support underlying growth trends. Jobs numbers that came out last week were quite impressive. Global GDP growth continues even with the issues now extend the market with coronavirus. We are watching very carefully, as all of you are, the impact to business by coronavirus. Occupier demand for real estate services continues to grow. Institutional investors own a greater proportion of global real estate. Those 2 dynamics, occupier demand for real estate services growing, institutional investors owning a greater proportion plays directly into the playbook for the top 3 firms in this industry who continue to take share from the rest. Both owners and occupiers continue to consolidate their providers and demand robust global platforms, as I just mentioned. Global services providers create value in a fragmented industry. We know that, and we've talked about that before. And increasing business complexity creates tremendous opportunities for innovation. I mentioned on the second bullet here that we are carefully watching the current and potential impact of coronavirus. And while no one can forecast the future, I can tell you anecdotally that over the weekend, I had conversations with a number of our most prolific brokers in the business and some of our managers in the business, and I asked them very specific questions. First, have they seen any transactions canceled over the last month due to coronavirus. Second, are property tours and showings and inspections continuing or being curtailed. And third, are transactions being pulled from the market or do they continue to be marketed as a business as usual item. And across the board, I would say, and generalizing a bit, the answer to those 3 questions are no. There aren't any material transactions that we can identify that have been pulled other than 2 very obvious transactions, one involving an airline looking to lease space in London and another regarding a cruise line, looking to move their headquarters. But other than that, I didn't find any transactions that had been pulled from the market or canceled. Showings and inspections in the U.S. continue on a business as usual basis, although people are being obviously more careful in how they interact with people in buildings and how they travel. That is not to say that my very informal survey is scientific or really means much of anything other than some anecdotal evidence that at least to date, the impact of the coronavirus on the business seems to be somewhat muted. I can also tell you that through the first 2 months of 2020, generally speaking, revenues in our business are on pace with our budget for the year. Let's move to Page 7. A global platform with size and scale. You've seen this slide from us before. The numbers should be familiar to you, and I'll point to just a few. First, $6.4 billion of fee revenue. We continue to grow our top line strongly. Second, $724 million of 2019 adjusted EBITDA, a strong performance in 2019 and a particularly strong performance in the fourth quarter. Adjusted EBITDA margin of 11.3%. And for those of you who were around when we started this journey, and we were looking at margins around 8% and promising you margin accretion, we are able and have been able to do this very, very well, and we're forecasting to do even better in 2020. And then finally, our percent of recurring revenue across the firm remains at about 50%, which we've told you is one of our primary objective is to have a good base of recurring revenue and cash flows in our business. Page 8, the competitor landscape. And again, nothing particularly new here. I would say that it is our view that the top 3 firms continue to distance themselves from the rest for all the reasons that I mentioned earlier. Page 9. And here, we look at the business model for commercial real estate services. As you know, our clients come in 2 types: occupiers who are using space for their own business and owner/investor clients who own space for rental income. As you look at the occupier services wheel, you can see the primary services or buckets of services that are delivered to these clients on a day-to-day basis. Our strategy is to make sure that we're a leading provider of each of these services so that we can provide them to our occupier clients wherever and whenever they need it. You can see in this wheel, the acquisitions we've made over the past 4 years to further strengthen these very important services within our occupier group. And the same is true for owner/investor services. You