B Riley Financial Inc (RILYP) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Great American Group Incorporated Second Quarter 2010 Earnings Conference Call. During today's presentation, all parties 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, Monday, August 16, 2010. I would now like to turn the conference over to Andrew Blazier. Please, go ahead, sir.

Good afternoon, everyone, and welcome to Great American Group Second 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 is also on hand to answer questions.

Before I turn 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. 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 10-K filed with the SEC.

All information discussed on this call is as of today August 16, 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 will 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 conference call. We appreciate your continued support. I will go over our results in detail in a few minutes, but before that I want to provide some context and perspective for what we are currently experiencing. Business activity within the retail liquidation sector has slowed to a near standstill.

We have been in the retail liquidation business for over 25 years. Through that period, we have seen plenty of ups and downs in our business activity. However, over the past 12 months, the number of retail liquidation opportunities has been extremely limited as economic conditions for retailers and credit markets have improved from the prior year.

Also over this period, we have seen creditors increasingly extend forbearance periods and amend credits facilities to allow troubled retailers to continue operations despite their deteriorating financial condition. Historically, these situations would have more rapidly resulted in bankruptcies, store closures and liquidations. These factors have had a direct impact on the level of business activity.

Despite recent conditions, we believe transaction activity will pick up. Economic conditions for the consumer remain challenging and unemployment it is -- [at] historical highs. During these challenging times, we are taking aggressive actions to mitigate the impact of the slowdown to our business; these actions include steps that will reduce operating and financial expenses.

In May, we announced the amendments on $52.4 million of promissory notes payable, reducing the annual interest rate from 12% to 3.75%. We also extended the maturity date by four years on $47 million of those notes. We are also undertaking a comprehensive review of each of our business lines to identify areas for expense reductions and operational improvements, expect to complete this review and begin to implement changes during the second half of 2010.

Together with the restructuring of our debt, these actions will enable us to retain greater financial flexibility and preserve capital for future transactions when deal activity resumes. We believe these actions will position the Company for improved performance and growth for the long-term. At the same time, we remain committed to our growth initiatives. Our UK expansion, GA Asset Advisors, continues to ramp up operations.

Under the leadership of Gavin George, an experienced British operator and restructuring professional, we see a real opportunity to increase our footprint in the UK and Germany against limited competition. Our most successful initiative to-date has been with GA Capital, our subsidiary that provides junior secured loans to retailers in need of growth capital, working capital and turnaround financing.

We launched GA Capital last fall and we have seen steady flow of financing opportunities for retailers, as our traditional funding sources primarily from regional and community banks have contracted. We are excited about the opportunity to provide liquidity to retailers to help them meet their business needs, as we are finding pent-up demand in this business.

And now, I would like to turn the call over to Paul Erickson our CFO, who will discuss our second quarter results in greater detail. Paul?

Thank you, Andy. In the second quarter of 2010, total revenues were $5.2 million, compared to revenues of $15 million in the same quarter of 2009. Revenues from services and fees were $2.3 million or 43.7% of total revenues, compared to $11 million or 73% of total revenues a year ago.

Sales of goods were $2.9 million or 56.3% of total revenues, compared to $4.1 million or 27% of total revenues in the second 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 segments.

This decline resulted from overall lack of retail liquidation opportunities across the industry as economic conditions for retailers in credit markets have improved, estimated losses that were accrued on June 30, 2010 on the performance of retail liquidation service engagements, where we guarantee a minimum recovery value for goods sold, and a decline in revenues from the auction of machinery and equipment.

Direct cost of services or $2.9 million, compared to $3.8 million a year ago period. The decrease in direct costs of services was a result of the decrease in the number of fee and commission engagements in the second quarter of 2010, where the Company contractually builds these commissions and reimbursable expenses.

Decrease in cost of services primarily -- or, was partially offset by an increase in cost of services and evaluation and appraisal services segment as a result of an increase in headcount in that segment compared to a year ago.

Cost of goods sold was $4 million in the second quarter of 2010, compared to $2.5 million in the same period the prior year, primarily as a result of $1.3 million of non-cash charges to increase the reserve for slow-moving goods held for sale at auction. Selling general and administrative expenses were $8.1 million, compared to $4.7 million in the second quarter of the prior year.

Increase in selling general and administrative expenses was primarily attributed to increases in payroll and operating expenses from the ongoing expansion of the Company's European operations, personnel costs to the expansion of the business development team, and advertising promotional expenses.

Selling general administrative expenses during the second quarter of 2009 included a $700,000 credit for the deferred compensation plan for the phantom stockholders -- equity holders. As a result, our operating loss during the quarter was $9.7 million, compared to operating income of $3.9 million during the second quarter of 2009.

Interest expense during the period declined to $800,000 from $1 million the prior year, primarily as a result of the decrease in interest expense from significantly lower borrowings and utilized in the second quarter and 2009 when the Company had more retail liquidation engagements.

Interest expense during the second quarter of 2010 was primarily comprised of interest expense on the notes payable to former Great American members and phantom equity holders. Increase -- I'm sorry, 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 equity holders that was effective February 1, 2010.

