Q3 2020 B. Riley Financial Inc Earnings Call

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Good afternoon, and welcome to B. Riley financial third quarter 2020 earnings call.

Earlier today B. Riley issued a press release and presentation detailing its financial results for the third quarter.

Copies are available on the Investor Relations section of the company's website at <unk> Dot B. Riley.

Dotcom.

This conference call include a discussion of non-GAAP financial measures to most directly comparable GAAP financial measures and information back on filing these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release.

As a reminder, today's call is being recorded.

An audio replay will also be available on the company's website later today.

Joining us today for B. Riley our bright Wiley.

Chairman and co CEO, Tom Keller co CEO.

Philip on CFO and COO.

After managements remarks, we will open the line for questions.

And before we conclude today's call I will provide the necessary cautions regarding forward looking statements.

I will now turn the call over to Mr., Brian Reilly.

Riley. Please proceed.

Thanks, welcome everyone well.

Performance this quarter demonstrates the benefits and resiliency of our diverse platform and business model has all the strength of the entire B. Riley team.

The lingering impact of cobot lighting, we executed our strategy at a high level and delivered solid financial and operational performance.

To that end, we generated operating revenues of 194.5 million.

This represents year over year growth of almost 40% in.

In addition to a robust top line growth operating adjusted EBITDA was 67.2 million compared to 35.2 million in the quarter of last year, an increase of more than 90%.

Year to date, we have delivered almost 185 million of operating adjusted EBITDA, which was up 90% compared to the first nine months of last year, we believe that our diverse and differentiated platform helps us to achieve this strong year over year growth.

Including investment gains Q3, total revenues increased 26% to 226.3 million well total adjusted EBITDA in Q2, we grew 34% to 94.1 million.

As you recall during the first quarter, we experienced significant pandora's marked our investment portfolio at the initial shock and the cobot pandemic swept through the promote your markets.

Well, certainly, Texas gold digger business activity across your markets continue to normalize an investment but further we'll probably in Q3 we.

We urge shareholders a focus on quarterly operating performance, while holding accountable the Balkan performance of our investment book.

Looking ahead, we see an accelerating number of growth drivers across our <unk> platform and have strong confidence in our strategy and teams that confidence supported our decision to once again increase our regular quarterly dividend to 37, and a half cents a share up from 30 cents per share. This marks the second consecutive quarter, we raised our regular quarterly dividend.

For the past six years, our dividend philosophy has been to Pip <unk>, well, we regular dividend and all but about what special dividends based on the strength of our episodic double sales as.

As our business is diversified and become increasingly consistent we believe that our investors are better were awarded by US instituting a larger regular quarterly dividend to go do something on the house per ship Centsper share, which annualizes at $1.50 per share well, we would consider a special dividend again in the future. We believe the higher regular dividends more appropriate.

Shareholders could look like business model. Our hope is that we will continue to grow and generate greater net profit that we'll be able to increase this regular dividend overtime. This.

Additionally, the board of directors authorized up to $50 million in share repurchases as another means to enhance shareholder returns.

With regards to the overall business environment, we remain encouraged by what we're seeing across our businesses, but recognize the cobot, we'll continue to have an impact on what the conditions.

On prior calls you heard us talk about our strategic rebranding and our decision to consolidate legacy businesses on the unified B. Riley Brown. This.

This will enable us to better leverage our collective capabilities.

Create greater affiliation similar to elevate the level of service, we deliver to our clients.

The rebranding initiative was executed in September and we are already seeing the benefits.

In addition earlier this month, we announced the launch of a new line of business B. Riley venture capital.

This business is being headed by Todd Sims, who was a B. Riley board member for four years until we recently stepped down a little to lead our efforts.

The strategic mandate, a b. Riley D.C., it's simple identifying the best in the late stage both companies on the pathway to entering the public markets. The team will be supported by a strong balance sheet and syndication platform as well as our diversified Papillon resources. We're excited about the potential for B. Riley PC.

