Heritage Global Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• General Overview: 2024 was challenging, but the team stayed profitable across all business units. Industrial supply was light in Q3 and Q4, but the pipeline is growing as delayed projects move to 2025. High layoffs are driving asset flow. M&A efforts have multiple prospects. Financially, more sellers are relying on EnWix, with stabilized pricing and a growing market.
• Financials: Consolidated operating income in Q4 2024 was $1.5 million vs. $4.6 million in Q4 2023. Adjusted EBITDA was $2.1 million vs. $4.9 million. Net loss of $200,000 in Q4 2024 was due to an income tax valuation allowance adjustment. The balance sheet had $65.2 million in stockholders' equity, no long-term debt, and ~1.3 million shares repurchased in 2024. Entered a $4.1 million mortgage loan for a new corporate headquarters.

Segment Performance

• Industrial Assets Division: In the fourth quarter of 2024, divisional operating income was $800,000, compared to $1.6 million in the prior year period. Volume was high but auctions were smaller in total dollars.
• Financial Assets Division: Total divisional operating income was $1.9 million. The brokerage business recorded operating income of $1.7 million in Q4 2024, down from $2.7 million in Q4 2023. The largest borrower defaulted in Q2 2024 but has remitted 100% of net collections for the remainder of 2024, with early signs of progress in negotiations with the borrower.

Guidance

• Expect increased economic pressures in 2025 to drive cost-cutting measures like layoffs and facility closures. Anticipate increased momentum in the auction pipeline for industrial assets. Bullish on the financial assets business due to growing defaults leading to more products in the market over the next 1-2 years. See potential for growth in 2025 with increased product flow from maturing defaults to charge offs.

Risks

• Economic uncertainty and continued layoffs/plant closures could impact business. The non-accrual loan balance ($22-23 million) and reserve ($1.4 million) could affect stock performance and valuation.

Question and Answer

• Q: Back on the loan book, did you guys increase any more of the provisions there? Or any relation between that and what you did on the tax asset side? A: Brian Cobb stated they have not increased or substantially decreased the reserve against the loan book. The tax valuation allowance change was based on 2024 results and NOL utilization assessment.
• Q: On the operating business, what's needed to grow the financial asset brokerage business? A: Ross Dove said defaults leading to charge offs drive the market, and record defaults mean more products will come to market in the next 1-2 years.
• Q: Exposure to federal space and how to play on trends? A: Ross Dove mentioned Heritage Global has a history with government work and is looking to be opportunistic with assets from government actions.
• Q: M&A deals, size, financing? A: Ross Dove said it would be a combination of debt and equity, not using stock due to low stock price. Cash on hand is $15 million plus.
• Q: Non-accrual loan balance and stock overhang? A: Brian Cobb said reserve is ~$1.4 million, and Ross Dove noted the non-accrual balance is a factor in stock undervaluation.
• Q: Industrial business exposure to federal space and opportunities? A: Ross Dove said Heritage Global has history with government work and is looking to benefit from government actions affecting asset sales.
• Q: Cash balance and interest income? A: Brian Cobb said they take advantage of short-term vehicles for interest income, but focus is on deploying cash into the business.
• Q: Stock repurchase authorization? A: Brian Cobb said the $6 million authorization ends in June 2025, with $3 million left to deploy.