B. Riley Financial Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 29, 2024

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to the B. Riley Financials 4th Quarter and Full Year 2023 Earnings Call. My name is Jordan, and I will be your call coordinator. Earlier today, B. Riley issued a press release and financial supplement detailing its results for the Q4 full year 2023, which can be found on its Investor Relations website at ir.brileyfin.com.

Operator

Today's call includes prepared remarks from the company followed by a question and answer session. Joining us today from B. Riley are Bryant Riley, Chairman, Co Founder and Co CEO Tom Keller, Co Founder and Co CEO and Philip Ahn, CFO and COO. After management's remarks, we will open the line for questions. Please note that all participants will be on a listen only mode until the Q and A portion of the call.

Operator

As a reminder, this call is being recorded. An audio replay will be available on the company's Investor Relations website later today. And 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.

Operator

Mr. Riley, please proceed.

Speaker 1

Thank you for joining our call this afternoon. Before we get into our results, I want to thank everyone who attended our Investor Day in December. And I want to encourage anyone looking to understand the complexities of our business to refer to our comprehensive presentation, which is posted to our Investor Relations website. At that event, we also addressed the attention of B. Riley related to our role in taking Franchise Group private, while Brian Kahn was CEO.

Speaker 1

Given the current scrutiny surrounding this matter and the time and resources it has required to complete our review, our annual report on Form 10 ks for the year will be delayed. This remains a focus for our team and we're working to complete it soon. Now in terms of our results, 2023 was a strong year for the majority of our subsidiaries. However, the strength across our core business was masked by non cash write downs related to targets and unrealized investment losses. Despite a choppy operating environment for certain of our core businesses, we delivered increased revenues of over 50% at $1,600,000,000 for the year and $368,000,000 of operating EBITDA.

Speaker 1

As we look ahead, our focus remains on turning the best path forward for our business, employees and shareholders. With these considerations in mind, this afternoon, we announced that we have obtained Moelis and Company to conduct a review of strategic alternatives for our appraisal and retail liquidation businesses formerly known as Great American Group. Those who have followed us know that Great American has played a significant role in B. Riley's history and overall success. We became a public company in 2014 through our combination with Great American.

Speaker 1

Since then, we have consistently stated our intention to use our balance sheet opportunistically to invest in and acquire businesses that can benefit from our platform and in turn create value for our shareholders. In line with that strategy, in 2016, our 2nd year as a public company, we acquired United Online, and we formed our Principal Investments Group to enhance the value of our platform longer term with additional sources of steady and recurring cash flow. In the 7 years since, we have bought and built a number of high quality businesses and in the process, we meaningfully expanded our core financial services, including investment banking, brokerage, wealth management, business consulting, forensic accounting among others. Each of these companies' founding partners and entrepreneurs who have joined the B. Riley platform have benefited from the knowledge and experience of our teams and together we capitalize on our growing market share.

Speaker 1

This is particularly true of Great American, which is led by an exceptional management team that has done a tremendous job growing the business organically since our combination 10 years ago. Together, we have executed a number of strategic initiatives to grow these businesses organically. In 2023, our appraisal and liquidation businesses generated approximately $153,000,000 in revenue $35,000,000 in operating income, a year over year increase of 35% 69% respectively. Our appraisal business has historically been a steady recurring performer and has been seeing strong growth over the last year. Our retail liquidation business is more episodic, but over the years has provided meaningful profits, which we have used to deliver returns to our shareholders and reinvest in our business.

Speaker 1

Together, Great American is a uniquely positioned asset with strategic relevance to many types of platforms, and we expect there will be a robust interest in this process. Great American is one example of the underappreciated value that is hidden in plain sight across our platform. This business is currently carried on a balance sheet at a book value of approximately 35,000,000 I'm not going to speculate on the sale price, but it's easy to do the math on the multiple. We will continue to explore options with an eye towards repurchasing our bonds and common stock, while investing in the rest of our core wealth management, advisory and institutional businesses. At our core, we are a financial services company that caters to both businesses and investors.

