Q3 2022 B Riley Financial Inc Earnings Call
Good afternoon, and welcome to B Riley.
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Cowen <unk> co founder and co CEO and the lab and CFO N C. O M. After management's remarks, we will open the line for questions and before.
Before we conclude today's call I want the necessary cautions regarding forward looking statements. As a reminder, this call is being recorded.
An audio replay will be available on the company's investor website. Later today I will now turn the call over to Mr. Bryant Riley. Please go ahead.
Thanks, and welcome to everyone joining our call. This afternoon are.
Third quarter results represent the underlying strength and continued versatility of our diversified platform. The investments we've made to augment our steady and recurring earnings have enabled us to deliver solid operating results despite volatile markets and amid the effective shutdown in capital markets over.
Over the past nine months, our platform has delivered operating revenues of 869 million and operating adjusted EBITDA $265 million.
During that same period, we have returned over $83 million to our shareholders in the form of dividends. While the recent market decline has created meaningful market to market losses. We think it is important to remind investors that this has come after a number of years of outsized gains many of which were realized and will utilize the diversify our operating businesses through opportunistic acquisitions.
We also use the last few years to fortify our balance sheet through the issuance of baby bonds with interest rates far below the current market and with meaningful remaining duration.
With that said underpinning our platform strategy is our commitment to return a portion of our excess earnings to our shareholders and we're pleased to deliver a third quarter dividend of $1 per share we recognize our business. It can be difficult for investors to model. We are not a typical broker dealer the composition of variability of our platform becomes more unique as we continued to diverse.
Diversify to balance the episodic and cyclical parts of our platform.
Our platform now has remained consistent and we will continue to be opportunistic.
Where opportunities present to that end, we recently announced three acquisitions, which we expect will further augment our steady and recurring earnings and cash flow in August we announced the addition of Bull's eye Telecom to a lingo communications subsidiary this acquisition expands our footprint in communication services in our overall portfolio of principal.
Investment companies.
In September we purchased an additional pool of performing receivables from bad got furniture based on the success of our initial receivables portfolio acquired at the end of 2021. This investment delivers on our state of mandate to expand our sources of steady cash flow, while providing a mutual beneficial outcome for our key relationships of our platform like FRG and.
Additionally, I think it is important to recognize that this first unlevered purchase of $400 million of receivables will not only result in strong returns, but it was also fortuitous as we monetize a portion of our equity assets at the end of 2021 with equities were much higher to fund. These purchases. We continue to be very pleased with this investment which continues to perform as this book.
Converts to cash on our balance sheet.
More recently, we announced our acquisition of targets, a leading laptop bag and tech accessory business targets is run by an exceptional operator, Michael Williams, who until recently served as a director on our board under Michaels leadership target has as right sized this business, while growing distribution over 100 companies with a large <unk>.
I'll turn the call over to fill on her CFO and CLO to discuss financial metrics for the quarter and then Tom Keller Coastie CEO will discuss our reportable segments and division highlights before we open up for questions.
<unk>.
Thanks, Brian .
For our third quarter ending September 30th.
Be Riley reporting total revenues of $344 million.
From $381 $5 million in the prior year period.
Total adjusted EBITDA for the quarter was $141 4 million compared to $114 $1 million in the prior year period.
Net income available to common shareholders was $45.8 million or $1 53 per diluted share.
As compared to net income of $48 $6 million or one dollar and 69 cents per diluted share in Q3 of last year.
Our third quarter results included operating revenues are $328 $2 million compared to $363.3 million in the prior year period.
Operating adjusted EBITDA was $106 2 million for the quarter compared to $101 $1 million in last year's period.
We also generated investment gains of approximately 12 million in Q3 of this year.
Which includes both realized an unrealized gains on certain strategic investments that we hold.
As a reminder, adjusted EBITDA and our metrics for operating an investment results are non-GAAP financial measures.
Please refer to our earnings release for a definition of terms and for reconciliation to the nearest GAAP measures.
Investors can also find additional details relating to these metrics and related reconciliations and the financial supplement on our Investor Relations website.
Tom will cover segment highlights in connection with his discussion of our business divisions.
