Heritage Global Inc. Q3 FY2024 earnings call

• Industrial: Busy but lacked high dollar auctions, pipeline growing with larger transactions on horizon. Industrial M&A activity heated up, with multiple fronts in make and offer stage.
• Financial: More first-time clients as sellers, consumer spending expected to remain high, NLEX's leadership helps scale with new prospects.
• Balance sheet: Built strength, paid down $5.7 million term loan in July, repurchased 600,000 shares, Board approved amendment to repurchase program increasing max repurchases to $6 million through June 2025.
• Specialty Lending: Plan to conservatively manage portfolio for higher performing loans and lower risk. Prices for charged-off and nonperforming loan portfolios decreased, making market more attractive.
• Core segments: Available cash position and financing capabilities position to invest strategically in core auction and brokerage segments.

Industrial Assets division: Total divisional operating income was $700,000 in Q3 2024 compared to $2.1 million in the prior year period. Auction business had lower-than-expected operating income due to absence of larger auctions, but business development efforts included selection to manage prominent bankruptcy auctions and an aerospace company project. Financial Assets division: Total divisional operating income was $1.8 million. Brokerage business recorded operating income of $1.7 million compared to $2.1 million in Q3 2023. Lending business had operating income of roughly $200,000 after change to nonaccrual status loans. Consolidated operating income was $1.5 million in Q3 2024 compared to $2.8 million in Q3 2023. Adjusted EBITDA was $1.9 million compared to $3.1 million in prior-year period. Net income was $1.1 million or $0.03 per diluted share compared to $2 million or $0.05 per diluted share in Q3 2023.

• Industrial M&A activity heated up, with multiple fronts in make and offer stage, expecting something to get done in near future within 12 months.
• Next 3 years expected to have enough supply to scale.
• Management bullish on future, sees growth in financial asset nonperforming loan sales and industrial consolidation.

• Concentration risk with large borrower, had too much concentration in one client, now learning lesson to broaden client level.
• Macroeconomic factors causing larger transactions to be sluggish and get held up.

Q: Brian, can you review the size of the lending book today? Any updates on large borrower?

A: Specialty Lending segment has net balance of approximately $31 million at Sept 30, a little over $3 million decline from 6/30. Largest borrower's loans in nonaccrual status, still working with them, no significant changes from last quarter.

Q: Any changes in loan loss reserves or accounting treatment?

A: No change to credit loss reserve this quarter, still appropriate.

Q: Pivoting to industrial assets, was it structural or bigger stuff pushed to Q4?

A: Pipeline rolling in looked strong, win rate fine, larger transactions held up, rolled into Q4 and Q1.

Q: M&A, reprioritizing cash flows away from lending?

A: M&A all around, industry consolidating, larger auctioneers and smaller ones combining in next 2-3 years, positioned to be leader.

Q: Concentration with large lender, mistake and process changes?

A: Had too much concentration, learned lesson, will broaden client level to not be dependent on specific entity.

Q: Thoughts on CFPB under Republican admin after election?

A: Wait and see, too early to tell.