Speaker 1

We partner with entrepreneurs. We help them build, sell, expand and fix their businesses. We are trusted advisor to founders, operators, company boards, financial institutions and law firms. We lean in with our balance sheet to support our clients, and we have a large investment book that is marked almost daily, reported quarterly and is volatile because of the dynamic investments we make. To put this in perspective, over the last 4 years, our core businesses delivered approximately $5,000,000,000 in operating revenue and $125,000,000,000 in operating EBITDA.

Speaker 1

During that same time, our prop book was effectively flat, which is not reflective of the opportunities our investments have created to enhance our operating results. Obviously, the external dynamics surrounding our firm has created significant dislocation in market value of both our common stock and publicly traded bonds. Our view is this has created an incredible opportunity for us. We have reduced our dividend by 50% based on the many opportunities we have to reinvest in our business, including repurchasing our debt at attractive prices. That brings me to Franchise Group.

Speaker 1

It has been roughly 6 months since the take private transaction and our team has helped FRG execute 2 transact actions in line with our stated investment thesis. First was Babcock's merger with Conn's in December. This transaction resulted in FRG owning just under 50 percent ownership interest in a publicly traded company that has significantly increased in value since the merger was completed. 2nd was FRG sale of Sylvan Learning to unleash brands earlier this month. The undisclosed purchase price was higher than what we had underwritten.

Speaker 1

FRG acquired Sylvan in 2021 for approximately $81,000,000 As challenging as the consumer environment has been, we remain confident in our long term thesis for FRG. Our thesis on FRG is that, is just that, a long term view that the underlying businesses are expected to create significant value to our shareholders. And we are working on FRG with the same vigor we have in all of our past transactions to maximize the value of our investment. Before I turn the call over to Phil, I want to express my appreciation to our employees for their continued resiliency and clients across our businesses who have reached out to express their support for B. Riley amid the growing noise surrounding our brand on social media.

Speaker 1

Fundamental research does not involve personal attacks, photoshopping memes or incessant harassment of our employees and business partners. This behavior alone should speak volumes about these authors. To be clear, this is not uncommon about short selling. Short selling serves a purpose in maintaining healthy capital markets and as a public company, we have responded to constructive feedback, including from short sellers. I appreciate we are a complex business, but I'm extremely proud of the business we have built, the businesses we have grown and the value we have delivered to all of our stakeholders.

Speaker 1

We have continued to deliver on our stated strategy year after year and to fully appreciate this, it's important to understand our history and where we came from. We started this business in 1997 with every dollar we had and formed a 2 person fundamental stock research firm. We invested opportunistically to build out our platform and to enable our client success. This is our core business and this is where we will continue to invest. Over the next few weeks, our executive team will be on the road and I look forward to catching up with our clients, partners and investors.

Speaker 1

We appreciate your continued trust and support in B. Riley. With that, I will now turn the call over to Phil to discuss key metrics for the quarter. Tom will discuss results from our business segments before we open up for questions. Over to you, Phil.

Speaker 2

Thanks, Brian. As I start my comments, I would like to remind everyone that the financial results discussed in our press release and on today's call are preliminary and unaudited. As mentioned in our press release, we will be filing a Form 12b-twenty 5 with the SEC to provide notice of the delayed filing of our annual report on Form 10 ks for 2023, which we are working to complete. Now turning to our results. For the Q4 ended December 31, 2023, B.

Speaker 2

Riley reported total revenues of $347,000,000 and a net loss of $70,000,000 or $2.32 diluted loss per share. Net loss for the quarter was primarily due to a non cash impairment charge related to Targus and unrealized investment losses related to securities owned. Investment gains and losses include realized and unrealized gains and losses on our investments. These investment gains and losses have and will continue to create volatility in our periodic earnings. For this reason, we generally discuss performance in the context of our operating revenues and operating adjusted EBITDA, which may be considered non GAAP financial measures.

