Kingsway Financial Services Inc. Q1 2023 Earnings Call
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Good day and.
[noise] welcome to Kingsway first quarter 2000 twenty-three earnings call. At this time, all participants have been placed in a listen only mode and the floor will be open for questions and comments. After the presentation. If you would like to join the queue at any time to ask a question you May press star one on your telephone keypad should you wish to remove yourself.
Q you May press star two.
With me on the call or J T Fitzgerald, Chief Executive Officer, and can't Hanson, Chief Financial Officer before.
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 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 risk factors detailed in the company's annual report on Form 10-K, as well as other reports that the company files from time to time with the Securities and Exchange Commission.
Please note too that today's call may include the use of non-GAAP metrics that management utilizes to analyze the company's performance.
Reconciliation, such non-GAAP metrics to the most comparable gap metrics is available.
And our most recent press release as well as in our periodic filings with the S. P. C. Now I'd like to turn the call over to J T. Fitzgerald C E O of Kingsway J T. Please proceed.
Thank you Tom.
Good afternoon, and welcome to the Kingsway first quarter 20 twenty-three earnings call.
Thank you for joining us.
Let me let me begin by saying we were very pleased with our start to 20th twenty-three with solid financial performance and operating results to generally met our expectations. Despite an environment of macro uncertainty regarding interest rates and inflation and.
Importantly, we further simplified and strengthened our balance sheet with the repurchase of nearly all our trust preferred that and recorded a nice game with.
Cleaned up balance sheet, and look and the liquidity and capital resources. We have available we are poised to execute on our strategy for future growth.
As of March 31st 2023 are trailing 12 months consolidated adjusted EBITDA was 11, and a half million dollars an increase of nearly 80% over the comparable year ago period.
Are trailing 12 months adjusted EBITDA run rate of our operating businesses continues to be in the 18 to 19 million range.
Turning first to our extended warranty segment.
On a pro forma basis first quarter warranty revenues increased 3% over last year and pro forma adjusted EBITDA increased by 17%.
Please note that are pro forma results exclude Pwm's C, which was sold in Q3 of 2022.
At our auto focus warranty businesses hire used car prices and increasing financing costs continue to have a modest impact on industrywide demand.
Despite these macro conditions are warranty businesses continue to execute and find opportunities for growth.
As used car prices begin to normalise, particularly at the older end of the spectrum, where our products are most relevant we continue to expect that declining used car prices will offset some of the impact of higher borrowing costs.
At our mechanical and Aidsvax focus warranty business ongoing supply chain backlogs for new equipment continue to pose challenges as the supply chain freeze up and those machines are shipped and installed we expect that the associated warranty revenues will revert to historical growth trends.
And our search accelerator or K S X segment revenues grew by 131% compared to the first quarter of last year and adjusted EBITDA 1.7 million was up 93 per cent.
This segment of our business is currently comprised of three operating entities <unk> see sweet and secure nursing services or S. N S.
As you May recall in November 2023, we acquired C suite of National Financial Executive services firm that provides financial management leadership in the U S and S. N S. A staffing agency for the nursing and healthcare vertical.
212023 is the first quarter that includes a full period of results for these two entities Kent.
<unk> will provide more details later in the call, but we are encouraged by the early performance of these acquired businesses.
Turning to the balance sheet.
During the quarter, we repurchased nearly all of our trust preferred that or trucks that as we call. It that was under option using available funds from working capital.
Paid 56.5 million for five of the six remaining trucks tranches with this transaction, we recognize the gain on extinguishment of debt of $31.6 million.
As of the end of the first quarter, we had a carrying value of $11.8 million related to the remaining trucks that instrument.
In March the board approved a one year share repurchase program and authorized the repurchase of up to $10 million of our stock through March 21st 2024.
We believe it is a good corporate practice to have a plan in place and the flexibility to allocate capital towards repurchasing shares.
We are acutely focussed on maximising intrinsic value per share and if market conditions provide opportunities, we will allocate capital to accretive repurchases of our stock.
Our priorities for 2023 and beyond remain the same strategically allocating capital to build a business that delivers sustainable longterm growth.
Generates positive cash from operations and provides an attractive return for our shareholders. We are targeting two to three new acquisitions per year that fit are clearly defined acquisition criteria and will generate annualized adjusted EBITDA in the range of one and a half million to 3 million each.
We aim to do this by in part attracting developing and retaining world class tell a talent within our K S. X platform, we have a great team of talented professionals, who are actively searching for acquisition targets that fit are defined set of criteria and our acquisition pipeline is strong.
Subsequent to the end of the first quarter, we added a new operator and residents or Oh I R. Mr. Peter her to the Chaos X platform Peter.
