RILY - NASDAQ

Good afternoon and welcome to B. Riley Financial’s First Quarter 2023 Earnings Call. My name is Harry and I will be your call coordinator. Earlier this afternoon, B. Riley issued its first quarter earnings release and financial supplement. Copies can be found on B. Riley’s Investor Relations website at ir.brileyfin.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 to be followed by a question-and-answer session with company management. Joining us today from B. Riley are Bryant Riley, Chairman, Co-Founder and Co-CEO; Tom Kelleher, Co-Founder and Co-CEO; and Phillip Ahn, CFO and COO. After management’s remarks, we will open the line for questions. [Operator Instructions] As a reminder, today’s call is being recorded and an audio replay will be available on the company’s Investor Relations website later today. Finally, before we conclude today’s call, I will provide the necessary cautions regarding forward-looking statements. Now, I will turn the call over to Mr. Bryant Riley. Mr. Riley, you may proceed.

Thanks, operator and welcome everyone. Our first quarter results again demonstrate the versatility and resiliency of our platform. During the first quarter, we generated total revenues of $432 million, including operating revenues of $380 million and $80 million of operating EBITDA. To deliver these results in a period with minimal contribution from our episodic businesses, which historically served as our largest profit drivers, only validates our strategy. This was not by accident. We appreciate the markets we serve are volatile. Over the past 5 years, we undertook several initiatives to further enhance and diversify our platform and generate an excessive amount of cash to fund our business model. We made a series of strategic acquisitions and expanded our sources of steady and recurring earnings to further insulate our business from any downturn in capital markets like the one we are seeing today. The benefits of this strategy were highlighted by a quarter and by the fact despite the lack of large banking and retail liquidation deals during the quarter, we continue to generate enough free operating cash flow to cover our dividend, our overhead, our tax and our interest requirements. This strategy allows us to play offense while others are contracting. For example, in Q4, we made a large push to expand our middle-market health care service practice, which is already beginning to bear fruit. In February, we brought on a team of about 45 professionals from Farber to complement our advisory services. And we recently announced several senior level hires in consumer and have also boosted our TMT business with multiple senior hires that will be announced shortly. Tom will expand on this a little bit more, but this is taking place across all our businesses, and we continue to invest to grow our talent base in line with client demand. As we look at our strategic equity investments, the equity markets continue to prove challenging. In contrast, our loan book is benefiting from stressed environment for lenders and creates a multitude of opportunities for us. As it relates to our balance sheet over the last 1.5 years, we have shifted a meaningful amount of our investments into our loan book, and we believe that this is not only opportunistic but also benefits our clients in a number of ways. A recent example of this strategy is Hero Health. We provided Hero with $60 million in debt financing in January to support an acquisition and previously helped the company raise $65 million as lead bat book letter and its equity and not its offering in December. This fully backstop commitment of $125 million helped to finance this acquisition, and our loan was repaid in full in March. This is just one example of how we’ve utilized our balance sheet to partner with our clients and enable their continued success. As we mentioned last quarter, we are providing a little more detail on our loan portfolio, which you will see in our quarterly supplement. At the end of 2022, we had 12 companies in our loan portfolio, which was fair valued at approximately $380 million. This excludes our Adcock Furniture receivables portfolio and a few smaller loans at less than $1 million at fair value. Since year end, 2 of those 12 positions were closed out and repaid in full. We invested an additional $112 million across 5 new loans during the quarter, of which $65 million was repaid within the quarter. At quarter end, our loan portfolio was valued at approximately $448 million across 14 companies with an average loan size of approximately $34 million. Our combined bank cot furniture receivables portfolio was valued at approximately $320 million at year-end, of which we expect 8% to be paid down every month. During the quarter, we made an additional investment in our receivables portfolio. We continue to see performance in line with our underwriting with 25 plus rates of return. Regarding our unleveled purchase of the first portfolio, as of March, we have recouped our initial investment of $400 million and today have an incremental $112 million of current receivables. We expect to generate unlevered IRR of greater than 25%. The second portfolio that we purchased in partnership with Pathway Capital using leverage is performing in line with our expectations. The debt associated with that purchase stood at $176 million and will be paid down rapidly as receivables are collected. We expect to have a levered IRR of over 40% on this portfolio. As the general lending environment tightens and market volatility and distress continue to accelerate, we are well positioned to deliver value to our clients, both in a capacity as a lender and as a strategic adviser to the company is navigating a restructuring and distressed situation. And while we are opportunistic, we remain diligent about our capital allocation and assessing the various opportunities being presented by the current dislocation of markets. For example, we participate in Bluestar Alliance’s recent acquisition of Scotch & Soda, which is a men’s clothing brand. This investment builds on the success of our longstanding relationship with Bluestar and enhances our existing brands business, which has generated meaningful returns for us since its inception on our platform in late 2019. Similar to our prior co-investments with Bluestar, which included the Hurley brand, the Justice brand and our Six brands portfolio, Bluestar will continue to operate the Scotch & Soda brand while expanding its distribution strategy and introducing the brand of new consumer demographics. As we look ahead, we see many opportunities to capitalize on the dislocations being presented by the current market environment. We recognize and appreciate that our story becomes a little more complex as we further diversify our platform. However, we remain steadfast in our approach and in our commitment to deliver for our colleagues, clients, partners and shareholders. With that, I will turn the call over to Phil on, our CFO and COO, to discuss key financial metrics for the quarter. Our Co-CEO, Tom Kelleher, will discuss results from our business segments before we open for questions. Phil?

