Earnings Call Transcript - RILY Q4 2022

Operator, 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 Kelleher, Co-Founder and Co-CEO; and Phillip Ahn, CFO and COO. After management's remarks, we will open the line for questions. 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. Mr. Riley, you may proceed.

Bryant Riley, Co-Founder and Co-CEO

Welcome, and thanks for joining our call this afternoon. Throughout 2022, we continued to execute our strategy amid a tough environment with markets taking back the investment gains we saw in 2021, contributing to a net loss of $168 million for the year. Despite the losses in our investment portfolio, we delivered operating revenues of $1.3 billion in 2022, which is close to where we were at the end of 2021 during the record year that produced operating revenues of $1.4 billion. It is important to put this into perspective. The income and losses over the last 2 years were largely influenced by our investment portfolio. And over the course of 2021 and 2022, our investment book has effectively remained flat. During that period, we made approximately $10 per basic share and generated operating EBITDA of over $780 million. Additionally, during that time, we continued to diversify our business and implement a strategy we began 5 years ago: to invest our excess episodic cash flows into recurring operating businesses that will generate strong cash flows even when our episodic businesses are slow. Our operating performance in 2022 highlights the benefits of this strategy. To highlight this point further, consider that our investment banking and institutional brokerage business represented roughly 60% of our operating EBITDA in 2021 versus about 10% in 2022. During that same period, overall operating EBITDA declined by less than 20%. Since our inception as a sub-$50 million market cap publicly traded company in 2014, we have delivered in excess of $21 per share, or over $570 million in common stock dividends to our shareholders. We have had notably up and down years, and through all cycles, our diversified platform has demonstrated strength and resiliency to yield meaningful returns for our business and our shareholders, including in previous down-market cycles. We are and will continue to be opportunistic. As I mentioned, we made several strategic acquisitions this past year to bolster our platform with additional uncorrelated sources of steady revenue and to enhance capabilities where we see opportunities for longer-term growth. These additions include Targus, which has already contributed meaningful growth in our results; BullsEye Telecom and Lingo, which have enhanced the cash flows generated by our Communications segment; and FocalPoint, which has expanded our M&A, debt, and restructuring advisory capabilities as part of B. Riley Securities. In addition, we added to our receivables portfolio. This has been a great investment that continues to perform with double-digit rates of return. Since our unlevered purchase of the first portfolio for $400 million, and as of yesterday, we have recovered approximately $395 million of cash and have an incremental $154 million of current receivables. We typically recover 78% of our receivables per month. The second portfolio that we purchased in partnership with Pathlight Capital is performing in line with our expectations, and we expect to have an IRR in excess of 40%. Speaking to our corporate loan portfolio, at year-end, we had 12 loans with a total sales value of $384 million. This excludes our Badcock loan receivable portfolio and a few loans under $1 million of fair value. Approximately 95% of our loan portfolio at fair value was represented by secured loans. As a general view, we believe that our loan portfolio, which is almost entirely fair valued by an outside valuation firm, provides a very attractive risk-adjusted return potential for us over the course of the year. We have received a number of calls on this portfolio, so I will outline a few highlights of our loan portfolio activity for 2022, including activity thus far for 2023. We received a total paydown of $41 million on that loan. We received a $50 million paydown of our Cadiz loan. We received an $11 million pay down of our Excel loan. The last loan I will update is our Core Scientific loan. We provided Core with a $42 million loan against future equity sales, which now is an unsecured claim in the bankruptcy. We also provided a $70 million dip of which $35 million has been funded in order to have a greater seat at the table during the bankruptcy. At the time, our $42 million loan was marked to less than $8 million, which is reflected in our 2022 results. And since that time, Bitcoin has risen from $16,500 to $24,000, and power costs, consisting of mostly natural gas, have declined meaningfully. We will continue to utilize our balance sheet to facilitate opportunities for our clients and provide strong returns for our constituents. In summary, we like where we sit heading into 2023 from an earnings power, liquidity, and opportunity perspective. And we will continue to keep our heads down to perform for our colleagues, our clients, our partners, and our shareholders. With that, I'll turn the call over to Phil Ahn, our CFO and COO, to discuss key financial metrics for the quarter. Then Tom Kelleher, our Co-CEO, will discuss results from our business segments before we open up for questions.

