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

Good day, and welcome to the iAccess Alpha Virtual Best Ideas Summer Investment Conference 2025. The next presenting company is Heritage Global Inc. [Operator Instructions]. I'd now like to turn the floor over to today's host, Ross Dove, CEO at Heritage Global Inc. Ross, the floor is yours.

Thank you very much. So we're going to do this in a question-and-answer format, where Lake Street is committed to ask me some very difficult questions that I'm going to give some very simple answers to. So before Mark takes over and ask me the questions, I thought I'd take just a few seconds or a few minutes to give you a real fast, quick understanding for those of you not familiar with Heritage Global. So Heritage Global is a leader in valuing and monetizing both industrial assets and financial assets, both healthy assets and sometimes distressed assets. Real quickly on the financial asset side, we sell primarily charged-off loans for everybody from money center banks to all the new fintech lenders, the peer-to-peer lenders, the buy now pay lenders, et cetera, and obviously, clearly growing business right now as we've reached all-time high consumer debt. I'll let Mark kind of drill down later in the questions there, but that's one side of the business. That business also lends to people that buy nonperforming charge to off consumer debt. The other side of our business is the legacy business that goes back all the way to my grandfather's Day, that's now run by my brothers son and my sons, et cetera, that's literally almost 7 decades old. That business auctions off, machinery and equipment, industrial assets in about 20 different vertical sectors worldwide, everything from pharma equipment to core industrial equipment like metalworking, plastics, et cetera, to high-tech equipment like semiconductor to earthmoving equipment, et cetera. So pretty much every kind of industrial manufacturing equipment with some transportation assets also worldwide. We do it from major corporations like Pfizer, like an Amgen, like a Halliburton, like a Boeing, and we've had a long history of working for the insolvency courts. We're the auctioneer who did the auctions for Solyndra, which was the solar collapse, et cetera. That business does hundreds of auctions a year. So those are the 2 businesses combined. We have auxiliary companies and a valuation company of industrial assets, a trading company of biotech, surplus assets, et cetera. I won't go any further because I don't want to steal Mark's thunder when he's ready to come up with some really salient important questions. I'll just tell you quickly, the company has been profitable for a very long time and tends to be profitable for a very long time going forward, trades on the NASDAQ about an $80 million market cap, which I think is screaming to grow from there. We're looking at making hopefully a couple of million a quarter going forward. We have in the past and right now, times are good for us. We're very active and very busy. And I'll turn it over to Mark now. Mark, so introduce yourself and let the questions fly.

Thanks, Ross. Good afternoon, everybody. Mark Argento, I'm one of the senior analysts at Lake Street Capital Markets, have covered Heritage Global for a number of years and was invited here to help moderate a fireside chat with Ross and the rest of the team at Heritage Global. So I prepared a couple -- a handful of questions. Just kind of walking through the story. First, though, I thought it would be helpful to kind of frame up. Ross, how you're thinking about where we are from kind of a macro and kind of market dynamic perspective? I know in Q1, it sounded, I think you even referred to it as a tale of 2 halves in terms of the quarter, things seem to have picked up a little bit as the quarter went on. Can you touch on a little bit of kind of where we are and the type of environment we're in? How you guys have normally fared in that type of environment? And where you see the business kind of trending currently?

