B Riley Financial Inc (RILYP) 2017 Q2 法說會逐字稿

Good afternoon, and welcome to B. Riley Financial Second Quarter 2017 Earnings Conference Call. My name is Roya, 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.

(Operator Instructions) 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 would like to 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 would like to turn the call over to B. Riley Financial's Chairman and CEO, Mr. Bryant Riley. Sir, please proceed.

Thanks, Roya. Welcome, everyone, and thank you for joining us. After the market closed today, we issued a press release announcing our financial results for the second quarter ended June 30, 2017, a copy of which is available in the IR section of our website.

As you can see from our results, Q2 was a continuation of the strong growth and operational momentum we have achieved over the last several quarters. The $66.7 million we reported in total revenues for Q2 was driven by multiple segments of our business.

We had another active and profitable quarter in our liquidations segment, having completed several liquidation projects, including ones for Gordmans and hhgregg.

In our Capital Markets segment, Q2 marked our fourth quarter of year-over-year growth, driven by several notable banking transactions as well as the inclusion of FBR for the last month of the quarter.

Our success in these 2 segments of our business was supplemented by meaningful profitability from United Online and our valuation business, which, when taken together, allowed us to generate $17.6 million of EBITDA and $8.8 million of adjusted net income in the quarter.

For further discussion about adjusted EBITDA and adjusted net income and reconciliation to the nearest GAAP measures, please refer to the section in today's earnings release titled Use of Non-GAAP Financial Measures.

We believe our results for the quarter demonstrate the financial capabilities of our diversified business model. Over the last 2 years, we've added multiple uncorrelated sources of recurring revenue and cash flow that we believe will help insulate us from subdued conditions in any one of our end markets.

Today, we have revenue and earnings diversification from our investment banking and trading appraisal and retail liquidation businesses, balanced by our asset management and United Online businesses.

Before I dive further into each of our business segments and talk about our strategic initiatives, I'd like to turn the call over to our COO and CFO, Phil Ahn, who will walk us through our financial performance of the quarter. Phil?

Thanks, Bryant, and welcome, everyone. Turning to our results for the second quarter ended June 30, 2017. As Bryant mentioned, our revenues totaled $66.7 million compared to $20.3 million in Q2 of last year. The significant increase was due to higher revenues from our Auction and Liquidation and our Capital Markets segments, combined with the addition of our Principal Investments segment, which includes United Online which we acquired in July of last year.

Now looking at our revenue mix and operating income by business segment for the second quarter of 2017. Revenue in our Auction and Liquidation segment for the second quarter increased to $21.8 million, up from $5.4 million in Q2 of last year. Our segment income was $7.3 million, a significant increase from $1.7 million in Q2 last year.

As we have mentioned before, the liquidation part of our business can be highly profitable but also episodic in nature. For this reason, results for this segment may vary substantially from quarter-to-quarter and year-to-year.

Revenue in our Capital Markets segment was $23.9 million, up significantly from $7.2 million we reported in Q2 last year. The increase was primarily due to the addition of FBR in June but was also driven by an increase in investment banking and fees and commissions during the quarter.

Segment loss was $4.8 million compared to a loss of $520,000 in Q2 of last year. The higher loss was primarily due to a $3.9 million charge in restructurings related to the acquisition of FBR.

Revenue in our Valuation and Appraisal segment for the second quarter was $8 million, up from $7.7 million in Q2 last year. Segment income for the quarter was $2.3 million, which was up from $2.1 million in Q2 of last year.

And finally, in our Principal Investments segment, which currently consists of United Online, revenues from services and fees, along with the sale of products, totaled $13 million. Segment income for the quarter was $5.1 million.

Now turning to our profitability metrics. Our GAAP net income in the second quarter totaled $3.3 million or $0.15 per diluted share. This compares to a net loss of $101,000 or $0.01 per diluted share in Q2 of last year.