can see here all the primary services that owners and investors purchase in the marketplace, and you can see here the impressive work our team has done to bolster these products through acquisitions. Page 10. Diversified business with substantial recurring revenue. I spoke about that a moment ago. We show you on the left, our fee revenue by segment, that's just geography. And we're very happy with this geographic spread. Americas is the main event in global commercial real estate services, where the majority of services are purchased and the majority of fees are paid. APAC, for us, at 17% and EMEA at 15% are a fair representation of what's available in those markets. And as we've mentioned before, we would like to see EMEA up way a bit in the recurring revenue businesses. And when you look to the right-hand side of our page here, we show you how our business globally breaks out among these various food groups. Recurring is the property, facilities and project management businesses and then a convention in the industry is to add leasing to recurring, which is then described in the industry as highly visible. The reason for that is there is a significant amount, the majority of leasing transactions will occur in any marketplace. Tenants don't have a choice. When their leases expire, they must either renew or move, and in many cases, we're paid either way. Let's move to Page 11. I've touched on a moment ago our work in infill M&A, and we believe this is a core strength for our firm and our management team. We've made 26 infill M&A deals since late 2014. These are in addition to the purchase of the 3 legacy firms that created Cushman & Wakefield. And as a group, these acquisitions are performing well above our underwriting, and virtually every one of them discretely is performing above underwriting. You noticed recently the acquisition of Pinnacle, which is a leading multifamily property manager here in the U.S., which opens up a new vertical for us to lean into. We're very excited about the people at Pinnacle and their track record, and we're very excited about this new vertical within Cushman & Wakefield. Moving to Page 12. We are a strong operator with a proven ability to drive margin accretion, and we talked to you about this every quarter. It's something we take great pride in, and it's something that we are hugely focused upon. On this chart, we talk a little bit about the history here with margin accretion. In 2014 to 2017, as you know, with the integration time for the 3 legacy firms and our development and implementation of process efficiencies. Over that period of time, we grew margin 250 basis points. 2018 to 2019, we're now getting into business as usual, and we were able to drive 145 basis points of margin accretion through organic growth, infill/whitespace acquisitions and, of course, continuing operating efficiency initiatives throughout the firm. And now we look at 2020 and beyond, and we're nowhere near done with margin accretion. This year, we launched a strategic realignment of the firm, which I'll talk about in a moment. The strategic realignment should create or be a great driver of a creation of at least 75 basis points of margin accretion based on the midpoint of our market guidance on EBITDA. Now moving to 13. Let me talk for a moment about the strategic realignment completed here at Cushman & Wakefield. In January of 2019, we reached an inflection point for Cushman & Wakefield. We were able to firmly and conclusively close the book and all the activities surrounding the integration of these 3 legacy firms. The business was hitting on all cylinders with strong revenue, EBITDA and EBITDA margin growth. Therefore, in January of 2019, we felt that 2019 was the right time to set out a strategy for our next 5 years, really to set out a refreshed strategy for the next 5 years because much of, if not most of, the strategy we've been executing against was as true today as it was then, but there were additional areas that we wanted to explore and lean into. Over the 12 months of 2019, we took a deep dive into both the entire occupier and investor/owner market as well as our own particular industry and our company. With the help of Bain, PwC and Alvarez, we conducted hundreds and hundreds of interviews with the industry's most important clients and hundreds of interviews with our teams, managers, [ firms ] and staff around the world. We look at the buying behaviors used today by the industry's most important clients, exactly why they