Yes. There was a feeling at the beginning of the year that we were going to have a really good Q1 based upon what's happened in the last 18 months with really the built-up amount of assets on both the financial side and the industrial side. But ironically, it kind of started slow with a lot of geopolitical questions and kind of a wait-and-see mode. But about halfway through the quarter, the spikes opened up like we anticipated, we thought they would when the year started and especially in financial assets where it really grew in the second half of the quarter. What happened is we've just seen a record amount of consumer debt, not just at the fintech companies, but at the FDIC chartered institutions in not just credit cards, but across the board in auto loans, et cetera, and also a growing difficulty in distress and increased buy-now-pay-later loans. So we added clients in the second half and the clients that we're basically taking a look at the analysis in the first half of the quarter, all went to market. They've continued going to market. So we didn't see just a good March, we saw a very strong April, we're seeing a very strong May right now. And we think that we've hit kind of a sweet spot in financial assets where we think quarter after quarter, we're going to stay very busy right now with the addition of the new clients and most of our existing portfolio clients using us every quarter. So the brokerage is very strong there. On the specialty lending component, we have a lot of people are underwriting now and there's activity over there, too. If you flash to the industrial assets, that's a business where we basically trail what happens in the past. So over the last 18 months, we saw a big increase announced in corporate bankruptcy filings, but the corporate bankruptcy filing increase was all in Chapter 11. Chapter 11, as you know, are ongoing bankruptcies, where there is a hope for the company to reemerge, hope for the company to sell, hope for the company to restructure, and they don't always turn into Chapter 7 liquidations which produced 363 sales and asset sales for people like us who sell the hard tangible assets, not the enterprises. That business is strong now. We've done some large bankruptcies and we're working on the pipeline of even more of them. And at the same time, we're seeing more large corporations really identify surplus than we have in the past. Some of that is with the advent of AI helping them find surplus, and some of that is just a push on the back end of the supply chain, but we've literally got an auction in almost every day over the next 3 months. So feeling good there too, Mark. So I think our revenue streams are strong Q2, Q3 and Q4 of this year, if that's a fair quick answer.

I think you knocked out about half of my questions that I had teed up here. So anything is duplicative, my apologies here. But I appreciate the setup there. Just kind of getting down into it a little more financial assets division. It seems like that's been flowed a little bit, just given where kind of consumer credit is, it seemed like that business, you would think would kind of continue to grow at fairly robust levels. What's the dynamic there that the ebb and the flow in terms of assets coming to market? And maybe you could drill down to that a little bit more for us.

So people look sometimes too early in the equation to try to estimate where we're going to go because what they're looking at is they're looking at nonperforming loans rather than looking at nonperforming loans that turn into charge-offs. So if you look at the equation, when somebody stops paying on a consumer loan, it doesn't immediately flow into our marketplaces. The first thing that happens is they're attempting to collect 100% of the money and which is not us, we're not really the performing loan guy. So if they do get it performing or restructured, it often doesn't go to us. So there's a trailing time where they're trying to work with the client before they reach the point of our marketplace. And our marketplace is the brokerage of the charge-off once the loan has really been fully written off. So we're the guys that sell stuff for $0.05, $0.10, $0.15 on the dollar, not the guys that are on the consumer side. We sell real estate loans for higher prices, obviously, because of the collateral. But on the financial side, we're basically kind of the last final place that we can liquidate an asset, while the asset still has tertiary value. So a lot of what happened in the last 1.5 years is now starting to become asset flow. So that's why I would say on financial assets, the best is yet to come for us. It's going to take another 24 months to work through the existing growth in the fact that we've got $1 trillion of credit card debt. A certain amount of that credit card debt does convert to charge-offs. A certain amount of the subprime auto debt does convert to charge-offs. So we think there's a 24-month at least building run there that is not going to help correct without the sale of the assets.

All right. That's helpful. And just -- I know one of the -- I think you noted maybe it was on the last earnings call. But part of the issue also is this a function of kind of market pricing of these assets, and there's a lot of dollars looking to buy these charged-off loans, they end up bidding up the price. And then at some point in time, the returns aren't there and things slow down a little. How do you see asset pricing right now? Is it the kind of off of its peaks and remaining there? How important is that to the equation?

So prices have pretty much stabilized. The huge run-up in the prices was pandemic driven. And it was really driven by the fact that there was not enough supply to go around. So the people that needed to have assets apply were forced in a supply and demand marketplace to -- I won't want to say overpay, but in essence, it did turn out in many instances to overpay compared to the value they're getting now when there's a robust amount of sellers again. So at this point in time, the prices have dropped down to where there's very competitive bidding. A lot of the people that held back during the pandemic that couldn't compete, have now reentered the market, the people that were dominated during the pandemic. There's enough supply that they don't have to put price pressure on to pay such a huge premium for the assets. So we look at it as a healthy normalized market now where we think the people that are buying these loans are going to realize the right type of profit and the people that's selling them are going to get kind of expected returns that are more predictable than they were during the pandemic, where the sellers were getting record prices, but the buyers were struggling to collect. So I would say we've kind of hit the sweet spot of a normalized healthy market now, and I think it should stay there, Mark.

