B. Riley Financial, Inc.

Good morning and welcome to the B. Riley Financial's third quarter 2023 earnings call. My name is Britt and I will be your call coordinator. Earlier this morning, B. Riley issued its third quarter earnings release. A copy of the release can be found on B. Riley's investor relations website at .brileyfin.com or on the right side of your screen if you're joining us today via web. Today's call includes prepared remarks from the company, which will be followed by a question and answer session with the management team. Joining us today from B. Riley are Bryant Riley, chairman, co-founder, and CEO, Tom Kelleher, co-founder and co-CEO, and Philip Ahn, CFO and COO. After management's remarks, we will open the line for questions. As a reminder, today's call is being recorded and an audio replay of this call will be available later today. Finally, before we conclude today's call, I will provide the necessary cautions regarding forward-looking statements. Now, I will turn the call over to Mr. Bryant Riley. Mr. Riley, you may proceed.

Welcome, everyone, and thanks for joining our call. During the quarter, we continued to execute a platform strategy, generating a meaningful amount of operating EBITDA while at the same time, maintaining discipline focus on balance sheet flexibility to pursue a continued growth. We generated operating adjusted EBITDA of 107.5 million for the third quarter of 2023, of 34% from Q2, and operating EBITDA of 267.8 million for the first nine months of 2023. Net loss of 76 million was driven by investment losses, which were primarily unrealized and relates to changes in -to-mark evaluation on investments that we hold. As we noted before, our investment gains and losses for any particular period are not indicative of our overall business performance, and we have a high degree of confidence in these investments. Our third quarter operating results highlighted strength across our platform with increased revenue and client activity levels picking up from earlier this year. To put this into perspective, our Q3 operating revenue is the highest quarterly total in our firm's history, and our Q3 operating EBITDA ranks third highest. On a -to-date basis for the first nine months, our 2023 operating revenue also ranks highest, and operating EBITDA ranks second. This is a direct outcome of our strategy and the steps we've taken to change the way we do things to relative mix of stable lower margin revenue versus episodic higher margin revenue. A few highlights for the quarter includes strong performance from retail liquidation and another record revenue period for advisory services, which continue to outperform as an additional bright spot on our platform with increased contributions from both our specialty consulting and appraisal units, in addition to a strong corner from our real estate restructuring division. During the quarter, we also saw meaningful increase in investment banking activity and improved performance from wealth management as a result of the actions we undertook to right size this business last year. In terms of our investments, we believe that equity valuations in the small cap market are as attractive as we have seen in a number of years, and we'll look to take advantage of this opportunity, both as a principal, but also to facilitate transactions for our clients. We have continued our discipline focus on maintaining an optimal capital structure to both fund our continuous growth and to take advantage of future opportunities. During the quarter, we raised approximately 150 million in equity proceeds in connection with our common stock offering in July, expanded our NoMora credit facility by approximately 240 million, and reduced our other outstanding debt by 160 million. Taken together, these events resulted in a meaningful change in our capitalization as of September 30th. With over two billion of cash investment and a balanced debt profile, with the vast majority of our debt maturing in 2026 to 2028, our platform is strongly positioned as we look ahead to 2024 and beyond. We found at B. Riley over 25 years ago in a principle that there was a void of financial service firms that could adequately support the needs of companies and investors focused on the lower middle market. I think that premise still remains true today, and there's no other platform as diverse and competitively positioned as ours and the ability to provide value to our clients and partners. And there is no better team than the world-class professionals across our B. Riley platform. With that, I will now turn the call over to Phil on, our CFO and COO to discuss key metrics for the quarter. Phil?

