B. Riley Financial, Inc.

Good afternoon and welcome to B. Reilly Financial's third quarter 2020 earnings call. Earlier today, B. Reilly issued a press release and presentation detailing its financial results for the third quarter. Copies are available in the investor relations section of the company's website at ir.breillyfin.com. This conference will include 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. As a reminder, today's call is being recorded. An audio replay will also be available on the company's website later today. Joining us today from B. Riley are Brian Riley, Chairman and Co-CEO, Tom Kelleher, Co-CEO, and Phillip Vaughn, 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 notions regarding forward-looking statements. I will now turn the call over to Mr. Bryant Riley. Mr. Riley, please proceed.

Thanks. Welcome, everyone. Our performance this quarter demonstrates the benefits and resiliency of our diverse platform and business model, as well as the strength of the entire B-Riley team. Despite the lingering impact of COVID-19, we executed our strategy at a high level and delivered solid financial and operational performance. To that end, we generated operating revenues of $194.5 million in the third quarter. This represents year-over-year growth of almost 40%. In addition to our robust top-line growth, operating adjusted EBITDA was $67.2 million compared to $35.2 million in the third quarter of last year, an increase of more than 90%. Year-to-date, we have delivered almost $185 million of operating adjusted EBITDA, which is up 90% compared to the first nine months of last year. We believe that our diverse and differentiated platform helps us to achieve this strong year-over-year growth. Including investment gains, Q3 total revenues increased 26% to $226.3 million, while total adjusted EBITDA in Q3 grew 34% to $94.1 million. As you recall, during the first quarter, we experienced significant unrealized markdowns on our investment portfolio. The initial shock of the COVID pandemic swept through the financial markets. While certain effects of COVID are no longer, business activity across our markets continue to normalize and our investment books further recover and increase rate. We urge shareholders to focus on quarterly operating performance while holding us accountable to the long-term performance of our investment books. Looking ahead, we see an accelerating number of growth drivers across our platform and have strong confidence in our strategy influence. That confidence supports our decision to once again increase our regular quarterly dividend to 37.5 cents a share, up from 30 cents per share. This marks the second consecutive quarter we've raised our regular quarterly dividend. For the past six years, our dividend philosophy has been to pay a lower regular dividend and augment that with special dividends based on the strength of our episodic business. As our business has diversified and become increasingly consistent, we believe that our investors are better rewarded by us instituting a larger regular quarterly dividend of 37.5 cents per share, which annualizes at $1.50 per share. While we would consider a special dividend again in the future, we believe a higher regular dividend is more appropriate for our shareholders given our current business model. Our hope is that we will continue to grow and generate greater net profits and we will be able to increase this regular dividend over time. Additionally, our board of directors has authorized up to $50 million in share repurchases as another means to enhance shareholder returns. With regards to the overall business environment, we remain encouraged by what we're seeing across our businesses, but recognize that COVID will continue to have an impact on market conditions. On prior calls, you heard us talk about our strategic rebranding and our decision to consolidate from legacy businesses under a unified BYU brand. This will enable us to better leverage our collective capabilities and create greater affiliation among our team, and elevate the level of service we deliver to our clients. The rebranding initiative was executed in September, and we are already seeing the benefits. In addition, earlier this month, we announced the launch of a new line of business, B. Reilly Venture Capital. This business is being headed by Todd Sims, who was a B. Reilly board member for four years until he recently stepped down in order to lead our efforts. The strategic mandate of Be Riley VC is simple. Identify and invest in late-stage growth companies on the pathway to entering the public markets. The team will be supported by a strong balance sheet and syndication platform, as well as our diversified platform and resources. We're excited about the potential for Be Riley VC. In addition to the VC effort, we bolstered our sponsor coordination across the enterprise by hiring two individuals who are dedicated to maximize all of the various touchpoints and services we have across the platform with the private equity community. Both have come from bulge-backed firms with extensive experience and relationship with sponsors. Turning to our overall business platform, there were a number of notable highlights in the quarter. In our capital market business, restructuring and SPAC activity remained strong, while our ATM business sustained its momentum in Q3. Our retail liquidation group was very busy throughout the quarter. In Q3, we saw an increase in business activity for this group, in Europe in particular. Challenges remain for brick-and-mortar retailers globally given COVID, and we expect activity levels to remain high as we move through the holiday season and into 2021. During the quarter, we bucked up the Glass Ratner and Great American Appraisal business under one brand, D. Riley Advisor. The latency-graphed Ratner business, which consisted primarily of forensic accounting and litigation support, as well as restructuring and turnaround management, continues its strong work trajectory. Projects hampered by closed courts due to COVID-related shutdowns were more than offset by new mandates. Our legacy Great American appraisal business continues to recover from some of the ABL market weakness related to COVID but continues to generate stable performance. Our real estate group remains active and, at the end of the day, has participated in 17 restructuring projects spanning approximately 1,600 locations. This is an impressive fact given that the vision was formed just earlier this year. Our principal investment companies delivered performance ahead of our expectations and remain key cash flow drivers for our business. And finally, our brand's business experienced some recovery in Q3 as retailers began to reopen for business. Our brand's platform remains a solid cash flow generator for us, and we'll see a number of attractive opportunities in the future. Taken together, these highlights demonstrate the versatility of our business model and how a diversified platform can be a key competitive differentiator during challenging times. I've shared my enthusiasm about our results and how the platform we've built sets us apart as we execute with a singular mission of driving value for our clients and partners. As excited as I am about today, I know there's more to come and more we can do. We're just scratching the surface of our potential, and our recent branding initiatives will help us unlock incremental growth opportunities. Both new and existing B-Riley clients stand to benefit from our expanding platform and commitment to driving success. I want to take a moment to thank the entire B-Riley team. who are already working tirelessly to deliver value to our clients and partners. I believe our ability to maintain that level of commitment, despite the challenges of COVID, further validates our reputation in standing as a current client and is helping us win new ones. Moving forward, our strategic focus is clear. Deliver increased value to our clients and partners across each and every one of our businesses. Doing this will best provision us for long-term sustainable growth generation and increased returns to stockholders. We focused on finishing the year strong and entering 2021 with accelerated momentum across our company. With that, I'll turn the call over to Phil Ahn, our CFO and COO, to discuss some financial metrics from the quarter. Phil?

