Q3 2023 Heritage Global Inc Earnings Call
Ladies and gentlemen, greetings and welcome to the health pitch Global Inc. Third quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It does not my pleasure to introduce your host John that's bet with I M. S. Investor Relations. Please go ahead Sir.
Thank you and good afternoon, everyone.
We began 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.
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'd like to turn the call over to Harrods Global's, Chief Executive Officer, Mr. Ralph Stuffs Ross. Thank.
Thank you John and thank everyone for attending and listening before Brian gives you an overview of what we feel was an extremely good quarter I wanted to take a few moments upfront to walk everyone through our noncash 900000 dollar loan loss reserve.
The reasons why we took it and how we feel about it so our largest borrower came to us and said that they would like to extend the term of the loan that they believe they'll definitely be able to pay off our full however, the collection curves have slowed.
And they've asked for an extension.
The first thing I thought about them asking for an extension.
Thank God I'm, only 71 years old so I've got plenty of time to extend it.
So we feel comfortable that it's going to work, but we took the $900000 charge.
The buyer is asking for an extension so over time, we'll have to figure out whether or not that charge or that noncash reserve will stay on the books for now we believe it was prudent and the safest thing to do so after I've thought about it for a long time.
I started thinking about our story from a very early in my career, but my grandfather of our founder told me. He said to me Kid never worried too much about the money that people Oh, you worry far more about the people you will money too so the.
Good news there is our loan book is growing to 35 million plus while our bank debt is only $7 million so with that perspective in mind I feel very comfortable about our future here.
So everybody kind of looking at the market right now and I'll talk about it later on after Brian speaks says it looks like Theres Rocky roads coming ahead. After 50 years doing this I can tell you over and over again that rocky roads have been ice cream to liquidators and we think our time.
It's going to get better and better over the next two or three years.
$13 million guidance, we gave for this year I'm still confirming after we took the loan loss reserve and I'm positive that next year and the year after you'll see growth with that I'll turn it over to Brian to walk you through the quarter. Once he does walk you through the quarter I'll kind of walk you through why I.
Caesars growth over the next two years three years and beyond Brian go ahead Europe.
Thank you Ross this was another very positive quarter for the company, where we delivered strong operating results on both sides of our business.
Within our industrial assets Division, we are seeing increased auction interest specifically in the biotech and pharmaceutical sector as the industry continues to consolidate.
Industrial posted a solid third quarter operating income of $2 1 million with strong results from its core auction business.
It is important to note that in the comparable quarter last year, we realized $1 5 million in earnings from equity method investments related to our real estate building closure.
And we did not have any real estate transactions this quarter.
Our financial asset Division posted an excellent quarter as well with operating income for the three and nine months ended up 18% and 110% compared to the prior year periods respectively.
We are seeing sustained tailwind with the current state of the economy, given consumer debt at record levels and high volumes of charged off portfolios.
The brokerage segment is positioned to capitalize from continued growth in the volume of nonperforming loans and charged off credit card accounts.
In this environment however.
The offsetting impact is that consumers have alaska capacity to pay their debts, resulting in lower collections in the near term.
We are seeing across the industry.
We recognize that there exists an elevated risk related to the underlying collateral.
Thus our loan book due to the reduced collection rates.
And as Ralph mentioned, we are working diligently with our partners to complete amended agreements with their largest borrow or to extend their maturity.
In light of the situation with this particular borrower as well as the overall macro trends in the collections market. We felt it was prudent to increase our noncash credit loss reserves by approximately 900000, resulting in a total balance of 1.4 million as of September 32023.
The increase to our credit loss reserve runs through the income statement against the SG&A and as an offset of that earnings from equity method investments with a roughly even split between the two accounts.
This situation is not having an impact on our other operating businesses, including <unk>, which continues to perform at record levels.
Turning to the financial results.
Solidago net operating income was $2 8 million in the third quarter.
