Q2 2023 Heritage Global Inc Earnings Call

Okay.

Greetings and welcome to Heritage Global Inc. Second quarter 2023 earnings call.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Rostov Chief Executive Officer. Thank you you may begin.

Thank you and good afternoon, everyone before before we begin I'd 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.

Light of these risks uncertainties and assumptions you should not place undue reliance on these forward looking statements, which speak only as of 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 Hertz Global's, Chief Executive Officer, Mr roster.

Go ahead Ross.

Thank you John and good afternoon, everyone. Thank you all for joining welcomes was 2023 second quarter earnings conference call. Today, we will start the call with Brian Cob, Our CFO Brian go ahead.

Thanks, Rob.

We were pleased to reach the halfway point of 2023 with a record 7 million and operating income our solid second quarter results included operating income of $3 1 million earnings of seven cents per diluted share and EBITDA of $3 2 million.

Both our financial assets and industrial assets Division are continuing to see tremendous opportunities in the marketplace. As the current economic situation is driving increased volume and assets coming to market.

Our industrial assets Division has seen a significant increase in its core asset disposition business. During the first half of 2023 as compared to the same period in 2022.

From time to time, we have real estate transactions in the mix, which occurred in the first half of 2022, but we think a more accurate comparison is looking at only our core auction business.

In the first half of 2023, we saw a higher volume of industrial auctions, which includes an increased contribution by American laboratory trading acquired in 2021.

With growing synergies within the division and the industrial asset pipeline currently in place. We anticipate we will continue to see a substantial activity during the second half of 2023.

In our financial assets Division, we are seeing heightened activity as consumer debt reaches record levels and creates a corresponding growth in the volume of nonperforming loans and charged off credit card accounts.

Both analytics and HCC are executing well in the current economic landscape, winning brokerage contracts and specialty lending opportunities.

This was demonstrated by a 185% increase in divisional net operating income during the six month period as compared to the same period in 2022.

As interest rates continue to rise and inflationary environment drives consumers to make more purchases on credit rather than cash we expect to see asset flows continue to increase as we move through the remainder of the year.

Turning to the financial details for the second quarter.

Consolidated net operating income was $3 1 million as compared to $3 6 million in the second quarter of 2022.

Net income was $2 8 million or seven cents per diluted share compared to net income of $2 6 million or <unk> <unk> per diluted share in the second quarter of 2022.

EBITDA was $3 2 million as compared to EBITDA of $3 8 million in the second quarter of 2022.

And adjusted EBITDA was $3 5 million for the second quarter of 2023 as compared to $3 9 million in the second quarter of 2022.

Our balance sheet remains strong with stockholders equity of $54 2 million as of June 32023, compared to $48 3 million as of December 31, 2022.

And net working capital of $15 5 million.

Additionally, our total balance related to investments in loans to buyers of charged off and nonperforming receivable portfolios was $29 9 million as of June 32023 of which $15 million is classified as notes receivable and $14 9 million is classified as equity method.

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

Thanks, Brian that was comprehensive well, let me just take a few brief moments and try to talk a little bit about the story behind the numbers.

As most of you know our headquarters here in del Mar.

So I took the day off on opening day to go to the racetrack and while I was there looking at duration for them. They started kind of thinking about heritage and saying everybody is getting the same information here today looking at the same form yet lots of people seem to be picking different horses.

So I thought about that and I talked about today, and what I could do to convey.

However, it is just the right horse to pick.

So kind of going into the story behind the numbers.

$7 million was great, but more importantly, I think far more important is how we earn the $7 million. If you look back at last year, where we had $11 million and a record year.

Crushing that this year, but much more importantly last year, we had several large deals and we had some large real estate deals it really helped us get to $11 million.

This year the story behind the numbers is very different this year the story behind the numbers because we didn't have any significant real estate deal in the first half. We just had incredible solid performance across all divisions all divisions are growing without.

Any phenomenal one time deal.

Hitting on all cylinders. So let me just take a moment, let's look at H B O quickly kind of division by Division and maybe I can help you figure out why.

So in financial assets.

Everyone gets the same information, we now have one trillion dollars.