And so now I wanted to provide some commentary on some of our recent acquisitions.
In August Arlindo subsidiary completed its previously announced acquisition of Bullseye Telecom.
The addition of Bullseye followed their acquisition of Lingo in May of this year.
And which we acquired and 80% ownership and a telecom services provider.
The Bullseye addition, augments our existing portfolio of communication services businesses.
I'll also providing or be arriving platform with an additional source of steady cash flow.
Just before quarter, and we acquired our portfolio of receivables from bad Con furniture for approximately $168 million.
This represented our second pull a purchase receivables and builds upon our prior receivables portfolio, which is generated attractive returns for us.
Our purchase of the second portfolio, representing $198 million of receivables.
Was financed primarily with a $148 million credit facility.
And which be robbing provides unlimited guarantee of $15 million.
Finally in October we announced our acquisition of targets and a transaction valued at approximately $250 million.
The deal was financed through a combination of cash and stock.
$85 $5 million in bank financing and in $114 million, a seller financing will be running bonds issued to the seller.
We're excited about targets and expect targets to be another strong cash flow generator for our be Riley platform.
We're excited about these recent acquisitions and I expect that they will all provide meaningful earnings and cash flow for our platform and ultimately to our shareholders.
Now turning back to our third quarter results.
Some highlights from our balance sheet as of September 30th include.
$232 million in unrestricted cash and cash equivalents.
$1.2 billion in net securities and other investments owned.
And $815 million in loans receivable, which includes are performing receivables portfolio and our loan book.
At quarter end.
Okay, the total cash and investments balance of approximately $233 billion.
Which includes approximately $46 million of other investments reported in prepaid and other assets.
Total debt as of September 30th was approximately $2 $32 billion.
Springer or cash in investments position net of debt to approximately $14 million a quarter and.
To be Riley Board has approved a regular quarterly dividend of one dollar per share.
Which will be payable on or about November 29th two common stock holders of record as of November 15th.
As well the board has approved an annual share repurchase plan under which be Riley may repurchase up to 50 million of our common shares.
That completes my financial summary, now I'll turn the call over to our co CEO Tom tell her to provide a segment summary, and highlights from our business divisions Tom.
Tom.
Thanks, Phil.
As financial conditions tightened diversified business is uniquely positioned to serve clients exceptionally well.
Embedded throughout our platform is core expertise in restructuring that refinancing direct lending bankruptcy advisory an asset disposition.
With demand for these services expected to increase we believe our counter cyclical businesses are poised for growth in the coming quarters.
At the same time stable performance across our non cyclical businesses continues to provide us a solid baseline with which to operate.
I'll now provide a summary of our segment results along with some color on the individual business units are comprised of our statements.
Starting with our capital market segment, despite lower levels of investment banking and underwrite activity third quarter segment revenues remained flat at $179 million.
Segment income increased to $124 million up from $88 million in the prior year period, primarily driven by increased interest income from loans and securities lending.
Revenue for be Riley Securities fixed income trading also increased during the quarter with rising rates translating the greater activity and.
In spite of market headwinds, we continue to be encouraged by her fixed income division and believe this group represents a significant growth opportunity.
In the same respect we remain encouraged by her growing banking advisory backlog buoyed by a number of focal point mandates, especially in healthcare.
Given this sectors relative immunity to challenging markets, we are investing to strategically expand this vertical with the recent addition of nine healthcare bankers from here on.
This group brings significant experience that deepens and expand their platforms existing health and life science expertise.
Combined with the focal point in the legacy be Riley team. We believe we now offer one of the strongest healthcare platforms and middle markets and we remain committed to investing in the best talent to serve our clients.
Seek to capitalise on the opportunities being presented by the evolving market landscape.
In our capital management business be Riley asset management, and 272 capital continued to gain momentum is part of our platform, while delivering strong returns for our clients.
We continued to expand marketing efforts, while growing our product offerings.
And wealth management segment revenues declined to 48 million for the quarter, primarily impacted by our strategic decision to part with a significant number of brokers and certain businesses previously affiliated with National Securities.
These exits along with unfavorable market conditions.
