Heritage Global Inc. Q1 2023 Earnings Call

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Welcome to the Heritage Global Inc. First quarter 2023 earnings call.

At this time, all participants will be in a listen only mode. Later, we will conduct a question and answer session. I will now turn the call over to your host John Nesbitt IMS Investor Relations you may begin.

Thank you and good afternoon, everyone before we begin like to remind everyone that this conference call contains forward looking statements.

Based on our 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 Exchange Commission now I'd like to turn the call over to Heritage Global's, Chief Executive Officer, Mr roster.

<unk> go ahead.

Thanks, John and good afternoon, everyone welcome to our first quarter of 2023 earnings Conference call, Let's start today's call with Brian Cobb, Our Chief Financial Officer, who will discuss our financial performance, Brian Your turn.

Thanks, Ross our 2023 first quarter performance reflected strong operating results, including record net operating income of $3 9 million improved profitability of eight cents per diluted share and EBITDA 4 million we.

We saw growth from both our financial assets in our industrial assets divisions with all four operating segments contributing to our profitability.

This quarter's performance is even more significant than a record result for two main reasons.

Not only did we achieve a record quarter, but we did so without real estate sales in our joint ventures as seen in the last three quarters of 2022.

Although we continue to search for a lucrative asset purchases that include a real estate component.

This is evidence even without real estate transactions that we can continue to perform at a high level and grow profits in each of our segments.

The second being the recent growth we have seen in the ability to deploy capital through our specialty lending segment.

Total balance related to investments in loans to buyers of charged off and nonperforming receivable portfolios was $28 4 million as of March 31 2023.

We have seen an increase of more than $20 million and the total balance from one year ago, and an increase of $6 7 million since December 31 2022.

Beyond Q1, or 2023 outlook is very promising.

As more businesses face challenges in a difficult economy.

Our industrial assets Division sees increased activity as downsizing and facility closures occur.

And companies look for ways to responsibly dispose of assets.

The slowing economy has also contributed to increased volumes in our financial assets Division as consumers are more reliant on credit cards and installment loans to make purchases.

As consumer debt grows so does the volume of charged off consumer loans being sold by financial institutions and.

And we anticipate that will continue to capitalize on the increasing asset flow as we move through 2023.

We remain optimistic that the current economic landscape will continue to produce tailwind on both sides of our business and drive continued financial success.

Turning to the financial details of the first quarter.

Consolidated net operating income was a record $3 9 million as compared to 875000 in the first quarter of 2022.

Net income was $2 8 million or <unk> <unk> per basic and diluted share compared to net income of 645000 or two cents per basic and diluted share in the first quarter of 2022.

EBITDA of $4 million increased substantially as compared to EBITDA of $1 million in the first quarter of 2022, and adjusted EBITDA grew to $4 2 million for the first quarter of 2023 up from $1 1 million in the first quarter of 2022.

Our balance sheet remains strong with stockholders equity of $51 2 million as of March 31, 2023, compared to $48 3 million as of December 31, 2022, and the net working capital of $8 6 million.

With that I'll now turn the call back over to Ross.

Thank you Brian you did that so well did you didn't leave me that much to add to it but I'll do my best anyway, So coming off a record year. It was really exciting that we are able right. After a record year the post our best quarters since our inception, so that was a bad.

Last quarter in the 12 years, we've been running heritage.

A mile and as Brian said that quarter was all organic de novo growth hitting our stride against all five revenue streams. There was no extraordinary wind in that quarter. It was just pure blocking and tackling and entire team of 100 people performing at a very high level.

So now you say to yourself, okay. They had a great year and then it's followed by a great quarter, what does that mean going forward, how can I look at the future and what can I access from that performance does these guys still have more tricks in the bag can these guys still grow at <unk>.

<unk> levels. So the question you want to save yourself is very simple after a decade in business working hard is heritage in a position now where its truly not just a market leader, but a built to last company.

So the answer from me as I believe everyone coming together and staying together with very little turnover gaining clients across the board in industrial and financial that this company has the right strategy and it operated with the right tactics and I am proud to say is to see.

That is the oldest guy here I look at everybody yogurt.

And I would say home all stick around because heritage is built to last it has years and years of growth. If we all perform so why do I say that.

Because I think at this point in time every one of our revenue streams from industrial to Pi financial his positions with true growth drivers already existing and already in place. Let me do a real quick update on the growth drivers across both sides of the biz.

In financial assets, you've got a quarter century old business called analytics.

Every kind of nonperforming loan from credit card loans to auto loans, and that's a growth company because the alternative lending in Fintech continues to grow and we continue to garner more share there while maintaining our legacy clients as we maintain our legacy clients.

