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. 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 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 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 an exciting call. Even as a perennial optimist, this quarter exceeded my expectations, with us exceeding the $4 million goal for Q4, reporting $4.6 million in operating income. This achievement brought our annual NOI past $14 million. I will soon turn the call over to Brian to give you the details in depth, and then I'll come back and add some color on our direction. When I was 12, I brought home a not-so-typical straight A report card. My mother, Zelda, sat at the kitchen table, 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 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 led to higher volumes of charged-off credit cards and non-performing loans. As a result, operating income for the division increased by 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, which delivered operating income of $8.9 million, an increase of $4.2 million or 90% as this segment expanded its number of clients and is more directly correlated with the increased volume of charged-off and non-performing loans on the market. Our Specialty Lending segment also made good progress in 2023, reaching a gross investment balance in notes receivable of $38.4 million, which is an increase of $16.3 million 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. 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. We reached an agreement with our largest 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 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 despite the economic tailwinds. And now I'll pass it off to Mr. Ross Dove.

Well, thank you, Brian. Let me just take a moment to tackle how we grew in 2023 and give you insight into what's happening. Starting with financials, the addressable market grew significantly. Our execution has always been where it should be, but it’s almost like miracle workers at NLEX during a pandemic when there was no supply. They not only stayed profitable and consistently profitable but also had zero layoffs while continuing to build out technology and take advantage of the marketplace, increasing the headcount with high-performing individuals. This was done because the CEO of NLEX, Dave Ludwig, understood that the market would rebound after 25 years in the industry. And it has come roaring back. We now face the highest-ever consumer debt, resulting in a substantially increased addressable market. We feel optimistic that over the next three years, as assets are sold off, NLEX can maintain high performance. On the industrial side, growth stems from gross asset sales, and we believe they can grow. Our confidence in this belief is based on the expanding addressable market. We’re witnessing more plant closures, consolidations, and layoffs than we did one or two years ago, which we view as favorable. I’m very comfortable that we are in a good position, and I thank you all for listening. We’re open to questions at any time.

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 were some tough comps 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. When you talk about growth, it's not that easy to brag about it after coming off a record year. We went from a record year two years ago to another record year this year. Do you get a record year every year? I don't even know if Babe Ruth hit more home runs every year. We think we will have a solid, high-performing year and a profitable one, Mark. While it's not certain whether it will be a record year or not, it is unpredictable when looking solely at the first quarter's forecasts. It really depends on whether we encounter a couple of windfalls. I can promise the marketplace that we will have a good year. Is that fair enough?

Just digging in a little bit, I mean, you touched on the addressable markets looking like they're expanding. How do you anticipate growing along with that expansion? I'm trying to figure out how we should think about modeling the out year and better understand the broader macro picture and how that translates. Do you anticipate growing? It doesn’t sound like you don't anticipate growing meaningfully, but yet, you could. So, I was hoping to pin you down a little more on what we should be thinking about.

Look, you're the one who went to college and became an analyst, not me. I'm just an auctioneer. At the end of the day, the addressable market is larger than last year, so we should make more money than last year. However, what I can’t predict is whether there will be a big win, like purchasing a large campus and making a couple of million dollars. Those are one-time transactional deals. What I advise our investors is not to view us as a quarter-over-quarter growth company. We will be profitable every quarter, but we will experience spikes in certain quarters.

And just one follow-up, perhaps for Brian. Regarding the health of the loan book, I know last quarter you increased the reserve. It doesn't look like you did anything in the reserve in Q4. Does the loan continue to perform as expected? Any updates in terms of your confidence level that everything is accounted for at this point?

We had the restructuring, as you all know, in early to late November, early December. About 25 loan agreements were restructured and consolidated, which allowed minimum monthly payments to decrease significantly for our largest borrower, so we feel good about that. Regarding the reserves, we conducted a very thorough analysis in Q4. We worked with our borrowers, senior lenders, the internal team, and our auditors. We feel very comfortable that the position we have taken in Q4 is appropriate given the information at hand. Our ongoing focus is to maintain strong relationships with our borrowers, monitor collection rates, and keep track of their financial positions. So, there’s been a significant effort to get to a point where we’re comfortable maintaining the reserve from Q3.

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

Ross, the growth at NLEX was impressive. I'm curious if you could break it down, if possible, into the macro dynamic versus the growing number of customers in that segment. How sustainable is growth in that segment?

Looking at the macro economy, we don't need it to change right now, George. We already have an enormous amount of runoff that must be sold over the next two years, including $1 trillion of credit card debt. I think we're going to maintain stability in profits over the next two or three years. We don't require additional changes in the economy. The supply is at an all-time high.

Now, speaking of the supply being at an all-time high, that will create an attractive environment for buyers. Wouldn't that suggest a greater need for loans in your other segment? What is your interest in growing your loan book given that dynamic?

You're exactly right, George. The declining collections have roughly decreased prices by 30% or more from their all-time highs. We've discussed this with our borrowers, and there's a significant buzz in the industry right now. This is the time to buy. We see public companies like PRA and Encore purchasing more, aligning with our strategy. My focus is managing the risk in our portfolio while redeploying our principal remittances to ensure we have higher quality collateral, making our loan book lower risk and sustainable for the long term.

Our next question is from Michael Diana with Maxim Group.

Ross, you talked about the addressable markets growing. On the financial side, I know traditionally, it has been charged-off credit cards. In the past, you've also talked about fintechs and buy now, pay later. Are those contributing substantially to the supply?

Yes, they have been growing significantly. The thing about fintech companies is they're not traditional lending institutions or large banks that have extensive recovery departments. As they need to offload assets, they're far more inclined to work with an outsourced partner like NLEX than to attempt it themselves. As their lending requirements rise and charge-offs increase, the likelihood they will use us compared to a money center bank with a large recovery team also increases. This is a true growth area for our business.

And let me ask about the industrial side, specifically American Lab Trading. I know that has been very synergistic for you. Can you remind us how that blends into your traditional auction business?

They primarily buy and sell lab equipment, but in the process, they identify auction opportunities and assets that, on their own, they may not have pursued. For example, if it’s a complete factory, they might cherry-pick items for inventory but choose to purchase everything instead. This creates a synergistic growth platform that I believe was an intelligent acquisition for us and a beneficial 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 thank everyone who listened to the call. Thank you to everyone who's invested with us and everyone who's placed trust in us. We're going to keep our foot on the pedal, and I appreciate you for listening in.

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