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

Good day, ladies and gentlemen, and welcome to the Heritage Global Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to John Nesbett of IMS Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. Before we begin, I'd like to remind everyone that this conference call contains forward-looking statements based on 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 conference call. For more details on facts 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 second quarter 2021 earnings conference call. We will start today's call with Brian Cobb, VP of Finance, who will discuss the financial performance for the quarter. Brian, you're up.

Thanks, Ross. The company achieved operating income of $73,000 for the second quarter of 2021 compared to operating income of $1 million in the second quarter of 2020. This decline was primarily due to delayed asset supply, resulting in lower volumes across both our industrial and financial asset divisions. For the 6 months ended June 30 2021, the company achieved an operating income of $1.1 million, consistent with operating income for the 6 months ended June 30, 2020. Net income decreased to $600,000 or $0.02 diluted earnings per share for the second quarter of 2021 compared to $2 million or $0.07 diluted earnings per share in the second quarter of 2020. Net income year-to-date was $1.6 million compared to net income of $2.1 million for the 6 months ended June 30, 2020. The company recorded EBITDA of $200,000 in the second quarter of 2021 compared to EBITDA of $1.1 million in the second quarter of 2020. Adjusted EBITDA was $200,000 compared to $1.2 million in the second quarter of 2020. EBITDA for the 6 months ended June 30, 2021, was $1.3 million, consistent with the prior year period. Adjusted EBITDA for the 6 months ended June 30, 2021, was $1.7 million compared to $1.5 million for the prior year period. At June 30, 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. Our balance sheet remains strong with net working capital of $12.6 million in stockholders' equity of $31 million as of June 30, 2021. With that, I will now turn the call back over to Ross Dove.

Thank you, Brian, for the overview of the quarter. I'd like to add some color to the achievements, not always as evident in 90-day results. Hopefully, it will reflect where we're going in each business segment and demonstrate why we remain excited about very promising growth opportunities over the next 24 months. Our financial and industrial asset divisions have seen a contraction in supply and also increased pricing. With both divisions finding lower asset flow, it explains lower income for the quarter. Importantly, we have stayed very active in relation to the competition and gained market share in both business segments. As supply is now returning in both financial and industrial centers, we expect a very positive increase in asset flow and our profits to follow. Let me start with the 2 financial assets revenue streams. NLEX is a leading broker of charge-off loans and Heritage Global Capital, which is a niche lender to purchasers of charge-offs from the financial institutions. NLEX has faced true headwinds in the current cycle with consumer spending delay and stimulate checks properly and successfully used to retire debt. As a result, prices have reached record levels while the supply of assets to sell has reached record lows. The bright side looking forward is we see a large uptick in consumer spending, over $27 billion increased this quarter alone. To us, it's really simply follow funny as has been proven time and again that the future of our supply correlates to rising spending. Clearly, this also builds well for Heritage Global Capital will have increased flow as our onboarded, vetted and qualified borrower base, who is already showing increased activity. Moving to our industrial asset sector. The pandemic actually helped prices of quality used manufacturing and processing equipment, primarily due to supply chain delays on new equipment orders. That said, many closed plants have taken a wait-and-see approach, choosing to mothball plants versus sell as they wait to address supply when there is much more clarity in the market. The bright side is in talking with clients in the planning stages, we anticipate an uptick in surplus dispositions going forward. This is coupled with large enterprises pacing a far greater ESG book on surplus being recycled and repurposed to avoid tons of landfills and rapidly deploying 0 carbon initiatives. Going forward, we're going to remain highly disciplined to continue our track record of consecutive quarterly profits while always thinking forward to ensure we have the growth drivers in place to execute and build a world-class enterprise growing in value continue. We're here to answer any questions, and thank you all for your time.

[Operator Instructions] Our first question comes from the line of Mark Argento with Lake Street.

Ross, just wanted to maybe dig in a little bit on kind of additional asset flows. It sounds like you're starting to see a pickup in activity here in the second half already. Is there any industries that you can point to that are picking their head up a little bit? Maybe give us a little more color on what's going on in the market.

Yes. Let me do it twofold. First, on the financial asset side, and then second, on the industrial side, where I'm proud to say we had a killer auction today. So on the financial side, there was a tremendous amount of capital that did go into buy now, pay later. It was really the only kind of growing sector during this really kind of hiatus and consumer spending for kind of logical reasons. The first reason is over the last year, a lot of people were staying home and a lot of people were purchasing via the Internet. And buy now, pay later was really very much a proponent of all of that. So we're now coming into what I'll call some of the issues with the pay later part. The beginning part did not create supply for us because, as you know, our marketplace is not performing loans, it's nonperforming loans. So there is a cycle between the increase in consumer spending and when those loans become a certain portion of the charge-offs. So we're just starting to see growth there, and we're starting to see that a lot of the clients that we've signed up were basically looking forward, and we onboarded them, but they're just beginning their activity. So you're going to see a much better Q3 and hopefully, by Q4, we really are pretty convinced back to normalized flows. So I think that it was not an easy 90 days, but I think it's 90 days we got through staying profitable. And at least in financial assets, we're very bullish on this year. And on lip side, on basically the industrial assets, there really hasn't been any insolvency business for the last year to speak of, which is a part of our business. There have been Chapter 11 filings, but during kind of this pandemic hold off, nobody was sure they wanted to dispose the plant. Hold on. Can you hear me?