Thanks, Bryant. For the third quarter of 2023, B. Riley generated total revenues of 462 million, which represents a 48% increase from 312 million for the same period in 2022. Total revenues also increased by 86% to 1.3 billion for the first nine months of 2023, compared to 699 million in the prior year period. Growth in revenue during the quarter was primarily driven by our option liquidation segment, consumer segment, and financial consulting segment. On a gap basis, we recorded a third quarter net loss of 76 million, primarily attributable to unrealized investment losses of the equity investments that we hold. Year to date, we reported a net loss of 16 million. Despite the markdowns in our investment portfolio, our platform continues to deliver strong operating results. For the third quarter of this year, operating revenues increased to 473 million, up from 319 million in the prior year quarter. Operating revenues increased to 1.22 billion for the first nine months of 2023, up from 843 million in the same prior year period. Third quarter operating adjusted EBITDA increased to 107.5 million, up from 106.2 million in the prior year quarter. And year to date, operating adjusted EBITDA increased to 268 million, up from 265 million in the first nine months of 2022. As a reminder, adjusted EBITDA and our metrics for operating and investment results may be considered non-gap financial measures. Investors can find additional details relating to these metrics, including a reconciliation to the nearest gap measures in our earnings release and our financial supplement, which will be posted to our investor relations website. Now turning to a summary of our balance sheet as of September 30th, at quarter end, we had approximately 252 million of unrestricted cash and cash equivalents, 1.2 billion in net securities and other investments owned at fair value, and 549 million in loans receivable at fair value. Total cash and investments was 2.05 billion, including 58 million of other investments reported in prepaid and other assets. Total debt as of September 30th was approximately 2.36 billion. Total debt net of cash and investments was 311 million at quarter end. Finally, we declared our regular quarterly dividend of $1 per share, which we paid on or about November 30th to stockholders of record as of November 20th. In addition, our board has approved an annual share repurchase plan, under which B. Riley made repurchase up to 50 million of our common shares. This completes my financial summary. I'll now turn the call over to Tom Gellher, our co-CEO, to discuss our business segments. Tom?

Thanks, Phil. B. Riley's unique combination of businesses and collaborative team approach has enabled us to continue to deliver against the backdrop of challenging markets. Throughout 2023, we have remained focused on executing on our strategic plans by continuing to invest in our platform, extending and strengthening our market share, and building out our execution capabilities. Excluding our investment results, our capital market segment contributed operating revenues of 151 million and operating income of 51 million during the third quarter. Within this segment, revenues from B. Riley securities represented a -over-year increase of over 10%, with investment banking fees revenue up over 100% from Q2, driven by significantly higher underwritten offerings. In addition to adding several new clients in Q3, we completed key mandates for several repeat clients, including Harrow Health and Lancia Homes. Our M&A pipeline is beginning to bear fruit, and we expect activity to accelerate going into 2024. B. Riley Securities has established its leadership in capital formation for small caps and the middle market. As we continue to focus on developing and adding talent to expand our coverage, we believe we are positioned to increase market shares and investment banking activity returns to more normalized activity levels. In our wealth management segment, revenues increased both -over-year and on a sequential basis to 51 million. Our third quarter results demonstrate continued progress in our strategic initiatives to realign this business, with improving margins and an upward trend in reoccurring revenues. At quarter end, our wealth assets under management totaled 24 billion, and our producer base remained flat at approximately 400, representing a balanced mix between independent and W2 advisors. As capital market activity improves, we believe there is an opportunity for more upside in this business. In auction and liquidations, B. Riley Retail Solutions had a robust third quarter, generating segment revenues of 78 million and segment income of 18 million, driven by an increase in both the number and the size of our retail liquidation engagements. The influx of new business that started during Q2 continued in the third quarter, with several new and ongoing domestic and European projects carrying into the fourth quarter. Engagements completed during the quarter include Bed Bath and Beyond, which we led with our JV partners, and Salamander Shoes in Europe. More recent engagements include Z Gallery and Depot Germany, which will contribute to future quarters. New business in Europe also continues to be promising as European retailers feel the effects of poor sales, reduced consumer spending, and rising interest rates. Financial consulting segment revenues of 37 million represents an increase, both on a sequential and absolute basis, as another record period for our advisory services business. Segment income was 10.5 million for the quarter, and we are seeing momentum continue into what is historically a busy season in Q4. Increasing levels of client activity across bankruptcy and litigation, consulting, appraisal, and real estate restructuring contributed to our strong quarterly results. Additionally, our team of professionals at Farber have already contributed meaningful results in joining our platform in February. This team operates as a seamless extension of our core bankruptcy and restructuring services in the Canada market, and we're currently in the process of introducing Legacy Farber's interim management and executive search as a new capability for us in the United States. We look forward to bringing our forensic accounting services to Canada in the near future as well. In our appraisal division, -over-year revenues and operating income increase across the board in all of our business lines, including inventory, machinery, and corporate valuations. Our appraisal business has continued to steadily gain market share over the last five years, and we expect demand from asset-based lenders to remain robust. Turning to our communications portfolio, segment revenues were 84 million, and segment income was 7.5 million for the third quarter. As a reminder, we acquired these businesses at opportunistic valuations, and with an understanding that the portions of the respective market segments may continue to decline. We acquired Unitedline in 2016 and MagicJack in late 2018. Since then, we've generated cash flows in excess of our original purchase prices for these businesses within about two years in the case of UnitedOnline, and within 3.5 years for MagicJack. Both continue to be strong cash flow contributors to BeReilly. Based on our earlier successes with these businesses, we added Marconi Wireless to our portfolio in late 2021, and Lingo Bullseye through a series of transactions over the last year, which contributed to the significant increase in this segment. In our consumer segment, revenues of 63 million for the third quarter were largely driven by the addition of Targets to our platform in Q4 of last year, in addition to the brand licensing revenues from our six brands portfolio. Targets has faced challenges in 2023 due to softness in the overall PC marketplace, and as a result, we recorded a non-cash goodwill and trade name impairment charge of 35.5 million, which contributed to a segment loss for the quarter. However, with the strength of the Targets brand and financial strengths of BeReilly, we believe Targets will be competitively positioned to gain share as the PC market recovers. Now I'd like to turn the call back over to Brian. Brian?

