Heritage Global Inc. (HGBL) Q1 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the Heritage Global Incorporated First Quarter 2021 Conference Call. [Operator Instructions] Please note this event is being recorded. 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 economy reopened and recovered in the first quarter, we saw and are still seeing momentum in our industrial last division, as clients in this segment seek to liquidate surplus industrial equipment and assets in order to improve their financial position as they're fully prepared 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 re-commercing 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 assets 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 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. Looking to our financial assets division, while the business did show improvement in the first quarter of 2021, we experienced wagon 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. 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 remained focused on offerings, especially financing solutions to small and medium size investors have charged-off and non-performing asset portfolios through Heritage Global Capital. As the year progresses, we expect to see more non-performing assets release into the market favorably impacting demand for both parts of our financial assets services. With the opportunities and trends we're 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 distress 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 code 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 they have a strong platform for which to capitalize on the interest and demand we're seeing for our services in both industrial and financial asset segments. With that, I'll now pass it 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 broker to asset sales, principle auctions, sales commissions, and advisory and secured lending piece. Net income increased $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 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 that earnings power over a model. At March 31 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 31 2021, and stockholder's 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 the Lake Street. Please go ahead.

So just a couple 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 and there 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, you're 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 Pfizer's, the Amgen, the Genentech’s on the pharma side, Halliburton on the oil and gas side. Because there's this huge push right now, not just the sustainability, but the lifecycle management into releasing assets that are surplus at a quicker rate than there used to be. 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 it 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 is 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 anything.

Pardon me, Mr. Argento, your line is still open.

Sorry about that, I had muted myself. In terms of the financial assets side of the house, still looking for that to pick up potentially later this year, and 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 our 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 to - 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 travelling 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 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. 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 in 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 is a plan to really focus on deploying what we have. We've extended our bank lines, and we're in good financial shape. I think Mark’s on mute still.

No, you're right. I don't know how to work my own phone. But anyways, that was it from me. Good luck, appreciate the answers there and hopefully in this environment would be interesting to see how especially in the rate environmental 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. 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.

Thank you. Hi Ross, actually I was, 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 your broker transactions or is it mainly…?

Yes, some of the large 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 international companies and tell them we want to be - 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 potential transactions, we're hopeful with this year. We did - 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 - 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. Please go ahead.

This is Jacob Parsons on the line from Mike Shlisky 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.

Yes.

I think we're on over our 100 sale with 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 this 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. 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, year and a half.

Got you, thanks 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 and the charge-offs and whatnot in the coming year in 2021? But given that credit card balances have been declining, they saw large quarterly decline here, just in April excuse me? Do you think that consumers with the stimulus checks are paying off the credit card? 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 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 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 isn't 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.

The next question - pardon me, it seems that no questions 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, and we're going to get stronger in the second half of the year than - we're 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 it's very positive in its feelings about its future and thankful for you guys all supporting us. Everybody have a great day.

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