BRC Group Holdings, Inc. (RILY) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to B. Riley Financial's Second Quarter 2022 Earnings Call. B. Riley today issued a press release and presentation detailing its financial results for the second quarter of 2022. Copies are available in the Investors section of the company's website at ir.brileyfin.com. As a reminder, this call is being recorded. An audio replay will be available on the company's Investor Relations website later today. 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. 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.

Welcome everyone and thank you for joining our call. Our [Technical Difficulty] are mostly unrealized and correlate to market contraction. Over the last year, we augmented our investments by increasing credit with our basting has become a larger and more integral part of our business to create value for our partners and shareholders and a strategy that we believe truly differentiates the B. Riley platform from our peers. Oftentimes the companies we invest in are companies that we provide services to be it investment banking, financial consulting or real estate advisory services. At the same time, we have made concerted efforts over the last five years to expand sources of steady and recurring income to balance the more cyclical episodic business, which are currently slow. To put this in perspective, over the last 10 quarters, we have earned approximately $17 per share for our shareholders, including the first two quarters of 2022. We believe that we are delivering on our objective of increasing our recurring EBITDA. The relative contribution from our less cyclical and less episodic businesses have meaningfully grown with the entire Riley platform generating $366 million of operating EBITDA over the trailing 12 months compared to $114 million of operating EBITDA in 2019. With increasing contributions from less cyclical and less episodic businesses exceeding the capital needed to support our dividend, we continue to have flexibility to invest across our businesses. To that end, we are pleased to deliver our shareholders $1 dividend for the quarter. Looking ahead, we are encouraged by the opportunity to increase that dividend to capital markets return and become more normalized and they will normalize. We have seen cycles like this many times over the course of B. Riley's 25 year history and each time we have come out on the other side strongly than before. Recognizing we are in a highly variable and volatile business, we will maintain focus on diligent expense control while utilizing our cash flows to continue to invest and enhance our businesses. Disruptive markets have historically presented some of our most attractive opportunities to differentiate ourselves with clients, attract top talent and to generate sustainable share gains across key business lines and we believe that current environment is no exception. In short, we are extremely encouraged by where we are today. Being able to generate the operating results that we did during another quarter without capital markets is extremely gratifying for us. And since quarter end, we have recovered some of the investment losses that we reported as the market has come back a bit. With over $200 million of cash and equivalents on the balance sheet, a significant receivables book converting into cash and debt maturities years away, we believe we have the flexibility to be able to capitalize in the many opportunities we see ahead. Now I'll turn the call over to Phillip Ahn, our CFO and COO, who will discuss our individual operating units before opening the line for questions. Over to you, Phil.

Thanks, Bryant. On a consolidated basis, total revenues were $42.7 million for the second quarter and 240 [Technical Difficulty] portfolio, year-to-date investment loss of 292, but decline in our investment book, our operating business has generated strong performance in the second quarter. Excluding investments, operating revenues were – the loss in this segment primarily related to the settlement of legacy regulatory matters for National Holdings that predated our acquisition in 2021, in addition to the overall decline in markets and its impact on client activity. Auction and Liquidation revenues were $3.9 million with segment income of $0.5 million for the second quarter. As we have stated on previous calls, results from this segment are variable due to the episodic impact of large retail liquidation engagements. Financial consulting revenues were $24.3 million with segment income of $4.3 million, driven primarily by bankruptcy restructurings, forensic litigation consulting matters, in addition to appraisal engagements and real estate dispositions completed during the second quarter. Principal investments, our Communications and Other segment revenues increased to $42.5 million for the second quarter, up from $19.6 million in the prior year period, primarily due to the addition of the Lingo Communications and Marconi Wireless businesses and segment income was $7.6 million for the quarter. Our companies in our communications segment, magicJack, United Online, Marconi Wireless and Lingo continue to provide steady cash flows to our platform. Revenues in our Brand segment increased to $5.2 million for the second quarter, up from $4.4 million in the prior year period. Segment income increased to $3.8 million, up from $3 million in the prior year period. Results in this segment relate to the licensing of trademarks for our six brands portfolio. As well our investments in Hurley and Justice Brands, which are recognized as Capital Markets segment, contributed income of $7.4 million for the quarter. As a reminder, adjusted EBITDA in our metrics for operating investment results are non-GAAP financial measures. Please refer to our earnings release for a definition of these terms and for reconciliation to the nearest GAAP measures. Investors can also find additional details relating to these metrics and related reconciliations in the financial supplement on our Investor Relations website. Now turning to some highlights from our balance sheet. At June 30th, B. Riley Financial had approximately $216.1 million in unrestricted cash and cash equivalents, $1.1 billion in net securities and other investments owned and $770.8 million in loans receivable. At quarter end, we have total cash and investments balance of approximately $2.2 billion, which includes approximately $49 million of other investments reported in our prepaid and other assets. Net of debt, B. Riley Financial's cash and investments totalled approximately $61.5 million at June 30th. Finally, we declared a second quarter dividend of $1 per common share. Our quarterly dividend will be paid on or about August 23rd to common stockholders of record as of August 11th. That completes my financial summary. Now I'll turn the call over to our Co-CEO, Tom Kelleher, to provide an overview of our operating units. Tom?

