Heritage Global Inc.

Thank you for standing by. This is the conference operator. Welcome to the Heritage Global Inc. fourth quarter and year-end 2022 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. And should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to John Nesbitt. 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 the future events and are subject to change based on various important factors. In light of these risks, uncertainties, and assumptions, we should not place undue reliance on these forward-looking statements. We speak only as of the date of this conference call. For more details and 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 Heritage Global's Chief Executive Officer, Mr. Ross Dove. Ross?

Thank you, John. Good afternoon, everyone. Welcome to our fourth quarter and year-end 2022 earnings conference call. Let's start the call today with Brian Cobb, our Chief Financial Officer, who will discuss our financial forms. Brian, you're up.

Thanks, Ross. We closed 2022 with strong operating results in the fourth quarter. which included operating an income of $3.1 million, improved profitability, and EBITDA of $3.3 million, driven by solid results from both our industrial and financial asset divisions. Additionally, for the full year ended December 31, 2022, we achieved record net operating income of $11.1 million and delivered full year earnings per share of 42 cents. Throughout 2022, activity in our industrial assets division showed continued momentum, and we closed out the fourth quarter with a 310% increase in asset sales to 6.5 million, compared to asset sales of 1.6 million in the fourth quarter of 2021. Our industrial assets division sees increased activity as more businesses scale down their operations and surplus assets and equipment becomes available for sale. A challenging economic landscape often accelerates auction activity as companies look to responsibly dispose of assets. Our financial assets division is benefiting from increased volumes as the economy has slowed and pandemic-related stimulus checks have dried up, causing consumers to more frequently rely on credit cards and installment loans to make purchases. Predictably, as consumer debt grows, so does the volume of charge-off consumer loans being sold by financial institutions, and we anticipate that we'll continue to see increasing asset flow as we move through 2023. The current economic environment is producing encouraging tailwinds that we believe position both our divisions for continued financial success. Turning to the financial details for the fourth quarter, consolidated net operating income more than doubled to $3.1 million as compared to $1.4 million in the fourth quarter of 2021. Based on the past several years of taxable income and projected operating results for the next five years, the company determined that it is more likely than not that it will utilize a significant portion of its net operating loss carry forwards and thus release $7.1 million of its valuation allowance against its deferred tax assets. As a result, during the fourth quarter of 2022, the company recognized an income tax benefit of $6.8 million compared to an income tax expense of $0.4 million a year ago. Net income was $9.9 million or $0.28 per basic and $0.27 per diluted share compared to net income of $1 million or $0.03 per basic and diluted share in the fourth quarter of 2021. EBITDA of 3.3 million was significantly improved as compared to EBITDA of 1.5 million in the fourth quarter of 2021, and adjusted EBITDA grew to 3.4 million for the fourth quarter of 2022, up from 1.6 million in the fourth quarter of 2021. For the full year 2022, we achieved record consolidated net operating income of 11.1 million. Operating income in our industrial assets division increased 168% to $9.2 million in fiscal 2022, compared to $3.4 million in 2021. In our financial assets division, we saw growth of 193% to $5.9 million in operating income, compared to $2 million in the prior year. Our balance sheet remains strong with stockholders' equity of $48.3 million as of December 31, 2022, compared to $32.6 million as of December 31, 2021, and networking capital of $7.7 million. With that, I'll now turn the call back over to Ross.