Great. I want to move over to the industrial asset side of the house. That business also kind of similarly seemed a little bit of ebb and flow, but in particular, maybe got a little stronger as the quarter went on in Q1 in particular. Lots going on with tariffs, domestic, international manufacturing, how do you see the industrial assets business, given kind of some of like more global macro environment there, both with tariffs and then just the regular business cycles?

So the tariff announcements have really been pretty much back and forth, back and forth kind of a yoyo up and down to where people really haven't kind of handle on exactly where they're going to wind up and end up. So there is some initial reactions to them. Once it's really kind of comes to fruition and we see that there's going to be some steady adjustment in tariffs, they're going to last a year or 18 months, 2 years. You're going to see what the impact will be, and clearly, looking historically and what the impact is going to be that at the end of the day, in our business, we're primarily selling used equipment were impacted tremendously by people having a choice between used equipment and new equipment. And if that choice becomes that it's very difficult in the supply chain to get new equipment because of the time lags in the supply chain on getting it, which can happen because tariffs really slow down and plug down the supply chain. And so equipment that you're buying that you get delivered in 3 months, become 6 months or 9 months, it creates a premium on used equipment and a bigger desire to buy used equipment. So our auctions become more popular when the choice isn't as easy between the new and used equipment. So that hasn't happened yet, it happened more during the pandemic. But if the tariffs really come into play and it slows down the supply chain and international ingress and egress that international ingress and egress will really clog things up and improve the sale of used equipment. But right now, it's very steady. We're getting not necessarily record numbers that are auctions, but large crowds in active bidding. So I think it can only get busier, not less busy. And there is an increased right now group of people that used to only buy new that now are buying used and refurbed assets, it's just become more acceptable in the marketplace now.

Have you seen prices migrated up a little bit as you've seen more demand in buying used equipment? Or is that something that you can track or get a pulse on?

What we've really noticed is that there is really kind of 2 kinds of used equipment. There's a very late model equipment that will get -- if biotech company, for instance, was venture-funded, bought all new equipment and only lasted 18 months, then you're going to get tremendous amount of bidding and very aggressive bidding because the equipment is really new and late-model equipment. We struggle when the equipment gets older now that there's a big influx of people that want to buy a very late model, nearly new equipment and less people looking to buy older equipment. So the newer, the more modern the plant is or the factory is or the equipment is, the higher the attendance at the auction and the more aggressive the buyers are.

Great. That's helpful. Maybe you could touch a little bit on the kind of real estate exposure you guys have right now. I know from time to time that you either buy or enter into joint ventures and buy actual buildings or plants. Where is the portfolio currently? Where are you in terms of working through any inventory there?

So there is one deal that is still basically in the process of where we still are an owner of the deal, and we're working through the deal, we don't anticipate an impact in significant -- any impact in [indiscernible] revenue this year, we anticipate that the profits that we hope will come next year. So there's nothing in our forecast that would show anything this year on that transaction, it's moving along as promised. But as you know, those things are not as quick to monetize as when there isn't a building involved. On that front, though, on the prospecting front, there were several deals, not necessarily in the pharma sector, but across multiple sectors that are out there right now, where there are transactions that could involve the building and the equipment. They exist in food processing, they exist in cannabis, they also exist in the pharma, et cetera. So there is a pipeline of potential deals that could have been announced that us and others are aware of. So while we're trying to get another one done this year, the ultimate goal is maybe not to get one done, we monetize this year. But to get one done that we can start working on this year. So the goal is in the next 6 months to at least find one more.

Great. And just for clarity, that the first existing piece of property or assets. I'm assuming that's the Huntsville properties.

Yes. That's the Huntsville properties. We love Alabama.

Got it. All right. So I want to make sure we're clear and made it clear for the audience. Just moving on quickly, and I know we're limited in time here. And if there are any questions from the audience feel free...

They told me -- they said you have plenty of time and nothing else to do all day. So come on...

All right. I'll just keep going. Obviously, especially lending and the portfolio status there. It looks like you guys went on accrual on one of the portfolios a while ago. Could you give us an update as to how things are going there in terms of recouping your -- the capital outlay? What new tactics or other types of approaches that you take to try to get those portfolios to perform?

