B Riley Financial Inc (RILYL) 2016 Q1 法說會逐字稿

Good afternoon. Welcome to B. Riley Financial's first-quarter 2016 earnings conference call. My name is Kevin and I'll be your operator for today's call.

Joining us for today's call is B. Riley Financial's Chairman and CEO, Bryant Riley, President, Tom Kelleher, and CFO and COO, Phillip Ahn. Following their remarks we will open up the call for questions. Then before we conclude today's call, I will provide the necessary cautions regarding forward-looking statements made by Management during this call.

I would like to remind everyone that this call will be recorded and made available for replay via a link available on the Investor Relations section of the Company's website www.brileyfin.com. Now I'd like to turn the call over to B. Riley Financial's Chairman and CEO, Mr. Bryant Riley. Please go ahead, sir.

Thanks, Kevin. Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our financial results for the first quarter ended March 31, 2016, a copy of which is available in the Investor Relations section of our website.

As many of you know, two weeks ago we announced the signing of a deal to acquire United Online for approximately $170 million and subsequently completed a $23 million follow-on offering of B. Riley common stock. The United Online acquisition represents a strategy that we hope to replicate with other uniquely positioned companies that may be attractive investment opportunities for us. We are very excited about both the United Online deal in the follow-on stock offering and I will comment on them towards the end of today's call after we discuss our first-quarter results.

The first quarter was challenging for two of our businesses, the capital market segment and the auction liquidation segment. Therefore, our results in the first quarter were subdued.

In the capital markets segment, volatile equity markets in January and February and a slower environment for investment banking services impacted our results. On top of this our auction and liquidation segment was down, primarily due to the lack of retail liquidation engagements completed during the quarter. However, despite these difficult headwinds, we were still able to generate a profit on a consolidated basis.

This is a reflection of our diversified business model, which is structured to provide steady and predictable cash flow and help us maintain profitability regardless of the macro-environment we are in. It also provides us with significant leverage and upside profit opportunities from our less-predictable investment banking and liquidation businesses.

But before I talk more about some of the advantages of our business model, as well as our operational highlights during Q1, I would like to turn it over to Phil Ahn, who will walk us through the numbers for the quarter. Afterward I will discuss our operational progress and outlook for the rest of 2016. Phil?

Thanks, Bryant, and welcome, everyone. Our revenues for the first quarter of 2016 totaled $19.9 million, which was up slightly from $19.8 million in the prior quarter and down from $26 million in the same-year-ago period. The year-over-year decrease in revenue is primarily due to lower revenue from our capital markets segment and our auction and liquidation segment, partially offset by an increase in revenue from our valuation appraisal segment.

Now looking at our revenue mix and operating income by business segment for the first quarter, revenue in our capital markets segment was $5.6 million compared to $9.2 million in Q1 of 2015. The decrease was primarily due to lower investment banking fees, partially offset by an increase in revenue from sales and trading commissions in wealth management services. Our segment loss totaled $631,000 compared to segment income of $2.6 million in the same-year-ago period.

Revenue from our auction and liquidation segment was $6.9 million, down from $9.6 million in the same-year-ago period. The decrease was primarily due to lower services and fees revenues from our liquidation engagements, partially offset by higher services and fees from our wholesale and industrial auction activities. Income from this segment totaled $2.2 million, compared to $3.1 million in the same-year-ago period.

Finally, revenue from our valuation and appraisal segment increased to $7.5 million from $7.3 million in the same-year-ago period. The increase was primarily due to an increase in the average fee per unit on appraisal engagements. Our income in this segment totaled $2.1 million compared to $1.8 million in Q1 of last year.

On a consolidated basis our GAAP net income for the first quarter of 2016 totaled $248,000, or $0.01 per diluted share, compared to $2.7 million, or $0.17 per diluted share, in the same-year-ago period. Our adjusted EBITDA, a non-GAAP metric, for the first quarter of 2016 totaled $1.2 million compared to $4.9 million in the same-year-ago quarter. For a further discussion about this non-GAAP term and reconciliation to the nearest GAAP measures, please refer to the section in today's earnings release titled, Use of non-GAAP Financial Measures.

