Q3 2023 Kingsway Financial Services Inc Earnings Call
Okay.
Good day and welcome to the Kingsway third quarter 2023 earnings call. At this time, all participants have been placed on listen only mode and the floor will be opened for your questions and comments after the presentation.
If you would like to ask a question. Please press star one on your telephone keypad at any time.
With me on the call are J T Fitzgerald, Chief Executive Officer, and Ken Thompson, Chief Financial Officer.
Before we begin I want to remind everyone that today's conference may contain forward looking statements.
We're 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 containing the subsequent field reports on Form 10-Q, as well as others that the company files from time to time with the <unk>.
<unk> 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 our most recent press release as well as in our periodic filings with the SEC.
Now I'd like to turn the call over to J T Fitzgerald CEO of Kingsway J T. Please proceed.
Thank you Paul.
Good afternoon, everybody and welcome to the King's wave third quarter 2023 earnings call.
Thanks for joining us.
We've been busy since our last earnings call. So let me go over the highlights.
Our third quarter results were largely in line with our expectations with consolidated revenue of $24 8 million up 11% from a year ago, while consolidated adjusted EBITDA decreased to $2 3 million in 2023 compared to $3 6 million last year.
Combined pro forma adjusted EBITDA for the extended warranty segment in <unk> segment was a total of $3 2 million in 2023 compared to a total of $4 $5 5 million in the third quarter of 2022.
We continued to repurchase the number of shares of our common stock and warrants, which Kevin will detail later.
Our $5 strike warrants expired on September 15th 2023, with all but 39000 and exercising.
We believe the overhang concerns that created are now largely behind us.
Yeah.
In September we acquired systems products International or S. P I.
And in October we acquired digital diagnostics imaging or DDI.
Our fourth and fifth acquisitions under the Kingsway search accelerator platform.
And in October we signed a definitive agreement to purchase 95% of the shares of National Institute of clinical research oriented ICR.
This is a lot to unpack so I'd like to start with our extended warranty segment, which delivered revenue of $17 3 million in the current quarter compared to pro forma revenue of $17 9 million a year ago.
Adjusted EBITDA for the current quarter was $2 1 million compared to pro forma adjusted EBITDA of $3 $8 million a year ago.
As a reminder, pro forma results exclude PWM C, which we sold in July of last year.
As we discussed on our last earnings call our vehicle service agreement or V. SA companies continue to be impacted by an increase in claims paid and persistent macro level revenue headwinds that impact consumers.
Primarily tighter credit conditions and persistently high used car prices.
At Trinity our maintenance support business revenues have been impacted by decreases in its equipment breakdown and maintenance support services due to mild weather conditions, which results in fewer service calls.
Both of Trinity segments have been negatively impacted by long lead times on parts and installations.
However, we've been able to mitigate some of this impact through lower operating expenses at all of our extended warranty companies in 2023 as compared to a year ago.
Yeah.
In addition to these headwinds last year I Ws had some very favorable realized gains from some of its investments.
In search funds coincidentally as well as our release in GAAP product reserves that didn't repeat this year.
Even with all of these challenges it's worth noting that the extended warranty segment had its strongest quarter of this year with adjusted EBITDA up 23% sequentially from Q2 2023.
Switching now to our search accelerator or K S X segment.
We had revenue of $7 5 million in the current quarter compared to revenue of $3 8 million a year ago.
Adjusted EBITDA for the current quarter was $1 1 million compared to adjusted EBITDA of <unk> 8 million a year ago.
These increases are due to C suite and SNF acquisitions that were completed in November 2022, and to a lesser extent the acquisition of Spi in September of this year.
Yeah.
The Raven C suite business is performing better than expected from a profitability perspective, as higher operating margins more than offset lower than expected revenues.
<unk> is performing slightly ahead of where it was last year in terms of operating income and adjusted EBITDA.
Through the quality of services provided to me, Okay and his team are retaining customers at <unk> and in certain instances have improved pricing.
At C suite the team is rebuilding its pipeline and advancing new business opportunities to reignite growth.
Both companies have recently added talent in the business development function to drive revenue growth.
S. N S is performing at or near our internal plans. Despite a shift in business mix from higher margin travel assignments to per diem assignments.
As we head into winter, we have not yet seen the typical spike in demand for travel nurses, but we are still early in the season.