In addition to the VC after we bolstered our sponsor coordination across the enterprise behind two individuals who are dedicated to maximize all the various touch points and services, we have a <unk> across the platform with the private equity community. Both have come from bulge bracket firms with extensive experience your relationship with sponsors.

Turning to our overall because of pottery barn, so a number of notable highlights of the quarter.

On the capital market business restructuring its back activity remain strong water ATM business sustained its momentum in Q3 are.

We tell liquidation group was very busy throughout the quarter in Q3, we saw an increase in doesn't affect revenue for this group in Europe in particular challenges remain for brick and mortar retailers globally, given told that they expect activity levels to remain high as we moved through the holiday season and do 2021.

During the quarter, we brought together the glass rattner and great American appraisal because it's under one brand B. Riley advisory the latency graphs Radnor business, which consisted primarily of one to become a little litigation support as well as restructuring and turnaround management continues its strong growth trajectory.

Projects hampered by close courts do encoded related shutdowns were more than offset by new mandates or legacy great American appraisal business continues across the covered them some of the NPL market weakness related to call that but continues to generate stable performance.

Our real estate group remains active and year to date and participate in some to restructuring project spending approximately 16 other locations.

This is an impressive start getting individuals born just really this year.

Principal investment companies delivered performance ahead of our expectations.

In key cash flow drivers for our business.

And finally, our brands business experienced some recovery in Q3 sales.

Again, we opened for business or brands platform remains a solid cash flow generator for us.

A number of attractive opportunities in the future.

Taken together these highlights demonstrate the versatility of our business model and our diversified platform can be a key competitive differentiator during challenging times.

I've shared my enthusiasm about our results and how the platform. We've built sets us apart as we execute with a singular mission of driving value for our clients and partners.

As I am about today I know there is more to come it more we can do we're just scratching the surface of open central at least some branding initiatives will help us unlock incremental growth opportunities.

No one of just a b. Riley claimed stand to benefit from our expanding platform commitment to driving through to us.

Let me take a moment to thank the entire B. Riley team, who are already working tirelessly to deliver value to our clients and partners.

I believe.

Our ability to maintain that level of commitment. Despite the challenges of cove. It further validates our reputation and standing with current clients and that's helping us win when no one's moving.

Moving forward, our strategic focus is clear.

The increased value to clients and partners across each and every one of our businesses. During this will best position us for long term sustainable growth generation and increased returns to stockholders before.

We focused on finishing the year strong in Mtwom 2021 of accelerated momentum across our company.

With that I'll turn the call over to Phil on our CFO and COO to discuss some financial metrics from the quarter Phil.

Thanks, Brian and welcome everyone.

For the quarter B. Riley reported total revenues of 226.3 million and total adjusted EBITDA of 94.1 billion.

This was an increase from Q3 of last year, which recorded 180.1 billion in total revenues and adjusted EBITDA of 70.3 million.

Net income available to common shareholders was 47.3 million or dollar 75 cents per diluted share compared to 34.3 million or $1.21 per diluted share for the prior year period.

This increase was primarily due to increased activity across most of our businesses as well as further recovery of that book.

Turning to our reportable segments.

Capital markets segment, which includes our investments as well as our operating results from our investment banking brokerage or bankruptcy and litigation financial consulting business.

In our wealth management and fund management businesses.

Excluding investment gains or capital market segment generated operating revenues of 115.1 million in segment operating income of 37.9 billion during the third quarter.

These results were primarily driven by increased speed and advisory services. The addition of our real estate business and an increase in income related to minority investments.

Turning to our auction liquidation segment, our retail liquidation business contributed revenues of 44.2 million in segment income of 12 million.

We concluded many successful engagements in the third quarter as market activity in the U.S. and Europe picked up following the initial impact of Tobin back in March.

As we have noted on prior earnings calls our liquidation segment results can vary from quarter to quarter and year to year due to the impact of large scale retail liquidations.

