B Riley Financial Inc (RILYL) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Great American Group 4th Quarter 2009 Earnings Conference Call. During today's presentation, all participants 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, Tuesday, March 30th 2010. At this time, I would like to turn the conference over to Mr. Andrew Blazier.

Good afternoon, everyone. And welcome to Great American Groups Fourth Quarter, 2009 Earnings Conference Call. My name is Andrew Blazier. I'm with Addo Communications, the company's investor relations firm.

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 10K filed with the SEC. All information discussed on this call is as of today, March 30, 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-gap, financial measure. Please see the company's press release for a reconciliation of adjusted EBITDA to net income, the most directly comparable gap measure.

And 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 in today's call -- our first as a public company. This is an exciting and dynamic time in the life of Great American Group. Thank you for your support through this new phase of our company's growth. Any of you on today's call may just be getting to know Great American. So I wanted to take a few minutes introducing you to where we've come from, how our business works and where we're headed.

Option and liquidation solutions, and valuation and appraisal services.

The Option and Liquidation Solutions Segment assists retail, wholesale and industrial clients in maximizing recovery rates on a variety of assets including inventory, machinery and equipment, and intellectual property.

The Valuation and Appraisal Division assists financial institutions, lenders, private equity investors and other capital providers in determining the value of various assets.

On the Option / Liquidation side of the business, we provide retail liquidation services for both distressed and healthy retailers, although we provide the bulk of these services to distressed retailers that are liquidating their stores. We support the sale of all assets including inventory, fixtures, leases and other assets. Historically, we have played a role in nearly half of the major inventory liquidations in the United States totaling more than $23 billion in retail value since 1995.

Most of our retail liquidations are completed under a guaranteed arrangement in which we estimate the total value of the assets we expect to recover and then provide our customers with a guaranteed recovery value. Generally, we advance a guaranteed value to our customers, however, in some larger arrangements, we pay a portion of the guarantee to our customers in advance in liquidation services. Any revenues we generate in excess of the guarantee and our associated expenses, are booked as profits to the company.

Alternatively, about 1/3 of our liquidation transactions are completed on a fee basis and do not carry a minimum recovery value. Instead, on these deals we charge a fee for our liquidation services typically as a percentage of the asset sales we generate on behalf of our customers.

As you might imagine, the recent credit crisis and economic recession resulted in increased liquidation activity from distressed retailers. The first quarter of 2009 was the most profitable and the highest-revenue quarter in our history and included such high-profile transactions as the Mervyn's and Circuit City liquidations. However, in the latter part of 2009, we experienced a significant slowdown in liquidation opportunities. Despite retailers trying to experience distress, lenders opted to extend forbearance to those companies instead of moving the companies to liquidation.

We believe some of the motivations behind these actions were derived from pressures on the balance sheets of the banks themselves. In an effort to avoid write-offs, many banks have extended forbearance in hopes of delaying charge-offs to later periods or in hopes of companies experiencing financial recovery.

Despite these conditions, we did perform liquidation assignments for healthier retailers such as Borders Books, Maxrave and Jo-Ann Fabrics & Craft stores.

Within the auction liquidation segment, we continued to see healthy transaction activity in our wholesale and industrial services division. Wholesale and industrial provides asset disposition services in cases where equipment has become surplus or idle and also assists retailers and wholesalers in monetizing excess inventory.

We have announced several recent examples of this activity including the auction last week of excess assets no longer required for the ongoing needs of Maui Pineapple Company. These assets included processing and cannery equipment, construction, agriculture and harvesting machinery, power plant generators, vehicles and other equipment.

In January, we announced a contract with the University of Delaware to auction the assets of the former Chrysler Automotive Fabrication Assembly Plant and Distribution Facilities in Newark, Delaware. Live, simultaneous bidding occurred on site and online and included the sale of press brakes, shears, vertical milling machines, lathes, saws, tooling equipment, CNC robotics, compressors and other similar assets.

The second major segment is the Valuation and Appraisal Division which provides asset valuation services for both retail and industrial companies for a wide range of assets including inventory, fixtures, intellectual property and real estate.

Our primary customers for these services are financial institutions which use our appraisals to track asset values related to financial transactions and loan arrangements. We also perform these services in conjunction with potential business acquisitions or asset sales. In contrast to the auction and liquidation segment, valuation and appraisal tends to have relatively predictable growth in both revenue and EBITDA.