Importantly, we believe long term demand for nurse staffing will be strong and the shortage of qualified nurses to deliver care persists.
In September we acquired S. P. I privately held vertical market software company.
It was the fourth acquisition completed under our search accelerator.
S P I fit our investment criteria with recurring revenue strong margins low capital demands. It operates in a growing industry and we expect it will be immediately accretive.
Spi has world class software products for the timeshare and vacation rental industries. Its platform includes a comprehensive set of modules with software solutions that cover the entire vacation ownership enterprise.
Operator and residents through Richard has transitioned into the day to day operating role as CEO of the company.
In October we acquired DDI, a provider of fully managed outsourced cardiac monitoring telemetry services.
We are excited about this transaction because <unk> has a high level of recurring revenue is scalable and operates in a stable growing market.
D. D is the industry standard for outsourced telemetry and has established itself as a trusted partner to its customers through its focus on a dependable high quality service offering.
Peter Dowsman, the operator and residents for this transaction is transition transitioned into the CEO role for DDR.
We held separate conference calls to discuss each of the Spi and DDI acquisitions can I encourage you to listen to those replays that you weren't able to make those calls.
Also in October we announced the signing of a definitive agreement to purchase 95% of the shares of National Institute of clinical research or Nics.
The remaining 5% will remain with the seller.
Ken ICR is a provider of clinical trial site management and recruitment services for nephrology, cardio metabolic and infectious diseases and gastroenterology clinical trials.
And ICR participates in the development of innovative and life saving therapies through its dedication to and focus on clinical research.
At ICR was attractive to us because of its track record of growth and profitability with a strong pipeline of critical clinical trials with some of the world's largest pharmaceutical companies.
The outlook for clinical trial site management is favorable.
At ICR has an impressive reputation as a provider of quality services.
Its commitment to delivering the highest level of service to clients and patients is foundational and we are committed to continuing this legacy.
Dr. <unk>, Zhang <unk>, the operator and residents responsible for finding and executing this transaction as a successful career in pharma and biotech and will transition to Chief Executive officer. Following the close of the transaction.
We expect to closing, which is subject to certain closing conditions will occur in the first quarter 2024.
Shortly after the deal closes we intend to host a conference call.
To discuss an ICR further.
As we've said in the past the timing of closing an M&A transaction is difficult to predict.
But in recent weeks, we have taken several deals across the finish line.
For several quarters, we have spoken about the quality of our pipeline conveyed the confidence we have in our OE ours to identify attractive targets and execute transactions.
In the third quarter, we added a new operator and residents for OA are miles mammen to the K S X platform.
Myles joined Us from Morgan Stanley, whereas Vice President he was responsible for acquisitions and asset management within the merchant banking and real estate investing group.
He began his career as an air and missile Defense officer in the United States Army.
Served in the Patriot missile unit supporting a NATO operation.
To protect the Turkish southern border.
During the Syrian Civil War.
<unk> holds a J D and an MBA from northwestern.
And also a be a from northwestern.
We continue to believe that the future is extremely bright for the company given the talent, we have on our team and the quality of opportunities they are identifying pursuing closing.
I'd like to turn now to our trailing 12 months adjusted EBITDA run rate.
On our last earnings call, we reiterated our range of $18 million to $19 million and indicated it was likely closer to 18 million to $19 million.
As a result of our recent acquisitions, we are increasing our trailing 12 month adjusted EBITDA run rate range to $19 million to $20 million.
This includes the extended warranty companies the existing K S X companies as well as Spi DDI and N ICR results.
Kent will unpack this further in his comments.
Looking ahead, our priorities for 2023 and beyond remain the same.
Operational excellence, while strategically deploying capital to build a business that delivers sustainable long term growth generates positive cash flow from operations and provides an attractive return for our shareholders.
We can continue to target two to three new acquisitions per year that fit our clearly defined acquisition criteria and it will generate annualized EBITDA in the range of one and a half to $3 million each.
I'll now turn the call over to Ken for a review of our financials Kent.
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, which owns a medical clinic, whose sole tenant as the U S Veterans administration.
As part of our strategic shift away from the lease real estate segment.
VA Lafayette is included in discontinued operations and its assets and liabilities are reported as held for sale the.
The results of its operations are reported separately and not included in the results I'm about to discuss.
Loss from continuing operations was 797000 for the third quarter of 2023 compared to income from continuing operations of $38 nine.
