B Riley Financial Inc (RILYL) 2016 Q2 法說會逐字稿

Good morning. Welcome to B. Riley Financial's second-quarter 2016 earnings conference call. My name is Kevin and I will 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 your questions.

Then before we conclude today's call, I will provide the necessary cautions regarding the 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 at www.brileyfin.com.

Now I would like to turn the call over to B. Riley Financial's Chairman and CEO, Mr. Bryant Riley. Sir, please proceed.

Thank you. Welcome everyone and thank you for joining us today. Earlier this morning we issued a press release announcing our financial results for the second quarter ending June 30, 2016, a copy of which is available in the investor relations section of our website. On this call we will discuss our financial results for the second quarter, update a few key strategic initiatives and provide third quarter 2016 guidance.

Despite a challenging environment for both our investment banking and asset disposition portions of our business we were still able to generate $1.8 million of adjusted EBITDA. As we have mentioned before, maintaining positive adjusted EBITDA during these slow quarters is a key component to our business model given the episodic nature of our business segments. This allows us to take advantage of any outsized opportunities as they arise which is consistent in prior years and reflected in our third-quarter guidance.

Before I hand it over to our COO and CFO, Phil Ahn, to fully discuss our financial results, I would like to spend a minute to mention the bigger takeaways from this quarter. As mentioned, we experienced a slowdown in our capital market segment and relatively modest activity in our auction and liquidation segment. On a comparative basis, the slowdown in Q2 was more pronounced relative to the exceptionally strong Q2 we had last year. As you may remember, our three major retail liquidation projects in Q2 of last year involving Target Canada, Charlotte Russe and Cache contributed heavily to our strong performance in both the top and bottom line for that period.

While liquidation activity has been subdued for much of the year, we are seeing activity picking up and exemplified by our work on Hancock Fabrics and the strong backlog of opportunities that we see as we head into the back half of the year.

Looking at other areas of our business, we continue to gain positive traction most notably with Great American Capital Partners and in our restructuring solutions practice. We saw healthy growth in activity during the quarter, we are seeing a pickup in our capital markets and sales and trading business in the third quarter.

We are also pleased to report that the completion of United Online acquisition has gone smoothly. We are presently executing on several initiatives to maximize free cash flow and overall risk-adjusted returns for our shareholders. I will talk a little bit more about United as well as the rest of our second-quarter later on in the call.

Before I do I would like now to turn it over to CFO and COO, Phil Ahn, who will walk us through the numbers for the quarter. Phil?

Thanks, Bryant and welcome everyone. Our revenue for the second quarter of 2016 totaled $20.3 million which were up slightly from $19.9 million in the prior quarter and down from $35.5 million in the same year-ago period. The year-over-year decrease in revenue was primarily due to lower revenue from our capital markets, auction liquidation and valuation and appraisal segments.

Our quarterly results in the second quarter of last year were significantly (inaudible) by the result of several sizable liquidation transactions which Bryant had referenced and so the decrease in this quarter's results appear much more pronounced on a comparative basis.

Now looking at our revenue mix and operating income by business segment for the second quarter, revenue in our capital market segment was $7.2 million compared to $13.7 million in Q2 of 2015. The decrease was primarily due to lower investment banking fees and trading income as well as lower commissions, fees and other income earned from our research, sales and trading and wealth management services. Our segment loss totaled $520,000 compared to segment income of $4.1 million in the same year-ago period.

Revenue from our auction and liquidation segment was $5.4 million, down from $24 million in the same year-ago period. The decrease was primarily due to lower services and fees from retail liquidation engagements and wholesale and industrial auction activities. Income from this segment totaled $1.7 million compared to $11.9 million in the same year-ago period.

Revenue from our valuation and appraisal segment decreased $7.7 million from $7.8 million in the same year-ago period. The slight decrease was primarily due to a net decrease in revenues related to appraisal engagements. Our income in this segment totaled $2.1 million compared to $2.3 million in Q2 of last year.

On a consolidated basis, our GAAP net loss for the second quarter of 2016 totaled $101,000 or $0.01 per diluted share compared to GAAP net income of $8.7 million or $0.53 per diluted share in the same year-ago period.

Our adjusted EBITDA to non-GAAP metric for the second quarter of 2016 totaled $1.8 million compared to $15.5 million in the same year-ago quarter. For further discussion on 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 $48.1 million of unrestricted cash and $18.7 million of net investments and securities. Shareholders' equity at quarter end totaled $134.4 million which was up from $111.2 million at March 31, 2016.

This completes my financial summary. For a more detailed analysis of our financial results, please reference our Form 10-Q which we 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 I mentioned earlier, our results for the quarter should be taken with the big picture in mind. Despite a temporary slowdown in our capital markets segment and modest activity in our auction and liquidation segment, we were still able to generate positive cash flow proving that our disciplined operating structure enables us to weather some of the more challenging quarters. Although we do not regularly provide financial guidance mainly due to the unpredictability of this business segment, we believe it is important to convey the overall strength and opportunities in our auction and liquidation segment to the extent we have visibility.

