Heritage Global Inc. (HGBL) Earnings Call Transcript & Summary

Good day, and welcome to the Heritage Global Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to John Nesbett of IMS Investor Relations. Please go ahead, sir.

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 release. 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?

Thanks, John, and good afternoon, everyone. Welcome to our first quarter 2021 Earnings Conference Call. 2021 is off to a solid start versus last year as demonstrated by our achievement of significantly increased operating income of $1 million and substantially improved adjusted EBITDA of $1.5 million. Our ability to drive growth and improve profitability can be attributed to strong execution by our team and reflects the strength of our diversified business model. As the economy reopened and recovered in the first quarter, we saw and are still succeeding momentum in our industrial asset division as clients in this segment seek to liquidate surplus industrial equipment and assets in order to improve their financial position as they fully prepare to reengage their operations. Many companies are reinventing themselves to adapt to a more financially viable and asset-light business model, and they are turning to Heritage to help them efficiently and sustainably dispose of unwanted surplus equipment. With our visibility of the marketplace today, we expect to continue to see steady demand for our industrial recommercing capabilities. As we move through the balance of 2021 and beyond, we anticipate that corporate sustainability practices will play an increasing role in driving growth in our industrial assets business. There is a tremendous emphasis in the industrial asset sector on giving second life to surplus machinery, industrial vehicles and other assets. In addition to the monetization of these assets, companies are also recognizing the value of supporting the circular economy by engaging and pursuing secondhand life for their equipment rather than relegating it to the landfills. Heritage, through our auction and retail expertise, is poised to support our clients as they seek new owners to repurpose and reuse their older equipment. We are seeing a growing number of opportunities to help our clients off-load used and unused equipment by recycling for others to use resilient and environmentally sound as well as fiscally beneficial process. We believe that our ability to support corporate and industrial sustainability practices represents a tremendous opportunity for us as we are moving forward. Looking to our financial assets division. While the business did show improvement in the first quarter of 2021, we experienced a lag in volumes due to pandemic-related continuation of waivers and loan forgiveness as well as the distribution of additional stimulus checks. Additionally, with the current limited availability of nonperforming assets in today's market, larger players are paying higher prices to acquire what is available. That being said, we still remain confident, over the course of the current calendar year, we will see an increase in the release of nonperforming assets into the marketplace. In the meantime, NLEX has been continually gaining market share and added a number of new clients, positioning it well to benefit from the future increases in activity. As we have said previously, during the past year, COVID-19 restrictions created a stay-at-home economy that drove increased online shopping activity. And with increased online shopping, the economy saw a rapid growth in the buy now, pay later, or BNPL, sales, which will result in an increase in charge-offs of these assets in the U.S. However, during the first quarter, we were still in the buy-now portion of this process and are now beginning to work through the expected pay-later reality. As pay later becomes challenging for consumers, we expect to see growing volumes in the release of nonperforming assets, and NLEX is competitively positioned to provide an effective and efficient nonperforming asset sale process for the new BNPL issuers. Additionally, we remain focused on offering specialty financing solutions to small- and medium-sized investors of charged-off and nonperforming asset portfolios through Heritage Global Capital. As the year progresses, we expect to see more nonperforming assets released into the market, favorably impacting demand for both parts of our financial asset services. With the opportunities and trends we are seeing in the marketplace, we are energized about the prospect for our industrial and our financial asset businesses as we move through 2021. Our industrial assets business is a proven partner in the liquidation of surplus and distressed assets for clients such as Pfizer, Amgen and, more recently, Halliburton. And we expect the reopening of the economy to result in growing demand from clients seeking our experience and our track record of success with brokered asset sales and online auctions. Additionally, as the economy gradually returns to pre-pandemic "business as usual", NLEX is uniquely positioned to address the market opportunity around the anticipated increases in charged-off and nonperforming consumer asset sales. Finally, Heritage Global remains well positioned to benefit from rising demand for capital by debt buyers as conventional lenders return to more aggressively off-loading underperforming and charged-off assets to manage credit losses. As I said earlier, we believe 2021 is off to a solid start and that we have a strong platform for which to capitalize on the interest and demand we are seeing for our services in both industrial and financial asset segments. With that, I'll now pass it to Brian Cobb, our VP of Finance. Brian will give you a deeper dive into our financials. Thank you all. Brian?