Thanks, Tom. Before we open up the call for Q&A, I just wanted to take a few moments to address news surrounding FRG. It wouldn't be appropriate for us to speculate or provide commentary on the reported allegations. However, I do think it's important for us to lend context to how we view FRG as a business and our rationale for that investment. During the quarter, we announced our role leading the financing of FRG's two billion take private transaction. We placed a significant portion of the equity and principally invested in the deal alongside management and other co-investors. We own a little over 30% equity interest in the private entity in connection with that transaction. FRG is comprised of six distinct businesses with over 3,000 combined locations across the US and Canada, including American Freight, Bangkok Furniture, Buddies Home Furnishing, Pet Supply Plus, Sylvan Learning Centers, and the Vitamin Shop. Given our view that FRG's public valuation was below the sum of its parts, we saw a compelling opportunity to participate in its take private as to many co-investors of that deal. We invested in FRG based on the fundamental of those distinct businesses. That is, we underwrote and that is what we invested in, the FRG business, and our confidence in these businesses have not waned at all. From an operational perspective, FRG is not run by any one individual. As franchise businesses, these companies are run by six different management teams that operate with their own infrastructures. FRG was formed through the purchase of shares of the founder of Liberty Tax in 2018. We purchased these shares at approximately $8 per share and we were a larger shareholder than the current management team at that time. We realized a return of over 30% IRR over the next few years in that original investment. We know these assets. As CEO, Brian Kahn was the architect that helped put these businesses together to form FRG as it is known today. I've known Brian for many years, I've had no direct experience with what has been alleged. We learned of this matter late last week like many others, and we continue to closely monitor relevant developments. However, I have no interest in going through hypotheticals and speculation. B-Riley's business is much more than just FRG and to the extent to which we have ever needed to work to protect the firm's interest and that of our investment partners, we have and always will. With that, we are ready to open for Q&A. As always, we're happy to address any questions within the context of our results and our overall business. Operators, please open the line for questions. Thanks.