Thanks, Brian. For the first quarter of 2023, Brian reported net income available to common shareholders of $15 million or $0.51 per diluted share. Income before taxes was approximately $24 million. Total revenues were $432 million for the first quarter of 2023. This represented a 75% increase compared to total revenues of $247 million in the prior year period. Total adjusted EBITDA increased to $95 million, up from $41 million in the prior year period. Excluding investment gains and losses, operating revenues were $381 million, which represented an increase of 43%, up from $266 million in the prior year quarter. Operating adjusted EBITDA for the quarter was $80 million, down slightly from $84 million in the prior year quarter. Our quarterly results were enhanced by our recent acquisitions, including Lingo and BullsEye Telecom, which we acquired last May in August, respectively, and Targus, which we acquired in October of last year. These additions to our platform served as an offset to the slowdown in the investment banking and equity capital markets. As a reminder, adjusted EBITDA and our metrics for operating investment results may be considered non-GAAP financial measures. Investors can find additional details relating to these metrics, including reconciliation to the nearest GAAP measures in our earnings release and financial supplement for the first quarter. Now turning to highlights from our balance sheet. As of March 31, we had $210 million in unrestricted cash and cash equivalents, $1.04 billion in net securities and other investments owned; and $772 million in loans receivable at fair value. At quarter end, we had total cash and investments balance of approximately $2 billion, which includes approximately $73 million in other investments reported in prepaid and other assets. Total debt as of March 31 was approximately $2.5 billion. And net of our cash and investments, our total net debt was approximately $427 million. During the quarter, we completed approximately $54 million in stock buybacks. And as of quarter end, we had approximately $30 million remaining under our current share repurchase program, which our Board authorized this past March. And finally, our Board of Directors has approved our regular quarterly dividend of $1 per share, which will be paid on or about May 23 to common stockholders of record as of May 16. Now that completes my financial summary. And I’ll turn the call over now to our Co-CEO, Tom Kelleher, who will provide highlights from our business divisions. Tom?