$9 million last year.
The third quarter of 2022 includes a onetime net gain of $37 9 million on the sale of Pwc.
<unk> adjusted EBITDA was $2 3 million for the third quarter of 2023 compared to $3 6 million last year.
Combined operating income for extended warranty and Castex was $2 8 million for the third quarter of 2023 compared to $3 2 million in the prior year while.
While the combined pro forma adjusted EBITDA, which excludes the results of Pwc that was sold last year was $3 2 million in the third quarter of 2023, and $4 6 million in the third quarter of last year.
Now I'd like to break these down by reportable segment.
An extended warranty.
Pro forma adjusted EBITDA was $2 1 million or 12, 3% of pro forma revenue.
In the third quarter of 2023 compared to $3 8 million or 21, 1% of pro forma segment revenue in the third quarter of last year.
This decline was attributable to decreases in revenues and increase in BSA claims.
And a decrease in realized investment gains, which were partially offset by lower operating expenses.
First let me go through the revenue decline.
Revenues were down at both our BSA companies in Trinity.
BSA revenues were down only one 1% from prior year due to the continuing impact of payment pressures unearned consumers, resulting from higher interest rate environment and continued higher than expected price of used automobiles.
While the price of a used automobiles fallen since the beginning of this year the declines for the end consumer are not occurring as quickly as anticipated.
It is difficult to predict when these macroeconomic trends will begin to ease.
However, a bright spot as I, ws, which sells through credit unions, where the decline in AWS contracts sold is much slower than the overall market decline in loans placed.
At Trinity as Jay discussed lower revenue was due to decreases in equipment breakdown and maintenance support services as a result of mild weather conditions, which results in fewer service calls.
And as well as long lead times on parts and installations.
However, we continue to have strong backlog of orders and the Trinity warranty business and as the supply chain freeze up and machines are shipped and installed we expect that the associated revenues will revert to historical growth trends.
Next the increase of DSA claims is due to an increase in the cost per claim or severity, while the number of claims or frequency was relatively stable.
The increase in severity as a result of rising labor and parts costs, which continue to increase at rates higher than the general market inflation.
Claims in the third quarter were $600000 higher than the prior year, but were slightly down from Q2 2023 on both an absolute dollar basis and as a percentage of revenue.
We continue to proactively assess our pricing to ensure that we're staying in front of any persistent claim severity increases.
Operating expenses across all extended warranty companies were down about $600000, excluding pwc, which reflects initiatives put in place a German S&P Wi since Brian cause growth to cover both businesses about a year ago as well as the continued scrutiny of all expense line items.
Also contributing to extended warranty results is the investment income earned from our float and any gains or losses on other investments.
As J P discussed.
And the second quarter of 2020, sorry, the third quarter of 2022, I Ws had very favorable realized gains from some of its investments as well as the release of GAAP product reserves, that's G AP product reserves.
These totaled about $1 1 million and we didn't realize similar results in 2023.
As we've discussed before we invest our flow, which was about 45 billion at September 32023, and U S bonds municipal securities and high quality corporate bonds with an average duration of two to three years.
As prior investments mature, we are able to reinvest at the current higher interest rates.
This has resulted in TTS investment income as of 923 of 953000 compared to just 369000 for the year ago period.
We believe the long term outlook for extended warranty remains healthy and we continue to believe this is an attractive business to hold in our portfolio portfolio.
<unk> adjusted EBITDA was $1 1 million or 14, 5% of segment revenue in the third quarter of 2023 compared to 778000 or 24% of segment revenue in the third quarter of last year.
And as a reminder, last year included just <unk>.
<unk> profitability was up slightly compared to the prior year as the decline in revenue was essentially offset by higher gross margin of 34, 7% in the third quarter of 2023 versus 28% in the year ago quarter.
The decline in revenue was due to a decrease in billable hours from lower than expected number of new clients that was partially offset by the increase in billing rates.
The latter due to a shift in services mix as well as price increases.
G suite delivered gross margin of 35, 6%, which was in line with our expectations, but on lower than expected revenues.
<unk> continues to rebuild its pipeline, which was disrupted during the acquisition process and has hired a business development team members to focus on our pipeline of opportunities.
SNS delivered gross margin of 26, 9%, which was higher than our expectations.
Expectations, but on lower than expected revenues.
We continue to see a shift in mix from travel staffing into per diem staffing.
