Q2 2023 B Riley Financial Inc Earnings Call
Participants
Bryant Richard Riley; Co-Founder, Chairman & Co-CEO; B. Riley Financial, Inc.
Mike Frank
Phillip Ahn; CFO & COO; B. Riley Financial, Inc.
Thomas J. Kelleher; Co-Founder, Co-CEO & Director; B. Riley Financial, Inc.
Jon Daniel Bosse; Co-President, CIO, Co-Head of NWQ, MD, Equity Analyst & Portfolio Manager; Nuveen Asset Management LLC
Sean Haydon
Unidentified Analyst
Presentation
Operator
Good afternoon, and welcome to B. Riley Financial's Second Quarter 2023 Earnings Call. My name is David, and I will be your call coordinator. This afternoon, B. Riley issued its second quarter earnings release and financial supplement. Copies can be found on B. Riley's Investor Relations website at ir.brileyfin.com or on the right side of your screen if you are joining us today via web.
(Operator Instructions) 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.
(Operator Instructions) As a remainder, 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 Richard Riley
Thank you for joining our call this afternoon. On a consolidated basis, our platform delivered solid results for the second quarter. We saw a meaningful year-over-year increase in revenues despite another period with nominal contribution from investment banking. With a more favorable market environment, momentum is carrying into the current quarter with increasing levels of client activity across capital markets, retail liquidation, consulting and appraisal.
In the month of July, we closed more investment banking transactions than during all of the second quarter, and we have since added several new and current engagements to our pipeline. Retail liquidation has picked up both in the U.S. and in Europe and demand for our financial advisory and appraisal services continues to be strong. Capital Markets conditions continue to improve. Wealth management should also be poised to benefit.
Based on where we are today, relative to our Q2 results, we are reaffirming our prior guidance. We expect to generate operating EBITDA of at least $105 million in the third quarter. To be clear, this guidance represents a floor based on where we are today. To the extent the current level of activity continues, we believe there will be additional upside from capital markets.
Over the last 3 years, we have remained focused while continuing to execute our strategy. I've said this before and it bears repeating. None of this is by accident. We have carefully constructed our business with a highly skilled team of professionals whose leadership allows us to be nimble in challenging markets and to be ready when conditions turn. Based on recent activity, we believe our business is on a near-term inflection, and we are well positioned to capitalize on our momentum.
With the current tailwinds in banking and liquidation, we will press the offensive and utilize our balance sheet to pursue opportunities we see across our platform. This includes supporting our clients in their strategic and capital raising initiatives as an underwriter or lender, adding new talent and businesses to support our existing teams while expanding core services in new markets, and making opportunistic investments to enhance our platform while continuing to diversify sources of steady recurring earnings.
We are extremely encouraged about where we are today and for our outlook relative to the opportunities ahead. 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. Now recapping our results for the second quarter of 2023. On a consolidated basis, our total revenues increased to $406 million in the second quarter, up from $140 million during the 3 months ended June 2022. Net income available to common shareholders was $44 million or $1.55 per diluted share. Our operating revenues increased by 41% to $364 million, up from $257 million in the prior year quarter.
Operating adjusted EBITDA increased to $80 million compared to operating EBITDA of $74 million in the prior year quarter. Increased revenues from our financial consulting and our Auction and Liquidation segment were partially offset by decreased investment banking and wealth management fee revenues as a result of overall lower capital markets activity during the quarter.
The additions of Lingo and BullsEye Telecom to our communications portfolio and targets to our consumer brands portfolio last year also contributed to a significant increase in revenues during the quarter. On a consolidated basis, our total revenue was also enhanced by $42 million in investment gains for the second quarter, reflecting both realized and unrealized gains and losses on strategic investments that we hold.
As a reminder, adjusted EBITDA in our metrics for operating 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 financial supplement.
Turning to a summary of our balance sheet at June 30. At quarter end, we had approximately $108 million in unrestricted cash and cash equivalents, $1.07 billion in net securities and other investments owned at fair value and $684 million in loans receivable at fair value. Total cash and investments was approximately $1.92 billion, including $66 million of other investments reported in prepaid and other assets.
Total debt as of June 30 was approximately $2.33 billion, and total debt net of cash and investments was $406 million at quarter end. Finally and as was previously announced, we declared a regular dividend of $1 per share, which will be paid on or about August 21 to stockholders of record as of August 11. This completes my financial summary.
