Good day, and welcome to the iACSES Alpha Virtual Best Ideas Summer investment conference 2025. The next presenting company is Heritage Global. If you'd like to ask a question during the webcast, you may do so at any point during the presentation by clicking the Ask Question button on the left side of your screen. Type your question into the box and hit Send to submit. I'd now like to turn the floor over to today's host, Ross Dove, CEO at Heritage Global. Ross, the floor is yours.
Thank you very much. We're going to do this in a question-and-answer format where Lake Street is committed to ask me some very difficult questions that I'm going to give some very simple answers to. Before Mark takes over and asks me the questions, I thought I'd take just a few seconds or a few minutes to give you a real fast, quick understanding for those of you not familiar with Heritage Global. Heritage Global is a leader in valuing and monetizing both industrial assets and financial assets, both healthy assets and sometimes distressed assets. Real quickly on the financial asset side, we sell primarily charged-off loans for everybody from money-centered banks to all the new fintech lenders, the peer-to-peer lenders, the buy-now-pay lenders, et cetera. Obviously, clearly growing business right now as we've reached all-time high consumer debt.
I'll let Mark kind of drill down later in the questions there, but that's one side of the business. That business also lends to people that buy non-performing charged-off consumer debt. The other side of our business is a legacy business that goes back all the way to my grandfather's day that's now run by my brother's son and my sons, et cetera. It's literally almost seven decades old. That business auctions off machinery and equipment, industrial assets in about 20 different vertical sectors worldwide, everything from farmer equipment to core industrial equipment like metalworking, plastics, et cetera, to high-tech equipment like semiconductor to earth-moving equipment, et cetera. Pretty much every kind of industrial manufacturing equipment with some transportation assets also worldwide. We do it for major corporations like a Pfizer, like an Amgen, like a Halliburton, like a Boeing.
We have had a long history of working for the insolvency courts. We are the auctioneer who did the auctions for Solyndra, which was the solar collapse, et cetera. That business does hundreds of auctions a year. Those are the two businesses combined. We have auxiliary companies, an evaluation company of industrial assets, a trading company of biotech surplus assets, et cetera. I will not go any further because I do not want to steal Mark's thunder when he is ready to come up with some really salient important questions. I will just tell you quickly, the company has been profitable for a very long time and tended to be profitable for a very long time going forward. Trades on the NASDAQ, about a $80 million market cap, which I think is screaming to grow from there. We are looking at making hopefully a couple of million a quarter going forward. We have in the past. Right now, times are good for us. We're very active and very busy. I'll turn it over to Mark now. Mark, introduce yourself and let the questions fly.
Thanks, Ross. Good afternoon, everybody. Mark Argento, one of the senior analysts at Lake Street Capital Markets. I've covered Heritage Global for a number of years and was invited here to help moderate a fireside chat with Ross and the rest of the team at Heritage Global. I prepared a handful of questions, just kind of walking through the story. First, though, I thought it would be helpful to kind of frame up, Ross, how you're thinking about where we are from kind of a macro and kind of market dynamic perspective. I know in Q1, I think you even referred to it as a tale of two halves in terms of the quarter. Things seem to have picked up a little bit as the quarter went on. Can you touch on a little bit of kind of where we are and the type of environment we're in, how you guys have normally fared in that type of environment, and where you see the business kind of trending currently?
Yeah, there was a feeling at the beginning of the year that we were going to have a really good Q1 based upon what's happened in the last 18 months with really the built-up amount of assets on both the financial side and the industrial side. Ironically, it kind of started slow with a lot of geopolitical questions and kind of a wait-and-see mode. About halfway through the quarter, the spigots opened up like we anticipated. We thought they would when the year started. Especially in financial assets where it really grew in the second half of the quarter. What happened is we've just seen a record amount of consumer debt, not just at the fintech companies, but at the FDIC chartered institutions, and not just credit cards, but across the board in auto loans, et cetera.
is also a growing difficulty and distress and increased buy-now-pay-later loans. We added clients in the second half, and the clients that were basically taking a look at the analysis in the first half of the quarter all went to market. They have continued going to market. We did not see just a good March. We saw a very strong April. We are seeing a very strong May right now. We think that we have hit kind of a sweet spot in financial assets where we think quarter after quarter, we are going to stay very busy right now with the addition of the new clients and most of our existing portfolio clients using us every quarter. The brokerage is very strong there on the specialty lending component. We have a lot of people who are underwriting now, and there is activity over there too.
