CBRE Group, Inc. (CBRE) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the CBRE Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I’d now like to turn the conference over to our host Mr. Nick Kormeluk with Investor Relations. Please go ahead, sir.

Thank you. And welcome to CBRE’s third quarter 2012 earnings conference call. About an hour ago, we issued a press release announcing our Q3 financial results. This release is available on the homepage of our website at cbre.com. This conference call is being webcast and is available on the Investor Relations section of our website. Also available is the presentation slide deck which you can use to follow along with our prepared remarks. An archive audio of the webcast and a PDF version of the slide presentation will be posted to the website later today and a transcript of our call will be posted tomorrow. Please turn to slide labeled Forward-Looking Statements. This presentation contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future growth momentum, operations, financial performance and business outlook. These statements should be considered as estimates only and actual results may ultimately differ from these estimates. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that you may hear today. Please refer to our third quarter earnings report filed on Form 8-K, and our current annual report on Form 10-K and our current quarterly report on Form 10-Q, in particular any discussion of risk factors or forward-looking statements, which are filed with the SEC and available at the SEC’s website sec.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today. We may make certain statements during the course of this presentation, which include references to non-GAAP financial measures, as defined by SEC regulations. As required by these regulations, we have provided reconciliations of these measures to what we believe are the most directly comparable GAAP measures, which are attached hereto within the appendix. Please turn to slide three. Participating with me today are Brett White, our Chief Executive Officer; Bob Sulentic, our President, who as you know will succeed Brett as CEO at the end of the year; and Gil Borok, our Chief Financial Officer. I’ll now turn the call over to Brett.

Thank you, Nick, and please turn to slide four. As you know, the market environment turned more cautious in the third quarter of this year. Many investors and occupiers deferred making decisions and commitments, concerns about ongoing European sovereign debt issues and slowing growth in Asia, which have been vain on the markets most of the year were joined by heightened uncertainty starting from lower corporate profit expectations, as well as the upcoming U.S. election and so called fiscal cliff. The increase caution was manifested in lower business volumes, particularly sale and lease transactions. In most of our geographies, also across EMEA, this was also the case in all other significant service lines. Despite this very challenging macro conditions we were nevertheless able to improve revenue, while holding operating expenses flat exclusive of cost containment expenses, thereby supporting normalized EBITDA and adjusted earnings per share, and preserving our industry-leading margins. This of course is a credit to our people and our broad diverse global platform. We’ve worked hard over a number of years to build a well-balanced integrated platform to meet the needs of our clients. The benefits of these efforts will vary evident in the third quarter of this year. Our acquisition of the ING REIM business has added significant and largely recurring fee based revenue to our Global Investment Management operations. As a result, this segment saw revenue grow sharply and its contribution to total company normalized EBITDA versus the third quarter of 2011 increased significantly. We’re quite pleased with the 32% normalized EBITDA margin, this business delivered in the third quarter, and we believe it is indicative of where it can perform on a consistent basis. Outsourcing continue to grow solidly with revenue up 7% globally or 11% in local currency and 13% in the Americas. Steady…

Thank you, Brett. Please advance to slide six. Total revenue was approximately $1.6 billion for the third quarter of 2012, up 1% from last year or 5% in local currency. This increase was driven by growth in outsourcing, Investment Management and Commercial Mortgage Brokerage. We recorded normalized EBITDA of $195.3 million in the third quarter of 2012 versus $194.8 million in the third quarter of 2011 for a normalized EBITDA margin of 12.5% close to our 12.7% EBITDA margin achieved last year. Cost of services increase 50 basis points to 58.8% of total revenue in the third quarter of 2012 versus 58.3% in the third quarter of 2011. This increase was driven by cost containment expenses incurred in the third quarter of 2012 and the decline in transaction revenues in certain geographies that has significant fix cost compensation structure. Despite the inclusion of all of the ING REIM costs in the operating expense line item and cost containment expenses incurred in the third quarter of 2012. Operating expense as a percentage of revenue in the third quarter increased by just 40 basis points from 30.6% of revenue in the third quarter of 2011 to 31% of revenue in the third quarter of 2012. In light of lower business volumes in EMEA in the first six months of the year and our expectations for the second half of the year. We took further cost contain actions in this region, primarily headcount reductions that resulted in a charge of approximately $16 million. This charge, as well as a charge of approximately $2 million for cost containment actions in Japan has been normalize and should result in savings of approximately $10 million on a run rate basis for 2013 and beyond. Furthermore, revert of the value of the trade name in the United…

