Kingsway Financial Services Inc

Good day and welcome to the Kingsway second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. With me on the call are JT Fitzgerald, Chief Executive Officer, and Kent Hanson, Chief Financial Officer. Before we begin, I want to remind everyone that today's conference call 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 of 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 the Form 10-K and subsequent Forms 10-Q and Forms 8-K filed with the Security and Exchange Commission. Please note also that today's call may include the use of non-GAAP metrics that management utilises to analyse 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 the company's 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, Jenny. Good afternoon, everyone, and welcome to the Kingsway earnings call for Q2 2025. To our knowledge, Kingsway is the only publicly traded U.S. company employing the search fund model to acquire and build great businesses. We own and operate a diversified collection of high-quality services companies that are asset-light, profitable, growing, and that generate recurring revenue. Our goal is to compound long-term shareholder value on a per-share basis, and we believe our business can scale due to our decentralized management model, and our talented team of operator CEOs. We also continue to benefit from significant tax assets that enhance our returns. In short, Kingsway is uniquely positioned to capitalize on the search fund model at scale within a tax-efficient public company framework. The second quarter of 2025 marked a major inflection point for the company. After years of investment in our Kingsway search accelerator, or KSX platform, our board of directors, with management support, made an exciting decision. We are ready to accelerate growth. By following our public search fund strategy, we believe that we have a compelling opportunity to build a much larger and far more profitable Kingsway. On June 24th, Kingsway announced a private placement of common shares, or PIPE transaction, with five high-quality and long-term institutional investors who contributed $15.7 million of capital to the company. We believe the funds received from the PIPE, in combination with operating cash flow and capital from other non-dilutive sources, will provide Kingsway with the financial resources to scale faster and to deliver the company's multi-year growth ambitions. Concurrent with the announcement of the PIPE, We also increased our target range for the number of KSX acquisitions the company expects to complete each year from two to three per year to three to five per year. This upgraded target underscores our confidence in the KSX model and the strong visibility we have into a growing pipeline of high quality opportunities. I'm pleased to share that since completing the pipe, we have executed three acquisitions that are each a terrific fit for our search-driven strategy. On July 1st, we completed our ninth KSX acquisition via the purchase of Roundhouse Electric and Equipment Company for $22.4 million. At the time of the acquisition, Roundhouse's trailing 12-month unaudited revenue was $16 million, and its trailing 12-month unaudited adjusted EBITDA was $4.2 million. Roundhouse based in Odessa, Texas, is a leading provider of industrial scale electric motor maintenance, repair, and testing solutions. This acquisition checks all the boxes for what we look for in a KSX business. It is capital light, roughly 90% of its revenues are recurring or reoccurring, and Roundhouse's services are considered mission critical by its customers, who are generally midstream natural gas pipeline operators and natural gas utilities in the Permian Basin. Roundhouse has excellent growth prospects underpinned by two clear secular trends. First, there is strong demand for additional pipeline capacity in the Permian Basin. Based on public statements, the four largest midstream natural gas pipeline operators collectively expect to increase their capacity by approximately 17 percent by the end of 2026. with even more growth in the years thereafter. Second, the industry is rapidly shifting from motors with combustible engines to motors with electric engines, which require less maintenance, have lower operating costs, and achieve better uptime. In 2020, an estimated 10% of compression horsepower in the Permian Basin was electric. Today, that number is over 20%. In the years ahead, we expect electric motors to become the dominant engine type in the Permian. This is a wonderful tailwind for Roundhouse's business. Miles Mammon, the operator in residence at Kingsway, who sourced and led this transaction, has stepped into the CEO role at Roundhouse. We are excited to support Miles as he partners with Roundhouse's exceptional leadership team, including Lee Hudson, who is remaining with the company as president. to drive the next phase of growth. We are pleased to welcome Roundhouse to the Kingsway family and look forward to being a great supportive partner. On August 1st, we completed our 10th KSX acquisition via the purchase of AAA Flexible Pipe Cleaning Corp, which operates as Advanced Plumbing and Drain, a well-respected plumbing services provider based in the Cleveland, Ohio metro area. This marks the second acquisition under our Kingsway skilled