Loss from operations before benefit for income taxes was $10.9 million, compared to income from operations of $2.7 million in the year ago period. During the second quarter, our operating results also included a benefit for income taxes of $4.2 million. Overall, our net loss during the second quarter of 2010 was $6.6 million or minus $0.24 per diluted share, compared with net income of $2.7 million in the second quarter of 2009.

During the second quarter of 2010, we generated adjusted loss before interest, taxes, depreciation and amortization of $9 million. During the quarter, the Company used $8 million in cash from operations. At June 30, 2010 the Company had $26.5 million in cash and equivalents compared to $38 million at December 31, 2009. Working capital was $24.5 million and long-term debt was $53.9 million.

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

Thanks, Paul. As we address the current challenges in our industry, we believe we are taking the proper steps to improve our position for the long-term. We take seriously the trust you have placed in us to do this.

The strategic review now underway is a real opportunity to further improve our competitiveness, and we look forward to updating you next quarter on our findings and corresponding implementations steps. Meanwhile, we are focused on proactive activities that will drive the growth of this Company.

Thanks again for your support of Great American Group. We look forward to speaking with you next quarter. And now, Operator, we are available to answer questions.

(Operator Instructions)

Our first question comes from a line of [Chris Segala] with B. Riley & Company. Please, go ahead.

Hello, calling in for Mike Crawford here. Thank you for taking my call. Just a few questions, wondering if you could provide just a brief update on any sort of activity you are seeing in the home auction business?

All right Chris, this is Andy Gumaer, I will answer that. In the home auction segment, it has been frustrating for us because of the governmental moratorium that was put on the banks, basically stem the flow of that product significantly -- pretty much the same story as the last quarter that we talked about this.

And we are -- as everyone else reading in the papers and from various institutions that track the data on foreclosures, we know that at some point there has to be a flood of this product to hit the market, and we have just been positioning ourselves for when that time comes. It is very difficult for us to understand why the banks are not being more proactive in terms of foreclosing on these properties and putting them through a process.

We have our sales team out there meeting with service providers and the various financial institutions that have this product in their portfolios, in addition to Fannie Mae, et cetera. And we feel that we are well positioned to capitalize on the opportunity once the flood of homes do hit the market.

But at this point, we haven't seen a significant number of product being released by these institutions yet not only to us, but to the other competitors in that space as well, at least not in any significant manner.

Okay, great. Thanks, that is very helpful. And then last question, just in terms of -- in regards to the movie gallery liquidation. Where are we on that timeline?

I think we have pretty much wrapped that up in terms of the operations. We are in the process of reconciling the final results of that liquidation. Certainly, at this time it is too preliminary to tell the results, other than I will say we did not necessarily hit the goals that we had initially looked for.

Okay, great. Thanks a lot, guys.

Thank you.

(Operator Instructions)

Our next question comes from the line of Avi Dalfen with Macquarie Capital. Please, go ahead.

Thank you. Can you comment a bit more on the macro conditions that have led to the, I guess, reduction in opportunities that you have? And what signs and indicators you would look for to give you basis for expecting and upturn in demand?

Well, we have varying revenue streams throughout our company here. Now, when we talk about the retail segment, granted we haven't seen it this slow in a number of years. I think the factors there are that as I mentioned earlier, the banks are being significantly more lenient than they have in the past.

Some of the situations that exist now would have gone down a fast track toward bankruptcy historically. I think that at some point things have to change. I think there was a long period of complete inactivity where everyone was sitting on the sidelines to see what would happen. And I think that was in a lot of different industries, not necessarily just the retail sector and the home foreclosure sector.

However, we do have other segments of our business that have continued to see healthy deal flow, such as in our auction segment, and our ability to grow our Great American Loan Sale Advisors site with current subscribers and also building up the amount of notes and loans that we are currently outselling four different financial institutions.

So it is not all segments that have slowed down significantly, it is primarily in the retail sector and, of course, the home auction segment where we have put a lot of infrastructure in place to capitalize on that, and we certainly thought we were going to see a flow a lot sooner than we have.

Okay. And the downturn in the appraisal revenues, what would be the driver there?

I don't think there is a downturn, is there, Paul?

Well, we were flat for last year.

Well, that is pretty much reflective of the market then. There aren't a lot of transactions being done out there. I think actually given the fact that the market was significantly flat, we did quite well to at least keep up with last year.

Okay.

So, I wouldn't view that as a downturn necessarily.

Okay. So overall, would it be fair to say that you would welcome any sort of either improvement or downturn in the economy as a way to get change from this current unusual situation we are in, with regards specifically to the retail part of your business?

Yes. I mean, I think that there is significant amount of opportunities already out there, it is just a matter of when the lenders or other parties with their varied interest determine when to pull the plug on certain retailers that have just been treading water for a long period of time. And yes, if there is a downturn in the economy certainly that always helps our business. And so if someone believes in a double dip recession, we certainly think that will affect our business in a very positive way.

Thank you.

(Operator Instructions)

And I show no further questions at this time. I would like to turn the call back over to Andy Gumaer, Chief Executive Officer. Please, go ahead, sir.

All right. Well thank you all for participating in the call today. Certainly, we hope to have better news to report at the end of next quarter, and we look forward to speaking to you all then. Thank you.

Ladies and gentlemen, this concludes the Great American Group Incorporated Second Quarter 2010 Earnings Conference Call. Thank you for your participation. You may now disconnect.