Thanks, Gil. And please turn to slide 18. We believe that the commercial real estate recovery is continuing despite the soft patch particularly in the U.S. in the third quarter of 2012. If nothing else, the third quarter is a reminder that variable market conditions will be the norm until global economic growth and job creation shift in the higher gear. In the interim, we expect outsourcing to continue with solid consistent growth, leasing to remain relatively subdued reflecting slower global economic and employment growth trends. Investments sales activity vary widely depending on local and regional market dynamics and investor sentiments which as we have seen can change quickly. Investment Management comparisons will benefit less from the ING REIM businesses in Q4, relatively to the first nine months of 2012, and full-year 2012 normalized EBITDA margins to improve. We expect conditions in Europe to remain soft until the sovereign debt challenges in Southern Europe are dealt with decisively and in Asia until more steady economic growth returns. In the U.S., the two big uncertainties namely the presidential election and the fiscal cliff will be resolved one way or another shortly. This resolution will be in greater certainty to the market. Meanwhile, underlined markets fundamentals continue to improve incrementally. Our business pipelines are healthy and our people around the world are energized to help our clients navigate the choppy environment. CBRE remains well positioned for this market climate because of the strength, the geographic scope and the diversity of our platform. Our strong financial position and the quality of our brand and people which assure clients they are also receiving the best advice. In light of the operating performance in the third quarter and our outlook for the fourth quarter, we now expect full-year 2012 adjusted earning per share to be in the range of $1.15 to $1.20. Notwithstanding current economy conditions, CBRE remains strongly position to thrive in a month and years ahead. To hear more about our long-term strategy, I hope you’ll be able to attend our Business Review Day this year. Bob Sulentic will be hosting event which will take place in the morning of Thursday, December 6th at our New York City office at 200 Park. With that, operator we’ll now take questions.

(Operator Instructions) And we’ll go to the line of Will Marks with JMP Securities.

Yeah. Good afternoon. First of all, Brett, maybe this is the last we’re going to hear from you, so best of luck to you.

Thanks, Will.

Second, I want to ask you about maybe for Gil, balance sheet strategy, any plans to do anything other than that, has there any acquisitions of late even if they are small, if you can talk about them?

Before Gil answer that question, Will, let me just say a few words about what has transpired on the East Coast these past two days. We want to convey our thoughts and prayers for everyone affected by Hurricane Sandy. I also want to thank our thousands of employees who have already rallied to assist our many clients impacted by the disaster. I witness our response to the main disaster is both man-made and natural over the years. And I can tell you that no one responds with more enthusiasm and energy on behalf of their clients than our folks across the field. So I really told them thank you for all your doing. And Gil you can now hit Will’s question.

Okay. Hi, Will, thank you. Thanks, Brett. Will, what I would say is generally speaking, debt pay down is always a priority of ours and frankly, we said at the moment our net debt balance is very good. We’ve got that cash of $700 million, $450 million available -- would be available in the U.S., around $250 million plus overseas. And we’re always anticipating what our options are with that cash. The one thing that I can say definitively and that I think I’ve said before is we do have a high-yield bonds coming due in June of next year, the 11.625. At least, there is a call on them. And whether we refinance those or partially finance those and partially use cash is yet to be determined, but you can certainly think about that in terms of an interest expense reduction, certainly for the back half of next year and the full year of 2013, if current interest rates and the current interest rate environment remains low. So there is no specific M&A. There is no specific opportunities for cash that you wouldn’t normally think of, we’ve obviously got our core investment program in the principle businesses. We’ve got capital expenditures, the routine stuff that you would -- that you are very, very familiar with, nothing specific except that debt item that I just mentioned.

Great. And then on acquisitions, have you been looking at deals any thing transpired?

We don’t have anything specific, Will.

Thanks. On some specific segments, leasing in America is down 2%. We heard from the competitors, the industry and volumes was down about 14%. Did you see similar figures in your own research, meaning some decent market share gains, despite the tough environment?

Well. Let me take a stand on that. Let me ask Bob to speak as well. First thing I want to caution you, Will, I think you already know this is -- it is dangerous to extrapolate too much from a single quarter. You may recall last year, we had a soft quarter in leasing in the end of the day at the end of the year, it end up meaning nothing. We do think that we picked up some share gain. We clearly picked up some share. I’ll let Bob talk a bit more specifically about our share gains. Bob.

