Good afternoon, ladies and gentlemen. Welcome to the Heritage Global Inc. Third Quarter 2024 Earnings Conference Call. This call is being recorded on Thursday, November 7, 2024. I would now like to turn the conference over to John Nesbett, 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. Please go ahead, Ross.

Thank you very much, John. Thank you all for joining today, and welcome. When you look at $1.5 million in net operating profit and $2 million in EBITDA cash flow on the surface, it looks like just another quarter, and I get that. But if I really drill down and look at it across the board at each revenue stream, it is still just another quarter. And that's okay because we're not a by-the-quarter company. We continue to say that we're just not a quarter-over-quarter company, where a snapshot in time tells where we're going. What happened was that industrial was very busy, but lacked any high dollar auction. However, the pipeline is steadily growing, and larger transactions are right on the horizon. They take longer, but we sense they are coming, and we feel a lot of comfort in a baseline with absolutely the minimum in large transactions in one quarter and being able to stay profitable and accretive. Going forward, industrial M&A activity has really heated up to our front burner now. Activity all around this has heightened, with transactions now closing and many possible prospects currently in play. We've now reached the make an offer stage on multiple fronts, and I'm comfortable that something is going to get done in the very near future, at least within the next 12 months. There are plenty of opportunities out there as the industry consolidates. Moving to the financial front, we're seeing more first-time clients now becoming sellers than ever before, and we have a strong belief that consumer spending will remain at heightened levels for the foreseeable future. It will take multiple years to work through the ongoing release of every month's new monthly charge-offs as defaults continue in credit cards and fintech products. NLEX's leadership in the industry will help us scale with these new prospects, and we're confident that there will be growth because we are the most reliable vendor in a growing market. With that, I'll turn it over to Brian to give you the highlights of this quarter. Thank you all for sticking with us. We're very comfortable that over the next three years, there will be enough supply for us to really turn things up a notch. Thank you. Go ahead, Brian.

Thank you, Ross. I'll begin by going over a few key developments before moving into our divisional and consolidated financial results. First, the company has made significant progress during the year in strengthening our balance sheet. Our consistent profitability and our conservative position regarding the funding of loans within our Specialty Lending segment has led to improvements in our available cash and working capital balances. This enabled the company to fully pay down its term loan of approximately $5.7 million in July and subsequently repurchase roughly 600,000 shares in the open market during the third quarter. Further, on September 13, 2024, the company's Board of Directors approved an amendment to the repurchase program, increasing the maximum aggregate dollar amount of repurchases to $6 million through June of 2025. As of September 30, 2024, the company had approximately $4.1 million in remaining aggregate dollar value of shares that may be purchased under the program. Additionally, we have decided to move forward without making any significant structural changes in our Specialty Lending segment. We plan to conservatively manage the portfolio to gain a higher concentration of performing loans and limit the company's potential exposure to lending risk. As we have previously mentioned, prices for charged-off and nonperforming loan portfolios have decreased from the highs during the pandemic, resulting in a more attractive market for our borrowers and a lower risk profile for investment. Last and most importantly, our available cash position and potential financing capabilities have positioned us well to invest strategically in our core auction and brokerage segments of the business. Turning to the financial results by division, our Industrial Assets division reported total divisional operating income of $700,000 in the third quarter of 2024 compared to $2.1 million in the prior year period. Our auction business achieved lower-than-expected operating income in the quarter, primarily due to the absence of the larger auctions we typically see. However, the number of projects executed and our ability to secure contracts remains strong. The quarterly results in this division do not capture our solid business development efforts, which included our selection to manage two prominent bankruptcy auctions and an auction project for a top-tier aerospace company that is slated to take place in 2025. As the current economic environment continues to pressure many organizations, we expect that continued facility closures and downsizing will keep our pipeline for auctions strong. Our Financial Assets division reported total divisional operating income of $1.8 million. Our brokerage business recorded operating income of $1.7 million compared to $2.1 million in the third quarter of 2023. Our lending business performed consistently with expectations, recording operating income of roughly $200,000 after the recent change to nonaccrual status loans with our largest borrower and implementation of the cost recovery method of accounting. Despite the challenging economy, consumer spending has not slowed, and consumer credit outstanding remains near all-time highs. As we expect charge-off volume to remain elevated, we are focused on capturing the opportunities presented by the current economic landscape to drive growth and continued profitability of our brokerage business. Now on to the consolidated financials. Consolidated operating income was $1.5 million in the third quarter of 2024 compared to $2.8 million in the third quarter of 2023. For the quarter, we reported adjusted EBITDA of $1.9 million compared to $3.1 million in the prior-year period. Net income was $1.1 million or $0.03 per diluted share compared to net income of $2 million or $0.05 per diluted share in the third quarter of 2023. Our balance sheet reflects stockholders' equity of $66.1 million as of September 30, 2024, up from $61.1 million at December 31, 2023, and net working capital of $16.2 million. And with that, I'll turn the call back over to Ross.