Thank you, Brian. So this is a great time to be the CEO of Air Ridge Global. Numbers don't lie. And it's, I got to be honest, a lot of fun to stand here today and be able to tell you how proud I am of our team, how proud I am of our company, and how thrilled I am with last year's results. So let me give you some color into the future, or at least into how our team looks at the future. One of the most common questions we're now getting is that was incredibly great. But what we really want to know is, was 2022 an anomaly? Or is 2022 the beginning of ongoing continued growth? And if there is ongoing continued growth, how long is that growth sustainable for? Those are the real questions that even I as an investor would most want to understand. So let me kind of go over why I'm very, very confident in the short term and the reasonably long term that we're going to achieve a lot of success. The reason that I'm confident is right now we've hit the sweet spot in the sectors that we are most prominent in and most successful in all at once. We simultaneously have growth across both industrial and financial. So in financial, here's what's really interesting. Consumer spending is at record levels. But really, what's more important than consumer spending being at record levels is our sweet spot, which is charge-offs, which is selling credit cards, which is selling auto loans, which is selling fintech loans. All of those sectors are fastly growing in asset supply. I've told you over and over again that asset supply is the key to our success. The more we can sell, the more profit we make, Our systems are in place to sell more, and we're now getting more. And the demand from the buyers is steady. If you look at it right now, you see that auto loan deficiencies have been growing month after month, quarter after quarter. Credit card defaults are growing. Our volume is growing. When that volume grows, our lending practice grows with it because the people that are buying that product need our services, and so we're putting out more capital, and the more capital we put out, the higher return. So that kind of tells you what I think for now. I think that's a trend that's got several years of tailwinds behind it. I think that we're just working through the beginning now of the rise in consumer spending, and that we will grow this year and next year. On the flip side of that, If you move over to our industrial asset division, right now in the industrial asset division, you're seeing not just in tech, but across the board, people trying to right-size manufacturing, people trying to right-size their companies, and you're seeing headcount reductions. Headcount reductions, or as they call them, layoffs, produce auctions three, six, nine months after the announcements. So all of these layoff announcements you're now seeing, it takes two, three, four months to effectuate the layoff. And then afterwards, people look at the back end of the supply chain and say, what is surplus? And how do I get rid of the surplus? In this economy, nobody wants their surplus to go in the landfill. So more and more of them are using industrial auctioneers. We think that's a sustainable trend. that's going to grow for several years to come. So when I look at industrial and I look at financial, I say to myself, this is not an anomaly. We're in a growth period in a rock solid company at the right place in the right time. I have a pipeline that I can look at that is not always all year long. But I can tell you now, sitting here today, looking at the pipeline, that this quarter, This is after a great record Q4. This quarter, we are off to a flying start for the year. And when I say a flying start, I'm talking two, three times what we made in the same year last year. So if you look at this year's Q1 and you look at last year's Q1, when we're all done and we announce it, you're going to say this company is flying high. So I'll leave that... I'm not trying to sound too arrogant, but I'll leave that with a thank you for all of you listening and stick with us because this is a good time for Heritage Global. Thank you.

We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. Our first question is from Mark Argento with Lake Street Capital Markets. Please go ahead.

Hey, Ross. Hey, Brian. Congrats on a strong year. Just was hoping to kind of drill down a little bit. Ross, you talked about just increasing asset flows. Is there any way to kind of help us quantify you know, you know, how many more portfolios are you guys seeing now on the, you know, on the MPL side or M like side, how many more auctions are you guys doing any kind of KPIs or operating metrics that you can point us to that, that can really just help us better understand what's going on in terms of the volumes.

So let me give it to you kind of in an abstract way, because these are not numbers that we report. and they're not metrics that we put out in our filings, but just flying at a 10,000-feet level looking at them, I can tell you this, that on our financial asset side, clients that we had pre-pandemic, clients that we maintained through the pandemic and are now operating with now are back to, and in many cases above, the levels that they were at before we went into the pandemic, most of those companies, the volumes were cut in half during the pandemic. And so that's probably 60% of the companies we're doing business with. The other 40%, Mark, are companies that are now really starting to come on board with us as we've grown the amount of companies using our platform. The growth in the companies using our platform is is really starting to take off now because the companies that were selling direct were basically getting a certain price for the assets. And there's been price point pressure now after the pandemic on what people were paying for the assets. So when they were just selling to one client, they're now moving into wanting to have a more transparent marketplace and using us greater. So that's fresh data. But right now, Financial assets at the charge-off level are selling not at the premium they were when there was a shortage in the pandemic, but back to normalized pricing.

All right. So on the industrial side, this is kind of in the context of thinking about the scalability, the ability for you guys to grow without having to add a lot of incremental costs. I'm assuming that the NLEX side is a little bit more scalable in as much as, you know, you don't have to put another team out on the road to tag assets. Obviously, it's digital. Maybe just talk about the scalability of both businesses. Do you need to add?