trades platform, and it's another strong addition to our portfolio. Advanced Plumbing and Drain is the second largest commercial plumbing business in its MSA. It is a capital light, profitable business with a 100-year legacy and an impressive book of reoccurring revenue. Its operations span both commercial and residential plumbing services with commercial work representing about two-thirds of the business. Kingsway acquired the company for $3.5 million plus a potential earn-out of up to $1.5 million for a total maximum purchase price of $5 million. And we expect the company to generate $7 million in revenue and approximately $700,000 in pro forma EBITDA in its first year. We see a clear path to significant revenue and profit growth as we invest in people, new service lines, and marketing. I want to congratulate Rob Casper, CEO of Kingsway Skilled Trades, for closing this deal and for the terrific progress he is already making across the Skilled Trades vertical. With Bud's Plumbing and now Advanced Plumbing and Drain now in the portfolio, we are gaining real traction in building a differentiated, high-quality platform with scale. Also on August 1st, our operating subsidiary, Ravix Group, completed our 11th KSX acquisition. via the strategic tuck-in acquisition of the HR Team, a specialized human resources service firm based in Maryland. The HR Team expands Ravix's capabilities in HR services, strengthens Ravix's presence on the East Coast, and accelerates Ravix's growth in the nonprofit membership organization and government services verticals. There is a high degree of cultural fit and alignment between the two organizations, and integration efforts are already underway and progressing smoothly. Senior leadership from the HR team remains actively engaged to ensure continuity of service during the integration period. This type of tuck-in is a perfect example of how we empower our portfolio company leaders to grow their businesses well beyond the initial acquisition. Timmy Oka continues to do an outstanding job leading Ravix, building out the team, expanding service lines, and executing thoughtful, high-impact growth initiatives. Moves like this reinforce our broader strategy of backing great operators and then giving them the tools and support to succeed. It's a clear validation of the KSX model and the caliber of leaders we have at Kingsway. Year to date, we have acquired five high quality asset light services businesses at the top end of our recently increased target range for KSX acquisitions per year. We are excited about the momentum building across Kingsway and energized by the pace and quality of acquisition activity so far in 2025. We currently have two operators and residents, or OIRs, who are actively searching for our next acquisition targets. and we are in the process of interviewing high-quality candidates to expand this bench. We are seeing exceptional interest in our OIR program, and the caliber of applicants continues to get better and better. With our strong pipeline of entrepreneurial talent, we are positioning Kingsway to efficiently source, acquire, and scale additional businesses that fit our model. As of quarter end, Our trailing 12-month adjusted run rate EBITDA for the businesses we own today stands at approximately $22 to $23 million. This metric provides a view of how the company would have performed over the last 12 months if Kingsway had owned all of our current businesses for that entire time. Gap results, in contrast, only capture the performance of the acquired businesses from their respective close dates onward. We believe this metric is particularly relevant during periods of high M&A activity like the past few years and better reflects the run rate earnings power of our current portfolio. It's also worth noting that in calculating this metric, we are not using modified cash EBITDA for our extended warranty businesses. As we've discussed in previous earnings calls, many in the extended warranty industry prefer to use a metric called modified cash EBITDA. when assessing and valuing extended warranty businesses. This is because under GAAP accounting, growing extended warranty businesses often see their EBITDA penalized, while shrinking extended warranty businesses often see their EBITDA boosted due to the timing differences in how revenue is recognized. Kingsway's extended warranty businesses are back in growth mode, and a GAAP has recently opened up between adjusted EBITDA and modified cash EBITDA. Compared to one year ago, trailing 12-month mod cash EBITDA for Kingsway's extended warranty businesses, which is how we assess the performance, is up 1.9%. In contrast, compared to one year ago, trailing 12-month adjusted EBITDA for Kingsway's extended warranty businesses is down 25.9%. Over time, adjusted EBITDA and mod cash EBITDA converge, and we expect the same to occur for Kingsway. To sum up, The second quarter was a quarter of significant progress for the company. We added capital to fund our multi-year growth ambitions, increased our acquisition targets, and delivered three attractive acquisitions. The earnings power of our KSX segment is now at a record high, and we feel like we're just getting started. With that, I'll turn the call over to Kent for a closer look at our second quarter financial performance. Kent?