Thanks, Phil. Following an active period of acquisitions and notwithstanding the challenges created by a volatile market environment, B. Riley remains focused on enhancing our platform for the benefit of our colleagues, clients and partners who continue to place their trust in us. In our Capital Markets segment, revenue increased 80% to $185 million in the first quarter, up from $103 million in the prior year period. Segment income increased 56% to $86 million, up from $55 million in the prior year period. Excluding investment gains and losses, Capital Markets segment operating revenues increased 10% to $135 million, up from $123 million in the prior year period. Amid the backdrop of challenging markets, BI Securities has firmly established market leadership as a preferred partner for small and mid-cap companies seeking to opportunistically raise capital. We layered several notable capital raise during the quarter, including a $55 million preferred stock private placement for Ribbon Communications, a $35 million underwritten common stock offering for Akoustis Technologies and a $40 million registered direct offering for Cadiz. Despite equity market headwinds and a soft M&A advisory environment, demand for our restructuring services continues to grow and we were recently retained a financial adviser to Valendo Group in connection with David Bridal Chapter 11 bankruptcy. Security lending once again served as a bright spot in lieu of large banking transactions and generated year-over-year revenue gains of over 140% in the first quarter. Our Fixed Income division also realized a revenue increase of approximately 65% compared to the prior year quarter. We have recently completed a series of strategic hires focused on expanding our coverage across growth verticals within the consumer and technology sectors. Recent additions to our team include a senior investment banker and 5 senior research analysts. Our equity research team has underpinned B. Riley’s platform for over 25 years, and we look forward to further strengthening our corporate and institutional relationships in these key industries and at our flagship Institutional Investor Conference, which takes place later this month. In our asset management business, while 2023 is off to a slower start, overall performance momentum for 272 capital remains strong as we continue to onboard several new institutional clients. In our Wealth Management segment, revenues were $50 million in the first quarter of 2023, up from $46 million in the fourth quarter of 2022, with fee-based assets also trending up on a sequential basis. As previously noted, we undertook several strategic initiatives in 2022 to de-risk the – and realign this business after acquiring National Holdings in 2021. The year-over-year revenue decrease from $77 million in the first quarter of 2022 was largely attributed to our decision to exit certain businesses and a significant amount of registered reps previously affiliated with National. We returned to profitability in the first quarter and at present, approximately 50% of our revenues are reoccurring. Our focus remains on growing this business organically and recruiting experienced advisers to our platform. At quarter end, B. Riley Wealth had over $24 billion of client assets under management and over 400 advisers. In Financial Consulting, segment revenues were $25 million for the first quarter, driven by an increase in asset-based lending appraisal activity and an uptick in corporate bankruptcy assignments. Demand for our forensic litigation practice and risk and compliance practice also remained strong during the quarter. Our Advisory Services business continues to perform as a steady source of revenue and income for our platform quarter-to-quarter. In February, we acquired the corporate division of Farber, a business advisory firm based in Toronto with approximately 45 professionals. This addition enhances our existing restructuring services and expands our reach in Canada while bringing new capabilities such as human capital consulting and executive search to our clients in the U.S. We continue to assess opportunities to further enhance and grow our talent base to meet growing client demand. In addition, our real estate division is currently engaged on several large sale leaseback transactions, many of which are existing clients of our platform. We recently closed a $48 million sale leaseback of iMedia Brands headquarters and distribution center and assisted LNG Company to Larian in securing an initial LOI for a sale-leaseback of 800 acres of land. We were also recently retained as real estate adviser in the United Furniture bankruptcy and are handling the sale of Lane Furniture’s Industrial Real Estate portfolio. In Auction and Liquidation, segment revenues increased to $5.7 million, up from $3.4 million in the first quarter of 2022. While early 2023 has been relatively soft, we recently commenced several new retail liquidation projects, including store closing assignments for Nordstrom, Canada. We expect activity to increase over the coming year as declining consumer spend and rising interest rates continue to put pressure on retailers. In our Communications segment, revenues increased to $87 million in the first quarter, up from $32 million in the prior year period. This increase was primarily driven by the acquisition of Lingo and Bullseye Telecom in 2022. On a combined basis, magicJack, United Online, Marconi Wireless, Lingo and Bullseye Telecom generated segment income of $10.8 million for the quarter. Our portfolio of communication businesses continues to serve as a significant source of steady cash flow for our platform. Lastly, in our consumer segment, revenues increased to $70 million for the first quarter, primarily driven by the $66 million of revenue from sale of goods attributable to our acquisition of Targets in the fourth quarter of 2022 and $4 million of revenues from services and fees primarily related to the licensing of trademarks. Our investments in Hurley and Justice brands’ which are recognized outside of our consumer segment and in other income, also continued to contribute meaningful dividend income, which we expect will be enhanced by our recent addition of Scotch & Soda. We intend to pursue additional opportunities to enhance this business in line with our stated strategy to expand and diversify our sources of steady and reoccurring earnings. Finally, we want to recognize the world-class team of professionals across the entire B. Riley platform. Our colleagues have been headed down over the past several months, helping our clients navigate through a tough market environment. Our continued success is entirely due to their hard work and dedication. With that, we will now open the line for questions and then turn it back over to Brian for closing remarks. Operator?