Peter joins us from Centerview partners, where he advised companies across a broad range of industries on key strategic and financial matters, including mergers and acquisitions, we welcome Peter to the team and look forward to supporting him in his search for a great company to acquire and run.
Also subsequent quarter, and we announced that we welcome Charles Joyce to Kingsway as Vice President of business development for our Chaos X platform.
This is a new position at the company <unk>.
Charlie joins us from Forest Circle, LLC, a search investment firm, where he was responsible for sourcing and evaluating investment opportunities weirdos.
We are delighted to welcome Charlie to the team as we build out our deals sourcing engine for future acquisitions.
And finally before I turn the call over to <unk> for a more in depth discussion of the numbers I would like to remind everyone that we are hosting our annual general meeting of shareholders along with an Investor day at the New York Stock Exchange next Tuesday may 16th the.
A G M will begin at nine am eastern time, and the Investor Day presentation will follow immediately thereafter.
I will now turn the call over to Kent for review of our financial results.
Okay.
Thank you J T before I get started as a reminder, during the fourth quarter of 2022, we began executing a plan to sell one of our subsidiaries VA Lafayette is part of our strategic shift away from the least real estate assets and a simple fire capital structure.
Lafayette is included in discontinued operations and its assets and liabilities are reported is held for sale <unk>.
The results of its operations are reported separately not included in the results on I'm about to discuss.
Income from continuing operations was $27.7 million for the first quarter of 2023 compared to a loss from continuing operations with $4 million in the first quarter of 2022.
The current period includes a 31.6 million dollar gain on the extinguishment of debt related to the repurchase of our chops.
As well as interest expense at all six chances through the date of repurchase.
Consolidated adjusted EBITDA was.
It was $2.4 million for the first quarter of 2023.
A 1.4 million or 135% increase compared to consolidated just to just to give it to you I have $1 million in the first quarter of last year.
Combined operating income for extended warranty and K S. X was 3 million for the first quarter of 2023 compared to $2.5 million in the prior year.
Combine pro forma adjusted EBITDA.
Which excludes the results of P. W. S. C that we sold in July of 2022.
Was 3.5 million in the first quarter of 2023, and 2.4 million in the first quarter of last year or an increase of 44%.
Breaking this down by reportable segments.
An extended warranty first quarter 2023 pro forma adjusted EBITDA was $1.8 million or 10.9% a pro forma extended warranty revenue.
Compared to $1.6 million or 9.6 per cent of pro forma revenue in the first quarter of last year.
The first quarter of 2023 was impacted by the following items.
First I'd Trinity lower revenue was due to an unseasonably mild winter and parts available parts availability issues due to the overall supply chain that J T mentioned, which was partially offset by lower cost of goods sold through the variable costs nature of those expenses.
Trinity leadership is focused on expanding its offerings and offering a warranties and the H back and refrigeration sectors and we believe there's a lot of room for growth in this area.
And the next slightly higher revenue at Pitt P. W. I, a lower general and administrative expenses that were partially offset by higher Commission expenses.
As mentioned on prior calls Brian cause Grove took over the leadership of P. W. I in the second half of 2022 and continues to implement strict cost discipline, while bringing in new leadership to the sales organization.
And finally higher revenue IW as was partially offset by an increase in commission expense and claims expense.
The letter attributed to a decrease the number of claims that was more than offset by an increase in the average cost of a claim.
For extended warranty on a trailing 12 month basis pro forma adjusted EBITDA was $10 million or 14.3 per cent of the pro forma revenue.
Compared to $7.7 million or 11.5 per cent of pro forma revenue in the previous trailing 12 month period.
Turning to K F X adjusted EBITDA, It was $1.7 million or 17.1% a segment revenue in the first quarter of 2023 compared to 861000 or 20.7 per cent of segment revenue in the first quarter of last year.
The first quarter of 2023 was impacted by the following items.
First at Rapex lower revenue due to a decline in billable hours that was partially offset by an increase in billing rates.
Shifting mixed a higher level positions and lower general administrative expenses the.
The decline in billable hours is mainly attributable to the decline in general M&A activity and venture capital funding.
However, gross margin improved to 33 per cent in the first quarter of 2023 compared to 29% a year ago.
For the quarter Rubik's had adjusted EBITDA of 900000.
Is timmy, Okay, we'll cover more at our Investor Day next week since Kingsway acquired rave X in October of 2021 T. T. M revenue has increased 21%.
T T M. Adjusted EBITDA has increased 40 per cent and the number of clients have an increased 18% all without increasing head count.
K S. S. K S X also benefited from a full quarter of financial results from C Street and S. M S.
Timmy, who also leaves right <unk> took over the leadership at sea Sweet upon its acquisition.
