Q2 2022 B Riley Financial Inc Earnings Call
Good afternoon, and welcome to B Riley Financial's second quarter 2022 earnings call.
Euryale today issued a press release and presentation detailing its financial results for the second quarter of 2022 copies are available in the investors section of the company's website at IR Dot B Riley Finn Dot Com as a reminder, this call.
Is being recorded.
An audio replay will be available on the company's Investor Relations website later today.
Joining us today from B, Riley or Brian Crowley, Chairman co founder and co CEO , Tom Kelleher co founder and co CEO and Philip on C. F O N C O O.
After management's 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 to Mr. Brian Reilly Mr. Riley. Please proceed.
Welcome everyone and thank you for joining our call our results demonstrated relative strength in our platform once again, highlighting the ability of our non cyclical businesses to steadily performed despite a challenging market.
And lending perspective to how we view the markdowns on our investments it's important to understand that we've also experienced meaningful gains on our investments over the course of the past three years on.
On a cumulative three year basis from January 2019 to June 2022 securities in our portfolio generated returns of more than 90% to B Riley. Despite.
Despite current valuations our securities portfolio has consistently outperformed the Russell 2000 index in both Bull and bear markets and while we've given back some of those gains during 2022, the losses are mostly unrealized and correlate to market contraction.
Over the last year, we augmented our investments by increasing credit with a bad comp receivable book from which we are already realizing benefits as that book converts into cash.
The remaining portion of our portfolio consists of public and private small companies, including several long duration position that we hold with high conviction and have no intention to sell.
As we've explained in prior calls strategic investing has become a larger and more integral part of our business to create value for our partners and shareholders and a strategy that we believe truly different differentiates the b Riley platform from our peers.
Oftentimes the companies, we invest in a company that we provide services to be in investment banking financial consulting a real estate advisory services.
At the same time, we have made concerted efforts over the last five years to extend sources of steady and recurring income to balance the more cyclical episodic business, which are currently swell.
To put this in perspective over the last 10 quarters, we have earned approximately $17 per share for our shareholders, including the first two quarters of 2022.
We believe that we are delivering on our objective of increasing our recurring EBITDA the relative contribution from our less cyclical and less episodic businesses have meaningfully grown with the entire Riley platform generated $366 million of operating EBITDA over the trailing 12 months compared to $114 million of operating EBITDA in 2019.
With increasing contributions from less cyclical and less episodic businesses exceeding the capital needed to support our dividend. We continue to have flexibility to invest across all our businesses to that end. We are pleased to deliver our shareholders $1 dividend for the quarter.
Looking ahead, we are encouraged by the opportunity to increase that dividend capital markets return and become more normalized and they will normalize we have seen cycles like this many times over the course of B Riley's 25 year history, and each time, we have come out.
On the other side stronger than before recognizing we are in a highly variable and volatile business. We will maintain focus on diligent expense control, while utilizing our cash flows to continue to invest in and enhance our businesses.
Disruptive markets historically presented some of our most attractive opportunities to differentiate ourselves with clients attract top talent and to generate sustainable share gains across key business lines and we believe the current environment is no exception.
In short we are extremely encouraged by where we are today being able to generate the operating results that we did during another quarter without capital markets is extremely gratifying for us and since quarter end, we have recovered some of the investment losses that we reported as the market has come back a bit.
With over $200 million of cash and equivalents on the balance sheet, a significant receivables book converting into cash and debt maturities years away. We believe we have the flexibility to be able to capitalize on the many opportunities we see ahead.
Now I'll turn the call over to Phil <unk>, our CFO and COO to discuss financial metrics for the quarter and then Tom Kelleher co CEO , who will discuss our individual operating units before opening the line for questions over to you Phil.
Thanks, Brian .
On a consolidated basis total revenues were $42 7 million for the second quarter and $248 3 million year to date.
Net loss available to common shareholders was $142 2 million for the second quarter and it was driven by an investment loss of $223 9 million related to a decline in capital markets, which impacted the value of the company's investment portfolio.
Year to date investment loss of $292 3 million compared to investment gains of $299 6 million in the same prior year period.
In contrast, with the decline in our investment book, our operating businesses generated strong performance in the second quarter.
Excluding investments operating revenues were $266 6 million for the second quarter with operating adjusted EBITDA of $74 2 million.
Year to date operating revenues were $540 6 million with operating EBITDA of $158 4 million.
