Earnings Call Transcript - RILY Q3 2021

Operator, Operator

Good afternoon and welcome to B. Riley Financial's Third Quarter 2021 Earnings Call. Earlier today, B. Riley issued a press release and presentation detailing its financial results for the third quarter. Copies are available in the Investor section of the Company's website at ir.brileyfin.com. As a reminder, today's call is being recorded. An audio replay will also be available on the Company's Investor Relation website later today. Joining us today from B. Riley are Bryant Riley, Chairman and 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. And before we conclude today's call, I will provide the necessary cautions regarding forward-looking statements. I will now turn the call over to Mr. Bryant Riley. Mr. Riley, please proceed.

Bryant Riley, Co-CEO

Thanks operator, and welcome everyone. We are pleased to report another solid quarter for B. Riley Financial. On previous calls, we've discussed our strategy to grow our steady state and recurring businesses and we continue to deliver on that strategy both on a top and bottom line basis. Year-to-date, as of September 30, we generated total revenues and total adjusted EBITDA of $1.3 billion and $624.5 million respectively. This represents a year-over-year revenue increase of 168% and a 327% increase in our adjusted EBITDA. In the same period, operating revenues totaled $1 billion for the first nine months with operating adjusted EBITDA of $315.9 million. This reflects a year-over-year increase of 89% in operating revenues and a 71% increase in operating adjusted EBITDA. Over the last year, B. Riley Securities has taken major strides in establishing itself as a preferred banking partner for small and mid-cap companies. Outside of the bulge bracket firms, there are few banks with the capabilities to lead and participate in equity transactions of more than $100 million and year-to-date, B. Riley Securities has raised nearly $3 billion in that capacity. Our investment banking division continues to gain market share on IPO underwriting, follow-on offerings, debt raises, ATMs, and spec-related transactions. We acknowledge that our diversified business can be difficult to analyze. Our ultimate goal is to continue to utilize our cash flows to enhance our business, make accretive acquisitions and to return capital to our shareholders. To that end, we believe a recurring dividend is an important measuring stick for our shareholders. In line with our stated commitment, we have increased our regular quarterly dividend to $1 per share and declared a special dividend of $3 per share for a total third quarter dividend of $4 per common share. Upon payment of our third quarter dividend, we will have returned a total of $9 per share in common stock dividends to shareholders for the first three quarters. The increase in our regular dividend reflects our increasing confidence in our recurring cash flows as well as the continued growth in our episodic businesses. Our balance sheet continues to be very strong, and our capital base has continued to increase reflecting the growing cash flows and strong fundamentals of our business. At the same time, we have made meaningful progress reducing our debt expense by recently redeeming two of our higher-rated bond series while also issuing debt at a rate that is approximately 200 basis points lower. We will continue to seek ways to reduce our overall cost of capital in the coming quarters. Taken together, we have never been more confident in the power of our combined platform and our ability to capitalize on the opportunities we see ahead. Earlier today, B. Riley Financial was ranked number two on Fortune Magazine's fastest-growing companies list for 2021, which ranks the top-performing publicly traded companies based on revenue, profits, and total returns over the three-year period ending June 30, 2021. It's extremely humbling and gratifying to earn external recognition of our accomplishments and continued momentum. We appreciate the trust and partnership of our clients and shareholders and are especially grateful for the world-class team of B. Riley and their continued dedication. As always, our focus will remain on delivering for all of our stakeholders. Finally, before I turn the call over to Phil, I want to take a moment to welcome our new Board member Renee LaBran, who currently serves on our audit and governance committees. Renee has been involved in the venture capital industry for over 20 years and has extensive experience advising early-stage growth companies on capital raising and M&A initiatives. Among her many accomplishments, Renee co-founded a women's founders network, which is dedicated to supporting female entrepreneurs by providing access to mentorship, visibility, and capital. She is a terrific addition to our Board and we could not be more pleased to welcome her to B. Riley. With that, I'll now turn the call over to Phil Ahn, our CFO and COO, who will provide more context around our quarterly metrics and then Tom Kelleher, our Co-CEO, will discuss some highlights across our operating units. Over to you, Phil.

