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B. Riley Financial Inc  (NASDAQ:RILY)
Q1 2019 Earnings Call
May. 01, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to B. Riley Financial's First Quarter 2019 Earnings Call. My name is Claudia, and I will be your conference operator today.

Earlier today, B. Riley issued a press release with its financial results. A copy can be found in the investor section of the Company's website at ir.brileyfin.com. As a reminder, this call is being recorded. A replay of today's call will also be made available on the Company's website.

Joining us today are Bryant Riley, Chairman and Co-CEO; Tom Kelleher, Co-CEO; and Phillip Ahn, CFO and COO. After management's remarks, we will open the line for question. 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 -- Chairman and Co-Chief Executive Officer

Thanks, operator and welcome, everyone. Meaningful top line growth and improved profitability contributed to a strong quarter for B. Riley and a good start to the year. Revenue growth was due in part to improved capital market conditions as well as the recent additions of GlassRatner and magicJack to our quarterly results. Additionally, our investment portfolio recovered nicely from the market driven losses in Q4. In Q1, we saw increased activity in our Great American retail liquidation business, as retailers continue to reassess their store strategies.

During the quarter we conducted ongoing liquidations for Bon-Ton, Gymboree and Payless Shoes which contributed to our quarterly results. While we did recognize revenue in Q1 from these liquidations, we expect to recognize more meaningful revenue in Q2. Our current backlog and pipeline in this business remains very strong and we expect this segment to continue to be a meaningful contributor to our results for the year.

Our Great American appraisal and valuation business had a relatively soft quarter compared to historical standards. That said we are seeing improvement in this business early into the second quarter and do not have a concern about the beginning of a trend. Q1 also included the first full quarter with both magicJack and United Online together under our principal investment segment. The integration of magicJack meaningfully contributed to our results for the quarter, as we continue to focus on building out our principal investment strategy.

During the quarter, we also raised $143 million for our SPAC, B. Riley Principal Merger Corp. which is focused on the opportunistic deal flow created through our B. Riley platform. As we've described on previous earnings calls, we employ a strategy of utilizing our balance sheet to help plan companies while also creating attractive investment opportunities for B. Riley. Two examples where we have applied our strategy include Babcock & Wilcox and Stoneham (ph).

Last month we announced we arranged $150 million in financing for Babcock & Wilcox. This credit facility provides a company with the necessary liquidity to continue its transformation and demonstrates our continued focus on investing in companies with strong potential to increase value in future cash flows. We've participated in multiple levels at the cap table of generating strong banking revenue and believe that the upside from this investment is significant.

With Stoneham we've had a $37 million debt to equity funding back in 2017 and served as a lead investor in the race. Our history with Stoneham combined with our experience and our diverse platform enabled us to source an effective solution to advance the Company's business objectives and we have remained a large investor in Stoneham which recently filed for its initial public offering. During the quarter we also increased our ownership with the National Holdings to 49%. We continue to leverage National's retail distribution and opportunities with our existing B. Riley wealth management and institutional business and I'm excited about the initial results of this partnership.

Opportunities like these happen and will continue to be a key differentiator for our business and we're seeing more proprietary investment opportunities than ever before which has been really exciting. Flexibility in our balance sheet allows us to successfully capitalize on the unique opportunities we source from our platform which we believe have the potential to create outsize returns.

I'd like to turn the call over to Phil Ahn, our CFO and COO to provide a summary of our financial metrics. Phil?

Phillip Ahn -- Chief Financial Officer and Chief Operating Officer

Thanks, Bryant and welcome, everyone. For the first quarter of 2019 our total revenues increased to $142.1 million compared to $95.8 million for the same year-ago period. Now turning to our revenue mix and operating income by business segment, our capital market segment includes results primarily for B. Riley FBR, B. Riley Wealth Management, Great American Capital Partners and Glass Ratner.

For the first quarter of 2019 our capital market segment revenues increased to $85.3 million, up from $60.3 million for the same year-ago period. Segment income increased to $13.9 million up from a loss of $0.3 million for the same year-ago period. The increase for this segment was primarily driven by the addition of Glass Ratner which we acquired in August 2018 and an increase in revenue from our investment portfolio in the first quarter which Bryant referred to earlier.