In our reportable segments capital markets includes results from our investments. In addition to operating results from our investment banking institutional brokerage and capital management businesses.
Excluding investment losses for the second quarter segment operating revenues were $129 8 million with segment operating income of $53 3 million.
Our performance was impacted by a decrease in investment banking and institutional brokerage activities that was consistent with the industry wide decline in deal activity.
Wealth management revenues were $62 4 million for the second quarter with a segment loss of $7 3 million.
The loss in this segment primarily related to the settlement of legacy regulatory matters for National Holdings that predated our acquisition in 2021. In addition to the overall decline in markets and its impact on client activity.
Auction and liquidation revenues were $3 9 million with segment income of <unk> 5 million for the second quarter.
As we have stated on previous calls results from this segment are variable due to the episodic impact of large retail liquidation engagements.
Financial consulting revenues were $24 3 million with segment income of $4 3 million driven primarily by bankruptcy restructurings.
Forensic litigation consulting matters. In addition to appraisal engagements and real estate dispositions completed during the second quarter.
Principal investments our communications and other segment revenues increased to $42 5 billion for the second quarter up from $19 6 million in the prior year period, primarily due to the addition of the Lingo communications in Martone wireless businesses.
Segment income was $7 6 million for the quarter.
Our companies and our communications segment, Magicjack, United online Marconi wireless and Lingo continued to provide steady cash flows to our platform.
Revenues in our brand segment increased to $5 2 million for the second quarter up from $4 4 million in the prior year period.
Segment income increased to $3 8 million up from 3 million in the prior year period.
Results in this segment relates to the licensing of trademarks for six brands portfolio.
As well our investments in early and Justice brands, which are recognized as capital market segment contributed income of $7 4 billion for the quarter.
As a reminder, adjusted EBITDAR metrics for operating investment results are non-GAAP financial measures.
Please refer to our earnings release for a definition of these terms and for a reconciliation to the nearest GAAP measures.
That's what you can also find additional details relating to these metrics and related reconciliation in the financial supplement on our Investor Relations website.
Now turning to some highlights from our balance sheet at June 30th B Riley financial had approximately $216 1 million in unrestricted cash and cash equivalents.
$1 1 billion in net securities and other investments owned.
And $778 million in loans receivable.
At quarter end, we had total cash and investments balance of approximately $2 2 billion, which includes approximately 49 million of other investments reported in our prepaid and other assets.
Net of debt B Riley financials cash investments totaled approximately $61 5 million at June 30.
Finally, we declared a second quarter dividend of $1 per common share.
Our quarterly dividend will be paid on or about August 20, <unk> to common stockholders of record as of August 11.
That completes my financial summary.
Now I will turn the call over to our co CEO , Tom Kelleher to provide an overview of our operating units.
Sure.
Thanks, Phil we'll not immune to the market deceleration, we continue to be pleased with the overall performance of our operating businesses.
As Brian mentioned, we remain confident in the firm's ability not only withstand periods of market austerity, but to find opportunities for growth with core capabilities in restructuring asset disposition in distress financing.
Confidence in our ability to support our clients amid disruptive markets.
Despite the current environment, our teams have made meaningful progress in both expanding existing portions of our business as well as consolidating recent acquisitions.
With the addition of focal point National Holdings, $2, 72 capital and Lingo as well as our recent investment to expand fixed income.
2022 has become a transformative year for B Riley financial.
With substantive integration activities behind us we are starting to realize synergies in these businesses and are looking ahead to other opportunities to accelerate growth.
Now I will walk through some of our highlights of our various divisions.
With Bureau Securities, having gained meaningful share in capital markets over the last few years, we sought opportunities to broaden our capabilities in M&A advisory and fixed income.
Earlier this year, we acquired Los Angeles based investment Bank focal point partners.
Focal points command of sponsor backed mid market M&A provides a platform with additional scale sector expertise and execution capabilities to support expanding our leadership position in small and mid market investment banking.
Since completing the acquisition in January we have consolidated FINRA licenses, which enables us to jointly market our combined services as a unified broker dealer, while realizing cost synergies.
Operating together allows us to leverage the relationships and execution resources of the combined groups to bring to bear the full breadth of capabilities to our clients.
During the quarter, we closed multiple seven figure advisory mandates, including apex innovative sciences certified collision group any carnallite group.
Notably we were also retained on a number of new restructuring mandates and based on the current level of market activity. We are seeing we expect this business to accelerate over the coming quarters.
With respect to capital markets opportunities remain selective.