Resulted in reduced client activity and related declines in wealth assets under management to approximately $25 billion in September 30th down from over $30 billion in the assets at the end of the first quarter.
With this strategic Derisking and realignment, 50% of our wealth business today is reoccurring revenue.
As we look ahead and continue to invest in building a best in class management platform for our customers and advisors recruiting quality talent remains our top priority.
With modest momentum and our recruiting we believe our brand and wealth management is continuing to gain market recognition.
Turning to our financial consulting segments, which is comprised of be rally advisory services, and our real estate business third quarter financial consulting revenues were $23 million driven by sustained demand for valuations to services to support loans and transaction financing and our expertise in bankruptcy restructuring forensic accounting.
As the whole be Riley advisory services continues to generate stable revenues and profits to our platform.
In addition be Riley real estate completed several disposition projects, while supporting ongoing retail restructuring projects during the quarter, including the sale of a real estate portfolio for bad Cock furniture.
Interaction and liquidation segment revenues were $7 million for the quarter, primarily driven by ongoing projects in Europe and smaller liquidation projects in the U S.
As we have stated previously on calls results from this business are variable due to the episodic impact of large retail liquidation engagements.
While current U S liquidation activity remains lower be Riley retail solutions has started to see increased activity with momentum expected to continue into the 2023 as retailers begin to feel the economic pressure of declining consumer spend.
And our principal investments segment revenues increased to $78 million, primarily due to the addition of Marconi wireless lingo and Bullseye telecom.
On a combined basis or communications business continued to perform above expectations contributing reoccurring cash flow to our platform.
Revenue for our brand segment, where $5 million for the third quarter, which relate to the licensing of trademarks for our <unk> brands portfolio. In addition, our investments and Hurley and Justice brands, which are recognized in our capital market segment contributed dividend income of 7 million for the quarter.
2022 is proven to be another transformative year and be rallies 25 year history over the past year. We have made great strides to incorporate acquired businesses, while welcoming new colleagues to expand existing business lines or to support the formation of new be Riley divisions.
All the while our platform continues to demonstrate its resiliency and ability to deliver solid results and difficult environment.
None of this could be accomplished without our colleagues provide us the expertise in agility to capitalize on the opportunities being presented by a rapidly evolving platform.
Colleagues drive innovation throughout the enterprise every single day, and we could not be more thankful for their continued dedication.
With that we will now open the line for questions and then turn it back over to Brian for closing remarks.
Thanks.
If you would like to ask a question. Please hang up by pressing star.
Our one on your telephone keypad.
A speaker phone please make sure your immune function is turned off.
Returning equipment.
Once again that is star one if you would like to ask a question.
And while paused for just a moment, everyone an opportunity that signal.
The operator this is Mike Frank it looks like we're having trouble getting people in so I have a few email questions to get US started so Brian can you walk through the current recurring EBITDA as you see it.
You've had a lot of new acquisitions, and new pieces to the business that appear to be recurring so can you walk us through that one more time.
Sure, Thanks, Mike and apologize too.
To everybody for not getting the calls and you know we do watch her expenses pretty carefully made doing into uptick are expensive.
Sure.
So Mike let's go through I'm going to be a little bit more broad than you might like but I'll I'll try and get to the gift to the answer so.
The recurring EBITDA number that I'm underwriting too is approximately $322 million.
Just as a reminder to kind of get to our dividend.
Dividend all of our overhead.
Interest in all of those things, it's about $295 million. So so that 322 million comprises roughly $70 million in our telcom assets UL Magicjack credo when Goin' bullseye.
Advisory, which is the glass renner appraisal side of $23 million.
A couple of other smaller assets real estate capital management security lending of about.
17 million.
Our brands.
Justice early and that our BB business and then the other six brands. We owners is about 40 $44 million.
Target is I think we're underwriting to $52 million, that's what they did last year I think somebody some could argue that.
You know maybe that business would we are left with a little bit given the current environment, but I would I would let everybody know that fray cost them roughly $50 million of EBITDA last year and freight has come back too close to pre COVID-19 level, So I feel comfortable about $52 million.
