Q3 2024 Heritage Global Inc Earnings Call
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Speaker Change: Good afternoon, ladies and gentlemen, welcome to the Heritage Global incorporated third quarter 2024 earnings Conference call.
Speaker Change: At this time all lines are in listen only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session.
Speaker Change: Yes.
During this call here required immediate assistance. Please press star Zero 40, operator.
Speaker Change: This call is being recorded on Thursday November seven 2024, I would now like to turn the conference over to John Nesbitt IMS Investor Relations. Please go ahead.
John Nesbitt: 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 our current expectations and projections about future events and are subject to change based on various important factors.
John Nesbitt: 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.
John Nesbitt: 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 Harris Global's, Chief Executive Officer, Mr. Raw stuff. Please go ahead Ross.
Ross: Well. Thank you very much all thank you all for joining you today and welcome.
Ross: When you look at one of the half a million dollars and net operating profit and $2 million in EBIT to cash flow on the surface like today.
Speaker Change: Yes, the blah blah okay.
Speaker Change: So what quarter and I get that pretty cool, but I really drill down and look at it across the board at each revenue stream.
Speaker Change: Or is it just a glance yeah. It is still just the blah blah, okay quarter.
Speaker Change: And that's okay.
Speaker Change: Because we're not a buyer the quarter company as we continue to say, we're just not a quarter over quarter company, whereas snapshot in time, where we're going what.
Speaker Change: What happened is industrial was very very busy but lacked any how're you doing other work.
Speaker Change: However, the pipeline is steadily growing and larger transactions are right on the horizon, they take longer but the centers are coming and we feel lots of comfort and a baseline with absolutely the minimum in large transactions in one quarter and being able to state problem.
Speaker Change: The bowl and accretive.
Speaker Change: Going forward <unk>.
Speaker Change: Just real M&A activity is really heated up to our front burner now.
Speaker Change: Activity all around this is heightened with transactions now closing and many possible prospects certainly in play we've now reached that make an offer stage on multiple fronts and I'm comfortable if something is going to get done in the very near future.
Speaker Change: Leased within the next 12 months.
Speaker Change: There are plenty of opportunities out there as the industry consolidates.
Speaker Change: Moving to the financial front, we're seeing more first time clients now becomes sellers didn't really ever before and we have a strong belief that consumer spending remained at heightened levels for the foreseeable future and it will be multiple years to work through the ongoing release of every month's new monthly.
Speaker Change: The charge offs as the false continue and credit cards as well as Fintech products analytics is leadership in the industry.
Speaker Change: The scale that these new prospects.
Speaker Change: We're very comfortable that there would be growth because we are the most reliable badger and a growing market.
Speaker Change: With that I'll turn it over to Brian to give you the highlights of this quarter.
Brian: Thank you all for sticking with US we're very very comfortable.
Brian: That's three years theres going to be enough supply for us to really turn it up a notch.
Speaker Change: Thank you.
Brian: Go ahead, Brian.
Brian: Thank you Ross.
Brian: I'll begin by going over a few key developments before moving into our divisional and consolidated financial results.
Brian: First the company has made significant progress during the year in building the strength of our balance sheet.
Brian: Our consistent profitability and our conservative position regarding the funding of loans within our specialty lending segment has led to improvements in our available cash and working capital balances.
Brian: This enabled the company to fully pay down its term loan of approximately $5 7 million in July.
Speaker Change: Subsequently repurchased roughly 600000 shares in the open market during the third quarter.
Speaker Change: Further on September 13.
Speaker Change: 24, the company's board of Directors approved an amendment to the repurchase program, increasing the maximum aggregate dollar amount of repurchases to 6 million through June of 2025.
Speaker Change: As of September 32024, the company had approximately $4 1 million in remaining aggregate dollar value of shares that may be purchased under the program.
Speaker Change: Additionally, we have determined to move forward without making any significant structural changes in our specialty lending segment.
Speaker Change: We plan to conservatively manage the portfolio to gain a higher concentration of performing loans and to limit the company's potential exposure to lending risk.
Speaker Change: As we have previously mentioned prices for charged off in nonperforming loan portfolios.
Speaker Change: Decreased from the highs during the pandemic.
Speaker Change: <unk> in a more attractive market for our borrowers and a lower risk profile for investment.
Speaker Change: Lastly, and most importantly.
Speaker Change: Our available cash position and potential financing capabilities are.
Speaker Change: Positioning us well to invest strategically in our core auction and brokerage segments of the business.
Speaker Change: Turning to the financial results by Division.