Thank you, Brian. The really good news you can take here is we're growing our available capital at a time when there are opportunities across the board for us to deploy that capital. We're looking very hard at those opportunities, really analyzing capital allocation, and we feel comfortable we're in a strong position to take this company to new heights. Stay with us, and thank you all very much for joining the call.

For our first question comes from Mark Argento of Lake Street.

Ross and Brian, a couple of quick ones here. First, Brian, can you just review the size of the lending book today? Did you guys deploy any more capital there? Any updates on the status with your large borrower?

Yes. So we have approximately $31 million of the net balance related to the loan book, the Specialty Lending segment at September 30. That's a little over $3 million decline from our balance at June 30. We've been cautiously looking at new loans, originating very little during this quarter. But our plan to move forward is to work with our strengthened underwriting criteria and judiciously invest in loans that are accretive and low risk. As I said earlier, prices are lower this year than they were in the past couple of years, so we think it's a lower risk.

Yes. And any update on the accrual status? It doesn't sound like much change there, but is the lender or the borrower making payments? Or what information can you provide us there?

Yes. So the borrower in question, our largest borrower, all the loans are in nonaccrual status. We're still working with that borrower. We're working to increase collections in the future by allowing certain legal collection methods. Our senior lenders to those loans are working closely with that borrower. No significant changes from last quarter.

And is there any changes in any of the loan loss reserves or any other kind of accounting treatment that we should be aware of?

No, there's been no change to our credit loss reserve this quarter. We still believe that that's an appropriate reserve.

Sure. Okay. Pivoting back to the industrial assets business, obviously, a disappointment. Is there anything going on structurally in terms of the activity levels in the industry? Or was it just a lot of smaller stuff, activity still there, but a lot of smaller projects and the bigger projects kind of got pushed into Q4?

Yes. That was the case. It's actually not a heightened amount in our pipeline. Our pipeline looked really strong. What happened is the percentage we signed was great. So it had nothing to do with our win rate. Our win rate was fine. It just seemed that all the larger transactions kind of got held up. I don't want to use the election as an excuse because I'm not smart enough to know if that's why or what was going on in the macro economy that just made me kind of slow down on the bigger transactions. Most of the bigger transactions and some of which we did ultimately sign rolled into Q4 and even into Q1. So it was sluggish on getting ink on the big transactions. It's not that we lost them, Mark, at all. It's just a lot of them just didn't come to fruition. They're still out there. We're still going to win our share. Like I said, not quarter-over-quarter, we're going to have some great big quarters just like we had a slow quarter.

Sounds good. And then just last one for me, and I'll hop back in the queue. But M&A, it sounds like you've been talking about it a little bit more in the last few quarters. I haven't really pulled the trigger. Is it a good read that you're going to reprioritize cash flows away from lending and focus more on M&A in the future? Or how should we take that?