Phil Ahn, CFO and COO

Thanks, Bryant. For the fourth quarter ending December 31, 2022, B. Riley reported total revenues of $327 million, down from $422 million in Q4 2021. Net loss available to common shareholders was $59 million, or $2.08 diluted loss per share, compared to net income of $62 million, or $2.08 diluted earnings per share in the prior year period. This loss primarily reflects investment losses of $124 million, representing mark-to-market declines in our investment portfolio. Excluding the marks on our investments, operating revenues increased to $450 million for the quarter, up from $353 million in Q4 of 2021. Operating adjusted EBITDA of $102 million compared to $106 million in the prior year period. For the full year ended December 31, 2022, total revenues were $915 million, down from $1.7 billion from the prior year. Net loss available to common shareholders was $168 million, or $5.95 diluted loss per share, compared to net income of $438 million, or $15.09 diluted earnings per share in 2021. Investment loss of $404 million for the year compared to investment gains of $387 million in 2021. Again, the loss was primarily due to the impact of the broad market declines throughout 2022 and its related impact on expenses that we hold. Operating revenues for the year were $1.3 billion, which was relatively flat compared to 2021 despite softness in small-cap markets and a decrease in investment banking and underwriting fees throughout 2022. Operating adjusted EBITDA was $366 million, down from $422 million for the prior year period. 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 highlights from our balance sheet. As of December 31, we had $269 million in unrestricted cash and cash equivalents, $1.1 billion in net securities and other investments owned, and $702 million in loans receivable. Of this total, loans on nonaccrual accounted for approximately $7 million of our total fair value. At year-end, we had a total cash and investment balance of approximately $2.1 billion, which includes approximately $54 million of other investments reported in prepaid and other assets. Total debt as of December 31 was approximately $2.4 billion. This includes $1.7 billion of senior notes, approximately $700 million of senior loans, and $25 million in notes payable at year-end. We remain in compliance with all of our debt covenants. Specifically, with regards to our debt facility covenants, the net asset value related to our primary guarantor was in excess of $2 billion at year-end. As a result of recent additions to our platform, we have realigned our segment reporting structure to reflect organizational changes at B. Riley. The new Consumer segment includes our previously reported Brands segment, which historically represented licensing revenues from our 6 brands portfolio, and Targus, which we acquired in the fourth quarter of 2022. The Consumer segment also includes revenues from our equity investments in Hurley and Justice brands, which were previously reported in the Capital Markets segment. We have also realigned our previously reported Principal Investments Communications and Other segment into 2 separate segments: a Communications segment and an All Other segment. The Communications segment includes our legacy United Online and magicJack businesses in addition to Marconi Wireless, Lingo, and BullsEye Telecom. The All Other segment consists of opportunistic acquisitions and sectors unrelated to the above-described segments. And finally, our regular quarterly dividend of $1 per share will be paid on or about March 23 to common stockholders of record as of March 10. That completes my financial summary, and now I'll turn the call over to our Co-CEO, Tom Kelleher, to provide highlights from our business divisions.