Looking ahead as Brian noted, we expect additional global retail liquidations in the coming quarters.

Our valuation and appraisal segment generated 9.7 million of revenue and 3 million in segment income in the third quarter.

Fraser activity continues to recover from Cobra related slowdown that already this year.

But the key metrics, we used to measure the progress increase on a sequential basis.

We're pleased to see the rebound in this business, which remains a valuable consistent source of flow generation.

During the third quarter, our principal investment segment companies United online. The Magicjack generated revenues of 21.6 million and segment income of 3.4 million.

These businesses are drivers of cash flow for our overall platform in both delivered strong quarterly results.

Last is our brand segment, which as a reminder was established back in the fourth quarter of 2018 is comprised of our interest in intellectual property and related assets of several fashion brands.

Our brands portfolio contributed licensing revenue of 4 million <unk> third quarter end.

And encourage segment income of 2.3 million.

We continue to be excited about the future growth opportunities for this business.

Now turning to some highlights from our balance sheet at September Thirtyth, B. Riley financial had 169.7 million in unrestricted cash and cash equivalents.

19.6 million in due from clearing brokers.

411.4 million in net securities and other investments owed and 330.4 million in loans receivable net of loan loan participation sold.

As of September Thirtyth, we had total cash and investments balance of 991.7 million, which includes 58.4 million of other equity investments included in prepaid and other assets.

Total cash and investments net of debt, including investments recorded in our prepaid and other assets was approximately 83.6 million.

In total B. Riley financial Stockholders' equity was 373.9 million at quarter end.

During the quarter, we repurchased over 450000 shares under our existing share repurchase program.

Year to date through September we bought back approximately 1.7 million shares.

Shares outstanding at the end of the quarter totaled approximately 25.4 million.

Lastly, as Brian noted, we are increasing our regular dividend to 37 and a half cents per common share from the previous dividend of 30 cents.

Our total quarterly cash dividend of 37 cents per common share will be payable to stockholders of record as of November 10, 2020 on or about November 24th 2020.

That completes my financial summary, now I will turn the call over to our co CEO, Tom Kelly here to share a few quarterly highlights from our individual operating units Tom.

Thanks, Phil as you've heard our third quarter results were strong and show the diversity and resiliency of our business model.

We're delivering robust year over year growth in the face of covert while also taking steps to further diversify and strengthen our platform.

I'll walk through some key highlights from our businesses.

Within our newly branded institutional broker dealer B. Riley securities or investment banking business posted strong results. We're on pace for a record year for our at the market or ATM product offerings. The restructuring advisory group had another strong quarter and built upon the momentum we experienced in Q2.

Our teams continue to work on several engagements and the retail and consumer products sector. As a result of the continued pressure placed on companies to do the pandemic.

Spec team also remained very active during the quarter as B. Riley principal merger court to entered into a definitive merger agreement for a business combination with iOS energy storage that will result in us becoming a publicly listed company the.

The deal is expected to close in Q4 and gives us the unique opportunity to invest in a disruptive sustainable energy solution that addresses a clear need in the rapidly growing energy storage market.

Now turning to our retail liquidation division business levels continue to be attractive due to the continued impact of coated in particular, we're seeing opportunities in overseas markets, including Europe, where activity has been strong.

We have completed over a number of transactions in Europe, and see attractive forward opportunities, both there and in Australia.

In the U.S., we are participating in some large liquidation projects. However, given the risk of Covance and potential for future shutdowns. These deals have been typically few related opportunities rather than a guaranteed structure.

Our recently added real estate advisory team has been active in working on a number of high profile transactions and making a meaningful contribution to our overall platform.

Year to date, we have participated in 17 restructuring projects totaling approximately 1600 locations. These engagements that span multiple sectors, including retail restaurants grocery entertainment and health services.

As Brian mentioned during the quarter, our great American appraisal glass, rather groups combined under the new brand B. Riley advisory we've already seen increased levels of coordination and collaboration among employees.