If you flash to the industrial assets, that's a business where we basically trail what happens in the past. Over the last 18 months, we saw a big increase announced in corporate bankruptcy filings, but the corporate bankruptcy filing increase was all in Chapter 11s. Chapter 11s, as you know, are ongoing bankruptcies where there is a hope for the company to reemerge, a hope for the company to sell, a hope for the company to restructure. They do not always turn into Chapter 7 liquidations, which produce 363 sales and asset sales for people like us who sell the hard tangible assets, not the enterprises. That business is strong now. We've done some large bankruptcies, and we're working on a pipeline of even more of them. At the same time, we're seeing more large corporations really identify surplus than we have in the past. Some of that is with the advent of AI helping them find surplus, and some of that is just a push on the back end of the supply chain. We have literally got an auction almost every day over the next three months. Feeling good there too, Mark. I think our revenue streams are strong Q2, Q3, and Q4 of this year, if that is a fair quick answer.
I think you knocked out about half of my questions that I had teed up here. If anything's duplicative, my apologies here. I appreciate the setup there. Just kind of getting down into it a little more. Financial assets division. Seems like that's ebbed and flowed a little bit. Just given where kind of consumer credit is, it seemed like that business you would think would kind of continue to grow at fairly robust levels. What's the dynamic there that ebbed and flowed in terms of assets coming to market? Maybe you could drill down into that a little bit more for us.
People look sometimes too early in the equation to try to estimate where we're going to go because what they're looking at is they're looking at non-performing loans rather than looking at non-performing loans that turn into charge-offs. If you look at the equation, when somebody stops paying on a consumer loan, it doesn't immediately flow into our marketplaces. The first thing that happens is they're attempting to collect 100% of the money, which is not us. We're not really the performing loan guy. If they do get it performing or restructured, it often doesn't go to us. There's a trailing time where they're trying to work with the client before they reach the point of our marketplace. Our marketplace is the brokerage of the charge-off once the loan has really been fully written off.
We're the guys that sell stuff for $0.05, $0.10, $0.15 on the dollar, not the guys that are on the consumer side. We sell real estate loans for higher prices, obviously, because of the collateral. On the financial side, we're basically kind of the last final place that we can liquidate an asset while the asset still has tertiary value. A lot of what happened in the last year and a half is now starting to become asset flow. That's why I would say on financial assets, the best is yet to come for us. It's going to take another 24 months to work through the existing growth and the fact that we've got a trillion dollars of credit card debt. A certain amount of that credit card debt does convert to charge-offs. A certain amount of the subprime auto debt does convert to charge-offs. We think there is a 24-month, at least, building run there that is not going to self-correct without the sale of the assets.
All right. That's helpful. I know one of the, I think you noted maybe it was on the last earnings call, but part of the issue also is this function of kind of market pricing of these assets. There's a lot of dollars looking to buy these charged-off loans. They end up bidding up the price. At some point in time, the returns aren't there and things slow down a little. How do you see asset pricing right now? Is it kind of off of its peaks and remaining there? How important is that to the equation?
Prices have pretty much stabilized. The huge run-up in the prices was pandemic-driven. It was really driven by the fact that there was not enough supply to go around. The people that needed to have asset supply were forced in a supply and demand marketplace to, I would not want to say overpay, but in essence, it did turn out in many instances to overpay compared to the value they are getting now when there is a robust amount of sellers again. At this point in time, the prices have dropped down to where there is very competitive bidding. A lot of the people that held back during the pandemic that could not compete have now re-entered the market. The people that were dominated during the pandemic, there is enough supply that they do not have to put price pressure on to pay such a huge premium for the assets.
We look at it as a healthy normalized market now where we think the people that are buying these loans are going to realize the right type of profit and the people that are selling them are going to get kind of expected returns that are more predictable than they were during the pandemic where the sellers were getting record prices, but the buyers were struggling to collect. I would say we've kind of hit the sweet spot of a normalized healthy market now. I think it should stay there, Mark.