Speaker 2

During the Q4, we recast our operating metrics to include revenue from fixed income spread activity, which represents spread income for our institutional business and a steady contributor to our earnings. This adjustment is reflected in our reconciliation for operating revenues and operating adjusted EBITDA. Investors can refer to our earnings release for a reconciliation of non GAAP metrics, as well as an explanation for our use of these metrics and the definition of these terms. Excluding investment loss of 49,000,000, operating revenues were 395,000,000 for the quarter, compared to 449,000,000 in Q4 of 2022. Operating adjusted EBITDA of $79,000,000 compared to $110,000,000 in the prior year period.

Speaker 2

Turning to our results for the full year, total revenues increased 52 percent to $1,650,000,000 in 2023, up from $1,080,000,000 in 2022. Operating revenues increased 25 percent to $1,630,000,000 in 20 20 3, up from $1,310,000,000 in 2022. Operating adjusted EBITDA was $368,000,000 for 2023. Our Total adjusted EBITDA for the full year 2023 increased to $240,000,000 up from $32,000,000 in 2022. Net loss for the year was $86,000,000 or $2.95 diluted loss per share, which again primarily related to Targus' non cash impairment and changes to mark to market valuations in our investment portfolio.

Speaker 2

Turning to highlights on our balance sheet. As of December 31, we had $232,000,000 in unrestricted cash and cash equivalents, $1,110,000,000 in net securities and other investments owned and $532,000,000 in loans receivable. At year end, we had total cash and investments balance of approximately $1,900,000,000 which includes approximately $15,000,000 in other investments reported in prepaid and other assets. Total debt, net of cash and investments was approximately $457,000,000 at quarter end. Total debt as of December 31st was approximately $2,400,000,000 Finally, as Bryant discussed, our Board has declared a quarterly dividend of $0.50 per common share, which will be paid on or about March 22 to common shareholders of record as of March 11.

Speaker 2

Now before Tom discusses our segment results and highlights from our businesses, I wanted to note that during the Q4, we realigned our segment reporting for the previously reported consumer segment. Our Targus business is now reported on a standalone basis in the consumer product segment. The remaining results in previously reported consumer segment, including results from our brands have been reclassified into all other, which is below the line and reported within corporate and other. The financial data related to these businesses has been recast in our earnings material for the periods presented. That completes my summary.

Speaker 2

I'll now the call over to Tom to discuss our business segments. Tom?

Speaker 3

Thanks, Phil. As Brian mentioned, noncash losses masked what was otherwise a strong year with notable progress across the vast majority of our subsidiaries. In our Capital Markets segment, which includes our investments in loan portfolio and results from B. Riley Securities, revenues increased 75% to $575,000,000 in 20 23, up from $328,000,000 in 2022. Segment income increased to $198,000,000 in 2023, up from $82,000,000 in 2022.

Speaker 3

Excluding investment gains and losses, segment operating revenues increased to 5 $2,000,000 up from $557,000,000 in 2022, primarily driven by investment banking and institutional brokerage activities at B. Riley Securities. B. Riley Securities saw a strong Q4 and contributed operating revenues of over $100,000,000 and over $20,000,000 of operating adjusted EBITDA. 4th quarter investment banking revenues increased year over year, but were slightly lower versus the previous quarter due to lower underwritten offerings.

Speaker 3

While Equity Capital Markets remained subdued in the quarter, we saw an uptick in M and A activity and have recently gained significant market share in Debt Capital Markets. With respect to our restructuring group, this team continues to field an increased number of opportunities and has seen a higher level of active engagements. Sales and trading demonstrated sequential improvement supported again by increasing contribution from fixed income trading. Looking ahead, we're gearing up for our 24th Annual Institutional Investor Conference this coming May. Our Wealth Management business returned to profitability in 2023 with revenues of $198,000,000 and segment income of $3,000,000 Recurring revenues contributed 60% of our wealth revenues for the year.

Speaker 3

For the Q4, revenues and fee based assets increased year over year compared to our Q4 of 2022. This is yet another milestone following the operational realignment of this business throughout 2021 2022 as discussed during our December Investor Day presentation. Our wealth management leadership team has done a tremendous job combining Legacy B. Riley Wealth with National Holdings, which we acquired in 2021. Through their efforts, we have realized significant annualized savings, lowered fixed costs, increased revenue contributions from reoccurring lines of business, all while de risking the business.

