CB Richard Ellis Group, Inc. (CBG)
Q2 2009 Earnings Call Transcript
July 30, 2009 10:30 a.m. ET

Executives

Nick Kormeluk - Senior Vice President, Investor Relations
Brett White - President and Chief Executive Officer
Bob Sulentic - Group President and Chief Financial Officer
Gil Borok, -- Chief Accounting Officer and CFO of the Americas
Jim Groch - Chief Investment Officer, CB Richard Ellis, Group, Inc. and Chief Investment Officer, Development Services

Analysts

Anthony Paolone - JP Morgan
Sloan Bohlen - Goldman Sachs
Will Marks - JMP Securities
Vikram for Vance Edelson – Morgan Stanley
Brandon Dobell for Robert Riggs - William Blair & Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by today and welcome to the CB Richard Ellis second quarter Earnings conference call. (Operator Instructions) As you may know, all participants are in a listen-only mode for this conference. So, when we will conduct a question-and-answer session, we will give you instructions at that time. If you need any assistance during the call you can press “*0” for the operator. As a reminder, the call is being recorded. And with that, we turn the call over to our host, Nick Kormeluk. Please go ahead sir.

Nick Kormeluk – Senior Vice President Investor Relations

Thank you. Good morning and welcome to the second quarter 2009 earnings conference call. Last night, we issued a press release announcing our financial results. This release is available on our homepage of our website at www.cbre.com. This conference call is being webcast live and is available on the Investor Relations section of our website. Also available is a presentation slide deck, which you can use to follow along with our prepared remarks. An archived audio of the webcast and a transcript and a PDF version of slide presentation will be posted to the website, later today. Please turn to the 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 momentum in 2009, future operations and future financial performance. These statements should be considered as estimates only and our 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 Annual Report on Form 10-K and our current quarterly Form 10-Q, in particular any discussion of risk factors which are filed with the SEC and available at the SEC''s website at www.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 includes 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 3. Our management team members participating today are Brett White, our President and Chief Executive Officer and Bob Sulentic, our Group President and Chief Financial Officer. Also with us today for the question-and-answer session are Gil Borok, our Chief Accounting Officer and CFO of the Americas and Jim Groch, our Chief Investment Officer. I will now hand the call up to Brett.

Brett White – Chief Executive Officer

Thank you Nick and good morning everyone. Please turn to slide four. Before I turn the call over to Bob for a detailed review of our second quarter results, I want to make some brief remarks regarding the progress we have made on several key initiatives most of which we discussed in the past. First, we have continued to focus on providing superior service to our customers and increasing our market share throughout this industry''s cyclical downturn. Our outsourcing business continues to perform well. In the current operating environment, many new clients are embracing the concept of outsourcing as a means to save on real estate operating cost and are focusing their attention on the higher quality platforms when choosing their service provider. As a result, global RFP activity has been very strong and new account wins are up 25%, versus second quarter 2008.

These same concerns about cost management and service quality are also creating many opportunities to expand our relationships with existing outsourcing customers. Square footage growth under management improved for this part of our business during the quarter. This was highlighted by our Bank of America account expansion, in the EMEA and Asia-Pacific. In addition, in investment sales, for the first half of 2009, we once again captured the number one position in the US with a share of 18.6% as compared to 17% in the same period last year according to Real Capital Analytics. I am particularly pleased to report on our progress in managing operating expenses. We are now targeting a run rate reduction of $575 million to $600 million in operating expenses, compared to our 2007 base year, an increase of $100 million over the previously reported range of $475 million to $500 million. As we have previously discussed this target excludes the very significant reduction in certain variable expenses including commission and other incentive compensation expenses that automatically occurs as a result of the company''s reduced revenues and profitability. The impact of our cost cutting efforts on the company''s current financial results is profound. While the company''s quarterly revenues have declined by 27% compared to 2008, our operating expenses have decreased 30% over the same period. The result is that although we currently are operating in one of the worst downturns, our history has seen the company has actually increased its normalized EBITDA margins to 9.5% in the second quarter of 2009 from 8.7% in the second quarter of 2008.

We believe that these efforts to mange our cost structure have created tremendous operating leverage in our business, which should allow us to accelerate earnings growth when the markets recover. As long as the environment remains difficult, we will continue to be diligent and seeking out opportunities to cut costs even further, while maintaining the high levels of service that our customers have come to expect. I should also mention that although we’ve implemented a very rigorous cost cutting program, it has been executed without eliminating or significantly impacting any of our geographies or business lines. In fact as I mentioned earlier, we have continued to build our business. Our efforts to strengthen our balance sheet also continued in the second quarter. Since November 2008, we have raised approximately $800 million in capital. In June, we issued $150 million in common stock at an average price of $7.84 per share which compares quite favorably to our price of $4.48 per share at the beginning of the year.

During the quarter, we also raised approximately $450 million in a private placement offering of subordinated debt with a year maturity. Paulson & Co elected to purchase $100 million of our equity and $100 million of this subordinated debt in these offerings. Given John''s reputation, as one of the world''s savviest investors we were especially pleased that he believed it to be a prudent time to invest in our industry and that he chose CBRE as the company he wanted to bet on. We have prepaid $195 million of bank debt amortization and have significantly extended the weighted average maturity of our outstanding debt. We have also launched a loan modification program for our revolver and portions of our term loans, to further spread out amortization and extend maturities. Bob will give additional details on this program in a moment. But I wanted to note that we have only received preliminary commitments to modify approximately $425 million of the targeted debt. We are pleased that the market seems to have faith in the actions we have taken in this regard. Since the beginning of the year, our equity market cap increased from $1.1 billion to $2.7 billion at the end of the second quarter and markets have responded favorably with our term debt trading up from approximately 55% of par value to approximately 95% of par value.

We are very pleased with the progress made in implementing these strategy initiatives and are excited about CBRE''s position to take advantage of opportunities that present themselves as the market recovers. Even though market challenges persisted, slide five provided examples to demonstrate that there was in fact activity in the marketplace and some of them was meaningful in size. That concludes my introductory remarks. I''ll now turn the call over to Bob to provide a detailed review of our results for the quarter. Bob?

Bob Sulentic – Chief Financial Officer

Thank you Brett and good morning everyone. Please advance to slide six. Revenue was $955.7 million for the second quarter, down 27% from last year, driven predominantly by weak sales and leasing activity. Normalized EBITDA came in at $90.9 million for a normalized EBITDA margin of 9.5% which was a marked improvement from the second quarter 2008 margin of 8.7%. This is of course, very difficult to accomplish in a declining revenue environment.