Great. I'm going to move over to the industrial asset side of the house. That business also kind of similarly seemed to a little bit of ebb and flow, but in particular, maybe got a little stronger as the quarter went on in Q1 in particular. Lots going on with tariffs, domestic, international manufacturing. How do you see the industrial assets business given kind of some of the more global macro environment there, both with tariffs and then just the regular business cycles?
The tariff announcements have really been pretty much back and forth, back and forth, kind of a yo-yo up and down to where people really have not got a handle on exactly where they are going to wind up and end up. There is some initial reactions to them. Once it really kind of comes to fruition and we see that there is going to be some steady adjustment in tariffs, they are going to last a year, 18 months, two years, you are going to see what the impact will be. Clearly, looking historically at what the impact is going to be, at the end of the day, in our business, we are primarily selling used equipment. We are impacted tremendously by people having a choice between used equipment and new equipment.
If that choice becomes that it's very difficult in the supply chain to get new equipment because of the time lags in the supply chain on getting it, which can happen because tariffs really slow down and clog down the supply chain. Equipment that you're buying that you'd get delivered in three months becomes six months or nine months, it creates a premium on used equipment and a bigger desire to buy used equipment. Our auctions become more popular when the choice isn't as easy between the new and used equipment. That hasn't happened yet. It happened more during the pandemic. If the tariffs really come into play and it slows down the supply chain and international ingress and egress, that international ingress and egress will really clog things up and improve the sale of used equipment. Right now, it's very steady.
We're getting not necessarily record numbers at our auctions, but large crowds and active bidding. I think it can only get busier, not less busy. There is an increased right now group of people that used to only buy new that now are buying used and refurbed assets. It's just become more acceptable in the marketplace now.
Have you seen prices migrated up a little bit as you've seen more demand and buying used equipment? Or is that something that you can track or get a pulse on?
What we've really noticed is that there is really kind of two kinds of used equipment. There's the very late model equipment that will get if a biotech company, for instance, was venture funded, bought all new equipment and only lasted 18 months, then you're going to get a tremendous amount of bidding and very aggressive bidding because the equipment is really new and late model equipment. We struggle when the equipment gets older now that there's a big influx of people that want to buy very late model, nearly new equipment and less people looking to buy older equipment. The newer, the more modern the plant is or the factory is or the equipment is, the higher the attendance at the auction and the more aggressive the buyers are.
Great. That's helpful. Maybe you could touch a little bit on the kind of real estate exposure you guys have right now. I know from time to time that you either buy or enter into joint ventures and buy actual buildings or plants. Where's the portfolio currently? Where are you in terms of working through any inventory there?
There is one deal that is still basically in the process of where we still are an owner of the deal and we're working through the deal. We don't anticipate any impact in significant revenue this year. We anticipate that the profits that we hope will come will come next year. There is nothing in our forecast that would show anything this year on that transaction. It's moving along as promised, but as you know, those things are not as quick to monetize as when there isn't a building involved. On that front, though, on the prospecting front, there are several deals, not necessarily in the pharma sector, but across multiple sectors that are out there right now where there are transactions that could involve the building and the equipment. They exist in food processing. They exist in cannabis.
They also exist in the pharma, etc. There is a pipeline of potential deals that have been announced that us and others are aware of. Are we trying to get another one done this year? The ultimate goal is maybe not to get one done we monetize this year, but to get one done that we can start working on this year. The goal is in the next six months to at least find one more.
Great. Just for clarity, the first existing piece of property or assets, I'm assuming that's the Huntsville properties?
Yes, that's the Huntsville properties. We love Alabama.
Got it. All right. Just wanted to make sure we're clear and made it clear for the audience. Just moving on quickly, I know we're limited in time here. If there are any questions from the audience, feel free.
They told me you have plenty of time and nothing else to do all day. So come on.
Awesome. All right. I'll just keep going. Obviously, specialty lending and the portfolio status there, it looks like you guys went non-accrual on one of the portfolios a while ago. Can you give us an update as to how things are going there in terms of recouping the capital outlay? What new tactics or other types of approaches have you taken to try to get those portfolios to perform?