And grow new clients there is the potential for exponential growth year over year for quite a while on top of that.

<unk> is now over with and we're seeing increased consumer spending and all of the segments. We operate in as consumer spending continues to increase defaults naturally fall will to some extent and thats the vaults follow than charge offs follow so right now we're looking at.

Had a great last year and a very promising multiyear future.

Simultaneous to that the people that we onboard it is growing we have more onboarding clients and our lending divisions than ever and they are winning more portfolios, they're relying upon us more and that business has literally the best predictability of any of our revenue stream.

<unk> and the most clear path to exponential growth every time, we fund that business, we wind up growing the business automatically so that's a business that in the end, we will constantly year after year improve as long as funding stays static even if funding growth.

And then that business truly has legs.

So that's on that side of the business now switching over to the industrial platform. The industrial platform is really positioned in the right place now strategically and tactically the acquisition of American Labs Tradings, that's proved highly synergistic with our auction division in fact on a.

Monthly basis, Theyre, finding assets that we can auction as long as assets assets that they can resell so packaging that together, that's a business with true growth our valuation business as more and more needed as we potentially move into recessionary times and there is a greater can.

<unk> with asset values, so that business has true legs right now.

And so basically if you look at all of our businesses every business has the growth driver.

August growth driver is this inherits global partners the auction company the growth driver. There is the entire industrial marketplace is moving to right sizing as it moves to the right sizing as it moves to lean manufacturing it moves the business process outsourcing. So these companies more and more.

Are using industrial auctioneers Theyre also looking more and more.

Prevent assets from going into the landfill.

Best way to present assets from going into the landfill is to consign them to an auctioneer with the worldwide purchasing base so over and over I can say that just this year not just next year, but I like to look at this company for years to come and I'm, a long term holder and I believe we have a group of.

Employees dedicated to staying here, a long time and really building something of value. Thank you all for hearing me out.

If you would like to ask a question. Please press star one on your telephone keypad now.

It will be placed into the queue in the order received.

These be repair to ask your question when prompted.

Once again, if you would like to ask a question. Please press star one on your phone now.

And our first question comes from Mark Argento from Lake Street. Please go ahead Marc.

Okay.

Hey, Ross, it's Brian Congrats on a great quarter really really impressive.

Just wanted to maybe drill down a little bit.

Okay.

The various segments and historically I know you guys have commented on.

Unit level profitability or I should say division level profitability any.

Any data or anything you guys can provide I know you said at a high level all four units.

Four businesses contributed but could you give us a little granularity ended up financial assets was industrial assets in terms of revenue contribution operating income contribution I need anything there would be helpful.

So I'll, let Brian add on afterwards, but just at a high level the biggest come back over to Lance.

Literal year and over the last six to nine months. The biggest come back has been and financial not in industrial the pandemic really had not a negative impact on industrial because.

Supply chain was clogged on new equipment to use the equipment sold at a premium and people needed. It. However on the financial outset side as you know the pandemic dramatically impacted the volume of assets, we were receiving to sell it.

That over with we had and I don't want to say, a resurgence or financial as much as a comeback. So we had to come back and now we're starting to see a resurgence so financial assets I don't want to say it was a surprise but.

It was the biggest higher performer.

Going forward.

Brian If you can add so ahead.

So add onto that as we look at each of the operating segments.

It's very evenly split when you look to operating income now Ross is correct with the comeback from Q1 of 2022 to Q1 of 2023, you see a larger increase in the financial assets division driven by the higher volumes and.

I'll also point out that we had a fantastic fantastic quarter from our refurbishment of resale segment and that's the L. T acquisition.

They had a larger purchase in Q4, which we sold resold in Q1, which contributed.

The increase in the overall industrial assets Division.

So $2 5 million to 6 million approximately.

The contribution from each division this quarter.

That's super helpful.

Although.

Financial asset side of the house given.

Hum.

<unk> paper digits.

Versus.

Physical goods the scalability in the margin profile on that business I would assume incremental margins are high and kind of thoughts on it.

Now the margin profile, there as that business scales.

So.

The margin on both sides of the business is just dramatically change with everything.

Everything being on an e-commerce platform.

In a lower physical touch on the industrial side of the platform. We used to physically go cold bids Mark and auction flight people out and the buyers had a fly out to go bid on the assets so that dramatically changed over there.

There's huge scale ability that everything can sell worldwide over the internet without the buyer having to travel to the site on the financial asset side.

Leverage was always there, but people didn't have to physically look at the outset. So on that side, it's not so much a switch to an e-commerce platform as the scalability is that the more volume we have.

We don't need an increased opex to do the volume.

Our staff is there and ready so literally.