The appraisal group, formerly known as Great American appraisal continues to recover from Covidien related slowdowns experience earlier. This year all of the key metrics of the business improved sequentially from Q2 to Q3 with new mandates accelerating throughout the period.

Our group, formerly known as glass Radnor continues to generate strong growth. Despite the Cobi 19 pandemic. This group has consistently grown since acquiring the business in August 2018, and in our current environment. We have no reason to believe that trend will not continue.

During the quarter B. Riley wealth management added a number of new advisors, who subsequently brought $500 million in assets, thus far to the firm.

Our diverse platform than boutique culture attracts high quality advisors with growing and sophisticated wealth management practices, we continue to see our assets and revenue per advisor client and our independent channel has doubled in size over the past six quarters.

With the increased depth and breadth of the large larger platform. Our wealth management group has seen a material increase in interest from advisors looking to join the firm.

Our principal investment accompanies magicjack in the United on line remained steady and important contributors of cash flow we.

We continue to seek opportunities to acquire businesses that would be complimentary to our current portfolio.

Our recently acquired brands portfolio continues to see the impact of the pandemic and its impact on the retail sector in general in the short term this impact on the brands portfolio will continue to present headwinds. Despite these challenges we are optimistic about the long term earnings potential from this group.

Lastly, I want to Echo Brian's comments about our employees, who have taken their commitment to our clients and partners to a new level in response to covert Nike.

Despite appended working conditions and the need to do jobs differently. The dedication of our teams has not wavered and the results we're announcing today and our outlook reflects that.

With that we will open the line for questions.

Operator.

Thank you the floor is now open for questions.

I'd like to ask a question. Please press star one on your telephone keypad at this time.

A confirmation tone will indicate your line is in the question queue.

You May press star two if he would like to remove your question from the Q.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Once again that is star one to register questions at this time.

We will pause for a moment to review questions and we for people to come through.

Once again, ladies and gentlemen that star one to register questions at this time.

Our first question today is coming from Kevin Rendino of 180 degree capital. Please go ahead.

Thanks, Brian Great review on a great quarter for you and your team. So it's obvious you have your hands in a lot of different areas you scan the universe what types of opportunities do you see B. Riley being most able to take advantage of is there any one area that has a greater focus in the short term than others. Thanks.

Thanks, Kevin and thanks for the comments.

I think that's probably the biggest challenge we have that I've talked a little bit about it but if you look at the B. Riley financial platform, you have but we're doing appraisals on over a thousand companies and we're doing advisory on the 200 companies when cover 500 companies and then we have all the other touch points of wealth management et cetera.

Trying to harness that and and do the best job, we can in terms of.

Delivering products to our clients you know looking through acquisitions, and then and then you know really getting synergies between all the organizations is really the biggest challenge we've done and we've done a lot of work there on and tell tell or co. CEO is really an amazing job of putting together an internal network to take advantage of all those opportunity.

Okay. So I think as I've looked through it you know we will continue to build on the business that we have we haven't made a really large acquisitions since incidence.

That's right and maybe Magicjack was around the same time as you know, we're seeing a lot of opportunities in the principal investment side.

We made the brand investment, but the philosophy of really taking some of our episodic profits and growing those as we have and then funneling those into a more of a comfortable carrying revenue stream through opportunistic purchases I think is the number one opportunity we have and will continue to build on that but it's.

I'd say, it's a full time job and Tom mentioned, we brought on two new people one person from JP Morgan a one person Goldman which I think speaks to the opportunity that they saw just to internally find opportunities and make sure we're not missing anything so.

I think its a vague answer to your question, but but I do think though that what you'll see in the you know in the short term as some opportunities on the principal investment side, what we are really starting to see unique investment opportunities and purchase opportunities.

Thanks, Brian.

Thank you.

Once again, ladies and gentlemen that its star one to register a question at this time.

Our next question is coming from what's coming up to 72 capital. Please go ahead.