On the M&A front, I've kind of stated that our goal was to do not just one, but multiple M&A deals over the next three years, kind of half in industrial and half in financial. We've been really working diligently to get to a place where we can get something done this year. The goal at the beginning of the year was to at least get something done this year. We have NDAs in place now where we're actively talking to four different entities. Nothing to announce other than the fact that we're in the early stages on some deals, but we're now in a more advanced stage on several deals where we've signed NDAs. We're giving them the information on us, which is not hard to find because we're public.
They're primarily private companies, so it takes a little longer to get and digest the information on them. From a strategic analytical fit, I'm very excited about what I think they could produce and that I think that getting those companies on board at HG would be a win for them, a win for us. I think preliminarily, they're very good cultural fits. I would give us an A for progress, but a C for expediting how fast it gets done. In between an A and a C makes a B, Mark.
Just along those lines, are we thinking financial asset businesses, industrial asset business, a little of both? Any kind of one area that you're focused a little more on?
I'm focused on both. Maybe the industrial asset ones are a little farther along than the financial asset ones. Other than a little farther along, we have an NDA out on each category.
Got it. Just pivoting back on the accrual portfolio of the lending portfolio, any updates there in terms of, I think, last quarter or maybe a couple of quarters ago, you guys talked about maybe using litigation and getting into the court systems in terms of being able to help along some of the portfolio recoveries. Any updates on those efforts or any other efforts?
Yeah. We're going to work hard on it's working is what I can tell you, but we're going to work hard over the remainder of this year really getting all the data together to really have a full year's analytics on how well it's working, so that sometime in Q1, we'll be able to really, at one of our earnings releases, go through in depth in a really kind of micro, not a macro sense, exactly how we think we've enhanced the collection operations with the numbers. Just from a preliminary outlook, while it's still early, everything has improved since we basically went to legal. We're matching, if not beating, the early forecast across the board on the legal collections. We're very optimistic that our plan was a smart plan that's being well executed.
Great. Just one quick one on tech. Obviously, AI is everywhere now. I'm sure it's found its way into your business to a certain degree. Do you have any specific use cases that you guys have been able to deploy AI, or how are you thinking about other types of AI or other machine learning technologies relative to your business?
Yeah. I'm not sure if you're aware, but Ross isn't actually here now. You're talking to an AI robot, Mark. Ross is out right now.
The answer should be good then.
Ross is in Vegas playing poker now, Mark. But speaking on his behalf as an AI robot, I'll kind of answer for him if that's fair, okay?
Sounds good.
There are some major game changers that are going to happen in the auction industry that are not that different than major game changers that may be happening in investment banking or any other commercial real estate or any other kind of service industry. There is a little bit different here, and I'll give you a little bit of the difference. Externally here, what's happening is the manufacturers are able to get better visibility on when they're going to have surplus asset, what asset they're not going to be needing in the future. The back end of the supply chain has been the most ignored end of the supply chain. Everybody focused on the front end, on the purchasing end and the savings there.
It was hard to focus on the back end of the predictability of the useful life of the asset versus the need for the asset versus the orders coming in that that asset produced. AI has really advanced the capability for manufacturers to really go in and predict what asset they will not need next quarter. You are seeing more assets come to market earlier, which brings a higher residual price, and it is a value to the seller and the buyer. That will be number one. AI across the board is revolutionizing sale prospecting, not just in our industry, but in all industries where it is giving us what industry could have the most surplus, what industry could have the most surplus that is needed in the most countries. It has really helped us there with the sales processing.
The flip side of that is then it helps with designing your auctions with a heightened bidding strategy because the more AI information you have, the more your bidding strategies work on what assets are going to be valuable, where you should be marketing them, what country could be needing them. In an age of information, the whole AI chat is going to kind of reinvigorate just enhancing knowledge across the board. We are not a huge inventor of AI, but in the end, I think we are going to be a huge user of AI.
That's helpful. Thanks for the thoughts there. I know we're kind of pushing maybe even over time here, but I have one last one. I know you talked a little bit about M&A, and that's an area that you guys are focused on. In terms of overall capital allocation strategy, I know you bought back some stock. You're obviously looking at M&A. I think the stock is trading here at, I'll call it, six-ish times on an EV/EBITDA basis for the 2025 numbers, obviously looking out maybe even less than that on a forward basis. How do you guys and the board think about capital allocation, buying your stock back versus buying other businesses? Do these acquisitions or M&A that you're focused on, do they have to be created right out of the gate? Any kind of thinking about capital allocation, I think that would be a great way to wrap up as far as I'd.