Yes.

I was getting closed on my phone, I apologize. So there is, we believe, very positive growth that I almost want to say is starting now. They're enough Mark?

Yes. Back on the financial side, I know you guys have -- I think you guys have brokered buy now, pay later portfolio. I think it was a $25 million book, if I'm not mistaken. Is that the same customer? Or do you get multiple buy now, pay later partners, customers that you're going to work with?

The only difficulty is it's very easy on the investor side to tell you who our client is. On the financial side, they many, many times, want to remain anonymous for obvious reasons. So we have several clients, but we generally speaking, only give their names to the registered buyer sort of prequalified? But the answer is that we believe it's going to be a big growth part of our business.

Great. And then historically, when you -- in past cycles when you see credit, we're starting to see consumer credit, starting to elevate and granted, you got the offset with the stimulus checks. But historically, when you see consumer -- consumers' balance sheet starting to get stretched out a little bit, how long does it typically take for that to manifest itself in NPL portfolios being generated and put the market?

So the cycle is different for each client. It's not so much different and when it becomes a charge-off. It's different on when they want to monetize it. With some clients, we have forward flows and they're monetizing their charge-offs monthly. Some clients want to wait until there's a certain buildup and they have a large enough portfolio to make it more attractive. So from -- so really anywhere from 90 days to 6 months, even 7 months sometimes before they actually bring the product to market. So that's why I'm saying Q3 will be stronger, but it will be building through Q3, Q4 and Q1 of next year.

On the financial asset side?

Right.

Great. Thanks, Ross. Appreciate the color. Good luck.

Thank you, Mark.

[Operator Instructions] Our next question comes from the line of Michael Diana with Maxim Group.

I was very interested in the statement in the release and you also said in your prepared remarks about gaining market share. Without naming names, which you just said is sometimes not possible. Could you just give us an indication of why are you sinking?

I can give you a really good example. Gaining market share is not always gaining market share in this sector you're strong in. So our strongest sector has been pharma, and we've had a very strong growth there, but we've gained market share in the food processing. We did more food processing auctions recently. They were small, but we've signed up very large multinational companies in that segment. So we're looking at growth there. We've just really begun to make headway in the oilfield sector. And 1 of the largest clients in the world has now used us 4x. If you look at our website, you can see we have an auction of tankers that's a pretty large auction for us next week. And 1.5 years ago, you wouldn't have saw that. You wouldn't have saw us making a real big market in that sector. So we've gained market share by expanding not really geographic region, but industrial segments, Michael. So once all the segments are robust at once, you can expect that the headwinds that we saw this quarter really quickly turn into tailwinds.

Okay. That's great. And on the financial side, when you were discussing that, I think you said you had some clients. You said, you onboarded some clients. So are those your sort of usual suspects, which I understand you have the largest market share, but -- or do you have no one on this as well?

It's really we went out and we onboarded not just new sellers, but we onboarded who we think are going to be the top 10 or 15 borrowers that are private companies that basically need capital in order to grow. And all of them have been in the planning stages for what they think is going to be exponential growth in the marketplace on the release of NPLs. So during a time when there wasn't a lot of volume, we put a lot of energy into basically going through the stringent process of qualifying them as borrowers, vetting them, going out and seeing their operations, making sure that they're SOX compliant. And these are people we've known for years. But these are people we now have on boarded. And some of these people, we've gained market share because they've left other institutions to now start using us as the market picks up. So we think that Heritage Global Capital is the best poised it's been since inception by far.

Okay. So you're saying both of your subsectors, if you will, of financial are going to pick up the brokering, the loans from sellers and then financing the buyers?

Yes, I think that the financing is going to pick up dramatically because a lot of what we've been selling now has been selling to public companies and larger companies that do not really need the use of capital. They have their own proceeds. But as the market picks up, the slightly smaller players that are aggressive, but at the same time can't always compete with the large guys on every transaction with more volume, they'll buy more. And as they buy more, we definitely succeed with basically growing our lending platform.

That does conclude the question-and-answer session. I'll turn it back to management for closing remarks.

So this is Ross, the CEO. I'd like to thank everybody for listening. I've tried for the last 2 or 3 years to let everybody know that we don't view this as a 90-day business. We view this by the year, and I'm very comfortable that all of you that can look at it that way will see we had a lot of progress in the quarter that isn't always visible, but it will show over time is how the people inside here strongly feel. So thank you very much for your commitment, and thank you for listening.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.