B Riley Financial Inc (RILY) 2019 Q4 法說會逐字稿

Good afternoon, and welcome to B. Riley Financial's Fourth Quarter and Full Year 2019 Earnings Call. Earlier today, B. Riley issued a press release with its financial results. Copy can be found in the Investors section of the company's website at ir.brileyfin.com. As a reminder, this call is being recorded. A replay of today's call will also be made available on the company's website. Joining us today are Bryant Riley, Chairman and Co-CEO; Tom Kelleher, Co-CEO; and Philip Ahn, CFO and COO.

After management's remarks, we'll open the line for questions. And before we conclude today's call, I will provide the necessary cautions regarding forward-looking statements. I will now turn the call over to Mr. Bryant Riley. Mr. Riley, please proceed.

Thank you, and welcome, everyone. 2019 was another year of continued progress and growth for B. Riley Financial, with total revenues of $652.1 million, a year-over-year increase of 54%; and adjusted EBITDA of $207.9 million, with net income of $81.3 million for the year, which is at the high end of our previous guidance. Our strong Q4 performance was driven by record investment banking revenues as well as significant investment portfolio gains, which more than offset a large loss in our liquidation segment. Meanwhile, our consulting, appraisal, wealth management and principal investment businesses continue to perform steadily as we pursue new opportunities to create additional value from our platform.

Over the last few years, we have meaningfully transformed our business by building and purchasing assets with steadier and more recurring revenue streams. At the same time, we focused on growing market share in our more episodic capital markets and retail liquidation businesses.

In Q4, we announced the formation of a brand investment portfolio, which aligns with our principal investment strategy and delivers additional steady recurring cash flow to our platform. Our brand holdings have already started contributing, generating $4.1 million in revenue and $2.7 million in operating income in the fourth quarter. We anticipate this new addition will help to provide further balance to our more episodic businesses.

Our recurring businesses contributed more than 50% of pretax income before corporate overhead and approximately 40% of adjusted EBITDA in 2019. As we look forward to 2020, we expect more than $100 million of our cash flow generated by our steadier businesses, which will enable us to continue to proactively pursue opportunities with our more volatile market.

And as we discussed on our prior calls, we are seeing more and more opportunities, which we believe are uniquely suited to our platform because of the diverse capabilities we offer under one roof. A more recent example includes our role in the Alta Equipment Group listing, which went public last month through a reverse merger with B. Riley-sponsored SPACs from last April. We are involved in multiple levels of this transaction as banking and capital market advisers, as placement agent on the debt and placement agent on the equity financing. We brought in multiple groups to advise on the transaction and arrange financing, which resulted in a successful business combination completed in just under 10 months. We're excited about the prospects for Alta, can't think of a better and more deserving company with a strong leadership and outstanding track record of delivering results. We look forward to continuing to be a partner to Alta in the future that looks to scale its business.

Another recent example is our ongoing work with the Franchise Group. This is a company in which we're a shareholder and currently hold 2 Board seats. FRG completed its acquisition of American Freight Group last month. This is another instance where we're able to serve as an adviser and placement agent on the deal, again, providing the company with the necessary financing to support a closing -- successful closing.

We see these types of opportunities time and time again. And our combined teams, our expanded universe and our proven ability to provide a diverse set of end-to-end capabilities under one roof truly differentiates us from our competitors. We will continue to leverage our balance sheet and to create more opportunities which not only benefit us but also support our partners and our clients. And while I feel like I say this often, I can't emphasize it enough. We recognize that we are stewards of our shareholders' capital, and we believe we have demonstrated this through dividends and through our share repurchase program.

During 2019, we repurchased more than 870,000 shares of our common stock and warrants. And we just announced an increase to our regularly quarterly dividend to $0.25, supplemented by a special dividend of $0.10 for a total fourth quarter dividend of $0.35. Upon payment of our Q4 dividend, we will have paid a total of $1.76 per share in dividends on our common stock related to our earnings for the full year of 2019.

With that, I'll turn the call over to our CFO and COO, Phil Ahn to provide a summary of our financial metrics. Phil?