would give business to one firm over another. But we also dove deep into what these occupiers and owners said they are going to demand in the future from their services providers. To put it mildly, we learned a lot. With these learnings, we then examined our company to see how well we were addressing what clients want today and, more importantly, how we were positioned to earn even more share and differentiate ourselves in an industry that almost every large occupier and investor told us is undifferentiated among the top 3 firms. The result is our strategic realignment. The result is a company with a very clear view of what great looks like. A company that's more agile, nimble, efficient and squarely organized and focused around our clients. As we mentioned on Page 13, I've referenced earlier, this strategic realignment not only positions us, we think, in a differentiated and much improved way around our clients, but nimbleness and the agility and the efficiency of the organization also drives significant improvement to EBITDA through operating efficiencies. Let me move to Page 14. And this is a description of our technology platform or said differently, our technology strategy. We've talked to you about this before, and we really think about our technology strategy in 3 primary buckets. First would be those technologies we use to create a more efficient organization, to standardize globally the processes and systems we use inside the company and to create a scalable platform that can accommodate the rapid number of infill acquisitions that we make every year. The second bucket, which we describe as emerging is our work with our partners, and we named them here, Plug and Play, Fifth Wall, MetaProp, 1871. We partnered with them to constantly scan property technology applications being created, developed or used out in the broader marketplace. These people spend their entire day doing nothing but looking at the property technology world and consulting with us on those technologies, they think would best be used both internally for us and with our clients. And then finally, on the client experience side, here are technologies either we've developed on our own or we have bought through licenses or outright investment that we use with our clients. It's interesting to note that in the hundreds of client surveys that we had done out in the broader marketplace, bespoke customized technology brought to our clients was surprisingly ranked in the lowest quartile for them to make decisions around which service provider to use. Said differently, the clients out in the marketplace tend to believe that off-the-shelf technologies integrated by a firm like Cushman & Wakefield is a better path than trying to develop a technology platform on your own bespoke for each client. Page 15, I talk about here our management team. And let me begin by saying I've been around this industry a very long time, which I'm sure the people in this room are nodding along -- maybe too long. And I've seen a lot of management teams, both firms we compete against and firms I've been associated with. I've never worked with the team more capable than the team we have here at Cushman & Wakefield. Each of these people were hand chosen to fill the position they're in. We have an extremely collegial, open, transparent culture here at Cushman & Wakefield and among our senior team. And as you look across this page, I think you will agree with me that the pedigree of each of these individuals is very impressive. You saw our press release most recently announcing the hiring of Michelle MacKay, as our Chief Operating Officer. Michelle will start April 6, and we're very excited to have her on board. And then finally, before I turn this over to Duncan to hit the finance slides, we're very, very focused on building a high-performance culture. And we're hitting this initiative a variety of different ways, whether it's diversity and inclusiveness or the way we train our managers to manage their people, the way in which we set KPIs, the way in which we develop and celebrate what we think is a terrific culture here at Cushman & Wakefield. This is as important a strategic initiative as any we employ in the firm. In a moment, I'm going to turn the call over to Duncan. And when Duncan is done, we're going to take Q&A. We would be happy to talk more about our realignment initiatives or any other topics and issues you would like to speak with and have on your mind. And with that, Duncan, I'll turn the call to you.