We're in a position of this company that if we can garner more supply across the board. We don't have to raise substantially any of our internal cost to sell more supply. So we view ourselves as a highly leveraged company that we can really leverage more supply without adding more.

Cost if that makes sense.

Yeah.

Hmm.

Makes sense.

Turning just briefly to the balance sheet in particular the loan book.

For the non performing loan buyers.

Obviously grown fairly substantially over the last year or even sequentially from Q4.

So I think you said was a 28 billion or somewhere around there what is the what is your current capacity and then more importantly, our ability to deploy additional capital sounds like fairly high at this point, maybe you could.

Help us just think through that.

Great question, Great question for the CFO to Shine So Bryan it's on you.

Yeah.

Thanks Mark.

So the growth in our lending balance currently has.

$28 4 million.

That consists of notes receivable and the investments in equity method that balances really correlated with asset supply and kind of the the performance on the brokerage side. So as we see the volume transaction level on the brokerage side goes up.

We see our onboarding clients or borrowers winning more deals.

And the ability to deploy capital.

Two are on boarded.

A list of clients is it's greater so we see.

A great potential for for that business to continue to grow that balance over this year with.

With the assumption that our asset transaction volume overall.

Overall stays high so or growth for that matter.

Yeah.

And the current current capacity to be able to put additional capital right now where does that sit.

So what John Yes look at Mark.

Let me answer first would you have to look at is we have free cash flow every quarter, we reported $4 million in EBITDA. This quarter, we're very confident we're going to have ongoing free cash flow. So our free cash flow is not needed for operations it's not.

Not needed for head count growth, so our free cash flow can contribute on a regular basis to exponential growth in our lending business. So that's number one so we're not.

In a position where we can't continue to fund based upon those contributing to free cash flow to fund and as you know free cash flow does not have a debt component to it. So our ROI is always going to be higher on the free cash flow simultaneously, we have good data.

You mentioned good partners. So if you want to add to that Brian go ahead.

Yeah.

I think you covered it so we would have.

Our our NOI or our operating income.

Roughly mirrors our EBITDA.

Because the tax expense that we record on a quarterly basis is noncash due to our Nols. So I think that's another big piece to consider.

Our total cash flows from operations. This is pre tax.

And then our principal remittances that we're getting from all of the loans outstanding.

It comes back at four 5% a month.

That we also can recycle.

Back out into into loans.

Yeah.

Okay. That's helpful and just one last one for me.

Roger you talked about building a company for a long duration.

You know when you think about investing back into the business in areas, where you can invest back in the business either in technology.

Additional M&A.

Maybe you could just talk through what you know what the priorities are right now to really take advantage of the strength of the business and get a little more aggressive either you know.

You know what sort of M&A, obviously, the L T acquisitions, performing well, but what can you do all the while while the Sun shines.

Well, there really wont acquire build this business for the long term.

So we're not an apple or a Google now I'm not talking about size with this massive war chest of free capital that the best deployment is to buy back your own stock. We're a growth company, that's micro cap and our best deployment of capital is.

Not in a buyback our best deployment of capital is growth capital to enhance our profit. So what we're looking at is using our capital on a contributing basis every quarter and literally.

Annually to put that money back into our lending segment, which we think is their most predictable revenue in the most logical place to put back our free cash flow and our profits on top of that we're always going to hold back enough opportunistic cap.

But all that on the industrial side, if we find a highly accretive deal it will be fine danceable internally by us without us looking for future capital.

So there's a balance there that we're constantly looking at quarter over quarter on making sure that we're financially capitalized for the future Mark if that makes sense.

No. That's helpful. I appreciate the time and again, congrats on a really really strong quarter.

Well, thank you very much.

For congratulating us because we're quite happy with the quarter and we anticipate that.

We're in a good place right now Mark.

As a reminder, if you would like to ask a question. Please press star one on your phone now.

And at this time there appears to be no further questions I would like to turn the call back to management for closing remarks.

So this is Ross <unk>, the CEO of management.

I want to thank you all for listening I wanted to thank you all that are existing shareholders for sticking with us it really matters to us and we're always available to talk to you and if there's anybody considering being a new shareholder.

Very very available to talk to you walk you through our business plan and.

I understand what Youre looking for against what we think we can accomplish and we look forward to.

Encouraging people to take a hard look at heritage because underneath the radar screen looking at ourselves, we're pretty proud of what we're doing and we think we can do more and we're looking for more people to pay attention to us. So we're extremely appreciative for anybody who paid enough attention to listen in.

Thank you all graciously everyone have a great day.

This concludes today's conference call. Thank you for attending.

Your participation in this conference has been terminated by the host Goodbye.