Now turning to our balance sheet, at quarter end we had $26.8 million unrestricted cash and $24.7 million of net investments and securities. Shareholders equity at quarter end total $111.2 million, which was up from $109.3 million at December 31, 2015.

This completes my financial summary. For a more detailed analysis of our financial results, please reference our form 10-Q, which plan to file shortly. I will now turn the call back to Bryant for additional comments on our business segments and outlook. Bryant?

Thanks, Phil. As we mentioned the press release, while the headline results for our first quarter may suggest otherwise, in many ways this quarter was gratifying. Despite generating limited revenue from our liquidation engagements and having one of our slowest investment banking quarters on record, we were still able to report positive EBITDA and net income. By relying on a study rep base of revenue from our appraisal and equity trading commissions businesses, we are able to pursue more profitable opportunities in our liquidation and investment banking businesses.

The key to our business is to maintain a disciplined operating structure that can operate profitably in quarters of low episodic activity, recognizing that when these events to come to fruition the business can generate outsized returns as suggested by our guidance of $9 million to $13 million for the year-to-date period through July.

From an operational perspective, we continue to executed on our plan to grow and diversify our business during Q1. Along these lines we made a major addition to our capital markets business by hiring Perry Mandarino and a team of restructuring professionals to head up our new restructuring solutions practice. As I mentioned on our last call, Perry brings nearly 30 years of expertise to B. Riley and is a nationally recognized leader in the corporate restructuring industry.

The new practice is a good fit with our existing investment banking and financial advisory business and a natural extension of our asset disposition business. Given the current economic environment and opportunities generated by existing businesses, we believe the formation of our restructuring group couldn't have come at a more ideal time. Perry and his team have hit the ground running and are actively engaged on several deals.

Also on the capital markets front, Q1 marked another busy period for our direct lending fund, GA Capital Partners. During the quarter, GACP provide a $17 million senior secured term loan to EVINE Live, a public company and a business which we are very familiar. This latest financing is the fourth loan transaction GACP has closed since inception last April. We believe this is a reflection of the growing demand for middle-market companies for asset-based loans as well as the significant operating and business development synergies of our platform. We continue to believe that GA Capital Partners has the potential to be one of our most promising business initiatives.

Turning to our auction and liquidation segment, coming off the heel of a record year, this segment was relatively quiet during Q1 from a retail liquidation engagement standpoint, which is in contrast to how this area of our business performed during Q1 of last year. However, as Phil mentioned, we did experience a significant increase in revenue from services and fees, driven by increased activity in our wholesale and industry auction division.

During the quarter we completed a large liquidation of energy-related equipment for Flint Energy Services. We are very pleased with this demonstration of our capabilities as we successfully sold over $20 million in energy-related mobile equipment during a particularly challenging period in the oil and gas marketplace.

On the retail liquidation front, while we did not complete a significant amount of transactions during in the quarter, on March 31 we were approved by the bankruptcy court to liquidate all of the remaining Hancock Fabrics locations. This approval granted us the right to liquidate retail inventory located in 185 Hancock stores and its distribution center. We anticipate completing the Hancock liquidation in the next couple of months. Great American group has extensive expressed working with specialty retailers like Hancock Fabrics as well as creditors to manage complicated and sensitive situations. As GA Capital Partners initiated and managed the loan to Hancock Fabrics, this transaction exemplifies the diverse operating and financial synergies of our platform.

Our appraisal and valuation segment had a moderately strong quarter, generating $7.5 million of revenues, up slightly from the prior year's quarter. Segment income for the quarter was $2.1 million, up from $1.8 million in last year's quarter. As I've stated on prior calls, appraisal and valuation segment is a business that provides a consistent revenue base.

While it is not our policy to provide regular financial guidance, we believe it's important to communicate the overall strength and opportunities in our auction and liquidation segment to the extent we have visibility. As many of you have come to understand, our financial performance from quarter-to-quarter can vary significantly due to this particular business segment. Several transactions this year are expected to conclude in June or July, which impacts the timing of recognition of such revenues, so we've taken the unusual approach to provide adjusted EBITDA guidance of $9 million to $13 million for a period that extends through July this year.