Thanks, Bryant. Welcome, everyone. For the fourth quarter, revenues totaled $165.2 million, up from $102 million for the same period of 2018. As Bryant mentioned, the increase in revenue for the quarter was primarily driven by investment banking and gains in our prop investment portfolio, which offset a large loss in our liquidation segment for the quarter. For the year, our total revenues were $652 million, which is a 54% increase compared to $423 million in total revenue for 2018.

Now turning to our individual segments. In Capital Markets, fourth quarter revenues increased to $172.2 million, up from $60.6 million for the same period of 2018. Segment income increased to $88.6 million, up from a loss of $12.5 million, which included restructuring charges incurred during the fourth quarter of 2018. The significantly quarterly increase in our Capital Markets segment was primarily driven by an increase in banking revenue as well as investment gains related to the company's equity portfolio.

For the year, Capital Markets segment revenues increased to $485.9 million, up from $275.1 million for 2018. Segment income increased to $179.3 million, up from $10.2 million for the prior year. The year-over-year increase in our Capital Markets segment was attributed to an increase in investment banking, gains in our investment portfolio and a full year's contribution from GlassRatner, which we acquired in August of 2018.

Now turning to our Auction and Liquidation segment. Auction and Liquidation recognized negative revenue of $44.4 million and a segment loss of $60.8 million for the fourth quarter. This compares to $10.1 million in revenue and $2.3 million in segment income for the same period of 2018. The fourth quarter results were impacted by a significant expected loss accrual related to a liquidation transaction that started in 2019 and is expected to be completed in 2020.

We have estimated the total expected loss for the entire project through completion and have booked a total loss into our Q4 results. For the year, Auction and Liquidation segment revenues totaled $22.5 million, with a segment loss of $25.5 million. This compares to $55 million in revenue and $27 million in segment income for 2018. As we've noted on our prior calls, our Auction and Liquidation segment results are expected to vary from quarter-to-quarter and year-to-year due to the episodic impact of these large-scale retail liquidation engagements.

Next, in our Valuation and Appraisal segment, for the quarter, revenues were $9.7 million compared to $11.3 million for the same period of 2018. Segment income was $2.7 million compared to $3.4 million for the same year ago period. For the year, revenues in our Valuation and Appraisal segment increased slightly to $38.8 million, up from $38.7 million for 2018. Segment income totaled $10.2 million compared to $11.1 million in the prior year. Our Valuation and Appraisal business continues to be one of our consistently performing businesses, generating steady cash flow for us quarter-to-quarter and year-to-year.

Next is our Principal Investments segment, which is primarily driven by results from United Online and magicJack, which we acquired in November of 2018. For the quarter, revenues increased $23.7 million, up from $20 million for the same period of 2018. Segment income increased to $8.8 million compared to $5.7 million for the fourth quarter of 2018.

For the year, revenues increased to $100.9 million, up from $54.2 million in 2018. Segment income increased to $33.2 million, up from $19.4 million for the full year 2018. As Bryant mentioned, we acquired a majority interest in the brand investment portfolio during the fourth quarter of 2019. Our newly added brand holdings contribute $4.1 million in revenue and $2.7 million in operating income for the fourth quarter and the full year.

Now turning to B. Riley Financial's profitability metrics, which are attributable to the company as a whole. Net income for the fourth quarter increased to $16.9 million or $0.59 per diluted share compared to a loss of $8.8 million or $0.34 per diluted share for the fourth quarter of 2018.

For the year, net income increased to $81.3 million or $2.95 per diluted share from $15.5 million or $0.58 per diluted share in the prior year. Adjusted EBITDA increased to $50.3 million in the fourth quarter of 2019 compared to $11.2 million for the same year ago period. For the year, adjusted EBITDA increased to $207.9 million compared to $89.6 million for 2018. Adjusted net income for the fourth quarter increased to $23.6 million or $0.83 per diluted share compared to $700,000 or $0.03 per diluted share for the same period of 2018.