As a result, we issued on our last call a year-to-date adjusted EBITDA guidance of $9 million to $13 million for the period in spending through July of this year.

Given the performance that we have seen in July and our expectation for the remainder of the quarter which includes United Online since July 1, we are providing adjusted EBITDA guidance for Q3 in a range of $15 million to $20 million.

Not only will we continue seeking and capitalizing on opportunities on a liquidation stage which has seen some signs of increased activity, but we are also looking to deploy available capital towards other areas of the market where we believe provides for the highest return on our investment.

One area that you have heard us talk about is the services side of our business where we help financially stable retailers open and close stores. During the quarter, we announced that we will close all Jones New York factory stores in Canada. We also announced partnering with Tiger Capital Group to close 113 Aeropostale stores in the US as well as all 41 of the apparel retailer stores in Canada. While this business does not have the same volatility as our liquidation business, it does deliver another consistent fee-based revenue not to mention adding an additional value-added service for our retail clientele.

Shifting gears to our capital markets segment. As I mentioned, we experienced a slow quarter overall for capital markets business during Q2. Trading and commission fees were right and our investment banking activity was relatively modest which we believe is a reflection of the broader market and M&A market in the US during this period.

To that end during this quarter, we've seen a number of broker dealers close their doors or have meaningful reductions in staff. We have taken this as an opportunity to selectively add to our product offering and invest in the downturn as we have always done since we started this side of our business 19 years ago. We have added two experienced equity sales people and expanded our research product in the healthcare vertical for the first time.

We are also seeing continued strong momentum in our restructuring business. As you may recall, we started this business last quarter to leverage our full range of services to identify and capture promising opportunities in the corporate restructuring space and we have gained meaningful traction in a relatively short time. We continue to invest in this part of our business as it represents an opportunity for us to not only to complement our existing banking and financial advisory business but also to grow and diversify our entire operations overall.

Our lending fund, GACP, continues the opportunity to put capital to work throughout the quarter. Since inception in April of last year, we have completed six loan transactions for middle-market companies and currently have a strong backlog of opportunities.

Relative to our valuation and appraisal segment, we have had a relatively flat quarter year-over-year both from a top and bottom line perspective. Contrary to our auction and liquidation segment, the valuation and appraisal segment is less episodic and predictable in nature. Our business model here is to generate recurring revenue from quarterly appraisals and fixed fees from valuation advisory services. We are pleased with the consistent strong cash flow generation that the appraisal business provides.

On July 1, we successfully completed the acquisition of United Online purchased in the price of $11 per share. In conjunction with the transaction, we completed a follow-on offering of our common stock resulting in net proceeds to the company of just under $23 million. The proceeds of the offering were used partially to fund the United transaction. I am pleased to say that insiders and the directors participated in the offering representing approximately $4 million or about 17% of the total amount raised. The offering was also supported by several high quality and long-term oriented institutional investors and provided an opportunity to provide new investors to gain exposure to our firm.

For those of you not familiar, United Online provides consumer services and products over the Internet. The company's communication segment features the Internet access brands NetZero and Juno which offer a range of high-quality low-priced [files] and DSL Internet access services. Last year the segment generated approximately $90 million in revenue and $29 million of adjusted EBITDA.

We have had the fortune of knowing United Online and its team of professionals for many years first by coming their equity research and by investing in it through our fund, B. Riley Capital Management. As a result, we developed deep knowledge and understanding of United's business. Despite the mature market United Online is in, we believe the acquisition presents our shareholder with a compelling risk-adjusted financial return that capitalizes on the company's predictable revenue, EBITDA and free cash flow.

As mentioned on our last call, we intend to operate the business to maximize the free cash flow for distribution to our shareholders.

I am also pleased to announce that our Board of Directors has approved a dividend of $0.03 per share for shareholders of record on August 22. The dividend is expected to be paid on around September 8. As we have mentioned on prior calls, the payment of the dividend reflects our philosophy of returning a portion of profits to our shareholder based on the success of our operating performance. However, it is important to remind you that our dividends will be decided on a quarter by quarter basis based on the profitability and outlook.

In summary, we see strong opportunities in our auction and liquidation segment, steady cash flow from our United Online business as well as valuation and appraisal segment, modest improvement in our capital markets segment.

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

(Operator Instructions). John Barton, Dialectic.

With respect to guidance of $15 million to $20 million for Q3, can you give us a little bit of a break down about where that comes from, what assumptions it is based on and most important, what elements of that are one time and what within that we can start to think of as having an ongoing component to it?

John, when we provided our earnings in July, that was without the United Online side of the business so that was 9 to 13. If you take United's kind of 28-ish, 29-ish or whatever assumptions you want to put on that for last year and you divide that by 4, you get in and around $7 million. So I guess what we are saying is somewhere around $7 million from United and the balance coming from the other side of the business. So when we said 9 to 13, you take on the low-end, you are saying $8 million in Q3 and then we also did $3 million year to date. So from the base business that would mean, it is kind of confusing, but it would be $11 million to $15 million for the year to date and then $7 million-ish from -- $11 million and a little bit more -- and then $7 million is from United Online.

