B. Riley Financial, Inc.

Good afternoon, and welcome to the B. Reilly Financial's fourth quarter and full year 2023 earnings call. My name is Jordan, and I will be your call coordinator. Earlier today, B. Reilly issued a press release and financial supplement detailing its results for the fourth quarter and full year 2023, which can be found on its investor relations website at ir.breillyfin.com. Today's call includes prepared remarks from the company, followed by a question and answer session. Joining us today from B. Riley are Bryant Riley, Chairman, Co-Founder and Co-CEO, Tom Keller, Co-Founder and Co-CEO, and Philip Ahn, CFO and COO. After management's remarks, we will open the line for questions. Please note that all participants will be on a listen-only mode until the Q&A portion of the call. As a reminder, this call is being recorded. An audio replay will be available on the company's investor relations website later today. And 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, please proceed.

Thank you for joining our call this afternoon. Before we get into our results, I want to thank everyone who attended our investor day in December. and I want to encourage anyone looking to understand the complexities of our business to refer to our comprehensive presentation, which is posted to our investor relations website. At that event, we also addressed the attention on B. Riley related to our role in taking franchise group private while Brian Kahn was CEO. Given the current scrutiny surrounding this matter and the time and resources it has required to complete our review, our annual report on Form 10-K for the year will be delayed. This remains a focus for our team, and we're working to complete it soon. Now, in terms of our results, 2023 was a strong year for the majority of our subsidiaries. However, the strength across our core business was masked by non-cash write-downs related to targets and unrealized investment losses. Despite a choppy operating environment for certain of our core businesses, we delivered increased revenues of over 50% at $1.6 billion for the year and $368 million of operating EBITDA. As we look ahead, our focus remains on turning the best path forward for our business, employees, and shareholders. With these considerations in mind, this afternoon we announced that we have obtained Mollison Company to conduct a review of strategic alternatives for our appraisal and retail liquidation businesses, formerly known as Great American Group. Those who have followed us know that Great American has played a significant role in V. Riley's history and overall success. We became a public company in 2014 through a combination with Great American. Since then, we have consistently stated our intention to use our balance sheet opportunistically to invest in and acquire businesses that can benefit from our platform and, in turn, create value for our shareholders. In line with that strategy, in 2016, our second year as a public company, we acquired United Online, and we formed our principal investments group to enhance the value of our platform longer term with additional sources of steady and recurring cash flow. In the seven years since, we have bought and built a number of high-quality businesses, and in the process, we meaningfully expanded our core financial services, including investment banking, brokerage, wealth management, business consulting, forensic accounting, among others. Each of these companies' founding partners and entrepreneurs who have joined the B-Riley platform have benefited from the knowledge and experience of our teams, and together, we capitalize on our growing market share. This is particularly true of Great American, which is led by an exceptional management team that has done a tremendous job growing the business organically since our combination 10 years ago. Together, we have executed a number of strategic initiatives to grow these businesses organically. In 2023, our appraisal and liquidation businesses generated approximately $153 million in revenue and $35 million in operating income, a year-over-year increase of 35% and 69% respectively. Our appraisal business has historically been a steady recurring performer and has seen strong growth over the last year. Our retail liquidation business is more episodic, but over the years has provided meaningful profits, which we have used to deliver returns to our shareholders and reinvest in our business. Together, Great American is a uniquely positioned asset with strategic relevance to