We also utilize the relationships we form in this division to generate new business in our liquidation division. We recently began offering valuation and appraisals for intellectual property and commercial real estate which we hope will become an eventual source of diversified revenue growth.

Turning our attention to growth initiatives, we made strides in the fourth quarter to develop new and complimentary revenue streams. Long before we took the company public, we looked at the cyclicality of the auction and liquidation business and realized we needed to expand our operations to incorporate new markets, new businesses and new geographies. To that end, we are focused on targeted growth opportunities within our retail liquidation division.

First is our international expansion which had already begun with an office in London. We believe that the UK and Western Europe represent more fragmented markets that are generally less competitive and that Great American can make significant strides in these markets.

In January, we announced an important strategic hire in that office with the addition of Gavin George as Managing Director of GA Asset Advisors. Gavin has 25 years of experience in retail having worked as an operator, consultant and restructuring professional. Prior to joining GA Asset Advisors, he spent 6 months serving as Chief Restructuring Officer for a distressed retailer. Before that, he was a partner and head of retail for Ernst and Young where he led a number of the firm's major commercial relationships.

Back at key initiative in development is the corporate services business within the auction division. Corporate services targets asset disposition work from larger Fortune 1000-type companies that seek to contract disposition work to (inaudible) provider on a contracted multi-year basis. Romie Castelli recently joined us to head up this initiative. Romie has more than 17 years of experience in surplus asset management and he worked with institutions such as [Gov B.I.D.] and Zone Trader.

During the fourth quarter, we began development of GA Capital which seeks to provide junior secured loans to retailers in need of growth capital, working capital and turnaround financing. With more than 14 years of retail experience, Dan Platt heads up the division which seeks to combine Great American's expertise in collateral asset values with the financing needs of retail companies.

Finally, Great American Real Estate, formerly known as Great American Home Auctions, our joint venture with Kelly Capital. Earlier this month, this division auctioned the 75-thousand-square-foot facility on 3 acres as well as the real property of the former Humboldt Creamery Facility in Los Angeles which included machinery, equipment and other assets.

During the quarter, this unit embarked on an initiative to market performing and non-performing loans on behalf of banking institutions. GA Loan Sales Advisors or GALSA operates a state-of-the-art auction website that allows investors to list, b.i.d. and purchase residential and commercial loans on a real-time basis bating custom, tailored transactions to serve everyone from modest individual investors to large institutions, any smaller and regional banking institutions have a significant supply of performing and non-performing loans which need to be disposed.

Accordingly, we believe this business will provide a consistent source of revenue as banks shore up their balance sheets by off-loading large packages of residential loans.

Now, I'd like to turn the call over to Paul Erickson our CFO who will discuss the details of our year-end and fourth quarter results. Paul.

Thank you, Andy. As we review the fourth quarter results, it's important to remember the somewhat lumpy nature of our business. Even as we expand our existing businesses, demand for our services cannot be predicted with great accuracy. This demand is largely a reflection of the liquidation activity occurring in the large retail economy. And as Andy said earlier, there have been very few of these opportunities recently.

Also, because of the nature of the liquidation business, as Andy discussed, the mix of (inaudible) guarantee arrangements can vary widely from quarter to quarter. That's -- we will not focus on margin movement between periods. We do not believe this volatile metrics are the right way to look at the health of our business. During the results, then, in the fourth quarter -- turning to the results in the fourth quarter of 2009, total revenues were $11.5 million compared to revenues of $21.4 million in the same quarter of 2008.

Revenues from services and fees were $10 million or 87.7% of total revenues compared to $19.7 million or 91.9% of total revenues the prior year. Sales of goods were $1.4 million or 12.3% of total revenues compared to $1.7 million or 8.1% of total revenues in the fourth quarter a year ago.

The decline in total revenues during the quarter was primarily the result of reduced revenues in the company's auction and liquidation segment stemming from an overall lack of retail liquidations across the industry. During the quarter, some of -- some revenue sources for the company expected to make meaningful contributions did not materialize to the extent we anticipated.

The launch of our Home Foreclosure Option business, originally targeted for January 2009, was delayed until the fourth quarter. In addition, the European expansion was developed more slowly than expected. Direct cost of services were $5 million compared to $5.7 million in the year ago period. The decline in direct costs of services were primarily related to reduced business activity in auctions and liquidations during the fourth quarter compared to a year ago.