And then interest income on loans receivables other interest adds up to about 110 will about $110 million.
So I think if you add all that up it comes up to 322, and then and then.
You've got to try and think through what the.
The Bureau of Securities businesses in the retail retail is starting to pick up we met a couple of announcements there. So I think you're going to see.
Pick up there that's averaged.
One to 2 million of EBITDA per month over the over a long period of time was a little less for the last couple of years as to whether the auto liquidations and then.
<unk> Securities. It's tough, it's really tough out there, there's not a lot of capital markets.
But I think that we've proven that when the markets turn and they do and the market's open we will.
Will be a big beneficiary. So you can put in whatever you want with lost money I believe one month in the last three years.
We've averaged.
Kind of EBITDA in and around $15 million a month.
So you I can underwrite that I don't know what's outside marks are but we are not we did not.
Take the enthusiasm that was out on the market last year and add meaningful to our meaningfully to our overheads. So I feel really really good about where we say.
Thank you and operator can you try to pull in the questionnaire that we have in queue.
Yeah, I'll take a question from Stanford with August partners.
Hey, guys How're you doing thanks, Thanks for taking the question and nice job navigating the environment.
Environment.
Yeah, and I I was going to ask along the same lines of the the recurring.
Alright, the operating income, but I guess the question I have on.
Capital market segment, it looks like that was stronger than than the first two quarters and even if you back out the the interest income it's in that segment I think Tom mentioned.
The fixed income desk was good but I guess any further color there on the on the <unk>.
Capital markets kind of picking up for the first two quarters of the year.
Yes, they are.
Where some stock related.
Income.
His face went public there where is.
Irregular way capital markets and some some positive.
Positive results in fixed income and just grinding it out I would say that and and fill if you want to speak a little bit more about this I would say the quality of our operating EBITDA was good.
But but you know it was challenging and it's challenging out there so.
I would tell you that.
Again, if anyone's going to go after the small cap companies and providing services and I can be a beneficiary. It's us we just I'm sure. Several you say it there's just not a lot of activity.
Yeah.
Yeah, no that makes sense.
And and then I guess you know looking at the at the principal investments segment.
I need to get the acquisition down there this quarter. It looks like the segment income was down to Vegas was there any one time kind of items and they're just from completing the the transaction.
So you want to speak to that.
Yeah, obviously, there was a big augmentation in terms of <unk> <unk>.
Comparative collapsed last year, we didn't have.
Yeah.
The four of Us operating.
Crito Marconi wireless Benjamin Uhm.
Mark Langdale Bullseye those words were not in.
So we did have some transaction expenses.
Also just as it relates to whenever we do require some of these businesses.
Simply tied in terms of masks.
We'll ramp up the integration.
So you know certainly I don't think.
First in the first quarter, it's not representative of what we think that the ultimate run radios.
Okay Gotcha is there.
Quantify I guess I think Brian mentioned that kind of 70 million dollar run right now for the brand segments I guess that's just.
Good number to use.
No no no no.
<unk> business is kind of you sign up brands footprints I'm, sorry, Yeah, I'm, sorry can principal investments.
You said 70 their prayer.
Principal investments.
$70 million for our telecom assets.
Maggie Jack Greenup Lingo bullseye.
Okay got it okay.
So that yeah, I mean that that normalizes for the one time expenses.
<unk>.
And then lastly on wealth management.
That I guess.
The last they're kind of where do you see that.
Going here and there.
I guess in the in the next few quarters.
Up and better we took.
We made some I think bold decisions to get the right people in place and.
Managers that we didn't think aligned with our philosophy or were.
It didn't make sense for us we made some bold decisions. There. So our assets are are down our brokers are down but we are really excited about the quality of the wealth management group the alignment they have with us the value that they bring as we look through distribution and other opportunities to.
Pushed through proprietary products that we think will be really exciting to those clients. So we we made some decisions based on the environment and based on having having that acquisition of national and for quite a while and we're really excited about the team.
Okay, Great sorry last question just on a buyback I guess any any color and how do you plan to implement that or is that just opportunistic.
Yeah, I mean, you know.
If I told you that we were going to do a certain price you might buy it ahead of us.