Adjusted EBITDA, a non-GAAP metric, for the second quarter of 2017, totaled $17.6 million compared to $1.8 million in the same year ago period. For further discussion about adjusted EBITDA and a reconciliation to net -- 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 $104.7 million of unrestricted cash and $74.7 million of net investments in securities and other investments.

Shareholders' equity at quarter-end totaled $239 million, which was up from $161.1 million at the end of last quarter. Our shares outstanding at quarter end were 24.4 million.

And finally, our Board of Directors approved an $0.08 per share regular quarterly dividend as well as a onetime special $0.05 per share cash dividend. The dividend will be paid on or about August 29 to stockholders of record as of August 21.

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

Thanks, Phil. I'm going to spend a couple of minutes discussing the results and progress in each of our business segments and then spend the balance of the time discussing our strategic acquisition of FBR and Wunderlich.

First, our Auction and Liquidation segment. We had another active quarter during which we completed several liquidation projects. One of these projects involved us comanaging the orderly liquidation of 48 of the remaining 105 Gordmans retail stores.

We also completed our liquidation for hhgregg, a consumer electronics and home appliance retailer, in which we facilitated the orderly exit of all 132 hhgregg stores in the United States, which involved approximately $80 million of inventory.

In addition to hhgregg, we began the liquidation and store closing process for 32 Gander Mountain stores involving approximately $160 million in inventory.

Last month, our subsidiary, Great American Group, formed a joint venture with other liquidators to manage the liquidation process for 54 Sears Canada stores. We expect to successfully complete this process in the coming weeks.

Clearly, a lot of activity in this segment of our business. In fact, this level of activity is some of the highest we've ever seen in Great American's history, with multiple projects operating simultaneously.

Overall, we believe that Great American remains ideally positioned with significant capital resources, including a $200 million credit facility, to rapidly move on larger liquidation projects. We believe these characteristics will enable us to continue capitalizing on the secular trend of online shopping and ongoing reduction of physical stores regardless of business cycles.

Now turning to our Capital Markets segment. As I mentioned in my opening remarks, we experienced another solid quarter in this segment. We closed the FBR transaction on June 1, so FBR's results for the month contributed to the revenue for the quarter.

Additionally, several investment banking transactions and increased commission activity helped to drive Q2 revenue to $16.7 million, which was a substantial increase to Q2 2016 even before adding FBR.

The continued improvement in this segment of our business reflects contributions from key strategic hires we've made during 2017, coupled with a favorable small-cap investment climate.

Now let's turn to fund management side of the Capital Market segment, which includes B. Riley Asset Management, B. Riley Wealth Management and Great American Capital Partners. During the second quarter, Great American Capital Partners, our direct lending fund, made 4 investments during the period. In April, we provided a $20 million term loan to General Financial Corporation (sic) [General Finance Corporation], followed by a joint investment with KKR Credit of CAD 300 million in Sears Canada.

A third investment during Q2 was a $25 million secured loan to Legend Energy Services, [which involved plans] used to acquire machinery and equipment. And most recently, JCP provided a $37 million bridge loan to BB Stores as part of the retailers' reorganization process.

In addition to the loan, BB engaged a restructuring team to assist with their reorganization process as well as explore strategic alternatives.

Our relationship with BB is illustrative of how we believe we are uniquely positioned to provide comprehensive services and value to our clients. The end result of this effort exemplifies how we believe the vast depth and breadth of our services and our collective expertise can benefit clients throughout all stages of the company's life cycle.

We believe the increasing level of activity that JCP is seeing reflects the growing demand from middle-market companies for asset-based loans as well as the significant operating and business development synergy our platform provides.

As I mentioned on our last call, as the fund nears its capacity for new investments, we will begin exploiting the prospects for initiating our next fund. We've been very happy with the returns on this fund.