Thanks, Phil. We're not immune to the market deceleration. We continue to be pleased with the overall performance of our operating businesses. As Bryant mentioned, we remain confident in the firm's ability not only withstand periods of market austerity, but define opportunities for growth. With core capabilities and restructuring, asset disposition and distressed financing, we are confident in our ability to support our clients amid disruptive markets. And despite the current environment, our teams have made meaningful progress in both expanding existing portions of our business as well as consolidating recent acquisitions. With the addition of FocalPoint, National Holdings, 272 Capital and Lingo, as well as our recent investment to expand fixed income, 2022 has become a transformative year for B. Riley Financial. With substantive integration activities behind us, we have started to realize synergies in these businesses and are looking ahead to other opportunities to accelerate growth. Now I will walk through some of our highlights of our various divisions. With B. Riley Securities having gained meaningful share in capital markets over the last few years, we sought opportunities to broaden our capabilities in M&A advisory and fixed income. Earlier this year, we acquired Los Angeles based investment bank, FocalPoint Partners. FocalPoint command of sponsor backed mid-market M&A provides our platform with additional scale, sector expertise and execution capabilities to support expanding our leadership position in small and mid-market investment banking. Since completing the acquisition in January, we have consolidated FINRA licenses, which enables us to jointly market or combined services as a unified broker dealer while realizing cost synergies. Operating together allows us to leverage the relationships and execution resources of the combined groups to bring to bear the full breadth of capabilities to our clients. During the quarter, we closed multiple seven-figure advisory mandates, including Apex Innovative Sciences, Certified Collision Group and Econolite Group. Notably, we were also retained on a number of new restructuring mandates and based on the current level of market activity we are seeing; we expect this business to accelerate over the coming quarters. With respect to capital markets, opportunities remain selective. We completed several financings during the quarter, including multiple debt raises, private placements and follow-on transactions. In addition, we served as lead bookrunner on Applied Blockchain’s April IPO. We also continue to actively engage and execute on behalf of a number of ATM and committed equity facility clients. In our newly expanded, Fixed Income Division, Tim Sullivan and team are working alongside our Banking and Capital Markets Group to help clients address issues, including yield enhancement, cash flow optimization, market risk and interest rate volatility. We are pleased to have the ability to provide our clients with an additional set of solutions and are encouraged with this division's growth in a relatively short period of time amid a difficult market. In Wealth Management, this past week, we formally completed the integration of National Holdings into our legacy B. Riley Wealth business. This is a significant milestone and represents a culmination of a challenging integration activities that began 18 months ago. Under the leadership of our Wealth Division’s, Co-CEOs, Chuck Hastings and Mike Mullen, our teams have worked tirelessly to create a stronger foundation from which to build upon while at the same time, enhancing our compliance posture and removing risk from the platform to position us for future growth. Operating under a single brand we believe a newly combined B. Riley Wealth Business is well positioned as we continue to invest in building out the best-in-class Wealth Management platform for both our advisors and our customers. Turning to B. Riley Advisory Services, our restructuring and turnaround management, and forensic accounting litigation support