Speaker 3

Importantly, we have significantly improved process efficiencies to help us better support our clients. B. Riley Wealth today includes a balanced mix of over 400 independent and W-two reps and advisors serving clients coast to coast. Assets under management increased to $25,400,000,000 at December 31, 2023, up from $24,000,000,000 in 2022. We maintain strong relationships with our premier clearing and custodial partners where all of our clients' assets are held.

Speaker 3

In auction and liquidation, revenue increased 39 percent to $103,000,000 in 2023, up from $74,000,000 in 2022. Our Retail Solutions business completed the year with approximately $30,000,000 net deal profit. We saw uptick in retail liquidation activity in the U. S. And Canada during 2023 and continued levels of retail liquidation activity in Europe.

Speaker 3

Prospects in Europe continue to be promising with a strong pipeline of opportunities as retailers continue to feel the effects of poor sales, reduced consumer spending and rising interest rates. Turning to our Financial Consulting segment, which includes B. Riley Advisory Services and our real estate brokerage practice, revenues increased 35 percent to $134,000,000 in 2023, up from $99,000,000 in 2022, primarily driven by an increase of bankruptcy and litigation consulting assignments and appraisal engagements and real estate restructuring projects. B. Riley Advisory Services maintained strong and steady growth throughout 2023.

Speaker 3

The 4th quarter saw another record revenue period for our legacy GlassRatner appraisal businesses history as demand from asset based lenders remain strong. Similarly, in our legacy GlassRatner business, bankruptcy and restructuring mandates continue to increase. Our Forensic and Litigation group has a strong pipeline heading into 2024 and we are looking to hire senior practitioners to support demand and continued growth in this group. Our Canadian affiliate, Farber, which we added last year, has also seen increased activity in its insolvency and restructuring practice, and we continue to build our domestic interim management and executive search practice to complement Farber's established niche in this space. Turning to our Communications segment.

Speaker 3

On a combined basis, our Communications segment contributed revenues of $82,000,000 $6,000,000 of segment income for the Q4. For the full year, revenues increased 43% year over year to $338,000,000 in 2023, up from 236,000,000 dollars Segment income increased 15 percent to $35,000,000 in 2023 from $30,000,000 in the prior year. As Brian mentioned earlier, we formed this business and acquired these companies on a cost basis in line with our investment thesis and stated strategy to maximize cash flows to our platform. This business leverages the strength of our operational capabilities and has continued to provide steady cash flows to our platform since inception. We continue to look for companies with similar characteristics that can add and leverage the operational capabilities of this group.

Speaker 3

Turning to our Consumer Products segment, which reflects results from Targus. As we discussed during our Investor Day, since acquiring the business in late 2022, Targus has been negatively impacted by what is the worst market for the PC and tablet sales since 2006 2011, respectively. While the market is not quite there yet, we are seeing some improvement, and we believe that Tardis, relative to its peers is well positioned to gain share as a worldwide leader in this category. Finally, our brands portfolio, which are various investments in fashion brands, including our 6 brands portfolio Justice, Hurley, BB and Scotch and Soda, which we added in April, dividend income related to our brand equity investments increased to $33,000,000 in 2023, up from $28,000,000 in 2022. Phil mentioned, our brand investments and businesses are reported outside of our segments and below the line in Corporate and All Other.

Speaker 3

Finally, as Bryant mentioned, we recognize that our diversified platform is unique and complex. But what truly differentiates B. Riley is our team. Our people are among the best in their industry and continue to demonstrate complete focus and dedication. This is paramount to both our and our clients' collective success and that is what we are most proud of.

Speaker 3

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

Operator

Thank you. At this time, we will conduct a question and answer session. First question comes from Steve with Emerson Investment Group. Your line is now open.

Speaker 4

Thank you for taking my question. We're long the stock and the bonds. I'd appreciate a little more color regarding the delay in filing and specifically if your auditor has agreed to sign off on the audit?

Speaker 5

Hey, Steve. It's been a while. We're not going to comment on the audit other than what we said in the press release.