For the year, adjusted net income increased to $108.3 million or $3.93 per diluted share compared to $38.8 million or $1.45 per diluted share in the prior year. For more information about adjusted EBITDA and adjusted net income and for a reconciliation to the nearest GAAP measures, you can refer to the section in today's earnings release regarding the use of non-GAAP financial measures.

And now turning to some highlights of our balance sheet. As of December 31, 2019, B. Riley Financial had $104.3 million in unrestricted cash and cash equivalents, $23.8 million in due from clearing brokers, $409.7 million in net securities and other investments owned, $27.3 million in advances against customer contracts, $213.4 million of loans receivable net of loan participations sold and $792.9 million in total debt. As of year-end, B. Riley Financial had a total cash and investment balance of $832.2 million, which includes approximately $53 million in equity investments included in prepaid and other assets. Net of the $792.9 million in total debt, we had a net cash and investment balance of roughly $39.2 million at the end of the fourth quarter.

Our total B. Riley Financial stockholders equity was $360.7 million as of December 31, 2019. As Bryant mentioned, we purchased more than 870,000 shares and warrants under our existing share repurchase program during 2019. Shares outstanding at the end of the quarter totaled approximately $27 million.

Lastly, our Board of Directors has declared a total quarterly cash dividend of $0.35 per share on our common stock. This reflects an increase in our regular quarterly dividend to $0.25 per share, supplemented by a onetime special quarterly dividend of $0.10 per share. Our common stock quarterly dividend will be paid on or about March 31, 2020, to stockholders of record as of March 17, 2020. That completes our financial summary. I'll now turn the call over to our Co-CEO, Tom Kelleher, to share a few specific highlights from our individual operating groups during the quarter. Tom?

Thanks, Phil. B. Riley FBR realized record quarterly revenues primarily driven by increased investment banking and capital markets activity. We continued to assert our leadership position in the SPAC space, and our outlook for this sector remains strong.

Noteworthy highlights from the quarter include our role as capital markets adviser and a sole placement agent to Trinity Merger Corp in support of its combination with Broadmark Realty, which created $1.5 billion mortgage real estate investment trust and resulted in one of the most successful real estate SPACs of all times. Additionally, we served as the sole underwriter for the Software Acquisition Group in it's $150 million SPAC IPO.

During the quarter, we also saw an increased contribution from our at-the-market, or ATM, business as well as from our securities lending and fixed income groups. In research, we continue to aggressively reposition our coverage universe to drive further value from our position as a middle market lead.

In Wealth Management, year-over-year revenues remained relatively flat. However, we continue to focus on cross-selling our platform and improving profitability through organic growth with our current and new advisers. Our mandate to add high-quality advisers has resulted in a robust pipeline of extremely reputable financial advisers, both in markets where we have an existing presence and in new markets where we have identified an opportunity for rapid growth.

Just last week, we were pleased to announce the addition of MJB Wealth Management Group in our Philadelphia branch, which we established just last year. Our GlassRatner Consulting Group has experienced tremendous growth since joining the B. Riley platform 18 months ago, with average monthly mandates doubling in that time period. This growth was due in part to an increase in cases and relevant opportunities to collaborate and cross-sell with other B. Riley Financial divisions as we've increased internal awareness of our bankruptcy litigation, forensic accounting and due diligence service lines. Key industries for GlassRatner continue to be health care, agriculture, real estate, energy and retail.

Turning to Great American Group, while our retail liquidation business experienced a challenging quarter related to a large project, the group continues to be actively engaged in multiple ongoing store closing projects, which we expect to continue in 2020. For context on the scale of this activity, we participated in more than 3,900 store closings and liquidated nearly $3 billion of retail inventory in 2019. We continue to expand our collective capabilities to capitalize on the trends in retail, whether through brand licensing, distressed real estate or other restructuring entry point. And we expect this will remain a meaningful part of our business as the retail industry continues to adjust to current market conditions.