Thank you. At this time, we will conduct the question and answer session. If you would like to ask a question,

please type star one

on your telephone keypad to enter the queue. If you've joined via web, please press the raise hand icon on the right side of your Deal Roadshow screen. Again, that's star one on your telephone keypad or the raise hand icon on the right side of your Deal Roadshow screen. We'll pause here briefly to allow questions to generate. Again, ladies and gentlemen, that's star one on your telephone keypad or the raise hand icon on the right side of your Deal Roadshow screen. My first question comes from Sean at Charles Lane Capital. Your line is open.

Hey, good morning. Good morning, guys. Hey, Sean. Can you guys hear me all right? Yes, can you hear me? Loud and clear. Okay, great. So on the consumer side, how big is the revenue increase? Like what contribution came from Targis

on

that?

Phil, do you have that number? I can tell you that effectively. I can break it down for you on EBITDA and Phil can come back to you. But Targis was close to breakeven EBITDA for the quarter. The brands business represented the vast majority of EBITDA and the brands business is doing great.

And just remind me, is that Scott's and Soda? Is that Curly?

So we have six brands that consist of smaller brands that we originally acquired from Blue Star. And then the bigger ones are Justice, Curly, Scott's and Soda. And then we also have a majority position in PB. So those are the majority. We're actually seeing some exciting momentum in Limited II. That's one of our six brands where that's got a kind of many of the children that shop there are now mothers and there's a lot of momentum around that brand. So we'll see what happens, but there's definitely some momentum there.

Got it. And then on auction and liquidation, big quarter, how should we think about the cadence of that business? I mean, for the current quarter, are you seeing engagements? How do we kind of follow that up?

Yeah, so look, we have tried to be really clear about how we think about the episodic businesses. And for a long time, the broker dealer was really the driver of the EBITDA and episodic businesses. We have always known that liquidation and retail advisory would have its time and that business has been run break even when there's nothing going on through some advisory stuff and things like that. And that's the same with the broker dealer when there's no capital markets and there's just no M&A, which has been the environment kind of off and on over the course of the last three or four months where our goal is just to break even and to have meaningful upside when things turn. And I think what you saw this quarter is there is a little bit more distress in the retail side, both domestically and Europe. We are a leader there and we had one of our best quarters ever. And I can't tell you that the timing of the next event, it's really short usually. We will find out a month before there's a company that the banks may want to do something. It usually happens in Q4 because what you will typically do is give a retailer through the holidays. So I will say that as I look forward in the next year of that business, I think it's going to be a very strong business. But I can't tell you that there's an exact backlog. There's a lot of activity.

Okay.

You know, a lot of news out there on a particular landlord recently filing bankruptcy. Can you comment on just is your real estate solutions business seeing any uptick in activity?

Yeah, I mean, we're definitely seeing an uptick in activity. I just can't quantify it for you.

Okay. Fair enough. And then just last for me, just on the buyback. Timing of that, I mean, the stocks obviously have been hit recently. Is that something that's going to be felt sooner or how are you guys thinking about that?

So I mean, it's obviously something that we've done in the past. We'll do in the future when we think it makes sense. I mean, realize that what is not on our balance sheet is the decision we made to sell bonds to a broad array of buyers because yield was hard to get two years ago. And that is a huge asset. If we were to buy those bonds back in the open market, that would be, you know, We have to determine whether we think the opportunities are better than to yield that those trade. Obviously, we have equity out there that has a very low yield and we feel like that's very undervalued. Or we'll, you know, the other thing I've said, Sean, before is the number one thing we will do is we will utilize those dollars for retail advisory situations, liquidations where we are principal. That's our best IRR. And then, you know, there's just not a lot of buyers of small cap stocks and there's not a lot of funders of small cap companies. And this is a time where we think we can use our balance sheet to really create a lot of value for our shareholders. If you remember the last go around after coded, I mean, we changed our whole business based on what we did there. Our EBITDA doubled. And we think that this environment is a great environment for us. We are incredibly well positioned to take advantage of that.

