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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Rule 100 and 101 of Regulation FD
Date of Report (Date of earliest event reported): November 2, 2000
________________________
CB RICHARD ELLIS SERVICES, INC.
(Exact name of registrant as specified in its chapter)
Delaware 001-12231 52-1616016
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
200 North Sepulveda Boulevard, El Segundo, California 90245-4380
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 563-8611
Not Applicable
(Former name or former address, if changed since last report)
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Item 9. Regulation FD Disclosure
On November 2, 2000, CB Richard Ellis Services, Inc. (the Company) conducted
its third quarter earnings conference call, as follows:
Moderator: Ray Wirta
November 2, 2000
8:00 a.m. PT
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the
CB Richard Ellis Third Quarter Earnings Conference Call. At this
time all participants are in a listen-only mode. Later we'll be
taking questions only from analysts from investment-banking
firms. At that time, if you have a question, you will need to
press the one followed by the four on your telephone. As a
reminder, this conference is being recorded Thursday, November
02, 2000. I would now like turn the conference over to Miss Jane
Adam, Treasurer of CB Richard Ellis. Please go ahead ma'am.
Jane Adam: Hello. Thanks for joining us for the third quarter earnings call.
Participating on the call this morning will be Ray Wirta, Chief
Executive Officer, Brett White, the Chairman of our Americas
Division and Chris Ludeman, President of Transaction Management.
Jim Leonetti our Chief Financial Officer and Ron Platisha, our
Executive Vice President in charge of Financial Operations are
also here to help with questions you may have. Before we get
started, I want to mention to you that we may make a number of
forward-looking statements during the course of the call. These
statements should be taken as estimates only and actual results
may differ materially from these estimates. CB Richard Ellis
undertakes no obligation to update or publicly revise any of the
forward-looking statements that you may hear today. Please refer
to the company's annual report and 10K and our quarterly reports
on Form 10Q for a full discussion of the risk and other factors
that may impact any estimates you hear today, and with that I'd
like to turn the call over to Ray.
Ray Wirta: Thanks Jane. Good morning. I would like to thank all of you who
are participating in the call and all those listening to us live
on the Internet, which I hope includes a great number of CBRE
employees. I will provide you with a brief overview of the third
quarter. Then Brett White and Chris Ludeman will then give you a
detailed report of our operations. I will then conclude the
formal remarks and open the discussion to Q&A. Jim Leonetti and
our finance team are prepared to answer any accounting and
related questions, I hope. As Brett and Chris will outline we had
a strong third quarter in terms of revenue, EBITDA and net
income. Our operating results reflect our continued commitment to
holding the line on expenses, growing our operations worldwide
and developing recurring revenue from our relations with
corporate clients. Our business model is influenced by several
factors. I'd like to mention three of them. The health of the
real estate market, which we believe to be good, our strategy to
focus on larger customers and their worldwide real estate
activities and the trend toward corporate outsourcing. Let me
talk about each of these. On point one as you look at real estate
markets throughout the United States and worldwide, we see
continued demand for product without the speculative building
that can lead to oversupply and downward pressure on rental rates
and prices. Therefore, we see continued equilibrium between
supply and demand for the balance of 2000 and to at least 2001.
On point two, as we said consistently, our focus is to help our
customers become successful in managing their real estate
operations. As worldwide leader in real estate services, we have
both the brand name and the worldwide infrastructure to provide a
complete array of services to our customers around the globe.
Third, we are perfectly positioned to capitalize on the trend of
outsourcing non-core competencies. Our corporate services unit,
which focuses on building complete relationships with corporate
clients, has continued to see the fruits of this trend. This
provides us a source of recurring
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revenue and capitalizes on our worldwide delivery platform. These
are just three of the factors that will allow us to generate
substantial cash flow from operations. While we are committed to
using a portion of our free cash flow to reduce our debt level,
for example, we are currently running 26 million below last
year's 9/30 debt level, we are also focused on investing for the
future. During this year we have invested approximately $22
million into real estate related e-business activities. These
investments will insure that we are aligned with leading edge
companies that are focused on meeting the challenges of the
future with the use of the latest technology. This year we formed
the Octane Internet Alliance along with Jones Lang LaSalle and
Trammell Crow to work on procurement, transactions and ASP
solutions for mutual benefit. Our biggest e-business investment
to date is the $10 million we invested in SiteStuff along with
our Octane partners. SiteStuff helps owners and managers of
commercial and multi-family properties to streamline their
operations through online procurement of goods and services. We
anticipate that our cost procurement savings will likely pay back
our investment in SiteStuff in less than five years, even
assuming no independent entity value for SiteStuff. Our strong
cash flow operating model provides us with the ability to
strengthen our financial condition and position the company for
future growth. With that here are Brett and Chris to talk
specifics relative to the third quarter.