Meanwhile, our Appraisal business saw a modest decline compared to a strong fourth quarter in 2018. Our Appraisal business maintained steady performance quarter-to-quarter and continues to prioritize expanding revenue sources across the automotive, energy, metals and mining and retail sectors. Our final segment is Principal Investments, which primarily consists of magicJack and United Online. Both businesses continue to outperform our initial investment estimate and are generating strong cash flow for our platform.

However, we are actively pursuing investment and acquisition opportunities to grow this segment and continue to assist EB, B&W, FRG and other portfolio companies with the respective acquisition efforts.

Lastly, looking ahead, we intend to continue to focus on our branding and marketing to better align and leverage the external relationships of all of our associated companies. We have been beneficiaries from the growth of our platform and increased recognition of our brand. Much of this is to the credit of our employees and our partners. We recognize that we could not have accomplished what we have without their support and dedication.

With that, we will now open the line for questions.

(Operator Instructions) Our first question comes from the line of Wes Cummins with [272 Capital].

Bryant, just to start, I think, the obvious question is the Great American Group historically has been very good about losing little or really never losing on projects. Just kind of curious to your take as to what happened on the project you mentioned in the quarter? And then kind of what the outlook is on larger potential projects in 2020?

Sure. Thanks, Wes, for the question. Yes. So I would say that -- I'll take the bullet on this one. We've been very aggressive in our approach to liquidation, whether it was on successful ones like Bon Ton, where we teamed up with the bondholders to credit bid and we owned the real estate, and we did things that, I think, were probably more expensive than we have done historically and then worked out. With Barneys -- this is Barneys. With Barneys, we effectively won this liquidation by taking out the ABL. That was something that I don't know has been done before. With that comes a lot of reward. We effectively locked ourselves in the liquidation, but also more risk, risk around the wind down, risk around, obviously, liquidation analysis. Add on that this is a pretty small base of stores, with a high-end customer. You put all those things together, and we felt like we were creating the asset at a level that would make a lot of sense for us. We make a lot of money.

In retrospect, clearly, I think we got all 3 things wrong. The recoveries were lower than we thought, lower than -- we had some insight to our competitors, and it's lower than they thought. The expenses on the wind down were higher than we expected. And the company was in low shape and some of the inventory was in more trouble shape. So we need to acknowledge that. We need to think through that, and then take responsibility for it.

And then, at the same token, I think we have to look at the mirror and say, what brought us to the dance. Did you get to $207 million EBITDA from $80 million by going -- working on projects right in the middle of the fairway, and clearly, the answer is no. So we need to make sure that we're learning from our mistakes. We're thinking thoroughly about each deal, but also recognize that if your -- if part of your business model is to take advantage of what we think sometimes is the ability to take risks and calculated risks and getting outside return, sometimes you're going to have these -- this is obviously bigger than anything we would have expected. But as I look through the whole year, I think we've got a lot to be proud of, and mentally, I think we've all -- we hope we've accrued for it as -- for the estimated losses, as Phil said.

And the markets are all -- that is a onetime event. But if you look at the market for retail and liquidation environment and where we sit, really excited about that, nothing will change. I mean we will continue to be aggressive. We'll just -- we've got to take a deep look in the mirror, say where did we go wrong, where did we go right and make sure we learn from it.

Okay. Great. I appreciate that. And then just with quite -- and I had -- I think I heard this right. Did you say that in 2020, you expect at least $100 million of EBITDA to come from one of your more steadier businesses?

Yes. So, Wes, if you look at the Principal Investment group, if you look at the Appraisal side of our business, GlassRatner and now our branded business, that business has been growing through acquisition. We've got a couple of businesses in there that are declining. And then we have a couple that are growing rapidly. So we've really tried to balance -- take some of the profits we've had on the episodic side and be opportunistic buyers of assets that we think we are buying them cheaply, whether by taking a orphan company private as the case in magicJack or United Online or having a partnership with a team at Bluestar that we've worked with on multiple projects that we think whirled out and have partnered with them. So yes, I think we are -- we've got a really good base of cash flow to work off of and take some of those calculated, but hopefully, more profitable risks than we did in Q4.