Tom Kelleher, Co-Founder and Co-CEO

Thanks, Phil. Over the past year, we helped clients navigate challenging markets to raise capital in a liquidity-restrained environment and execute on their strategic business initiatives. At the same time, we continued to grow our platform while making enhancements to strengthen our position long-term, both organically and through acquisitions. Excluding investments, our Capital Markets segment generated operating revenues of $542 million with segment operating income of $232 million for the year, reflecting lower levels of investment banking and underwriting activity. Our securities lending business continues to demonstrate resiliency amid a softer capital markets environment. After a challenging year, we realized a meaningful improvement in our Capital Markets business during the fourth quarter that has us optimistic for 2023. Underwriting, ATM, and banking advisory activities within B. Riley Securities all increased sequentially compared to Q3 with notable deals completed during the quarter, including a $75 million equity follow-on for AST SpaceMobile, a $125 million combined debt and equity raise for Arrow Health, a $119 million follow-on offering, along with several notable sell-side transactions. While many issuers have opted to wait for a more accommodating market environment, we are proud to have been nimble and aggressive in helping clients opportunistically seize windows to raise capital, as evidenced by our role as sole book running manager in Bed Bath & Beyond's public equity raise earlier in the month. In our B. Riley Asset Management business, 272 Capital has maintained its performance as a top equity long-short fund worldwide while adding assets and growing our institutional base. Assets under management for the business increased substantially year-over-year to $330 million as of December 31, 2022. Turning to Wealth Management, revenues for this segment totaled $234 million for the year, down from $382 million in 2021. The year-over-year decrease is primarily related to our strategic realignment of this division following our acquisition of National in the first quarter of 2021, as well as reduced client activity due to market headwinds through 2022. As part of our realignment in this business, we exited a significant amount of producing registered representatives to achieve the balance we sought for the business. Today, more than half of our wealth revenues are on a recurring basis. As fixed costs for this division continue to trend down, we expect to realize additional annual savings as vendor contracts roll off in the coming years. As we look ahead, we continue to invest in growing this business organically and recruiting quality advisers to our platform. Assets under management were more than $23 billion at December 31. In our Financial Consulting segment, revenues totaled $99 million for the year, with segment income of $16 million related to B. Riley Advisory Services and B. Riley Real Estate. During 2022, we achieved record appraisal revenue levels, expanded our Forensic and Litigation Services division, and realized year-over-year revenue growth in our Real Estate division, which we established in 2020. This segment continues to steadily perform as a source of stable revenues and profits for our platform, and we continue to explore opportunities to grow this division. To that end, earlier today, we announced our acquisition of the Corporate division of Farber Group, a Toronto-based restructuring and business advisory firm that our legacy GlassRatner team has collaborated with on cross-border engagements for over 15 years. This acquisition enhances our suite of advisory services. In addition to restructuring and turnaround management, Farber brings specialized expertise in human capital consulting, interim management, and executive search services. This added capability supports our role when we are appointed as interim CEO, CFO, or CRO for clients navigating a restructuring. This addition also extends our appraisal, valuation, litigation, and forensic services to Farber's clients and provides the foundation to expand our capabilities in Canada. We look forward to growing our collective foothold across the North American market together. In addition, we have established a new field examination practice to complement services we provide to lenders, private equity firms, and company borrowers. Our field exam practice strengthens our in-house capabilities and offers incremental value to our clients as a service that can be performed in conjunction with an appraisal for a more streamlined process in valuing collateral. This new practice is led by a veteran valuation expert, who joined us at the end of last year. We are excited about the opportunity to grow this vertical within our Appraisal division. In our Auction and Liquidation segment, revenues increased to $74 million for the year driven by an increase in retail liquidation assignments with legacy and repeat clients in the U.S. during the quarter and two large European projects, which added sizable profits in December. Rising interest rates, rising labor rates, and past supply chain disruptions are all adding to retail distress and disruptions. As financial pressure continues to mount for retailers, we are starting to see positive momentum for liquidations and are optimistic about the distressed retail market going into 2023. Turning to our Communications segment with recent enhancements. Our Communications segment revenues increased over 150% to $236 million for the year and generated segment income of $30 million in 2022. This segment has grown significantly since 2021, when it was primarily composed of United Online and magicJack, which we acquired in 2016 and 2018, respectively. Since then, we have added Marconi Wireless in the fourth quarter of 2021, completed the acquisition of Lingo in the second quarter of 2022, and acquired BullsEye Telecom in the third quarter of 2022. We acquired all of these companies on a cost basis, in line with our investment thesis and stated strategy to maximize cash flows to our platform. Importantly, each of these businesses continues to perform ahead of our investment ROI goal to generate cash flow for the firm. Finally, our Consumer segment revenues increased to $171 million, with segment income of $96 million for the year. This significant increase was primarily due to the acquisition of Targus in the fourth quarter of 2022. This segment also includes our investment in the Hurley and Justice brands and dividend income received from those investments, which totaled $28 million for the year, as well as revenues related to the licensing of trademarks for our six brands portfolio. We have a world-class team across B. Riley, who have the industry credentials and awards to rival the best in their fields. The dedication and support of our teams continue to be paramount to both our and our clients' collective success. We appreciate that integration is a big lift and requires flexibility from all our teams, both new and old. Our colleagues continue to bring complete focus and dedication. Our people are the most valuable asset we have, and we are humbled by the high caliber of professionals who represent the B. Riley brand in the market every day. With that, we will now open the line for questions and then turn it back over to Bryant for closing remarks.