Brett White: Thanks Ray. As Ray mentioned, we had a strong third quarter.
Revenues reached their highest level for the third quarter in the
company's history and totaled $327 million, a 6 percent increase
over last year. Revenues for the first nine months of this year
are $905 million up 11 percent on the same period in 1999. The
growth in revenue was better during the third quarter in
virtually every major category as compared to last year. Leasing
revenue was up 16 percent. Property and facilities management
fees up 3 percent. Consultant referral fees up 5 percent.
Appraisal fees up 13 percent. Mortgage revenue up 24 percent.
Investment management fees up almost 80 percent. Revenues in
sales transactions, however, are down from last year. The
pipeline, though, for sales transactions appears solid. We expect
substantial improvement in sales activity during the fourth
quarter. Even though revenue for the third quarter was negatively
impacted by foreign currency, our revenue growth for the
international division was 7 percent. Now on to the expense side.
Commission expense is up 9 percent this quarter from last year
due to increased revenues. Commission expense did increase at a
higher rate than revenue and Chris will talk a bit more about
that later. Operating expenses were flat quarter to quarter and
up only slightly, 3 percent, for the first nine months of the
year compared to last year. However, when you compare operating
expenses as a percentage of revenue, we again improved our
control in administrative expenses by 6 percent. EBITDA increased
19 percent in the third quarter to $36 million compared to $30
million last year. The EBITDA margin increased from 9.8 percent
in the third quarter of 1999 to 10.9 percent this year. The
increase in EBITDA is due to increases in revenue and our
continual efforts to reduce costs. Net income increased 50
percent quarter to quarter and about 100 percent when the first
nine months of 2000 are compared to the first nine months of
1999. EPS is 33 cents for the quarter up from 22 cents last year
and at 60 cents year to date 2000 as compared to 30 cents last
year.
The company's operations are reported as three geographic
divisions. The Americas which includes the US, Canada and Latin
America. EMEA which includes Europe, the Middle East and Africa
and Asia/Pacific which includes Asia and Australia. The Americas
is a geographic division that contributes the largest amount to
revenue and EBITDA accounting for 81 percent of revenue and 83
percent of EBITDA for the quarter. EMEA contributed 13 percent of
revenue and 15 percent of EBITDA while Asia/Pacific contributed 6
percent of revenue and 2 percent of EBITDA. This is consistent
with operating performance for all of 2000. I'd now like to ask
Chris Ludeman, President of our Transaction Management Division,
to discuss his results with focus on corporate services. Chris.
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Chris Ludeman: Thanks Brett. Transaction management operations, which includes
brokerage services, investment properties and corporate services,
had revenue growth of $7.6 million or growth of 3 percent for the
quarter. However, revenue was up 10 percent for the full nine
months. Transaction management accounted for 71 percent of
consolidated revenue, which is consistent with last year. EBITDA
for this segment in the third quarter was 23.2 million resulting
in an EBITDA margin of 10 percent. As Brett previously mentioned,
the increase in commission expense is higher than the increase in
revenue. This occurred because our producers are compensated on a
commission scale that increases with increased production volume.
As producers reach higher commission volume, their compensation
for the entire year is increased retroactively to that higher
level. Due to an increase in revenue, many producers reached a
higher revenue plateau earlier this year than last.