As I've talked about on prior calls, our Valuation and Appraisal segment continues to provide us with steady growth, profitability and predictable cash flow. On top of this, this segment is an important business development generator for us because it provides us with a lot of touch points with companies in need of our diversified services.

In Q2, we saw modest uptick in revenue to $8 million, along with generating $2.3 million in segment income.

Our strategy is to generate recurring revenue from appraisals and fixed fees from valuation and advisory services, making this segment an important part of our overall performance. We believe there are further opportunities to expand this business and have an increased presence in a corporate valuation space with the addition of several new hires that have helped us to recently enter new markets, including the automotive marketplace.

Our final business segment is Principal Investments. United Online continues to perform to our expectations, contributing $13 million in revenue and $5.1 million in segment income during the quarter.

We continue to look for opportunities to acquire similar orphan companies that exhibit challenging market dynamics but where we can come in and implement operational and financial changes to attract -- to generate attractive returns.

Now shifting gears to our acquisition of FBR & Co. and Wunderlich. We are extremely pleased to have successfully completed both strategic acquisitions. As I talked about, we believe FBR strengthens our Capital Markets business through their market-leading equity offerings practice and sector coverage. The acquisition also expands our geographic distribution with operations throughout the East and West Coasts.

Wunderlich bolsters our Wealth Management business by adding 200 financial advisers and $10 billion in assets under administration, positioning B. Riley Capital Management, in our view, as one of the most comprehensive Wealth Management platforms in the industry.

Gary Wunderlich was appointed to the board of B. Riley Financial and will continue to act as CEO of Wunderlich, and Tom Kelleher and I will serve as Co-CEOs of the combined investment banks and brokerage business.

Today, we believe our combined organization of more than 800 professionals and strong balance sheet not only gives us a national footprint in equities and fixed income but also provides the necessary scale and resources to strategically expand our leading position in business services, financial advisory and investment banking.

We have already made significant strides toward integrating both businesses. As it relates to FBR, we implement cost-savings measures in June, taking into account the planned synergies as a result of the acquisition, which included a reduction in force for some of the FBR corporate executives and restructuring to integrate FBR's operations with our operations. These initiatives resulted in $6.1 million restructuring charge in Q2.

From the opportunities perspective, we have also begun to see the benefits of a combination, as demonstrated by our recent $230 million capital raise for Industrea Acquisition Corp. that was managed solely by FBR and B. Riley.

With the Wunderlich transaction, which closed in July, the acquisition has gone very smoothly. The firm's wealth management and institutional fixed operations are additive and complementary to existing B. Riley Financial lines of business.

The acquisition has been received very positively by the wealth management advisers, who are already seeing increased deal flow and access to more than double the research coverage as well as access to certain B. Riley Asset Management offerings. All these things are anticipated to be beneficial to the Wealth Management business over time.

We expect to complete the integration for both businesses by year-end and we look forward to benefiting from the financial and operational synergies in the quarters and years ahead.

In summary, we believe our continued strong financial performance demonstrates our significant operating and financial momentum across our business.

Looking ahead, we plan to build on this by leveraging our expanding resources, infrastructure and capabilities, while acting strategically to invest and acquire businesses that can help our platform scale even further.

Just to go off script for one moment, I also wanted to mention that about 4 months ago, we lost a leader of our appraisal group, Lester Friedman. The group in the appraisal side of this business has been amazing as they've taken over the leadership, and I think the commitment that they've shown is a testimony to Lester's leadership, who'll be missed. And I just wanted to -- I'd be remiss if I didn't mention how important he's been to the [kudos of] the company and how much we will miss him.

Operator, please provide the appropriate instructions for questions.

(Operator Instructions) Our first question comes from the line of Wes Cummins with Nokomis Capital.

Bryant, sorry I missed a little bit of the call, so I hope you -- maybe you might have covered this already, but I know it's been about 2 months since you closed the deal with FBR. But could you just maybe talk about the cost savings and kind of the synergies you're achieving? And then any impact that might have on revenue in some of the divisions where you have some overlap?