many types of platforms, and we expect there will be a robust interest in this process. Great American is one example of the underappreciated value that is hidden in plain sight across our platform. This business is currently carried on our balance sheet at a book value of approximately $35 million. I'm not going to speculate on a sale price, but it's easy to do the math on the multiple. We will continue to explore options with an eye towards repurchasing our bonds of common stock while investing in the rest of our core wealth management, advisory, and institutional businesses. At our core, we are a financial services company that caters to both businesses and investors. We partner with entrepreneurs. We help them build, sell, expand, and fix their businesses. We are a trusted advisor to founders, operators, company boards, financial institutions, and law firms. We lean in with our balance sheet to support our clients, and we hold a large investment book that is marked almost daily, reported quarterly, and is volatile because of the dynamic investments we make. To put this into perspective, over the last four years, our corporate businesses delivered approximately $5 billion in operating revenue and $1.5 billion in operating EBITDA. During that same time, our prop book was effectively flat, which is not reflective of the opportunities our investments have created to enhance our operating results. Obviously, the external dynamics surrounding our firm has created significant dislocation in market value of both our common stock and publicly traded bonds. Our view is this has created an incredible opportunity for us. We have reduced our dividend by 50% based on the many opportunities we have to reinvest in our business, including repurchasing our debt at attractive prices. That brings me to Franchise Group. It has been roughly six months since we've taken a private transaction, and our team has helped FRG execute two transactions in line with our stated investment thesis. First was Badcock's merger with Kahn's in December. This transaction resulted in FRG owning just under 50% ownership interest in a publicly traded company that has significantly increased in value since the merger was completed. Second was FRG's sale of Sylvan Learning to Unleashed Brands earlier this month. The undisclosed purchase price was higher than what we had underwritten. FRG acquired Sylvan in 2021 for approximately $81 million. As challenging as the consumer environment has been, we remain confident in our long-term thesis for FRG. Our thesis on FRG is just that, a long-term view that the underlying businesses are expected to create significant value to our shareholders. And we are working on FRG with the same vigor we have in all of our past transactions to maximize the value of our investment. Before I turn the call over to Phil, I want to express my appreciation to our employees for their continued resiliency and the clients across our businesses who have reached out to express their support for B. Reilly amid the growing noise surrounding our brand on social media. Fundamental research does not involve personal attacks, Photoshopping memes, or incessant harassment of our employees and business partners. This behavior alone should speak volumes about these authors. To be clear, this is not a comment about short-selling. Short-selling serves a purpose in maintaining healthy capital markets, and as a public company, we have responded to constructive feedback, including from short-sellers. I appreciate we are a complex business, but I am extremely proud of the business we have built, the businesses we have grown, and the value we have delivered to all of our stakeholders. We have continued to deliver on our stated strategy year after year, and to fully appreciate this, it's important to understand our history and where we came from. We started this business in 1997 with every dollar we had and formed a two-person fundamental stock research firm. We invested opportunistically to build out our platform and to enable our clients' success. This is our core business, and this is where we will continue to invest. Over the next few weeks, our executive team will be on the road, and I look forward to catching up with our clients, partners, and investors. We appreciate your continued trust and support, and be rightly. With that, I will now turn the call over to Phil to discuss key metrics for the quarter. Tom will discuss results from our business segments before we open up for questions. Over to you, Phil.