All right. I do not want to speak for the entire board because obviously everyone has different opinions and different thoughts at different times. Speaking for myself, I think that in the end of the day, nothing is as important as focusing on growing the company. And growing the company, nothing is as important as EPS. There should be a lot of focus on growing the top line. There should be focus on NOI. In the end of the day, to me, it is all about earnings per share. If you are really thinking about earnings per share, then you are thinking about both things at once. You are thinking about how to grow your profits and also how to have less outstanding shares. If you merge those two things together, you are driving for the ultimate gauge in what a great company is.
A great company is a company driven to EPS. Any company driven to EPS as their ultimate designated goal should be weighing always a buyback program against M&A, against organic de novo growth, and putting all those factors on the board on a monthly basis and looking at capital allocation tied to what is going to drive the ultimate end game of EPS. We are always looking at them both. We are always measuring them both. To me, long term, you have to have enough shares outstanding to make the company an attractive company. Do people feel enough float in? Do people feel they own a company that has enough availability? At the same time, you do not want to have too many shares outstanding. The primary driver has got to be growing the enterprise.
Growing the enterprise has got to be, above all, the ultimate goal you're seeking at all times. If there's always a choice of where to use the capital, my choice of using the capital will always be either M&A, as I believe will be accretive over a reasonable period of time, and/or organic growth of hiring the best people and building out the sectors and the buyback program being tertiary to that. That's kind of where we stand. We want this company to be viewed as a growth company. A company viewed as a growth company is not a company who overemphasizes buybacks over building the enterprise.
A growth company is a company that is not afraid of buybacks, that embraces buybacks when they think their stock is undervalued, but also believes the greatest way to raise the value of the stock is to outperform the marketplace as an enterprise.
Bud, thanks for laying that out. Very succinct.
I didn't do that, Mark. My AI robot partner did that for me.
I know. Yep. AI Ross is on it, so.
That guy's good. That guy's good.
Yeah. He's good. I think that's probably a natural pause here. I don't know if there were any other questions, but I think that's probably.
I'm told that I have questions. I don't know if there's a moderator who could read me the questions, but I'm told that I have questions. Oh, somebody's handing me the questions now. Hold on. I think from here for Mark. Here's the question. I have a question from Maxim Groot that wants to know what's going on with BNPL. The answer to that question would be BNPL has been steadily growing, Keith. The reason is obviously it's the newest one. We've had a 30-year track record of selling credit cards, selling auto paper, and other consumer paper. Thirty years ago, BNPL did not exist. BNPL has been growing steadily. As the companies are growing, they can't grow without simultaneously growing the portfolio of people that aren't paying.
They've now realized over some period of time that they have to have a partner in the marketplace helping them address their non-performing loans as their overall portfolios are growing. BNPL is very successful. It's a growing entity. You see constantly new people entering and the existing people growing. As they grow, the good news for us is a part of their growth will produce more asset flow. I see that the second question is coming from where? From Thomas Smith. What competitive advantages allow Heritage to consistently win bids with a financial institution? If you're talking about a financial institution on the financial asset side, NLAX is over a quarter century old, and there's a significant barrier to entry there that the sellers of the assets care very much about protecting the personal property information of everybody basically in their portfolio. NLAX has vaults.
NLAX has high security. Tom Ludwick, who runs compliance there, is literally an industry and international leader in the kind of protecting of the privacy information. So they're very comfortable there. NLAX has went out and spent substantial time vetting the people that sells the assets to so that the institutions are very comfortable that when they give us the portfolios, we're going to sell them safely and properly to qualified buyers. So there's a significant barrier of entry that we've been able to really define ourselves as number one in that sector. What is it? I think we're running out of time. We're running out of time now. If anybody has any other questions, we're around. We're giving multiple presentations tomorrow. If you want to listen to those presentations and ask questions afterwards, we would welcome your attendance. Thank you all for paying attention today.
A special thanks to Mark Argento from Lake Street for coming on in and helping us out and being a great banker to us and a great partner. Thank you, Mark, and thank you all for listening.
Thank you.
Thank you. That concludes Heritage Global's presentation. You may now disconnect. Please consult the conference agenda for the next presenting company.