Kingsway Financial Services Inc

Good day, and welcome to the Kingsway First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. With me on the call are J.T. Fitzgerald, Chief Executive Officer, and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone that today's conference may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses, and future business outlook. Actual results or trends could materially differ from those contemplated by those forward-looking statements. for a discussion of such risks and uncertainties which could cause actual results to differ from those expressed or implied in the forward-looking statements. Please see the risk factors detailed in the company's annual report on Form 10-K and subsequent Form 10-Qs and Form 8-Ks filed with the Securities and Exchange Commission. Please note also that today's call may include the use of non-GAAP metrics that management utilizes to analyze the company's performance. A reconciliation of such non-GAAP metrics to the most comparable GAAP measures is available in the most recent press release, as well as in our periodic filings with the SEC. Now, I would like to turn the call over to JT Fitzgerald, CEO of Kingsway. JT, please proceed.

Thank you, Holly. Good afternoon, everybody, and welcome to the Kingsway earnings call for the first quarter of 2024. It's only been a short time since our last earnings call in March, so thank you all for joining us again today. We finished the first quarter of 2024 with financial results that are largely in line with our expectations, particularly in light of current market conditions that are impacting certain of our operating entities. Most importantly, our strategy and investment thesis remain the same. Execution at our operating businesses while growing through acquisitions to deliver sustainable long-term growth in cash flows and generating attractive returns for our shareholders. Let's first look at the consolidated financial results. For the first quarter of 2024, consolidated revenue was $26.2 million, roughly in line with the prior year quarter. An adjusted consolidated EBITDA was $2.1 million, compared to $2.4 million in the year-ago quarter. For the extended warranty segment and the KSX segment, combined adjusted EBITDA was $3.0 million compared to $3.5 million for the year-ago quarter. In our extended warranty segment, our vehicle service agreement, or VSA, companies were again impacted by an increase in average claims expense and persistent macroeconomic conditions, namely tighter credit conditions and lower loan volumes compared to the same period last year, making for a challenging year-over-year comparison. Despite the revenue headwinds facing the industry, we were able to sell more contracts in Q1 2024 and at a higher average revenue per contract than last year. However, the claims severity we saw moderating as we exited 2023 ticked back up in Q1 with higher labor costs driving higher claims expenses in the quarter. I would note that we didn't see claims inflation really pick up until Q2 and Q3 last year, so we expect more favorable comparisons in the quarters ahead. All in all, challenges faced by the businesses in our extended warranty segment are moderating, and importantly, we remain focused on controlling what we can, improving contract production and managing our costs. We are seeing positive improvement thus far in 2024 with performance in March better than when we started the year, and importantly, we continue to expect improving financial results in 2024 compared to last year. Moving to our search accelerator, or KSX segment, higher revenues were primarily driven by the recent acquisitions of SPI and DDI in the second half of 2023. Ravix has continued to perform ahead of our original investment thesis, and in the first quarter, adjusted EBITDA improved compared to last year, despite a slight decrease in revenue. Strong utilization and higher gross margins combined with tight expense management delivered improved EBITDA margins in the quarter. At C-suite, revenue and adjusted EBITDA were lower than prior year. However, gross margins continue to be strong and expenses are down from prior year. Looking ahead, the private equity and M&A environment is showing signs of reinvigoration and the team is bolstering its pipeline of new deals. While it is early in the year, we have begun to see business activity improve, and both Ravix and C-Suite have added business development talent to accelerate revenue growth. At SNS, consistent with market trends, the per diem business continues to perform well, while market demand for travel nurses has continued to be challenging. This has resulted in much lower revenue and adjusted EBITDA in Q1 2024 than a year ago. However, our travel business is rebuilding and industry intelligence supports our view that travel demand is stabilizing and long-term demand for nurse staffing will be strong given the projected persistent shortage of registered nurses over the next several years. We remain bullish on this business for the long term. At Systems Products International, or SPI, the team is developing and executing a strategy to grow annual recurring revenue, or ARR. Since acquisition, the company has signed heap new clients who are at various stages of implementation. Once onboarded, these customers should provide a nice lift to ARR. Additionally, SPI is executing several promising strategies to increase penetration and grow market share in its core market. The company is also expanding its high-value partnerships to bring innovative solutions to their new and long-standing customers. At Digital Diagnostics Imaging, or DDI, revenue continues to grow both month-over-month and year-over-year, with several new hospital customer ads in the quarter. Q1 revenue exceeded the prior year by over 20 percent. EBITDA trailed the prior year slightly as the company is investing to support the growth they are seeing. DDI is focused on building the internal infrastructure and processes to scale alongside the high level of demand they are seeing while also ensuring continued excellent levels of quality and care. Now turning to KSX search activities. Growth through acquisitions remains central to our corporate strategy, targeting opportunities that deliver predictably high returns on tangible capital in large and growing end markets. While the timing of completing a transaction is challenging to predict, we are encouraged by the strength of our pipeline and continue to target the completion of two to three deals over the next year that can each generate one to three million in annualized EBITDA. Given the recent performance noted above, our 12-month run rate adjusted EBITDA for the operating companies is now 16 to 17 million. As a reminder, run rate is intended to capture the last 12-month EBITDA of the businesses we currently own, including those we've recently acquired. It is not intended to be forward-looking. As a reminder, we currently have four highly talented operators and residents who are actively searching for opportunities and evaluating a number of potential acquisition targets. Our deal pipeline is the most robust that I have seen it, reflecting both the hard work of our OIRs as well as the systems and processes we have put in place for effective sourcing. That, combined with an improving overall M&A environment, gives us confidence in our ability to execute our plan. We are also actively recruiting our next cohort of OIRs. We received interest from over 60 qualified candidates in the first quarter alone. As always, we will remain highly selective about who we bring into the program. We are focused on delivering long-term results for you, our shareholders. We continue to make great progress. With that, I'll now turn the call over to Kent for a deeper review of our financials.

