B. Riley Financial, Inc. (NASDAQ:RILY) Q3 2023 Earnings Call Transcript
B. Riley Financial, Inc. (NASDAQ:RILY) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Good morning, and welcome to the B. Riley Financial's Third Quarter 2023 Earnings Call. My name is Britt, and I will be your call coordinator. Earlier this morning, B. Riley issued its third quarter earnings release. A copy of the release can be found on B. Riley's Investor Relations website at ir.brileyfin.com, or on the right side of your screen if you're joining us today via web. Today's call includes prepared remarks from the Company, which will be followed by a question-and-answer session with the management team. Joining us today from B. Riley are Bryant Riley, Chairman, Co-Founder and 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, today's call is being recorded, and an audio replay of this call will be available 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: Welcome, everyone, and thanks for joining our call. During the quarter, we continued to execute our platform strategy, generating a meaningful amount of operating EBITDA, while at the same time, maintaining disciplined focus on balance sheet flexibility to pursue our continued growth. We generated operating adjusted EBITDA of $107.5 million for the third quarter of 2023, up 34% from Q2 and operating EBITDA of $267.8 million for the first nine months of 2023. Net loss of $76 million was driven by investment losses, which were primarily unrealized and relates to changes in mark-to-market valuation on investments that we hold. As we noted before, our investment gains and losses for any particular period are not indicative of our overall business performance, and we have a high degree of confidence in these investments.
Our third quarter operating results highlighted strength across our platform with increased revenue and client activity levels picking up from earlier this year. To put this into perspective, our Q3 operating revenue was the highest quarterly total in our firm's history, and our Q3 operating EBITDA ranks third highest. On a year-to-date basis for the first nine months, our 2023 operating revenue also ranks highest, and operating EBITDA ranks second. This is a direct outcome of our strategy in the steps we've taken to change the relative mix of stable, lower-margin revenue versus episodic higher-margin revenue. A few highlights for the quarter include strong performance from retail liquidation and another record revenue period for advisory services, which continue to perform -- outperform as an additional bright spot on our platform with increased contributions from both our specialty consulting and appraisal units in addition to a strong quarter from our real estate restructuring division.
During the quarter, we also saw a meaningful increase in investment banking activity and improved performance from Wealth Management as a result of the actions we undertook to right size this business last year. In terms of our investments, we believe that equity valuations in the small-cap market are as attractive as we have seen in a number of years, and we'll look to take advantage of this opportunity, both as a principle, but also to facilitate transactions for our clients. We have continued our disciplined focus on maintaining an optimal capital structure to both fund our continued growth and to take advantage of future opportunities. During the quarter, we raised approximately $150 million in equity proceeds in connection with our common stock offering in July, expanded our Nomura credit facility by approximately $240 million and reduced our other outstanding debt by over $160 million.
Taken together, these events resulted in a meaningful change in our capitalization as of September 30. With over $2 billion of cash investment and a balanced debt profile, with the vast majority of our debt maturing in 2026 to 2028, our platform is strongly positioned as we look ahead to 2024 and beyond. We founded B. Riley over 25 years ago in a principle that there was a void of financial service firms that could adequately support the needs of companies and investors focused on the lower middle market. I think that premise still remains true today, and there's no other platform as diverse and competitively positioned as ours in the ability to provide value to our clients and partners, and there is no better team than the world-class professionals across our B.
Riley platform. With that, I will now turn the call over to Phil Ahn, our CFO and COO, to discuss key metrics for the quarter. Phil?
Phillip Ahn: Thanks, Bryant. For the third quarter of 2023, B. Riley generated total revenues of $462 million, which represents a 48% increase from $312 million for the same period in 2022. Total revenues also increased by 86% to $1.3 billion for the first nine months of 2023 compared to $699 million in the prior year period. Growth in revenue during the quarter was primarily driven by our Auction and Liquidation segment, Consumer segment and Financial Consulting segment. On a GAAP basis, we recorded a third quarter net loss of $76 million, primarily attributable to unrealized investment losses of the equity investments that we hold. Year-to-date, we reported a net loss of $16 million. Despite the markdowns in our investment portfolio, our platform continues to deliver strong operating results.