Next is our option liquidation segment. Revenues increased to $20.7 million in the first quarter of 2019 up from $15.5 million for the same year-ago period. Segment income increased to $11.5 million up from $8.1 million for the same year-ago period. As we noted on previous calls, our Auction and Liquidation segment results tend to vary from quarter-to-quarter and year-to-year due to the impact of periodic large scale retail liquidation projects.

Moving on to our valuation and appraisal segment, for the quarter revenues in this segment increased to $8.6 million up from $8..5 million for the same year-ago period. Segment income for the quarter totaled $1.4 million compared to $1.9 million for the same year-ago period. Our final segment is our Principal Investments segment, which is driven by the results from United Online and magicJack. Revenues increased to $27.5 million, up from a $11.4 million for the same year-ago period. Segment income increased to $7.9 million compared to $4.9 million for the same year-ago period. The significant increase for this segment's results was driven primarily by the addition of magicJack which we acquired in November 2018 to our quarterly results.

Now turning to our profitability metrics, which are attributable to B. Riley Financial as a whole. Net income for the first quarter increased to $8 million or $0.30 per diluted share compared to $4.5 million or $0.17 per diluted share for the same year-ago period. Adjusted EBITDA totaled $34.4 million compared to $16.1 billion for the same year ago period and adjusted net income increased to $16.4 million or $0.61 per diluted share compared to $8.8 million or $0.32 per diluted share for the same year-ago period.

For more information about adjusted EBITDA and adjusted net income and a reconciliation to the nearest GAAP measures, you can refer to this section in today's earnings release regarding the use of non-GAAP financial measures.

And now turning to some highlights of our balance sheet. As of March 31, 2019, the Company had $163.5 million in unrestricted cash and cash equivalents; $7.5 million in restricted cash; $22.4 million in due from clearing brokers, $53.4 million of loans receivables, $252.9 million in net securities and other investments owned and $555.4 million in total debt. Our total net debt as of March 31, was approximately $56 million, when you factor our positions in cash securities and various other investments against our total debt. Our total B. Riley financial stockholders equity was $253.4 million as of March 31, with shares outstanding at the end of the quarter totaling approximately $26.5 million.

Lastly, our Board of Directors approved a special dividend of $0.18 per share, in addition to our regular quarterly dividend of $0.08 per share which will be paid on or about May 29th to stockholders of record as of May 15th.

That completes my financial summary and I'll turn the call back over to Bryant. Bryant?

Bryant Riley -- Chairman and Co-Chief Executive Officer

Thanks, Phil. Now I'll get into each of our segments starting with capital markets. This is our largest segment by revenue and includes results from our B. Riley FBR banking and brokerage business, our B. Riley wealth management, RIA business, our Glass Ratner consulting business as well as our asset and fund management businesses including Great American Capital Partners. In terms of B. Riley FBR restructuring, M&A advisory and our SPAC business continues to represent our sweet spot. We completed several restructuring mandates during quarter and closed a few notable M&A deals in the TMT and pulp and paper sectors. Our SPAC business remain strong as we see continued activity in the space. Later this month we'll be hosting our annual institutional investor conference in Beverly Hills. We'll be joined by over 300 public and private companies and over 1,000 investors across our network. This is the 20th anniversary of our conference and we look forward to celebrating the success with the underserved small and mid-cap for over two decades. As we mentioned earlier improved performance from our investment portfolio contributed to strong results in the segment for the quarter.

Moving to our retail brokerage and RIA business, B. Riley Wealth Management. Our private wealth business continues to be a steady contributor of our revenues. This grouped together with our institutional business, and National Holdings provides us with a powerful distribution network which combined represents over 900 RIAs. Our participation in several capital markets offerings contributed to syndicate revenues for the quarter and our team remains focused on bringing high quality financial advisors to the platform. A pipeline for new recruits is stronger than it's ever been.

