B Riley Financial Inc (RILY) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Great American Group Incorporated First Quarter 2010 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today Monday, May 17th, 2010.

I will now like to turn the conference over to Mr. Andrew Blazier of Addo Communications. Please go ahead, sir.

Good afternoon, everyone and welcome to Great American Group's First Quarter 2010 Earnings Conference Call. With me today are the company's Chief Executive Officer, Andrew Gumaer and Chief Financial Officer, Paul Erickson. Howard Weitzman, the company's Chief Accounting Officer is also on hand to answer questions.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Financial risks and other uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's Form 10-K filed with the SEC.

All information discussed on this call is as of today, May 17th, 2010 and Great American Group does not intend and undertakes no duty to update future events or circumstances. Also, during today's call, the company will be discussing adjusted EBITDA, which is a non-GAAP, financial measure. Please see the company's press release for a reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP measure.

Now, I'll turn the call over to Andy Gumaer, Chief Executive Officer of Great American Group. Andy?

Thanks, Andrew and thank you everyone for participating today's conference call. We appreciate your continued support. This continues to be an important time for Great American Group for both challenges and opportunities. We are disappointed with our operating results during the first quarter. Prolonged recession has not resulted in the sustained level of retail liquidation that we and the industry had expected.

Our auction liquidation business has based a challenging environment as credit markets have rapidly improved and lenders have increasingly chosen a strategy to extend maturities for defaulting borrowers. Although management has embarked on a number of growth initiatives to diversify our revenue base, the auction and liquidation segment is still our largest source of revenues and our financial results had suffered in a slowdown in liquidations.

However, we believe the business activity in our auction and liquidation business will increase as lenders are forced to deal with problem credit facing maturity and the economy continuous to face many challengers over the next several years. During the first quarter, we did complete several notable transactions that I want to highlight.

In March, we announced the GA Capital will served as the administrative agent on a $90 million term loan facility to Borders Group. This facility is part of a larger recommencing effort by Borders, which includes the new $700 million senior secured asset based credit facility, which matures in March 2014. Orders transaction demonstrates our creative ability to assist companies with our financing need and we hope will be a foreshadowing of future activity by GA Capital, one of our new business initiatives.

Also in late March, we auctioned excess assets of Maui Pineapple Company. These assets included processing and cannery equipment, construction, agriculture and harvesting machinery, power plant generators and vehicles and other equipment. Earlier in the quarter, we announced the contract with the University of Delaware to auction the assets of the former Chrysler Automotive Fabrication Assembly Plant and Distribution Facilities in Newark, Delaware.

Despite the easing of credit default in retail liquidations, we continue to build for the future and pursue growth initiatives. We announced three important strategic, personnel additions during the quarter. These included Gavin George as Managing Director of GA Asset Advisors in London. As I indicated on our last call, Gavin has more than 25 years of experience in retail as an operator consultant and restructuring professional and has mandate the oversea to growth of our UK presence.

We also added Romie Castelli, who is heading up our cooperate service business within our auction division, targeting asset disposition work for larger Fortune 1,000 Companies that seek to contract disposition work to preferred providers on a contracted multi-year basis.

In addition to the growth initiatives, we are working to become more efficient. Recently, we announced the amendment on $52.4 million of the $55.6 million of promissory notes due to the former Great American Members and certain Phantom Equityholders that were issued as a part of the company going public last year. In amending these notes, we reduced the annual interest rate from 12% to 3.75% on $52.4 million of the notes, and also extended the maturity date by four years on $47 million of these notes to July 2008.

This will enable the company to retain greater capital flexibility and preserve capital for future liquidation transactions when deal activity escalates. We believe such activities should help position the company for improved performance and growth for the long-term.

I want to also speak briefly about the Movie Gallery retail liquidation transaction that was announced last week. As you know, Movie Gallery has been a significant player in the video rental market for many years. Movie Gallery operates through several retail names, including Movie Gallery, Hollywood Video and Game Crazy.

Last week, we reached agreement with Movie Gallery to liquidate the remaining US operations which is subject to bankruptcy court approval in auction proceedings. This is one of the larger transactions in a retail liquidations space that we have seen over the past six months and demonstrates Great American's strong market position in the retail liquidation industry.