Thanks, Brett. I'm going to start off on Page 18, where we talk about our historical financials. As you can see, we've more than doubled EBITDA over the period 2014 to 2019. Our revenue growth has been on average about 6% over those 5 years, and our margin growth has been almost 400 basis points. Moving on now to Page 19, where you see our track record of adjusted EBITDA margin accretion. This remains a primary focus of management and, in fact, is an annual metric in our long-term incentive program. We continue to see an opportunity to drive margin indicated by the fact that our margin versus our leading competitors on a mix adjusted basis is still about 300 basis points lower than that. Over the period 2014 to 2017, we saw margin accretion of about 250 basis points during the integration phase, where we deployed a lot of capital against operating efficiency projects as well as seeing growth organically. During the period 2018 to 2019, we were able to invest money against operating efficiency and see a lot of organic growth and some infill M&A, driving margins upwards by 145 basis points. In 2020 and beyond, we expect to continue to focus on margin accretion. In fact, in 2020, we've said we expect to see margin accretion of 75 basis points or more at the midpoint of guidance, with some benefit continuing to come in 2021 as the full run rate benefit from our cost actions in 2020 come to fruition. Overall, the drivers will continue to be organic growth, infill M&A and operating efficiency. This is something we'll remain focused on as we go forward. Page 20, I'll talk a little bit about the margin profile of the different service lines. This was a view that we gave at the time of our IPO to give some breakdown of the fully allocated margins of our different service lines globally. With average margin of 11.3%, we see PM/FM/PjM, our most recurring service line representing about 46% of our total fee revenue to be about 5% to 10%. Leasing, which we consider to be highly visible, about 10% to 15%. Valuation and other are relatively small service lines of about 10%. And Capital markets, our most profitable margin service line around about 15%. Even though our margin has gone up about 145 basis points over the period, each of those ranges has really not changed over that period with each one of them, probably on average going up just a little bit. Now moving on to Page 21, where I'm going to talk a bit about 2020 and some of the key things that we're driving during 2020 to achieve growth in EBITDA. We expect to see profitable organic growth assuming a similar macro outlook to 2019. Most of the operating efficiencies that we've talked about driven by our strategic realignment will be personnel in nature, maybe about 3/4 of the overall run rate total. That's going to come across our globe and across our different service lines and functions from delayering our management structure, from streamlining our overall organization to make us more nimble in the marketplace and generally improving the efficiency, both of our operating units and our functions, including finance, legal, HR, IT and marketing and research. Some of that will come from things like investments in robotics. In addition to our people savings, we expect about 1/4 of the benefits to come from reducing inefficiency in non-personnel spend, including reducing the amount of contractors and consultants that we use and centralizing in procurement globally some of our overall spend management. Moving now to Page 22. I'm going to talk about some of the more specific financial impact of the key drivers in 2020. As we said on the recent earnings call, we expect to see adjusted EBITDA between $810 million and $860 million during 2020, assuming a similar macro environment to 2019. Within that, we expect to see margin accretion of at least 75 basis points at the midpoint of guidance. A significant portion of the margin accretion will be generated by the operating efficiency that is driven by the strategic realignment that we talked about earlier. Within 2020, we'd expect operating efficiencies to ramp up during the year as cost savings are executed in the first half. That means we'd expect to see limited benefit in the first quarter, but all actions substantially complete by the end of the year. Roughly about 75% of the savings should be realized during 2020, with the additional 25% being realized in 2021. In terms of what that means for the EBITDA growth during the year, we'd expect the significant majority of the EBITDA growth implied in our guidance to be in the second half as operating efficiency savings ramp and due to the seasonality of our underlying organic business. Relatively little of the operating efficiency will be realized in the first quarter and ramping will start in the second quarter. We do expect to see some year-over-year revenue weakness in Asia during the first half of the year, and therefore, in the first half, that revenue weakness and the operating efficiency savings as they ramp up should somewhat offset during the first half. Moving on now to Page 23. I'm going to talk a little bit about our disciplined capital deployment framework. We've used the same framework essentially since 2014, and it remains consistent. The priorities remain operating efficiency projects, which have the highest return for us and relatively speaking, the lowest risk, typically paying back in 1 to 2 years. And then recruitment of fee earners and infill M&A, which have also very accretive returns and enable us to drive operating margins as we grow. All of these 3 things, in fact, are drivers of margin accretion, as we talked about earlier on. If you look at different years recently, to give some examples, we saw a lot of cost reduction projects during the integration. And obviously, this year, relatively speaking, we'll invest a lot of capital in operating efficiency projects. In 2018, we deployed a lot of capital in recruiting fee earners, particularly in the second half of the year in the Americas. And in 2019, we deployed a lot of infill M&A capital buying QSI early on in the year. So the diet of this capital allocation framework will vary year-by-year, all of it will be invested against growing our business and accreting to our margin, and we will continue to deploy this framework as we go forward. On Page 24, you see that our financial position is robust, not only is our fee revenue 46% recurring and 84% highly visible, but also we have a track record of significant free cash flow and a very strong balance sheet. We recently increased the size of our revolving credit facility to just over $1 billion, which gave us $1.8 billion of liquidity at the end of 2019, and we were able to reprice our term loan, improving our interest rate by 50 basis points early on in January. Overall, we're very comfortable with our leverage. It was in the mid-2s at the end of 2018. It was in the mid-2s at the end of 2019. And we said that we're comfortable with leverage in the mid-2s. We will not be deploying a new target anytime soon to replace being in the mid-2s where we're entirely comfortable. You can also infer from the number of accretive investment opportunities that we have, that debt pay down is a low priority given all those investment opportunities. So to close, our company is in great financial shape with a very robust balance sheet and a very strong track record of margin accretion and growth in adjusted EBITDA. With that, I'll hand back the call to the operator for our Q&A session.