Credit card debt.

Think about that one trillion dollars so the huge growth in the.

Yeah.

Feeling more and more product into our marketplaces, and with more and more product moving into our marketplaces. There is an increase in the purchasing by our one boarded buyers who are very active now and.

They're active.

Basically coming to us more and more.

Lending opportunities. So we're growing both the brokerage business on the financial side.

In the lending business, and we think that really bodes well for not just the second half of this year.

Ongoing into next year and beyond.

So we feel very comfortable on the financial side that we're in an actual growth trajectory now.

Now, let's switch to the industrial sucked Q2 was yes, an average quarter in the amount of assets, we saw primarily cause several assets.

Flowed over into Q3, more importantly, though and far more is what I see it in the pipe what we have 26 auctions already posted for Q3, so we're off to really a record start.

And several of those auctions were signed by a L T, which really bodes well, but they're not just performing in their existing retail business, but they're also sourcing options for us. So on the industrial side, we see an increase in Q3 over.

Q2, and growing solid into Q4, if you look at the Q3 industrial auctions one of the things that is great.

Along with our traditional pharma, you're now seeing us really winning in multiple sectors across the board. We've got an aviation alternative parts for Sky plus we've got processing from canopy growth with just cannabis we've got vertical farming from upward farms, where once again.

With Twitter doing our second auction there we're now selling a lot of just the sheer breadth of machinery, we've got a project Rawlings sportswear company with <unk> core the fitting company. So all in all we see significant.

Risks not just in the numbers, but in the story behind the numbers.

Think that $7 million is repeatable and we think over the years, we can grow.

So we're grateful for all of you that have hung in there with us and we're telling you we see good times going forward. Thank you all once again for joining us and listening.

I'm open to any questions at this point thanks again.

Okay.

Thank you ladies and gentlemen at this time, we will begin conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad.

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Our first question comes from the line of Mark Argento with Lake Street. Please proceed with your question.

Hey, Ross and Brian a couple of quick ones here first off.

Could you help us Ross you alluded to it about looking at last year's operating income contribution from real estate.

Could you just help us understand what that $11 billion would look like without the real estate. So we can kind of think about a little apples to apples from last year. This year.

And then just wanted to also see if you could touch on the loan book It looks like it grew a little bit in the quarter.

The 29 billion and change, but I was thinking maybe that would have grown a little bit more just given the how strong.

The finance.

Sorry about this but you guys.

Good delve into that a little bit for me I'd appreciate it. Thanks.

So I'm actually going to pass the baton to Brian because those are financial questions I think that ease.

He is ready and willing to get after so go ahead Brad.

Alright.

So your first question Marc we reported in Q2 2022.

The net impact of the Huntsville pharmaceutical campus closure.

In that quarter was $2 6 million to 10 net operating income so when I'm looking at a total divisional net operating income for industrial.

A $4 2 million in last year's six six month period versus this year six month period at $4 million last year, you've got to remove $2 6 million and then where it comparing our core.

Business year over year.

And then Andrew.

The next question about our balance go ahead on Orlando Yeah.

So to touch on the lending side. So, yes, we had significant significantly more growth.

To the overall loan book in Q1.

And then there's two real reasons to that in.

In Q2, we did originate a lot of loans that we're not slowing down our originations.

What happened was we established a new joint venture with a new senior lender.

And we transferred some of our existing loans under that joined joint venture during the quarter. So not only away, we're still originating but we've developed new relationships in the industry and we think that's going to bode well for our future.

Future deals potential new borrowers.

Borrowers coming onboard and the ability to kind of diversify our loan book.

And I would expect that in the next quarter or two we'd see more growth than we saw in Q2.

Do you happen to have that origination like what are you guys originated in Q2 versus what you originate in Q1.

Yes.

So Q I can kind of look at the cash flow statement I wouldn't want to give exact numbers right now but.

We had.

$18 7 million in investments in notes receivable.

Investments in equity method investments was four point too.

So you are looking at.

2022 'twenty 3 million in originations and then and then transfers of 9 million coming out of that for the whole year. In Q1, we had about 13 million in originations so less.

I would say less originations on a net basis.