Thanks, Brian.

As I start my comments, I would like to remind everyone that the financial results discussed in our press release and on today's call are preliminary and unaudited. As mentioned in our press release, we will be filing a form 12B25 with the SEC to provide notice of the delayed filing of our annual report on form 10K for 2023, which we are working to complete. Now turning to our results. For the fourth quarter ended December 31st, 2023, B-Rolly reported total revenues of $347 million and a net loss of $70 million, or $2.32 diluted loss per share. Net loss for the quarter was primarily due to a non-cash impairment charge related to Targus and unrealized investment losses related to security zones. Investment gains and losses include realized and unrealized gains and losses on our investments. These investment gains and losses have and will continue to create volatility in our periodic earnings. For this reason, we generally discuss performance in the context of our operating revenues and operating adjusted EBITDA, which may be considered non-GAAP financial measures. During the fourth quarter, we recast our operating metrics to include revenue from fixed income spread activity, which represents spread income for our institutional business and a steady contributor to our earnings. This adjustment is reflected in our reconciliation for operating revenues and operating adjusted EBITDA. Investors can refer to our earnings release for a reconciliation of non-GAAP metrics, as well as an explanation for our use of these metrics and a definition of these terms. Excluding investment loss of $49 million, operating revenues were $395 million for the quarter, compared to $449 million in Q4 of 2022. operating adjusted EBITDA of $79 million compared to $110 million in the prior year period. Turning to our results for the full year, total revenues increased 52% to $1.65 billion in 2023, up from $1.08 billion in 2022. Operating revenues increased 25% to $1.63 billion in 2023, up from $1.31 billion in 2022. Operating adjusted EBITDA was $368 million for 2023. Total adjusted EBITDA for the full year 2023 increased to $240 million, up from $32 million in 2022. Net loss for the year was $86 million, or $2.95 diluted loss per share, which again primarily related to Targus, Targus' non-cash impairment, and changes to mark-to-market valuations in our investment portfolio. Turning to highlights on our balance sheet, as of December 31st, we had $232 million in unrestricted cash and cash equivalents, $1.11 billion in net securities and other investments owned, and $532 million in loans receivable. At year end, we had total cash and investments balance of approximately $1.9 billion, which includes approximately $15 million in other investments reported in prepaid and other assets. Total debt. Net of cash and investments was approximately $457 million at quarter end. Total debt as of December 31st was approximately $2.4 billion. Finally, as Brian discussed, our board has declared a quarterly dividend of $0.50 per common share, which will be paid on or about March 22nd to common shareholders of record as of March 11th. Now, before Tom discusses our segment results and highlights from our businesses, I wanted to note that during the fourth quarter, we realigned our segment reporting for the previously reported consumer segment. Our targets business is now reported on a standalone basis in the consumer product segment. The remaining results in the previously reported consumer segment, including results from our brands, have been reclassified into all other, which is below the line and reported within corporate and other. The financial data, related to these businesses has been recast in our earnings material for the periods presented. That completes my summary. I'll now turn the call over to Tom to discuss our business segments. Tom?

Thanks, Phil.