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

My first question is, if I look on Slide 7, where you lay out the regions and head count, margins and so forth. When you think about the strategic initiatives and efficiencies that you plan to get, where do you see the biggest changes in head count? And where do you see the biggest opportunity in margin when you think about those regions?

Sure. The biggest changes in head count and the biggest opportunities in margin will follow the geographic spread. So Americas first, EMEA second, APAC third. All 3 regions are being realigned. All 3 regions should see margin accretion as we laid out. Duncan, anything you want to add to that?

No, I think that kind of captures it. I mean we see opportunities across service lines. We see opportunities across functions. You should think of this as a global realignment. Obviously, with the corporate headquarters and the Americas being in the Americas region and the Americas region being so large, that, that's where preponderance of actual dollar numbers will show up.

And I should mention, Anthony, that this program, which we've already begun executing, it's been something we've had, as I mentioned in my prepared comments, we've had in the works for many, many months. And so many of the actions that are part of this program are already in place and have been executed. So this is not a theoretical exercise. This is something that it's very much underway at the moment.

Was there anything -- or were there any changes? Or will there be any changes made to commission structure or incentive structures as part of all of this? Or is this mainly other sorts of cost reductions?

There will be -- at the margin, there will be some work, some final cleanup work on harmonization of commission work across the U.S., but that's at the margin. As it pertains to incentives? Absolutely. So one of our findings from the work that we did with Bain last year was really getting a very, very clear view of what our large corporate clients are looking for in terms of service delivery today and what they're going to be looking for and what they're going to demand from us in service delivery going forward. That caused us to realign the way in which we sell to these clients, caused us to realign the verticals that we pursue, and frankly, some that we are not going to pursue because they're not very profitable. And the incentives around our corporate services GOS team have been very much realigned to match what we think is the winning strategy within that particular business line. For the broader management team, as Duncan mentioned in his comments, EBITDA margin growth has become a very, very important metric for the senior team, both in terms of how they're paid and how they think about success in managing the P&L.

You shouldn't be thinking, though, that changes to incentive compensation is a big proponent -- a big component of the cost savings we're talking about.

All right. Yes, it has no impact on that. Thanks, Duncan.

Okay. And then with respect to the virus, can you talk a little more specifically about Asia and just what kind of unfolded there from a revenue and business point of view, now that, that's kind of in its most advanced phases as the virus works around the world? And what -- kind of how you're thinking about that and how that may change how you go about business in Europe and then the Americas as it makes its way over here?

Sure. Let me take a hit at that. I'm going to turn it over to John Forrester, who is much closer to the field than I am. But I'll just start with this. The -- it was surprising, I think, to us, how quickly Asia Pacific and China, in particular, are getting back to a business as usual footing. Even during the worst of the virus outbreak in China, all the properties that we manage, hundreds and hundreds of millions of feet around China were being operated as they were before the virus outbreak. Certainly, a lot more cleaning being done and certainly a lot of employees for companies working from home. But the buildings themselves, operating fine. Our income from those buildings coming in, as you would expect, again, because these are recurring revenue businesses. Today, as we sit here, China -- and you're seeing this yourself in the press, China is very quickly moving back to what I would describe as a more business as usual footing and that surprised us how quickly that has occurred. And fingers crossed that, that remains the case in Greater China. For the U.S. and for Europe, we are behind where China has been. And so at the moment, I would say the next place that is feeling the brunt of this is clearly Western Europe. And so you see in Western Europe, governments and jurisdictions trying to learn from the protocols that Greater China put in place, some with success, some not with success. And the impact of the virus in Western Europe and the way people are going about their business is more severe than it is here in the United States. So what do we do, how are we learning from what happened in China? What do we think will happen here? If things play out in Europe and the United States as they did in Greater China, then we can be hopeful that the impact of the virus will be relatively short-lived. And if that's the case, we don't know that it is, but if that's the case, then whatever diminution we see in the business in the short term should be recaptured in the midterm. That would be base case at the moment. But of course, that could change tomorrow. But let me stop there. John is much closer to both the way we operated in Greater China during the worst of it. And he's also quite close to the way in which we are responding in Europe and the United States to the virus. And John, maybe you could talk a little bit about how things played out in China. But then maybe more importantly, how we are operating today in Europe and Americas to learn from what we saw over there and to reduce the impact of the virus.