Excluding the total impact of our credit loss reserve adjustments consolidated net operating income was approximately $3 6 million.
Net income was 2 million or five cents per diluted share.
Including our credit loss reserve adjustments earnings per share was <unk> <unk>.
For the quarter, we reported adjusted EBITDA of $3 1 million.
Our balance sheet remains strong with stockholders equity of 56 million as of September 32023 up from 48 million at December 31, 2022, and a net working capital of $13 8 million.
Additionally, our total balance related to investments in loans to buyers of charged off in nonperforming receivable portfolios was $35 9 million as of September 32023 of which $20 6 million is classified as notes receivable and $15 3 million.
In dollars is classified as equity method investments.
The total increase in our loan book was $6 million during the quarter and $14 million year to date.
So I'll wrap this up by reiterating that this was a great quarter for us with strong macro tailwind in both sides of our business performing well and benefiting from increased asset volume.
With that Ross I'll pass it back to you.
Thank you Brian so over the next 30 days, we should really have a lot more visibility to report back to you on our ability to come up with an extension that works for our senior lender and works for Us and let you know.
Basically more detail exactly where we're at.
And how we hopefully avoided the default with we are very promising and we believe we can as of today. During that next 30 days. We will also be able to add guidance to our Q4 numbers Q4. It looks like it has the potential to be a record quarter. We don't have all of the numbers and you added.
We're still conducting auctions, but let me tell you why we're so bullish kind of across the board, where I think each of our divisions could have a record quarter. There would offset really any loan loss reserve in my opinion as we're growing our business pretty dramatically on the analytics.
We are now as you can see are basically each month, adding new clients and not just are we adding new clients or existing clients are giving us more and more supply of assets to sell because they have more and more need to sell the assets as nonperforming loans.
Our growing more rapidly than they even were last year defaults are growing and as defaults grow ultimately charge offs grow so the flood of assets into our marketplace is growing at a faster pace than it has been in the past and lakes had a record quarter in the brokerage.
Business.
This last quarter and is forecasting a record quarter once again.
I've already addressed at Heritage Global capital is struggling.
Slipped at some point with the amount of loans being paid off as fast as we anticipated.
We don't have any other borrowers asking for an extension at this point in time, we don't currently anticipate that we will so we're working through our one large buyer and their issues and we're being prudent and new loans, we expect a financial asset business to stay profitable in the loan book to grow.
Albeit a little bit more cautiously and slowly over the next couple of years and we're very bullish across both those businesses going forward on the industrial side, we're having literally the most auctions conducted in one quarter. We've had since the inception of heritage Global partners. If you looked at our column.
Youll see that Theres literally almost an auction every day, we have an extremely robust full calendar, we have an extremely robust pipeline into Q1 and beyond and we're very very comfortable that there's multiple years of growth there still.
<unk> hundreds and hundreds of biotech companies that are struggling.
We're gonna need assets to be sold so that stays solid along with that same solid our valuation business is dramatically growing right now why isn't growing because when removing into time sit with a little bit more rocky roads and those times valuation businesses are.
Needed American labs trading as massively upgraded its inventory and basically it at this point in time Theres growth over the next two or three years as they continue to upgrade their inventory and more and more buyers as we move into a more difficult economy wants to savings.
Used equipment, so we're bullish across financial and industrial.
And we're looking at that charge very seriously.
And at the same time, we're extremely confident in the future and open to any questions anyone has and once again. Thank you all for your time, we greatly appreciated. Thank you for being shareholders and we will keep on trying to perform at the very best we can and feeling pretty good about where we sit today.
Thank you.
Thank you Larry.
Ladies and gentlemen, we will now be conducting a question and answer session. If.
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Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Our first question is from the line of Mark Argento with Lake Street Capital markets. Please go ahead.
Hi, Laura.
Okay.
This is Jim a little bit.
On the loan loss reserve.
Maybe they were a little color on.
Turning to our type of portfolio or consumer credit versus.
