Q4 2023 Heritage Global Inc Earnings Call

Presentation

Operator

Ladies and gentlemen, greetings, and welcome to the Heritage global Fourth Quarter and Year End 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. 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, John Nesbett with IMS Investor Relations. Please go ahead.

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 in light of these risks uncertainties, and hence, 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'd like to turn the call over to Harish Global's Chief Executive Officer, Mr. Ross, stuff. Ross?

Thank you, John. Good evening and thank you all for joining. This is a fun one. Even as a perennial optimist this quarter exceeded my expectation with us. Lillian buys of $4 million goal for Q4 was 4.6 million and the operating income it brought our annual NOI. passed $14 million. I will to turn the call over to Brian in a moment to give you the details in depth, then I'll come back and tried to add some color on how and why and where we're headed what I was 12 and brought home had not so typical straight a report card by mother Zelda of data at the kitchen table. He opens it up and said now kit Can you just keep doing this?
Well, that's my goal here at Heritage global. Thank you all for I in Europe.

Thank you, Ross, and welcome again to those tuning and we greatly appreciate your ongoing support.
Also, I want to thank the entire heritage team for an outstanding year. I'm pleased to announce that we recorded full year 2023 operating income of 14.3 million. This was another strong quarter and year for Heritage global. As we saw continued progress across the business, we're continuing to see positive trends in our industrial assets division with heightened macroeconomic pressures driving continued progress in our auction business. In our core auction and resale segments, we saw growth year over year in the volume of transactions with all segments increasing their ability to work in tandem to source use assets for resale and win option contracts.
The overall division's operating income was 7.8 million, including no earnings from joint ventures involving real estate as compared to 9.2 million during 2022, which included approximately $5.1 million of operating income from joint ventures involving a real estate component. While the auction business tends to be a bit lumpier quarter to quarter, our pipeline remains strong and we anticipate continued momentum into 2024. Our Financial Assets division reported a strong quarter as record consumer debt has led to higher volumes of charged-off credit cards and nonperforming loans. And as a result, operating income for the division was up 43% and 83% for the fourth quarter and full year ended December 31st, 2023, respectively, when compared to the prior year periods. This year's performance within the Financial Assets division was primarily driven by our brokerage segment with operating income of $8.9 million, an increase of $4.2 million or 90% as this segment has expanded its number of clients and is more directly correlated with the increase in volume. I've charged off and nonperforming loans on the market. Our specialty lending segment also has made good progress in 2023, reaching a gross investment balance in notes receivable of $38.4 million, an increase of $16.3 million as compared to the prior year. This segment contributed operating income of approximately 1.9 million for the full year, up 54% when compared to 2022 and as a reminder, the operating income from our lending segment includes the effect of new accounting guidance, which requires companies to estimate and reserve for their current expected credit losses. The segment's provision for credit losses during the year was roughly $1.2 million, offsetting both its notes receivable and equity method investment balances. As mentioned last call, we increased the Company's non-cash credit loss reserve in the third quarter due to ongoing restructuring efforts with our largest borrower and decline collection rates industry-wide, we reached an agreement with this borrower and expect to recoup the loan, albeit over a potentially a longer time period than previously expected. In the fourth quarter, we did not materially increase our credit loss reserve and sitting here today we generally don't see elevated risk from our other borrowers while we continue to diligently monitor the collection rates of our borrowers and industry wide.
Turning to the financial results, consolidated operating income was $4.6 million in the fourth quarter compared to $3.1 million in the fourth quarter of 2022. For the quarter, we reported adjusted EBITDA of $4.9 million compared to $3.4 million in the prior year period. Based on the past several years of taxable income and projected operating results for the next five years, we determined that it is more likely than not that we will utilize a significant portion of our net operating loss carryforwards and thus released an additional $2.2 million of our valuation allowance against certain deferred tax assets as compared to 7.1 million during the fourth quarter of 2022. As a result during the fourth quarter of 2023, we recognized an income tax benefit of $0.4 million compared to an income tax benefit of $6.8 million a year ago, net income was 4.9 million, or $0.13 per diluted share compared to net income of $10 million, or $0.27 per diluted share in the fourth quarter of 2022. The decrease year over year was primarily driven by reduced release of the income tax valuation allowance, as previously stated, offset by improved operational performance our balance sheet remains strong with stockholders' equity of $61.1 million as of December 31st, 2023, up from 48.3 million at December 31st, 2022, and net working capital currently sits at 11.6 million.
I'll conclude by reiterating what a strong quarter and year. This was for Heritage global with our business showing continued growth with some help from macroeconomic tailwinds. And now I'll pass it off, Mr. Opta.

