B Riley Financial Inc (RILYL) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Great American Group, Inc. Third Quarter 2010 Earnings Conference Call. [Operator Instructions] And I would now like to turn the conference over to Mr. Andrew [Blazier]. Please go ahead, sir.

Good afternoon, everyone, and welcome to Great American Group's Third 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, and Philip Ahn, Senior Vice President, Strategy and Corporate Development are 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 risk, uncertainties and assumptions. Potential risks and 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, November 15th, 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. 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 your continued support of Great American. Although our reported results reflect sequential improvements from the second quarter in net income for the third quarter, we were disappointed with our results. We continue to face challenges in the auction and liquidation business environment, as economic conditions for retailers and creditors have continued to improve. As we announced on our last conference call, we made amendments on $52.4 million of promissory notes payable, but we reduced the annual interest rate from 12% to 3.75%, and extended the maturity date by four years on $47 million of those notes.

In September we undertook a difficult but necessary review of each of our business lines to streamline operations and reduce our operating expenses. As a result, we reduced employee headcount by approximately 7%, reduced salaries to our senior executives and other expenses reductions as well. We believe these expense reductions will result in annual cost savings of approximately $2.2 million. Given that we made these cost reductions toward the end of the third quarter, we would expect to see some of the financial benefits of these cost savings during the fourth quarter of 2010. Taken together, these actions have given us greater financial flexibility and enabled us to preserve capital for future transactions as the electivity improves.

Meanwhile, we continue to invest in those areas of our business where we see meaningful potential for revenue growth, shifting resources to initiatives such as our U.K. expansion. We're beginning to see some traction in this new market in particular. GA Europe, our London-based subsidiary, works in partnership with retailers and their financial stakeholders across Europe, providing services to retail sector such as operational and financial restructuring, distressed debt, and accelerated merger and acquisition consulting.

The economic environments in the U.K. and Europe are likely to continue to be difficult, and we believe GA Europe is well positioned to assist solvent and insolvent businesses. In October we announced GA Europe will operate the Suits You retail chain in the U.K., which went into the U.K. equivalent of bankruptcy in February of 2010. GA Europe will act as retail agent to advise the administrator on this chain's trading and retail operation.

Just this month we announced the appointment of Martin Gustenberg as European Business Development Director for GA Europe. Martin has more than 30 years of experience and extensive product category knowledge in the retail sector. He has worked as CEO, turnaround professional, corporate finance advisor and consultant, and previously served in senior roles for international retail companies including IKEA Germany, ProMarkt and Co-op.

GA Capital, our subsidiary that provides [junior's] impaired loans to retailers in need of growth capital, working capital and turnaround financing, continues to generate new business. We announced in September that GA Capital will serve as the administrative agent on a $65 million senior secured term loan to Vion Holdings, which facilitated an acquisition by Vion. This credit facility diversifies GA Capital's business model into other asset classes, and is another example of the creative financing we're able to provide to companies seeking alternatives to traditional borrowing from commercial banks. We're excited about this business which is meeting pent-up market demand.

Our wholesale machinery and equipment option division has experienced a recent increase in activity as well. We have announced several auctions in just the last two months. One recent example was the auction of machinery equipment vehicles and tools on behalf of a Bakersfield, California rental firm, Flashco, in mid September. We also webcast the auction through Great American's web auction platform, allowing bidders to participate in real time with buyers who attended the live sale in person.

We've also begun to see increased activity in the retail liquidation business, albeit at modest levels. We're seeing more opportunities in this space than we have seen over the past several months. However, these deals are somewhat smaller in size. We are cautiously optimistic that this may be a sign our business is beginning to improve. And now, I'd like to turn the call over to Paul Erickson, our CFO, who will discuss our third quarter results in greater detail. Paul?

Thank you, Andy. In the third quarter of 2010, total revenues were $13.9 million compared to revenues of $15 million in the same quarter of 2009. Revenues from services and fees were $13.5 million, or 97.4% of total revenues, compared to $11 million or 73% of total revenues a year ago. Sales of goods were $400,000 or 2.6% of total revenues, compared to $4.1 million or 27% of total revenues in the third quarter of the prior year. The decline in total revenues during the quarter was primarily the result of reduced revenues in the company's auction and liquidation segment. This decline resulted from overall lack of retail liquidation opportunities across the industry as the economic conditions for retailers and credit markets improved from the prior year.

Direct cost of services were $2.9 million compared to $4.8 million a year ago. The decrease in direct cost of services was a result of a decrease in the number of fee and commission engagements in the third quarter of 2010, where the company contractually billed fees, commissions and reimbursable expenses in the auction and liquidation segment, and a reduction in personnel during the second quarter of 2010 in the valuation and appraisal segment which resulted in a decrease in salaries and wages in the third quarter of 2010 as compared to 2009. Cost of goods sold was $600,000 in the third question of 2010 compared to $3.9 million in the third quarter of the prior year, primarily as a result of fewer auction engagements where the company sells assets.

Selling, general and administrative expenses were $8.0 million, compared to $7.2 million, the same period a year ago. The increase in SG&A was primarily attributed to the increase in payroll, operating expenses from the ongoing expansion of the company's European operations, and advertising and promotion expenses. SG&A during the third quarter of 2009 included $2.4 million credit from the deferred compensation plan for the Phantom Equityholders. Excluding this credit, selling, general and administrative expenses were $9.6 million during the third quarter of 2009, which included approximately $2.2 million of accounting, legal and consulting expenses as a result of the acquisition on July 31, 2009.