Cost of goods sold was $3.1 million compared to $1.8 million in the fourth quarter of 2008. During the fourth quarter of 2009, we recorded a $1.2 million inventory valuation change to write down the carrying value of certain goods held for sale or auction to lower of cost or market.

Selling, general and administrative expenses were $9.7 million, compared to $7.8 million in the fourth quarter of the prior year. The increase in SG&A expense was primarily related to additional expenses we incurred as a public company and as an increase of $1.9 million of share based compensation related to the restricted stock grant to the Phantom Stock Equity holders. As a result, our operating loss during the quarter was $6.3 million, compared to operating income of $6.1 million during the fourth quarter of 2008.

Interest expense during the period improved to $2 million from $2.9 million the prior year, primarily as a result of a decrease in interest expense from borrowing we used in the fourth quarter of 2008 which was utilized to conduct retail liquidation engagements. As a result, loss from continuing operations before a benefit for income taxes was $8.5 million, compared to income from continuing operations of $3.2 million a year ago.

During the fourth quarter, our operating results also included benefit for income taxes of $4.1 million. This resulted in a loss from continuing operations of $4.5 million, compared to income from continuing operations of $3.2 million a year ago.

Overall, our net loss during the fourth quarter of 2009 was $4.5 million, or minus $0.16 per diluted share, compared with net income of $1.4 million or $0.13 per diluted share in the fourth quarter of 2008.

For the 2009 fiscal year, total revenues were $83.4 million, a 56.9% increase from total revenues, of $53.2 million in 2008. Total operating expenses were $65.9 million, compared to total operating expenses of $47 million in the prior year.

Operating income for 2009 was $17.5 million, an increase of 185.2% from operating income of $6.1 million a year ago.

Income from continuing operations was $17.1 million, compared to $2.3 million in 2008. Income from continuing operations in 2009 includes an income tax benefit of $11.7 million. The income tax benefit included a benefit of $7 million, as a result of a change in the Company's tax status from a limited liability company, whereby the Company was taxed as a partnership, to a C corporation in connection with the consummation of the acquisition by Alternative Asset Management Corporation, "AAMAC", on July 31, 2009.

Net income in 2009 was $17.0 million, or $0.91 per diluted share, compared to net income of $0.3 million, or $0.02 per diluted share, during 2008.

During the year ended December 31, 2009, we generated adjusted earnings before interest, taxes, depreciation and amortization of $28.6 million. During the AAMAC transaction, there were contingent shares that could be issued in the event the EBITDA reached $45 million for the year ended December 31, 2009. We did not reach this amount for the year ended December 31, 2009, and we do not expect to meet the other EBITDA amount for the rolling 12 months ended March 31, 2010.

During the 2009 fiscal year, the Company generated $17.8 million in cash from operations. At December 31, 2009, the company had $38 million in cash and cash equivalents, compared to $17 million at December 31, 2008. Working capital was $31.6 million, and total long-term debt was $44.5 million.

Now, I will turn the call back over to Andy for some final thoughts.

Thanks, Paul. This is an important time for our economy and for this company. As we move into 2010, we remain hopeful but cautious given the economic head winds of high unemployment and insecure real estate market and the impact of consumers and the potential for the prolonged high unemployment, the second wave of home foreclosures and continued weak economic conditions, we feel that Great American is poised to benefit as banks are ultimately forced to recognize or reconcile with problem situations that they have historically kicked down the road.

As Paul noted, some of our initiatives have yet to produce meaningful revenues to the extent we expected in the short term. Still, we made several meaningful, strategic advances during the year as we continued to build this company for the long-term, continue to compliment our core business with growth initiatives that can direct the long-term prosperity of this company.

Thanks again for your interest and support of Great American Group. We look forward to speaking with you again next quarter.

And with that, Operator, we are available to answer questions.

Thank you, sir. Ladies and gentleman, we will now begin the question and answer session. (Operator Instructions). One moment please for our first question. And our first question is from the line of Mike Crawford with B. Riley and Company. Please go ahead.

Thanks. I'd like to just ask a couple of questions about the business and maybe one or two about the models, if you don't mind. First, with GALSA so, like right now, you have this online structured loan sale, is that right -- of $78 million of performing loans that you were preparing to auction?

That's correct, Mike. We have from various lenders, notes that we are selling on a fee-for-service basis where we are going through a sealed-bid auction to offer those to our website of registered bidders as well as through various advertising venues.

