Heritage Global Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, greetings, and welcome to the Heritage Global, Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, John Nesbitt with IMS Investor Relations.

Speaker 1

Thank you, and good afternoon, everyone. Before we begin, I'd like to remind everyone that this conference call contains forward looking statements based on current expectations and projections about future events and are subject to change based on various important factors. In light of these risks, uncertainties and assumptions, you should not place undue reliance on these forward looking statements, which speak only as of the date of this call. For more details on factors that could affect these expectations, please see our filings with the Securities and Exchange Commission. Now I would like to turn the call over to Heritage Global's Chief Officer, Mr.

Speaker 1

Ross Duff. Ross?

Speaker 2

Thank you, John. Good afternoon and thank you everyone for joining. Ending Q1 with a solid Q and $2,600,000 in NOI feels very good after our very large Q4. It bodes well for just this year and also next year and beyond. We're now in Q2 with lots of momentum and a strong sale in the books already and on track and pace to close our Q1 well positioned to continue our organic growth trajectory.

Speaker 2

We are now healthy enough and confident enough and positive enough to pivot to a strong drive towards M and A. With that, I turn the call over to Brian for the nuts and bolts of Q1 results and I'll add some color afterwards on where I see the market, where I see the opportunities and where I see us striving forward. So Brian will walk you through the quarter and then I'll join back in. And once again, thank you for joining.

Speaker 3

Thank you, Ross. Before we dive into the overall financial results, I want to first touch on our divisional highlights. Our Financial Assets division continued to build on its momentum in 2023, capitalizing on opportunities in the marketplace as increased macroeconomic pressure drove continued volumes of charge off credit cards and non performing loans. The division reported operating income of $2,900,000 in the Q1 of 2024 compared to $2,500,000 in 2023 period, a 16% increase year over year. The growth in our Financial Assets division was primarily driven by our Specialty Lending segment, which recorded operating income in the Q1 of approximately 900,000 dollars an 81% increase compared to the prior year period.

Speaker 3

As of March 31, 2024, our total gross balance related to investments and loans to buyers of charged off and non performing receivable portfolios was 37,300,000 dollars classified on our balance sheet as both notes receivable and as equity method investments. Our brokerage segment continues to be the main driver of income for our financial assets division and recorded $2,100,000 in operating income compared to $2,000,000 in the prior year quarter. We continue to strengthen our existing relationships in this segment with high quality, top and mid tier buyers and are seeing a strong pipeline of opportunities in the upcoming year. In the Industrial Assets division, total operating income was $800,000 during the quarter compared to 2.6 $1,000,000 during the Q1 of 2023. While the division didn't see certain large auctions as executed in the first quarter of 2023 or the volume of auctions seen in the Q4 of 2023.

Speaker 3

Have significantly added to the current pipeline during the Q1 and we expect to see strong auction activity as we move through the Q2. One big development related to our auction segment. In conjunction with our joint venture partners, we acquired a pharmaceutical plant in Missouri late in December 2023. Only 4 months later, we closed the sale of machinery and equipment within the building along with a 10 year building lease. This is another quick turn from acquisition to close for real estate and a big win for our auction segment, which exemplifies the strength of our sales team and relationships with our joint venture partners.

Speaker 3

And lastly, before turning to the financials, I want to touch on a brief accounting item. In accordance with new segment reporting guidance, we're working on expanding our segment specific disclosures by reporting additional income statement details by the end of 2024. We look forward to sharing more information on our segment operations and providing further transparency for shareholders. Now turning to the financial results. Consolidated operating income was $2,600,000 in the Q1 of 2024 compared to 3 $900,000 in the Q1 of 2023.

Speaker 3

For the quarter, we reported adjusted EBITDA of 2 point compared to $4,200,000 in the prior year period. Net income was $1,800,000 or $0.05 per diluted share compared to net income of $2,800,000 or $0.08 per diluted share in the Q1 of 2023. Our balance sheet continues to strengthen with stockholders' equity of $63,000,000 as of March 31, 2024, up from $61,100,000 at December 31, 2023 and net working capital of 15,000,000 dollars Looking forward, while we continue to drive our organic growth and profitability, we are increasing our focus on strategic M and A to drive the long term growth of the business. It's incredibly exciting to see how this company has evolved over just a few years, and I'm enthusiastic about the increased number of opportunities we see in the M and A space. With continued performance in our core segments and a strong balance sheet, I'm confident that we'll be able to achieve our goals to broaden our business through acquisition.