Well, thank you, Brian. Let me just tried to take a moment to tackle how we grew in 2023 and kind of get you to really see exactly what's happening.
So I'll start with financial in the end of the day. What happens in Financial is the addressable market grew. So our execution is always been where it should be, but it's almost like they were miracle workers that team had in legs during a pandemic when there was no supply, but not just stay profitable and consistently profitable, but they have zero layoffs. And at the same time, they had zero layoffs to continue building out the technology as it take advantage of the marketplace and increase the headcount with high-performing individuals that was done because the CEONYX. state Ludwig, new vendors and anybody after 25 years in the industry that the market was going to come back. While the market has come back has come roaring back, we have the highest ever consumer debt. So our addressable market is dramatically increased, and we feel really good that over the next two years as there's a runoff of selling off these assets and lead scheme reform at a very high rate.
I'll kind of switch now over to the industrial side. On the industrial side, it's all about gas gross asset sales, and we believe they can grow why do we believe they can grow because at the end of the day, the ultimate way they grow is the same way. It's based upon the addressable market, and we're seeing more plant closures. We're seeing more consolidations and we're seeing more layoffs than we did one or two years ago to we believe it does in our favor. And we have two different parts of our business that can grow at once. So I'm very comfortable that we're in a good spot. And I thank you all for listening, and we're open to questions.
At any time.
Thank you.

Question and Answer Session

Operator

We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question in the queue For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star two. One moment please while we poll for questions.
Thank you. Our first question is from Mark Argento with Lake Street Capital Markets.

Please proceed with your question in Rossi.
Brian, congrats on a decent end of the year and a strong year overall. I'm just looking at 2024. I know you guys are confident they will not get some tough comps here in the last second half of 2023 compared to the year ago period. But when you sit back and look given the macro.
Yes.
How are you thinking about 2024 in terms of growth?
I'll take that before, Brian. So when you talk about growth, it's not that easy to talk about it and brag about it after you just came off a record year. So we went from a record year, two years ago to a record year this year twos, um, you get a record year every year. I don't even know of even Babe Ruth hit more home runs every year. So we think we're going to have a solid high-performing year, and we think we're going to have a good profitable year mark. And whether it's not whether it's going to be a record year or not, it is not predictable when you look at the first quarter's forecast alone. So it really depends on whether or not we get a couple of windfalls we're going to have and I can promise the marketplace, we're going to have a good year. Is that fair enough?
Yes.
Well, just digging in a little bit, I mean, you touched on the addressable markets. We are expanding. You can kind of grow along with that expansion? I'm just trying to figure out how we should think about kind of model in the out year here and and I'm just trying to better understand the I'm trying to get the of the broader macro picture and kind of how that translates in and how do you guys anticipate growing? It doesn't sound like you don't anticipate growing meaningfully, but yet you cut that out. So I was just hoping to maybe try to pin you down a little bit more on, you know what how we should be thinking about it, but you're the guy went to college and became an analyst, not me, I'm an auctioneer.
What do I think I think that at the end of the day, the addressable market is bigger than last year. So therefore, we should make more money than last year. But at the end of the day, what I don't know is that there's going to be a big winner, not where we buy some one large campus and make a couple of million dollars, which is a big swing. Those are one-time transactional deals. What I've tried to tell all of our investors is please don't be in an investor that looks at us as a quarter-over-quarter sequential growth company. We're going to be profitable every quarter, but we're going to have bikes in some quarters.
And just one follow up, Bob, maybe for Brian. In terms of the health of the loan book, I know last quarter, you took the reserve increase. The reserve doesn't look like you did anything that reserve in Q4. Does that loan continue to kind of perform as I'm assuming the loan continues to perform. Any updates there in terms of your confidence level that you have everything accounted for at this point?
Yes, yes, we had the restructuring, as you all know, on in early just said late November, early December on about 25 loan agreements previously were restructured and consolidated that allowed the minimum monthly payments to go down significantly for our largest borrower. So we feel good about what we did there on the reserve, we went through a very thorough analysis in Q4. We worked with our borrowers who worked with our senior lenders, the internal team, our auditors, and we feel very comfortable that the position that we have taken in Q4 is appropriate given the information that we have, some of the ongoing work there is really to stay closely tied to our borrowers and their performance to make sure we're on top of the collection rates on the performance of collections and also the remittances and payments from our borrowers and their financial position. So I think there's been a lot of work to get to a point where we're comfortable not changing the reserve from Q. three very much.