Be opportunistic.
Yeah, Yeah that makes sense, great well, thanks for taking the questions and get a nice job navigating a tough tough environment.
Thank you and congratulations getting through the operating system.
Uh huh. Thank you yes.
Thanks, Brian we have a few more E mail question. So can we go.
Go through a little bit more of the capital markets activity and just kind of highlight worthy stability is coming from more of the positives.
<unk> vocal bullet point doing maybe talk about the ATM business and maybe a step up from interesting confidence.
Sure.
<unk>.
For a long time are breakeven in revenues and our broker dealer has been in and around $10 million and.
Amongst and so that has not changed meaningfully and the way that we look at that consists of our ATM business that consists of our stock loan business and that consists of are regularly commissions.
And everything and then and then the plug is banking and I think the fair thing to assume on the plug.
And this again is pre focal point, so I'll get the focal point is in and around $5 million a month, a banking revenue in more breakeven and everything above that is 50% to 55% margin.
So if you look through our historical banking rates.
$300 million plus that's that's why we had such strong years.
You know to not do $15 million, a banking and a quarter feels.
Feels like that is very doable I suppose it could happen for a quarter or two but I think if it did happen we would you know.
Have a very very strong.
Period after that because usually when it's slow and it's slow for wallet and opens up and then it's really active. So we have maintained that discipline and will continue to maintain that discipline focal pulling that acquisition from every perspective other than timing has been great. So so do I mean by that obviously anything really.
<unk> two capital markets private equity ability raise money interest rates all of those things have been challenging so they've had a more difficult period, where they have lost a little bit of money we clearly.
Could you have bought the asset cheaper I I don't really know I, just know that we're really fired up for that group and they're fitting in perfectly and when we come out of this we will have a really robust M&A practice and one. Good thing is we are so we are getting super organized all the groups are ready to go and we are seeing more activity than I would have <unk>.
<unk> that I that I would've thought when we made the acquisition more pitch is more wins, we're just not seeing a lot of deals closed and I think that's I think that's all there is a lot of really good reasons for that so.
So a separate to what I said about.
The breakeven that's that's focal point and then fixed income we have two elements and I'll just call it.
New build out and then.
Some of the older fixed income assets, we have the new build out slow.
We are we've got we've added 22 people the grinding again tough market.
Some of our some of our other <unk>.
Political and fixed income have been really profitable and overall fixed income has been profitable so.
That's what I would say.
It feels very hard for us to lose a lot of money.
On the broker dealer and there is the incremental margin is super meaningful so I feel good about that and then I don't remember the other part of your question.
Interest income are we seeing a step up from that.
Higher rates.
So interesting interesting and I think something that I would point out too that I don't know that that people recognize we were pretty aggressive issuers of baby bonds.
And.
As rates have gone up those baby bond prices have come down.
We have a we will obviously our commitment to anybody who buys a barry bonds is we're going to build interest and we're gonna pay the principal now if the right Enviroment goes up and we're beneficiary of that.
I guess, that's that's positive for us so if we were to buy our baby Bonzer market.
There are 20% below where we issued a moral almost $380 million I would say part of that might be some noise out in the markets.
But there is a real part of it that's from from rates going up in those being a little bit less valuable role on a relative basis. So maybe there is $180 million of embedded opportunity. If we were to buy some our baby bonds on the open market I just think that's an interesting fact in an interesting asset.
As it relates to are we seeing are we able to put our money for.
Capital into higher rates, yeah that slow it takes a while I mean, it's not like we have one month loans. So a loan today that we are doing would probably be <unk>.
500 basis points more than alone that we were doing last year.
Got it and then.
Next one is regarding the loan receivable portfolio are there any metrics, we can share in terms of maybe how many borrowers makeup that portfolio. It seems like there's.
At least pretty good vote of confidence that we took on another saga of that so is there anything we can kind of detail.
Well.
So I think we highlight what we expect our IRR is R and each queue right. So.
It will be in the queue and what was the last one Phil.
Well, we get we highlight are.
I'll have them right here, we talk about sort of where our valuations on the assumption that we have on some of the private security.
