Q2 2023 B Riley Financial Inc Earnings Call

Your line is muted.

Good afternoon, and welcome to B Riley Financial's second quarter 2023 earnings call. My name is David and I will be your call coordinator.

This afternoon B Riley issued its second quarter earnings release, and financial supplement copies can be found on B Riley's Investor Relations website at IR Dot B Riley Finn dot com or on the right side of your screen. If you are joining us today via web.

Today's call includes prepared remarks from the company, which will be followed by a question and answer session with the management team joining us today from B Riley Our Bryant Riley 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.

If you'd like to ask a verbal questions. Please press star one on your telephone keypad with the raise hand icon on the right side of your deal Roadshow screen to enter the queue written questions may be submitted anytime via the ask a question button on your deal Roadshow screen.

As a reminder, today's call is being recorded and an audio replay of this call will be available later today. Finally before we conclude today's call I'll provide the necessary cautions regarding forward looking statements now I will turn the call over to Mr. Brian Reilly. Mr. Riley you May proceed.

Thank you for joining our call. This afternoon on a consolidated basis, our platform delivered solid results for the second quarter, we saw meaningful year over year increase in revenues. Despite another period with nominal contribution from investment banking.

With a more favorable market environment momentum is carrying into the current quarter with increasing levels of client activity across capital markets retail liquidation consulting and appraisal.

In the month of July we closed more investment banking transactions then during all of the second quarter and we've since added several new and current engagements to our pipeline.

Retail liquidation has picked up both in the U S and in Europe and demand for our financial Advisory and appraisal services continues to be strong.

Capital markets conditions continue to improve wealth management should also be poised to benefit.

Based on where we are today relative to our Q2 results. We are reaffirming our prior guidance, we expect to generate operating EBITDA of at least $105 million in the third quarter.

To be clear this guidance represents a floor based on where we are today to the extent the current level of activity continues we believe there will be additional upside from capital markets.

Over the last three years, we have remained focused while continuing to execute our strategy I've said this before and it bears repeating none of this is by accident. We have carefully constructed our business with a highly skilled team of professionals, whose leadership allows us to be nimble in challenging markets and to be ready when conditions turn based on recent activity, we believe our business.

Is that a near term inflection and we are well positioned to capitalize on our momentum.

With the current tailwind in banking liquidation, we will press the offensive and utilize our balance sheet to pursue opportunities we see across our platform.

This includes supporting our clients and their strategic and capital raising initiatives as an underwriter or lender, adding new talent and businesses to support our existing teams, while expanding core services in new markets, and making opportunistic investments to enhance our platform while continuing to diversify sources of steady recurring earnings we're extremely encouraged.

It's about where we are today and for our outlook relative to the opportunities ahead with that I will now turn the call over to Phil <unk>, our CFO and C O O to discuss key metrics for the quarter Phil.

Thanks, Brian .

Now recapping our results for the second quarter of 2023.

On a consolidated basis, our total revenues increased to $406 million in the second quarter up from $140 million. During the three months ended June 2022.

Net income available to common shareholders was $44 million or $1 55 per diluted share.

Our operating revenues increased by 41% to $364 million up from $257 million in the prior year quarter.

Operating adjusted EBITDA increased to $80 million compared to operating EBITDA of $74 million in the prior year quarter.

Increased revenues from our financial and consulting and our auction and liquidation segments were partially offset by decreased investment banking and wealth management fee revenues as a result of overall lower capital markets activity during the quarter.

The additions of Lingo in Bullseye telecom to our communications portfolio and target to our consumer brands portfolio last year also contributed to a significant increase in revenues during the quarter.

On a consolidated basis. Our total revenue was also enhanced by $42 million in investment gains for the second quarter, reflecting both realized and unrealized gains and losses on strategic investments that we hold.

Okay.

As a reminder, adjusted EBITDA in our metrics for operating investment results may be considered non-GAAP financial measures.

Investors can find additional details relating to these metrics, including a reconciliation to the nearest GAAP measures in our earnings release and financial supplement.

Okay.

Turning to a summary of our balance sheet at June 30th.

At quarter end, we had approximately $108 million in unrestricted cash and cash equivalents.

1.87 billion in net securities and other investments owned at fair value.

And $684 million in loans receivable at fair value.

Total cash and investments.

It was approximately $1 92 billion, including $66 million of other investments reporting in prepaid and other assets.

Total debt as of June 30 was approximately $2 33 billion.

And total debt net of cash and investments was 406 million at quarter end.

Yes.

Finally, and as previously announced we declared a regular dividend of $1 per share, which will be paid on or about August 20, <unk> to stockholders of record as of August 11th.