Thanks, Brian, and welcome, everyone. For the quarter, V. Reilly reported total revenues of $226.3 million and total adjusted EBITDA of $94.1 million. This was an increase from Q3 of last year, which recorded $180.1 million in total revenues and adjusted EBITDA of 70.3 million. Net income available to common shareholders was 47.3 million, or $1.75 per diluted share, compared to 34.3 million, or $1.21 per diluted share for the prior year period. This increase was primarily due to increased activity across most of our businesses, as well as further recovery of our investment book. Turning to our reportable segments, Our capital market segment, which includes our investments, as well as our operating results from our investment bank and brokerage, our bankruptcy and litigation financial consulting business, and our wealth management and fund management businesses. Excluding investment gains, our capital market segment generated operating revenues of $115.1 million and segment operating income of $37.9 million during the third quarter. These results were primarily driven by increased fees in advisory services the addition of our real estate business, and an increase in income related to minority investments. Turning to our auction liquidation segment, our retail liquidation business contributed revenues of $44.2 million and segment income of $12 million. We concluded many successful engagements in the third quarter as market activity in the U.S. and Europe picked up following the initial impact of COVID back in March. As we have noted on prior earnings calls, our liquidation segment results can vary from quarter to quarter and year to year due to the impact of large-scale retail liquidation. Looking ahead, as Bryant noted, we expect additional global retail liquidations in the coming quarters. Our valuation of appraisal segment generated $9.7 million in revenue and $3 million in segment income in the third quarter. Appraisal activity continues to recover from COVID-related slowdown earlier this year, but the key metrics we used to measure the progress increased on a sequential basis. We're pleased to see the rebound in this business, which remains a valuable and consistent source of flow generation. During the third quarter, our principal investment segment companies, United Online and MagicJack, generated revenues of $21.6 million and segment income of $8.4 million. These businesses are drivers of cash flow for our overall platform, and both delivered strong quarterly results. Last is our brand segment. which, as a reminder, was established back in the fourth quarter of 2019, is comprised of our interest in intellectual property and related assets of several fashion brands. Our brand's portfolio contributed licensing revenue of $4 million in the third quarter and encouraged segment income of $2.3 million. We continue to be excited about the future growth opportunities for this business. Now, turning to some highlights from our balance sheet, at September 30th, B-Rally Financial head, $169.7 million in unrestricted cash and cash equivalents, $19.6 million in due from clearing brokers, $411.4 million in net securities and other investments owned, and $330.4 million in loans receivable, net of loan participation sold. As of September 30th, we had total cash and investments balance of $991.7 million, which includes $58.4 million of other equity investments included in prepaid and other assets. Total cash and investments net of debt, including investments reported in our prepaid and other assets, was approximately $83.6 million. And total B-Raleigh financial stockholders' equity was $373.9 million at quarter end. During the quarter, we repurchased over 450,000 shares under our existing share repurchase program. Year-to-date through September, we've bought back approximately 1.7 million shares. Shares outstanding at the end of the quarter totaled approximately 25.4 million. Lastly, as Brian noted, we are increasing our regular dividend to 37.5 cents per common share from the previous dividend of 30 cents. Our total quarterly cash dividend of 37.5 cents per common share will be payable to stockholders of record as of November 10, 2020, on or about November 24, 2020. That completes my financial summary. Now I'll turn the call over to our co-CEO, Tom Kelleher, to share a few quarterly highlights from our individual operating units. Tom?