C suites revenue is being impacted by similar factors as <unk> as well as a higher mix of revenue from search which is generally lower margin.
Gross margin was 30% for the first quarter of 2023.
For the quarter C suite had adjusted EBITDA of 135000.
And as soon as we have seen a shift in mixed from travel staffing to two per diem staffing, resulting in a nearly 50 50 split for Q1 of 2023.
While the total number of shifts is down slightly from prior year. The average billing rates are holding at a higher level than anticipated <unk>.
Charles was doing a nice job transitioning the business from the former owner and is already looking to expand into other geographic markets.
Gross margin was 26 per cent in the first quarter of 2023.
And S. N S had adjusted EBITDA of about 650000.
Turning now to our balance sheet at the end of the first quarter of 2023, we had cash and cash equivalents of $8.3 million compared to 64.2 million at the end of 2022.
<unk>. This decrease was largely driven by the trucks repurchase of approximately $56.5 million.
We also received $6.2 million in cash proceeds from holders.
Of our warrants exercising during the quarter.
As of March 31st 2023, $3.2 million of our five dollar strike warrants remained outstanding.
Our total outstanding debt is comprised of bank loans and and the remaining trumps.
<unk> associated with the VA Lafayette has reported as a separate line item on our balance sheet as liabilities held for sale.
As a result, we had total outstanding debt of $42.8 million at the end of the first quarter of 2023.
Compared with 102.1 million at the end of 2022.
And originally reported amount of $292.7 million at the end of 2021.
So since the end of 2021, we have reduced our total debt by 85 per cent.
And as of March 31st 2023 are deferred interest was zero.
I would also like to note that all but 30000 of our class a preferred shares elected to convert during the first quarter and the remaining 30000 are expected to convert during the second quarter.
As a reminder, conversion requires zero cash outlay by the company.
On a quick side note R. V. A clinic is listed for sale and is actively being marketed by a national broker we receive a lot of serious interest and hope to have a V. A clinic sold during 2023.
S. J T mentioned, the board approved a one year share repurchase program and authorized to repurchase overstock.
No shares were repurchase during the three months ended March 31st 2023.
In summary, our business performed while in the first quarter, we have substantially delevered and simplified our financials and we have the financial flexibility to be selective and opportunistic as we'd have liked to play capital.
With that I look forward to seeing you at our upcoming Investor Day, and now I'll turn the call back <unk> back over to the operator to open line for questions.
Certainly and thank you ladies.
Ladies and gentlemen, the floor is now open for questions. If you would like to join the queue to ask a question. At this time you May press star one on your telephone keypad should.
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We do have a question from Atlanta Tankan.
Adam.
His life. Please proceed.
Hey, guys congratulations on a nice start to the year.
Thanks, Adam Thanks to you.
Yeah. Likewise, so I guess I have just a few quick questions. So my first one is I was interested in the hiring of Charlie choice can you expand on his role and what you expect him to bring to the team and what that might mean for your ability to.
Maybe attract additional oh, I ours and to conclude purchases of businesses in the Chaos X segment.
Yeah, So Ah Charlie.
Great background was doing a self funded search.
And so understands the EDTA community very broadly and the thought process here is to really lean into our sourcing process here at K S X two.
Allow <unk> to focus on more direct sourcing in specific industries of interest so Charlie will be.
Predominantly focused on building out our database of intermediaries brokers and investment bankers.
And enhancing our outreach process to describe the search accelerator.
Our acquisition criteria.
And the solution that we provide to lots of business owners, who we're looking to transition into retirement.
And so the hope is that we will be able to see a lot more opportunities that are coming through traditional broker an intermediary channel with someone you know a single point of contact at the search accelerator. They can focus on that that will also provide continuity in that Ah sourcing engine as new <unk>.
Come on to the platform and other out wires leave when they get an acquisition done.
He'll also spend some time focused on our recruiting efforts.
He is very plugged in and the Ta community as I said and so he will be.
Point of presence for the search accelerator at EPA conferences on business school campuses et cetera. So I think that it really enhances our product offering for <unk> to come onboard if they can step into a very vibrant and powerful pipeline of of ongoing deal flow through.
That channel and I think it will also help that he's out and getting the word out in the community.
That's great that's a really exciting person to bring on board and it sounds like a really nice fit maybe to kind of transition to something you touched on there you know now you have four Oh, I ours and I know you reiterated during your prepared remarks that you're still targeting two to three acquisitions per year.
You may be talk about what you're seeing out there in the market. How your pipeline looks may be compared to you know last quarter or a few months ago, just with love any update on the progress around around the O I R as in making business acquisitions.
Yeah look at you know I think broadly the general M&A environment was a little slow in the first quarter. We certainly saw that at sea sweetened <unk> and I think you'd probably read about it at the lower end of the lower middle market I think that it remain pretty solid credit conditions tightened up a bit valuation expectations probably.