Operator, Operator

Our first question comes from Sean at Charles Lane Capital.

Sean Haydon, Analyst

Congratulations on the quarter, and thanks for finding a better dialing this quarter. That was a pleasant surprise. Quick question on Farber. It seems like you guys have been building out capabilities for the past couple of years. But this one you're expanding geographically. Can you just kind of discuss your vision there and if that's something you're finding pursuing going forward?

Bryant Riley, Co-Founder and Co-CEO

Sure. Sean, it's Bryant. So we're looking at two ways to consider acquisitions: strategic and opportunistic. Farber was an opportunistic acquisition of a group of people that Ian Ratner, who runs that business, has known for a long time. He actually happens to be from Canada but is very familiar with that group. We found an opportunity to acquire them, adding not only capabilities but also geographical opportunities. We weren't explicitly looking to enter Canada; we saw it as a great fit for both parties. They recognized the benefits from our previous acquisitions like GlassRatner. We're really excited about this fit, as it was not a forced acquisition. We're happy to take opportunities as they present themselves.

Sean Haydon, Analyst

Great. I mean, just on that note, like does it come with any kind of expediting of entry into the Canadian market for your other businesses? Or is this just kind of separate from all that?

Bryant Riley, Co-Founder and Co-CEO

I don't know, Tom, do you have any thoughts on that? I would say that we have been mostly domestic, but to the extent we can utilize those relationships—whether in capital markets or lending—we will. But that's not why we did it; we acquired them because of the people who are coming on board. Tom, anything you want to add?

Tom Kelleher, Co-Founder and Co-CEO

Yes, I'd just add that it's a great opportunity. The base business—accounting and shareholder litigation support restructuring—is strong by itself. But there are executive search pieces, and wealth management that can be leveraged, enhancing our offering overall.

Sean Haydon, Analyst

Got it. Okay. That makes sense. And then I know you’ve done this in the past, but could you just remind us of the recurring EBITDA and kind of where that settles for the year?

Bryant Riley, Co-Founder and Co-CEO

Sure. To be specific, so for 2022, our definition of recurring EBITDA was about $325 million. To put this in perspective, we need about $310 million to cover everything, including our dividend and overhead. Being able to cover all that with our recurring EBITDA and have two other businesses that can generate outsized returns puts us in a good place. Looking at 2023, we received a significant benefit from Badcock receivables in 2022, which we need to replace. We also did not have the benefit of a full year from Targus, Lingo, and BullsEye. My run-rate recurring EBITDA is somewhere in the low 300s with an upside in the high 300s. We feel good about where we sit. None of those businesses require high CapEx; they are cash flow generative. If capital markets and liquidation return, as you've seen before, those can be powerful additions.

Operator, Operator

Our next question comes from Paul at Punch & Associates.

Paul Dwyer, Analyst

A couple of questions for you. First, on the loan book. I appreciate you guys tackling things head-on here. And given the attention this attracted, could you spend a little more time just talking about the underwriting process with the loan portfolio specifically and how you think about rates as well as how the loan book can fit with the rest of the business strategically?