But on a gross basis.

That's kind of what I heard.

Yeah, what was that originated more than Q2 than you did in Q1.

On a gross basis.

Yeah.

Yeah, Yeah, no I mean, I think that it would be helpful and obviously it sounds like you do either sold off some of the loans or you know what with your new partner, but.

Yeah, just that gross originations number it would be helpful. Just to kind of get a gauge sort of the trajectory because it seems like just given how strong that financial side.

Segment is that heritage you know global capital would be.

Christ in which it sounds like it is but looking at just a balance there through threw me off with that but I. Appreciate it yeah additional unfold thanks guys.

Yep.

Our next question comes from the line of George Sutton with Craig Hallum. Please proceed with your question.

Thank you.

So I appreciate the horse racing tie in what was interesting. So I wanted to just address the third quarter. We're tracking the auctions off the platform very closely we see what you just indicated which is you have started very strong in Q3. We're also as you know tracking charge off volumes very closely.

From a macro perspective, so it would certainly seem like the fuel for your business is very good and this quarter has started well can you just expand on that if you could.

Yes, so what happened on the industrial side George in Q2 is what kind of always happens after a record Q1 youre scrambling. After a record Q1, not just to sign them, but to finish up the Q1 auctions. So the problem with that.

Sequential over sequential growth is sometimes it's hard to do quarter over quarter. So what happened is we add a large amount of deals getting signed over the last six weeks. So that's why we're telling you we're gonna have a bang up Q3.

Because we made it pretty darn good living in Q2, but more importantly, we had lots of when you can see on our website posted for Q3, and we had a couple of Q2 deals that rolled over.

So that's kind of why I can talk so bullish because I can see.

We've already signed.

And noticed Theres still some time left so I'm really comfortable on the industrial side.

On the financial side George.

Obviously, the amount of when I say, there's a trillion dollars in credit card debt.

Some of those people are probably going to pay back their credit card debt no just a joke, but.

There is an absolute mathematical.

Miracles true to the amount of debt leads eventually through the mathematical amount of charge offs.

So we can clearly see that as the debt is reaching all time highs over the next six months nine months year two years Theres, an elevated amount of product for us to sell so that's why we can kind of comfortably forecast a did we see growth.

Is that a fair answer.

That's great as an aside I would say the folks at the horse race, probably won't be those that pay back their debts, but I did want to ask one other question and in some of the checks we've seen.

The you know the direct sellers the J P. Morgan types, who sell direct into the market are not achieving the same pricing in their sales that N lexas, which would be increasingly important when we start to talk about a trillion dollars of credit that they could turn into charge offs can you just did.

Because the environment that you're seeing and is that are you seeing what we're hearing about.

A lot of these companies that are very large not just.

The largest banks.

Banks, but a lot of companies wound up basically with a one trick pony.

Had one buyer of it we're extremely comfortable with which we understand because a big part of buying the loans is credibility, having a trusted purchaser who is sox compliant until you know it's going to follow all the rules. So they got comfortable with one buyer.

And it kind of worked in rising times, but right now when times aren't rising on what you're getting is recovery more and more of them are looking to them.

Want to run a process to make sure. They don't just have the one right buyer and that are kind of ethical auction process will be bringing multiple buyers and they find the right company is starting to resonate that doesn't work in a growing economy.

We're everyone's very comfortable that they have the right vendor there.

Right now people are wondering do I have the right vendor and they're looking to make sure that they have the best possible vendor in place. So we think we're going to get more and more people at least giving us a test against their current vendor.

Okay. Finally did you walk away as a net winner or loser at the races.

So the way I look at the races is I don't bet on the favorite.

And at the same time I don't bet on the long shot I try to find the worse it is getting better and better over time, So I bet on the heritage choice and yours.

Perfect. Thank you.

There are no further questions in the queue I'd like to hand, the call back to Rostov for closing remarks.

So thank you all very much we truly appreciate you guys paying attention you guys hanging in there with us.

Gang with us and we're.

We're here to try to prove that you have done the right thing and we graciously appreciate the fact that you're still here.

You and we will keep on pushing forward.

Yeah.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.