<unk>.
Or a little mismatch between sort of buyers cost of capital and sellers expectations, but I fully expected that to kind of revert and.
The the broader sort of M&A environment Anza here as we head into the summer.
<unk> it looks pretty strong you know Peter and drew her up to full speed and and cranking, along we have Peter her and just joined US So expect to get him up and going and then obviously the things that Charlie is doing will only enhance at we didn't part ways with one <unk> subsequent quarter and so.
We're still at a.
A total of three <unk> with the addition of Peter.
Got it okay. That's that's helpful to know and then maybe just one final question on a slightly different topic, which is I was just scanning through the 10-Q. After you guys released it and noticed that you had a 1.1 million dollar gain or an unrealized gain and it looks.
It's related to Limbach shares and I noticed the limbach stock price was up a whole bunch. Today can you may be comments on what that is and what you plan to do with that and you know obviously anytime you see a million dollar game. That's that's it.
Seems like a positive thing, but would love to understand a little bit more about what's going on there.
Yeah. So the that gain is related to warrants that we received in limbach as part of this back sponsorship that King's way sponsored all the way back in 2016, when Limbach went public via a reverse merger.
$400015 strike warrants and limbach and so and.
And they're available to cashless exercise and they expire in July .
And so you know.
Provided the stock prices is higher than the strike price, we will cashless exercise for limbach shares.
Those shares will be restricted for six months I believe.
And then and then we would be able to monetize that that asset.
Got it so have you already exercise that or how does that work in terms of you know so.
So I guess, that's a really good thing stock was up 17% today, but Ah yeah, maybe if you could give a little bit more color on you know, whether you've exercised it or not or what your plans are.
You know we went through a process to just test the exit the cashless exercise to make sure that we had all of the machinations of that understood and could do a timely so we exercise.
Exercise a small portion of them in the last week or so and I think the thinking was we would wait to get through earnings and the potential that they would get added to the Russell and see what the momentum and the stock is heading into the.
The expiration and so we'll continue to monitor that with a view to maximizing the value you get a little leverage by not exercising them. If the stock price continues to go up so we're keeping an eye on it.
Okay, Great all sounds good I'd really appreciate it guys and I will go off the line, but good luck with everything and again I appreciate all the comments in color.
You bet. Thanks, Thank you.
Once again, if anyone has a question at this time you May press star one on your keypad to enter the queue to ask a question once again that'll be star one at this time, if you'd like to join the queue to ask a question. Please hold a moment, while we pull for questions.
And there are no further questions in queue at this time I would not like to turn the floor back to management for closing remarks.
James did you have any questions.
Questions that were sent via E Mail I want to make sure that if people submitted question to the email that we had an opportunity to address those.
Absolutely Yeah, three did come in.
You know the first question that came in was is there targeted hold exit period for investments and the accelerator segment or these investments entered into with the expectation of holding indefinitely unless for a compelling external bid.
Yeah, I I think that what I would say is that our general preference would be to hold a great asset indefinitely. We don't go into an investment with a preconceived idea of of an exit.
That said if like like the question asked if we got a compelling external bid that allowed us to realize a return and redeploy that capital at a higher rate of return than we would certainly do that but I think that.
Our goal here is to build an compound with the great businesses that were buying with some sort of an indefinite horizon.
Great. Thank you and the second question that came in was <unk> J T or can comment on the run rate operating costs of the hold co. What are those currently and what level of consolidated EBITDA is required for K F S to cash flow.
Yeah. Thanks, James This is cats, so I think I'll talk about you know the the hold co runway run rate expenses and when I say holdco. It means that you know the corporate team as well as the the chaos X team that hasn't sort of migrated to one of the operations yet. So if we look at sort of like the cash only.
<unk> and and not taking into account interest expense, because that's variable and it's only a small part of our troops that are locked. So we are targeting the run rate cash expenses say 1 million to 1.2 ish.
Her per quarter.
Great and the third and final question that came in online was what would the management team need to see to engage in buybacks. What are the targets that would trigger them. It does close with saying looking forward to the discussion in next week's Investor day.
Yeah, I think I touched a little bit on that in the in the in my comments presentation.
I think that our goal would be to do buybacks in a way that is accretive to our view of intrinsic value per share and so any buybacks. We do would be at a discount to that view and so that's where we would be.
Be looking to repurchase shares.
Great that that does conclude the questions that came in online J J I throw it back to you for any closing comments.
Okay, well thanks, everyone for participating in the call. This afternoon really appreciate your attendance and look forward to seeing.
All of you next week in New York for our Investor Day.
Thanks, and have a great afternoon.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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