We completed several financings during the quarter, including multiple debt raises private placements and follow on transactions.
In addition, we served as lead book runner on apply blockchain April IPO.
We also continue to actively engage and execute on behalf of a number of ATM and committed equity facility clients.
And our newly expanded fixed income division, Tim Sullivan and team are working alongside our banking and capital markets group to help clients address issues, including yield enhancement cash flow optimization market risk and interest rate volatility.
We are pleased to have the ability to provide our clients with an additional set of solutions and are encouraged with is this division's growth in a relatively short period of time amid a difficult market.
In wealth management. This past week, we formally completed the integration of National holdings into our legacy B Riley wealth business.
This is a significant milestone and represents a culmination of a challenging integration activities that began 18 months ago under the leadership of our wealth divisions co Ceos, Chuck Hastings, and Mike Mullin. Our teams have worked tirelessly to create a stronger foundation from which to build upon while at the same time, enhancing our compliance posture and remove.
<unk> risk from the platform to position us for future growth.
Operating under a single brand we believe the newly combined B Riley wealth business is well positioned as we continue to invest in building out the best in class wealth management platform for both our advisers and our customers.
Turning to B Riley adviser advisory services.
Our restructuring and turnaround management and forensic accounting litigation support practices continue to perform exceptionally well, providing stable revenues and profits to our platform.
In addition to strong performance B Riley continues to earn recognition for industry leadership, having recently won several awards for our team's exceptional execution in complex matters concerning turnaround management and specialty finance.
Among recent high profile matters, we served as chief restructuring officer to line three based services and a complex chapter 11 and related sales process, which resulted in the preservation of thousands of jobs.
We also participated as expert witness in the high profile trials, Johnny Depp versus Amber heard providing testimony on financial damages for Mr. Bill.
Our pipeline for related projects continues to build for the second half of 2022.
And our appraisal division performance remained relatively steady as financial institutions lenders and borrowers seek valuation services to support transaction financing and loans.
Our legacy appraisal division continues to serve as a stable rerecording reoccurring source of income quarter to quarter and year to year as well as the hub for referrals to other parts of the business.
We previously previously stated our intent to build out asset management, which resulted in our acquisition of $2 72 capital led by B Riley alone West Conference.
We're really pleased with the continued momentum this newly expanded division has had as part of the B Riley platform.
Western team continue to deliver great returns for our clients while successfully growing our asset base. The team is currently exploring the addition of new products and extending our marketing efforts globally.
Our B Riley real estate Division also contributed a strong quarter with several large real estate disposition projects for new and existing clients of our broader platform.
Notably, we recently led the sale of a sizable real estate portfolio for Babcock home furniture.
Which included 35 retail store locations and three distribution centers located throughout the southeast United States.
Our team sold the properties and approximately approximately six months through two separate sale leaseback transactions, which resulted in aggregate proceeds of $244 million.
Our real estate Division is another area of the firm that stands to benefit from the current market headwinds given our core expertise is in real estate restructuring and disposition.
And our retail liquidation and asset disposition division, we recently welcomed Tim Schilling as executive Vice President of B Riley retail solutions.
Tim is a veteran retailer retail advisor, who has worked with some of the most prominent retailers across North America and has led thousands of retail assignments over the span of his 20 year career.
While current activities remain low by historical standards rising interest rates and supply chain disruptions are putting pressure on retailers and we expect currency headwinds to result in more opportunities in both Europe and domestically in the back half of this year and into next.
As I mentioned earlier, we recently added lingo to our portfolio of communications companies with foreign principal investments through our acquisition of United online in 2016 and have since built and expanding portfolio of industry adjacent companies in the telecommunications sector, including Magicjack and United online Marconi wireless and now Linda.
Today, Our communications unit serves as a leading sources stable reoccurring income for our platform and an area. We continue to look for opportunities to grow.
To sum up despite the near term volatility that current market conditions is created in our investment book, we couldnt be more pleased with our underlying operating business and the opportunities they provide.
And as always we didn't do any of this without the dedication and hard work of all our call colleagues.
I think one at all.
With that we'll now open the line for questions and then turn it back over to Brian for final remarks.
Thanks.
Thank you we will now begin the question and answer session.
Wish to ask a question you May press star and one on your Touchtone telephone to join the question queue.
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Please press star and one for you.
We'll pause for a moment as callers join the queue.
There are no <unk>.
Thank you.
The skin great.