Sure. Thanks, Wes. In general, we've seen cost savings across, obviously, salary and compensation, fixed costs, real estate. I think if we took last year and we took the total amount of comp tied to people who either left or people that we let go, it was close to $28 million on the FBR side, so including everything in fringe. We -- that's been difficult. We -- the B. Riley never, in their time, had a mass layoff, and Great American didn't really, too much either. So it's been difficult. I -- we've lost some people who have left on their own. And then we also let go of some people that we really thought were helpful, but we just couldn't make the numbers work and make it fit. What I would say is, I -- as I look around and I look at the people, especially at FBR who we've gotten to know, there's an excellent group there. And I don't think we've lost any muscle. We -- all the sales force that have been there for a long time, have been behind a lot of the larger transactions that they've done, are all here, all the quality analysts. What we really did was eliminate a structure of expenses that we thought we were able to without really affecting our business negatively. And that results in a couple of things. It results in being able to have a lower fixed cost and lower breakeven but also to raise payouts. We've been raising payouts for sales and trading and banking. So we're just getting the dollars a little bit closer to the producers. So I'm really excited. It's been a grind. It's been a lot of work by -- a lot of the leadership at B. Riley and FBR. But as I look forward -- and I kind of look at that Industrea transaction as maybe the coming-out party, $230 million, IPO oversubscribed, never -- too exercised, 90 investors. So I think that demonstrates the -- kind of the power that we have on the distribution side and feel really good about it. But it's been a bit of a grind, but we're -- I think we're 95% past it.

Okay, great. And then maybe just to follow up, just kind of overlap here a bit. Historically, the B. Riley side of the business, the Capital Markets and brokerage business has had a much lower breakeven and then a pretty high contribution margin once you get past that breakeven. Should I think about the FBR kind of both breakeven coming down significantly, like you just talked about it, that's in the contribution margin being similar to what we've seen historically with B. Riley going forward?

Yes. I mean, I'll try and quantify that. As you can imagine, things are changing quickly, and we're -- there's numbers we're trying to take out of the system and expenses we're trying to take out of the system. But if FBR's breakeven previously was in and around $25 million to $30 million, probably closer to $30 million a quarter, I think our number of now is a little bit closer to $20 million to $22 million, $23 million, maybe a little bit lower, and then incremental margin should be in excess of 50%. So not dissimilar to how we've always run B. Riley. And I feel like, in this climate and given kind of the size of the firm and the opportunities we're seeing, I feel really good about those breakeven levels.

(Operator Instructions) Our next question comes from the line of [Sean Haydon] with [PAC].

Question on the brokerage side. Did the growth come from volume or pricing or both?

So when you say pricing on the brokerage side, the commission business is just a brutal contracting business. And I just -- it's a great business to be in. It provides a lot of opportunities for the banking side and everywhere else, but in terms of pricing contraction, that continues. We hope we've seen the bottom of that. But yes -- so it's all a function activity. We're seeing more volume on the banking side. We're seeing more volume on the trading side. We're obviously -- our balance sheet enables us to facilitate some increased trading. We think that's really proprietary. But in general, it's a pretty active market in the capital raising side. And we're -- and our advisory business is pretty strong. Our -- particularly our restructuring business, has really ramped. So it's a combination of those things, but the pricing side is -- boy, I would love to tell you at some point that we saw an increased and a better environment for pricing, but still pretty tough.

Okay. And then given the strong performance in your mutual fund, do you guys have any plans to expand that to maybe different offerings or put it on the Wunderlich platform? How do you see the growth of business just given your success to-date?