Okay. Just going back to Asia and China, first of all, to give some context. We have -- do have the benefit of this significant recurring revenue platform globally and nowhere more now after the Vanke transaction in China. So for all of those hundreds of millions of square feet of space that we have under management, we still -- all of our people did great work still showing up to do their work every day through the worst of the virus impacts there. And interestingly, of course, the virus did impact China at its quietest time in -- of the year across the Chinese New Year, and they're getting back to something like business as usual now pretty quickly, given the depth of the impact to certain regions. And it gives us insight as to how this might roll across other geographies, which are more than just touched by the virus. So moving across to EMEA, and I'll split my observations between the owners and developers of real estate and the occupiers who have different ways of reacting to situations like this. But with both, we have to work within the requirements, of course, of our clients. And very often, now we are part of informing our clients as to how to deal with the real estate impacts. From an occupier perspective, we are seeing a very much business as usual proposition. Some -- and I would say it's a minority of occupiers are getting more sensitive about how and who -- how those space is accessed, who is coming into their space. That just means it takes us a little longer to show buildings, to get over space, but it doesn't illustrate any falloff in overall demand. We certainly haven't seen that to date. And as Brett mentioned briefly, there is a flip side, again, to the benefit of our full-service platform and that we are seeing an uptick, not necessarily material at this time, but an uptick for the demand in our services, in our facilities business, of course, as we are required to undertake greater frequency of cleaning in facilities. So moving on then to the investor side, we really haven't seen much of a change in the demand for investor transactional stock over the last couple of months. Interestingly, as one market of demand, say, the Asian investor is not able to travel so much to the Americas and to Europe, we are seeing other geographies of capital demand stepping in. So for instance, year-to-date in London, we've seen a very significant move into the market by German investors. So it's very typical that pricing and appetite move with the flow of opportunity that is seen by global investors at this time. They're all seeking to get into the highest quality real estate, which is, to an extent, our -- the services that we provide. That okay, Brett?

Yes. Go ahead, Duncan.

So just a couple of points. I'd just remind you of things we said sort of in the earlier remarks. One is, as Brett mentioned, what we've seen year-to-date, year-to-date February in terms of revenue trends really has been pretty much in line around the world with our operating plan. So we really haven't seen much change so far in terms of that impact. And I did say that we do expect year-over-year to see some weakness in Asian revenue in the first half versus last year for a variety of factors, one of them being coronavirus. And we kind of factored that in as we think about our guidance for the year. With that sort of a factor sort of offsetting to some extent both going in different directions, the cost ramp that we're expecting to see in benefits from cost reductions in the second quarter of the year.

And just to put a finer point on that, Duncan, correct me if I misstate this. The point here is that the weakness that Duncan is referring to in the first half in Asia was built into our plan for 2020 and was built into the guidance we provided at the end of the fourth quarter. So, so far, we've not seen in any of our business, any material impact from the virus. And again, that is not to say that couldn't change tomorrow. But as of today, as we sit here, that -- those would be the fact.

Okay. So you feel like you baked in Asia, but to the extent, EMEA and America starts to feel this that is still TBD in terms of how to think about that?

I think so. Again, it's -- you know this, Anthony, as well as everyone on the phone call, which is it's all about duration. So if this moves through the system, as it did in China, I think we feel pretty good about where we set guidance for the year. Of course, if this leads to a recession, then all bets are off, but we don't see that at the moment.

And just bear in mind that in our transactional businesses, particularly in Europe, a heavy amount of those in terms of revenue and EBITDA show up in the fourth quarter, not in the second, for example.