Phillip Ahn, CFO and COO

Thanks, Bryant. As Bryant noted, we reported strong results for our third quarter ending September 30. On a consolidated basis, B. Riley reported total revenues of $381.5 million, up 69% from the prior year period. Total adjusted EBITDA was $114.1 million, which was up 21% year-over-year. Net income available to common shareholders was $48.6 million or $1.69 per diluted share. This compares to net income of $47.3 million or $1.75 per diluted share for the prior year period. Our third quarter results included operating revenues of $363.3 million, a year-over-year increase of 87%, and operating adjusted EBITDA of $101 million, which was up 50% year-over-year. During the quarter, we also saw modest investment gains of approximately $18 million, which includes both realized and unrealized gains on certain strategic investments that we hold. Overall, our strong quarter was largely driven by momentum in our investment banking division. This was enhanced by contributions from our recently expanded wealth management division and continued cash flow generation from our principal investments companies and our brands businesses. Turning to our reportable segments, starting with capital markets, which includes our investments and operating results from investment banking, institutional brokerage, and fund management. Excluding investment gains, Capital Markets segment operating revenues totaled $161.7 million, which represented an increase of 98% year-over-year. Segment operating income was $76.1 million, which was up 129% year-over-year. Now turning to our wealth management segment. Segment revenues and segment income increased to $118.8 million and $6.6 million respectively. This increase was primarily related to the addition of National Holdings, which we acquired in February. Our Auction and Liquidation segment revenues and segment income totaled $37.1 million and $6.3 million respectively. As noted on prior calls, results from this segment tend to be variable due to the episodic nature of large retail liquidation engagements. Financial Consulting segment revenues and segment income totaled $21.3 million and $2.8 million respectively. Results from our legacy GlassRatner Consulting division and our Appraisal division were impacted by the overall market conditions in the restructuring and ABL lending markets. Our Principal Investment companies magicJack and United Online contributed revenues of $19.3 million and segment income of $6.5 million. These companies continue to provide steady cash flow to our platform. And lastly, our Brands segment continues to make contributions to the overall B. Riley platform, having generated segment revenues of $6.4 million and segment income of $4.7 million related to the licensing of brand trademarks. As a reminder, adjusted EBITDA and our metrics for operating and investment results are non-GAAP financial measures. Please refer to our earnings release for a definition of these terms and for a reconciliation to the nearest GAAP measures. Investors can also find additional details relating to these metrics and related reconciliations in the financial supplement on our Investor Relations website. Now turning to some highlights from our balance sheet. At September 30, B. Riley Financial had $378 million in unrestricted cash and cash equivalents, $933 million in net securities and other investments owned and $351 million of loans receivable. At quarter end, we had a total cash and investments balance of approximately $2.3 billion, which includes $43 million of other investments reported in prepaid and other assets. At quarter end, our total debt balance was approximately $1.7 billion. And net of our debt, B. Riley Financial's cash and investments totaled approximately $593 million at September 30. Finally, as Bryant mentioned, we declared a total third quarter dividend of $4 per common share. This includes an increase in our regular quarterly dividend from $0.50 to $1 per share. Additionally, we declared a special one-time dividend of $3 per common share. The $4 in total Q3 dividend payments will be paid on or about November 23 to common shareholders of record as of November 9. That completes my financial summary. Now I'll turn the call over to our Co-CEO, Tom Kelleher. Tom?