For the third quarter of this year, operating revenues increased to $473 million, up from $319 million in the prior year quarter. Operating revenues increased to $1.22 billion for the first nine months of 2023, up from $843 million in the same prior year period. Third quarter operating adjusted EBITDA increased to $107.5 million, up from $106.2 million in the prior year quarter. And year-to-date, operating adjusted EBITDA increased to $268 million, up from $265 million in the first nine months of 2022. As a reminder, adjusted EBITDA and our metrics for operating and investment results may be considered non-GAAP financial measures. Investors can find additional details relating to these metrics, including a reconciliation to the nearest GAAP measures in our earnings release and our financial supplement, which will be posted to our Investor Relations website.
Now turning to a summary of our balance sheet as of September 30. At quarter end, we had approximately $252 million of unrestricted cash and cash equivalents, $1.2 billion in net securities and other investments owned at fair value and $549 million in loans receivable at fair value. Total cash and investments was $2.05 billion, including $58 million of other investments reported in prepaid and other assets. Total debt as of September 30 was approximately $2.36 billion. Total debt net of cash and investments was $311 million at quarter end. Finally, we declared our regular quarterly dividend of $1 per share, which we paid on or about November 30 to stockholders of record as of November 20. In addition, our Board has approved an annual share repurchase plan under which B.
Riley may repurchase up to $50 million of our common shares. This completes my financial summary. I'll now turn the call over to Tom Kelleher, our co-CEO, to discuss our business segments. Tom?
Tom Kelleher: Thanks, Phil. B. Riley's unique combination of businesses and collaborative team approach has enabled us to continue to deliver against the backdrop of challenging markets. Throughout 2023, we have remained focused on executing on our strategic plans by continuing to invest in our platform, extending and strengthening our market share and building out our execution capabilities. Excluding our investment results, our Capital Markets segment contributed operating revenues of $151 million and operating income of $51 million during the third quarter. Within this segment, revenues from B. Riley Securities represented a year-over-year increase of over 10% with investment banking fees revenue up over 100% from Q2, driven by significantly higher underwritten offerings.
In addition to adding several new clients in Q3, we completed key mandates for several repeat clients, including Harrow Health and Landsea Homes. Our M&A pipeline is beginning to bear fruit, and we expect activity to accelerate going into 2024. B. Riley Securities has established its leadership in capital formation for small caps in the middle market. As we continue to focus on developing and adding talent to expand our coverage, we believe we are positioned to increase market share as investment banking activity returns to more normalized activity levels. In our Wealth Management segment, revenues increased both year-over-year and on a sequential basis to $51 million. Our third quarter results demonstrate continued progress in our strategic initiatives to realign this business with improving margins and an upward trend in reoccurring revenues.
At quarter end, our wealth assets under management totaled $24 billion, and our producer base remained flat at approximately 400, representing a balanced mix between independent and W-2 advisers. As capital market activity improves, we believe there is an opportunity for more upside in this business. In Auction and Liquidations, B. Riley Retail Solutions had a robust third quarter, generating segment revenues of $78 million and segment income of $18 million, driven by an increase in both the number and the size of our retail liquidation engagements. The influx of new business that started during Q2 continued in the third quarter with several new and ongoing domestic and European projects carrying into the fourth quarter. Engagements completed during the quarter include Bed Bath & Beyond which we led with our JV partners and Salamander Shoes in Europe.
More recent engagements include Z Gallerie and Depot Germany, which will contribute to future quarters. New business in Europe also continues to be promising as European retailers feel the effects of poor sales, reduced consumer spending and rising interest rates. Financial Consulting segment revenues of $37 million represents an increase both on a sequential and absolute basis as another record period for our advisory services business. Segment income was $10.5 million for the quarter, and we are seeing momentum continue into what is historically a busy season in Q4. Increasing levels of client activity across bankruptcy and litigation, consulting, appraisal and real estate restructuring contributed to our strong quarterly results. Additionally, our team of professionals at Farber have already contributed meaningful results in joining our platform in February.