Speaker 4

Thank you.

Operator

Our next question comes from Sean with Charles Lane Capital. Your line is now open.

Speaker 6

Hey, guys. How are you doing? Just real quick, could you just walk us through the thinking behind the former Great American sale? Why that unit? And if you have any sense of timing on that that would be helpful.

Speaker 5

Sure. So I think Sean you've been around this business for a long time and you've seen us make acquisitions of wealth management at a time where it was out of favor. We acquired GlassRatner when they were great business, but doing $4,000,000 or $5,000,000 EBITDA and helped enhance that with this great management team. My view is that what we're best served at is finding opportunities, again, whether it's United Online, where we bought for $48,000,000 and a return over $120,000,000 or its brands, finding opportunities that are either out of favor or just represent a unique opportunity for us. So that's 1.

Speaker 5

2 is Great American in my view is poised to take off with a different entity. And the reason I say that is if you look at our competitors, we did some of this. We had a direct lending fund that was very successful. We leveraged that asset asset into buying brands. We utilized some help when we did the receivables business.

Speaker 5

We've done some consignment, but I think they're right in the middle of the sweet spot as direct lending becomes even more increased. And I think a larger institution with a bigger balance sheet is going to kill it with that asset. And from my perspective, we've got some opportunities around businesses we already own and know and our own business. And so we thought the timing was good. As far as how long, I think we like to have a pretty good sense of where we are by the end of the second quarter.

Speaker 5

Okay. And then

Speaker 6

with the savings, so to speak, from the dividend cut, do you have priority for shares versus bonds?

Speaker 5

Yes, I would say that's a Board decision. Obviously, one has limited upside and one has more upside. But I would say we're just going to be opportunistic around our CapStack. And anything that we find is not core, not a business, but an asset that's not core. If we can utilize that to buy back some of our debt at 30% strip yields, then we should be thinking that that asset is worth 30% more than it is.

Speaker 5

So we have an opportunity to I think create real value based on the perception of our company right now by some.

Speaker 6

Got it. All right. Thanks guys. Appreciate it. Thank you.

Operator

Thank you.

Speaker 5

Okay. Operator,

Speaker 7

are we good?

Operator

Correct. Just prompting, once again, ladies and gentlemen, press star 1.

Speaker 5

I think we've prompted 3 times. So let me just let me speak to our employees and partners and clients directly. Many of you and I think we highlighted this in our Investor Day, we've been fighting through and growing this business for 20, 25 years together, 15 years together. This is a battle that I'm excited to be in everyone that's part of this team. We are in a great spot.

Speaker 5

I'd much rather have a business go from $12,000,000 EBITDA to $20,000,000 EBITDA in a year than a mark or a markdown. And what we saw this year was improvement in almost all of our operating businesses. So let's just stay focused. I know we can we will stay focused and we will take advantage of what I view as a huge disconnect. So thanks everyone for listening on the call.

Speaker 5

TK or Phil, anything you want to add?

Speaker 7

Yes. And I just would echo your sentiments. I mean, the core of this firm is our people and the resilience that they've shown over the last couple of months cannot be overstated. It's truly gratifying the city and it's what's going to carry us through this. So

Speaker 3

not a company on

Speaker 7

the planet that doesn't go through trials. And we're going through ours and we're going to get through it. So looking forward to

Operator

it. 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 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.

Operator

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 and segments regarding a transaction related to the company's Greater American business and potential use of proceeds. 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.

Operator

Periodic filings with the SEC, including, without limitation, the risks described in B. Riley Financial, Inc. Annual report on Form 10 ks for the year ended December 31, 2022, under the captions Risk Factors and Management's Discussion and Analysis of Financial Conditions and Results of operations, as applicable. Additional information will be set forth in B. Riley Financial's Annual Report on Form 10 ks for the year ended December 31, 2023.

Operator

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 today for B. Riley Financial's 4th quarter and full year 2023 earnings conference call.

Operator

You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
B. Riley Financial Q4 2023
00:00 / 00:00
Remove Ads