Tom Kelleher, Co-CEO

Thanks, Phil. This quarter we continue to diversify and expand our opportunities, both in terms of new businesses as well as our ability to attract quality talent. Adding complementary practices like cyber security advisory, our financial sponsors group, and our real estate division has enabled us to provide superior execution capabilities, while continuing to deliver on the core services we've become known for. While clients are the obvious beneficiary of our expanded capabilities, our investment banks, advisory consultants, and wealth managers have also benefited. Every day, we see more collaboration and referral activity across our operating groups, and there is no greater validation of our platform strategy than from our internal B. Riley stakeholders, our colleagues. We believe our philosophy and diverse platform continue to be our key differentiator. This has enabled us to successfully recruit several experienced and accomplished professionals across our divisions amid this highly competitive market for talent. Last quarter, we stated our intent to build out Asset Management and fixed income. Since then we've welcomed back former colleague Wes Cummins and his team at 272 Capital. He and his team employ a small cap strategy rooted in fundamental research, which closely aligns with our own. Wes serves as President of our asset management division and will continue to oversee the funds of 272 Capital, in addition to B. Riley's private funds. And to support the growth of our fixed-income division, we also recently named Tim Sullivan, head of Fixed Income with B. Riley Securities. Tim's experience complements the firm's established leadership in structuring products, including our market-leading senior notes offering franchise and specialization in corporate debt issuances. Year-to-date, our team has led over $1.5 billion of corporate debt and preferred stock offerings. In wealth management, we opened a new branch location in Warrenton, Virginia, led by three seasoned financial advisors who joined us from BB&T Truist. And in New York, we recently welcomed a sophisticated advisor from UBS who is focused on serving ultra-high net worth individuals. Our ability to attract talented professionals of this caliber speaks to the value of being able to offer a unique array of services under one roof. We continue to actively recruit across all our business lines, with particular focus on investment banking to support our growing capital markets business and M&A practice. As Bryant noted at the top of the call, our strong quarter was driven by investment banking, including several significant transactions involving contributions from other B. Riley divisions. Noteworthy banking deals from the quarter include Greenidge Generation's $2 billion merger with Support.com, in which we served as buy-side advisor; RumbleOn's $575 million business combination with RideNow, in which we led both a common follow-on and debt raise, and also served as capital markets and buy-side advisor; Charah Solutions' $135 million senior notes offering, in which we served as lead bookrunner; and Tellurian's $120 million secondary offering in which we served as sole bookrunner; and DoubleDown Interactive's $113 million August IPO. Our Spec group also continued its momentum, contributing meaningfully to the quarter's results. A key offering of our Equity Research department, our proprietary corporate access events have helped differentiate us in our approach to bringing unique small and mid-cap market investment ideas to our clients and partners. During the quarter, we led 50 virtual events as well as an exclusive in-person conference in LA, which featured 35 companies and 50 institutional investors. Looking ahead, this December we are hosting an in-person Crypto Conference in New York. B. Riley Securities has quickly established a leadership position in the emerging cryptocurrency arena, being the first bank to bring a crypto miner public with Stronghold Digital Mining's recent IPO. In Wealth Management, our legacy business B. Riley Wealth and our recently acquired National Holdings continue to perform steadily with revenue, EBITDA, and fee-based assets up both on a year-over-year and sequential basis. Perhaps what is more gratifying, however, is the dedication and skill our coworkers are displaying as we work toward combining these businesses. In retail liquidation, despite domestic headwinds, this group has managed to keep active with projects in Europe. As we enter the holiday shopping season, the team has been busy working with returning retail clients to model store closings in preparation for the potential fallout from ongoing supply chain issues. And in its Advisory services, which includes our legacy GlassRatner Financial Consulting group and legacy Great American Appraisal division, the coordination of these businesses continues to bear fruit in generating referrals across our platform. We recently added senior hires to our restructuring division, valuation services practice into our risk compliance and cyber practice. This group's focus remains on the legal and lender community and corporate compliance markets. Despite a challenging environment for both legacy businesses, they both have found ways to be meaningful contributors to the overall B. Riley enterprise. Our Principal Investment companies, magicJack and United Online, continue to perform above our expectations, while providing cash flow to our platform. We are still working to obtain necessary regulatory approval to complete the second tranche of our investment Lingo, which should enhance our results in future quarters. Lastly, after a difficult period following the beginning of the pandemic, volumes within our brand investment business have dramatically increased. We remain optimistic about growth in this business in 2022. And finally, a point that cannot be overstated is how incredibly proud we are to represent and work alongside our colleagues. Our coworkers continue to step up in the face of the occasion, despite the challenges created by the ongoing pandemic. Our people show dedication on and off the playing field, both in the normal course of business, as well as by participating in any number of B. Riley sponsored programs. We continue to be inspired every day by the people we work with. Echoing Bryant's sentiment at the top of the call, with a common goal and shared purpose, our commitment is to continue to keep our eye on the ball and focused on delivering for our employees and our stakeholders. With that, we will now open the line for questions and then will turn the call back to Bryant for closing remarks.