As it relates to recurring, that is a tricky question. I think that they have obviously had some meaningful auctions and certainly that is a big part of it but while it is not an appraise business or it is not the United business, we believe the auction business is recurring and we are seeing a lot of opportunities there. I would be hesitant to break it down too [linear] -- but I think we are seeing a lot of strong opportunities and really excited to see a bit of a pickup in our capital markets business as we move through the back half of the year.

Thank you very much.

(Operator Instructions). We have reached the end of our question-and-answer session. I do apologize, our next question is coming from Wes Cummins from Nokomis Capital.

Bryant, I might have missed this but on the liquidations business, can you just maybe give a little more information about the pipeline you are seeing and maybe the size of the pipeline or the size of the opportunities that are coming through for the next six months? I don't know what kind of visibility you get into that if it is six or 12 for only three months.

It is short because first you have a bankruptcy or a potential bankruptcy and then the question is it going to be a liquidation, is it going to be a going concern? So we have seen I think it is pretty apparent what has gone on in the retail space whether it is Pacific Sunwear, Aeropostale, there is a number of companies that have filed and then there is the number that it appears that it is going to be challenging. There is also some opportunities internationally that hopefully we will provide a little bit more data on that in the next coming period.

But there is some specific opportunities we are seeing both domestically and internationally that leads us to believe that we're going to have an active second half.

As far as backlog again, I think it is our job to try and recognize and figure out what opportunities are out there for us and whether it is public or private and whether it is retail or other opportunities, it is just a pretty robust environment to find opportunities.

Okay, thanks.

John Barton, Dialectic.

Bryant, you mentioned six transactions at Great American and a strong pipeline. How much has Great American deployed? How big is their book right now? How many positions are in it? From that pipeline, do you have any idea of the pace of growth of that book that you can discuss?

I think this is going to be the biggest difficulty as an investor to try and gauge. As I mentioned they pop up and we are part of a group and a small group of people that have the skill set to run these auctions and buy the inventory. We currently have and Phil, correct me if I'm wrong, we have two current auctions in process. We have one that recently wrapped up and then --.

I was talking about the direct lending business. (multiple speakers) When you said six transactions you might have been referring to auctions. I thought you were talking about direct lending. Can you discuss the direct lending able bit?

Sure. So we are seeing more and more traction and I think it is because we have just been in the business a bit longer. So as you know, I think in Q3 we put to work or excuse me -- during the last couple of months we have seen a meaningful pickup. I want to say that currently we are in the $70 million to $80 million of money out. The interesting transaction for the direct lending fund that are I really think speaks to the opportunity is direct lending fund was a (inaudible) to Hancock Fabrics and we believe we will get all of the money back which kind of speaks to that model which says even if the business deteriorates, there is enough assets to back the loan.

So I think John, my excitement is what we are seeing. I would say the opportunity set has meaningfully increased in the last two months and I would not be surprised to see us get the vast majority of those funds out in the next few months and go out for Fund II and we would hope based on what we have seen from Fund I we would hope Fund II would be meaningfully larger.

Terrific. Thank you.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Thanks everyone for joining us on today's call. I particularly want to thank our employees, partners, investors for their continued support. We have obviously been very active in a number of fronts and couldn't do it without the dedication of our employee base who have been working overtime to help us deliver the returns that we expect in Q3 and have historically done for our shareholders. So can't thank them enough. We look forward to updating you on our next call. Thank you.

Before we conclude today's call, I would 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 facts including without limitation statements containing the words expects, anticipates, intends, plans, beliefs, seeks, may, estimates and similar expressions and statements. Such forward-looking statements include but are not limited to expressed or implied statements regarding future financial performance, the effects of our business model, the effects of the United Online acquisition and related actions; expectations regarding future transactions and the financial impact, size and consistency of returns and timing thereof; expectations regarding adjusted EBITDA for the third quarter of 2016 as well as statements regarding the effective investments in our business segments.

Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events or developments to differ materially from those expressed or implied by these forward-looking statements. Such factors include risks associated with large engagements in our auction and liquidation segment; our ability to achieve expected cost savings or other benefits with respect to the acquisition of United Online, each case, with an expected timeframes or at all; our ability to consummate anticipated transactions and the expected financial impact thereof, in each case within the expected timeframes or at all; our ability to successfully integrate recent acquisitions; loss of key personnel; our ability to manage growth; the potential loss of financial institution clients; the timing of completion of significant engagements and those risks described from the time to time in B. Riley Financial Inc.'s filings with the SEC including without limitation the risks described in B. Riley Financial Inc.'s annual report on Form 10-K for the year ended December 31, 2015 under the captions risk factors and management's discussion and analysis of financial condition and results of operation.

Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2016. These factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. All information discussed on today's call as of today August 5, 2016 and B. Riley Financial does not intend or undertakes no duty to update such information based upon future events and 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 measures and information reconciling me 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 would 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 our presentation. You may now disconnect.