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] We will pause here briefly to allow any questions to generate – our first question comes from [indiscernible] at Charles Lane Capital. Your line is open.

Hey, guys. Congrats on a strong quarter in a tough environment.

Thanks, Shawn.

Just a couple of kind of broad questions. The first is on the dividend, you have got roughly a yield 4x that of the 10-year, which is great and we love to see it. But is there any consideration to maybe cutting that and putting more capital to say buyback, for example?

Well, look, I think that – there is obviously buybacks, there’s our bond and there’s return on capital to shareholders. And I think from our perspective, to the extent that we are generating free cash flow to pay our dividend and all our expenses, we feel really good about where our balance sheet is, and we will utilize other ways to maybe take advantage of some of those things. You saw that we purchased a lot of shares this quarter. That was from cash on hand. We had some piece of debt we sold, some equities we sold. But we’ll manage it really carefully, and we feel really good about what our network net leverage is. I mean, it’s a little bit more than 1x during a time where we think our equities in our book are incredibly undervalued and our debt is – all the debt that we have is loans are money good. So the answer to the question is, we – as long as we continue in this environment where we are able to continue to generate this kind of cash flow, we are going to keep our dividend.

Got it. Okay. And then I guess just as it relates to capital markets, anything kind of into Q2 that you can comment on just as far as the macro concern whether the environment has gotten any better in words...

Look, I would say that it hasn’t gotten any better, but we’ve seen this movie a million times over 27 years. We are better positioned to take advantage of it when it turns, it will turn and they don’t ring a bell when it turns, but we are making sure that we have the right infrastructure. We’re taking advantage of some firms that don’t have our diversity to continue to hire talent, and we will be a leader in small cap when it turns just like we were before. And I would argue we are in better position than we were. So the answer is no. There is not a lot of – there is a lot of backlog. If we look at our engagements that we have, whether it’s M&A and equity, it’s close to an all-time high, if not an all-time high, but there is just not a lot of closings because of the interest rate environment and there is not a lot of – there is a lot of equity appetite by funds and that’s understandable. But that will change and we will be ready for it.

Yes. Alright, great. Alright, that’s all I got. Thank you, guys.

Alright. Thanks a lot. Thank you.

Thank you. [Operator Instructions] We’ll pause here briefly to allow more questions to generate. Our next question comes from Barry.

This is Barry. I own about 33,000 shares of Riley, I have been in the stock market about 50 years and I would like to compliment you on the great job you’ve done. And I– Riley is my largest position and I very much appreciate the $4 year dividend that we are presently paying. It is very important and schedule by personal finances. And secondly, I am also purchasing Riley Bonds. In addition, when negative comments appear on seeking alpha about Riley, I tried to correct it so that I do my best for Riley and I very much appreciate our share structure of about 28 million shares outstanding, whereby every dollar that goes to the profit line goes back to shareholders pretty much and also in the form of dividend. So I thank you very much on what you have done.

Thank you. Thank you for those comments. We appreciate them...

Thank you. Our next question comes from Paul at Punch & Associates. <<

Thank you. Our next question comes from Paul at Punch & Associates. Your line is open.

Hey, guys.

Hey, Paul.

How are you doing?

Good.

Great. Maybe to start, can you just update on how Targus is doing and just the integration there?