This team operates as a seamless extension of our core bankruptcy and restructuring services in the Canada market, and we are currently in the process of introducing legacy Farber's interim management and executive search as a new capability for us in the United States. We look forward to bringing our forensic accounting services to Canada in the near future as well. In our Appraisal division, year-over-year revenues and operating income increased across the board in all of our business lines, including inventory, machinery and corporate valuations. Our appraisal business has continued to steadily gain market share over the last five years, and we expect demand from asset-based lenders to remain robust. Turning to our communications portfolio.
Segment revenues were $84 million and segment income was $7.5 million for the third quarter. As a reminder, we acquired these businesses at opportunistic valuations and with an understanding that the portions of the respective market segments may continue to decline. We acquired United Online in 2016 and magicJack in late 2018. Since then, we've generated cash flows in excess of our original purchase prices for these businesses within about two years in the case of United Online and within 3.5 years for magicJack. Both continue to be strong cash flow contributors to B. Riley. Based on our earlier successes with these businesses, we added Marconi Wireless to our portfolio in late 2021 and Lingo BullsEye through a series of transactions over the last year, which contributed to the significant increase in this segment.
In our Consumer segment, revenues of $63 million for the third quarter were largely driven by the addition of targets to our platform in Q4 of last year in addition to the brand licensing revenues from our six brands portfolio. Targus has faced challenges in 2023 due to softness in the overall PC marketplace, and as a result we recorded a noncash goodwill and trade name impairment charge of $35.5 million, which contributed to a segment loss for the quarter. However, with the strength of the Targus brand and financial strength at B. Riley, we believe Targus will be competitively positioned to gain share as the PC market recovers. Now I'd like to turn the call back over to Bryant. Bryant?
Bryant Riley: Thanks, Tom. Before we open up the call for Q&A, I just wanted to take a few moments to address the news surrounding FRG. It wouldn't be appropriate for us to speculate or provide commentary on the reported allegations. However, I do think it's important for us to lend context to how we view FRG as a business and our rationale for that investment. During the quarter, we announced our role leading the financing of FRG's $2 billion take-private transaction. We placed a significant portion of the equity and principally invested in the deal alongside management and other co-investors. We own a little over 30% equity interest in the private entity in connection with that transaction. FRG is comprised of six distinct businesses with over 3,000 combined locations across the U.S. and Canada, including American Freight, Badcock Furniture, Buddy's Home Furnishing, Pet Supply Plus, Sylvan Learning Centers and the Vitamin Shoppe.
Given our view that FRG's public valuation was below the sum of its parts, we saw a compelling opportunity to participate in its take private as do many co-investors of that deal. We invested in FRG based on the fundamental of those distinct businesses, that is we underwrote and that is what we invested in, the FRG business. And our confidence in these businesses has not waned at all. From an operational perspective, FRG is not run by any one individual. As franchise businesses, these companies are run by six different management teams that operate with their own infrastructures. FRG was formed through the purchase of shares of the founder of Liberty Tax in 2018. We purchased these shares at approximately $8 per share, and we were a largest shareholder than the current management team at that time.
We realized a return of over 30% IRR over the next few years on that original investment. We know these assets. As CEO, Brian Kahn was the architect to help put these businesses together to form FRG as it is known today. I've known Brian for many years and have had no direct experience with what has been alleged. We learned of this matter late last week like many others, and we continue to closely monitor relevant developments. However, I have no interest in going through hypotheticals and speculation. B. Riley's business is much more than just FRG and to the extent to which we have ever needed to work to protect the firm's interest and that of our investment partners, we have and always will. With that, we are ready to open for Q&A. As always, we're happy to address any questions within the context of our results and our overall business.
Operators, please open the line for questions. Thanks.
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