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..

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?.

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..

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..

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..

[Operator Instructions] Our first question is from Mark Argento with Lake Street Capital Markets..

Congrats on a decent end of the year and a strong year overall.

Just looking at 2024, I know you guys are comping there was some tough comps here in the last second half of 2023 compared to the year ago period, but when you sit back and look, given the macro, how are you thinking about 2024 in terms of growth?.

I'll take that before Brian does. So when you talk about growth, it's not that easy to talk about it and brag about it after you just came off a record year. So we went from a record year two years ago to a record year this year. Do you get a record year every year? I don't even know if even Babe Ruth hit more home runs every year.

So, we think we're going to have a solid high-performing year and we think we're going to have a good profitable year, Mark. And whether it's not -- whether it's going to be a record year or not, it is not predictable when you'd look at the first quarter's forecasts alone, so it really depends on whether or not we hit a couple of windfalls.

We're going to have -- and I can promise the marketplace, we're going to have a good year.

Is that fair enough?.

Well just digging in a little bit, I mean, you touched on the addressable markets look like they're expanding.

You kind of grow along with that expansion? I'm just trying to figure out how we should think about kind of modeling the out year here and just trying to better understand -- trying to get the broader macro picture and kind of how that translates in? Do you guys anticipate growing? It doesn't sound like you don't anticipate growing meaningfully, but yet, you could.

So I was just hoping to maybe try to pin you down a little bit more on what -- how we should be thinking about it?.

Look, you're the guy who went to college and became an analyst not me. I'm an auctioneer. What do I think? I think that at the end of the day, the addressable market is bigger than last year, so therefore we should make more money than last year.

But at the end of the day, what I don't know is that there's going to be a big win or not, where we buy some one large campus and make a couple of million dollars, which is a big swing. Those are onetime transactional deals.

What I've tried to tell all of our investors is please don't be an investor that looks at us as a quarter-over-quarter sequential growth company. We're going to be profitable every quarter, but we're going to have spikes in some quarters..

And just one follow-up maybe for Brian. In terms of the health of the loan book, I know last quarter, you took the reserve or increased the reserve. Doesn't look like you did anything in the reserve in Q4? Does that loan continue to kind of perform as -- I'm assuming the loan continues to perform.

Any updates there in terms of your confidence level that you have everything accounted for at this point?.

We had the restructuring, as you all know in early to late November, early December. About 25 loan agreements previously were restructured and consolidated that allowed the minimum monthly payments to go down significantly for our largest borrower, so we feel good about what we did there.

On the reserves, we went through a very thorough analysis in Q4. We worked with our borrowers, we worked with our senior lenders, the internal team, our auditors. And we feel very comfortable that the position that we have taken in Q4 is appropriate given the information that we have.

So the ongoing work there is to stay closely tied to our borrowers and their performance and make sure we're on top of the collection rates, the performance of collections and also the remittances and payments from our borrowers and their financial position.

So, I think there's been a lot of work to get to a point where we're comfortable not changing the reserve from Q3 very much..

Our next question is from George Sutton with Craig-Hallum..

Ross, the growth at NLEX was great.

I'm just curious if you could break it down, if possible, into the macro dynamic versus what you mentioned to be a growing number of customers in that segment? And therefore, how sustainable is growth in that segment?.

So I think right now, looking at the macro economy, we don't need it to change right now, George. In other words, already, we have this enormous amount of runoff that has to get sold over the next two years in $1 trillion of credit card debt, et cetera. So I think we're going to be stable for the next two or three years making profits every quarter.

And I don't think that we need anything to make it any different than what it is. The supply is at an all-time high..

Now, speaking of the supply being an all-time high that's going to create an attractive environment for buyers. That would suggest that there would be a greater need for loans in your other segment. And I'm just curious your comfort and interest in growing your loan book given that dynamic..

I can this one. .

Go ahead, Brian..

So you're exactly right, George, the declining collections roughly decreased prices, I think from their all-time highs, maybe 30% or more. So we've been talking in tandem with our borrowers and there's a lot of excitement in the industry. Right now is the time to buy.

And we see that with the PRA and Encore, the public company financials that they're purchasing more. And that's exactly what we're thinking about.

What I'm focused on now with the team is really managing the risk in the portfolio as well as redeploying our principal remittances in a way that we have higher quality collateral such that over time, our loan book is, one, at a lower risk, and two, more sustainable for the long term..

[Operator Instructions] Our next question is from Michael Diana with Maxim Group..

Ross, you talked about the -- your addressable markets growing. And on the financial side, I know traditionally, it's been charged-off credit cards. In the past, you've also talked about fintechs, buy now, pay later and all that.

Are those contributing substantially to the supply?.

Yes, they've been really growing. The thing about the fintech companies is they're not old line -- basically old line lending companies or big banks that have huge recovery departments. So as they need to sell off assets, they're way more positioned to use an outsourced partner like NLEX than to try to do it themselves.

So as their lending requirements keep coming up and as their charge-offs keep growing, there's a higher probability they're going to use us than a money center bank who's got 100 people in recovery. So it's a true growth part of our business..

And let me ask on the industrial side, American Lab trading. I know that's been a big -- it's been very synergistic.

Can you just remind us how that blends in with your other traditional auction business?.

So they basically buy and sell lab equipment, but in the process of buying and selling lab equipment, they find us auctions, they find us assets that may be on their own as American Lab trading they wouldn't have bought.

For instance, if it's a whole factory, they may have wanted to cherry pick the stuff they wanted to put into inventory and they would have passed on the other stuff. They can now say, okay, we'll pay a premium for these very specific identifiable assets we want to put into our inventory, but we'll pay you for everything.

So we've created basically a synergistic growth platform there that I think was an intelligent buy for us and also a very good deal for them, Michael..

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing remarks..

This is Ross, the CEO, and I just want to say thank you to everybody who's listened on the call. Thank you to everybody who's invested with us and thank you to everybody who's put trust in us. We're going to keep our foot on the pedal. And thank you for listening in..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..