Thanks, Phil. As you've heard, our third quarter results were strong and showed the diversity and resiliency of our business model. We're delivering robust year-over-year growth in the face of COVID while also taking steps to further diversify and strengthen our platform. I'll now walk through some key highlights from our businesses. Within our newly branded institutional broker dealer, B. Riley Securities, our investment banking business posted strong results. We were on pace for a record year for our at-the-market or ATM product offerings. The restructuring advisory group had another strong quarter and built upon the momentum we experienced in Q2. Our teams continued their work on several engagements in the retail and consumer product sector as a result of the continued pressure placed on companies due to the pandemic. Our SPAC team also remained very active during the quarter as B. Reilly Principal Merger Corp. 2 entered into a definitive merger agreement for a business combination with EOS Energy Storage that will result in EOS becoming a publicly listed company. The deal is expected to close in Q4 and gives us the unique opportunity to invest in a disruptive, sustainable energy solution that addresses a clear need in the rapidly growing energy storage market. Now, turning to our retail liquidation division, business levels continue to be attractive due to the continued impact of COVID. In particular, we are seeing opportunities in overseas markets, including Europe, where activity has been strong. We've completed a number of transactions in Europe and see attractive forward opportunities both there and in Australia. In the U.S., we are participating in some large liquidation projects. However, given the risk of COVID and potential for future shutdowns, These deals have been typically fee-related opportunities rather than a guaranteed structure. Our recently added real estate advisory team has been active in working on a number of high-profile transactions and making a meaningful contribution to our overall platform. Year-to-date, we have participated in 17 restructuring projects, totaling approximately 1,600 locations. These engagements have spanned multiple sectors, including retail, restaurant, grocery, entertainment, and health services. As Brian mentioned, during the quarter, our Great American Appraisal and Glass-Ratner groups combined under the new brand, B. Riley Advisory. We have already seen increased levels of coordination and collaboration among the employees. The appraisal group, formerly known as Great American Appraisal, continues to recover from COVID-19-related slowdowns and experience earlier this year. All of the key metrics of their business improved sequentially from Q2 to Q3, with new mandates accelerating throughout the period. Our group formerly known as Glass Ratner continues to generate strong growth despite the COVID-19 pandemic. This group has consistently grown since firing the business in August, 2018. And in our current environment, we have no reason to believe that trend will not continue. During the quarter, B Raleigh Wealth Management added a number of new advisors who subsequently brought $500 million in assets thus far to the firm. Our diverse platform and culture attracts high quality advisors with growing and sophisticated wealth management practices. We continue to see our assets and revenue per advisor climb, and our independent channel has doubled in size over the past six quarters. With the increased depth and breadth of the larger platform, our wealth management group has seen a material increase in interest from advisors looking to join the firm. Our principal investment companies, MagicJack and United Online, remain steady and important contributors of cash flow. We continue to seek opportunities to acquire businesses that would be complementary to our current portfolio. Our recently acquired brand portfolio continues to see the impact of the pandemic and its impact on the retail sector in general. In the short term, this impact on the brand portfolio will continue to present headwinds. Despite these challenges, we are optimistic about the long-term earnings potential from this group. Lastly, I want to echo Brian's comments about our employees who have taken their commitment to our clients and partners to a new level in response to COVID-19. Despite upended working conditions and a need to do jobs differently, the dedication of our teams has not wavered, and the results we're announcing today and our outlook reflect that. With that, we will open the line for questions. Operator?

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star 1 to register questions at this time. We will pause for a moment to review questions and wait for people to queue through. Once again, ladies and gentlemen, that's star one to register questions at this time. Our first question today is coming from Kevin Rendino of 180 Degree Capital. Please go ahead.

Thanks, Brian. Great review and a great quarter for you and your team. So it's obvious you have your hands in a lot of different areas. As you scan the universe, what types of opportunities do you see B-Raleigh being most able to take advantage of? Is there any one area that has a greater focus in the short term than others?