So on the M&A front, I've kind of stated that our goal was to do not just 1 but multiple M&A deals over the next 3 years, kind of half in industrial and half in financial. We've been really working diligently to get to a place where we can get something done this year. The goal at the beginning of the year was at least get something done this year. We have NDAs in place now where we're actively talking to 4 different entities. So nothing to announce other than the fact that we're not in the -- we're in the early stages on some deals, but we're now in a more advanced stage on several deals where we've signed NDAs. We're giving them the information on us, which is not hard to find because we're public. They're primarily private companies. So it takes a little longer to get and digest the information on them. But from a strategic analytical fit, I'm very excited about what I think they could produce. And that I think that getting those companies on board at HG would be a win for them, a win for us. And I think preliminarily, they're very good cultural fit. So it would give us an A for progress, but a C for expediting how fast it gets done. So in between an A and a C makes a B, Mark.

Just along those lines, are we thinking financial asset businesses, industrial asset business a little above. Any kind of one area that you're focused a little more on?

I have focus on both, maybe the industrial asset ones are a little further along than the financial asset ones. But other than a little farther along, we have an NDA out on each category.

Got it. And then just pivoting back on the accrual portfolio of lending portfolio. Any updates there in terms of -- I think last quarter or maybe a quarter -- a couple of quarters ago, you guys talked about maybe using litigation and getting into the court systems in terms of being able to help along some of the portfolio recoveries. Any updates on those efforts or any other efforts?

Yes. We're going to work hard on -- it's working is what I can tell you, but we're going to work hard over the next remainder of this year really getting all the data together to really have a full year's analytics on how well it's working so that sometime in Q1, we'll be able to really out at 1 of our earnings releases go through in depth in a really kind of micro not a macro sense, exactly how we think we've enhanced the collection operations with the numbers. But just from a preliminary outlook, while it's still early, everything has improved since we basically went to legal. And we're matching, if not beating the early forecast across the board on the legal collections. So we're very optimistic that our plan was a smart plan that's being well executed.

Great. Just one quick one on Tech. Obviously, AI is everywhere now. I'm sure it's found its way into your business to a certain degree. Do you have any specific use cases that you guys have been able to deploy AI? Or how are you thinking about other types of AI or the machine learning technologies relative to your business?

Yes. I'm not sure if you're aware, Ross isn't actually here now. You're talking to an AI robot, Mark. Ross is right.

The answer should be good then.

Ross in Vegas, playing poker now, Mark. But speaking in his behalf is an AI robot, I'll kind of -- I'll answer for him if that's fair, okay? So they're like -- some major game changers that are going to happen in the auction industry that are not that different major game changers that may be happening in investment banking or any other or commercial real estate or any other kind of service industry. But it's a little bit different here, and I'll give you a little bit of the difference. So externally here, what's happening is the manufacturers are able to get better visibility on when they're going to have surplus asset, what asset they're not going to be needing in the future. So the back end of the supply chain has been the most ignored and of the supply chain, everybody focused on the front end on the purchasing and in the savings there. And it was hard to focus on the back end of the predictability of the useful life of the asset versus the need for the asset versus the orders coming in that, that asset produced. So AI has really advanced the capability for manufacturers to really go in and predict what asset they won't need next quarter. So you're seeing more assets come to market earlier, which brings a higher residual price and it's a value to the seller and the buyer. So that will be number one. AI across the board is revolutionizing sale prospecting, not just in our industry, but in all industries where it is giving us what industry could have the most surplus, what industry could have the most surplus, it's needed in the most countries. So it's really helped us there with the sales process. And the flip side of that is then it helps with designing your auctions with a heightened bidding strategy because the more AI information you have, the more your bidding strategies work on when assets are going to be valuable, where you should be marketing them, what country could be needing them. And so in the nature of information, the whole AI shop is going to kind of reinvigorate just enhancing knowledge across the board. So we're not a huge inventor of AI, but in the end, I think we're going to be a huge user of AI.

That's helpful. I know we're kind of pushing maybe even over time here, but I'll add one last one. I know you talked a little bit about M&A, and that's an area that you guys are focused on. In terms of overall capital allocation strategy, I know you have -- you bought back your stock, you're obviously looking at M&A. I think the stock is trading here at, we'll call it, 6-ish times on an EV-to-EBITDA basis for the 2025 numbers, obviously, looking out maybe even less than that on a forward basis. How do you guys and the board think about capital allocation, buying your stock back versus buying other businesses? And do these acquisitions or M&A that you're focused on, that they have to be accretive right out of the gate? Any kind of thinking about capital allocation, I think that would be a great way to wrap up this fireside.