As a result, our operating income during the quarter was $2.4 million compared to an operating loss of $900,000 during the third quarter of 2009. Interest expense during the period declined to $800,000 from $2.3 million the prior year, primarily as a result of the decrease in interest expense from significantly lower borrowings from the third quarter of 2010 than in the same period in 2009 when the company had more retail liquidation engagements. Interest expense during the third 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 $55.6 million of notes payable to the former Great American members and certain Phantom Equityholders that was effective February 1, 2010.

Income from operations before provision for income taxes was $1.3 million, compared to a loss from operations of $3.5 million in the third quarter of 2009. During the third quarter, our operating results also included a provision for income taxes of $900,000. Overall net income during the third quarter of 2010 was $500,000 or $0.02 per diluted share, compared with a net of $4 million -- net income of $4 million in the third quarter of 2009. Operating results during the third quarter of 2009 included a benefit for income taxes of $7.6 million. During the third quarter of 2010 we generated adjusted earnings before interest, taxes, depreciation, amortization of $3.1 million. During the first nine months of 2010, the company used $6.9 million in cash from operations.

At September 30, 2010 the company had $21 million in cash and equivalents compared to $38 million at December 31, 2009. Also at September 30, 2010 working capital was $25 million and total long-term debt was $53.9 million. On October 27, 2010 the Company entered into agreements with $51.3 million of the $53.9 million principal amount outstanding of the subordinated, unsecured promissory notes payable to the Great American members and Phantom Equityholders, whereby the noteholders agreed to allow the company to defer payment of the interest payments due on October 31, 2010, January 31, 2011, April 30, 2011, until July 31, 2011. Now I'll turn the call back to Andy for some closing thoughts. Andy?

Thank you, Paul. During the third quarter we experienced increased activity in GA Capital and GA Europe which positions us for additional growth in the expansion of our business model. We also completed the review of our operations to reduce our operating expenses to position us for profitability in the near term and increased long-term growth. This allows us to be more competitive from a cost perspective without sacrificing our most promising growth prospects. We're already seeing the beneficial effects of our proactive actions, and we look forward to providing further updates on our progress as we move into 2011. Thanks again for your support of Great American Group. Operator, we are available to answer questions now.

Thank you. [Operator Instructions] One moment, please. And our first question comes from the line of Mike Crawford with B. Riley & Co. Please go ahead.

Thank you. First I'd like to commend you on continuing to take steps to -- that are shareholder funding steps, like deferring these interest payments, I presume, for no fee or pound of flesh on the other side, and also for cutting costs. I guess one question is, you being some of the largest holders of the promissory notes, you know, is there -- would you be willing to sell those notes at less than par?

Well, Mike, I don't know for what purpose we'd want to do that at this, at this stage of our life. I don't know that we would. I also don't know that we wouldn't. I really haven't gone down that road in terms of thinking about what we would do with the debt or not.

Yes. Okay. And then regarding progress in Europe -- so, I'm sorry, I didn't quite catch the name of the chain that you're liquidating in the U.K.

I -- Suits You -- Suits You.

Suit You?

Suits, Suits. Suits You.

Hey, Mike, this is Paul Erickson. It's S-U-I-T-S You -- Y-O-U.

Okay. Is there any way to predict or guess what percent of your -- or what level of business to expect in, out of Europe, you know, in the coming three or 12 months?

Well, we certainly don't know at this time, Mike. You know, we have been getting traction there in terms of having looks at transactions. We certainly think that it's relatively fertile ground for us. It was, it was significant that we were able to get that Suits You transaction. And from that, we'll get significantly more exposure. And hopefully that will lead to many more transactions. We don't really have a number on what that expansion is going to do for us. But we certainly feel very optimistic about it, given the fact that the competition over there is significantly less than what it is over here.

Okay. And then, being halfway through your first quarters, is there any -- what's the best you can tell as to how the balance sheet's going to look at the end of the quarter? Do you think it's going to be another use of cash, or, or around break even? Or it's too hard to say still?

Well, I think that we certainly have seen more activity in just about every one of our segments than we have seen in a very long time. Activity's picked up significantly. And typically that bodes well for us in, in terms of being able to convert at least some number of those to our benefit. Certainly it's too early to know exactly what the fourth quarter's going to look like, but we feel very optimistic, based upon the activity, that we're going to get our fair share of transactions and hopefully do well.

So I mean, I don't mean to pin you down exactly, but you know, directionally with Q3, is it more than likely to be better than or worse than, or is it just, you just can't even say, it's just too hard to (inaudible)?

It's too hard to say, Mike.

Okay. And then so I'm guessing there might be a similar answer to next, for next year as well. But when you sit down and do your planning, what, what kind of goes, comes out of the hopper when you consider what might happen for next year?

Well, we'll take a look at the segments of our business that are very visible -- for instance, our appraisal division -- that's very visible in terms of determining what we think we'll do in terms of top line revenue. And certainly with GA Capital taking off the way it has, I think we'll be able to forecast that fairly well. But the other segments, you know, such as the retail liquidation segment and the auction segment is very hard to forecast. It depends on what's going out in the marketplace. We certainly will get our fair share of those transactions, but really the market's going to dictate exactly how well we do.

Okay. Thank you, Andy.

Yes.

Thank you. (Operator Instructions) And I'd like to turn the conference back over to Mr. Gumaer for closing comments.

All right, terrific. Well, thank all of you for being on the call with us today. We certainly appreciate your continued interest in Great American. And we look forward to speaking to you on our next call. Thank you.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation. And at this time you may now disconnect.