As Brian mentioned, non-cash losses masked what was otherwise a strong year with notable progress across the vast majority of our subsidiaries. In our capital market segment, which includes our investments and loan portfolio and results from BRI securities, revenues increased 75% to $575 million in 2023, up from $328 million in 2022. Segment income increased to $198 million in 2023, up from $82 million in 2022. Excluding investment gains and losses, segment operating revenues increased to $562 million, up from $557 million in 2022, primarily driven by investment banking and institutional brokerage activities at B. Riley Securities. B. Riley Securities saw a strong Q4 and contributed operating revenues of over $100 million and over $20 million of operating adjusted EBITDA. Fourth quarter investment banking revenues increased year over year, but were slightly lower versus the previous quarter due to lower underwritten offerings. While equity capital markets remain subdued in the quarter, we saw an uptick in M&A activity and have recently gained significant market share in debt capital markets. With respect to our restructuring group, this team continues to field an increased number of opportunities and has seen a higher level of active engagements. Sales and trading demonstrated sequential improvement, supported again by increasing contribution from fixed income trading. Looking ahead, we are gearing up for our 24th annual Institutional Investor Conference this coming May. Our wealth management business returned to profitability in 2023 with revenues of $198 million and segment income of $3 million. Reoccurring revenues contributed 60% of our wealth revenues for the year. For the fourth quarter, revenues and fee-based assets increased year over year compared to our fourth quarter of 2022. This is yet another milestone following the operational realignment of this business throughout 2021 and 2022, as discussed during our December investor day presentation. Our wealth management leadership team has done a tremendous job combining legacy B-Rally wealth with national holdings, which we acquired in 2021. Through their efforts, we have realized significant annualized savings, lowered fixed costs, increased revenue contributions from reoccurring lines of business, all while de-risking the business. Importantly, we have significantly improved process efficiencies to help us better support our clients. URiley Wealth today includes a balanced mix of over 400 independent and W-2 reps and advisors serving clients coast-to-coast. Assets under management increased to $25.4 billion at December 31, 2023, up from $24 billion in 2022. We maintain strong relationships with our premier clearing and custodial partners where all of our clients' assets are held. In auction and liquidation, revenue increased 39% to $103 million in 2023, up from $74 million in 2022. Our retail solutions business completed the year with approximately $30 million net deal profit. We saw a significant uptick in retail liquidation activity in the U.S. and Canada during 2023 and continued levels of retail liquidation activity in Europe. Prospects in Europe continue to be promising with a strong pipeline of opportunities as retailers continue to feel the effects of poor sales, reduced consumer spending, and rising interest rates. Turning to our financial consulting segment, which includes B. Reilly Advisory Services and our real estate brokerage practice, revenues increased 35% to $134 million in 2023, up from $99 million in 2022, primarily driven by an increase of bankruptcy and litigation consulting assignments and appraisal engagements and real estate restructuring projects. B. Reilly Advisory Services maintained strong and steady growth throughout 2023. The fourth quarter saw another record revenue period for our legacy Glass-Ratner consulting business, along with increased revenues from appraisal. Momentum is continuing into Q1. This has been the strongest start to the year in our appraisal business's history, as demand from asset-based lenders remains strong. Similarly, in our legacy Glass-Ratner business, bankruptcy and restructuring mandates continue to increase. Our forensic and litigation group has a strong pipeline heading into 2024, and we are looking to hire senior practitioners to support demand and continue growth in this group. Our Canadian affiliate, Farber, which we added last year, has also seen increased activity in its insolvency and restructuring practice, and we continue to build our domestic interim management and executive search practice to complement Farber's established niche in this space. Turning to our communication segment, on a combined basis, our communication segment contributed revenues of $82 million and $6 million of segment income for the fourth quarter. For the full year, revenues increased 43% year-over-year to $338 million in 2023, up from $236 million. Segment income increased 15% to $35 million in 2023, from $30 million in the prior year. As Brian mentioned earlier, we formed this business and acquired these companies on a cost basis in line with our investment thesis. and stated strategy to maximize cash flows to our platform. This business leverages the strength of our operational capabilities and has continued to provide steady cash flows to our platform since inception. We continue to look for companies with similar characteristics that can add and leverage the operational capabilities of this group. Turning to our consumer product segment, which reflects results from Targus, as we discussed during our investor day, since acquiring the business in late 2022, Targus has been negatively impacted by what is the worst market for the PC and tablet sales since 2006 and 2011, respectively. While the market is not quite there yet, we are seeing some improvement, and we believe that Targus, relative to its peers, is well-positioned to gain share as a worldwide leader in this category. Finally, our brands portfolio, which are various investments in fashion brands, including our six brands portfolio, Justice, Hurley, BB, and Scotch and Soda, which we added in April, dividend income related to our brand equity investments increased to $33 million in 2023, up from $28 million in 2022. As Jill mentioned, our brand investments and businesses are reported outside of our segments and below the line in corporate and all other. Finally, as Bryant mentioned, we recognize that our diversified platform is unique and complex. But what truly differentiates B. Riley is our team. Our people are among the best in their industry and continue to demonstrate complete focus and dedication. This has been paramount to both our and our clients' collective success, and that is what we are most proud of. With that, we will now open the call up for questions before turning the call back to Bryant for closing remarks.

Thank you. At this time, we will conduct the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to enter the queue. If you have joined via web, please press the raise hand icon on the right side of your Deal Roadshow screen. Again, press star 1 on your telephone keypad to enter the queue or the raise hand icon on the right side of your Deal Roadshow screen. We will pause here briefly to allow any questions to generate.

Once again, press star 1 or the raise hand icon. First question comes from Steve with Emerson Investment Group.

Your line is now open.

Thank you for taking my question. We're long the stock and the bonds. I'd appreciate a little more color regarding the delay in filings. And specifically, if your auditor has agreed to sign off on the audit.

Hey, Steve. Been a while. We're not going to comment on the audit other than what we said in the press release.

Thank you. Thank you. Our next question comes from Sean with Charles Lane Capital. Your line is now open.

Hey, guys. How you doing? Just real quick, could you just walk us through the thinking behind the former Great American sale? Why that unit? And if you have any sense of timing on that, that would be helpful.