Bryant Riley, Co-Founder and Co-CEO

Sure. In general, when we provide a loan, we consider it as enhancing our relationship, whether it’s a corporate relationship where we can create incremental opportunities to create fees or because we own part of the equity. Our Principal Investment Group has five people who do deep underwriting. We often engage GlassRatner for the Badcock receivables segment of our business, ensuring that we're supported by individuals with years of receivable expertise. Our restructuring side has a dedicated team that dives deep into assessing risks. When we undertake borrowing, we aim to be bridges until clients can secure longer-term financing.

Paul Dwyer, Analyst

No, that's perfect. I appreciate you expanding on that. And like I said, tackling it head-on in the prepared remarks. That's great. On Wealth Management, can you just spend a little more time talking about what, I guess, the amount of time you think it will take to get that business to the level of profitability that you were thinking about initially?

Bryant Riley, Co-Founder and Co-CEO

I would grade myself fairly well on most of the businesses we've positioned, but with Wealth Management, I have not done as well. I initially believed we would see profitability quicker. We made a strategic decision to reduce the size of that business, focusing on our most productive wealth managers. Today, the quality of our partnerships in this business is much improved. I believe we are very close to profitability without needing incremental syndicate business. The recurring revenue is progressing well; however, the syndicate reliance is diminished, so I expect profitability around this year.

Tom Kelleher, Co-Founder and Co-CEO

It's been a challenging integration process, but much of the operational headaches that arise from combining two large teams are now behind us. Moving forward, we can focus on growth and scaling this business.

Paul Dwyer, Analyst

On Targus, could you just spend a little bit of time on how that's getting integrated? And how they're managing through what I believe is a largely corporate clientele?

Bryant Riley, Co-Founder and Co-CEO

The beauty of Targus is that Mikel Williams is an incredible CEO who transformed it into a low CapEx, high cash flow business. We underwrote the acquisition expecting a downturn in their profitability but with anticipation of freight savings that would offset that.Targus is managing through challenges, and while I slightly expect it to be closer to the lower EBITDA range, integration is smooth. We're in it for the long term and will enforce opportunities for add-on products.

Paul Dwyer, Analyst

Okay. Great. And just pulling on that thread a little bit. Where are you looking to allocate capital either strategically? I guess it's harder to predict the opportunistic ones. But where do you want to put your incremental dollars in 2023?

Bryant Riley, Co-Founder and Co-CEO

We're considering bridge loans to public companies where we can utilize our institutional relationships and offer various types of loans, whether asset-backed or otherwise. One of our smart strategies was selling a lot of baby bonds at low rates. We're looking to leverage our balance sheet for investments that offer mid-teens type of returns while enhancing our offerings, whether sell-side or otherwise. Companies are feeling pressure to find money quickly, and we believe we can assist.

Operator, Operator

Our next question comes from Thompson at Economics.

Unidentified Analyst, Analyst

A lot of my questions have been answered. I saw the net debt for the quarter as net of cash investments went negative. Any target you guys are looking for there? Where do you want to be?

Bryant Riley, Co-Founder and Co-CEO

We aim for net cash, but we can accept some degrees of leverage. We paid out $580 million to our shareholders while maintaining a position that is less than 1x leveraged, which feels solid. We could leverage ourselves about 2.5x to 3x, but I don't think we will. Our business should earn itself out of that, and our portfolio may be undervalued right now. We have a recurring revenue piece that does not have extensive working capital needs, and we are positioned well, so I don’t worry much about our net debt.

Unidentified Analyst, Analyst

Great. Yes, super helpful. And then looking at the loans receivable for the end of the year, $700 million. Can you just break down a little bit, you or Phil, break down a little bit about what's in there? We've got Badcock, and we got Babcock. Can you kind of get through those? And then any other big ones?