Speaker Change: Our industrial assets Division reported total divisional operating income of 700000 in the third quarter of 2024 as compared to $2 1 million in the prior year period.
Speaker Change: Our auction business achieved a lower than expected operating income in the quarter, primarily due to the absence of the larger auctions, we typically see.
Speaker Change: However, the number of projects executed and our ability to win contracts remains strong.
The quarterly results in this division do not capture a solid business development efforts in the quarter.
Speaker Change: Which included our selection to manage two prominent bankruptcy auctions and then auction project for a top tier aerospace company that is slated to take place in 2025.
Speaker Change: As the current economic environment continues to pressure. Many organizations. We expect that continued facility closures and downsizing will keep our pipeline for auction is strong.
Speaker Change: Our financial assets Division reported total divisional operating income of $1 8 million, our brokerage business recorded operating income of $1 7 million as compared to $2 1 million in the third quarter of 2023.
Speaker Change: Our lending business performed consistently with expectations recording operating income of roughly 200000. After the recent change to non accrual status loans with our largest borrower.
Speaker Change: And the implementation of the cost recovery method of accounting.
Speaker Change: Despite the challenging economy, and consumer spending has not flowed and consumer credit outstanding remains near all time highs.
Speaker Change: As we expect charge off volume to remain at elevated levels. We're focused on continuing to capture the opportunities presented by the current economic landscape to drive growth and continued profitability of our brokerage business.
Speaker Change: Now onto the consolidated financials.
Speaker Change: Consolidated operating income was $1 5 million in the third quarter of 2024.
Speaker Change: <unk> to $2 8 million in the third quarter of 2023.
Speaker Change: For the quarter, we reported adjusted EBITDA of $1 9 million compared to $3 1 million in the prior year period.
Speaker Change: Net income was $1 1 million or <unk> <unk> per diluted share compared to net income of $2 million or <unk> <unk> per diluted share in the third quarter of 2023.
Speaker Change: Our balance sheet reflects stockholders' equity of $66 1 million as of September 32024 up from $61 1 million at December 31, 2023.
Speaker Change: And networking capital of $16 2 million.
Speaker Change: And with that I will turn the call back over to Ross.
Ross: Thank you Brian.
Speaker Change: So really good news you can take here is we're growing our available capital at a time when there's opportunities across the board for us to deploy that capital and we're looking very hard at all of those opportunities really analyzing capital allocation and we feel.
Speaker Change: We're comfortable awareness strong position to take this company to new Heights.
Speaker Change: Stay with us and thank you all very much for joining the call.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: Do you have a question please.
Speaker Change: Whereas this time's followed by the number one on your Touchtone phone you will hear from Jeff here has been reached.
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Speaker Change: For our first question comes from Mark Argento Lake Street. Please go ahead.
Speaker Change: Hey, Ross it's Brian.
Speaker Change: A couple of quick ones here first Brian could you just review kind of the size of our lending book today.
Speaker Change: You guys deploy any more capital.
Speaker Change: There are any updates as well on kind of the status with your large or a borrower.
Speaker Change: Yes, so we have <unk>.
Speaker Change: Proximately $31 million is a net balance related to the loan book the specialty lending segment.
Speaker Change: At September 30th.
Speaker Change: A little over $3 million decline from our balance at 630.
Speaker Change: If we had been.
Speaker Change: Cautiously.
Speaker Change: Looking at new loans.
Speaker Change: Origination very little during this quarter.
Speaker Change: But our plan to move forward is to.
Speaker Change: Work with our strengthened.
Speaker Change: Underwriting criteria.
Speaker Change: And judiciously.
Speaker Change: Invest in loans that are accretive and at a low risk as I said earlier that the prices are lower.
Speaker Change: This year than they were in the past couple of years. So we think that's a lower risk.
Speaker Change: Any update on <unk>.
Speaker Change: The accrual status I mean, it doesn't sound like much change there but.
Speaker Change: Wonder or the borrower.
Speaker Change: Making payments or what can talk and you provided here.
Speaker Change: Yes, so the borrower.
Speaker Change: <unk> our largest borrower.
Speaker Change: All the loans are in nonaccrual status, we're still working with that borrower.
Speaker Change: We're working to increase our collections in the future by allowing.
Speaker Change: Certain legal collection methods.
Speaker Change: And our senior lenders to those loans or are working closely with our borrowers no significant changes.
Speaker Change: Last quarter.
Speaker Change: Okay.
Speaker Change: Is there any changes or any of the loan loss reserves or any other kind of accounting treatment, where we are.
Speaker Change: Be aware of.