You know what he's talking about these talking about backups receivable book.
Oh, Oh I apologize.
Maybe.
And come back.
I think we came out I don't know what I think it was also the quarters in and around 29% of Unlevered Irr's and the first basket second basket, we levered.
We do not get we guaranteed to be specific we brought about $160 million, we put down 20 some million dollars in equity we guarantee the lender $15 million of that $160 million. So we have $50 million plus our equity exposure and we would expect irr's over 50%.
Excellent good stuff.
And then just with respect to wealth management.
Are there any specific charges.
That went into this particular quarter or do you see any.
To cancel for any negative consequences from brokers that might have left the firm is there any way to kind of handicap.
Look I think operating EBITDA was a loss of $3 million in the middle of a nightmare market, while cutting 180 brokers and and integrating to broker dealers like not any of that bad I mean, that's not that's not the worst and we were making pretty good money and a better market. So now where we are as we are much more fully integrated we are getting a benefit.
From our cash on cash dollars at the clearing firms, where we get paid on our margin.
Execution of slow banking is slow, but we've got a really great base, where 50% of our revenues are recurring.
We just had a we had our.
Chairman Council in Arizona. This week with our top brokers everybody is I think really excited about being part of a smaller team with a lot more touch points from us and recognizing the markets are tough but.
But no I think that I think you're going to see.
Improving steady improvement and profitability.
All of next year is what I would say.
Great and then the last one I have is regarding the loan book.
Ask the receivables portfolio are there any matrix, we can disclose on.
Sort of you to the concentration of industries or companies and how do we get more comfortable with.
Yeah.
I'd say the that that piece is about 430 million and 14 13 or 14 loans. The average loan is 37 million. There is some that are bigger some that are smaller there is some that we never think about and there is some that we think about every other day I mean this is.
This is a chaotic environment and so we have some businesses that have benefited from it and there's some that are <unk>.
Grinding through it so I would say.
I, that's not as much color as I I would give you only because I'm not.
I think that tells it all this is this is this is.
You know, it's it's an interesting environment, but I feel good about like we have outside Valuator is that come in and every quarter. They look at those loans and I feel really good about the overall book, but every every every portfolio you have whether it's a stock portfolio that portfolio, some real easy ones and some harder ones and that's the environment. We're in.
Excellent.
Wraps up the questions that you'd like to.
Add some closing remarks.
Thanks, Mike and I again, I apologize for the Q&A mix up.
You know I would just say that it is.
It is fun to be an environmentally 2021, where you're just trying to keep up with the amount of deal flow and everybody's.
Everybody Super active and it's exciting but it's at these it's times like this where our competitors don't have are diversified revenue stream and don't have a diversified EBITDA stream and we can invest in people. We can invest in deals we have a lot of liquidity for companies out there that may need some.
Capital for an acquisition or for whatever and we have capital capital is hard to have and we think that's going to create a lot of opportunities for us. So we appreciate everybody's interest.
We look forward to talk to you next quarter and for all of our partners financial the subsidiaries. We thank you for all your hard work and.
Look forward to talking to everybody. Thank you everyone.
And can be finally conclude today's call. It will provide a beaver island financial safe harbors statement, which includes important cautious regarding.
Constant regarding forward looking statements made during this comp.
And its main during this call about be Riley financial future expectations plans and pass backs and any other statements regarding matters that are not historical facts may constitute forward looking statements within the meaning at the private Securities litigation reform at 1999.
And bastards.
Should be aware that any forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materiel leaf in Dallas discussed here today.
These risk factors.
Mmm. These risk factors include the unpredictable and ongoing impact the COVID-19 pandemic as well as the other risk factors explained in detail in the company's filings with the Securities and Exchange Commission. Please.
Please refer to these filings for a more detailed discussion and forward looking statements and the risks and uncertainties at such statements.
I'll forward looking statements are made as of today and accept it.
Except as required by law that company undertakes no obligation to publicly are revised any forward looking statements.
New information.
Events or otherwise.
Thank you for joining us today for be Riley financial third quarter of 2022 earnings Conference call. You may now disconnect.
Yeah.
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