Yeah. Well, I think you hit it, Brett, two things, we don’t want to take any one quarter too seriously. And secondly, we were happy that we picked up some share in the market place both domestically in the U.S. and around the world we think. So that’s encouraging to us. And the other thing I had mentioned as it relates to our brokerage business broadly, but our leasing business specifically, we’ve been very focused in the last couple of years on upgrading our team. We have a program called move-up, move-out. We’ve been doing a decent amount of hiring to upgrade our team. We’re shifting our focus, Will, now a little bit to actually growth in headcount. And I can tell you that year-to-date, this year, we’ve made more hires in the U.S. in brokerage for instance than we did in all of last year. So, yeah, we’ve made some market share gains in a period where the market wasn’t particularly good. And our focus was more on upgrading rather than growing the headcount. But we’re actually going to go -- we’re moving in both directions continuing to upgrade the staff and growing headcount going forward.

Okay. Thank you. That’s very helpful. I just had one final question on outsourcing. I don’t believe that you restated your comment about the size of the industry, but I assume nothing has changed on the industry size, not that it would, but your ability to kind of chase that?

No. Nothing has change. We believe and we continue to believe that we’re advantaged over any other firm in the industry in this particular space. And I think, Will, you would agree that our numbers in that space the last three or four years certainly are evidence of that.

Okay. Perfect. Thanks a lot.

(Operator Instructions) Next we’ll go to the line of David Ridley-Lane with Merrill Lynch.

Yeah. Just a couple of numbers questions. Could you breakout the cost containment between cost of services and SG&A, kind of, give a rough split?

Yeah. It’s about 50-50, David.

About 50-50.

Half and half, yeah.

And you said $10 million in annualize payback from these actions beginning in the first quarter of ‘13?

There will be $10 million of savings, yeah. I just would caution that whether there is a bigger discussion around, whether or not that would go forward to the bottom line or would offset other items including depending on how revenues looks next year in investment and so forth. So yeah, in it of itself it will produce $10 million of savings.

Okay. And the tax rate that you’re now guiding to implies that the fourth quarter will be under 30%. Is that what you’re thinking?

No. And it wouldn’t be. But it will be lower than it’s been, it wouldn’t be under 30%. No, we can go over it in more detail by quarter offline if you’re like, but 35 is a full year rate and that you should be able to sell for the quarter.

Okay. Okay. And would you expect a -- the tax rate to be sustainable under 2013?

I’m not ready to comment on 2013. I think we’ll differ commenting on that to the year-end call, the February call where we’ll give our guidance and we’ll incorporate call for it, the tax rate and other variables into guidance at that time. What I can’t say is and what I did say is we all -- we continue to focus on this aspect of our business we started to talk about in the few quarters ago. You’re starting to see the beginnings of all the benefits of our work in this area. And there will be benefit next year, but in terms of how much I’m not ready to talk about that quite yet, David.

Sure. And then may -- one big picture question. In terms of the trends of EMEA, did they steadily decelerate through the quarter and October was worse than the third quarter or was -- what was going in intra-quarter and early fourth quarter trends there? Thank you.

Yeah. And this is Brett. I’ll take a stab and again, I’ll have Bob give us some more color on this. First thing I would say is that EMEA has been a soft story for a lot longer than the third quarter. Third quarter was just another chapter and what seems to be a fairly long book now on difficult market conditions. I will say and we referenced in our comments that, that being said, EMEA as well as our other global businesses feels pretty good about their fourth quarter and the pipelines that they have. But nonetheless, as we said on the call, until we see -- really I think this way, until there is confidence in the Europe across continental Europe, I think EMEA is going to be feelings from pain. Bob, do you want to add some color to that?

Yeah. Well, first of all, I agree with all that. As we look at the third quarter in EMEA, we didn’t differentiate one-time period within the quarter versus another, as being a driver in the outcome. It was all a pretty rough time. What was more important from us is to makeup of our business, the geographic makeup of our business. We have a particularly large business in France, which had a very good year last year and has suffered a big time this year as a marketplace. In addition to that, it just so happens, France has also had very tough compare on FX, as you know and foreign exchange. So, the combination of the size of our business, the decline of that business in that marketplace in France, the FX circumstance with the euro has made for a very tough quarter in the third quarter in Europe. And it was more about that from our perspective than it was about any one particular part of the quarter all of which was pretty rough. I will say the business in the U.K., which is our biggest business over there. I had a much more solid quarter than we did on the continent or in France.

Was that it from Mr. Lane?

Yeah.

And at this time, there is no more in queue with the questions.

Great. Well, thanks everyone for you time on the call. We’ll look forward to speaking to you again at the end of the fourth quarter. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.