Speaker Change: No there's been no change to our credit loss reserve.
Speaker Change: This quarter.
Speaker Change: And I still believe that.
Speaker Change: That's an appropriate reserve.
Speaker Change: Sure.
Speaker Change: Pivoted back to you.
Speaker Change: Industrial <unk> business.
Speaker Change: It's a disappointment.
Speaker Change: Is there anything going on structurally.
Speaker Change: The activity levels in the industry or was it just kind of.
Speaker Change: Yeah.
Speaker Change: Lot of smaller stop activity installed there were a lot of smaller stuff.
Speaker Change: The bigger stuff that got pushed into Q4.
Speaker Change: Yes, there was the same it's actually not at a heightened amount.
Speaker Change: Our pipeline so our pipeline ruling and looked really strong and what happened is the percentage. We signed was great. So it had nothing to do with our win rate our win rate was fine. It just seemed that all of the larger transactions kind of got held up I don't want to use the election.
Speaker Change: And as an excuse.
Cause I'm not smart enough to know if that's why or what was going on in the macro economy that just made vehicles kind of slow down on the bigger transactions, but most of the bigger transactions and some of which we ultimately did sign rolled into Q4 and even into Q1. So it was <unk>.
Speaker Change: Just kind of sluggish on getting ink on the big transactions, it's not that we lost them Mark at all it's just a lot of it just didn't come into fruition.
Speaker Change: They're still out there, we're still going to win our share and.
Speaker Change: We're going to like I said not quarter over quarter, we're going to have some bang our big quarters, just like we had a slow quarter.
Speaker Change: Oh, Yeah, there's lots of room for me and I'll hop back in the queue, but M&A.
Speaker Change: As we've been talking about the M&A, a little bit more of the last few quarters have been really.
Speaker Change: Pull the trigger.
Speaker Change:
Speaker Change: <unk> got a good read that you're going to re prioritize and their cash flows and maybe away from lending and focus more on M&A in the future or should we just been there has been M&A yes.
Speaker Change: There's been M&A all around us all around us.
Speaker Change: You know the Great American group, which was the part of B Riley stalled recently too.
Speaker Change: You know a large hedge fund the two largest industrial manufacturing auctioneers in Europe have consolidated into one company there are companies now.
That kind of were getting an inside look at that weren't really talking about selling in the past that now.
Speaker Change: It could be time for the industry too.
Speaker Change: I wouldn't say.
Speaker Change: A massive roll up, but it's definitely youre going to have larger auctioneers.
Speaker Change: And some of the smaller ones combining over the next two or three years and we think we're in a really strong place to be what are the leaders in that consolidation. So yes, if you're asking are we we're not hoarding cash, but we've built up enough cash and enough credit.
Speaker Change: We're in we're in there and we're gonna.
Speaker Change: No make a big fight to get.
Speaker Change: Get the good ones on our team.
Speaker Change: Alright, I appreciate it I'll hop back in the queue.
Thanks.
Speaker Change: Okay.
Speaker Change: Should you wish to ask a question. Please press star followed by the number one.
Our next question comes from Michael Diana of <unk>.
Please go ahead.
Speaker Change: I'm not hearing Michael Yes, Ken can you hear me.
Speaker Change: I can now.
Speaker Change: Okay.
Speaker Change: I was not on mute.
Speaker Change: What happened.
Speaker Change: Okay. So on M&A that sounds really exciting.
Speaker Change: Yes.
Speaker Change: When you talk about acquiring.
Speaker Change: Making an acquisition or are you talking about.
Speaker Change: Fine.
Speaker Change: Uh huh.
Speaker Change: Basically by people buying teams.
Speaker Change: And whole companies with infrastructure and all that what what exactly.
Speaker Change: Would you think you'd be getting if you made a big acquisition.
Speaker Change: So there is there is two things.
Speaker Change: You can really look at when you've kind of go to the whiteboard and say how do we make acquisitions to move the needle that really can be growth oriented significant changes, where one and one equals more than one and one and you come down to two significant.
Speaker Change: Areas, one is geography, which is obvious 90% of our auctions are 95% are in North America with 95% of all industrial auctions clearly are not in North America, but they are global just in Europe alone there is reassuring coming back to north.
Speaker Change: Erica we think with.
Speaker Change: You know the prospects of our <unk>.
Speaker Change: Some government changes with the new election, reassuring may even grow more significantly so obviously having feet on the street and other parts of the world would have significant ability for growth. We also have clients here that are multi national clients that more and more.
Speaker Change: Looking to fill offshore assets not just the onshore assets, so geography would be key.