Now, I would like to turn the call over to Paul Erickson, our CFO who will discuss our first quarter results in greater detail. Paul?

Thank you, Andy. In the first quarter 2010, total revenues were $12.1 million compared to revenues of $41.9 million in the same quarter of 2009. Revenues from services and fees were $10.6 million or 88.1% of total revenues compared to $38.8 million or 92.7% of total revenues a year ago. Sales of goods were $1.4 million or 11.9% of total revenues compared to $3.1 million or 7.3% of total revenues in the first quarter of 2009.

The decline in total revenues during the quarter was primarily due to the results of reduced revenues in our auction and liquidation segment, stemming from an overall lack of retail liquidation opportunities across the industry as economic conditions for retailers and credit market have improved. During the first quarter of 2009, the company earned revenues of $25.7 million or 61.2% of total revenues and two large consumer product retail liquidations.

Direct costs and services were $5.2 million compared to $3.9 million in the year ago period. The increase in direct revenues from services was a result of an increase in the number of fee and commission engagements in 2010, where the company contractually bills fees, commissions and reimbursable expenses, and an increase in headcount in the valuation and appraisal segment compared to a year ago. Cost of goods sold was $1.5 million, compared to $3.2 million in the first quarter of 2009, as a result of the sale of goods with lower asset values than a year ago.

Selling, general and administrative expenses were $8.5 million, compared to $14.1 million in the first quarter of the prior year. The decline in selling, general and administrative expense was primarily related to a decrease in corporate expenses from the deferred compensation plan for the Phantom Equityholders, which was terminated in conjection with the transaction to a public company in 2009, July 2009.

This reduction was partially offset by an increase in payroll and operating expenses from the previously announced expansion of the company's European operations and an increase in personnel costs due to the expansion of our business development team. As a result, our operating loss during the quarter was $3.2 million, compared to operating income of $20.7 million during the first quarter of 2009.

Interest expense during the period declined to $1 million from $5.9 million the prior year, primarily because a decrease in interest expense from significantly lower borrowings than were utilized in the first quarter of 2009, when the company had more retail liquidation engagements.

Interest expense during the first quarter of 2010 was primarily comprised of interest expense on the notes payable to the former Great American Members and Phantom Equityholders. Interest expense also reflects the interest rate reduction from 12% to 3.75% on $52.4 million of the promissory notes Andy discussed earlier. Loss on operations before a benefit for income taxes was $4.6 million, compared to income from operations of $14.8 million in the same period last year.

During the first quarter, our operating results also included the benefit for income taxes of $1.6 million overall -- $1.6 million. Overall, our net loss in the first quarter of 2010 was $3 million or minus $0.11 per diluted share compared with net income of $14.8 million in the first quarter of 2009.

During the first quarter of 2010, we generated adjusted loss before interest, taxes, depreciation and amortization of $2.1 million. During the quarter, the company used $6.1 million in cash from operations. On March 31, 2010, the company had $28.3 million cash and equivalent compared with $38 million at December 31, 2009. Working capital was $39 million and long-term debt was $53.9 million. During the quarter, $9.5 million of the amended notes which had been payable July 31, 2010 was reclassified as long-term debt payable July 31, 2014 in accordance with the amendment terms of the notes.

I'll now turn the call back over to Andy for some final thoughts. Andy?

Thanks, Paul. Amid the continued uncertainty of economic conditions in announcing backlog of both commercial and consumer debt, we believe Greater American Group is poised to benefit as financial reckoning becomes a reality for many corporate borrowers. But some economists believe the country is poised for a V-shape recovery, there are others who believe we are prime for a double-dip recession. They cite unemployment rate at 9.9%, interest rates near historic lows and a depressed residential and commercial real estate market.

However, until that opportunity materializes, we're taking a proactive approach, shoring up our finances in a way that does not jeopardize future growth. We made considerable progress on several of our initiative already this year and we continue to concentrate our energy on activities that will contribute to the long-term success for the company.

Thanks again for your interest and support of Great American Group. We look forward to speaking with you next quarter. Now, operator, we're available to answer your questions.

Thank you, sir. (Operator Instructions).

And our first question comes from the line of Mike Crawford with B. Riley and Company. Please go ahead.