Thanks, Rob. The company achieved operating income of $1 million for the first quarter of 2021, demonstrating significant improvement compared to operating income of $100,000 in the first quarter of 2020. The improved performance was primarily due to the completion of multiple large resales of previously purchased assets in the company's industrial auctions business. As Ross mentioned, this growth reflects the underlying strength of our multiple revenue streams from brokered asset sales, principal auctions, sales commissions and advisory and secured lending fees. Net income increased to $1 million or $0.03 diluted earnings per share for the first quarter of 2021 compared to $38,000 or breakeven diluted earnings per share in the first quarter of 2020. During the quarter, the company realized approximately $276,000 in onetime severance-related costs. The company recorded EBITDA of $1.1 million in the first quarter of 2021 compared to EBITDA of $200,000 in the first quarter of 2020. Adjusted EBITDA was $1.5 million compared to $300,000 in the first quarter of 2020, reflecting the earnings power of our model. At March 31, 2021, the company had aggregate tax net operating loss carryforwards of approximately $78 million, including $62 million of unrestricted net operating tax losses and approximately $16 million of restricted net operating tax losses. Substantially, all of the net operating loss carryforwards expire between 2024 and 2037. Finally, turning to our financial position. The company's balance sheet remains strong with net cash of $15.9 million at March 31, 2021, and stockholders' equity of $30.9 million. With that, we will open up the call for questions. Operator?

[Operator Instructions] And the first question will come from Mark Argento with Lake Street.

So just a couple of questions for you. First off, can you talk about the environment on the industrial side? It seems like maybe some of the energy assets or energy industry is kind of an area you're seeing a lot of activity. But maybe just if you could kind of delve in there a little bit on what you're seeing. And also in terms of pharma in a post-vaccine, are we going to see a lot of additional equipment hit the market? Any kind of incremental color you can provide on that segment, that would be very helpful.

Yes. A lot of our sales in this first half of the year, in Q1, have been from really the large global clients: the Pfizers, the Amgens, the Genentechs on the pharma side; Halliburton on the oil and gas side, because there's this huge push right now not just to sustainability but the life cycle management and to releasing assets that are surplus at a quicker rate than there used to be. And now that people are really kind of back to work and reengaged, there is some catch-up. So they're all playing a little bit of catch-up where when they were really just focused on their core business in the pandemic, there wasn't as much urgency right now -- in the past as there is right now to really kind of catch up in your life cycle management and get these assets out into the marketplace. So most of our business has not been insolvency-related, Mark, and has not been distressed companies so far. It's been really more surplus from large multinationals.

In terms of the financial asset side of the house, still looking for that to pick up potentially later this year. Kind of what gives you that incremental confidence that you're going to see those portfolios start to come to market?

Well, there's one thing I can tell you, the demand from the buyers is really stronger than ever. The prices we're getting are record prices because of the short amount of supply. So there's a big pressure basically from all of the people that are in the business that want to acquire these assets for it to turn. And I'm not the expert in whether or not there's going to be another stimulus check after this one, how much more capital the government is going to push into the economy. But I -- and so I'm not a soothsayer about the future. But I can tell you, at some point, it becomes finite. And at some point, there is less stimulus. At some point -- and it's great for all of us. At some point, we are more back to normal. The pandemic is basically no longer as focal an issue. And we believe then, you're going to see an increase in spending from people that are traveling more, the people that are out, not just working more but spending more. So we think it's inevitable that supply grows. And as I've said over and over again, when supply grows in either segment, we flourish.

Great. And then just the last question, kind of dovetailing with the financial assets. In terms of deploying capital, I'm assuming that there's not as many portfolios out there to be bought. The need for capital, probably not super high. Have you been able to deploy additional capital? And maybe any thoughts around that business.

Yes. We've actually deployed capital in more -- to be honest with you, in more small transactions than any one big, large gating transaction where you see a press release. We've been buying pharma assets literally every week, but smaller amounts, $50,000 here, $200,000 there, from companies that basically don't have enough to focus on an auction and just want a rapid return and want to get the capital in now and the assets out of their physical buildings. So we've been deploying cash but in smaller amounts. There are a couple of large campuses, manufacturing campuses, that are coming for sale towards midyear and the end of the year, and we're excited about the possibility that we could deploy a lot of capital on the industrial side. And we're hopeful. On the lending side, we think the second half of the year we'll be able to put up much more capital than we have in the first half. So we're holding plenty of cash right now. There's no plan to raise more capital. There's a plan to really focus on deploying what we have. We've extended our bank lines and we're in good financial shape.

That was it for me. Good luck. I appreciate the answers there. And hopefully, in this environment, it would be interesting to see how -- especially in the rate environment, how things play out in the second half, but it would be great to see the financial side of the house start to kick in.

We're very hopeful, and we are very optimistic.

The next question will come from Michael Diana with Maxim Group.

Actually, the first thing I was going to ask you is the thing you just talked about, which is some of the bigger industrial assets coming up. You talked about campuses. So is there a possibility there for both principal transactions and for broker transactions? Or is it mainly...