So there really wasn’t a lot of integration. If you remember, Paul, that business is run by Michael Williams, Michael was on our Board for a lot of years. He had run two public companies, a great success, one of which I was on the Board. There was an opportunity to buy that business from some debt holders that have bought it distressed many years ago, Michael has been CEO for, I don’t know, 5 or 6 years. And we took that as an opportunity with them to acquire that business. That business is facing the same issues as a lot of businesses that benefited from stay at home. We recognize that when we bought it, that, that was – we recognized two things. We recognize that last year, they had freight costs that were $20 million more than normal, and we recognize that they benefited from the COVID effect. I think the downturn there is bigger than we would have expected, but our confidence in that business is has not deteriorated at all. I would double down on it. We are going to look for acquisitions in that space. It’s not just us that are seeing those same effects, and we’ve got a great management team, a great brand, great distribution. So we’ll take advantage of that. As we’re looking to do in every one of our segments, and that’s the value of being diversified.

Okay. Yes. Perfect. On liquidation, could you – we saw the headlines of Bed Bath & Beyond. Can you maybe just talk about the opportunity there for liquidation? And if you can, just how B. Riley kind of monetize the entire relationship with the company like that at the end.

So there are really two different segments, right? There’s the public company aspect and then there’s a liquidation. Obviously, we work with the company as an agent to help facilitate some institutional raises and some ATM sales that ended up not getting enough money – enough capital for them to succeed. The liquidation is different groups. So we are one of the largest liquidators out there. We’re one of four participating in this field. It’s a large liquidation. So when there’s a large liquidation, you often will have regions where one liquidator is on in one region, another one is running another region. And we’ve got really good partners in our – in Hilco, Gordon Brothers and Tiger. This is a fee deal. So on a fee deal, it’s really getting paid a fee based on that liquidation. And then you’re also getting a piece of the augment. So I don’t know if you remember how the liquidations work, but often are what you will do and where you can often make outsized returns is if you have a chain that is going to see a lot of traffic, you can go out to some of their consumers or some of their vendors, excuse me, the vendors and buy incremental inventory run it through the stores and participate in that augment. So Bed Bath & Beyond will be a very profitable transaction with no risk. We didn’t – the converse of that is an equity deal where we buy the inventory that lends itself to a lot more possible gains and also losses you’ll remember, Barney’s 4 or 5 years ago where we lost a lot of money on that deal, one of the only deals we lost. That was an equity deal. So this will be a really – a nice profit as we liquidate because we’re really good at that and should end sometime – most of it will be in this quarter and a little bit next quarter.

Okay. And you talked about Northern Canada and this one. Any – just generally, how is the liquidation pipeline looking?

Europe, we really – we had a record year in Europe last year. There’s a lot of activity in Europe. Domestically, we’re seeing things pop up here and there. I wouldn’t say – I think they’re starting to see the beginning. And – but you will – I mean the thing about liquidation is you don’t know to you, we have a list of hundreds of retailers, many of them we do appraisals on. We know them very well. But it’s when an ABL or a lender decides that they don’t think that it makes sense to lend to them and they tighten them. And that’s a 1 day that. It’s not that they haven’t spent a year working through it. But it happens and then that either manifests itself in either liquidation or just not life. So I would say that on a scale of 1 to 10, it’s probably a 5. But if you ask me next quarter, I think it’ll – by that time, it will probably be closer to a 7 or 8.

Got it. Okay. And thank you again for the additional update on the loans receivables book. That’s helpful. Can you spend a little more time talking about the – if you can call it the exact company or just the – a little more color on this fair value markup of $43 million in the book.

Sure. So the vast majority of that, we get outside marks. The vast majority of that is marking up the sub debt of Core Scientific, which we marked down when we – when it went into bankruptcy meaningfully, back to closer to 90%. With – as a side note, we were actually paid down $6.5 – roughly $6 million from our DIP loan because of excess cash. We have excess cash sweep in the DIP loan. That just happened the last couple of days. They are, as you can imagine, generating a lot more cash than expected – with bitcoin prices here. And so my view is we will be money good on that sub debt. Now obviously, the volatility of bitcoin prices needs to be recognized. But if you were to say to me now, we will be money good. How that will come back to us, we’ll be – we’ll see when the restructuring when they get out of bankruptcy, and that process is ongoing.

Yes. Okay. Great. That’s – great to hear. Just last for me is on the wealth management side. Congrats on moving back into profitability. Just curious where you think you are in terms of getting that business to where you want it to be.

