Heritage Global Inc. (NASDAQ:HGBL) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Welcome to the Heritage Global Inc. First Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the call over to your host, John Nesbett, IMS Investor Relations. You may begin.

John Nesbett: 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 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 and Exchange Commission. Now I’d like to turn the call over to Heritage Global’s Chief Executive Officer, Mr. Ross Dove. Ross, go ahead.

Ross Dove: Thanks, John, and good afternoon, everyone. Welcome to our first quarter 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.

Brian Cobb: Thanks, Ross. Our 2023 first quarter performance reflected strong operating results, including record net operating income of $3.9 million, improved profitability of $0.08 per diluted share and EBITDA of $4 million. We saw growth from both our financial assets and 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 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 and the ability to deploy capital through our specialty lending segment. Our 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 in the total balance from one year ago and an increase of $6.7 million since December 31, 2022. Beyond Q1, our 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 we anticipate that we’ll 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 tailwinds 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 $875,000 in the first quarter of 2022. Net income was $2.8 million or $0.08 per basic and diluted share compared to net income of $645,000 or $0.02 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 a net working capital of $8.6 million. With that, I will now turn the call back over to Ross.

Ross Dove: Thank you, Brian. You did that so well that 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, to post our best quarter since our inception. So that was our best quarter in the 12 years we’ve been running Heritage by 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 win in that quarter. It was just pure blocking and tackling and an 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. Do these guys still have more hat tricks in the bag? Can these guys still grow at record levels?” So the question you want to say to yourself is very simple, after a decade in business, working hard, is Heritage in a position now where it’s truly not just a market leader but a built-to-last company? So the answer for me is, 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’m proud to say as the CEO that as the oldest guy here, I look at everybody younger than me, and I say to them 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 financial, is positioned 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 business. In Financial Assets, you’ve got a quarter-century-old business called NLEX that sells every kind of nonperforming loan from credit card loans to auto loans, and it’s a growth company because 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, the pandemic is now over with, and we’re seeing increased consumer spending in all of the segments we operate in. As consumer spending continues to increase, defaults naturally follow, to some extent. And as defaults follow, then charge-offs follow. So right now, we’re looking at a great last year and a very pleasing multiyear future. Simultaneous to that, the people that we’ve onboarded has grown. We have more onboarded clients in our lending division than ever. And they’re winning more portfolios, they’re relying upon us more and that business has literally the best predictability of any of our revenue streams 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, will constantly, year after year, improve as long as funding stays static even. If funding grows, 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 Lab Trading has proved highly synergistic with our auction division. In fact, on a monthly basis, they’re finding assets that we can auction as long as it’s assets that they can resell. So packaging that together, that’s a business with true growth. Our valuation business is more and more needed as we potentially move into recessionary times, and there’s a greater concern 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 a growth driver. The obvious growth driver is Heritage Global Partners, the auction company. The growth driver there is the entire industrial marketplace is moving to rightsizing. As it moves to rightsizing, as it moves to lean manufacturing, it moves the business process outsourcing. So these companies more and more are using industrial auctioneers. They’re also looking more and more to prevent assets from going into landfill. The best way to present assets from going into landfill is to consign them to an auctioneer with a worldwide purchasing base. So over and over, I can say, not just this year, not just next year, but I’d 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.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Mark Argento from Lake Street. Please go ahead, Mark.

Operator: [Operator Instructions] And at this time, there appears to be no further questions. I would like to turn the call back to management for closing remarks.

Ross Dove: All right. So this is Ross, the CEO of management. I want to thank you all for listening. I want to thank you all, our 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, we’re very, very available to talk to you, walk you through our business plan and understand what you’re 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. And I thank you all graciously. Everyone, have a great day.

Operator: This concludes today’s conference call. Thank you for attending.