Student loan or whatnot.
And a pretty in depth.
Work in terms of understanding your exposure just given the environment we're in.
It's a mixed portfolio of all different types of consumer loans. There was some auto blended with some credit card not a lot of student loans.
Primarily that with Fintech stuff at the same time, a combination of the NPL.
And peer to peer loans, so it's really across all the consumer sectors and.
It's been performing obviously with collections every month, they were a little aggressive and how fast they thought they could collect so by being a little aggressive and how fast the market changed after they stopped the stimulus and theyre going through the same issue that every single person in the collection business is going through.
If you saw that the big public companies PRA and Encore also announced at the collection curves are slow so it's an industry wide.
Issued a collection curves has slowed and that's why we're working with a mark.
All makes sense and then when you're thinking about putting additional capital at this point.
How do you kind of price to be.
Credit.
In terms of rates go up the terms change what are you seeing in terms of pricing and you guys are putting on additional okay well. The first thing we're gonna do it first thing we're going to do is make sure that when we put it.
Out of all two things do we get a little bigger down payment and we understand that it's going to take a longer cycle to get paid back. So the biggest thing on our underwriting is understanding what we thought could be a three year payback could turn into a five year payback. So we're gonna have to do the analytics on.
Whether it makes sense not to do a loan that comes back in five years, so that that's the real difference.
Loans basically are going to extend right now if people are going after judgments. The courts are crowded there's way more product on the market way more people buying products. So.
We're looking at the loan curves extending not just this year and not just next year, but maybe for the next couple of years, while we go through this massive volume increase.
Got it and in terms of the loan loss reserve is that something that you guys worked out obviously quarterly annually and what's the probability of having to continue to tweak that materially here going forward.
So.
Obviously, we're looking at it every quarter always we think that it's sufficient and we don't anticipate.
Doing it again at least from everything we see today, we think that what we did was conservative and aggressive in taking the $900000. So by making a conservative and aggressive we think we've got ourselves covered.
For next year and beyond.
Alright, I appreciate the extra color I'll hop back in the queue.
Alright, well, thank you very much and we'll talk soon the good mark.
Thank you.
Our next question is from the line of George Sutton with Craig Hallum. Please go ahead.
Hi, George.
Thank you Hi, Ross sorry, I missed your earlier prepared comments. So if my questions are confused there's a good reason but.
It was very clear in listening to PRA as call that they were talking about this rapid cliff of charge offs coming are they were talking about well above four flow arrangements opportunities are in the market that would correct me if I'm wrong directly lead to brokered bid.
<unk> of which you are the primary player is that a fair Steve Yeah, why sorry in your prepared remarks, I told them that in like I said, a record Q3 is having a true record Q4 and not just are we getting new sellers, but the current sellers, who are giving us more and more product now.
Because they have more and more product to sell so we're forecasting next year being the biggest year in the history of analytics. So.
Our marketplaces are really full this quarter coming up in Q4.
I think will be the best quarter in the history of analytics. So right now yeah, you're right I mean, and I think it is sustainable for the next couple of years, if you listen to PRA, you listen to encore, they're all saying that the collection curves is slowing.
But at the same time the collection curves are slowing the volume is growing literally quarter, Florida, Georgia.
Now relative to the capacity that your buyers have on the brokerage side how.
How much are you assuming this lender.
You're specifically referencing and related to the charge offs I'm, sorry related to the Oh malls higher assumption for loan loss.
Sure. Thank you very different than a charge off for for those listening.
If they don't have capacity, how much does that impact your ability in the market too.
Uh huh.
Get that sort of normal although the absorption rate is still very very strong we're getting bids on everything we put out the pricing has gone down to more normal levels. During the pandemic there wasn't enough supply and people were paying very high prices and thinking through the collection curves were.
<unk> than they are now, but the absorption rate is 100%. We haven't had a portfolio that we have been unable to get bids on and so we think that will continue but a lot of these people really couldnt spend any money during the pandemic and now all of a sudden they're basically back in business. So.