This completes my financial summary, and now I'll turn the call over to Tom Kelleher, our co CEO to discuss our business segments Tom.

Thanks, Phil we remain encouraged by our overall performance in the current momentum we are seeing across our diversified platform.

As Brian referenced B Riley Securities has seen directional improvement in the current period with strong investment banking results in July both in terms of completed transactions and new and near term engagements.

Additionally, current market dynamics have created a favorable environment for recruiting as we look to strategically grow in verticals, where we see opportunity.

During the quarter, we added multiple experienced hires to our banking and equity research teams and meaningfully expanded our coverage across the consumer and TMT sectors.

Our newly expanded consumer team is looking forward to hosting our consumer conference in New York next month.

In wealth management revenue production remained solid during the second quarter, despite muted capital markets, while legacy settlement costs and integration challenges at <unk>.

<unk> historical operating efficiencies. This was a pivotal quarter for the business gross margin has improved substantially and monthly fixed costs are down we have achieved a meaningful amount of annualized savings, while significantly reducing risk associated with legacy issues.

Having met our goals to rightsize the business, we can now look forward and focus on growth.

Our current adviser base as a balanced mix of W. Two and independents and more than 50% of our revenue is reoccurring.

We believe there is an opportunity for more upside in this business as capital markets activity improves and we are continuing to focus on recruiting high quality advisers with sophisticated clients to join our platform.

In auction and liquidation we saw a significant influx of large retail engagements, which contributed to increased revenues of $10 6 million during the quarter.

The majority of our domestic profit for Q2 was from ongoing projects that we initiated earlier this year, including Nordstrom, Canada and store closures for bed Bath <unk> beyond which have continued into the current quarter. In addition, we continue to see substantial activity in Europe . During the quarter. We finished up projects in Germany, and Ireland for Gamestop, which included.

121 stores more recently, we started a large engagement with salamander, which includes over 130 stores across Germany, Austria and Hungary.

And this past week, we signed an engagement with depot, Germany, which includes over 100 stores.

These projects should contribute meaningfully to our results in future quarters, and we expect to see more activity in the remainder of this year given the continued constraints across retail.

In financial consulting B Riley Advisory services experienced another record quarter in Q2 with momentum continuing in Q3.

Revenues from this segment increased by 28% year over year to $31 million up from $24 million in the prior year quarter.

Segment income increased to $8 million up from $4 million in the prior year period.

Demand for bankruptcy restructuring and litigation and advisory services remains strong following early successes from the addition of Farber to our platform. This past February we recently completed two more acquisitions to strategically enhance our business.

In May we acquired a B T V and in the process added a team of senior restructuring professionals based in Charlotte.

This team quickly hit the ground running and is already working alongside our existing team and in July we acquired Crawford and when they are ski a boutique forensic accountancy and litigation support practice, which gives us a significant presence in Detroit, where we already have an established restructuring in practice.

Our appraisal division engagement capacity is fully utilized we are looking to increase staffing levels to support growing appraisal needs for asset based lenders.

We're also continuing to focus on building our field exams group, which has seen early success since introducing this is a new service line. This past February .

Bringing on these highly skilled professionals not only provides incremental value to our existing team and clients, but also breaks ground and new markets for our other B Riley divisions.

Our new colleagues have been enthusiastic about bringing the breadth of our platform to their clients.

In our communications segment, our portfolio of businesses continues to perform to our expectations, while contributing meaningful earnings to our platform on a combined basis. These businesses generate segment revenues of 85 million and segment income of $10 million for the quarter.

The significant increase was primarily driven by the acquisitions of lingo in Bullseye Telecom in May and August of 2022.

Finally revenues from our consumer segment were $60 million for the quarter largely driven by targets, which was acquired in Q4 of last year. In addition to the brand licensing related to our six business portfolio, which continues to perform relatively steadily.

During the quarter, we expanded our brands investment portfolio through the purchase of a minority equity stake in Dutch fashion brand Scotch <unk> soda in connection with Bluestar Alliance's acquisition of the brand out of bankruptcy.

The structure of this investment is similar to our other co investments with Bluestar, including Justice and Hurley, which have generated meaningful dividend income for the platform since our initial investment.

[noise] Bluestar will continue to operate discussions soda brand, while expanding its retail distribution.

Given the relative strength across our business and our outlook for the current quarter. We remain extremely encouraged as we looked at the many opportunities ahead.

We recognize that our diversified platform is unique but what truly differentiates b Riley is our team of dedicated professionals, who contribute to our continued success.

As always we are indebted to them for their commitment to making their firm what it is.

With that we will now open the call up for questions before turning back to Brian for closing remarks.

Operator.