Thank you, J.T., and good afternoon, everyone. For the second quarter, consolidated revenue was $30.9 million, an increase of 16.9 percent compared to $26.4 million in the second quarter of 2024. Consolidated adjusted EBITDA was $1.7 million for the three months ended June 30, 2025, compared to $2.5 million in the prior year quarter. In our KSX segment, Revenue increased by 42.1% to $13.3 million in Q2, up from $9.3 million in the same quarter a year ago. Adjusted EBITDA increased by 31% to $2.4 million, compared to $1.8 million in the year-ago quarter. The increases were driven by recent acquisitions as well as by organic growth. Overall, we continue to see strong momentum across the KSX portfolio, with contributions from both new and established businesses helping drive both the top and bottom line. Importantly, many of our operating businesses are setting themselves up to accelerate growth in the quarters ahead. Ravix and C-Suite, which are operated by Common Management and provide outsourced finance, human resources, and CFO services, hired a new director of sales to lead client acquisition efforts and enhance sales execution and client engagement. S&S appears to have turned the corner and delivered encouraging volume trends this quarter with both travel shifts and per diem shifts up double digits year over year. SPI Software delivered an outstanding quarter with strong customer go-lives and high-adjusted EBITDA. DDI's revenue growth was solidly in the double digits. Image Solutions has rebuilt its sales team, negotiated and signed an MSA with a key customer, and is planning for solid growth in the back half of the year. And Bud's Plumbing is off to an excellent start under the Kingsway skilled trades platform. Simply put, there's a lot to be bullish about in the KSX portfolio of operating companies. Moving to our extended warranty segment, revenue increased by 3.1% to $17.6 million in the second quarter, up from $17.1 million in the prior year period. Adjusted EBITDA was down to $600,000 from $1.6 million in the prior year quarter. As JT discussed earlier, the extended warranty segments modified cash EBITDA, a key industry metric that more closely reflects the cash flow dynamics of the warranty businesses, showed improvement. Trailing 12-month mod cash EBITDA for extended warranty ended the quarter up 1.9% relative to one year ago. In addition, cash sales were up 9.2% year-over-year for the quarter, an acceleration from Q1, and are now up 6.5% year-to-date. Demand for our warranty services continues to strengthen, and the improvement in cash sales reinforces our confidence that GAAP earnings will recover over time as deferred revenue from recent cash sales is recognized. Overall, the extended warranty segment remains cash generative and well-positioned for continued success. Let's now turn to the balance sheet and capital structure. As of June 30, 2025, we held $12.1 million in cash and cash equivalents, up from $5.5 million at year-end. Total debt was $58.3 million at quarter-end, compared to $57.5 million as of December 31, 2024. Our debt consists of $43.4 million in bank loans, $1.1 million in notes payable, and $13.9 million in subordinated debt. Net debt, or debt minus cash, at quarter end was $46.3 million, down from $52 million at year end. The decrease in net debt is primarily related to net proceeds from the private placement we completed during the second quarter. Turning briefly to a legacy legal matter, during the second quarter, we recorded $600,000 of expense related to a settlement agreement with Aegis Security Insurance. This stems from a longstanding dispute tied to customs bond issues related to Lincoln General, a former Kingsway subsidiary placed into liquidation nearly 10 years ago in 2015. Importantly, our reimbursement obligations under this agreement ended on June 30, 2025, so this expense will not recur going forward. Additional information regarding this item can be found in our Form 10-Q. Let me turn things back over to JT for a few final thoughts before we open the line for questions. JT?