Sure. So, you know, I think, Sean, you've been around this business for, for a long time and, you know, you've seen us make acquisitions of wealth management at a time where it was out of favor. You know, we acquired Glass Ratner when they were a great business doing $4 or $5 million EBITDA and helped enhance that with this great management team. My view is that what we're best served at is finding opportunities again, whether it's United Online, where we bought for $48 million and returned over $120 million, or it's brands, finding opportunities that are either out of favor or just represent a unique opportunity for us. So that's one. Two is Great American, in my view, is poised to take off with a different entity. And the reason I say that is if you look at our competitors, and we did some of this, We had a direct lending fund that was very successful. We leveraged that asset into buying brands. We utilized some help when we did the receivables business. We've done some consignment. But I think they're right in the middle of the sweet spot as direct lending becomes even more increased. And I think a larger institution with a bigger balance sheet is going to kill it with that asset. And from my perspective, we've got some opportunities around businesses we already own and know in our own business. And so we thought the timing was good. As far as how long, you know, I think we like to have a pretty good sense of where we are by, you know, by the end of the second quarter.

Okay.

And then, you know, with the savings, so to speak, from the dividend cut. Do you have a priority for shares versus bonds?

Yeah, I would say that that's a board decision. Obviously, you know, one has limited upside and one has, you know, more upside. But I would say we're just going to be opportunistic around our cap stack. And anything that we find is not core, not a business, but an asset that's not core, if we can utilize that to buy back some of our debt at 30% strip yields, then we should be thinking that that asset's worth 30% more than it is. So we have an opportunity to, I think, create real value based on the perception of our company right now by some.

Got it. All right. Thanks, guys. Appreciate it. Thank you. Thank you.

Once again, ladies and gentlemen, to ask a question, please press star 1 or the raise hand icon on the right side of your Deal Roadshow screen. Okay, operator, are we good? Correct. Just prompting, once again, ladies and gentlemen, press star 1.

I think we prompted three times. So let me just... Let me speak to our employees and partners and clients directly. Many of you, and I think we highlighted this in our investor day, we've been fighting through and growing this business for 20, 25 years together, 15 years together. This is a battle that I'm excited to be in with everyone that's part of this team. We are... We're in a great spot. I'd much rather have a business go from 12 million EBITDA to 20 million EBITDA in a year than a mark or a markdown. And what we saw this year was improvement in almost all of our operating businesses. So let's just stay focused. I know we will stay focused, and we will take advantage of what I view as a huge disconnect. So thanks, everyone, for listening on the call. TK or Phil, anything you want to add?

Yeah, and I just would echo your sentiments. I mean, the core of this firm is our people, and the resilience that they've shown over the last couple months cannot be overstated. It's truly gratifying to see, and it's what's going to carry us through this. So not a company on the planet that doesn't go through its trials, and we're going through ours, and we're going to get through it.

So looking forward to it. All right. Thank you, Operator. Thank you.

Before we conclude today's call, I will provide B Reilly Financial's safe harbor statement, which includes important cautions regarding forward-looking statements made during this call. Statements made during this call that are not descriptions of historical facts are forward-looking statements that are based on management's current expectations and assumptions and are subject to risks and uncertainties. If such risks or uncertainties materialize or such assumptions prove incorrect, Thank you. and segments regarding a transaction related to the company's greater american business and potential use of proceeds factors that could cause such actual results to differ materially from those contemplated or implied by such forward-looking statements include without limitation the risks described from time to time in b riley financial inc's periodic filings with the sec including, without limitation, the risks described in B. Reilly Financial, Inc.' 's annual report on Form 10-K for the year ended December 31, 2022 under the captions Risk Factors in Management's Discussion and Analysis of Financial Conditions and Results of Operations, as applicable. Additional information will be set forth in B. Reilly Financial's annual report on Form 10-K for the year ended December 31, 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. Reilly Financial undertakes no duty to update this information. Thank you for joining us today for B. Reilly Financial's fourth quarter and full year 2023 earnings conference call. You may now disconnect.