Heritage Global Inc. (NASDAQ:HGBL) Q1 2024 Earnings Call Transcript May 11, 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 Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett, with IMS Investor Relations.
John Nesbett: 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 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 afternoon, and thank you, everyone, for joining. Ending Q1 with a solid Q and $2.6 million in NOI feels very good after our very large Q4. It bodes well for just this year and also next year and beyond. We're now in Q2 with lots of momentum and a strong sale in the books already and on track and pace to close our first quarter, well positioned to continue our organic growth trajectory. We are now healthy enough and confident enough and positive enough to pivot to a strong drive towards M&A. With that, I turn the call over to Brian for the nuts and bolts of Q1 results, and I'll add some color afterwards on where I see the market, where I see the opportunities and where I see us driving forward. So Brian will walk you through the quarter, and then I'll join back in. And once again, thank you for joining.
Brian Cobb: Thank you, Ross. Before we dive into the overall financial results, I want to first touch on our divisional highlights. Our Financial Assets division continued to build on its momentum in 2023, capitalizing on opportunities in the marketplace as increased macroeconomic pressure drove continued volumes of charged-off credit cards and nonperforming loans. The division reported operating income of $2.9 million in the first quarter of 2024 compared to $2.5 million in the 2023 period, a 16% increase year-over-year. The growth in our Financial Assets division was primarily driven by our specialty lending segment, which recorded operating income in the first quarter of approximately $900,000, an 81% increase compared to the prior year period.
As of March 31, 2024, our total gross balance related to investments in loans to buyers of charged-off and nonperforming receivable portfolios was $37.3 million, classified on our balance sheet as both notes receivable and as equity method investments. Our brokerage segment continues to be the main driver of income for our Financial Assets division and recorded $2.1 million in operating income compared to $2 million in the prior year quarter. We continue to strengthen our existing relationships in the segment with high quality, top and mid-tier buyers and are seeing a strong pipeline of opportunities in the upcoming year. In the Industrial Assets division, total operating income was $800,000 during the quarter compared to $2.6 million during the first quarter of 2023.
While the division didn't see certain large auctions as executed in the first quarter of 2023 or the volume of auctions seen in the fourth quarter of 2023, we have significantly added to the current pipeline during the first quarter, and we expect to see strong auction activity as we move through the second quarter. One big development related to our auction segment. In conjunction with our joint venture partners, we acquired a pharmaceutical plant in Missouri late in December 2023. Only 4 months later, we closed the sale of machinery and equipment within the building, along with a 10-year building lease. This is another quick turn from acquisition to close for real estate and a big win for our auction segment, which exemplifies the strength of our sales team and relationships with our joint venture partners.
A close-up of a stock exchange board, displaying the active trading of the company's securities.
And lastly, before turning to the financials, I want to touch on a brief accounting item. In accordance with new segment reporting guidance, we are working on expanding our segment-specific disclosures by reporting additional income statement details by the end of 2024. We look forward to sharing more information on our segment operations and providing further transparency for shareholders. Now turning to the financial results. Consolidated operating income was $2.6 million in the first quarter of 2024 compared to $3.9 million in the first quarter of 2023. For the quarter, we reported adjusted EBITDA of $2.9 million compared to $4.2 million in the prior year period. Net income was $1.8 million or $0.05 per diluted share compared to net income of $2.8 million or $0.08 per diluted share in the first quarter of 2023.
Our balance sheet continues to strengthen with stockholders' equity of $63 million as of March 31, 2024, up from $61.1 million at December 31, 2023, and net working capital of $15 million. Looking forward, while we continue to drive our organic growth and profitability, we are increasing our focus on strategic M&A to drive the long-term growth of the business. It's incredibly exciting to see how this company has evolved over just a few years, and I'm enthusiastic about the increased number of opportunities we see in the M&A space. With continued performance in our core segments and a strong balance sheet, I'm confident that we'll be able to achieve our goals to broaden our business through acquisition. And with that, I'll turn the call back over to Ross.
Ross Dove: Thank you, Brian. That was good to hear. So let me try to kind of open up the drapes and give you kind of a window into where we see our growth. Because we have a lot of competitors in the marketplace, I'm not going to completely and entirely unveil what we think is our super sauce. But let me just give you some obvious drivers we're already in the process of initiating. So let me talk about first lending. 95% our lending business is financial assets. But as you know, half of our revenue is industrial assets. There's going to be a significant push into balancing out our lending and leveraging our databases that literally have almost $1 billion of assets captured on the industrial side and becoming a far more aggressive lender.
So that's kind of one of the multiple things we're doing. Let me talk to you about the second one. We have all of this data we've recorded in both financial and industrial, and we're not really gaining what we should do in revenue on finding a way to monetize the data-driven revenue. That is an initiative that's begun this year. We see lots of opportunities to take that data and monetize it. The third one is we want to look hard at the sectors we're in. Yes, we're winning in pharma. We're winning in biopharma. We're doing great in food and beverage, but there are 20 manufacturing sectors, and also there's a global geography where we're primarily focused in North America. So we're looking at expanding all of that and trying to speed up our growth and make our shareholders proud.
Some of this will require an increase in M&A, and some of this will require just simply adding expertise to our existing company. We're always going to look hard at the build or buy component, and we're not necessarily saying it takes all M&A to grow because we think we're solid growing organically too, but we're going to put all of our engines together on both, and we're going to push forward with confidence. I thank you all for hearing us. We're now open for questions, and we appreciate you guys always joining. Thank you.
Operator: [Operator Instructions] Our first question comes from Mark Argento from Lake Street Capital.