Bryant Riley, Co-Founder and Co-CEO

Phil, I think you should break that up regarding Badcock and others. We have loans all over the board with an average loan of $32 million, which excludes Badcock, across 13 names. The duration of these loans is targeted to be less than a year, typically around 3 to 6 months. Our goal with these bridge loans is to facilitate deals and assist clients in progressing towards more stable financing.

Operator, Operator

Our next question comes from Keith at Cruiser Capital Advisors.

Keith Rosenbloom, Analyst

Bryant, could you elaborate a little bit on the operating earnings that you've guided to—the non-episodic operating earnings. Does that—I think you said $324 million? Does that include a full year of Targus? Or is Targus additive to that?

Bryant Riley, Co-Founder and Co-CEO

Targus contributed about $11 million for the year; we acquired that in mid-October. I don't think we're seeing major returns to Targus just now, but we freed up a lot from Badcock receivables over the last 14 months. I still do not expect major contributions from Targus for the next fiscal year. That said, we're optimistic about our performance moving ahead.

Keith Rosenbloom, Analyst

Okay. And then on the Babcock & Wilcox receivables themselves, one of the elements of the short report was questioning the caliber or quality of those receivables for the loan. What has been the overall, I guess, default rate? How would you categorize the quality of the loan?

Bryant Riley, Co-Founder and Co-CEO

I think it's important to distinguish between the valid aspects here. The criticism focused on our backing of lines of credit for Babcock & Wilcox. We backstopped approximately $100 million of LCs at a low rate, which I view as noncontroversial due to their strong history. We made an investment into Badcock, purchasing approximately $530 million of receivables at a rate of 75 cents on the dollar. Our investment, which has produced great returns, indicates we are optimistic about our receivables as we have recovered $396 million of our $400 million initial investment.

Operator, Operator

Our next question comes from Steve with Strategic Advisors.

Unidentified Analyst, Analyst

Congrats on the adjusted operating EBITDA in a tough environment.

Bryant Riley, Co-Founder and Co-CEO

Thanks, Steve.

Unidentified Analyst, Analyst

Maybe just staying on the high level here. So in '20 and '21, looking back, you guys have never had over $100 million in net cash from operations. And with interest expense now exceeding $175 million on an annual rate and negative tangible book value, when you think of the dividend, what do you think about the funding model for this dividend? What's going to be the source to fund this? Because obviously, you have the cash available to pay it down, but I guess just the sustainable funding of the dividend.

Bryant Riley, Co-Founder and Co-CEO

I feel that our recurring EBITDA has funded our dividend and overhead on a consistent basis, addressing your concern here. This $310 million funding was drawn from a $324 million recurring EBITDA in 2022. Our capital markets arm, although not always consistent, continues to strive to produce cash flow, which has seen us through various market conditions as a protective approach. This is how we sustain our dividends.

Operator, Operator

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

Bryant Riley, Co-Founder and Co-CEO

Thank you, everyone. I noticed 480 people on this call, which I think is a record. Many people work at our firm, and they've entrusted their careers with us. We take that responsibility seriously. There has been a lot of noise and inaccuracies floating around, but we believe we're very well positioned as we move forward in 2023—both on the recurring and episodic side. We think we have a great runway, and we're very appreciative to everybody who helps us get there. To our shareholders, we understand that our story can be difficult to grasp, especially in this volatile climate, but overall, I think we performed well, and we're dedicated to continuing this performance. Thank you for giving us that opportunity.

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 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. If such risks or uncertainties materialize—or such assumptions prove incorrect—our business, operating results, financial condition, and stock price could be 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, 2021, and in our quarterly reports on Form 10-Q for the quarters ended March 31, June 30, September 30, 2022 under the captions risk factors and management's discussion and analysis of financial condition and results of operations, as applicable. Additional information will be set forth in our annual report on Form 10-K for the year ended December 31, 2022. These factors should be carefully considered, 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 fourth quarter and full year 2022 earnings conference call. You may now disconnect.