Yes, and it's had a really good beginning of the month. So look, we are in the Wunderlich platform. We're starting to see some capital inflows from that side. It is a really difficult environment for mutual funds. And as long as the markets go up every day, I think it's going to continue to be a difficult market for mutual funds. I think there'll be a time where stock picking really starts to outperform passive. And I talk a lot about my view on active versus passive. But we're outperforming, and you can see it. But I think that you'll see it more meaningfully if we saw a market that kind of wasn't -- was a little bit more volatile. So, yes, we are distributing through Wunderlich. We are getting the word out there. We are getting on our third year anniversary. Assets are -- I think, just hit new highs today. So we are going to actively distribute it. When we started it, it was a bit of a free call. And now that we've got this track record, I think we'll be more aggressive about monetizing it.

Yes -- no, the results have been good. And then finally, just on the balance sheet. You guys obviously took on some debt to close these deals. Are you comfortable at this level? Do you think you could take on more or you're going to hold tight for now?

Yes. So I mean, if you look at our EBITDA without -- forgetting FBR and Wunderlich, just our last 4 quarters we report, I think our trailing 12 months EBITDA is $75 million, $77 million. We still have net cash. And so if we found the right opportunity, I don't think we need to -- we wouldn't think about using equity right now. We've got plenty of flexibility on our balance sheet. So if we found the right opportunity, we have plenty of capability, I think, on our -- given those cash flow statistics to generate -- to go out and make some acquisitions.

Our next question comes from the line of [Richard Haydon] with [PAC].

First of all, congratulations on diversifying your revenue base. It's critical. First question, what does assets under administration mean?

So assets under administration, you will have -- when you have a retail client, you'll have some of his dollars in an account that you have, and then you will have some of his dollars that you advise on. And so that's a combination of those numbers. So it's not a perfect number and statistic, but it gives you a good feel for, in general, where we're generating a revenue base that we're either a broker on or generating fees off of.

And I assume the idea is to convert a lot of this into higher fee-paying assets?

The idea is to make them a lot of money and find them good products and good investments. And then in general, I think that will create more revenue opportunity. So I think a lot of firms have gotten into a lot of trouble moving their retail base into transactions with 7%, 8%, 9% fees that are hard to make back for the investors. So we're going to just take the tack that if we -- we have good product, we're very proud of our research, and we believe the advisers see that, and they'll be able to offer better products. And absolutely, we'll be able to show products to our advisers, but we want to make sure that they're comfortable, they understand the products, and we're being really cognizant of expenses to the investor.

Another question. When do you think FBR could be breakeven?

Right away. I don't -- I did not envision us losing money on newco, on the brokerage side. I mean, look, there's -- you know how many different dynamics there are in the stock in the market, and fees and transactions can be pushed out. But we don't -- we'd be very upset if we didn't make profits right away.

Okay. And can I make one unsolicited observation?

Sure.

Your $0.08 regular dividend, a $0.05 non-regular dividend sends an awkward message to investors. So you have to just -- just to think about that.

So fair enough. Let me just give you the logic behind that because we started that long ago. The employees and management of B. Riley and the company are very large shareholders. And part of what we decided a long time ago is we would be a firm that was probably a little lighter on executive comp but make sure that we paid out a portion of our profits to our shareholders. We just think that's good corporate governance. And what we have said clearly is that we will pay 15% to 25% of our EBITDA in the form of a dividend. And we don't know -- we don't have enough visibility, given the volatile size of our business, to be able to say that equals $0.10 or that equals $0.14. We feel confident that we can do $0.08, and then we -- it's very formulaic. And I know that might be a little different and -- but we want to earn our dividend, we want to be clear as to why we're paying out our dividend, and we want to be smart about it. So I don't think that will change.

Okay. But you understand my perspective of your regular dividends are considered a nonrecurring event, and it really reinforces the lack of visibility into the cash flow and earnings to the company?

Fair enough. Thank you. Thanks a lot.

(Operator Instructions) Our next question comes from the line of Derek Pilecki with Gator Capital.

When you bought FBR, I believe they had a big deferred tax asset that they had a valuation allowance again. How did you recognize that? Did you recognize that deferred tax asset when you've bought FBR? And could you just talk generally about your cash tax position?