And now I'll turn the call over to Tom Kelleher, our Co-CEO, to discuss our business segments. Tom?
Thomas J. Kelleher
Thanks, Phil. We remain encouraged by our overall performance and the current momentum we are seeing across our diversified platform. As Bryant referenced, B. Riley Securities is seeing directional improvement in the current period with strong investment banking results in July, both in terms of completed transactions and new and near-term engagements.
Additionally, current market dynamics have created a favorable environment for recruiting as we look to strategically grow in verticals where we see opportunity.
During the quarter, we added multiple experienced hires to our banking and equity research team and meaningfully expanded our coverage across the consumer and TMT sectors. Our newly expanded consumer team is looking forward to hosting our consumer conference in New York next month.
In Wealth Management, revenue production remained solid during the second quarter despite muted capital markets. While legacy settlement costs and integration challenges have obscured historical operating efficiencies, this was a pivotal quarter for the business. Gross margin has improved substantially, and monthly fixed costs are down. We have achieved a meaningful amount of annualized savings while significantly reducing risk associated with legacy issues. Having met our goals to rightsize the business, we can now look forward and focus on growth.
Our current adviser base is a balanced mix of W-2 and independents, and more than 50% of our revenue is reoccurring. We believe there is an opportunity for more upside in this business as capital markets activity improves and we are continuing to focus on recruiting high-quality advisers with sophisticated clients to join our platform.
In Auction and Liquidation, we saw a significant influx of large retail engagements, which contributed to increased revenues of $10.6 million during the quarter. The majority of our domestic profit for Q2 was from ongoing projects that we initiated earlier this year, including Nordstrom Canada and store closures for Bed Bath & Beyond, which have continued into the current quarter.
In addition, we continue to see substantial activity in Europe. During the quarter, we finished up projects in Germany and Ireland for GameStop, which included 121 stores. More recently, we started a large engagement with Salamander, which includes over 130 stores across Germany, Austria and Hungary. In this past week, we signed an engagement with [Depot] Germany, which includes over 100 stores. These projects should contribute meaningfully to our results in future quarters, and we expect to see more activity in the remainder of this year given the continued constraints across retail.
In financial consulting, B. Riley Advisory Services experienced another record quarter in Q2 with momentum continuing in Q3. Revenues from this segment increased by 28% year-over-year to $31 million, up from $24 million in the prior year quarter. Segment income increased to $8 million, up from $4 million in the prior year period.
Demand for bankruptcy restructuring and litigation advisory services remained strong. Following early successes from the addition of Farber to our platform this past February, we recently completed 2 more acquisitions to strategically enhance our business. In May, we acquired ABTV and in the process, added a team of senior restructuring professionals based in Charlotte. This team quickly hit the ground running and is already working alongside our existing team. And in July, we acquired Crawford & Winiarski, a boutique forensic accountancy and litigation support practice, which gives us a significant presence in Detroit, where we already have an established restructuring practice.
In our appraisal division, engagement capacity is fully utilized. We are looking to increase staffing levels to support growing appraisal needs for asset-based lenders. We're also continuing to focus on building our field exams group, which has seen early success since introducing this as a new service line this past February.
Bringing on these highly skilled professionals not only provides incremental value to our existing team and clients but also breaks ground in new markets for our other B. Riley divisions. Our new colleagues have been enthusiastic about bringing the breadth of our platform to their clients. In our Communications segment, our portfolio of businesses continues to perform to our expectations while contributing meaningful earnings to our platform. On a combined basis, these businesses generated segment revenues of $85 million and segment income of $10 million for the quarter. The significant increase was primarily driven by the acquisitions of Lingo and BullsEye Telecom in May and August of 2022.
Finally, revenues from our Consumer segment were $60 million for the quarter, largely driven by Targus, which was acquired in Q4 of last year, in addition to the brand licensing related to our 6 business portfolio, which continues to perform relatively steadily. During the quarter, we expanded our brands investment portfolio through the purchase of a minority equity stake in Dutch fashion brand, Scotch & Soda in connection with Bluestar Alliance's acquisition of the brand out of bankruptcy.
The structure of this investment is similar to our other co-investments with Bluestar, including Justice and Hurley, which have generated meaningful dividend income for the platform since our initial investment. Bluestar will continue to operate the Scotch & Soda brand while expanding its retail distribution.