Right. So I don't want to speak for the entire board because, obviously, everyone has different opinions and different thoughts at different times. So speaking for myself, I think that at the end of the day, nothing as important is focusing on growing the company and growing the company. Nothing as important as EPS. So -- yes, there should be a lot of focus on growing the top line, there should be focus on NOI. But in the end of the day, to me, it's all about earnings per share. So if you're really thinking about earnings per share, then you're thinking about both things at once, you're thinking about how to grow your profits and also how to have less outstanding shares. Because if you merge those 2 things together, you're driving for the ultimate gauge and what a great company is and a great company as a company driven to EPS. So any company driven to EPS as their ultimate designated goal should be weighing always a buyback program against M&A, against organic de novo growth. And putting all those factors on the board on a monthly basis and looking at capital allocation kind of what's going to drive the ultimate endgame of EPS. So we're always looking at them both, we're always measuring them both. And to me, long term, you have to have enough shares outstanding to make the company an attractive company because people feel enough float in that people feel they own a company that has enough availability. And at the same time, you don't want to have too many shares outstanding. But the primary driver has got to be growing the enterprise. Growing the enterprise has got to be above all the ultimate goal you're seeking at all times. So if there's always a choice of where to use the capital. My choice of using the capital will always be either M&A or I believe, will be accretive over a reasonable period of time and/or organic growth of hiring the best people and building out the sectors and the buyback program being tertiary to that. So that's kind of where we stand. And we want this company to be viewed as a growth company. A company view as a growth company is not a company who overemphasizes buybacks over building the enterprise. So a growth company is a company that is not afraid of buybacks, it embraces buybacks when they think their stock is undervalued, but also believes the greatest way to raise the value of the stock is to outperform the marketplace as an enterprise.

Well put. Thanks for laying that out.

I didn't do that. My AI robot partner did that for me.

AI Ross is on it.

Yes, it is good.

So I think that's probably a natural pause here. I don't know if there are any other questions, but I think that's probably...

I'm told that I have questions. I don't know if there's a moderator who could read me to questions, but I'm told that I have questions. If somebody's handing me to questions now. Hold on. Are they premiere for Mark? Here is the question. I have a question from Maxim Group that wants to know what's going on with BNPL. So the answer to that question would be has been steadily growing, Keith. The reason is, obviously, it's the newest one. We've had a 30-year track record of selling credit cards, selling auto paper and other consumer paper. 30 years ago, NPL did not exist. So the NPL has been growing steadily as the companies are growing, they can't grow without simultaneously growing the portfolio of people that aren't paying. So they've now realized over some period of time that they have to have a partner in the marketplace helping them address their nonperforming loans as their overall portfolios are growing. So BNPL is very successful. It's a growing entity. You see constantly new people entering in the existing people growing. But as they grow, the good news for us is that part of their growth will produce more asset flow. I see that the second question is coming from where from Tom Smith. What competitive advantages allow heritage to consistently win bids with a financial institution. So if you're talking about a financial institution on the financial asset side, NLEX is over a quarter century old, and there's a significant barrier to entry there that the sellers of the assets care very much about protecting the personal property information of everybody basically in their portfolio. NLEX has Vault, NLEX, high security. Tom Ledwith, who runs compliance there is literally an industry and international leader in the kind of protecting of the privacy information, so they're very comfortable there. NLEX went out and spent substantial time vetting the people that sell the assets to so that the institutions are very comfortable that when they give us the portfolios, we're going to sell them safely and properly to qualified buyers. So there's a significant barrier of entry that we've been able to really define ourselves as number one in that center. What is that? I think we're running out of time. So we're running out of time now. So if anybody has any other questions, we're around, we're giving multiple presentations tomorrow if you want to listen to those presentations and ask questions afterwards, we would welcome your attendance. Thank you all for paying attention today and a special thanks to Mark Argento from Lake Street for coming on in and helping us out and being a great banker to us and a great partner. So thank you, Mark, and thank you all for listening.

Thank you.

Thank you. That concludes Heritage Global and presentation. You may now disconnect. please consult the conference agenda for the next presenting company.