Next is Glass Ratner, we could not be more pleased with this group and its leadership. They've been a terrific boost of energy to our team. We're already seeing great synergy between Glass Ratner and other B. Riley companies in terms of due diligence leads, turnaround work and internet traction to our network of financial sponsors and lenders who are in touch with B. Riley FBR and Great American Group. Healthcare and agriculture are two areas where softness have created opportunity for us and we continue to open approximately 25 to 35 new matters a month spending across our bankruptcy and restructuring and forensic and due diligence divisions.

On the asset and fund management side of our capital market segment, Great American Capital Partners or GACP our direct lending fund continues to grow and perform. Most notably in Q1, GACP led one of its largest loans to-date, a $200 million term loan to BJ Services which is one of the leading oil service companies in the US.

Our GACP fund one is in harvest mode and has four remaining positions that we expect GACP fund two to be fully invested in the second half of the year. During the quarter we also added new structured credit platform under our B. Riley capital management subsidiary called Gateway Credit Partners or GCP. Our GCP strategy aligns with our overall strategy and active management of overlooked investment opportunities. GCP specializes in actively managed credit portfolios whose average bond or loan tranche size is sub $500 million which we believe makes us a great addition to our platform. We continue to believe that companies with enterprise values of under $1 billion represents one of the very few areas where Alpha can be generated.

Now moving to our auction and liquidation segment. In February we began liquidation of approximately 2,100 Payless shoe source stores and we have already completed the cause of several hundred stores by the end of April. We started on a few other new store closing assignments during the quarter and continued our participation in other projects with our JV partners.

We closed the quarter winding down on Gymboree and Crazy 8 store closing projects. We are the busiest we've ever been in this business and expect much of this activity and opportunity will continue through Q2 and the remainder of 2019. Next is our Valuation & Appraisal segment which consists of Great American Group Advisory & Valuation Services. Business in this segment remains steady while quarterly results for the appraisals business were more muted by comparison to historical standards, we still generated a strong profit in Q1 and are seeing positive results driven by our efforts to grow new sources of revenue. Our pipeline for new business engagements has increased and we continue to expand growth in our corporate, advisory and valuation divisions.

Finally our last segment, principal investments which historically include the United Online, now also includes magicJack. As we discussed earlier magicJack was a significant contributor to our Q1 results and we continue to look for new opportunities which leverage our operational skill sets.

I briefly mentioned our stack earlier. Our team is currently looking for business to bring to the public markets that will benefit from the mid-cap expertise that the B. Riley platform is known for. Taken together we believe momentum in our business positioned us for strength in future quarters. We recognize our success, relies on the support of our employees, partners and investors and we look forward to building upon our franchise as we continue to execute on our core strategy. With that we're ready to open the call for questions.

Questions and Answers:

Operator

Thank you. Well will now begin the question-and-answer session. (Operator Instructions) Our first question is from Sean Hayden (ph) with THC. Please go ahead.

Sean Hayden -- THC -- Analyst

Hi, guys congrats on the quarter. First question is on the spec to whatever degree you can -- can you just explain the rationale behind that and what your goal with that effort is?

Bryant Riley -- Chairman and Co-Chief Executive Officer

Sure. Thanks for the question. So if you look at the IPO market, it's really been characterized by companies that I would say or in industries that are very popular whether it's cannabis or whatever it is. Initial quant offering so a while back and our story stocks or group of growth stocks and there's a gap in companies that would fit more what we kind of view also, opportunities to grow in different ways, you know maybe a new management team hasn't changed in around a roll up story, but a company that deserves to be public but might not just have as much of the cachet of some of the other companies and we think by backstopping a portion of that IPO in lending, their company credibility and accountability and being part of that team. We think we can find a really good situation and bring to the market and we think there's a gap in the amount of companies out there that are now public in the small cap world have shrunk and it's -- I think it's something that really needs, you know we're excited to try and create opportunities for companies like that.

Sean Hayden -- THC -- Analyst

Okay. And then as far as capital management goes you've done the special dividends pretty regularly with the stock where it is today, would you guys in the Board consider share repurchases a priority at all?