practices continue to perform exceptionally well, providing stable revenues and profits to our platform. In addition to strong performance, B. Riley continues to earn recognition for industry leadership, having recently won several awards for our team's exceptional execution in complex matters concerning turnaround management and specialty finance. Among recent high profile matters, we served as Chief Restructuring Officer to LionTree base services in a complex Chapter 11 and related sales process, which resulted in the preservation of thousands of jobs. We also participated as expert witness in the high profile trial of Johnny Depp versus Amber Heard, providing testimony on financial damages for Mr. Depp. Our pipeline for related projects continues to build for the second half of 2022. In our appraisal division performance remained relatively steady as financial institutions, lenders, and borrowers seek valuation services to support transaction, financing and loans. Our legacy appraisal division continues to serve as a stable reoccurring source of income quarter-to-quarter and year-to-year, as well as a hub for referrals to the other parts of the business. We previously stated our intent to build out asset management, which resulted in our acquisition of 272 Capital led by B. Riley along Wes Cummins. We are really pleased with the continuing momentum; this newly expanded division has had as part of the B. Riley platform. Wes and team continued to deliver great returns for our clients while successfully growing our asset base. The team is currently exploring the addition of new products and is extending our marketing efforts globally. Our B. Riley Real Estate division also contributed a strong quarter with several large real estate disposition projects for new and existing clients of our broader platform. Notably, we recently led the sale of a sizeable real estate portfolio for Badcock Home Furniture, which included 35 retail store locations and three distribution centers located throughout Southeast United States. Our team sold the properties in approximately six months through two separate sale lease back transactions, which resulted in aggregate proceeds of $244 million. Our Real Estate division is another area of the firm that stands to benefit from the current market headwinds, given our core expertise is in real estate restructuring and disposition. In our retail liquidation and asset disposition division we recently welcomed Tim Shilling as Executive Vice President of B. Riley Retail Solutions. Tim is a veteran retail advisor, who has worked with some of the most prominent retailers across North America and has led thousands of retail assignments over the span of his 20-year career. While current activities remain low by historical standards, rising interest rates and supply chain disruptions are putting pressure on retailers and we expect current headwinds to result in more opportunities in both Europe and domestically in the back half of this year and into next. As I mentioned earlier, we recently added Lingo to our portfolio of communications companies. We formed principle investments through our acquisition of United Online in 2016, and have since built an expanding portfolio of industry adjacent companies in the telecommunication sector, including magicJack, United Online, Marconi Wireless and now Lingo. Today our communications unit serves as a leading source of stable, reoccurring income for our platform, an area we continue to look for opportunities to grow. To sum up, despite the near term volatility that current market conditions has created in our investment book, we couldn't be more pleased with our underlying operating business and the opportunities they provide. And as always, we couldn't do any of this without the dedication and hard work of all our colleagues. We thank one and all. With that, we'll now open the line for questions and then turn it back over to Brian for final remarks. Thanks.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] There are no questions on queue.