Speaker Change: Key area would be.
Speaker Change: Mcmahon area, because if you look at how dominant we are in certain segments.
Speaker Change: Biopharma lab to be one obviously with the <unk> acquisition. There are other sectors that are growing sectors. Now that we think we can get equivalent dominance in which really leaves us forward, so geography, and expanding our sector presence would be.
Speaker Change: <unk>.
Speaker Change: The two main goals.
Speaker Change: And that would be.
Speaker Change: Both obviously, we're still looking organically.
Speaker Change: The ability to go green and hire people, but simultaneous we see that there are real opportunities right now heightened opportunities to acquire entities. Michael So we have the cash now we've grown into the ability where we can.
Speaker Change: Really execute on that front and there were a lot more firms ready to make a move to join larger firms now than there were in the past. So we think now's the time.
Speaker Change: Alright, that's very interesting.
Speaker Change: Well stay tuned thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Our next question comes from Chad Stephens, a private investor.
Speaker Change: Go ahead.
Okay.
Speaker Change: Hello can you guys hear me.
Speaker Change: I can hear you Chad.
Speaker Change: Hi, I guess I have.
Speaker Change: The assumption that having that level of concentration with one large lender.
Speaker Change: I guess Larry.
Speaker Change: Steak or.
Speaker Change: Our process failure in some sense.
Speaker Change: And is that the case and if so.
Speaker Change: Change has been made to the process in order to make sure.
Speaker Change: Risk levels like that are not taken again and could you kind of walk through what happened and how that's being addressed.
Speaker Change: Yes, it's a very reputable company that we had no and on the brokerage side for decades. So it wasn't that we were underwriting someone did we didn't have prior knowledge of that didn't have a long history of success without a default.
Speaker Change: But if you wanted to asked me in retrospect.
Speaker Change: How do I feel now about the concentration.
Speaker Change: I would say that youre right that we had too much concentration in any one client no matter, what we thought about the client.
Speaker Change: And if you are asking.
Speaker Change: Have we learned our lesson.
Speaker Change: I guess the answer would be yes, we've learned a lesson, but going forward, we intend for that to be a significant criteria as we led more judiciously and more cautiously.
Speaker Change: Who really broad base the client level. So we're not.
Speaker Change: Dependent upon any specific entity, so I would applaud you for being correct.
Speaker Change: I appreciate it such a direct answer on that that's helpful. Thank you.
Speaker Change: Youre welcome. Thank you for asking.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from Sam <unk> memory.
Speaker Change: With investment. Please go ahead.
Speaker Change: Hi, Ross Bryan Keane.
Speaker Change: Was the most surprising perhaps to the election.
Speaker Change: There wasn't more positive movement in the stock and one of the reasons I was thinking I just wanted to get your thoughts on what the <unk>.
Speaker Change: Financial assets division, especially the lending side.
Speaker Change: CFPB I assume.
Speaker Change: Under Republican administration.
Speaker Change: Would not be as aggressive in taking stance towards.
Speaker Change:
Speaker Change: Those borrowers do you have any thoughts or.
Speaker Change: Any color maybe you can provide on that.
Speaker Change: Well I mean, if you look back in history I don't know that you can actually pick.
Speaker Change: By the president would with consumers.
Speaker Change: I don't know I don't know if the presidential election is going to change it or not so I guess that would be a wait and see rather than people reacting over the first two days.
Speaker Change: No.
Sam: Its too clever question for me to come up with an answer today I think we'll find out over time Sam.
Speaker Change: Got it okay. Thank you.
Speaker Change: There are no further questions at this time.
Speaker Change: This concludes our Q&A session I'd like to turn the conference over to management. Please go ahead.
Ross: Hi, This is Ross so I wanted to thank you all for joining I wanted to thank all of the shareholders that have stuck with us and joined and I'd like to.
Ross: Encourage people to really take a hard look at where we are today and where we think we're going because I can tell you that internally management is very bullish on our future. We're excited on the opportunities as.
Ross: As we see there'll be a growth we think in financial assets nonperforming loan sales, we think we're positioned well there with an incredible team that is for a quarter century has been a leader. We think we can even grow the products on that side on the industrial side.
Ross: We think the industry is going to basically consolidate to some extent and did our leadership role.
Ross: It's really going to come into fruition.
Ross: So we see ourselves as a great entry point right now for people, who want to come on board and we're excited about the next.
Ross: Decades of where we think we can get to.
Ross: So we'd welcome anybody and we thank you all for paying attention.
Ross: Thank you so much ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.