Speaker 3

And with that, I'll turn the call back over to Ross.

Speaker 2

Thank you, Brian. It was good to hear. So let me try to kind of open up the drapes and give you kind of a window into where we see our growth, because we have a lot of competitors in the marketplace. I'm not going to completely and entirely unveil what we think is our super sauce. But let me just give you some obvious drivers we're already in the process of initiating.

Speaker 2

So let me talk about 1st lending. 95% of our lending business is financial assets, But as you know, half our revenue is industrial assets. There's going to be a significant push into balancing out our lending and leveraging our databases that literally have almost $1,000,000,000 of assets captured on the industrial side and becoming a far more aggressive lender. So that's kind of one of the multiple things we're doing. Let me talk to you about the second one.

Speaker 2

We have all of this data we've recorded in both financial and industrial and we're not really gaining what we should do in revenue on finding a way to monetize the data driven revenue. That is an initiative that's begun this year. We see lots of opportunities to take that data and monetize it. The third one is we want to look hard at the sectors we're in. Yes, we're winning in pharma, we're winning in biopharma, we're doing great in food and beverage, but there are 20 manufacturing sectors.

Speaker 2

And also there's a global geography where we're primarily focused in North America. So we're looking at expanding all of that and trying to speed up our growth and make our shareholders proud. Some of this will require an increase in M and A and some of this will require just simply adding expertise to our existing company. We're always going to look hard at the build or buy component and we're not necessarily saying it takes all M and A to grow because we think we're solid growing organically too, but we're going to put all of our engines together on both and we're going to push forward with confidence. I thank you all for hearing us.

Speaker 2

We're now open for questions and we appreciate you guys always joining. Thank you.

Operator

And our first question comes from Mark Argento from Lake Street Capital. Your line is open.

Speaker 4

Hey, guys. Good afternoon. Just wanted to touch a little bit, I know you talked a little bit more about M and A than you have historically. What any specific criteria from a financial perspective? Does it need to be immediately accretive?

Speaker 4

What are you kind of when you're looking at opportunities, what are the key criteria that you're looking to fulfill? So

Speaker 2

I'll take it first, Brian. So obviously, Enlex originally was an acquisition that worked out phenomenally well. ALT is working out well. What we really look at is having 1 and 1 equal 3, so to speak. If we can buy somebody, we don't mind it not being just a pure straight look at all the numbers today.

Speaker 2

What we're looking at more importantly is looking the fit, looking at the culture and looking at something that expands our offering, but has a lot of synergy. So there are opportunities on both sides of the table. There are financial asset companies that basically are not all consumer loans that are also real estate loans and other types of loans that we think will really fit into our platform. On the industrial side, there are niche players in very specific industries that we think can also fit into our platform. And there's also us growing our international business as well, Mark.

Speaker 2

So we're kind of looking at a lot of different fronts at once, and we're seeing a bunch of potential opportunities.

Speaker 4

Okay. In terms of the just looking at the business, in particular, looking at the financial assets business, it sounds like the lending business is performing well. Looks like the charged off or brokered loan business seem to be kind of flattish. Any you've seen any activity, any pickup there, any kind seasonality or are there

Speaker 2

kind of higher level of growth that's going to affect that? It is actually growing. We didn't have any episodic transactions in Q1. So Q1 was almost entirely the existing forward flow. The good news there is we added new forward flow clients.

Speaker 2

So you're going to see it pick up as the year goes by. So we think it's actually going to have some sequential quarter over quarter growth going forward. And we're going to have, like we do every year, some episodic transactions that will get a spike in 1 or 2 of the quarters. So it's going to grow organically on its own and it's also going to grow because we've added some more clients. And you don't see the revenue from those clients in the quarter that we onboard them.

Speaker 2

You see the revenue coming in Q2 and Q3 as they start giving us product to sell.