Thank you gentlemen, Lady.

Ladies and gentlemen at this time, we will conduct a question and answer session. If at any point you would like to submit a written question click on the ask a question button on the upper right of the Euro deal Roadshow screen and typing. Your question if you'd like to ask a live question. Please press star one on your telephone keypad to enter the queue. If you have joined via web. Please press the race handle.

Icon on the right side of your deal Roadshow screen will pause briefly to allow any questions to generate.

So operator, we have a.

And E mailing question I can just ask real quickly.

If we can provide an update on the franchise group acquisition.

Thanks, Mike So.

Franchise group should.

Their shareholder vote is the 17th.

And then we will close shortly thereafter.

August 17th so about a week and a half.

Operator, if you want to open up for questions Thats great.

Understood. Thank you. Our next question comes from Sean from Charles Lane Capital. Your line is open.

Hey, guys congrats on the quarter.

Real quick question on wealth management, how far along are we in terms of the rational rationalization.

I know this has been kind of an ongoing process.

Would you say Randall lakes during our third day.

T J you want to answer that since you've been kind of more involved.

Sure Yes.

I would say we're in the eighth inning, eight eight or ninth inning, you heard the prepared remarks, it's really this quarter that kind of seemed like we turned the corner.

We changed the name earlier in the year last year was clearly a kind of a triage here two large groups coming together to completely.

Different systems that support those businesses and all the nuances that go on there and it just took some time to really sit through but.

Really in the last couple of months it feels like.

A lot of the <unk>.

Some have been normalized a lot of the personnel issues all of that stuff that kind of goes with a large acquisition.

Really we've kind of had been normalized so.

In the past it was always about trying to figure out what we're going to do with this system, where these individuals are how we're going to manage that now. It's all the discussions are how are we going to grow this business, how do we attract new talented people to come to the platform.

Let's show them, what we've done how we do things and get them excited about the platform. So.

We're excited.

Yes, Sean the other thing I would say on that is that.

If we're not if we're not experiencing much of a capital markets environment that means the wealth managers are experiencing.

The same and it's just a bit tighter for them and it's a bit tighter for us.

We really view those wealth managers as partners. So if we can breakeven.

It was a really really tough environment.

That's fine with US and then we will partner with them as things improve whether that's in private shares or whether that's the right way kind of markets or whatever so we feel really good about how that business is position I think we feel good about the partnerships. We've built with the wealth managers I think they are onboard and excited about what we bring to the table.

How are you kind of front ran my second question.

So there was a more buoyant market.

In the second quarter there.

Do you guys expect.

Segment breakeven.

Breakeven.

I guess on an income basis this year next year.

Should we be modeling as far as I think you should be modeling I think you should be modeling a breakeven if there is a.

I am very core capital markets environment, and then making somewhere between $2 million to $5 million a quarter. If it's a robust operating environment. It's not we don't have the same leverage that we have and.

And our and our regular way institutional business, so youre not going to see that wealth management business generate $40 million EBITDA on the revenue base. It has but I would say I would flex it from zero to 20 based on the overall environment.

Okay.

Is there an example.

Scott.

I assume that's going on to the consumer.

Great.

How should we think about that in terms of sizing that.

Roughly the same size as currently and justice or.

No.

We bought a smaller percentage of that one for a number of reasons. So.

I think Scott Ginn soda ultimately can generate for us.

Maybe $3 million to $5 million of incremental EBITDA, where our justice and Hurley combined.

Over in and around 30, so it's a smaller asset, but we think the hours are going to be well over 30%.

Got it and Thats just margin for you're right that just dropped out.

Yes, we don't that.

That is dividend income so that.

That is free cash flow yes.

Okay. It makes sense.

And then.

Tom called out a number of engagements in Europe .

This past quarter.

It seems like that's.

Gaining a little momentum.

There that you can attribute that to.

I mean, I think it's actually gaining a lot of momentum.

Yes, I think the goal in businesses like.

Liquidations or businesses like capital market is to be investing in it when it slow be aggressively marketing one it flows so when it turns you are.

Creating opportunities and that's what's happened there we have been.

<unk> got a great team, there and they've been in position and been working hard for when there were opportunities and now theres opportunities and I think their market share is probably.

I don't know its high and so it's exciting and that's that's the mantra I mean, we don't sell in those businesses. It's not like we're selling widgets and we've got a ton of backlog <unk> got to be ready for it when it happens and you never know when it's going to happen and I think they've done a great job of positioning ourselves, it's not a big group, we don't burn.

No a lot of capital one.

100 people, it's a much smaller and targeted group that are super talented and now that there is.

It's been a little bit of distress in European retail, we are a beneficiary of that.