Bryant Riley -- Chairman and Co-Chief Executive Officer

Yeah, so I think I don't, the number we bought over the quarter was not great, couple of a 1,000 shares. It's stocks not incredibly liquid. We're only able to buy a certain percentage of the volume. You did see a multitude of Board members and myself buying during the quarter. So the answer is yes and we have a buyback in place. And you know it's just -- it's tough to buy at times.

Sean Hayden -- THC -- Analyst

Yeah. And then finally you know you call out the appraisal business, was there something specific in the quarter or is that just you know kind of an anomaly slow?

Bryant Riley -- Chairman and Co-Chief Executive Officer

Yeah. Our business has been so steady for so long. So if -- well that's an anomaly with April was right back to counter the previous numbers that we had a super strong Q4. So I think it was just a -- maybe there's an effect of you know the (inaudible) closing for a little bit. Some banks some loans slowing down or things like that but as we've looked them in the covers. Nothing for us to be. We're not concerned at all.

Sean Hayden -- THC -- Analyst

Got you. Thank you. And congrats again.

Bryant Riley -- Chairman and Co-Chief Executive Officer

I appreciate it.

Operator

(Operator Instructions) Our next question is from Brett Hendrickson with Nokomis Capital. Please go ahead.

Brett Hendrickson -- Nokomis Capital -- Analyst

Hey, Bryant. Can you just give us a quick update on synergies for magicJack. And remind us if magicJack is going to be sharing any I guess any facilities or shared services, back office and such with in online?

Bryant Riley -- Chairman and Co-Chief Executive Officer

So I think we have to give, probably a hand. I don't know that many people get the comments right on the first show. So, I'm sure -- so, yeah we have a great team in (inaudible) that came from the United Online that ran that business and effectively with Kenny Young and his team taking up the total management. There's still some people from magicJack but the leadership is united online.

We have 100 people in India providing support, building support, service support that are now being utilized by the magicJack team. So operating synergies are very much in line. They didn't asked this question, but I will tell you where there's been an amazing amount of synergies that we did not, just expected it more -- it's in the Glass Ratner transaction, I mean the amount of business that's gone back and forth between banking, appraisal, asset disposition and the services that Glass Ratner provides has just been really surprising and really good.

So we're always looking for whether it's operational or revenue synergies but I think that specific -- question we've come a long way in integrating those two. I don't know, Phil or TK do you want to add anything to that? The accounting -- go ahead sorry.

Phillip Ahn -- Chief Financial Officer and Chief Operating Officer

Yeah, Bryant I would just throw in addition to magicJack there's other synergies for instance in Hyderabad India where we have those engineers. We're finding ways to utilize engineers for great American and for our broker dealer operations. So it's -- that's a big part of what we do with all these companies is where we wouldn't have normally gone over to India to open up an office to put some engineers since we already have that office over there. It's very easy and convenient just to add to that location and support other parts of the business. So I would say that goes on all over the place among all of our businesses.

Brett Hendrickson -- Nokomis Capital -- Analyst

I just say Tom I never thought see the day where I heard you talk about opening up the India office. So yeah it's come along with. You guys care to give a -- do you guys care to give a synergy number on how much savings you take out of magicJack business from when it was operating on a stand-alone basis?

Bryant Riley -- Chairman and Co-Chief Executive Officer

Well I'm going to say -- say in a different way and I think that when magicJack was public these are gonna be rough, Brett, I think that's kind of the run rate was somewhere between 22% and 24%ish in EBITDA maybe and I would expect that as we look at run rates a lot of that's just subtracting public company costs but we would expect to get 25% to 30% higher EBITDA out of that same base.

Brett Hendrickson -- Nokomis Capital -- Analyst

That's nice, considering what you paid for it. And then, what we're going to ask is -- they brought up Glass Ratner, so from the outside looking in. We just see press releases about auto dealerships and that kind of stuff. I guess, so the question to me how much of it is auto related and then what are the -- if it's not I guess, what are the other industry verticals that they're strong in?