Thank you. Andy, I was hoping you could walk us through a little bit about some details on the Movie Gallery transaction. Is there a guaranteed amount to Movie Gallery around $63 million? Is that correct or is that not correct?

That is correct. That will be a guaranteed transaction.

Okay. So, that typically in that type of transaction, you would expect to earn a higher margin. Is that correct?

Absolutely, as opposed to a fee, I assume you're asking.

Yes.

Yes, that's correct. On all guaranteed transactions since we're taking additional risk, we look for a higher margin.

Right. So, I mean, let say the proceeds come out to $63 million of them and how much would you expect to make and then, what -- how does the upside work from there?

I currently am not sitting with a pro forma, Mike. But the $62.3 million, if that's the exact number; I don't recall, but it's somewhere close to that, is essentially the guarantee that we are essentially purchasing that inventory for. Then, after that comes the operating expenses to conduct the sale. And mostly at that level, we will make a certain level of compensation and then if we had an additional higher level, we will share back with Movie Gallery.

Okay. And is there a timeline set up for this?

The exact duration hasn't been determined yet, but you could estimate about eight weeks.

Okay, thanks. And then, shifting gears a little bit, what can we report on home auctions front?

Well, we have seen a slight uptick in activity. Certainly, REDC, one of our largest competitors in that space has shown additional traffic on their website of foreclosed properties and a few sprinkling of auctions that they have conducted. We are in dialog with many service providers that are collecting product now that we believe will have a very good chance of participating and helping them sell that product. Certainly, it's more activity than we've seen at that market in the last six months, so we're hopeful that we will be conducting some of those auctions soon.

Okay, great. And then, final question is on retail liquidation pipeline. So, these deals, may be from when you first hear about them, they can come together all in just a few weeks timeframe. Is that, I think so -- are there any in that short pipeline at this point?

Well, we certainly have a watch list of any and all troubled retailers. You can never tell what the timing is, but you are correct that we can become aware of a transactions small or very large and be bidding on it with a week's notice. So, we could have significant activity right around the corner or it could be some months before we see significant activity. But we have also seen an uptick in the number of deals that are becoming available in retail liquidations as well, as noted by this Movie Gallery transaction.

Okay, great. Thank you.

Thank you. (Operator Instructions).

And our next question comes from the line of Richard Schuster with Robeco Investment Management. Please go ahead.

Hey guys, one quick question. Andy, what do you think -- if we stay at these levels of revenues, what do you think the cash flow will be for the remainder of the year?

Paul, you want to answer that?

I think probably Howard, you've done more analysis. Cash flow for the rest of the year, Richard -- one second.

Oh sure. No problem.

Hey, Richard?

Yes?

I discussed it with Howard who is the Chief Accounting Officer who's intimately more familiar with it than I am and he is going through the first quarter and discuss it with you. Go ahead, Howard.

Thanks a lot, guys.

When you take a look at the first quarter, we had a use of cash at almost $6.1 million from operation.

Yes.

In that, there's some accrual for year-end bonuses and a big accrual for interest on the notes.

Yes.

And so for the first quarter, with the note reduction, that number drops to about $2 million.

Okay.

Based on the operating performance of the company for the first quarter.

Okay. So, if -- with the note reductions, the $6 million would go to $2 million, so in a comparable environment, you might be around $2 million instead of $6 million?

In a comparable environment, when you take a look at the first quarter and obviously with the Movie Gallery, we did not have a similar transaction like that in the first quarter, so there's going to be improvement there, for example, when we report revenues on that.

Okay. No, that's what I wanted to hear. And the second question is and I commend you guys for the reduction in the notes 12% to 3.75%. Was there any consideration for that or you just reduced it from 12% to 3.75% and extended the maturity?

The latter is true. We just reduced it, no consideration and we did it in the best interest of the shareholders.

I really commend you guys. Very few people -- shareholder -- very few management which I've invested have done that. So, I really appreciate that.

Thank you.

Thank you. (Operator Instructions). Alright, management, I show no further questions in queue at this time. Please continue.

Alright then. Thank you, everyone for joining our call and we look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes the Great American Group, Incorporated First Quarter 2010 Earnings Conference Call. Thank you for your participation. You may now disconnect.