Yes, some of the larger deals, you actually have a better opportunity to deploy capital because when it's a lot of capital -- and I'm not talking about a lot of capital for a multibillion-dollar company, but I'm talking about a lot of capital for the industrial liquidation business, these $10 million, $20 million, $30 million, $40 million purchases, where you're buying a lot of tangible assets, a lot of different manufacturing plants, a lot of times, they want the assurance of capital upfront. And so they're not all pure acquisitions. There's an opportunity for equity partnership where we will go in with one of these large national companies and tell them, "We want to share the risk with you. We think these assets are worth $40 million. We realize that's a large number for you to put at risk in a liquidation scenario. We'll put up $20 million as your partner, and we'll share the upside." So we see a couple of potential transactions we're hopeful with this year. We can't report. We don't have these deals yet. We don't even know if they're going to come to fruition, but we do see that there's going to be some opportunities in our industry.

Okay. Great. And just I think you were telling us that on the industrial side, the owners of the assets are now, for environmental and other reasons, almost more eager to cycle the assets. But on the financial asset side, besides the fact that maybe there are fewer bad loans because of stimulus and all, could you talk about the reluctance, if there is reluctance, on the part of the owners to sell?

Yes. That's kind of coming to an end as we move through the pandemic, as people are vaccinated, as people are back to work. There was a huge feeling that nobody wanted to be the Grim Reaper in the middle of the most devastating part of the pandemic and sell assets to collection agencies that were going to put pressure on people that were home, that weren't working, that were laid off. There was also, at the same time, a real uncertainty at that point in time over how long this would last, over when we would get back to normal. That's changing now, and we're seeing a lot more people starting to plan to release these assets now. And we are really anticipating a bigger second half of the year.

[Operator Instructions] Our next question will come from Michael Shlisky with Colliers Securities.

This is Jacob Parsons on the line for Mike Shlisky today. One of my questions here is, kind of looking ahead, are there going to be any more kind of bigger non health care-related auction going forward compared to the past? Any color on that?

So a big part of our business is in the pharma sector right now. In that sector, you have ongoing sales on a monthly basis for clients like Pfizer and Amgen that use us on a regular basis. We have a lot of visibility there because we do sales every month. I think we're over our 100th sale at Pfizer. What we don't have visibility in is when new companies that are not current clients, or existing companies that do not contract with us monthly, do a plant closure and/or instead of doing a plant closure, they do a massive upgrade. We do see that there are several companies now that have announced big purchases and big upgrades. Big upgrades create redundant assets. And so there will be pharma sales as they upgrade. The other unknown that creates a lot of surplus assets for the auction is M&A. So as the market matures again and comes back again to a more active market where people are kind of not holding back on their business plans, we think there's going to be an increase in M&A over the next 2 years. And when that happens, many of these companies are not buying the tangible physical manufacturing assets. They're buying the patents. They're buying the intellectual assets. They're buying the brand. They're buying the scientists, but they don't need the excess manufacturing equipment. So we think at least half our business could be in the biopharma side. But we're also seeing an uptick in aerospace auctions. We're seeing an uptick in some of the food auctions. So we think that we'll have a pretty diverse supply at least over the next year, 1.5 years.

Got it. That's very informative. I appreciate that. And just kind of one last question here. I know that you're still looking for some of these loosenings in the charge-offs and whatnot in the coming year in 2021. But given that credit card balances have been declining, they saw a large quarterly decline here just in April. Do you think that consumers with the stimulus checks are paying off their credit cards? Do you think there are going to be any headwinds with that kind of market? Or are you still pretty confident?

I think as long as they get stimulus checks and as long as they're not spending at the rate that they were spending pre-pandemic when more people were at home, more people aren't out, that there is a time lag before credit card sales escalate. But I think that there's also other products that are going to more rapidly grow. I think that you saw a huge amount of capital going into the buy now, pay later marketplace. And there is going to be some fallout from that, like there is in any kind of ALT alternative lending. So we think that could have an earlier curve. I think now that people are more active and really back trying to work and get going again, you're going to see an increase in peer-to-peer lending again. And as that increases, there will be some level of fallout. So we think that there's a lot of different products that we can address. And we think that, at least in our mind, we're looking at much more strength in Q3 and Q4. And if there is a little bit of holdback there, we're very bullish on next year. And we think that eventually, the supply levels are going to get to the point where we're going to be incredibly active.

So this will conclude our question-and-answer session. And I would like to turn the conference back over to Mr. Ross Dove for any closing remarks. Please go ahead.

So I want to thank everybody for calling in, for listening for showing their continued interest in the company. We are really pleased with the fact that we did so well in the first quarter compared to what we did last year in the same quarter, which we think bodes well for a promising year. We think that our pipeline will grow throughout the year and that we're going to get stronger in the second half of the year than we were going to be in the first half. So we're feeling good about the company. The company, I can tell you, has high morale and is very positive in its feelings about its future and thankful for you guys all supporting us. Everybody, have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.