B Riley Financial Inc (RILYL) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to B. Riley's Financials First Quarter 2017 Earnings Conference Call. My name is Joe, and I will be your operator for today's call.

Joining us for today's call are 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'll provide the necessary cautions regarding the forward-looking statements made by management during this call.

I'd like remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at www.brileyfin.com.

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

Welcome, everyone and thank you for joining us. After the market closed today, we issued a press release announcing our financial results for the first quarter ended March 31, 2017, a copy of which is available on the IR section of our website.

As you can see from our earnings release, our results for Q1 were strong across the board, marking another highly profitable quarter for B. Riley Financial. In addition to our total revenues being up across all of our business segments, especially in Capital Markets and Auction and Liquidation, we generated over $15 million in adjusted EBITDA and $14 million of net income or $0.71 per diluted share. We were able to generate these strong returns despite not completing any major retail liquidations in this period.

We believe our performance this quarter demonstrates the attractiveness of the business model that we have and are continuing to build. Our goal has been to add multiple uncorrelated sources of recurring revenue and cash flow to help insulate us from subdued conditions on any one of our end markets. We now have revenue and earnings diversification for United Online in our Principal Investments segment, balanced out by investment banking and trading, retail, appraisal and liquidations and asset management. In addition to the increased ability of the model, we also have opportunities to generate period of outside returns, which is reflected on our trailing 12-month adjusted EBITDA of over $60 million, majority of which was generated in the last 3 quarters.

Before I dive into each of our business segments and talk about our strategic initiatives, such as our pending merger with FBR & Co., I would like to turn over the call to our COO and CFO, Phil Ahn, who will walk us through our financial performance for the quarter. Phil?

Thanks, Bryant, and welcome, everyone. Turning to our results for the first quarter ended March 31, 2017. Our revenues for the first quarter of 2017 totaled $52.9 million compared to $19.9 million in Q1 of last year. The significant increase was due to higher revenues from our Auction and Liquidation segment, as well as Capital Markets segment combined with the addition of our Principal Investments segment, which includes United Online that we acquired on July 1, 2016.

Now looking at the revenue mix and operating income by business segment for the first quarter of 2017. Revenue in our Capital Markets segment was $17.7 million, up significantly from $5.6 million in Q1 of last year. Segment income was $6.6 million, up from a loss of $631,000 in Q1 of last year. The revenue and income improvement was principally driven by investment banking transactions completed during the quarter.

Revenue in our Auction and Liquidation segment for the first quarter increased to $14 million from $6.9 million in Q1 of last year. Our segment income was $1.8 million, down slightly from $2.2 million in Q1 of last year. This segment of our business can be highly profitable but also episodic in nature, where results may vary substantially from quarter-to-quarter and year-to-year.

Revenue in our Valuation and Appraisal segment for the first quarter was $7.8 million, up slightly from $7.5 million in Q1 of last year. Segment income for the quarter was $2 million, down slightly from $2.1 million in Q1 of last year.

And finally, in our Principal Investments segment, which currently consisted of United Online, revenues from services and fees and sale of products totaled $13.4 million. Segment income for the quarter was $4.2 million.

Turning to our profitability metrics. Our GAAP net income in the first quarter was $14 million or $0.71 per diluted share. This included a onetime noncash tax benefit of $8.4 million or $0.43 per diluted share related to our election to treat the acquisition of United Online as a taxable business combination for income tax purposes. Excluding this tax benefit, net income for the first quarter would've been $5.6 million or $0.29 per diluted share. This was an improvement from net income of $248,000 or $0.01 per diluted share in Q1 of last year.

Our adjusted EBITDA, our non-GAAP metric, for the first quarter of 2017 totaled $15 million, compared to $1.2 million in the same year-ago period. For further discussion about adjusted EBITDA and the 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 $71.5 million of unrestricted cash, and $39.4 million of net investments and securities. Shareholders' equity at quarter-end totaled $161.1 million, which was up from $149.3 million at the end of last year. Our shares outstanding at quarter-end was $19.3 million.