Year to date, 58% of the ships were pretty M, which is the same year.
Year to date figure as the first six months of 2023.
Also the total number of shifts in Q3, 2023 was down 20% to that in the year ago quarter.
As a reminder, when we purchased SNS our purchase price was based on go forward results being lower than recent historical results at the time of acquisition as we believe that staffing rates and the number of shifts where referred to levels more in line with those experienced pre pandemic.
Sure.
At SNS near term growth as it is expected to come from expanding its base of travel nurses as well as an expansion into new geographic areas.
SNS has more seasonality than our other businesses and the number of travel shifts is expected to improve as travel demand increases during the upcoming cold and flu season.
Given we acquired Spi in early September its contribution to the current quarter results was minimal we plan to discuss Spi more on future calls.
Turning now to our balance sheet at the end of the third quarter of 2023, we had cash and cash equivalents cash equivalents of $22 million.
Compared to $64 2 million at the end of 2022.
Cash used in operating activities from continuing operations was $9 6 million for the nine months ended September 32023, compared to cash provided by operations of $4 9 million in the first nine months of last year.
Our cash balance has been impacted by the following items this year.
$5 million payment of Trups deferred interest in Q1 of 2023.
$2 million for the release of the Mendota escrow in Q1.
$1 8 million of management fees paid in Q1, and Q2 of this year related to the final sale of commercial real estate investments.
Lower operating income from the extended warranty segment.
$16 7 million of cash received from holders exercising warrants and $3 3 million from the sale of Limbach stock.
Our total outstanding debt is comprised of bank loans, and one remaining tranche of trups that debt.
Debt associated with the VA Lafayette is included in a separate line item on our balance sheet as liabilities held for sale.
As a result, we had total outstanding debt of $40 9 million at the end of the third quarter of 2023, compared with $102 1 million at the end of last year.
Net debt decreased to $20 8 million as of September 32023, compared to $30 9 million at the end of last year, I'm, sorry, $37 9 million at the end of last year.
Earlier this year the board approved a one year securities repurchase program.
Through October 31, 2023, we have repurchased $1 million.
93861 of our warrants a repurchase just over 250000 shares of our common stock.
After considering both stock and warrant repurchases $4 1 million of stock repurchases or securities repurchases could be made through March 22nd of of next year.
The repurchase common stock is being held as treasury stock at cost and has been removed from our common shares outstanding.
As you May recall, the company had a number of outstanding $5 strike warrants that expired on September 15th 2023.
After accounting for warrants repurchased by the company all about 39000 warrants were exercised prior to exploration.
In 2023, just over $3 $3 million of our warrants were exercised resulting in $16 7 million of cash to the company.
You can see a breakdown by quarter in today's earnings release.
Yeah.
During Q3 2023, we completed the sale of all stock held in Limbach Holdings, Inc, and recorded a realized gain of 600000.
Total cash proceeds from the sales were $3 3 million.
I would like to close by discussing our trailing 12 month adjusted EBITDA run rate as J T indicated our range is now 19 million to $20 million.
We often get questions from from investors about this metric so I would like to explain a few things.
This metric is not intended to be guidance by management regarding the future earnings of the company.
Rather it is it is intended to capture the 12 month earnings of what the company currently owns or has recently acquired.
As such it includes the following.
The actual operating results of our extended warranty businesses for the prior 12 months months, which includes the recent declines.
The investment income associated with our extended warranty float adjusted to reflect higher earnings associated with the current interest rate environment. We.
We do not factor in any expectations on realized gains or losses much like we had at <unk> in Q3 of last year.
It also includes <unk> 12 months actual results as well as C suite actual 12 months results, both pre and post acquisition.
It includes 12 months of SNS results based on actual results since the acquisition and adjusted results in order to reflect management's view that performance would revert to levels more in line with pre pandemic.
Results.
And 12 months of results for Spi DDI and at ICR based on adjusted results from our quality of earnings due diligence reports.
In summary, while our extended warranty segment continue to experience some softness due to the claims expense. They continued to perform and delivered the best quarterly results. So far this year for the segment.
We've added two companies to our <unk> portfolio and hope to add a third early next year, which will enable us to deliver on our strategy of growth.
Finally, we made further progress reducing our net debt, we were able to repurchase a meaningful amount of our securities and we have a robust pipeline of acquisition opportunities in front of us.