Operator, Operator

Our first question comes from Keith Rosenbloom with Cruiser Capital. Please proceed.

Keith Rosenbloom, Analyst

Thank you. Guys, what a great quarter and what a great reflection of the business here. I just wanted to...

Bryant Riley, Co-CEO

Thank you.

Keith Rosenbloom, Analyst

You're welcome. I wanted to clarify my thoughts and make sure I'm aligned. I'm looking at the business, and it appears to be trading at a PE of 3. You've increased your dividend yield, which now stands at 6%. However, it seems much higher when considering the special dividends. Bryant, you hold 20% of the company and have just started a buyback. When comparing with other investment banks, they have significantly higher multiples and lower dividend yields. Additionally, there's no research coverage on your company. I'm curious if there's a clearer way to describe the business and what you're doing, Bryant, that would better illustrate your identity, or if the discrepancies in comparison to your peers are so obvious and unjustified that they might confuse potential investors.

Bryant Riley, Co-CEO

Yes, Keith, we've discussed this extensively internally, and it contributes to our proactive approach to cash returns and the introduction of a substantial annual dividend. I believe there's no confusion regarding our position. We function as an investment and merchant bank, leveraging our balance sheet to generate fees, investment opportunities, and profits for our clients and shareholders. A straightforward perspective on our business involves considering our recurring EBITDA, which includes a consistent level of interest income due to our loan book, placing that figure around $180 million to $200 million. Additionally, we have a broker-dealer and a liquidation business that can experience fluctuations, and it's unrealistic to assume we will always be on an upward trajectory. In analyzing our dividend, we observed that over the past three years, our broker-dealer has yielded roughly $10 million to $11 million in monthly EBITDA, with the previous year averaging closer to $21 million. Meanwhile, our retail operations have generated about $1 million to $3 million monthly over recent years. For our dividend, we determined the break-even point for a $4 dividend is underwriting the broker-deal to $5 million a month, rather than the $10 million average over the last three years or the $20 million last year, and underwriting the liquidation to $0.5 million. This allows us considerable flexibility to pay dividends while remaining cautious, as markets can be cyclical. The dividend yield offers a sense of security, and we intend to utilize the excess free cash flow, which results from underwriting to conservative figures, ensuring solid coverage for our dividend. In the past year, our operating EBITDA has reached $430 million, with total EBITDA significantly surpassing that, and our free cash flow has amounted to $592 million after investments. We have reinvested substantially in our business and have been expanding our fixed income practice, making acquisitions, and enhancing our research capabilities. However, when it comes to a public company that encompasses diverse businesses such as dial-up services, brands like magicJack, liquidation, and a broker-dealer, many may prefer a pure broker-dealer without the complexities. We believe in the importance of a broad mandate, which fuels our commitment to transparency regarding our activities and philosophy, and we've returned substantial cash to our shareholders. While this broad mandate represents a significant advantage, it also leads to some valuation discounts. Addressing those discounts is challenging; I think we just need to keep working hard and generating profits, and the rest will fall into place.

Keith Rosenbloom, Analyst

Can I just get two quick follow-ups in?

Bryant Riley, Co-CEO

Sure.

Keith Rosenbloom, Analyst

So, Tom just discussed the cryptocurrency business regarding crypto trading. Could you provide some insight into what that might signify for your contributions on the trading crypto side? Additionally, I know you've invested effort into building the asset management business. Can you share your thoughts on what the contribution from management fees might look like in a year from now for the asset management side of the business?

Bryant Riley, Co-CEO

Let me start with the management aspect, because I'm not sure if Tom will provide additional insights. We are not involved in trading cryptocurrencies; instead, we have been actively raising capital for miners, and I know you have participated in some of those efforts.

Keith Rosenbloom, Analyst

Yes.

