Kingsway Financial Services Inc

Good day, and welcome to the Kingsway third 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 everybody 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-Q and Form 8-K 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 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, John. Good afternoon, everybody, and welcome to the Kingsway earnings call for the third quarter of 2024. Let me start by saying that we had another very solid quarter that was largely in line with our expectations. We saw improving performance in our extended warranty segment, which showed strong cash sales and a continuing moderation of claims experience, and exited the quarter with nice momentum heading into the fourth quarter. Our KSX segment also performed to our expectations with adjusted EBITDA improving sequentially and year over year. The third quarter was highlighted by our acquisition of Image Solutions at the end of September, marking our sixth acquisition in our accelerator portfolio. Image Solutions is one of the largest IT managed service providers in Western North Carolina with approximately 85% contractual recurring revenue. with low churn, strong margins, and impressive historical organic growth. We acquired the company for $19.5 million, roughly 6.3 times TTM EBITDA, plus some transaction expenses and a small working capital adjustment, and an all-cash transaction. As a service business operating in an industry with attractive long-term growth opportunities, established customer relationships and a high margin asset light business model with 12 month adjusted EBITDA of 3.1 million for the 12 months ended June 30th, 2024. Image Solutions met all of our clearly defined investment criteria. Davide Zanke led the deal and has since transitioned from his role as an OIR to the CEO of the company. Davide and his team will be focusing on scaling the business by further penetration of their existing market, expanding its service area geographically, and eventually expanding its offerings to include services such as cybersecurity and cloud storage. As you may know, Image Solutions is in the middle of the area that was devastated by Hurricane Helene. Fortunately, our team members and their families were all safe, and the region continues to recover. Image Solutions was one of the first IT providers to get back up and running and has been working tirelessly to help its customers and prospects get back to business. We believe any short-term impacts from this storm are delayed revenue rather than lost revenue, as hardware installations are being rescheduled to later this year. Operationally, the third quarter was, again, largely in line with our expectations. Consolidated revenue was $27.1 million, a solid increase of nearly 10% compared to the prior year quarter. Our consolidated adjusted EBITDA was $2.9 million, a 28% improvement over the $2.3 million in the year-ago quarter. For the extended warranty segment and the KSX segment, combined adjusted EBITDA was $3.4 million in the third quarter, an increase of 5% compared to $3.2 million in the third quarter of last year. Digging into our extended warranty segment, a slight increase in the sale of warranty contracts and higher cash sales drove a 3.4% increase in revenue Claims expense rose by 7.5% over the third quarter of last year, which is lower than the 12% increase that we experienced in the year-ago period. Year-to-date claims expense is up 7.3% over prior year compared to an 11% increase in the year-ago period. Adjusted EBITDA of 2.1 million was essentially flat to prior year as an increase in claims offset gains from increased revenue and ongoing cost savings initiatives. While the impact from claims inflation have not abated quite as quickly as anticipated, they are improving. We also see opportunity for accelerating growth in our credit union and mechanical businesses. IWS's opportunity pipeline has returned to pre-pandemic levels and is currently onboarding two new significant credit union partners. while Trinity, our commercial HVAC and refrigeration warranty business, continues to grow and hit record levels of revenue and profitability. We also believe that any future interest rate cuts from the Fed could have a positive impact on our extended warranty business, as lower interest rates make auto financing more affordable for the end customer. In our search accelerator, or KSX segment, revenues increased 23% compared to the year-ago quarter, primarily as the result of a favorable comparison due to the acquisition of SPI late in the third quarter of last year and the acquisition of DDI in the fourth quarter of last year. Q3 2024 results exclude those of Image Solutions as we only owned that business for a few days during the quarter. Within KSX, talk about each one of those businesses. At Ravix, the team focuses on increasing utilization rates and managing costs to improve profitability. Gross margins improved slightly for both the third quarter and year to date compared to prior year periods, despite a slight decline in revenue. Adjusted EBITDA was down in the third quarter compared to the third quarter of last year. Overall, The venture market remains slow in the quarter with deal volume depressed as fewer new companies are being funded and in need of our services. However, the market is showing signs of recovery. October was a favorable month from a new opportunity perspective as the team's marketing efforts are starting to generate solid leads and the trend of closed deals over prior year turned positive for the first time this year in October. Similarly, at C-suite, persistent challenging market conditions were again an overhang for the business in the third quarter. The team has a solid pipeline of staffing requests. However, with a slower private equity deal market and macro uncertainty, the team is experiencing placement deferrals. Importantly, the placements are being deferred and not canceled, and we continue to believe the business has a healthy outlook and is headed in the right direction strategically. For the third quarter, revenue was lower than the prior year period, yet the impact of operating income and adjusted EBITDA was diminished by a lower cost of sales and lower G&A expenses. At SNS, our nurse staffing company, we made great progress on the rebuild of our travel business in the quarter. The number