And finally, our Board of Directors approved an $0.08 per share regular quarterly cash dividend as well as a onetime special $0.08 per share cash dividend. The dividend will be paid on or about May 31 to stockholders of record as of May 23.

That completes my financial summary. I'll now turn the call back over to Bryant. Bryant?

Thanks, Phil. I will now give a brief summary of activities in our various segments. In our capital markets segment, we experienced another period of significant investment banking transactions activity in Q1. This was highlighted by several large transactions completed in the quarter, including a $25 million secondary offering for IRMA, as well as a major refinancing for Gibson brands. These transactions helped produce a significant improvement in our financial results, both sequentially and year-over-year. The improvement reflects the successful contribution of key strategic hires and a more favorable small-cap investing climate.

Our sales and training team continues to focus on active alpha generation in an otherwise record-low volatility environment, and achieving best execution for an institutional accounts that has been recognized by them and industry rankings alike. The micro and small-cap space saw a noticeable uptick in Q1 volume, and we were able to capitalize on being well positioned to capture some of that business.

Our research department contributed to a strong equities performance. Numerous analysts were recognized by industry organizations for stock picking, excellence versus peers, while other signs of productivity, including a research coverage in corporate access, which set a record in Q1 went favorable. We look forward to taking this momentum not only into our 18th annual conference slated this month in Santa Monica, but also in our acquisition of FBR next month.

One item we are very proud of is our highly ranked mutual fund, which is based on our research best ideas list. This fund was ranked in the top 3% of funds in the small-cap growth category for year-to-date performance as of the first quarter and continues to perform well versus it's peers in the second quarter. While assets have been slow to flow into this fund, we are seeing increasing momentum and believe that continued strong performance will be recognized.

Since we started the firm over 20 years ago, we always held a single belief: if you make your clients money, good things will happen. We believe that the fact that our equity commission is up 34% year-over-year and 5% sequentially is a direct result of this view.

A significant development for our company is our previously announced merger with FBR. This represents a great fit for B. Riley and brings to us a company with strong franchise in areas complementary to our existing business. With the increased scale-reaching capabilities achieved through the merger with FBR, we will be ideally situated to expand our market-leading position in the small-cap investment banking space while also realizing attractive cross-selling opportunities across our highly unique and increasingly diversified financial services platform. The closing process is going as planned, which we expect to close on or shortly after June 1.

In our Retail and Appraisal segment, while we didn't complete any large liquidations in Q1, we did initiate 2 smaller deals while continuing to build our pipeline. We have announced 3 deals to complete in the second quarter, and we hope to win more. In addition, we enhanced our capital resources to enable us to move more effectively and rapidly on larger deals in the future through 2 debt facilities that combined, provide us with over $200 million of additional liquidity.

One of the 2 liquidation engagements we initiated in the first quarter involve MC Sports, where we partnered with another liquidator to facilitate the orderly exit of all 68 of MC Sports stores across the Midwest. We concluded the going-out-of-business sale only this week.

The other liquidation we initiated in Q1 was for Family Christian, in which we've facilitated the successful close of all their 237 stores in 36 states nationwide. We expect this liquidation to be completed shortly.

In addition to these 2 deals, Great American, along with another liquidator, were engaged by Gander Mountain at the end of March to facilitate the liquidation of 32 of its Gander Mountain stores nationwide. As a background, the retailer filed for Chapter 11 bankruptcy on March 10, and hope to continue operating its remaining 137 stores. The liquidation sales at the 32 locations began on March 23, and are expected to be completed by the end of August.

Additionally, on May 5, the court approved Great American to liquidate the remaining 137 stores as part of a consortium with other liquidation firms in camping world. Our activity in the liquidation segment is the highest we have ever seen, with 11 projects operating simultaneously, covering more than 1,000 stores.

As we have always mentioned, it's important to remember that many of these transactions are onetime in nature, and may result in us experiencing revenue volatility from quarter-to-quarter. However, we believe Great American is ideally positioned to continue benefiting from the secular trend of online shopping and ongoing reduction of physical stores regardless of business cycles.

