B. Riley Financial, Inc. 6.00% Senior Notes Due 2028 Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Strategy Execution: Continued executing the platform strategy, generating operating adjusted EBITDA of $107.5 million in Q3 2023, up 34% from Q2; Q3 operating revenue was the highest quarterly total in the firm's history.
• Segment Highlights: Strong performance from retail liquidation, advisory services, specialty consulting, appraisal units, and real estate restructuring; increased investment banking activity and improved Wealth Management.
• Investments: Believes small-cap equity valuations are attractive and will look to take advantage; maintained disciplined focus on capital structure, raising approximately $150 million in equity proceeds, expanding the Nomura credit facility by ~$240 million, and reducing other outstanding debt by over $160 million.
• FRG Commentary: Addressed news surrounding FRG, stating confidence in the business and its distinct units, and monitoring developments related to the reported allegations.

Segment Performance

• Capital Markets: Excluding investment results, contributed operating revenues of $151 million and operating income of $51 million in Q3 2023.
• Wealth Management: Revenues increased year-over-year and sequentially to $51 million; wealth assets under management totaled $24 billion at quarter end.
• Auction and Liquidations: B. Riley Retail Solutions had segment revenues of $78 million and segment income of $18 million in Q3 2023, driven by increased retail liquidation engagements.
• Financial Consulting: Revenues of $37 million, with segment income of $10.5 million; advisory services had another record period.
• Appraisal: Year-over-year revenues and operating income increased across all business lines.
• Communications: Segment revenues were $84 million and segment income was $7.5 million in Q3 2023.
• Consumer: Revenues of $63 million in Q3 2023, with Targus facing challenges but the brands business doing well.

Guidance

• Forward-Looking: Believes small-cap equity valuations are attractive and will look to take advantage of the opportunity; confident in the platform's position with over $2 billion in cash and a balanced debt profile, with the majority of debt maturing from 2026 to 2028.
• Capital Structure: Continues to focus on maintaining an optimal capital structure to fund growth and seize future opportunities.

Risks

• Investment Portfolio: Net loss for the quarter was driven by unrealized investment losses; investment gains/losses not indicative of overall business performance.
• Market Conditions: Targus faced challenges due to softness in the overall PC marketplace; potential impact of market fluctuations on investments and business segments.
• FRG Developments: Uncertainties related to reported allegations against FRG and potential impact on the investment.

Question and Answer

Q: On the consumer side, how big did the revenue increase? Like what contribution came from Targus on that?

A: Targus was close to breakeven EBITDA for the quarter. The brands business represented the vast majority of the EBITDA, and the brands business is doing great.

Q: And just remind me, what is that Scotch & Soda, is that currently impacted?

A: We have six brands that consist of smaller brands we originally acquired from Bluestar. There's exciting momentum in Limited Too, and Scotch & Soda had a little bump due to their asset liquidation efforts.

Q: 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 model that out?

A: There is more distress in the retail side, both domestically and Europe. We had one of our best quarters ever, but it's hard to quantify exact future engagements as it's often episodic.

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

A: Yes, we're definitely seeing an uptick in activity, but I can't quantify it for you.

Q: 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 soon, or how are you guys thinking about that?

A: We'll consider buyback when it makes sense. Our balance sheet has assets that could be used for value creation, and we think we can use our balance sheet to create value for shareholders.

Q: Can you walk through the updated recurring EBITDA and then go through the forward interest expense and maybe touch on the breakeven for B. Riley Securities?

A: Breakeven EBITDA is in and around $85 million. The breakeven is calculated by underwriting various business segments' EBITDA, including broker-dealer, retail advisory, appraisal advisory, telecoms, wealth, brands, interest income, and Targus.

Q: Could you just remind us which brands were the where essentially your royalty income goes into dividend? And if there's anything else that was added into that line-item year-over-year.

A: The Brands business had a strong quarter. Hurley, Justice, and Scotch & Soda contributed, with Scotch & Soda having a little bump due to their asset liquidation efforts.