I'll now turn the call back over to the operator to open the line for questions Paul.
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Please press star one on your phone at this time, if you wish to ask a question once again Thats Star one if you wish to ask a question from the lines.
And there were currently no questions from the lines I would like to hand, the call to James Carbonara for any questions submitted via E Mail.
Sure. Thank you operator, we did have a few questions come in on the email.
First one is a two part question. It says what is run rate EBITDA pro forma for the recent acquisitions are what is pro forma debt at <unk>.
And what is the run rate interest expense for the acquisitions and current base rates I can reread any of that if necessary.
Okay, Yeah, I think I got it.
So first run rate EBITDA pro forma for the recent acquisitions I think Kent just walk through that.
We have increased that $19 million to $20 million range.
That's sort of the TTM EBITDA of the things we own plus the things that we expect to own.
<unk>.
Pro forma debt.
Net debt at 930 was roughly $28 million.
And then pro forma I guess would include the new acquisitions.
We borrowed an additional $5 6 million to help finance the DDI transaction.
And we anticipate borrowing another roughly $3 million or so to finance the nics acquisition.
We didn't use any debt.
To help finance the Spi acquisition, So I guess, if you add all of that up.
Five six plus three plus 29.
Catch you.
$29 5 million of net debt.
And then James Sorry, what was the final question part of the question.
Sure. It concluded with what is the run rate interest rate expense for the acquisitions and current base rates.
Yeah, So I'll take that in reverse order. So current base rates. The DDI acquisition that has an interest rate of prime plus 50 basis points. So primes at eight and a half today, so that would be 9% and we would expect similar pricing on the nics acquisition debt. So.
Base plus spread.
And that translates into an additional 500000 of interest expense give or take at DDI.
And somewhere around 270000, or so of interest expense and ICR.
Great. Thank you J T.
And I do see we have a quite a live question in the queue. Operator can we take that before reverting back to these email questions.
Certainly we did have a question come in once again, ladies and gentlemen, you can still press star one if you wish to ask a question from the phone lines and we have a question coming from Adam Patinkin from David Capital.
In his life.
Hey, guys, congratulations on a nice quarter and all of the progress along the way.
Thanks, Adam.
Great. So I have a few questions that I wanted to jump through and I am sorry, there a little bit.
<unk>.
This join us so they're kind of unrelated to one another so my first question is.
I guess the way that I think about the value of the company is based on what I guess, you would call normalized earnings would be or what go forward earnings you would be and so I guess, what I'm trying to do is to track the trailing 12 months.
Adjusted EBITDA number of $19 million to $20 million, which is a really helpful number to know, but then to try to look forward and obviously there is no guidance and youre not predicting but.
I can do some of that math, where I say, hey, this is where I think the.
The growth might be in some of the acquisitions.
You've made through through the <unk> accelerator.
One that I'm, a little less clear on as warranty. So you've talked about how maybe warranty has been going through a tougher period.
But there is an opportunity for it to maybe revert to the mean, which I think is partly underway with the improvement in profit this quarter versus last quarter.
You mentioned on the call like a $600000 reduction in so if I annualize that I get to between two and $3 million of EBITDA above where you currently are.
Maybe in a more normal environment, so I am not talking about a peak environment, but I'm also not talking about <unk>.
Core environment is that the right way to think about it or how do you think about what kind of a normalized earnings power would be for the warranty business compared to where you have it over the last 12 months.
Yeah look that's a great question a lot of ways to sort of attack that first and foremost I would say.
TTM is our sort.
The best predictor of the future in a more normal environment, obviously warranty isn't there right now Adam.
And so yes. They are have been very focused on cost rationalization and maintaining sort of very lean operating.
Environment in in what is a challenging both sales and claims environment and so the way I think about it is that the.
Cost reductions have.
Essentially offset the reduction in revenue.
And the claims are in the quarter were 600000 higher than prior quarter.
And as we move forward, we're going through a pretty comprehensive.
Pricing exercise both moving.
Vehicles mileage bands.
In a different rig classes and things and also taking price kind of across the entire book.
And so if those.
Can you just kind of to play on your question here as those price increases work their way through the book and we're talking sort of.
Mid to high single digit price increases.
That would offset the claims severity and if the operating expense improvements.
Our sustained then you get back to that sort of $2 million and improve profitability right that isn't guidance, but that's just me kind of working through the math the way I think about it.