Hey, great. Thanks, Brian I was just going through the numbers over the past four quarters and when I look back over the trailing 12 months, if I normalize for operating EBITDA could normalize kind of barneys out to Q4 in the securities in Q1, I'm getting it right around 250 million of <unk>.

Operating EBITDA, even though you just started reporting that the share does that sound right to you.

Yeah, So west so I think the thing I'm going to be most excited about when we report Q4, as we will anniversary Barneys and we want us to talk about that one again, but thanks for bringing that up [laughter] Oh, we are yeah. So we have been very clear and you know I think we we talked everybody, but the loss we took them borrow.

Yes, I think that is a.

That is an example of probably more of an equity investment. We you know we took a big big bet on some of the work it wasn't super recurring so.

I think what you're saying is if you added back that loss and and then took the operating EBITDA for the last four quarters I think your numbers are if not then within a couple of percent that's right.

Okay. Okay, and then I mean is that a reasonable number to think about going forward I know you never like to to make projections, but I'm. Just just curious if that's one of the level we've reached out.

So you.

No I think that we feel really comfortable about projecting half of our business and so when you look at it.

So all of the recurring sides of our business as you know were sneaking up to 115 125 kind of annualized run rate and then you have the retail on the brokerage and.

Brokerage is up or.

Almost 60% year over year on EBITDA, and so does that continue I feel like we have a lot of momentum I feel like the you know the leadership in that group is doing amazing job of increasing our presence we've been doing this kind of small cap world for 22 years and you.

Now doing more mid cap and I think thats being appreciated so the opportunity set is as bigger and bigger well, having said that you know markets are cyclical and you know this is betting in the world, where you had coal they create companies needing to raise capital and investors you know given.

And some of those companies a bit of a pass given that dynamic and so I'm really good companies wanting to the markets and raise money, we were able to help them, but on the advisory side. The restructuring side you know the capital markets I know you know now doing.

Larger debt deals and in addition to our equity deals I feel really good about where we stand I think the base as a wheel base. So we'll see but but excited about next year.

Okay, great. Thanks appreciate it.

Thanks Wes.

Once again, ladies and gentlemen.

But its star one to register a question. Our next question is coming from Catholic why not focus partners. Please go ahead.

Hey, guys, Hey, great Great results, great to see all the all the progress you guys are making just you know Brian just to piggyback on West as question. There I mean, you guys are.

You know growing 90% EBITDA.

EBITDA on increasing the dividend and buying back stock and just looking at the market cap. I mean, you guys are trading kind of sub three times EBITDA for tremendous growth and a lot of tailwinds in your business and I guess I was just curious to get your take on how kind of the valuation of the company I know you're buying back stock and incentives are buying so maybe you prefer do kind of a.

[noise] lower share price, but you raising capital occasionally and then it seems like you know that the share price is pretty undervalued for further growth in the opportunities. So just would love your take on on how you see the devaluation of the company.

Oh, Thanks, So you.

You know we are word difficult company to put in a box. If you are if you want to play or invest in the capital market cycle. You know there are a lot of companies that have a very focused business and the capital markets or if you want to buy distressed purchasing maybe you you know there's some private equity firms are bdcs that may enable.

Will you to go invest in those types of things. So so we you know I I think it's hard to put us in a box I think it's hard to get analyst coverage on a company like ours, one because some of the companies that would five coverage our competitors.

And two it's a difficult again, it's just kind of a difficult company to evaluate you know what I would say.

You know with this quarterly dividend, we effectively in 2014 went public at $5 a share through the merger with Great. American we are I don't know Phil before above it but like a 490 something in terms of dividends returned to our shareholders.

And when I look at that measure and how we've returned yield between buybacks and dividends in the last six quarters, we returned $14 million roughly $30 million to $40 million every quarter.

Well, our shareholders and you know I think that to me I'd much rather have a business that you know is generating a lot of cash and we feel those undervalued than a business that was you know that we were.