Great. And Bryant, last one for me. Just on the capital return to shareholders, it's good to see the regular dividend going up again? And do you expect that to kind of -- that as a signal that has more of the strategy to have a larger regular dividend and a smaller special dividend in the future and maybe allocate the capital for acquisitions or stock buyback? Just curious on the thought.

No. I think, Wes, look, I think there is -- we just bought a big slug of stock, which we announced in Q1. We bought 880,000 shares. We have publicly traded bonds that create the opportunity to buy them, or if we think there's an appropriate use of capital to sell them, and then we think of our shareholders. And so I think that may be -- we think there's an opportunity -- there's some opportunities around the stock and around other things. But for the most part, I would not -- our focus has been 20% of our EBITDA roughly will be returned to shareholders. And we just -- we moved it up because of that recurring revenue. But if you look at the whole year, it was over $1.70. So I don' think there is a big strategic change. We feel pretty good about our balance sheet and the opportunity to take advantage of some of the disconnect in the stock or in other opportunities.

Okay. Yes, it's been good to see the regular dividend go up so much. Appreciate it.

(Operator Instructions) Our next question comes from the line of Sean Haydon with THC.

Congrats on a really terrific year and fourth quarter. Given that, I believe, and I'm sure you agree, you guys have a really nice story of growth and capital return. Have you looked to engage with any sell-side firms to kind of get the word out because it seems like where your valuation is, the disconnect really is just people not knowing beyond kind of your research, people on The Street knowing the full story.

So look, I think that's a fair question. I was -- we did a couple of conferences a year. I guess at the end of the day, if you were to look at -- I always focus, and if we just take a step back and say, what's happened in the last 5 years. I don't know the exact number, maybe Phil knows, but I think we paid $3.50 in dividends from that initial $5 effective IPO. So that's $1.50 or $2 cost basis. And our stock is where it is, whether -- and I'm looking -- I think what we think to ourselves is let's focus on the business, let's focus on being disciplined about returning capital to our shareholders. We acknowledge that our story is difficult. There's a variety of business -- businesses in here. And our responsibility in the way that we kind of think about making up for that complication is by being very aggressive in returning capital. And so would it -- would we like coverage? I mean, look, we absolutely like to get some coverage and get some more sponsorship. But I think at the end of the day, you've been around stocks that are not great stories, but really high market caps. And you've been around stocks that kept the nose down and just really worked hard, and I usually would always want to own the ones that they keep their nose down and just work hard, and that's kind of where we are. But I appreciate the point.

Yes. And then I guess, just a cursory question. How does this rate cut affect the business?

Well, the disconnect and, I think, credit, we've been -- we've got a really meaningful beneficiary of, whether it's in GA Capital or whether it's on our balance sheet. There is a world of kind of haves and haves not in getting credit. And to the extent that our ability to get credit at lower rates, I mean, our most recent bond offering was meaningfully lower than the first one we did, over 1% lower. And the flow that we see to arbitrage our cost of capital, put money to work at a higher rate and get significant fees at the same time, that's really good for us. And so we're -- volatility is good. It's painful in the short term, it's tough when the market sell-off 10% or 15%. But at the end of the day, starting from when we've started in '97, the opportunities have always been around volatility and others that might not have been in a good position as we are in, and our operating expenses are the way of diversification now. So I like the volatility. I think this is opportunistic for us.

(Operator Instructions) Thank you. This concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Riley for his closing comments.

Great. Well, thank you, operator. Once a quarter, we get to thank our partners, our shareholders, everybody that works here. And obviously, we appreciate all of the support and look forward to continue to deliver and look forward to talking next quarter. Thank you.

Thank you. Before we conclude today's call, I will provide B. Riley Financial's safe harbor statement, which includes important cautions regarding forward-looking statements made during this call. Statements made during this call about B. Riley Financial's future expectations, plans and prospects and any other statements regarding matters that are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements.

All forward-looking statements are made as of today, and except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. This conference call also included a discussion of non-GAAP financial measures to the most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release.

Thank you for joining us today for B. Riley Financial's Fourth Quarter and Full Year 2019 Earnings Conference Call. You may now disconnect.