Yes. Let me give a shout-out to that team, Mike and Chuck to run that. That business – the mandate in that business is to run it profitably when there is not a kind of a cap markets environment and be positioned to benefit when there is a cat market environment. So for – they’re there. Now I will say that the tax business is a seasonal benefit. We’ll get a little bit of that in Q2. So we did get a benefit that from Q1. I think there’s still more negotiations with vendors and others that will continue to lower the breakeven. And our job now is just to make the wealth managers that we have and we continue to have, and I don’t know if you remember, we did cut a lot. I don’t know if the number was 25,300 club managers that we didn’t think made sense to partner with. The ones that we have to be our partners to show them product that we want to own to make sure that we’re protecting the retail investors and to utilize that asset base as a beneficial distribution leverage. So that’s how we think and I think they’ve done a great job in a really difficult environment of getting there. One other thing to keep in mind that I would say is that we have been a beneficiary of higher rates. So there’s that. But barring that, I still think we’ve really done a good job of rightsizing that business. And if we – look, the way that I look at this is if we’re doing any $80 million at a time where there’s absolutely nothing going on in cap markets and nothing going on and very little going on liquidation in the quarter. If you started to see a better environment, I think we will far exceed the previous operating EBITDA that we did in the last cycle. And I can’t tell you when it’s going to be. But if you cannot lose money, during these downtimes, you’re going to be really well positioned. And I think that’s where we are.

Yes. I obviously agree. Okay, that’s it for me. Thank you very much.

Alright. Thank you.

Thank you. Our next question comes from Thompson at Mauldin Economics. Your line is open.

Thanks for the questions. Hey, Brian, I followed the company for a long time. When was the last time you guys did a buyback of this magnitude, I’d love to see it. Just curious on you got have done that very often.

Yes. We did a large buyback, Phil, maybe I remember we bought back a couple of strategic or early investors in 2019, maybe something like that? Or would do a lot, like we – I think we bought a couple of mindshare – file can tack check me. But look, we look at all of those things and utilize our capital wherever we think it makes the most sense, also understanding that we don’t have unlimited capital. So we have to be thoughtful about it. But yes, obviously, we thought that buyback stock was attractive for buying our company at an enterprise value that a market cap of $1 billion and an enterprise value of net debt of $1.4 billion based on where we think we are, was a really smart thing to do.

Great. Great. And second question for me is maybe more of an accounting one for Phil. For the SPAC, you guys recently – your $250, whichever SPAC that was liquidated – the cash that’s on the balance sheet, but there’s an offsetting liability. So there’s no hit to equity, right? Or am I getting that wrong?

Yes. No, that’s correct. That’s correct. The cash on trust is held now prepaid another, right, but correspondingly, you’ll see there’s a line – the right after our [indiscernible] liabilities rigor our equity [indiscernible], which is the [indiscernible] non-controlling interest and equity subsidiaries, roughly $175 million, that’s best the offset.

And Thompson, I don’t mean to – so because I know you – it’s kind of accounting one-on-one and not to you, but the things we’ve seen out there that’s shocking to me that is not understood.

Yes. Yes, that’s exactly my thought as well. Okay. Great. You talked about core scientific. You talked about Hero that was paid off. I’m trying to think of anything, again, that was ridiculous in some of the short reports, but I think you’ve really addressed it all. So I got nothing else to add. Thanks, guys. Great quarter. Yes, keep it up.

We appreciate it. Thank you.

Thank you. 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, thanks, everybody. I really want to speak to our fellow partners at the firm. I will say that I think we have the best people on the street. We have had some – we had a change in our audit that surprised us. And the team – Phil’s team jumped on this like nothing I’ve ever seen before. And I’ve seen that in every group we have. And look, we understand that it’s tough right now. We appreciate it. But TK, myself, every part funding leadership is head down, and I am – I could not feel more confident of how we’re going to come out of this because I’ve seen it so many times. So let’s keep grinding. We appreciate all of our shareholders for trying to get to the focus on the facts and not the noise. And our commitment is to keep working as hard as we can to create as much value as we can for our shareholders. So thank you, everyone, and we look forward to talking to you next quarter.