The industrial auction business had giant leaps already, the giant leaps. And this is from the old guy who grew up in the business. is that you're not calling bids anymore, and you're not deploying a bunch of auctioneers, and you're not asking all the buyers to get on planes and fly to the plants. So they took a little bit of the fun out of it if you're talking to an old auctioneer, but it made it massively scalable because Ross and Kirk Dove, when they were running the shop, could only do one auction in one day. Nick Dove's running his shop now that can do eight auctions in one day if he gets enough supply. So the buyers don't have to travel now. So the buyers can bid at seven or eight auctions in one day versus if they traveled, they could only bid at one. So industrial auctions is really like a hundred X scalable from the days I started in it. And so the only cost that is really variable at this point in time is the cost of the operations end of the business versus which is a headcount cost to physically send the people out to do the tangible work on the front end, basically writing the specs, and then the work on the back end, working with the shippers and the riggers and the safety and the HAVMAT checking it out. So the bottom line is it can grow exponentially by not adding a bigger sales force if you have the marketplaces, not really adding more people in finance or more people in marketing or more people at the C-level, but adding more people at the operations level. So we think one of the real great things about this company is that we can do two, three times the volume across the entire spectrum of services with a very limited amount of OPEX expenditure. So we think we've hit the time of real operating leverage.

Great. And then maybe one for Brian, just to change it up a little bit. So when Ross says... Ask him a hard one, Mark.

You asked me softballs. Give him a tough one.

So when Ross tells us, hey, you're off to a flying start, two to three X better than Q1 last year. So two to three X better on what? On revenue, on operating income, on everything. That's not a softball. I don't know what it is.

Well, so when Ross talks about 2 to 3x times last quarter, he's usually referring to operating income. And so that position that he's taking is absolutely a reasonable position based on what we're looking at right now.

Great. All right, Ross, you passed. Congrats. Thanks, guys. Good work. Thanks, Mark. All right, thank you, Mark. Be good.

Once again, if you have a question, please press star then one. This concludes the question. Oh, pardon me. Our next question is from Michael Diana with Maxim Group. Please go ahead.

Okay, thanks. Hey, Ross. Hey, Michael. So you were talking a lot about your financial assets, and you were mostly talking about, I think, auctioning off, charge-offs. What about the financing end of that? I think that's going pretty well too, isn't it?

Yeah, so what happened is during the pandemic, there was not enough supply to really fill our specific onboarded buyers. A lot of the supply was was going to the multibillion-dollar public companies in that business who really didn't need our capital. They have a very low cost of capital. Now that the volumes have opened up, the 25 guys we've onboarded are now buying more portfolios, so there's a lot bigger need for us. So our funding has been growing over the last three quarters, basically kind of tied together. to the volume also growing on the selling. So there's really kind of an empirical truth that the greater the volume is, the more the need for our services are. So as the volumes keep growing, we're going to have to need more and more capital and keep funding more and more capital. The good news is we get back more and more monthly remittances, and we have free cash flow that we can keep deploying. So there is constant growth there. As long as we stay profitable and get back the remittances, we think we can grow it really year over year.

Okay. And I assume because of what interest rates are doing, you're probably charging more to your borrowers. Is that constraining this business at all or not?

No, the truth is that we haven't really raised our capital cost to our buyers yet. that interest rates have went up, but since we've been really deploying free cash flow, we haven't really had to borrow a lot of money in order to fund a lot of these deals. A lot of them are self-funded, and our ROI has been steady enough on self-fundings. Obviously, as our cost of capital goes up, like any traditional lender in any marketplace, there's going to be a pass-through of the cost of capital. We're not looking when the cost of capital goes up to in any way gouge anybody or in any way get a premium on our cost of capital. What we're looking to do is be a fair ethical lender and get back basically our cost of capital cost.

Okay, great. I appreciate it. I'm looking forward to your first quarter report.

Thank you. So are we. We're anxious to get it out, and we're working hard to make it a good one. You have a great day, Michael.

Thanks. This concludes the question and answer session. I'd like to turn the conference back over to management for closing remarks.

Hi, this is Ross. On behalf of myself and Brian and the entire team here at Heritage Global, we'd like to thank everybody for participating today. We'd like to thank all of the current investors for sticking with us. We're highly appreciative. We're easy to get a hold of if you have further questions. So feel free to reach out at any time and we'd love to talk with you. If you're a new investor and would like more information before you decided to jump on board, we're available on a regular basis to talk with you too. So we just want to let you know we're thankful and we're here to try to do everything we can to get you the right information so you understand our company, and we'll keep on working hard. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.