We are seeing many opportunities in the segment and deploying available capital towards retail liquidations is our best use of capital. As we continue to see opportunities on the service side, helping financial stable retailers open and close stores is also an opportunity. It's important to understand this business does not have the same type of potentially large profit and loss swings as liquidation business, although it does deliver another consist fee-based revenue stream. It also adds an additional value-added service for our retail clientele.

Switching gears to our pending acquisition of United Online. Earlier this month we signed a definitive agreement and plan of merger to acquire United Online, a publicly traded provider of consumer and product -- consumer services and products over the internet. As detailed in the press release and 8-K filing, the aggregate merger consideration is $11 per share, or approximately $170 million. We estimate, however, that our total cash outlay will be approximately $48 million after taking into account United Online's projected cash balance at closing.

In connection with the acquisition, on May 10 we closed a $23 million equity offering at $9.50 per share. Gross proceeds were $23 million and directors purchased about 17% of the total amount raised -- excuse me, insiders and directors. The offering was also supported by several high-quality and longer-term oriented institutional investors.

To give some color, additional color on the acquisition, United Online's communication segment features the internet access brands NetZero and Juno, which offer a range of high-quality low-price dial-up and DSL internet access services. Last year its communication services -- excuse me, its communications segment generated approximately $90 million in revenue and $29.1 million of adjusted EBITDA.

By way of background, several of our business segments were very familiar with the United Online business and prospects. Between covering it on the equity research side for many years to B. Riley Capital Management owning significant equity stake, we have a long history with, and deep knowledge of, United Online's visit in understanding that United Online's a mature market.

Importantly, we believe that the acquisition will allow our shareholders to benefit from United Online's predictable revenue, EBITDA and free cash flow. We intend to operate the business to maximize the free cash flow for distribution to our shareholders. We intend to finance approximately $30 million of the purchase price through a senior secured facility and are currently speaking to several potential lenders. We anticipate that the merger will close during Q3 pending satisfaction of customary closing conditions, including a favorable vote by the stockholders of United Online.

From a strategic perspective, the acquisition of United Online represents an investment model which we hope to replicate with future acquisitions, namely purchasing out-of-favor companies with challenging dynamics and making operational changes to generate attractive returns. In the case of United Online, the company operates in a marketplace with a steady but declining subscriber base. For this reason, the company isn't a particularly attractive acquisition candidate for others. However, we believe that United Online represents an opportunity to acquire stable revenue business that can generate attractive returns for us.

In summary, it's been a busy and productive start to the year. We plan to build on our operational momentum by leveraging our infrastructure and services across our business segments and being opportunistic and acting on the right strategic acquisitions, like United Online.

Now with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

(Operator Instructions)

John Fichthorn, Dialectic Capital.

Hello. Was just hoping you could maybe give us some insights. I know it's pretty far out with regards to the United Online, but maybe just thoughts as to what kind of EBITDA that would generate for you. Also, maybe if you could talk about the pipeline for retail liquidation. It seems like we see retail organizations go bankrupt every day and kind of thoughts about how big that could be, either on a EBITDA or size of opportunity or just something else so we have a way to frame it. Thanks.

Sure. Hey, John. First, let's talk about the retail environment. I sit here from Delaware at the Sports Authority auction and we'll see how that plays out. That's obviously a large auction of sporting stores. The headline names out there that are either in distress or close to bankruptcy is larger than any time I think we've ever seen.

Clearly there's been a sea change in bricks and mortar. We are going to be in the middle of that and we have traditionally won a pretty high percentage in and around 25% to 35% of liquidations we've won and typically when we win a liquidation, it's profitable.

I feel really good about the team. Obviously our balance sheet is very strong and we need to keep it strong because a lot of these liquidations require a fair amount of capital up front. Our consultants have been busy. They've done a great job in a number of opportunities, not only in liquidations, but also in the fee-type business. That's a really meaningful change when we are able to generate a fair amount of fee every quarter. And as we repeat probably too much, it's all about staying in the game so that we can have some of these larger opportunities.