Great.

Sorry. Thanks operator real quick. Thank you. I just wanted to mention and thank again as Tom did all of our new employees that are listening the call not getting questions is usually a pretty good sign. People don't care about us. And if histories are guide after that we get some momentum. Last time we lost money was Q1 2020 in the beginning of the pandemic. And since that time, I think, we paid $14 in dividends and made a lot of money. So I think a question did come in. So operator, if you want to open it up that that's fine.

Thank you. Our first question comes from Sean Haydon with Charles Lane Capital. Please go ahead.

Hey guys. Sorry. Got in here late. But congrats in the quarter. Had a question about just capital allocation here. It's great seeing the dividend as usual. But maybe you can just provide some numbers around this. Going forward, do you have any sort of a preference for be it buybacks or kind of more M&A given the press valuations in addition to the dividend?

Hey, Sean, look, that's, obviously we live in this world of investments and we think about that all the time. I think that as we look at all the things that did happen this quarter, I mean, underwriting business was $9 million in the quarter versus $385 million last year. And to think that and to see that we still are profitable about our broker dealer, we haven't closed – we closed Lingo in the middle of the quarter, we have not closed Bullseye, which we think once it kind of gets going, we'll add with synergies $15 million to $20 million of EBITDA. We just got National and B. Riley together, so that we think we'll run a little bit more efficiently. FocalPoint, which was very profitable last year, but is building up their backlog. So, while we're proud of the operating EBITDA that we had for this quarter, there is a lot of things that can meaningfully enhance that. And so I don't know that we're going to have to pick one thing. We feel really good about our cash flow to pair dividends. We have no net debt for a business that generates this kind of operating EBITDA. You could obviously leverage your balance sheet to buy stock. And we feel good about making acquisitions. So I don't feel like we're hampered in any way. I feel like we will be able to have a lot of opportunities. If you look at the accounts receivable book, for example, just to put some – this might have been lucky or good; we took a chunk of money out of equities and bought a $400 million receivable book that's returning roughly $30 million, $35 million a month. It's declining as the book gets slower, but what a good place to hide some money while the markets were down and collect. I think our most recent estimate is kind of a 30% IRR. So that money comes back to us. So I don't think that we're sitting here going, boy, we just let – let's just pay a dividend and not think about a buyback. I think all of those things are on the table.

No. That's great to hear. And then on focal point without quantifying it, just what does the restructuring business look like there? Is it half the business or because that that could pick up substantially in the coming months? So just...

Yes. So let's not quite half, it's less than half. Let's maybe 20%, 25% but don't forget that the old GlassRatner business is a big part of their business is restructuring. And then we have our own restructuring business that Perry Mandarino has been running for a few years and we're seeing activity pick-up there. The fixed income group benefits from a little bit of distress. We think we're going to see some opportunities there. So I don't think – I think underwriting means a lot more to us from a size perspective than the opportunities and restructuring, but that's not to say that we're not – we don't – we think we're really well positioned to get some mandates and pick up from where we left off in early 2020 where we were really starting to see momentum there.

Got it. Okay. And just finally on National, I know I asked this last time, but as far as the payment for prior litigation is that going to like roll through eventually? Or is that just something that's going to kind of exist here?

Are you saying do we feel like the litigation is behind us from National?

Yes. Yes. Like any liability there?

Well, look, look here, here. Let's we would – we just merged the broker dealer. So I think that speaks to our confidence and we've made a lot of changes. I mean, we've – we think we have a high – really high quality group of wealth managers and we made decisions to, in our opinion upgrade that meaningfully and that resulted in TK probably knows this better than me, but I would say 180 wealth managers moving on to other spots. So I think we're – I think we're, we feel good about where we are one benefit Sean that we've had more recently is interest rates help that business. You get money and your cash at the cleaning firm. So while there's not been a lot of activity in the underwriting side, and it's been kind of challenging, I would estimate there's $8-ish million a year in incremental cash on cash that we're getting versus last year. So if we can – if we can get a little bit of more of an active market and build on those cash-on-cash dollars we're getting, I could see it being really nice and profitable with a smaller but better core.

Okay, great. That's all I got. Thanks guys and congrats.

Thanks. Thanks, Sean. We appreciate it.

[Operator Instructions] The next question is from Brett Hendrickson with Nokomis Capital. Please go ahead.

Hey Bryan.

Hey Brett.

Sorry, I have just a couple of clarification questions. Did I hear right $7.1 million from Hurley and Justice?

Are you asking about what the dividends were?

