Heritage Global Inc. (NASDAQ:HGBL) Q4 2023 Earnings Call Transcript
Heritage Global Inc. (NASDAQ:HGBL) Q4 2023 Earnings Call Transcript March 14, 2024
Heritage Global Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, greetings, and welcome to the Heritage Global Fourth Quarter and Year-End 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett, with IMS Investor Relations. Please go ahead.
John Nesbett: Thank you, and good afternoon, everyone. Before we begin, I’d 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?
Ross Dove : Thank you, John. Good evening, and thank you all for joining. This is a fun one. Even as a perennial optimist, this quarter exceeded my expectation, with us flowing by the $4 million goal for Q4, with $4.6 million in operating income. It brought our annual NOI past $14 million. I will soon turn the call over to Brian in a moment to give you the details in depth, then I'll come back and try to add some color on how and why and where we're headed. When I was 12, I brought home a not-so-typical straight a report card. My mother, Zelda, sat at the kitchen table. She opened it up and said, now, kid, can you just keep doing this? Well, that's my goal here at Heritage Global. Thank you all. Brian, you're up.
Brian Cobb : Thank you, Ross, and welcome again to those tuning in. We greatly appreciate your ongoing support. Also, I want to thank the entire Heritage team for an outstanding year. I'm pleased to announce that we recorded full year 2023 operating income of $14.3 million. This was another strong quarter and year for Heritage Global as we saw continued progress across the business. We're continuing to see positive trends in our Industrial Assets division, with heightened macroeconomic pressures driving continued progress in our auction business. In our Core Auction and Resale segments, we saw growth year-over-year in the volume of transactions, with both segments increasing their ability to work in tandem to source used assets, approve resale and win auction contracts.
The overall division's operating income was $7.8 million, including no earnings from joint ventures involving real estate as compared to $9.2 million during 2022, which included approximately $5.1 million of operating income from joint ventures involving a real estate component. While the auction business tends to be a bit lumpier quarter-to-quarter, our pipeline remains strong and we anticipate continued momentum into 2024. Our Financial Assets division reported a strong quarter as record consumer debt has led to higher volumes of charged-off credit cards and non-performing loans. And as a result, operating income for the division was up 43% and 83% for the fourth quarter and full year ended December 31, 2023, respectively, when compared to the prior year period.
This year's performance within the Financial Assets division was primarily driven by our brokerage segment with operating income of $8.9 million, an increase of $4.2 million or 90% as this segment has expanded its number of clients and is more directly correlated with the increase in volume of charged-off and non-performing loans on the market. Our Specialty Lending segment also has made good progress in 2023, reaching a gross investment balance in notes receivable of $38.4 million, an increase of $16.3 million as compared to the prior year. The segment contributed operating income of approximately $1.9 million for the full year, up 54% when compared to 2022. And as a reminder, the operating income from our Lending segment includes the effect of new accounting guidance, which requires companies to estimate and reserve for their current expected credit losses.
The segment's provision for credit losses during the year was roughly $1.2 million, offsetting both its notes receivable and equity method investment balances. As mentioned in the last call, we increased the company's non-cash credit loss reserve in the third quarter due to ongoing restructuring efforts with our largest borrower and decline collection rates industry-wide. We reached an agreement with this borrower and expect to recoup the loan, albeit over a potentially longer time period than previously expected. In the fourth quarter, we did not materially increase our credit loss reserve and sitting here today, we generally don't see elevated risk from our other borrowers, but we continue to diligently monitor the collection rates of our borrowers and industry-wide.
Turning to the financial results. Consolidated operating income was $4.6 million in the fourth quarter compared to $3.1 million in the fourth quarter of 2022. For the quarter, we reported adjusted EBITDA of $4.9 million compared to $3.4 million in the prior year period. Based on the past several years of taxable income and projected operating results for the next 5 years, we determined that it is more likely than not that we will utilize a significant portion of our net operating loss carryforwards and thus released an additional $2.2 million of our valuation allowance against our deferred tax assets as compared to $7.1 million during the fourth quarter of 2022. As a result, during the fourth quarter of 2023, we recognized an income tax benefit of $0.4 million compared to an income tax benefit of $6.8 million a year ago.
Net income was $4.9 million or $0.13 per diluted share compared to net income of $10 million or $0.27 per diluted share in the fourth quarter of 2022. The decrease year-over-year was primarily driven by reduced relief of the income tax valuation allowance as previously stated, offset by improved operational performance. Our balance sheet remains strong, with stockholders' equity of $61.1 million as of December 31, 2023, up from $48.3 million at December 31, 2022, and net working capital currently sits at $11.6 million. I'll conclude by reiterating what a strong quarter and year this was for Heritage Global for economic tailwinds. And now I'll pass it off to Mr. Ross Dove.
Ross Dove : Well, thank you, Brian. Let me just try to take a moment to tackle how we grew in 2023 and kind of get you to really see exactly what's happening. So I'll start with financials. In the end of the day, what happened in financial is the addressable market grew. So our execution has always been where it should be, but it's almost like they were miracle workers, that team at NLEX, during a pandemic when there was no supply, to not just stay profitable and consistently profitable, but to have zero layoffs and at the same time, they had zero layoffs to continue building out the technology and to take advantage of the marketplace and increase the head count with high-performing individuals. That was done because the CEO of NLEX, Dave Ludwig, knew better than anybody after 25 years in the industry that the market was going to come back.
While the market has come back. It's come roaring back. We have the highest-ever consumer debt, so our addressable market has dramatically increased and we feel really good that over the next three years, as there's a runoff of selling off these assets, NLEX can perform at a very high rate. I'll come and sweep down over to the industrial side. On the industrial side, it's all about gas gross asset sales, and we believe they can grow. Why do we believe they can grow? Because at the end of the day, the ultimate way they grow is the same way. It's based upon the addressable market. And we're seeing more plant closures, we're seeing more consolidations, and we're seeing more layoffs than we did one or two years ago, so we believe that's in our favor and that we have two different parts of our business that can grow at once.
So I'm very comfortable that we're in a good spot and I thank you all for listening, and we're open to questions at any time.
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