Got it that's super helpful. I mean, that's that's essentially thats, what im trying to get at is to say, okay. In a more normal environment and I'm confident the car market will head back towards that obviously you can see the declines in car prices that are coming through with I think more to come but in a more normal environment.
Yes.
I'm confident the business will do.
Maybe what its done in the past and that's really helpful to know that maybe normalized warranty means that adjusted EBITDA number might be more like 22, or 23 or whatever it whatever it would end up being.
Let's see my next question is on the VA Lafayette can you give any update on that sales process.
Yeah. Adam this is Ken so we continue to have it.
Being marketed by by a national broker.
We've had a number of interests in that and we just we just continue to the commercial real estate market.
It's been a little bit challenging this year, but we continue to.
Marketed towards targeted.
People are companies that we think would be interested in that particular profile. It does have some some debt on it that said some people find attractive some buyers need some depreciation recapture before the end of the year. So it's still a very active market right now.
Okay.
Got it great Thats helpful. Thank you Kent and then my next question is just on your Searchers, you've got two searchers going right now and I know your goal is to bring on a couple more searchers can you maybe.
Speak to both of those.
How's it going with the current searchers and how are they progressing in there.
And their searches and then also can you speak to your confidence level about attracting.
High quality candidates to join as your next two searchers.
Yeah sure happy to happy to talk about it so Peter Hearn joined US in early May and then miles just joined US at the end of the summer mid to late August.
And now as we've launched both drew and Peter Dowsman and soon to launch Davita day, we've been actively recruiting and fielding inbound interest throughs concentric circles of networks of our our current CEO of <unk>.
<unk> talked to Doug.
And dozens 60, plus candidates really high quality group of folks that we've been talking to.
I'm pretty advanced stages with a handful of them.
And the goal would always be to have four to five people actively looking for acquisitions in support of that two to three acquisitions a year.
And so yes, we are.
Making great progress again, we want to maintain our discipline.
And really target folks that have that set of attributes that we think will make them both effective searchers, but more importantly, great Ceos and small businesses.
So that work is ongoing.
And with respect to Mylan.
At Peter early days, we've built a really nice set of processes around proprietary search as well as intermediate search.
<unk> got a handful of industries that they're very interested in and are running that playbook.
But I would always go back to sort of average time to close the transaction is probably 17% 18 months, we've seen that here at Kingsway right. Some some searchers close very quickly like davita.
Peter Dowsman took them over two years to finally close the transaction and so we're going to support them focus on.
What we say is we derive our margin of safety from business quality.
And so really making sure that we maintain our discipline around the types of acquisitions, we are pursuing and so.
They're doing all the right things and we're very optimistic about their prospects, but we also want to maintain discipline.
Got it that makes a lot of sense and then maybe this is a question I'm just going to ask one last question, which is.
Maybe you Havent gotten there on this but I just wanted to ask.
Hugh.
As you acquire more businesses through the Kingsway search accelerator.
Your business is kind of mixed shifting away from warranty, which is a wonderful business, but maybe a little lower growth business and towards some of these higher growth businesses.
You think about something like.
The last two acquisitions that you've made here as being really growth year businesses and that is going to be more and more of the kingsway portfolio over time, which I think should be positive. When you think about the business quality and positive about the earnings growth ahead of the company.
The mix in a way is a little bit growth year.
Do you guys think about.
Closures over time.
In terms of disclosing where each of the businesses are in terms of their EBITDA or whether you prefer to kind of lump them altogether or maybe give snapshots every now and then I don't know if you guys have had settled on an approach there, but hopefully there will be a lot more acquisitions to come and I'm just trying to understand.
How you are thinking about sharing that information with the market.
Ill step off that my last question. So thank you guys.
Yes. It is.
Great question, Adam and.
Right now we have a reportable segment.
That means.
Certain things to.
Under GAAP and things about how we manage those businesses, we think of them within <unk> is offsetting a very similar profile and we're focused on the same types of things and so that becomes its own reportable segment.
And then like today, we sort of unpacked within that segment the performance of each one of the individual businesses and I would expect that we will continue to do that certainly also as we update our investor deck for Q3.
Breakout that performance and that would be something that we intend to do quarterly going forward. So people can see under the hood how each one of these businesses are doing within that search accelerator segment and the same is true at warranty.
Maybe a different growth profile, we really like those businesses combination of our diversified contractual prepaid revenue and the investable float.