There's been M&A all around us. The Great American Group, which was part of B. Riley, sold recently to a large hedge fund. The two largest industrial manufacturing auctioneers in Europe have consolidated into one company. There are companies that are now getting an inside look at that weren't really talking about selling in the past, and they now think it could be time for the industry to consolidate. I wouldn't say have a massive roll-up, but there are definitely going to be larger auctioneers and some of the smaller ones combining over the next two or three years. We believe we're in a strong position to be one of the leaders in that consolidation. So yes, if you're asking if we're not hoarding cash, we've built up enough cash and enough credit that we're in the position to make a big push to get the good ones on our team.

Our next question comes from Michael Diana of Maxim Group.

So on M&A, that sounds really exciting. When you talk about making an acquisition, are you talking about basically buying people, buying teams, buying whole companies with infrastructures and all that? What exactly would you think you'd be getting if you made a big acquisition?

So there are two areas you can really look at when you go to the whiteboard and say how do we make acquisitions that move the needle and create growth-oriented significant changes. The first is geography, which is obvious. Ninety percent of our auctions or 95% are in North America, while 95% of all industrial auctions are not in North America, but are global. Just in Europe alone, reshoring is coming back to North America. We believe that prospects from potential government changes with the new election may heighten the reshoring. Thus, having feet on the street in other parts of the world would significantly increase our growth potential. Secondly, we have clients here who are multinational and are increasingly looking to sell offshore assets, not just onshore assets. Geography is key. The second area of focus would be a segment area. We are already dominant while there are other growing sectors we think we can gain equivalent dominance in. Therefore, both geography expansion and enhancing our sector presence are our main goals. We are still looking organically, but we also see heightened opportunities to acquire entire entities. With our current cash position, we can really execute on that front since more firms are ready to join larger firms now than in the past. We think now is the time.

Our next question comes from Chad Stauffer, Private Investor.

I guess I have the assumption that having that level of concentration with one large lender was a mistake or a process failure in some sense. Is that the case? And if so, have changes been made to the process to ensure that risk levels like that are not taken again? Can you walk through what happened and how that's being addressed?

It's a very reputable company that we had known on the brokerage side for decades. It wasn't that we were underwriting someone that we didn't know or that didn't have a long history of success without a default. However, if you want to ask me in retrospect how I feel about the concentration, I would agree that we had too much concentration with one client, regardless of what we thought about that client. If you're asking if we've learned our lesson, the answer is yes. We intend to lend more judiciously and cautiously, spreading out our client level so that we are not dependent upon any one entity. So I would applaud you for being correct.

Our next question comes from Sam Namiri of Ridgewood Investments.

I was a little surprised that after the election, there wasn't more positive movement in the stock. One reason I was thinking of was the Financial Assets division, specifically on the lending side. I assume under a Republican administration, the CFPB would not be as aggressive in taking stances towards those borrowers. Do you have any thoughts or any color you could provide on that?

Well, if you look back in history, I don't know that you can actually correlate consumer behavior to the President in office. I'm not sure if the presidential election will change it or not. So I guess that would be a wait-and-see rather than people reacting over the first couple of days. It’s a clever question, but too complex for me to answer today. I think we'll find out over time.

There are no further questions at this time. This concludes our Q&A session. I'd like to turn the conference over to management. Please go ahead.

This is Ross. I wanted to thank you all for joining. I wanted to thank all of the shareholders that have stuck with us and joined. I encourage everyone to take a hard look at where we are today and where we think we're going because I can tell you that internally, management is very bullish on our future. We're excited about the opportunities as we see them. We believe there will be growth in financial asset nonperforming loan sales, and we think we're positioned well there with an incredible team that has been a leader for a quarter century. We believe we can even grow the products on that side. On the industrial side, we think the industry is going to consolidate to some extent, and our leadership role is going to come to fruition. So we see ourselves as a great entry point right now for those who want to come on board, and we're excited about the next decade of where we think we can get to. We'd welcome anybody, and we thank you all for your attention.

Thank you so much. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.