It was overvalued or we didn't understand that so we're we're obviously, putting our money where mouth as you've seen multiple directors buys in multiple insiders buy you've seen us by almost 7% of our company this year and balancing that with dividends. So.

Well, we can do is grind and you know continue to look through the opportunities and continue to do what we think we're good at which is what we've done the last six years as being opportunistic around you know the principal side and sticking to our knitting on the on the broker dealer enhancing it with no acquisitions like you know like class right now I mean, what we havent.

You talked about as the real estate group, we started a real estate group to work in mostly liquidation types of situations in the beginning of the year from not from nothing because we hired a guy that is very well respected in the industry or partner with them.

And they're doing 17 mandates already I mean that you know, including JC Penney, which was announced so we have a lot to build on with lots of kind of a no ever game, but we also have a lot of opportunities I think to to buy so one long winded answer to your question. It's always hard that one yes management, so how they feel about evaluation, but I think.

We will be speaking with our pockets and and our dollars more than no more than anything else.

Yeah definitely well I appreciate the feedback and great to see the strong growth in the results and I'm sure the market well well start to pay more attention you guys continue to execute so thank you very much.

Well, we appreciate your interest thanks.

Once again that is star one if you have a question.

Thank you. Our next question is coming from Sean Haydon of Tipp Hill. Please go ahead.

Hey, guys I, congrats on a great quarter.

A quick question you might have mentioned this I hopped on in a few minutes late but I can you just talk about that a venture capital effort have you guys recently launched.

So Sean thanks.

Thanks for the question so.

I did talk about a platform in all the different opportunities that we see.

And you know venture capital, especially of later stage venture capital. If you think about the offering we can bring to a company that may be thinking about going public. So we that's all we've dealt with this smaller companies that you know maybe sub a billion a 500 million of gone public work, where public we have a lot of views.

I think a lotta.

Yeah, we don't know how to sing or Dan, but I think when it when it's you know when we talk about being a public company and how you think about that and how ya.

Discuss you know and communicate with investors that we've been doing it for a long time and so if we can utilize that experience in that skill set to find interesting investments and then hopefully those when those companies do go public we'll be able to help them you know the multiple.

Of capacity is whether it's an underwriting and investment banking and and so we had a we had someone then Todd Sims, who was on a board and as a long background in venture capital investing and you know we saw that as an opportunity to really and into that business. So that's that's the philosophy. We've got a couple already in the hall.

Further we've we've done a few in the past, but we're really going to take a look at seeing if we can expand this effort.

Great. Thanks.

All right. Thanks, Sean.

Thank you at this time I'd like to turn the floor back over to Mr. Reilly for his closing comments.

Well, thank you and thank you all the shareholders and and clients and most of all really appreciate.

All of our partners employees, it's been a it's been a crazy six nine months, but cannot you can't think of a better team to be in the Fox Paul that pit with and they say that sort of like when you get the just we are really thankful that all the.

On the partnerships we have so we look forward to reporting next quarter. Thank you.

Thank you ladies and gentlemen.

Before we conclude today's call I will provide b. Riley financial Safe Harbor statement, which includes important cautions regarding forward looking statements made during this call.

Statements made during this call by B. Riley financial future expectations plans and prospects and any other statements regarding matters that are not historical facts.

Constitute forward looking statements within the meetings of the private Securities Litigation Reform Act of 99.

Hi.

Investors should be aware that any forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These.

Risk factors include the unpredictable and ongoing impact of the COVID-19 pandemic.

As well as other risk factors explained in detail in the Companys filings with the Securities and Exchange Commission.

Please refer to these filings for a more detailed discussion of forward looking statements and the risks and uncertainties of such statements.

All forward looking statements are made as of today and except as required by law. The company undertakes no obligation to publicly update or revise any forward looking statements, whether because of new information future events or otherwise.

Thank you for joining us for todays B. Riley financial third quarter 2020 earnings Conference call you may now disconnect.

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