B. Riley Financial, Inc. (NASDAQ:RILY) Q1 2023 Earnings Call Transcript

B. Riley Financial, Inc. (NASDAQ:RILY) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: 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.

Bryant Riley: 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?

Phillip Ahn: 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?

Tom Kelleher: 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?

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Q&A Session

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.

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

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

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

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

Operator: 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.

Bryant Riley: 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.

Operator: 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 are not descriptions of historical facts 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 uncertain uncertainties. If 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 and 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 in B. Riley Financial, Inc.’s periodic filings with the SEC, including, without limitation, the risks described in B. Riley Financial Inc.’s annual report on Form 10-K for the year ended December 31, 2022, under the captions, Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations. Additional information will be set forth in our quarterly report on Form 10-Q for the quarter ended March 31, 2023.

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 undertakes no duty to update this information. Thank you for joining us for B. Riley Financial’s first quarter 2023 earnings conference call.