Alright, thanks, Thanks, operator real quick.
You.
I just wanted to mention.
Thank again as Tom then all of our new employees that are listening on the call.
Not getting questions is usually a pretty good sign people don't care about us in and if history is a guide.
After that we get some momentum last time, we lost money was Q1 2020 in the middle and the beginning of the pandemic and since that time, I think we paid $14 in dividends and.
Made a lot of money. So I think a question did come in so operator, if you want to open it up that's fine.
Thank you.
First question comes from Sean Haydon with Charles Lane Carroll. Please go ahead.
Hey, guys, sorry got it here late but.
Congrats on the quarter.
Had a question about just capital allocation here, it's great seeing the dividend as usual.
But.
Maybe you can just provide some numbers on this going forward do you have.
Any sort of a preference for.
Be it buybacks or kind of more M&A given depressed valuations.
In addition to the dividend.
Hey, Sean.
Obviously, we live in this world of.
Investments are we thinking about that all the time.
I think the.
As we look at all the things that that didn't happen. This quarter. I mean, you know underwriting business was $9 million in the quarter versus $385 million last year.
And to think that you know and to see that we still are profitable in our broker dealer, we havent closed.
We closed window in the middle of the quarter, we have not closed bullseye, which we think you know it.
Once it kind of gets going will add.
With synergies $15 million to $20 million of EBITDA.
We just got national and B Riley together, so that we think will run a little bit more efficiently focal point, which was very profitable last year is building up there.
It's building up their backlog so you know.
While we're proud of the operating EBITA that we had for this quarter. There was a lot of things that can meaningfully enhance that and so I don't know that we're going to have to pick one thing.
We feel really good about our cash flow to pay our dividends, we have no net debt for a business that generates this kind of operating EBITDA you can obviously leverage your balance sheet to buy stock and we feel good about making acquisitions. So I don't feel like we're hampered in any way I feel like you know we will.
We'll be able to.
Have a lot of opportunities if you look at the accounts receivable book for example, just to put some there's quite a bit of lucky or good.
We took a.
Hunk of money out of equities and bought a $400 million receivable book, that's returning roughly $30 million to $35 million a month, it's declining as a book get slower, but you know what a good place to hide some monarch money, while the markets were down and collect I think our most recent estimate is kind of a 30% IRR. So that money comes back to us So I don't think that.
We're we're sitting here going boy, we just let's let's.
Let's just pay a dividend and not thinking about a buyback I think all of those things are on the table.
No that's great to hear.
<unk>.
And then ill.
Ill focal point.
Without quantifying it just what what.
Does the restructuring business it looked like there is it.
Half the business or.
Cause that could pick up substantially in the coming months.
So yes it is.
Not quite half, it's less than half, what's you know maybe 2025% but don't.
Don't forget that the old glass Ratner business does it is a big part of their business is restructuring and then we have our own restructuring business that you know the Paramount Arena, that's been running for a few years and we're seeing activity pick up there.
Fixed income group benefits from you know from a little bit of distress, we think we're going to see some opportunities there. So.
I don't think I think.
Underwriting means a lot more to us from a size perspective than the opportunities of restructuring, but that's not to say that we're not we don't think we're really well positioned.
To give some mandates in and pick up from from where we left off.
In early 2020, where we're really starting to see momentum there.
Got it okay and just finally on National I know I asked this last time, but as far as the.
The payment for prior litigation.
Is that given like roll through eventually or is that just something that's going to kind of.
Exist here.
Oh are you, saying do we feel like the lytic litigate.
Litigation is behind us from from National Yeah, Yeah any liability there.
Look here.
We would.
You know we just merged.
The broker dealer, so I think that speaks to our confidence and we've made a lot of changes I mean, we've.
We think we have a high really high quality group of wealth managers, and we made decisions to in our opinion upgrade that meaningfully and that resulted in teekay, probably knows us better than me, but I would say 180, <unk> wealth managers, you know moving onto other other spot. So I think we're I think.
We're we feel good about where we are and no one no one benefits that we've had more recently as interest rates helped that business.
Money on your cash at our clearing firms so while theres not been a lot of activity in the underwriting side and it's been kind of challenging.
I'd estimate those eight ish million dollars a year in incremental cash on cash that we're getting versus last year. So if we can we can get a little bit of more of an active market and build on those.
Cash and cash dollars, we're getting I could see it being really nicely profitable with a smaller but better core.
Okay, Great. That's all I got thanks, guys and.