Well, yes. What you had coming back to you and then I wanted to understand and make sure the geography hadn't changed, I think that goes in.

Yes. I mean, if you look at the brands Hurley and Justice we're talking about 40, low-40 kind of run rate with Hurley and Justice at $7.4 million for the quarter.

Okay. $7.4 million and where did that $7.4 million go on the...

When you say where did it go? It's just we get a dividend. So...

Yes. So it doesn't go in the brand segment. It goes in interest and other; I don't have your P&L in front of me right now.

We recognize that in our capital market.

Okay. And has that been consistent? Is that always been in capital market?

Yes, it's an investment out there, correct.

Okay, good. And I only had one question when hit star one Bryant, but you generated two more from me. Did I hear with the last investor, did you say underwriting went from $385 million to $9 million? What was that stat?

$385 million for the year to $9 million for the quarter. So on average of $95 million, Brett, that's a 50 plus type of margin business that would pretty much be all incremental. So $85 million, less $42.5 million of 50, I mean, it's maybe go a little bit higher. So I was just pointing out that I feel pretty good about our results when we're dealing with these inputs that we have. We're very little control of, it's not like we've lost market share. The market just stopped. I think there's a lot of preparation that goes into that at way ahead of time and I feel like that came back to us as a benefit here this quarter.

Great. And then the last clarification, are you saying that in the – with the cash you have with the clearing firms related to wealth management; did you say interest this year is on an $8 million higher run rate than last year? Just on the interest – just on the fed funds move so far?

So it's, I would say as of right now, so, I think the last – there you hit certain hurdles and then you pick up and TK, you comment if you want, if I get this wrong, but it's the last fed fund, the last rate increased was a meaningful one. We just got another one and that's the measurement. So I think on an annualized basis we're about $8 million of 100% margin better than we were this time last year. Tom, does that sound about right?

Yes. That's right. Not to get two in the weeks, but we actually do principle clearing arrangements, one with Fidelity and one with Wells Fargo and there are separate agreements, different covenants, whatnot. So the Wells Fargo one kicked in earlier at lower levels and that's one I was referring to gone from $1 million run rate to about an $8 million run rate. Rates have to a bit more for the other one to kick in, but once again it kicks in much more quickly and numbers will accumulate much faster.

Okay.

I mean, well that’s been a thing with wealth management where a lot of firms just lost a piece of income for years and, and it was always kind of a free call and interest rates that we viewed it as a little bit of a free call and we're finally after years and years seeing a little bit of a benefit from that.

That's great. And I just want to clarify the – is that $8 million before the 75 bips that the fed did yesterday or is that after?

No, that's a run rate. So it might pick up a little bit, but I gave you, sorry, if I wasn't more specific, I gave you kind of like, we look at it every day and I think the number as of right now is in and around $8 million, maybe a little bit higher, better than last year.

Okay. So that would be before, I don't think the fed funds has kicked in yet from yesterday. So that would be before the 75 bips...

No. I mean, we knew – I think we all knew fed funds were going to raise, so we did that – we did that math five days ago. I asked for an update and included the three quarter basis point raise.

Perfect. Okay. Thanks for the clarification. Keep up the good work.

Thanks, Brett.

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

Well, I think I prematurely did that, so I won't do it again. I do – we are really thankful for all our partners and our new partners and think that we're going to come out of this market softness really, really well and we're really excited to do that. So thank you. We'll talk next quarter and we look forward to it. Thanks.

Thank you. Before we conclude today's call, I will provide B. Riley Financials Safe Harbor statement, which includes important cautions regarding forward-looking statements made during this call. Statements made during this call about B. Riley Financials future expectations, plans and prospects and any other statements regarding matters that are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors include the unpredictable and on-going impact of the COVID-19 pandemic, as well as the other risk factors explained in detail and the company's filings with the Securities & 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 except as required by law. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. Thank you for joining us today for B. Riley Financials second quarter 2022 earnings conference call. You may now disconnect.