Then, can you walk through the rough economics on something like that, please, for Great American?

Right now, in order to garner a greater market share, we are discounting our pricing relative to our competition in that space which is primarily Debt X and mission capital. We are charging a 1% fee on the transaction value for performing loans and a 1.5% fee for non-performing loans. And to the degree that a transaction takes place, we generate that fee income. As we mature in that market space, I'm sure our prices will reflect more of what the current market is.

Okay. And how -- what is the turn-cycle on something like this? Is this -- you might -- is this something where you could have a deal like this every month or every couple weeks or once a quarter or any idea?

I think it's fair to say that we continue to compile packages of notes from various lenders where we are currently attempting to sign contracts with them on exclusive arrangement basis for a 60-day term. So, I believe most of the transactions would take place within that 60-day period. And that's currently our current plan for that and we're hopeful that we'll continue to see a good supply so that we can continue to have these auctions, hopefully on a monthly basis.

Okay. Great. And then, with the GAHA home option business, so, this overall moratorium with less foreclosures being auctioned in general, when is anybody going to see the first home auction from Great American? I know you've done a couple of condos -- deals.

We did do some smaller transactions already but in terms of the size that we'd like to have in one geographic location, we haven't seen yet. As you mentioned, the pipeline of foreclosures -- basically, that purged out when the government put a moratorium down and put pressures on the banks not to foreclose. If you look at certain companies attract these things, like RealtyTrac, they'll tell you that there's over 7 million homes in the United States in some stage of foreclosure or default. There's 33,000 homes that are currently delinquent on their mortgage payments that the banks have not even begun foreclosure procedure on. This is, of course, due to the pressures from the government.

So, as this pipeline fills up, once this moratorium is lifted, to a larger degree, we believe we'll see a much greater flow of those opportunities. In the mean time, we continue to build up our infrastructure and become an approved vendor for various service providers and financial institutions so that when the supply of homes comes on the market, we'll be ready to do a number of those auctions.

Okay. Good. A couple more if you don't mind. So, I know the retail liquidations business is incredibly (inaudible) $24 million EBITDA quarter Q1 last year and now you have no idea when the next deal could come -- a major deal, anyway -- so, maybe setting that aside, you also have this more steady-eddy type of valuation and appraisal business. Could you put some parameters on what kind of revenue EBITDA expectations you would have for that portion of your business on an annualized basis?

Paul is better to answer that specific question but I will say that on our appraisal side of the business, it's certainly more visible in terms of the revenues and much easier to forecast and it is a stable, recurring revenue stream for us that we can count on year in and year out and are better able to determine quarter to quarter unlike that of the retail liquidations which are, as you mentioned, very unpredictable to determine.

And along those lines, with the retail segment, we believe that not only are the banks being more lenient on the retailers at this point, but also the landlords are being much more lenient on rent relief and other discounts like that which are also helping keep some of these retailers afloat.

Paul, go ahead and talk about the visibility of the appraisal segment.

Well, Mike, I believe your question. We don't give any guidance. So I can't really ask any questions about looking forward. But you're absolutely correct. The appraisal business is much more steady. It's much easier to plan. It's more of a constant flow of revenue as opposed to lumpiness.

So I can't give you any projected numbers. Last year, the appraisal segment did revenues $22 million. And we received our segment income from that appraisal business is about $4 million to Great American LLC. As far as -- I said forward looking, I can't comment on that.

Okay. So the final question is related to a model, so I don't know if you're even going to answer this if you're not going to give any guidance, but Q1, to me, seems like it's not actually a guidance question, it's just a question of what happens since it ends maybe tomorrow. So, what is the general sense of what Q1 looks like? And then, what are you going to say about 2010?

Well, Q1 is certainly not going to be the level of what our expectations were for 2010 I'm hopeful that the growth initiatives will begin to blossom and get significant traction so that we diversify our revenue streams throughout 2010 and in an attempt to take out the lumpiness of our earnings that we've had historically.

Okay. Thank you.

(Operator Instructions). And, management, I'm showing no further questions at this time. Please continue with any closing remarks.

Thanks again everyone for joining us on this call. I look forward to speaking with you again next quarter.

Thank you, ladies and gentlemen. This does conclude the Great American Group fourth quarter 2009 earnings conference call. Thank you very much for your participation. You may now disconnect.