Phil?

Yes, sure. Sorry, we're in the midst of -- when we acquired United Online, they had a significant NOL position that we actually converted to a 338(g) election, and we were able to certainly step up those assets. We're actually looking at that currently, and so the cash tax position might change on that. In terms of the cash tax position, we are -- we do currently still maintain a small NOL, but looking into next year, I think our cash position is going to -- our cash tax position is going to alter slightly from historically when we weren't traditionally a taxpayer.

Do you think you'll be able to use the FBR deferred tax asset?

Yes, but with limitations.

(Operator Instructions) Our next question will come from the line of Keith Rosenbloom with Cruiser Capital.

Real quickly, when you guys are doing your underwritten offerings, right, your underwritten secondaries and your underwritten public deals, are you taking capital risk there? And are there any circumstances where you're able to effectively buy stock from the company and resell it to the public at a higher price or a different price?

So there's an underwritten deal which you really don't flip. The traditional underwritten deal, you don't flip to an actual underwriting until you're ready or very close to ready to price the deal. So you're really taking on very limited risk. A bought deal, which we are a meaningful proponent of, and we think that's a proprietary advantage given our balance sheet, we will take on risk. So we will negotiate with the seller directly before we've actually marketed the position. So we have -- I'm trying to think if we did a bought deal this quarter. We did -- we had a couple for MasterCraft, which were -- which was a private equity seller. And we bought them. We bought them off our balance sheet. If we didn't see any aftermarket interest, we would have been [long on them]. And in that case, we did keep some. We try and balance out the customer base and kind of how we think about it, and we can go long some of those bought deals. But for the most part, an underwritten deal and a bought deal, typically, if all things are smoothly, we will not -- we will very rarely be an owner. Where we'll be an owner is...

You always capture that extra profit?

No. I mean, there's some rules around that, too. If you have an underwriting and then you go and sell it the next day, that's still part of an underwriting, and there's rules against that. So no, we won't do that. Where we'll get long is if we're supporting the deal or we're trading in it and things like that.

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Bryant Riley for his closing remarks.

Thank you very much. I just want to thank all employees and all the people and management -- outside of me, but management that have been working tirelessly. This has been -- we've bit off a lot between FBR and Wunderlich. And I can't thank -- I'm not going through the names, you know who you are. I can't thank everyone enough for their effort. It's been -- it's just been a really busy 2 months. So I want to thank everyone there and thank our clients and our investors. We look forward to talking to you in about 3 months. 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 the 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, expressed or implied statements regarding future financial performance and future dividends, the effects of our business model, the effects of our balance sheet and credit facilities on our ability to pursue business opportunities; the effects and anticipated benefits of our acquisitions of United Online, Inc.; rights to manage certain hedge funds managed by Dialectic Capital Management, FBR & Co. and Wunderlich Securities, Inc. and related actions; expectations regarding future transactions and the financial impact, size and consistency of returns and timing thereof; as well as statements regarding the effects 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 the 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 acquisitions of United Online, Inc., rights to manage certain hedge funds managed by Dialectic Capital Management, FBR & Co. and Wunderlich Securities, Inc., 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 with the accepted expected time frames or at all; our ability to successfully integrate acquisitions, loss of key personnel; our ability to manage growth; the potential loss of financial institutional clients; the timing of completion of significant engagement and those risks described from time to time in B. Riley Financial, Inc.'s filings with the SEC, including, without limitation, the risks described in B. Riley Financial's annual report on Form 10-K for the year ended December 31, 2016, 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 our quarterly report on Form 10-Q for the quarter ended June 30, 2017. These factors should be considered carefully, and readers are cautioned not to place undue reliance on such forward-looking statements. All information discussed on this call is as of today, August 7, 2017, and B. Riley Financial does not intend and undertakes no duty to update such information based on 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 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 would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website.

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