Heritage Global (NASDAQ:HGBL) Q1 2021 Earnings Call

0:00 Good day, and welcome to the Heritage Global Incorporated first quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to John Nesbitt, 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.

1:05 Now I'd like to turn the call over to Harris 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 incomes. of one 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 seeing momentum in our industrial arts 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.

2:09 Many companies are reinventing themselves to adopt 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 recombination 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.

2:59 In addition to the monetization of these assets, companies are also recognizing the value of supporting the circular economy by engaging in 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 offload 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.

3:51 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 the pandemic-related continuation of waivers and loan forgiveness, as well as the distribution of additional stimulus checks. Additionally, with the current limited availability of non-performing assets in today's market, larger players are paying higher prices to acquire what is available. That being said, we still remain competent over the course of the current calendar year. We will see an increase in the release of non-performing 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.

4:46 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 when 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 non-performing assets and NLEX is competitively positioned to provide an effective and efficient non-performing asset sale process for the new BNPL issuers. Additionally, we remain focused on offering specially financing solutions to small and medium-sized investors of charged-off and non-performing asset portfolios through Heritage Global Capital.

5:51 As the year progresses, we expect to see more non-performing 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 prospects 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.

6:38 Additionally, as the economy gradually returns to pre-pandemic, quote, business as usual, NLEX is uniquely positioned to address the market opportunity around the anticipated increases in charged off and non-performing 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 offloading 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.

7:26 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, Ross. The company achieved an 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.

8:19 Net income increased to $1 million or $0.03 diluted earnings per share for the first quarter of 2021 compared to $38,000 or break-even diluted earnings per share in the first quarter of 2020. During the quarter, the company realized approximately $276,000 in one-time 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.

9:05 At March 31st, 2021, the company had aggregate tax net operating loss carry forwards 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 carry-forwards 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 31st, 2021 and stockholders' equity of $30.9 million. With that, we will open up the call for questions.

9:53 Operator? Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Mark Argento with Lake Street. Please go ahead. Hey, Ross. How you doing? I'm good. Hi, Mark. So just a couple questions for you. First off, can you talk about the environment on the industrial side?

10:38 It seems like maybe some of the energy assets or energy... A lot of our sales in this first half of the year in Q1 have been from really the large global clients, the Pfizer's, the Amgen's, the Genentech's 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 lifecycle management and to releasing assets that are surplus at a quicker rate than there used to be.

11:34 And now that people are really kind of back in 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 a 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 lifecycle management and get these assets out into the marketplace. So most of our business has not been insolvency related, Mark, and it's not been distressed companies so far. It's been really more surplus from large multinationals. Fair enough? Didn't hear anybody.

12:20 Pardon me, Mr. Argento, your line is still open. Sorry about that. I had muted myself. In terms of the financial asset side of the house, still looking for that to pick up potentially later this year. 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.

13:12 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.

13:58 In terms of deploying capital, I'm assuming if 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? Yeah, we've actually deployed capital in more, to be honest with you, in more small transactions than in 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.

14:48 So we've been deploying cash, but in smaller amounts. There are a couple large campuses, manufacturing campuses, that are coming for sale towards mid-year 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. I think Mark's on mute still. The answer is there, and hopefully in this environment it will be interesting to see how, especially in the rate environment, how things play out in the second half.

15:55 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. So we'll talk soon, Mark. Have a great day. Thanks, guys. The next question will come from Michael Diana with Maxim Group. Please go ahead. Hi, Michael. Thank you. Hi, Ross. 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 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 multi-billion dollar company but I'm talking about a lot of capital for the industrial liquidation business these 10, 20, 30, 40 million dollar 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 up front 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

17:26 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 upsides. So we see a couple 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 assets 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?

18:36 Yeah. 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, Thank you, Michael. Again, if you have a question, please press star. Our next question will come from Michael Schliske with Collier Securities.

19:40 Please go ahead. Hi, Michael. Hi, guys. This is Jacob Parsons on the line from Mike Schliske today. One of my questions here is kind of looking ahead, are there going to be any more kind of bigger non-healthcare related auctions 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 uses on a regular basis. So that we have a lot of visibility there because we do sales every month. I think we're on over our 100th sale for Pfizer.

20:26 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 two years.

21:16 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 biopharmacide, 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 and many more. or 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?

22:33 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 are 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 gonna 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 you know at least in our mind we're looking at much more strength in Q3 and Q4 and if there is a little bit of hold back 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.

23:49 Gotcha. I really appreciate it. Thank you, guys. Thank you. The next question. Pardon me. It seems that that question has left. 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. The conference has now concluded.

24:37 Thank you for attending today's presentation. You may now disconnect.