Given the relative strength across our business and our outlook for the current quarter, we remain extremely encouraged as we look at the many opportunities ahead. We recognize that our diversified platform is unique. But what truly differentiates B. Riley is our team of dedicated professionals who contribute to our continued success. As always, we are indebted to them for their commitment to making the firm what it is.
With that, we will now open the call up for questions before turning back to Bryant for closing remarks. Operator?
Question and Answer Session
Operator
(Operator Instructions)
Mike Frank
So operator, we have an e-mail in question. I can just ask that real quickly. If we can provide an update on the franchise group acquisition.
Bryant Richard Riley
Thanks, Mike. So franchise group should -- their shareholder vote is the 17th, and then we'll close shortly thereafter, August 17, so about 1.5 weeks.
Operator, if you want to open up for questions, that's great.
Operator
Our next question comes from Sean from Charles Lane Capital.
Sean Haydon
Congrats on the quarter. Real quick question on wealth management. How far along are we in terms of the rationalization of that? I know this has been kind of an ongoing process. But would you say around the sixth inning or third inning?
Bryant Richard Riley
TK, do you want to answer that since you've been kind of more involved?
Thomas J. Kelleher
Sure. Yes. I would say we're in the eighth inning or ninth inning. You heard the prepared remarks. It's really this quarter that kind of seemed like we turned the corner. We changed the name earlier in the year. Last year was clearly kind of a triage year, 2 large groups coming together, 2 completely different systems that supported those businesses and all the nuances that go on there.
And it just took some time to really sift through. But really in the last couple of months, it feels like a lot of the systems have been normalized. A lot of the personnel issues, all that stuff that kind of goes with a large acquisition, really, we've kind of -- have been normalized.
So in the past, it was always about trying to figure out what we're going to do with this system or these individuals or how we're going to manage that. Now it's -- all the discussions are how are we going to grow this business, how do we attract new talented people to come to the platform. Let's show them what we've done, how we do things and get them excited about the platform. So we're excited.
Bryant Richard Riley
Yes, Sean, the other thing I would say on that is that if we're not experiencing much of the capital markets environment, that means the wealth managers aren't experiencing the same. And it's just a bit tighter for them, and it's a bit tighter for us. And we really view those wealth managers as partners. So if we can break even in a -- it was a really, really tough environment. That's fine with us.
And then we will partner with them as things improve, whether that's in private shares or whether that's regular way cap markets or whatever. So we feel really good about how that business is positioned. I think we feel good about the partnerships we've built with the wealth managers. I think they are onboard and excited about what we bring to the table.
Sean Haydon
You kind of front ran my second question. So there was a more buoyant market in the second quarter there. Do you guys expect to segment breakeven, I guess, on an income basis this year, next year? Like what should we be modeling as far as...
Bryant Richard Riley
I think you should be modeling a breakeven if there is a very poor capital markets environment and then making somewhere between $2 million to $5 million a quarter if it's a robust operating environment. It's not -- we don't have the same leverage that we have in our regular way institutional business. So you're not going to see that wealth management business generate $40 million EBITDA on the revenue base it has. But I would say, I would flex it from 0 to 20 based on the overall environment.
Sean Haydon
Okay. That's fair. That's helpful. On Scotch & Soda, I assume that's going into the Consumer segment. How should we think about that in terms of sizing? Is it roughly the same size as Hurley and Justice or will it be larger?
Bryant Richard Riley
We bought a smaller percentage of that one for a number of reasons. So I think Scotch & Soda ultimately can generate, for us, maybe $3 million to $5 million incremental EBITDA, where Justice and Hurley combined are over -- in and around $30 million. So it's a smaller asset, but we think the IRRs are going to be well over 30%.
Sean Haydon
Got it. And that's just margin for you, right? Like that just drops down?
Bryant Richard Riley
Yes. We don't -- that is dividend income, so that is free cash flow, yes.
Sean Haydon
Yes. Okay. Makes sense. And then Tom called out a number of engagements in Europe this past quarter. Seems like that's gaining a little momentum. Anything there that you attribute that to?
Bryant Richard Riley
I mean it's actually gaining a lot of momentum. I think the goal in businesses like liquidations or businesses like capital markets is to be investing in it when it's low, be aggressively marketing when it's low. So when it turns, you are creating opportunities. And that's what's happened there. We have been -- we've got a great team there, and they've been in position and been working hard for when there were opportunities. And now there's opportunities. And I think their market share is probably -- I don't know. It's high.