Our operation in Australia and Europe are also very attractive, and these markets have a tendency to lag behind our U.S. business. We are confident in our ability to more effectively pursue larger-scaled opportunities because of our strong balance sheet and our recently amended credit facility that I previously mentioned, was increased from $100 million to $200 million.

As in prior quarters, our Valuation and Appraisal segment continues to provide us with modest growth, profitability and predictable cash flow. Our results for Q1 reflect these contributions, both from a top and bottom line perspective. We were able to achieve growth despite our run-off of outstanding loans commitments from within the asset-based lending marketplace. The modest revenue growth we achieved in Q1 was helped by growth in our CBS product, with fresh start accounting and trade name valuation work within our appraisal division.

Our strategy remains to generate recurring revenue from appraisals and fixed fees from valuation and advisory services, making this segment an important part of our overall performance both today and moving forward. In addition, this group is an important engine in the retail liquidation, restructuring and lending groups, for generating intelligence around what is happening in the market.

Our Restructuring business has continued to gain momentum. We started this business during a year ago to leverage and enhance B. Riley's Financial's full range of services. We have gained meaningful traction in a relatively short time as we continue to invest and expand this part of our business. We have then retained 19 mandates from inception through Q1, and in addition to Gibson, these mandates range from advising companies, creditors, including ad hoc secured and unsecured creditor groups, and buyers of distressed assets.

Our team covers several sectors, including minerals and mining, healthcare, energy, business services and retail. Our expertise in retail has resulted in cross-selling opportunities in a number of situations throughout our Capital Markets, Liquidation and Appraisal business. Finally, to support our plan, our Restructuring team has grown, adding 2 professionals this quarter.

Another growth area of our business that continues to gain traction is our specialty finance company, Great American Capital Partners or GACP. The fund is highly synergistic to other areas of our platform, like banking and restructuring, providing business development opportunities.

An example of this is with HHGregg in which GACP provided the retail with over $30 million DIP loan as part of the bankruptcy filing I mentioned earlier. This relationship and immanent knowledge of HHGregg's business and assets led to Great American selection as a co-liquidator of the 132 stores HHGregg stores across the U.S., which involved approximately $80 million of merchandise.

More recently, GACP made 2 additional investments; the first was a $20 million term loan to General Finance Corporation, and most recently, a joint investment with KKR Credit Advisors of CAD 300 million to Sears Canada. This is yet another example of GACP's ability to provide creative solutions to the challenging retail environment. We believe the increased level of activity that GACP is seeing reflects the growing demand from middle-market companies for asset-based loans, as well as the significant operating and business development synergies our platform provides. As the fund mirrors it's capacity for new investments, we will begin exploring the prospects for initiating our next fund.

An emerging and complementary area of our business is in asset management. Last month, B. Riley Capital Management acquired the rights to manage certain hedge funds managed by Dialectic Capital Management. Under John Fichthorn's leadership as our new Head of Alternative Investments, B. Riley Financial will work to increase our exposure to active management. We see the cycle of active versus passive investing, swinging back towards active management in the future, and believe the opportunity is now to begin investing for that.

The acquisition is consistent with our strategy of expanding our capital management business, which now has nearly $1 billion in assets under management. Dialectic has established an impressive track record and solid reputation in the hedge fund industry, and we look forward to benefiting from John's experience to scale our asset management business even further.

Onto our final business segment, Principal Investments. United Online, which we acquired last July continues to perform to our expectations, contributing $13.4 million in revenue, and $4.2 million in segment income in the first quarter of this year. Our success in the United Online provides a proven blueprint for us to replicate with similar orphan companies that exhibit challenging market dynamics, where we can implement operational changes to generate attractive returns.

In summary, we believe our strong financial results for Q1 continue to demonstrate our significant operating and financial momentum across our businesses. Looking ahead, we plan to build on this momentum by leveraging our expanding infrastructure, and acting strategically to invest and acquire businesses that can help our company scale even further.

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

(Operator Instructions) The first question today comes from Wes Cummins with Nokomis Capital.