Thanks. Thanks, Kevin, and thanks for the comments. I think that's probably the biggest challenge we have, and I've talked a little bit about it. But if you look at the B-Riley Financial platform, you have – we're doing appraisals on over 1,000 companies, and we're doing advisory on 200 companies, and we cover 500 companies, and then we have all the other touchpoints of wealth management, et cetera. trying to harness that and do the best job we can in terms of delivering products to our clients, looking through acquisitions, and then really getting synergies between all the organizations is really the biggest challenge we've done. And we've done a lot of work there, and Tom Keller of CoCO has really done an amazing job of putting together an internal network to take advantage of all those opportunities. I think as I look through it, you know, we will continue to build on the business that we have. We haven't made a really large acquisition since, I think since last round, or maybe Magic Jack was around the same time. You know, we're seeing a lot of opportunities in the principal investment side. You know, we made the brand investment, but our philosophy of really taking some of our episodic profits and growing those as we have, and then funneling those into a more recurring revenue stream through opportunistic purchases, I think is the number one opportunity we have, and we'll continue to build on that. But it's a full-time job, and Tom mentioned we brought on two new people, one person from J.P. Morgan and one person from Goldman, which I think speaks to the opportunity that they saw just to internally find opportunities and make sure we're not missing anything. I think it's a vague answer to your question, but I do think that what you'll see in the short term is some opportunities on the principal investment side where we are really starting to see unique investment opportunities and purchase opportunities.

Thanks, Brian.

Thank you.

Once again, ladies and gentlemen, that is Star 1 to register a question at this time. Our next question is coming from Wes Cummins of 272 Capital. Please go ahead.

Hey, Fred. Thanks. Brian, I was just going through the numbers over the past four quarters, and when I look back kind of at the trailing 12 months, if I normalize for operating EBITDA, if we normalize kind of Barney's out of Q4 and the securities in Q1, I'm getting right around $250 million of operating EBITDA, even though you just started reporting that this year. Does that sound right to you?

Yeah, so, Wes, I think the thing I'm going to be most excited about when we report Q4 is we will anniversary Barney's, and we won't have to talk about that one again, but thanks for bringing that up. Yeah, so we have been very clear, and, you know, I think we talked to everybody about the loss we took in Barney's. I think that is a – I think that is an example of probably more of an equity investment. You know, we took a big bet on something that didn't work. It wasn't super recurring. So I think what you're saying is if you added back that loss and then took the operating EBITDA for the last four quarters, your numbers are, if not, they're within a couple percent.

That's right. Okay. Okay. And is that a reasonable number to think about going forward? I know you never like to make projections, but just curious if that's kind of a level we've reached now.

So, you know, I think that we feel really comfortable about projecting half of our business. And so when you look at, you know, all of the recurring sides of our businesses, you know, we're sneaking up to 115, 125 kind of annualized. run rate, and then you have the retail and the brokerage. And, you know, brokerage is up, you know, almost 50% year-over-year on EBITDA. And so does that continue? I feel like we have a lot of momentum. I feel like, you know, the leadership in that group is doing an amazing job of increasing our presence. You know, we've been doing this kind of small-cap world for 22 years, and now doing more mid-cap, and I think that's being appreciated. So the opportunity set is bigger and bigger. Having said that, markets are cyclical, and this has been a unique world where you had COVID create companies needing to raise capital and investors giving some of those companies a bit of a pass given that dynamic. And so really good companies went into markets and raised money, and we were able to help them. But On the advisory side, the restructuring side, you know, the capital market side now, you know, now doing larger debt deals in addition to our equity deals, I feel really good about where we stand. I think the base is a real base. So, you know, we'll see, but excited about next year.

Okay. Great. Thanks. I appreciate it. Thanks, Wes.

Once again, ladies and gentlemen, that is star one to register a question. Our next question is coming from Stanford Wyatt of August Partners. Please go ahead.

Hey, guys. Great results. Great to see all the progress you guys are making. Brian, just to piggyback on Wes's question there, you guys are growing 90% EBITDA and increasing the dividend and buying back stock and Just looking at the market cap, I mean, you guys are trading kind of sub three times EBITDA for tremendous growth and a lot of tailwinds in your business. And I guess I'm just curious to get your take on kind of the valuation of your company and your buying back stock and insiders are buying, so maybe you prefer kind of a – you know, lower share price, but, you know, you're raising capital occasionally, and it seems like, you know, the share price is pretty undervalued for the growth and the opportunities. So just would love your take on how you see the valuation of your company.