I think there's a solid base of buyers right now.
Quick question on the biotech side. So we're somewhat stunned by the number of auctions that you've had how much is that impacting the buyer side in terms of their willingness to pay up in these auctions.
Understanding that if I don't buy today, there's a number of other auctions coming.
It's been really good because most of what we're doing is not for the fortune 1000, Big Pfizer's New world. The Amgen to the World. Most of what we're doing is for companies that are struggling that basically have newer equipment. So because we are selling much newer equipment.
Because we're getting it from venture type companies that equipments 1234 years old we're getting very aggressive bids and what happens that people may not understand when times get tighter.
Increase not a decrease in the volume of people that will buy used equipment. So people that look at used equipment, when they're getting 20 million dollar funding from.
The vcs and they can buy everything brand new shiny without any kind of worries are now not getting that kind of money and so as they are trying to basically balance their supply chain. They are more and more looking at used equipment. We're selling used equipment now the guys that are buying used equipment for the first time.
Gotcha.
Okay. That's it for me thank you.
Thank you.
Thank you.
Ladies and gentlemen, if you wish to ask a question Please press star and one.
Our next question is from the line of Michael Diana with Maxim Group. Please go ahead.
Hi, Michael.
Hey, Ross.
Uh huh.
I'd like to just you talked about absorption rates in other words.
Demand for the charged off loans.
And you said your absorption rates were still high although the pricing maybe is a little softer. So can you remind us how you get paid.
Sales of the charge there.
We're never.
Yes.
That dynamic you know.
It will impact your your revenue.
So we're never a principle, we're never at financial risk at all we're 100% a broker we gave no guarantees on the pricing we try to give them guidance on what we think its worth to make sure that theyre going to be happy with our performance and we get paid a basically a commission.
A seller's commission so its the same way that.
CBRE or cushman, and Wakefield would get paid a brokerage so it's a brokerage fee and we get paid at closing.
Sorry.
And so we're really focused we make more money, 100% on volume. So if the pricing is lower that is not as being an impact as long as we're selling more and more loan portfolios. Both the pricing goes from 10 to eight it's not that huge a difference in how much money, we're making this different.
As if we go from doing 200 to 300 offerings in a year.
Right right. So you've got a fixed percentage of the amount sold right.
Yeah.
So as you say you can make it up and buy right even if appraisals.
We can make it up on volume and the Great News. There is it's really easy to make it up in volume because in this business you're not raising your opex you don't need more people to sell more loans, we've got pretty much the staff in place that can handle the growth because in the end, it's a different in the industrial auction business.
Setting up the plants you don't you don't have shippers you don't have rigors youre not checking out the plants.
Here, you're literally just selling paper, so there's tremendous leverage.
Okay, great. Thank you.
Thank you Michael.
Thank you.
Has there are no further questions I would now have the conference over to the management for closing comments.
Okay.
So thank everyone for listening and we always appreciate having an audience of people to pay attention to and wanted to learn more about our company that wanted to get more knowledge about our company. We're very accessible if anybody wants to contact us. After this call and have any one on one discussion we'd love to have a one on one discussion with you.
We think that next year is going to be the best year in the history of the company and we have every reason to believe that in every indication to believe that looking at the pipeline across the board. So this is about as excited as we can get we got a lot of work to do and we're going to do that work, we realized that we're going.
Basically have to wait a little longer to get all of our money paid back but as I said in the earnings call I'm pretty glad that people only $35 million. So that's a good feeling and if it takes a little longer to get paid back we don't need the money tomorrow, we have excellent cash flow, we have excellent operating leverage and we're in a fantastic.
Position, if we have to wait another six months or a year year and a half to get paid back on some of this because we did everything right to be strong enough that we can wait so everybody have a great day and thank you all for listening.
Yeah.
Thank you.
Conference have hesitated Global Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
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