Just one question from me. Now that you've done more work and you're getting closer to closing on FBR, just your thoughts around potential synergies, both the cost and revenue, if you've got any update versus the last quarter.

Wes, yes, we've actually, obviously, we've been working together as much as we can over the course of the last few weeks. And what I would say is there's the obvious cost saves, which are board and public company costs and things like that. In terms of other opportunities, we think there's quite a bit of money on the real estate side, quite a bit of money on the services side and the technology side. And as the integration moves forward, we're evaluating all of our various verticals, and feel like we have a very good group and a good broad breadth of verticals that we're going to be able to go after. So I would say, the beauty of this transaction was there wasn't a lot of overlap. The markets are good, the markets are pretty good. So from that aspect, that stayed intact, capital markets are opening up a bit. I think we'll both be beneficiaries of that, as you saw in our quarter. And it's all about working together and integrating the 2 businesses and research. But I think, I feel that very good that we're going to find a meaningful amount of cost savings, but at the same time, keep the key product sets from both sides of the business. So we're -- we feel good about it. It's obviously, it's a meaningful transaction, it's going to be a lot of work, but I think the merit of the transactions that we saw when we started, we're still very excited about the people and that transaction.

(Operator Instructions) At this time, this concludes our question-and-answer session. I will now turn the call back over to Mr. Bryant Riley for closing remarks.

Great. Thank you, and thank you for joining us on today's call. I particularly want to thank our employees, partners and investors for their continued support, and I'd also like to welcome any FBR employees listening on the call. We're excited to have you as part of the team. We look forward to our conference. We hope that many of you can be there, and we look forward to reporting the results next quarter. 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, believes, seeks, may, estimates and similar expressions and statements. Such forward-looking statements include but are not limited to express or implied statements regarding future financial performance, future dividends, the effects of our business model, the effects of our balance sheet and credit facility on our ability to pursue business opportunities, the effects of the United Online, Inc. acquisition, the effects of our acquisition of rights to manage certain hedge funds managed by Dialectic Capital Management, the anticipated benefits of our pending acquisition of FBR & Co. and related actions, expectations regarding future transactions and financial impacts, size, consistency of returns and timing thereof, as well as statements regarding the effect of 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; the possibility that the pending acquisition of FBR & Co. does not close when expected or at all because required regulatory, stockholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all; lower FBR & Co. earnings and/or higher FBR Co. transaction and other expenses; our ability to achieve expected cost savings or other benefits with respect to the acquisition of United Online, Inc., our acquisition of rights to manage certain hedge funds managed by Dialectic Capital Management or the pending acquisition of FBR & Co., in each case, within expected time frames or at all; our ability to consummate anticipated transactions and the expected financial impact thereof, in each case within the expected time frames or at all; our ability to successfully integrate recent and pending acquisitions; loss of key personnel; our ability to manage growth; the potential loss of financial institutional 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 and Analysis of Financial Condition and Results of Operations. Additional information will also be set forth in the company's annual report on Form 10-K for the year ended December 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 10, 2017, and B. Riley Financial does not intend or 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 measures and the 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.

The statements made today do not constitute an offer to sell or solicitation of an offer to buy any securities or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction with such offer, solicitation or sale will be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of prospectus, meaning the requirements of Section 10 of the Securities Act of 1933 as amended.

Stockholders are urged to carefully review and consider each of B. Riley Financial, Inc.'s and FBR & Co.'s public filings with the SEC, including but not limited to their annual reports on Form 10-K, their proxy statements, their current reports on Form 8-K and the quarterly reports on Form 10-Q. FBR & Co. and B. Riley Financial, Inc. stockholders are urged to read the joint proxy in prospectus and the other relevant materials before voting on the transaction. Please refer to the press release issued today for additional information of both the pending acquisition of FBR & Co. and where to find it.

Finally, I would like remind everyone that a recording of today's call will be available for replay via the link available in the Investors section of the company's website.

Thank you for joining us today for B. Riley Financial's First Quarter 2017 Earnings Conference Call. You may now disconnect.