Makes sense, alright, well thats all I got thanks, guys alright. Thank you.

Thank you Sean.

Once again, ladies and gentlemen, if you would like to ask a live question. Please press star one on your telephone keypad in order to enter the queue. If you have joined via web. Please press the raise hand icon on the right side of your deal Roadshow screen or if at any point you'd like to submit a written question click on the ask a question button on the upper right of the deal Roadshow and type in your question.

Our next question comes from Steve from Wisconsin, <unk> strategic advisors.

Your line is open.

Hi, guys Congrats on FRG and I'm sure you can turn it around.

My first question is just on rolling the debt coming due soon given the tick third cash level.

I think in May is 24, you have $199 million baby bond coming due so do you plan to roll that by raising more.

No we don't plan on rolling with $1 $9 billion investments of quarterly cash number.

As a period of time, we do not want to have a lot of cash we want to be having $30 million of investments over in European liquidations, we want to be having the highly profitable loans. So.

That period for example, we have been repaid $70 million of our loans. So we will continue to utilize our balance sheet, but we will.

We will use the assets of our balance sheet.

To pay our debt.

Got it Okay, and then maybe just stepping back just a refresher on the asset management business.

AUM level is the client base retail institutional what's the base of clients and the investment strategy and personnel I know you have web content, whereas the number half for you guys. So just just like kind of a high level walk us through the asset management business again.

Institutional $250 million.

Long short hedge.

Five people.

Got it okay. Okay.

Thank you Steve.

Once again, ladies and gentlemen, if you would like to ask a live question. Please press star one on your telephone keypad, whereas you've joined via web. Please press the raise hand icon on the right side of your deal Roadshow screen.

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Our next question comes from John from Nuveen asset management.

Hey, Brian It's John Basi.

Obviously, the prospects of bitcoin and core scientific have gotten a lot better can you provide a bit of an update on <unk>.

Yeah kind of the prospects, which seem to be looking much better and they've obviously filed some plans as well.

Sure and just I forgot on the previous call or we paid down $60 million of bar.

Riley OS early so that we actually have a $140 million outstanding just.

To be clear.

So on encore, we have to.

Assets, we have the depth and we have a our sub debt.

So the debt has been paid down I think it started at 35.

$536 million has been paid down to 15, I would imagine given where bitcoin prices are the dip will be.

Gone by the time they exit bankruptcy.

The sub debt. We have is obviously part of our filing and part of the negotiation between all of the constituents of core and given.

The cash flows that tour has.

Estimated and and are working through on the restructuring we believe that that sub debt will be money good.

Certainly it certainly seems that way or direction. So, it's obviously very positive for them.

Where we were before and part of that whole short report that came out as well.

That's good news.

Yep. Thank you.

Thank you John .

Once again, ladies and gentlemen, if you would like to ask a live question. Please press star one on your telephone keypad to enter the queue. If you have joined via web. Please press the raise hand icon on the right side of your deal Roadshow screen or if at any point you'd like to submit a written question click on the ask a question button on the upper right of the deal Roadshow and type in your question.

Okay.

Okay, well operator, I think we're good. Thank you everybody for joining us on the call. We're excited obviously about the macro we think that our team has done a really good job through a difficult.

Period in our more episodic businesses, which.

Both of them are starting to see a lot better environment. So we're enthusiastic about that we appreciate everybody's support and we will we will keep working hard to deliver strong results. Thank you very much.

Thank you Mr <unk>.

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 that are not descriptions of historical facts are forward looking statements that are based on management's current expectations and assumptions and are subject to risks and uncertainties.

Such risks or uncertainties materialize or such assumptions prove incorrect our business operating results financial condition and stock price could be materially negatively affected you should not place undue reliance on such forward looking statements, which are based on the information currently available to us and speak only as of today's date.

Such forward looking statements include but are not limited to statements regarding our excitement in the expected growth of our business segments factors that could cause such actual results to differ materially from those contemplated or implied by such forward. Looking statements include without limitation. The risks described from time to time and B Riley Financial Inc.

The Arctic filings with the SEC, including without limitation. The risk described in B Riley Financial Inc. Annual report on Form 10-K for the year ended December 31, 2022 under the captions risk factors and management discussion and analysis of financial condition and results of operations as applicable.

Additional information will be set forth in our quarterly report on Form 10-Q for the quarter ended June 32023. These factors should be considered carefully and participants are cautioned not to place undue reliance on such forward looking statements.

All information is current as of today's call and B Riley Financial's undertakes no duty to update this information.

Thank you for joining us today for B Riley Financial's second quarter 2023 earnings Conference call you may now disconnect.

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