Bryant Riley, Co-CEO

So that's become one of the major efforts. The most important aspect is that every one of those deals we've completed has generated significant gains, making a lot of people prosperous and providing substantial capital for miners to expand their operations. Additionally, we are hosting a conference focused specifically on that sector. In terms of asset management, unlike our competitors, we are the only firm without a substantial asset management division. However, we have a retail wealth management segment exceeding $30 billion, and we believe that an asset management business led by Wes Cummins, whom we've known for a long time, will produce excellent results. We are confident he will deliver outstanding products for our internal wealth managers as well as for other institutions. We are ensuring that Wes is well-established and equipped with his own infrastructure. We recognize that this is a new opportunity for us that we can actively pursue. I would be disappointed if we aren't managing over $1 billion. Depending on the returns, that could translate into $20 million to $30 million in income.

Keith Rosenbloom, Analyst

Thank you.

Bryant Riley, Co-CEO

Alright. Thanks, Keith.

Operator, Operator

Our next question comes from Brian Rohman with Boston Partners. Please go ahead.

Brian Rohman, Analyst

I want to echo Keith's comment about what a great quarter it has been. I have a question regarding the dividend. I don't typically consider broker-dealers as yield-type stocks, yet that's how you're presenting this. The reason I see a disconnect between yield and broker-dealers is that the core investment banking business can be quite volatile over time. What kind of situation would lead you to believe that the dividend might be at risk? Your new dividend.

Bryant Riley, Co-CEO

So I'm going to do the math again that I did before because...

Brian Rohman, Analyst

Yes, yes. And you did a great job for going over that. I'd like to hear that again.

Bryant Riley, Co-CEO

We are different from our competitors by acquiring operating businesses, such as magicJack and United Online, along with the brands we own. When we analyze these elements and our recurring business, our annual EBITDA is approximately between $140 million and $150 million. Additionally, we will always have a loan book, which contributes to our interest income.

Brian Rohman, Analyst

I'm sorry, Bryant, I didn't mean to interrupt you. Is the $140 million to $150 million you just mentioned the total for all the businesses?

Bryant Riley, Co-CEO

That is everything together except for the broker dealer.

Brian Rohman, Analyst

Okay.

Bryant Riley, Co-CEO

Our two volatile businesses are the broker dealer, which is currently very strong, and the liquidation business, which has significantly decreased in performance. Two years ago, the liquidation business was generating around $30 million in EBITDA, but now it’s closer to $10 million to $15 million due to the nature of the economy. This business involves buying inventory from companies that are going bankrupt and taking over their shareholders. Currently, this part of our operation is slower due to economic conditions. We categorize these as episodic businesses, while everything else is seen as more of a recurring business. For instance, the hourly advisory business we acquired, GlassRatner, is expected to generate $10 million to $12 million in EBITDA. Additionally, our appraisal services are also generating around $10 million to $12 million. When combined, these figures amount to approximately $140 million to $150 million in EBITDA. When considering our balance sheet, we have about $2.2 billion available for investment. Out of this, approximately $500 million is allocated in loans to clients and new opportunities, contributing around $50 million in interest income. By combining these figures, we arrive at about $200 million in total EBITDA. Regarding the broker dealer, it has been averaging around $21 million monthly in EBITDA over the past year, while looking back over the last three years it averaged about $10 million monthly. We have considered scenarios where if the broker dealer’s EBITDA drops down to $5 million per month, this would still provide enough cash to cover the dividends. The liquidation business has seen a decline from an average of $2 million per month to $1 million last year, which we have underwritten to about $10 million annually. Additionally, we have a $1.5 billion investment portfolio, which we are confident can yield strong returns. Overall, we believe we have a solid array of numbers and don’t foresee significant immediate debt concerns, with the nearest obligations coming due in the upcoming years. Even if we fall short by $2 million a month, we are confident in our business's strength and ability to recover. We're committed to sharing our returns with our shareholders, which is reflected in our approach to dividends.

Brian Rohman, Analyst

Let me rephrase my question. Currently, Bloomberg indicates you have approximately 28 million shares outstanding. With those shares priced at around $4 each, that results in about $100 million in cash flow for dividend payments. Are you considering whether the recurring businesses will be sufficient to cover these dividends, apart from any significant investments, while the episodic businesses continue to generate special dividends over time?