Just maybe a slightly more mature market. So I don't know if that fully answered your question, Adam, but we would we would certainly.
I don't think we will have separate reportable segments within <unk>, but we will break them out.
And talk about the underlying performance of each one of our businesses.
Every quarter.
Investor deck, Yeah. This is Ken I'll just add.
U S. GAAP rules sort of are complicated when it comes to determining your reportable segments and it's hard to determine if we'd be required in our filings to sort of break apart <unk> will depend on the profile of future acquisitions and how.
Closely they are sort of related to each other.
But internally right now.
Sort of look at Capex as a segment inter.
Internally and the board looks at it that way and.
But we will continue to try to give as much color as we can without also perhaps disclosing too much information that a competitor might pick up as well.
Thank you and there were no other questions from the lines back to you James.
Thank you operator.
Yes, we have three more questions from the email is actually one that just came in live and if you do have a question youre listening on the webcast feel free to shoot it over to James at Hayden IR Dot com happy to.
The question Teed up.
The most recent question that came in was on C. Suites. It says why was C suites pipeline disrupted during the acquisition process.
Sure.
That's all the questions for Jay to your cost.
Yes, great question.
So.
Arthur the seller was the primary business development person at his company and so as he got.
Deeply involved in the sale of his business.
His pipeline of new business.
Offered a bit I would say just through distraction.
And so.
Kimi has.
Internally promoted someone at the company to transition Arthur out he is now.
No longer with the company satisfied his one year.
Our consulting agreement and Timmy is now focused on rebuilding that pipeline and that has been most of the year as well, but I would say that.
The pipeline of new business activity.
Took a backseat during the sales process because Arthur was.
Selling his business and not focus on business development.
Got it.
The next one was how does management feel about levered acquisitions, given the current interest rate environment, what spreads are they able to get on acquisition debt currently.
Yes, I think we talked about the spreads on acquisition debt.
Acquisition that is sort of 50 basis points over prime on our most recent deal and Thats been pretty consistent now all of our acquisitions.
And then levered acquisitions, given the current interest rate environment.
It's important to point out that.
We have and will continue to use what we believe to be a relatively conservative amount of leverage in support of these transactions. So three times senior funded debt to EBITDA.
Or less at closing.
And.
So obviously the cost of capital that that capital is higher.
But interestingly, if you sort of model that out.
In our acquisition models.
Because of the amortization of the debt and things.
The impact on our modeled Irr's, if you go from sort of 6% debt cost of capital and the nine.
Only decreases by 100 basis points or so over six years. So.
The higher cost of debt doesn't really have a big impact on the model returns.
But as I've said before we want to use a modest amount of debt to enhance those equity returns, but we're probably more focused on striking the appropriate balance.
On returns to our invested capital.
With adequate covenant headroom right and so.
We want to give these operators plenty of cushion out of the gate.
So we don't take on a ton of debt. So that we're not in senior funded debt to EBITDA pickles or fixed charge coverage ratio challenges and so.
The current rate environment.
At our level of leverage Hasnt really impacted things.
Great and the <unk>.
Last question, we have here is.
Does management have a lower bound for interest coverage I would they pulled back on the acquisition pipeline.
Risk coverage fell below one times or a different thresholds.
You may have just answered that but just sharing that last one that came in.
Yeah.
Certainly if interest coverage was below one times that would be.
Not good.
We would absolutely pullback, but it is a good question I think it's important to point out that each one of our acquisitions is financed independently.
And so for instance, the DDI debt that we just used to support that acquisition is nonrecourse to Kingsway the parent company and it is secured only by the cash flows and assets of DDI.
And that loan facility has financial covenants that include that sort of maximum senior leverage ratio and a fixed charge coverage ratio of one two times, which includes both principal and interest.
And so we would never get anywhere close to one times and interest coverage at the sort of lower bound and we're kind of bound to a fixed charge.
Coverage, which includes again, both principal and interest of one two times and when we model. These things out there plenty of plenty of cash flow coverage on fixed charges.
Got it.
Yeah, I think that's a that's what I'm looking at the email and im not seeing any additional questions.
In there.
J P. I G finished answering the question.
Yeah, that's great I think if there are no more questions, we'll we'll hand it back to the operator, Thank you everybody for participating on the call.
Thank you. This does conclude today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Yeah.