And so it's exciting. And that's the mantra. I mean we don't sell -- in those businesses, it's not like we're selling widgets and we've got a ton of backlog. You've got to be ready for it when it happens, and you never know when it's going to happen. And I think they've done a great job of positioning themselves. It's not a big group. We don't burn a lot of capital on 100 people. It's a much smaller and targeted group that are super talented. And now that there's been a little bit of distress in European retail, we are a beneficiary of that.
Operator
(Operator Instructions) Our next question comes from [Steve] from Schonfeld Strategic Advisors.
Unidentified Analyst
Congrats on FRG, and I'm sure you can turn it around. My first question is just on [roll] of debt coming due soon, given the 6/30 cash level. I think in May 24, you have a $199 million baby bond coming due. So do you plan to roll that by raising more baby bonds?
Bryant Richard Riley
No, no, no. Listen, no, we don't plan on rolling. We have $1.9 billion investment. It's a quarterly cash number. There is a period in time we do not want to have a lot of cash. We want to be having $30 million of investments over in European liquidations. We want to be having a highly profitable loan. So since that period, for example, we have repaid $70 million of our loans. So we will continue to utilize our balance sheet, but we will use the assets of our balance sheet to pay our debt.
Unidentified Analyst
Got it. Okay. And then maybe just stepping back, just a refresher on the Asset Management business. Just like AUM levels, is the client base -- retail institutional, what's the base of the clients, the investment strategy? And like personnel, I know you have Wes Cummins, and he wears a number of hats for you guys. But just like kind of the high level, walk us through the Asset Management business again.
Bryant Richard Riley
Institutional, $250 million, long, short hedge, 5 people.
Operator
(Operator Instructions) Our next question comes from Jon from Nuveen Asset Management.
Jon Daniel Bosse
Bryant, it's Jon Bosse. Obviously, the prospects of Bitcoin and Core Scientific have gotten a lot better. Can you provide a bit of an update on kind of the prospects, which seem to be looking much better and they've obviously filed some plans as well.
Bryant Richard Riley
Sure. And just I forgot on the previous call, we paid down $60 million of our Riley [owes] early. So we actually have $140 million outstanding just to be clear. So on Core, we have 2 assets. We have the DIP, and we have a -- our sub debt. So the DIP has been paid down. I think it started at $35 million, $36 million. It's been paid down to $15 million. I would imagine, given where Bitcoin prices are, the DIP will be gone by the time they exit bankruptcy.
The sub debt we have is obviously part of the filing and part of the negotiation between all of the constituents at Core. And given the cash flows that Core has estimated and are working through on the restructuring, we believe that, that sub debt will be [money good].
Thomas J. Kelleher
Which is -- certainly seems that way or the direction, so it's obviously very positive from where we were before, and part of that short report that came out as well. That's good news.
Operator
(Operator Instructions)
Bryant Richard Riley
Okay. Well, operator, I think we're good. Thank you, everybody, for joining us on the call. We're excited, obviously, about the macro. We think that our team has done a really good job through a difficult period in our more episodic businesses, which both of them are starting to see a lot better environment. So we're enthusiastic about that. We appreciate everybody's support, and we'll keep working hard to deliver strong results. Thank you very much.
Operator
Thank you, Mr. Riley. 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 materially negatively affected. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of today's date.
Such forward-looking statements include, but are not limited to, statements regarding our excitement and the expected growth of our business segments. Factors that could cause such actual results to differ materially from those contemplated or implied by such forward-looking statements include, without limitation, the risks described from time to time in B. Riley Financial, Inc.'s periodic filings with the SEC, including, without limitation, the risks described in B. Riley Financial, Inc.'s annual report on Form 10-K for the year ended December 31, 2022, under the captions Risk Factors and Management Discussion and Analysis of Financial Condition and Results of Operations as applicable.
Additional information will be set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2023. These factors should be considered carefully, and participants are cautioned not to place undue reliance on such forward-looking statements. All information is current as of today's call, and B. Riley Financial undertakes no duty to update this information.
Thank you for joining us today for B. Riley Financial's Second Quarter 2023 Earnings Conference Call. You may now disconnect.