Bryant Riley, Co-CEO

You're close. You're not quite there yet.

Brian Rohman, Analyst

Yes.

Bryant Riley, Co-CEO

But you're close enough to think of it that way.

Operator, Operator

Our next question comes from Sean Haydon with Charles Lane Capital. Please go ahead.

Sean Haydon, Analyst

Hey, everyone. I want to congratulate you on the quarter and thank you for the dividends. I have a question regarding the wealth management unit. How advanced are you in the integration process of National? What should we anticipate regarding the operating margin there? Currently, it seems to be in the mid-single digits. Do you expect any improvement in that margin in the future once everything stabilizes and the integration is complete?

Bryant Riley, Co-CEO

I would like to comment on that transaction. We've always been somewhat understated, but on a scale of 1 to 10, the integration has been a perfect ten. To put it into perspective, in just two months, we're achieving $9 million of EBITDA with a $36 million run rate, which is impressive. We've received considerable support from the wealth managers as we've spent time introducing them to our products, and they’ve been involved in many of our deals. From a revenue momentum standpoint, we are in great shape. Is there more work to do on the operational side? Yes, we have leases and negotiations with vendors that could lead to more expense savings as the wealth managers merge. I can't give you a specific EBITDA target; our main goal is to be as profitable as possible. However, it's important to recognize that National and our wealth management businesses are different. The National business operates independently while we still distribute products to them. Their payout structure differs from our W2 wealth managers, who are full employees with all associated costs. You can expect a lower margin from an independent wealth management business compared to W2, but it carries less risk since we cover many of their costs. I'm excited about achieving $9 million, and I believe this is just the beginning. I anticipate attracting many recruits as we are an appealing place to work, backed by strong leadership actively recruiting. I believe our business could potentially develop into a $50 million to $60 million EBITDA operation in a year. This isn't a market challenge; it's an optimistic assessment based on current numbers.

Sean Haydon, Analyst

Okay. Yes, that's helpful, thanks. And then on brands. I mean it looks like that's really taking shape there. Do you guys have any targets in mind, or are you just trying to be opportunistic when it comes to the brands portfolio?

Bryant Riley, Co-CEO

Yes, one valuable aspect I've discovered over time is the importance of connecting with great people in this business. If you partner with individuals you've known or observed in action for a while, you can truly enhance your business. For instance, Kenny Young, the CEO of another company, has become our President, and Brian Kahn from the Vintage group has collaborated with us extensively in deals with Franchise Group due to our long-standing relationship. Additionally, we've developed a strong rapport with the founders of BlueStar, who we believe excel in their field, and we are prepared to partner with them when opportunities arise. While it's not a necessity, we are committed to supporting them as a capital provider and partner. I would note that you will often find more brand opportunities during challenging times than in a booming economy. For example, the apparel brand Justice, which was once a brick-and-mortar business that went bankrupt, now has a presence in 2,800 Walmart locations and often features in their commercials. We own over 40 percent of that brand and consider them our partner. Our approach isn’t focused on reaching a specific numerical goal or acquiring a set number of brands; instead, we aim to be opportunistic.

Sean Haydon, Analyst

Alright, great. Well again, congrats on the quarter.

Bryant Riley, Co-CEO

Thanks. Thanks, Sean, appreciate all your support.

Operator, Operator

This concludes our question-and-answer session. I'd now like to turn the call back to Mr. Bryant Riley for his closing remarks.

Bryant Riley, Co-CEO

Well, thank you, operator, and thanks everyone for participating. It’s really exciting day being able to return the kind of capital we are to our shareholders and our partners at our firm and being recognized by Fortune as the number two growing firm. Super humbled and really thankful for all the people that have helped us get there. So look forward to next quarter's call. Thank you, everyone.

Operator, 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 about B. Riley Financial's future expectations, plans, and prospects, and any other statements regarding matters that are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors include the unpredictable and ongoing impact of the COVID-19 pandemic, as well as the other risk factors explained in detail in the Company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of each statement. All forward-looking statements are made as of today, except as required by law. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. Thank you for joining us today for B. Riley Financial's third quarter of 2021 results earnings conference call. You may now disconnect.