Thanks. So, you know, we are a difficult company to put in a box. If you want to play or invest in the capital market cycle, you know, there are a lot of companies that have, a very focused business in the capital markets. Or if you want to play distressed purchasing, maybe you, you know, there's some private equity firms or BDCs that might enable you to invest in those types of things. So we, you know, I think it's hard to put us in a box. I think it's hard to get analyst coverage on a company like ours. One, because some of the companies that would provide coverage are competitors. And two, it's a difficult, again, it's just kind of a difficult company to evaluate. You know, what I would say is, you know, with this quarterly dividend, we effectively in 2014 went public at $5 a share through Merge with Great American. And we are, I don't know, Phil, if we're above it, but we're like a $490 something in terms of dividends returned to our shareholders. You know, and when I look at that measure and how we've returned, you know, between buybacks and dividends in the last six quarters, we've returned $14 million, roughly $13 to $14 million every quarter to our shareholders. And You know, I think that, to me, I'd much rather have a business that, you know, is generating a lot of cash and we feel it was undervalued than a business that was, you know, that we were – that was overvalued and we didn't understand it. So we're obviously putting our money where our mouth is. You've seen multiple directors buy. You've seen multiple insiders buy. You've seen us buy almost 7% of our company this year and balance that with dividends. Yeah. All we can do is blind and, you know, continue to look through the opportunities and, you know, continue to do what we think we're good at, which is what we've done the last six years, is being opportunistic around, you know, the principal side and, you know, sticking to our knitting on the broker deal or enhancing it with, you know, acquisitions like, you know, like Glass-Ratner. I mean, what we haven't even talked about is the real estate group. We started a real estate group to work in, you know, mostly liquidation types of situations. in the beginning of the year from, not from nothing, because we hired a guy that is very well respected in the industry, our partner with him. I mean, they're doing 17 mandates already. I mean, that, you know, including JCPenney, which was announced. So we have a lot to build on. We have a lot to kind of, you know, evergreen, but we also have a lot of opportunities, I think, to buy. So, you know, long-winded answer to your question, it's always hard to, you know, when you ask management, you know, how they feel about a valuation, but I think we're really speaking you know, with our pockets and our dollars more than, you know, more than anything else.

Yeah, definitely. Well, I appreciate the feedback and great to see the strong growth and the results. And I'm sure the market will start to pay more attention and continue to execute. So thank you very much.

Well, I appreciate your interest. Thanks.

Once again, that is Star 1 if you have a question. Thank you. Our next question is coming from Sean Hayden of Tip Hill. Please go ahead.

Hey, guys. Congrats on a great quarter. I had a quick question, and you might have mentioned this. I hopped on a few minutes late, but can you just talk about the venture capital effort that you guys recently launched?

So, Sean, thanks for the question. So I did talk about our platform and all the different opportunities that we see. And, you know, venture capital, especially later stage venture capital, if you think about the offering we can bring to a company that may be thinking about going public, it's all we've dealt with is smaller companies, you know, maybe sub a billion, sub 500 million that have gone public. We're public. We have a lot of views. And I think a lot of, you know, we don't know how to sing or dance, but I think when it's, you know, when we talk about being a public company and how you think about that and how you – discuss, you know, and communicate with investors that we've been doing it for a long time. And so if we can utilize that experience and that skill set to find, you know, interesting investments, and then, you know, hopefully when those companies do go public, we'll be able to help them, you know, in multiple capacities, whether it's in underwriting or investment banking. And so we had someone named Todd Sims who was on our board and has a long background in venture capital investing, and we saw that as an opportunity to really expand into that business. So that's the philosophy. We've got a couple already in the hopper. We've done a few in the past, but we're really going to take a look at seeing if we can expand this effort. Great. Thanks. All right. Thanks, Sean.

Thank you. At this time, I'd like to turn the floor back over to Mr. Riley for his closing comments.

Well, thank you, and thank you, all the shareholders and clients, and most of all, really appreciate all of our partners and employees. It's been a crazy six, nine months, but can't think of a better team to be in the Fox pit with, and did I say that term right? You get the gist. We are really thankful about all the partnerships we have. So we look forward to reporting next quarter. Thank you.

Thank you, ladies and gentlemen. 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 by B. Riley Financial's future expectations, plans, and prospects, and any other statements regarding matters that are not historical facts, may constitute forward-looking statements with the meetings 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 ongoing impact of the COVID-19 pandemic, as well as other risk factors 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, 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 for today's B. Reilly Financial's Third Quarter 2020 Earnings Conference Call. You may now disconnect.