Bryant Riley -- Chairman and Co-Chief Executive Officer

So you know if you think of an STI or you know one of these kind of advisory business, it's more about the people than the industry. So we've just brought three healthcare kind of experts that can be applied to -- can be applied to quality of earnings, could be applied to expert witness work. So it's really not about Glass Ratner's expertise and they've got I mean they've got great people in real estate and you know we brought the Glass Ratner to help us in the bond time liquidation as CRO and they've done a terrific job there.

It's kind of a collection of you know excellent individuals offer that platform with the leadership of Ian and his team. And then you know when we find a situation that could lend itself to that even though the public markets or private company that might need some pre IPO work or they see something where there's a company they're providing some advisory and maybe they have some excess assets that they need to dispose of or some banking opportunities that's where we get those synergies. But in terms of the industry, the ones that come to mind is real estate, litigation -- you know that kind of stuff.

Brett Hendrickson -- Nokomis Capital -- Analyst

Okay. So are they actually providing expert witnesses in litigation?

Bryant Riley -- Chairman and Co-Chief Executive Officer

Yeah. Yeah they do. We actually had a cocktail party in LA yesterday with last night with the team and you know, it was all litigators and clients of the firm and it was super well attended and I think that you know we -- B. Riley is helping that attendance. You know we've got we have litigators unfortunately we have one more and more recently as you know, but we have lawyers in relationships that are keen to do business with us just as we've gotten bigger and that's just another way for them to do business, just like a company. You know companies recover -- just another opportunity to show them some products in cross-sell.

Brett Hendrickson -- Nokomis Capital -- Analyst

Okay. Good. Okay. Well, thanks, guys.

Bryant Riley -- Chairman and Co-Chief Executive Officer

All right. Thanks, Brett.

Operator

Our next question is from Richard Hayden (ph) with GHC. Please go ahead, sir.

Richard Hayden -- GHC -- Analyst

Good afternoon. How are you today?

Bryant Riley -- Chairman and Co-Chief Executive Officer

Great.

Richard Hayden -- GHC -- Analyst

I think, I understand that the industry has vertical visibility pulling for -- but having acknowledged that. Is there any way you can characterize quantitatively and qualitatively how the second quarter is doing?

Bryant Riley -- Chairman and Co-Chief Executive Officer

Well I think what we said. I can only repeat what we said which was our liquidation business has liquidations going on currently. There are times when that's not always the case. There's times where there are we report quarters where there's not a lot of asset disposition revenue. So we have some carry over there. And then I think, you can kind of gauge the steady businesses or the businesses that are growing a little bit or declining and you can get a pretty good feel for that. And then you know the other part of the episodic side of our business is the banking business which we really didn't provide any color on. So I can't really provide any additional color. But I will say we've had -- we've been buying back stock. We announced 26 (ph) dividend and we've had insiders purchasing fairly regularly. So I think that price speaks more volumes than I could speak with words.

Richard Hayden -- GHC -- Analyst

Okay. Again congratulations on -- congratulations on the quarter and thank you for the response.

Bryant Riley -- Chairman and Co-Chief Executive Officer

Thank you.

Operator

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

Bryant Riley -- Chairman and Co-Chief Executive Officer

Okay. Well, thank you and thanks, everyone. We always say it, but it's a service business, the people that work here are the key elements of this business. So we're thankful for all the hard work with us obviously, make some acquisitions, we'll continue to do so and that always cause more disruption. But it's really all about the team so we appreciate that and we appreciate the confidence our shareholders give to us and we will continue to try and reward them. So thank you, operator and we'll talk to you next quarter.

Operator

Thank you. Before we conclude today's call I would like to provide B. Riley Financial's Safe Harbor statement that 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 as well as 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 are 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 such statements. All forward looking statements are made as of today and accept as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Further, this conference call included a discussion of non-GAAP financial measures, the most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP are included in the earnings release.

Thank you for joining us today for B. Riley Financial's first quarter 2019 earnings conference call. You may now disconnect.

Duration: 28 minutes

Call participants:

Bryant Riley -- Chairman and Co-Chief Executive Officer

Phillip Ahn -- Chief Financial Officer and Chief Operating Officer

Sean Hayden -- THC -- Analyst

Brett Hendrickson -- Nokomis Capital -- Analyst

Richard Hayden -- GHC -- Analyst

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