Yes, it's a good point. Obviously, there's a lot of anecdotal stuff that we're watching, Anthony. So we're -- every day, we're -- all of us in this room are talking to people in the field and asking lots and lots of questions. I had an e-mail. So one of the brokers that I surveyed Sunday e-mailed me overnight last night. It's just interesting anecdotal story, which is he told me that he had a property that was about to be tied up at $90 million in Los Angeles. And yesterday, the cover buyer came back with an offer $10 million higher at $100 million, and the rationale they used for the $10 million higher price was lower rates. And so that doesn't necessarily mean anything. But I thought it was interesting that, that was the note I got overnight from that particular broker. It wasn't, "Hey, all my deals are gone." It was, "Hey, I have a property about to go into escrow, and it's got bid up $10 million by lower rate." But again, none of this is a -- is necessarily a forecast for the future. It's just interesting how things are playing out at the moment.

[Operator Instructions] I will now turn the call back over to Mr. Texter to address a question on the web.

Yes, we have one question here, guys. It says, could you please provide some additional color or breakdown on the expected cost efficiencies to occur in 2020 by quarter end or some phasing? And then how do you think about that in the relation to acquisition and other possible tailwinds versus headwinds, corona-related and the like?

Duncan.

Okay. So what we said is a couple of things. One is, we would expect -- well, we're taking all the actions basically now and rolling into the second quarter, maybe a few actions will be complete after that. But the vast majority of actions will be complete before the end of the second quarter, all of them are in place now, as Brett said, and they'll all be substantially complete by the end of the year. So that's the actions. In terms of the benefits, we'd expect a relatively small amount of the benefits in Q1, a ramping amount of those benefits in Q2 and obviously, more realized benefits in Q3 and Q4 as the full benefits approach full run rate. So that's kind of the ramping relatively little in Q1 and then a ramping up over Q2, Q3, Q4 towards full run rate. Think of year-end as being pretty much at full run rate. That will mean that there will be about 75% of the benefits will be realized this year, a full run rate. And then the last quarter being realized next year. Within that, around about 3/4 of those overall benefits you should think of as being people-related, personnel-related in type, maybe 1/4 being nonpeople-related, things like procuring stuff, so that's kind of how that flows out. So that should give kind of a feel. In terms of weighting that against other factors, I mean, in our guidance, obviously, we've talked about having factored in some impact from coronavirus in Asia. We don't really have line of sight to any benefit as we just talked about in terms of impact from coronavirus in Europe or the Americas. So we haven't factored that specifically into our guidance, although, obviously, we have a guidance range. So that's sort of how that factors in. And I did say that in the first half, although we will have some benefit in the second quarter, particularly from the cost benefits, there'll be some offset between that and the relative revenue weakness in Asia that we're going to see in the first half.

You do have a question by the web -- by the phone, Stephen Sheldon with William Blair.

First, I wanted to ask if we enter an environment where your customers have to become more focused on cost containment, just how this could impact PM/FM. And specifically, from your client standpoint, are there typically immediate year 1 cost savings when they outsource some of these solutions, especially those that maybe have handled some of those operations at least internally before?

Yes. So I think I understand the direction of travel of your question, and you're right that in an environment of folks trying to save cost quickly, they outsource. And so what we have seen historically is that the growth rates in the outsourcing businesses tend to increase during difficult times and tend to flatten out or plateau during very good times. So at the moment, by the way, we're not seeing any increase based on people trying to cut cost right now. It's just share growth that we're seeing. But certainly, if we were to move to a recessionary environment, and we would expect to see more folks begin to outsource. In terms of cost savings, for a client, there's immediate benefit because what they end up doing if they're in-sourcing is transferring a big piece of their SG&A, which is employment cost over to their providers. The provider then takes that employment base tends to pair it back because they're working from economies of scale. And so there are savings for the client. Those savings occur immediately, which is why you see folks increase the pace of outsourcing in difficult times. Again, we're not seeing any of that right now. I don't -- I'm not aware of any large clients today taking the types of actions they would take if we were entering a recession, but of course, that could change.