Thanks, guys.

I'll hop back in the queue.

Operator

Our next question today is Bob Sutton.
Our next question is from George Sutton with Craig-Hallum. Please proceed with your question.

Thank you, Ross, the growth at NLX was great. I just curious if you could break it down, if possible, into the macro dynamic versus what you mentioned to be a growing number of customers in that in that segment and therefore, how sustainable is growth in that in that segment?
So I think right now looking at the macro economy, we don't need needed to change right now, George, in other words already, we have this enormous amount of runoff that has to get sold over the next two years in a trillion a credit card debt, et cetera. So I think we're going to be stable for the next two or three years making no profits every quarter. And I don't think that we need anything to make it any different than what it is.
Supply is at an all-time high now three years following an all-time high that's going to create an attractive environment for buyers. That would suggest that there would be a greater need for loans in your other segment. And I'm just curious your comfort and interest in growing your loan book, given that dynamic so the I can tell you on the graph, but go ahead, Brian.
Yes, so on, you're exactly right, George, on the declining collections, roughly a decrease prices, I think from their all-time highs, maybe 30% or more. And so we've been talking some in tandem with our borrowers and there's a lot of excitement in the industry. And right now is the time to buy. And we see that with the PRA and OnCore public company financials that they're purchasing more. And that's exactly what we're thinking about.
What I'm focused on now with the team is really managing the risk in the portfolio as well as we are redeploying our principal remittances in a way that we have higher-quality collateral such that over time, our loan book is one at a lower risk, two more sustainable for long term.
Got you. Okay. Offline, Ross, I'd love to hear what nonstandard straight days means. I can't come up with it myself, you probably got them, George.

Operator

Maybe as a reminder, if you'd like to ask your question, please press star one on your telephone keypad. Our next question is from Michael Diana with Maxim Group. Please proceed with your question.
Jay.

Thank you.

Hey, Ross.

I Michael, you talked about the your your addressable markets growing and on the financial side, I know, traditionally, it's been charged off credit cards in the past. Evoltra also talked about fintechs buy now pay later and on that, are those contributing substantially to the supply?

Yes, they've been really growing.
The thing about the fintech companies is not old line. Basically, old-line lending companies are big banks that have huge recovery departments. So as they need to sell off assets. They're way more positioned to use an outsourced partner like NLX, then they tried to do it themselves. So as their lending requirements keep coming up and as our charge-offs keep growing. There's a higher probability they're going to use us then a money center bank who's got 100 people in recoveries. So it's a true growth part of our business.
Okay.

That's great. And let me ask him on the industrial side, American lab trading. I know that's been a big it's vendors synergistic. Can you just remind us how how that blends in with your other traditional auction business.

So they basically buy and sell lab equipment.
But in the process of buying and selling lab equipment, they find us auctions. They find us assets that may be on their own as American lab trading. They wouldn't have bought, for instance, if it's a whole factory, they may have wanted to cherry the stuff they wanted to put it into inventory and it would have passed on the other stuff. They can now say, okay, we'll pay a premium for these very specific identifiable bull assets. We want to put it into our IT inventory, but we'll pay you for everything. So we've created basically a synergistic growth platform there that I think was, um, was an intelligent buyer for us and also a very good deal for them, Michael.

Great.

Thanks, Ron.

Operator

Thank you. There are no further questions at this time. I'd like to end Paul back over to management for any closing remarks.
This is Ross, the CEO., and I just want to say thank you to everybody who listened on the call. Thank you to everybody who's invested with us and thank you to everybody who's put trust in us. We're going to keep our foot on the pedal and thank you for listening in.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.