Okay.

Yeah, I guess just, you know, you're trading at, you know, the stock is at a kind of alarmingly high yield. Any thought of, you know, maybe diverting some of the funds you guys use for a dividend towards either more buybacks or buying the bonds? Just given, you know, how high your dividend yield is

today. Look, I think that we would, the dividend is very important to us and it's important for us to return a portion of our EBITDA shareholders. I think what we could do if we wanted to be more aggressive around those things, we have some, like the brand's assets are amazing assets. They generate $50 million of dividends. Those assets are super valuable. Do we think from time and, you know, the partners here are that and that business are amazing and I'm a huge fan. But is that is that something that historically has traded at 12 times, maybe traded eight times or 10 times now? That's something that, you know, if things got, you know, if there was an opportunity for us to do something dramatic because our shares, our business is being undervalued. You know, we would not hesitate to do something like that.

Okay,

good to hear. Thanks guys for taking my questions and thanks for the update. Thanks, Sean.

Thank you, Sean.

Again,

ladies and gentlemen, if you'd like to ask a live question, please press star one on your telephone keypad or if you've joined us via the web.

It's

the raise hand icon on the right side of your Deal Road Show screen.

I have an email in question. This is Mike Frank. Brian, can you walk through the updated recurring EBITDA and then go through the forward interest expense and maybe touch on the break even for B-Riley securities?

Sure. So the break even EBITDA, when you're talking about break even where we're paying for a whole dividend, right, paying all our interest expenses, it's in and around 85 million. And let me give you how we underwrite that 85 million. Excuse me. And then you can you can kind of work through those numbers. So the way that we underwrite those those those that that that 85 million is the broker dealer for a long period of time was averaging $30 million a quarter in EBITDA. We just we we underwrite that 15 million a quarter. You know, obviously, it did more this quarter. The retail advisory can be all over the place, but we underwrite that to seven million a quarter. Appraisal advisory. I mean, look at those numbers, those numbers. The appraisal business is up 35 percent. Advisory is far more than that. Those two businesses this quarter did over 10 million EBITDA. So we underwrite that to eight to 10 million EBITDA per quarter. So you're at about 30 million. Telecoms, you know, we were underwriting that to closer to 70, 80 a quarter. You know, I think it's in and around 15 to 17 and a point five per quarter. But the telecom assets wealth, we underwrite to about four million per quarter. Brands, including BB, 12 million per quarter. Interest income in and around 25 million per quarter, 25 to 30 million per quarter. And Targus, 10 million per quarter. So, you know, Targus right now is last quarter was flat. It's going to be EBITDA positive this quarter. And we are starting to see the PC market come back for many, many years. That business generated at least 40 million in EBITDA per quarter. So, you know, we're not going to we recognize right now that that business is up. And in our long term model, we underwrite that. So if you add all that up, it comes out to somewhere and then take, you know, 10 million from core. It comes out to somewhere, you know, in and around 85, 90 million bucks. And then there's we think those are the conservative views of each of those businesses.

And then, Phil, do you want to comment on the interest expense going forward and any other overhead that might be included in those recurring businesses?

Well, I can just comment on the go forward interest expense. We're roughly run rating at 42 million a quarter in interest expense. The one we netted against some of our investments and net interest income that we're receiving. The the net of that is is in the low 20s. And we and the when when Brian was just talking about the operating business, that's that is that's inclusive of allocations for for corporate.

So so the quick math, quick math is you take 90 and we have DNA of 12. Excuse me, we have interest of call it 40. You know, it depends whether we're going to pay taxes or not. You know, the dividend, there's no capex in this business, very little capex. And, you know, you always have a minimum amount of taxes, but that's kind of the math. Anything else, Mike?

Hello?

Yeah, so we've got a couple other in the queue operator. Do you want to go to the next question?

Our next question comes from Brett at Nacoma's capital. Brett, your line is open.