Speaker 4

Great. Appreciate it. I'll hop back in the queue. Thanks.

Operator

Thank you. And our next question comes from George Sutton of Craig Hallum. Your line is open.

Speaker 2

Hi, George.

Speaker 5

Hello, Ross. How are you?

Speaker 2

I'm good.

Speaker 5

So, first, I wondered if you could walk through the pharma plant economics just so we're kind of clear what that opportunity looked like and what you achieved there?

Speaker 2

I'm going to give that to Brian, because it's a little complicated on how the revenue recognition is going to take place when you sell the equipment and then you do a 10 year lease versus just sell it all at once. So Brian probably is more qualified in working with the auditors. So Brian, you get this question.

Speaker 3

Yes. Okay. So we haven't provided any details on the in the earnings release on the extent of the transaction. However, we're working through the accounting that is a partnership or a joint venture with 3 other partners. So we're working through the accounting, all of the expenses have to flow through the joint venture.

Speaker 3

And also as Ross mentioned, a 10 year lease has a couple of different ways that it could be accounted for. My I anticipate the lease to be a sales type lease, although we have to agree as a management team and with our auditors that that's the position. And until that point, I think it's we'll leave it there for now and we'll provide more details at the end of Q2. The only thing other I'll mention is that back in 2022, we had purchased in the same joint venture 2 buildings with machinery and equipment. So it could be a good transaction to look to.

Speaker 2

So to list some language from the press release, I'll list the 2 words highly accretive.

Speaker 5

Understand. Okay. So, Ross, you talked about perhaps starting an industrial lending offering. And I just want to be clear, would you be providing capital to the buyers of assets at your auctions? Or would you be looking to provide capital to buyers of assets coming from your auctions?

Speaker 2

So not to provide financing. At ALT Capital, we actually do already provide financing to the buyers that buy at our retail offerings. So that exists. We did a deal last year, an asset based deal, where we lent money basically as a hard money asset based lender to an aircraft company or an aircraft transportation company, we're actually seeing lots of offers now. The marketplace has kind of moved where it's getting very, very difficult in a lot of industries to get venture lease money.

Speaker 2

It's getting more difficult to get your Series CD and E and F money from the venture community. So there's more people that have capital assets out there now that are looking to borrow directly against their assets. And as the banks are getting a little bit more cautious on lending, we see a lot of growth in industrial asset based lending. It's a marketplace we understand. We're very skilled at the underwriting.

Speaker 2

So we're just going to move more aggressively into looking at those deals. We didn't earlier when we didn't have as much free capital, but now when you're looking at our credit line of $10,000,000 it's 0. You're looking at us having substantial multimillion dollar profits every quarter. We think it's a good strong, safe, smart way to broaden our lending business and to basically take our lending book and be both an industrial and a financial lender, which was always kind of the long term goal, George.

Speaker 5

Understand. Okay. That's helpful. Lastly for me, you may have seen we put out a note recently that kind of summarized most of the charge off numbers and expectations from all of the key players in the industry. And it was very impressive in terms of the charge off volume and the potential that they see.

Speaker 5

Most of them argue though that the latter part of this year would see some normalization. And frankly, I kind of remember them saying the same thing last year. But can you just give your perspective on how much opportunity you see in terms of the volumes there?

Speaker 2

Right. So not looking at the future, but looking at the past and then looking at our future from the past, there is already out there, a tremendous amount of product that has not yet become available. When you see a default, it takes time for that default to kind of mature into a charge off. And then once it becomes a charge off, it comes to us. So there's already a lot of product that's going to be coming available all of this year and obviously a lot of it rolling into next year.

Speaker 2

So if it does level off on the amount of charge offs, there's a lot of sell through still in front of us, George.

Speaker 5

Okay. That makes sense. Thanks very much.

Speaker 2

Thank

Operator

And seeing no further questions, I'll turn the call back over to our host.

Speaker 2

This is Ross. I want to thank you all for joining. We're very easy to get a hold of and always available, and we really enjoy talking to our investors and talking to anybody who's curious or thoughtful or interested in being a future investor. So we're always available and we thank you all for participating. Everyone have a great day.

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Earnings Conference Call
Heritage Global Q1 2024
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