of total shifts increased 5% year over year, while travel shifts increased 73% year over year, and the number of travel nurses on assignment has more than doubled since the beginning of the year. In spite of higher shift counts, competitive pressure on pricing caused revenue to decline roughly 1% in the current quarter versus last year. Adjusted EBITDA was also slightly down compared to prior year, but the magnitude of decline is much less than we saw in the first half of 2024. We're beginning to see a positive change in the industry, and Charles continues to focus on margins, working capital management, technology upgrades, and building a bench of top-notch recruiters. We remain optimistic about the outlook for the nurse staffing market and the prospects for this business. At SPI, our global software solutions provider for the management of share-owned properties, revenue increased, and in fact, year-to-date revenue through the first nine months of 2024 is on par with the full-year revenue number that we used to base our investment decision just a year ago. Since acquisition, SPI has grown its ARR, annual recurring revenue, by 16 percent, expanded its capabilities through discipline recruiting and development of its team, added new clients, and expanded with existing customers. Operational metrics are also up across the board with solid ARR growth and excellent growth and net retention dynamics. Drew and the team are building a solid pipeline of qualified leads for continued ARR growth. At DDI, our provider of fully managed outsourced cardiac monitoring services, investments that have been made in infrastructure and talent are beginning to pay off. The team opened its second operations center in Salt Lake City in the third quarter, which provides not only the capacity needed to grow, but also reduces the business risk associated with having only a single operations center. Revenue continues to grow over prior year pre-acquisition periods, with revenue in the quarter up 20% year-over-year and up 19% year-to-date. Adjusted EBITDA was down modestly in the quarter and from prior year periods due to the aforementioned investments and growth. DDI has a robust backlog of new customers that will be onboarded over the next couple of quarters, and the near- to mid-term pipeline of opportunities also remains strong. We expect profitability to improve as the business scales. Based on the performance of our operating businesses, the 12-month run rate adjusted EBITDA improved to 18.5 million to 19.5 million. Those numbers include image solutions. As a reminder, run rate is intended to capture the last 12 months of adjusted EBITDA for the businesses we currently own, including those we have recently acquired. Of note, run rate adjusted EBITDA was negatively impacted in the quarter by a roughly 100 basis point reduction in the reinvestment market yield on our warranty float at quarter end. Last week, we announced that Rob Casper has joined Kingsway as our newest operator in residence. Rob previously led private equity-backed consolidations in the veterinary services in HVAC and plumbing industries and has developed a solid investment thesis targeting a couple of attractive service industries. Rob is a graduate of the United States Naval Academy and served three deployments as an officer in the Marine Corps. He holds a Bachelor of Science degree in systems engineering from the Naval Academy and an MBA from Harvard Business School. Rob brings really terrific leadership and operational execution experience to the team and has hit the ground running. With the addition of Rob and Davide transitioning to CEO of Image Solutions, we currently have four OIRs who are actively searching for acquisition opportunities. We have a great current cohort of entrepreneurs and a solid deal flow pipeline to support our strategy of acquisitive growth within our accelerator segment. To summarize, solid operational execution and discipline management drove improved consolidated financial results for the third quarter and we're seeing promising signs of further improving market conditions. We're excited about the opportunities with the addition of image solutions to our KSX portfolio and remain committed to our corporate strategy of growth through acquisitions. I'll now turn the call over to Kent for some additional commentary related to the financials.

Thanks, 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. In August, we completed the sale of the VA clinic. The final adjustment between the net carrying value of the assets and the selling price, as well as the loss on disposal, are recorded below the operating line in discontinued operations. As JT discussed, we acquired Image Solutions during the third quarter for $19.5 million, plus transaction expenses and a working capital adjustment. The transaction was funded by $11.4 million in cash and $7.75 million in debt financing. The $11.4 million came primarily from the proceeds of the issuance of 330,000 shares of newly created Class B convertible preferred stock and proceeds from drawing on our existing KWH loan and cash on hand. The $7.75 million of debt financing was provided by Avid Bank in the form of a six-year term loan with a graduated amortization schedule that is non-recourse to Kingsway. Also during the third quarter, we completed an accretive purchase of the 10% interest in IWS that we did not previously own, and as such, IWS is now a wholly owned subsidiary of the company. As of September 30th, we had cash and cash equivalents of 6.5 million compared to 9.1 million at the end of 2023, and total debt outstanding of 58.5 million compared to 44.4 million at the end of 2023. Our debt balance is comprised of 44.8 million of bank loans and 13.7 million of subordinated debt. Net debt increased to 52 million as of September 30th, 2024, compared to $35.3 million at the end of 2023, primarily due to the $7.75 million of acquisition financing for InMIS Solutions, and a $1 million draw on the KWH revolver, as well as a $6.5 million draw on the KWH delayed draw term loan. In March of this year, our securities repurchase program was extended for one year through March of 2025. Year to date, we have repurchased 312,850 shares of common stock for an aggregate purchase price of approximately $2.5 million. I'll now turn the call back over to John to open the line for any questions.