Okay. That's helpful. And then, I guess, just somewhat related to that. I guess just an update on the normal sales cycle in that business. How long it typically takes to -- when you first start getting a deal to when it typically closes?

Well, a typical sales cycle is month can be years. I think in a -- so let's talk about a typical environment. Typical environment, a property management bid or facility management bid is going to go out to the market. A property management bid might take 3 months, a little bit less, a little bit more. Facility management bid could take a year, it could take over a year. That's a normal environment. We saw -- take the WeWork example. We saw -- we were brought to the marketplace and ask for an FM/PM bid in 1 week from a variety of vendors, and that would be an example of a company that felt pressured to do something quickly. But by the way -- so let me just -- since we got John on the line. John, in this environment right now, are you seeing any customers, ours or anyone else's customers rushing to bid based on cost reduction they're putting in place today, last week, and anything unusual in the market in that way?

Nothing specific to a change in the last few weeks. 2019, we did see a gradual increase throughout the year in our order book. We had some really pleasing outsourced wins from major corporates like Boeing, Kimberly Clark, Cummings, Carrier, all of whom illustrated that sort of 6- to 15-month window of how long it took for them to correctly go-to-market and achieve the partnership that they aspire to when they first took the decision. But it is a growing -- the growing trend of outsourcing continues. We haven't seen a spike at all yet.

Thanks, John.

There are no -- I'll now pass the call back over to Len Texter for a question on the web.

Yes, a question here from the website is asking about the prioritization from a capital allocation in the context of the current environment and how we see spend this year in relation to the leverage ratio as well.

Okay. I'll take that. So as we talked about -- our capital allocation framework really hasn't changed. And we're very focused, as you can tell on margin accretion, a lot of our capital that we spend every year, it goes to investments actually that are pretty accretive to margin. Obviously, our best investment on which we're able to do quite a lot of this year will be in operating efficiency, typically with 1- to 2-year paybacks, and we're going to put in somewhere between $80 million and $120 million this year into doing that as part of the strategic realignment operating efficiency work. We then deploy capital either into infill recruitment or to infill M&A. That was quite a lot of money in 2019, particularly in QSI, which we did earlier in the year. Those are also pretty accretive, not as accretive, but pretty accretive. I would say that what's baked into our guidance this year is probably a normal year of that. We really haven't had like a feeling that there's a particular tilt towards that, if anything, the tilt this year is towards operating efficiency. In terms of how that affects leverage, we've said we're comfortable with leverage in the mid-2s. I wouldn't want anyone to think that mid-2s means exactly 2.5% or exactly 2.4% or 2.6% or 2.7% for that matter or 2.3%. I mean all of that is mid-2s. So I don't think you should be inferring anything from saying we're going to be in the mid-2s to a specific individual number for leverage, simply that we're pretty comfortable at this level. And that as our opportunities for investing capital are opportunity-driven fundamentally with a rigorous capital allocation prioritization framework, not driven by keeping our leverage at a specific level or investing in a specific amount of money in a specific area. It's more making sure that we are responsive to the opportunities we have, and we see those as being pretty accretive, both in terms of value and in terms of margin. And that's all factored into how we see this year.

The time allotted for Q&A has concluded. I would now like to turn the call back over to Brett White for closing remarks.

Great. We appreciate everyone taking the time today. I know everyone's very, very busy on other things. We did make the decision that canceling the call would have been worse than having a shorter call. We did, I think, we were able to communicate to you folks the things we thought were most important in this current environment, which is we are moving forward BAU and hopeful that this particular issue with coronavirus gets behind all of us very, very quickly. We look forward to talking to you at the end of the first quarter with our first quarter numbers. Thank you.

This concludes the Cushman & Wakefield Investor Day Conference Call. We thank you for your participation. You may now disconnect.