Let me now briefly discuss our corporate services business. Our
corporate services' line of business focuses on building
strategic relationships with large corporations in an effort to
relieve them of commercial real estate activities that are not
their core competencies. We expect corporate services will
experience growth rates higher than most other business units due
to several factors including one, the increasing number of our
professionals and service lines who are focusing on the corporate
occupier, secondly, gaining more work from current clients who
are expanding the breadth and depth of their outsourcing
activities and an increasing volume of new requests for
outsourcing services. As evidence, our current clients are
increasing their outsourcing activities and with CB Richard Ellis
gaining more client share, we've recently been awarded additional
business from a large telecommunication company which doubles the
size of our relationship to providing transaction and consulting
services to 80 million square feet of their portfolio as well as
our beginning to provide facilities management services for the
same client. We're in the process of executing a five-year
extension of our integrated outsourcing contract with a major
financial services firm which also includes an expanded scope of
services and finally a global software firm awarded CB Richard
Ellis transaction project management business in several regions
in the United States and we have just expanded this relationship
to include Asia/Pacific and EMEA.
B. White: Thanks Chris. As Chris mentioned, we continue to be very excited
about the growth prospects for our corporate services outsourcing
business. Now turning to the financial services operation, we
have three primary business lines: valuation, the commercial
mortgage business and investment advisory services. Financial
services generated 17 percent of third quarter revenues or $56
million. Revenues for financial services are up 31 percent over
the third quarter of 1999 or $13 million. EBITDA for financial
services totaled $10 million, an increase of over 440 percent or
$8 million over EBITDA from the third quarter of last year. The
EBITDA margin improved to 17 percent from 4 percent during last
year. The growth in financial services revenue and EBITDA was
driven by our investment advisory and mortgage businesses.
Investment advisory increased their revenue by $5 million or 70
percent and EBITDA by $3 million or over 200 percent. Mortgage
revenues were up by $6 million or 47 percent over the third
quarter of last year. EBITDA increased to $4 million or 182
percent over last year. We believe those results certainly speak
for themselves. I'll wrap up with a discussion of management
services segment which provides property and facility management.
EBITDA for management services increased 77 percent for the third
quarter over last year. The EBITDA increase is largely
attributable to the fact that in the second quarter we
contributed our engineering services group to a strategic joint
venture. This permits us to outsource our costs associated with
engineering while maintaining our revenue source. The EBITDA
margin increased from 4 percent in the third quarter of 1999 to 8
percent this quarter. Revenue from property management is up 10
percent this quarter over last year. That concludes my remarks
and now back to Ray.
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R. Wirta: Thank you Brett and thank you Chris. In conclusion we are
pleased with our third quarter results and our outlook is
good. I would like to spend a few minutes focusing on our
vision for the future. As we've discussed in prior calls, we
are committed to improving our operating leverage by
reducing the amount of our corporate overhead. Corporate
support costs in third quarter are down 19 percent compared
to last year. Although this is a substantial reduction we
believe that further improvements are possible. We also
focused on reducing our level of debt. As mentioned, debt
has already been reduced by 26 million or 6 percent in the
level at this time last year. We expect to further reduce
our debt during the fourth quarter and currently estimate
that by year-end debt will be lowered by approximately 50
million from the 9/30 level of 394. We also want to be
property positioned for the future. The Internet has already
made meaningful changes in the way business is conducted.
For example, simple things like this conference call is
being broadcast live, accessible by anyone. Our Internet
alliance with Octane and e-investments will insure that CB
Richard Ellis is positioned to take full advantage of the
technological changes in the future. The climate for
commercial real estate and other market factors effecting
our business remain positive. Our global platform, strong
relationships with corporate clients and broad array of
services give us a leading position in our industry sector.
This is evidenced by the fact that on a revenue basis we are
40 percent larger than our closest competitor. The company's
operating results are seasonal with the fourth quarter
typically generating our greatest volume of revenue, EBITDA,
cash flow, net earnings and this year will be consistent
with that pattern. We are confident about our ability to
meet analyst expectations for EPS for the year as reported
on first call. CB Richard Ellis is the most recognized real
estate service brand worldwide and we offer the broadest
array of services in the industry. Our worldwide delivery
channel is unmatched and our confidence in our ability to
build on our number one position is high. With that I would
like to conclude our formal remarks and turn to the
moderator for questions. Moderator.