Thank you, JT. As a reminder, during the fourth quarter of 2022, we began executing a plan to sell one of our subsidiaries, VA Lafayette, which owns a medical clinic whose sole tenant is the U.S. Veterans Administration. As part of our strategic shift away from the leased real estate segment, VA Lafayette is included in discontinued operations, and its assets and liabilities are reported as held for sale. The results of its operations are reported separately and not included in the results I'm about to discuss. Since JT already covered the results of extended warranty and KSX, I won't rehash those now. I'll start with our balance sheet and cash flows. At the end of the first quarter of 2024, we had cash and cash equivalents of $12.1 million compared to $9.1 million at the end of 2023. In Q1 2024, we drew $3.5 million on our delayed draw term loan and a half a million on our KWH revolver. Given the delayed draw term loan expired at the end of February, we felt it prudent to have some dry powder on our balance sheet. Cash provided by operating activities from continuing operations was $0.2 million for the first three months of 2024 compared to cash used in operating activities of $22.8 million in the year-ago period. A large portion of the cash used in operations in the prior year was related to payment of deferred interest on the trust's preferred debt instruments that we repurchased during the first quarter of last year and payment of deferred interest on the remaining trust preferred debt instrument that we did not buy back. We had total outstanding debt, which is comprised of bank loans and trust debt, of $47.1 million at the end of the first quarter of 2024, compared to $44.4 million at the end of 2023. Net debt decreased to $34.9 million as of March 31, 2024, compared to $35.3 million at the end of 2023. In March of this year, our securities repurchase program was extended for one year through March of 2025. During 2024, we repurchased 8,000 shares of common stock for an aggregate purchase price of approximately $100,000. To date, the company has repurchased securities at a total cost of $7.2 million. That's total under the program. In summary, the first quarter financial results were largely in line with our expectations. Our balance sheet remains healthy, and we are poised for improving results as we progress throughout 2024. Our annual general meeting of shareholders and Investor Day will be held at the New York Stock Exchange on Monday, May 20, 2024. The AGM will begin at 9 a.m. Eastern, and the Investor Day presentation will begin at 9.30 a.m. Eastern. Will Thorndyke has agreed to join us for a fireside chat to share his thoughts on capital allocation, the power of long holding periods, and his experience as an original and long-term investor in the search fund ecosystem. Anyone interested in attending the in-person Investor Day, as well as the off-site cocktail reception, may RSVP by emailing james at haydenir.com. His email is in today's press release. We hope to see you there. I'll now turn the call back over to Holly to open the line for questions.