Congrats.
Thanks, Thanks, John I appreciate it.
Once again, if you have a question please press star one.
Next question is from Brad <unk>.
With Nicole MS Capital. Please go ahead.
Hey, Brian Hey, Brian .
Sorry, I have just a couple of clarification questions did I hear right $7 1 million from Hurley and Justice.
Are you asking about what the dividends were.
Well, yeah, well you had coming back to you and I then I wanted to understand make sure. The geography, you hadn't changed I think that goes in.
I mean, if you look at the if you look at the brands early injustice, we're talking about.
40, low 40 kind of run rate with Hurley and justice at $7 4 million for the quarter.
Okay, some form and where did that some forgo.
When you say where to go and just we get a dividend.
So yes, so it doesn't go in the brand segment. It goes and interest another I don't have the P&L in front of me right now.
We recognize that our capital markets.
Yeah.
Okay and has that been consistent hasn't always been the capital markets.
Yes, it's an investment out there correct.
Okay, Good and I only had one question Raj I hit Star one, Brian , but you generated two more for me.
Did I hear would the last.
Investor did you say underwriting went from 385 to 9 million what was that.
$385 for the year.
Two 9 million for the quarter, so an average of $95 million in.
But that's a 50 plus type of margin business that would pretty much be all incremental.
So $85 million last $42 5 billion or 50, I mean, it's maybe been a little bit higher. So I was just pointing out that I feel pretty good about our results. When we're dealing with these inputs that we haven't been very little control of its only who've lost market share. The market just stopped I think theres a lot of preparation that.
Goes into that at way ahead of time.
And I feel like that came back to us as a benefit here this quarter.
Great and then a last clarification.
Are you, saying that with the cash you have on the clearing firms.
Related to wealth management.
Did you say interest this year is on the 8 million higher run rate than last year just on them.
On the fed funds move so far.
So it's I would say as of right now so I think the last.
Certain hurdles and then you pick up and to get you to comment if you want if I get this wrong, but it's the last fed fund the last rate increase was a meaningful one we just got another one and that's the measurement. So I think on an annualized basis, we're about $8 million of 100% margin better than <unk>.
We were this time last year, Tom does that sound about right yes.
That's right.
Not to get too in the weeds, but we have two principal.
Clearing arrangements, one with fidelity and one with Wells Fargo.
And there are separate agreements.
Covenants whatnot, so the wells Fargo one kick.
Kicked in earlier at lower levels and that's one.
Referring to you've gone from a $1 million run rate to about $8 million run rate.
Right.
But more for the.
The other one that kicking butt.
But once it kicks.
Kitchen, much more quickly and the numbers will.
Accumulate much faster so.
Okay.
That's correct, Jamie was wealth management, where we're a lot of firms just lost.
Piece of income for years, and it was always kind of a free call on interest rates that we viewed it as a little bit of a free call and were finally after years of near a seeing a little bit of a of.
Of a benefit from that.
That's great and I just wanted to clarify that.
Is that $8 million before the 75 bps that the fed did yesterday or is that after no thats a run rate. So it might pick up a little bit, but I gave you sorry, if I wasn't more specific I gave you kind of like we look at it every day and I think the number as of right now is in around $8 million, maybe a little bit higher better than last year.
Okay, so but that would be before I don't think the fed funds kicked in yet from yesterday, so that'd be before the 75, but no I mean, we know I think we all know that fed funds were going to raise so we did that we did that math.
Five days ago asked for an update and included the three quarter basis point price.
Perfect. Okay. Thanks for the clarification and keep up the good work.
Thanks, Brett.
This concludes our question and answer session I'd now like to turn the call back over to Mr. Riley for his closing remarks.
Well I think I prematurely did that so I won't do it again I do we're really thankful for all our partners and our new partners and I think that we're going to come.
Come out of this market softness.
Really really well and we're really excited to do that so thank you. We will talk next quarter and we look forward to it. Thanks.
Yeah.
Thank you before we conclude today's call I will provide b Riley Financial's Safe Harbor statement, which includes important cautions regarding forward looking statements made during this call.
Statements made during this call about B Riley financial future expectations plans and prospects and any other statements regarding matters that are not historical facts may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
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 the other risk factors are explained in detail in the company's filings with the Securities and Exchange Commission.
Please refer to these filings for a more detailed discussion of forward looking statements ambience 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 today for B Riley Financial's second quarter 2022.
<unk> Conference call you may now disconnect.
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