Operator: Ladies and gentlemen, we will now begin the question and
answer session. If you are an analyst from an investment-
banking firm, please press the one followed by the four on
your telephone. You will hear a three tone prompt
acknowledging your request. If your question has been
answered and you wish to withdraw your polling request, you
may do so by pressing the one followed by the three. If you
are on a speakerphone, please pick up your handset before
entering your request. One moment please for the first
question. Brett Hendrickson from B Riley & Company please go
ahead with your question.
Brett Hendrickson: Good morning everybody.
R. Wirta: Morning Brett.
B. White: Hi Brett.
B. Hendrickson: I've got just three-- I think pretty quick questions. One is
for Brett just to clarify in your opening comments, you said
Q4 investment properties should be up significantly and I
just want to clarify, you mean over last year's Q4, correct?
Not over to this year's Q3?
B. White: Correct.
B. Hendrickson: OK and then are you guys able to talk about the growth in
your assets under management and your investment advisory
business and maybe where you think you'll end the year at--
in that area-- and maybe where you are at this moment in
time.
R. Wirta: Brett, this is Ray. We believe we'll end the year a little
over $10 billion, which would be up probably 1 1/2 billion
over year-end 1999.
B. Hendrickson: OK and you're just under that right now, Ray?
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R. Wirta: Yes. We're right around 10 billion or so, we could actually
do better than I expect but that's the number that I'm
promoting at the moment.
B. Hendrickson: OK, sounds good. Then the last question is the commissions.
I understand that you have a different kind of in the way
they're paid this year because of the retroactive rate going
up. How much of the increase would you say is also
attributed to-- and it might be hard to quantify-- just
ongoing kind of ramps in the commissions on producers are
getting from the big-- kind of from the biggest first out
there? I know Grubb & Ellis reported some disappointing
results and partially blamed commissions. What have you guys
seen out there at this moment?
B. White: Brett, this is Brett answering. First of all, we're very
comfortable with our commission expense accrual to date and
we're lined up for the year. The way our commission program
works is that as producers hit certain plateaus and revenue
production, we pay an increase in commission to them back to
dollar one and two things have happened this year which
meaningfully impact these numbers. First, we have a number
of producers that are hitting the higher thresholds early so
we're paying more commission expense and we did pay more
commission expense in the third quarter than we did in prior
year third quarter. Secondly, as these producers hit these
thresholds, many of them are now at the upper end of the
threshold and will not be increasing in the fourth quarter
their split that we've now picked up in the third quarter.
So the way we're looking at this is we're right on track for
our commission expense accruals for the year and feel very
comfortable with our projections for the balance of the year
in that area.
B. Hendrickson: And Brett, can I just make sure that all of us out here are
straight on the accounting of that. Say there's an increase
in the split for a given producer in Q3. Let's say he hits
that threshold in Q3, you guys account for the incremental
difference in what he was actually paid in Q1 and Q2 an
expense at all in Q3, is that correct?
B. White: That's correct.
B. Hendrickson: So since some producers were hitting earlier this year, that
will prevent you guys from having to account for that in Q4.
So that could actually [interrupted].
B. White: Brett you're exactly right. Brett you're on exactly the
right track. That's right.
B. Hendrickson: OK, thanks guys.
B. White: Thank you.
Operator: Ladies and gentlemen if there are any additional questions,
please press the one followed by the four at this time. Mr.
Wirta there are no further questions at this time. Please
continue with your presentation or any closing remarks.
R. Wirta: We'd like to thank everyone for attending and remind our
employees that are on the Web to please use the CEO chat
line to ask your questions, which we encourage and invite
and now we're all going back to work to make some more money
in the fourth quarter. Thanks for listening. Bye.
Operator: Ladies and gentlemen that does conclude your conference for
today. You may all disconnect and thank you for
participating.
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SIGNATURES
Pursuant to the requirements of Rule 100 and 101 of Regulation FD, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CB RICHARD ELLIS SERVICES, INC.
Date: December 29, 2000 By: /s/ James H. Leonetti
-------------------------------
James H. Leonetti
Chief Financial Officer
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