You don't know day to day when there's going to be an event. And obviously in Q1 there wasn't. But in Q2, there -- as we've talked about in our guidance there was, and we are going to be positioned for it. I don't have any quantitative number. I don't know, Phil, if you have anything to add, or Tom, but it's a really robust environment out there for us.

As it relates to United, I can't give forward guidance. I think what we can say is that, that business was is uniquely positioned for us from a number of fronts. Their headquarters are next door to our headquarters. Obviously, being a public company with a declining revenue curve and the cost associated with being public, it made it very challenging for them. But we have all the infrastructure that they would need as a public company. We think that that segment income that we mentioned in 2015, it's going to be more reflective of the type of EBITDA numbers we can do then than the numbers they report that include corporate allocation.

I think we understand the declining part of that business. We've been -- we feel really comfortable with the management team there. And outside of that, I think that's all I can say. I don't know, Phil or Tom, if you want to add anything to that.

I would just say in the announcement that we put out there, we do have some of the numbers on a historical basis 2015 which, as Bryant had mentioned, the $29 million in communication segment EBITDA, as well as we do have was roughly $14 million, $15 million of corporate charges. But as Bryant had indicated, we think a number of those charges won't be reflected in the go forward.

John, anything else?

No, that's good. I'll get back in line.

Okay.

(Operator Instructions)

At this time it does conclude our question-and-answer session. I'd like to call the call back over to Mr. Bryant Riley for his closing remarks.

Okay. I think, John, you may have had another one and you got off the line. So just call me if you have another question. Thanks, everyone, for joining us today on today's call. I particularly want to thank our employees, partners and investors for their continued support and we look forward to updating you on our next call. Thank you, everyone.

Before we conclude today's call I'd like to provide B. Riley Financial's Safe Harbor Statement that includes important cautions regarding forward-looking statements made during this call. During today's call there were forward-looking statements that are not based on historical fact including, without limitation, statements containing the words expects, anticipates, intends, plans, believes, seeks, may, estimates, and similar expressions and statements.

Such forward-looking statements include, but are not limited to, expressed or implied statements regarding the Company's plans for future operations, business of initiatives, anticipated future financial position, anticipated results of operations, business strategy, competitive position, the effects of our business model, demand for future products, the proposed acquisition and related actions, including our ability to secure a related credit facility, expectations regarding future transactions and the financial impact, [eyes and] consistency of returns and timing thereof, expectations regarding adjusted EBITDA for January through July 2016, potential feature acquisition candidates and the financial impact thereof, intentions of investors in the reason offering and the Company's expectations regarding opportunities for growth.

Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events, or development to differ materially from those expressed or implied by these forward-looking statements. Such factors include our ability to complete the proposed acquisition, including obtaining the approval of United Online stockholders, the ability to achieve expected cost savings or other acquisition benefits, in each case within expected time frames or at all, the total expected cash component of the proposed acquisition and the availability of a credit facility to finance a portion of the acquisition, our ability to consummate the anticipated transactions and the expected financial impact thereof, in each case within the expected time frames or at all, our ability to identify potential feature acquisition targets and complete such a acquisitions and the financial impact thereof.

The Company's ability to successfully integrate recent acquisitions, loss of key personnel, the Company's ability to manage growth, the potential loss of financial institution clients, the timing of completion of significant engagements and those risks described from time to time in the Company's filings with the SEC, including without limitation the risks described in the Company's annual report on form 10-K for the year ended December 31, 2015, under the captions Risk Factors and Management's discussion of analysis of financial condition and results of operations.

Additional information will also be set forth in the Company's quarterly report on form 10-Q for the quarter ended March 31, 2016. These factors should be considered carefully and you are cautioned not to place undue reliance on such forward-looking statements.

All information discussed on this call is as of today May 16, 2016, and B. Riley Financial does not intend and undertakes no duty to update such information based upon future events or circumstances. Further, this conference call included a discussion of non-GAAP financial measures as that term is defined in Regulation G.

The most directly comparable GAAP financial measure information reconciling these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP are included in the earnings release, which is posted on the Company's website at www.brileyfin.com. Finally, I'd like to remind everyone that a recording of today's call will be available for replay via a link available in the investor section of the Company's website. Thank you for joining us today for presentation. You may now disconnect.