Hey, Brian, could you just remind us which which brand were the were essentially your royalty income goes into dividend? And if there's anything else that was added into that line item year over year?

Yeah, Phil, do you have the breakdowns of each of the brands or roughly? I mean, I have them roughly. Do you have that number handy?

I'm sorry. Actually, I don't have that, but I can follow up on that. Okay, Brett.

Okay. Thanks.

Yeah, Brett, Brett, the number you're solving the brand's business had a had a really strong quarter. Hold on. Let's give you a little bit to have it here. Just give me one sec. But the brand's business had a really strong quarter. So, you know, six brands for the quarter was in and around three ish three ish and change a million. Hurley Justice was in and around nine million at nine point five million. That's higher than typical Scotch and soda. We had a little bump from Scotch and soda because, you know, they they have done a really good job of kind of getting to a spot of liquidating the assets before. It's just a regular brand. So we picked up a couple million there. So that's probably the biggest difference you're seeing is a Scotch and soda.

Got it, because I can't remember the timing. Scotch and soda was not in Q3 a year ago. No, it was not. Okay. So when I think of that, I think it went from nine point two million to twelve point nine million of dividend income. I should think about a moderate amount of same-star growth, probably mostly limited to which we're seeing in, I guess, a bigger presence in Wal-Mart and then and then adding Scotch and soda gets you that growth. Yep. Okay. Thanks. Thank you.

Thank you, Brett. This concludes today's Q&A. I'd like to turn the call back to Mr. Riley for his closing remarks.

Thanks, operator. I want to be I want to I want to actually answer some questions that I don't think were asked. And I think there's noise out there. So I want to I want to address it and be crystal clear. We would have bought all of franchise groups. We are a huge fan of that business, and it's a really simple analysis. They have a great steady, even dot and vitamin shops. Pet Supply Plus, which was bought for nine hundred million, is going to get to one hundred forty million in the next couple of years. American Freight is an unbelievable business that faces the same challenges of Targis. That's a business that was doing one hundred and ten million in twenty, twenty one and went down along with that. That was our opportunity. And we would buy that over and over again. We were a founder in that business. We have been we have been a great with a great partnership with Brian. We have great partnership with other management teams. We've helped fund that. We sold the real estate. We made twenty seven percent higher on our receivables. We made the first batch. We made over 40 percent on the second batch. We have fifty million dollars exposure there now, which is money good. And we over time determined that the better path was to allow shareholders that weren't involved in franchise group, many of which rolled as well as management, many of which purchased in the deal to participate. So there should be no confusion where that is. And I know that today a statement came out from Brian denying any involvement in what happened with Prophecy. And that's good enough for me. So I'm a fan. I don't I don't I want to just be crystal clear. We I believe we are going to make a lot of money for our shareholders and franchise group, just like we did in the first investment when we bought a big chunk of Liberty Tax at eight and just like we did at Backhawk and just like and we will continue to do so. So one answer that question and we'll we'll we'll go back to closing this out. And by the way, I just want to again shout out to everybody that's a partner with us. Many of our shareholders that invested in our initial deal at five are still shareholders and we appreciate your partnership. Our our the people that we work with, our partners are like the best out there. And I am so excited about how we are going to create value of the next year with a little bit of dislocation out there. So thank you, operator. We look forward to next quarter.

Thank you. Before we conclude today's call, I will provide the financial safe harbor statement, which includes important cautions regarding forward looking statements made during this call. Statements made during this call that are not descriptors 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-Rally Financial Inc's periodic filings with the SEC, including without limitation, the risks described in B-Rally Financial Inc's annual report on Form 10-K for the year ended December 31st, 2022, under the captions, risk factors and management's discussion of analysis, the financial condition and results of operations, as applicable. Additional information will be set forth in B-Rally Financial's quarterly report on Form 10-Q for the quarter ended September 30th, 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-Rally Financial undertakes no duty to update this information. Thank you for joining us today for B-Rally Financial's third quarter 2023 earnings conference call. You may now disconnect.