Full Year 2023 Kingsway Financial Services Inc Earnings Call
Operator: Good day and welcome to the Kingsway full year 2023 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.
Good day and welcome to the Kingsway full year 2023 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.
Unknown Executive: With me on the call are J.T. Fitzgerald, Chief Executive Officer, and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone that today's call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses, and future business outlook. However, actual results or trends could materially differ from those contemplated by those forward-looking statements because of discussion of such risks and uncertainties
With me on the call are J P Fitzgerald, Chief Executive Officer, and Ken Hanson Chief Financial Officer.
Before we begin I want to remind everyone that today's 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 the risk factors detailed in the company's annual report on Form 10-K, and subsequent form 10, Qs and form eight Ks filed with the Securities and Exchange Commission.
Unknown Executive: Unknown Executive, James Carbonara, John Taylor, Kent Hansen, Douglas Ott, Drew Richard, Please note also that today's call may include the use of non-GAP metrics that management utilizes to analyze the company's performance. A reconciliation of such non-GAP metrics to the most comparable GAAP measures is available in the most recent press release, as well as in our periodic filings with the FDIC. Now I'd like to turn the call over to
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.
E C now I'd like to turn the call over to J P. Fitzgerald CEO of Kingsway J T. Please proceed.
John Taylor: Fitzgerald, CEO of Kingsway. J.T., please proceed. Thank you, John. Good afternoon, everyone.
Thank you John and good afternoon, everyone and welcome to the Kingsway earnings call for the full year 2023, Thank you for joining us.
John Taylor: And welcome to the Kingsway earnings call for the full year 2023. Thank you for joining us. I'd also like to quickly apologize.
I'd also like to quickly apologize I know that the earnings release.
John Taylor: I know that the earnings release just dropped; we had some technical difficulties with our service provider and then a fairly large queue to get those things out, so I apologize for the short timing here. So, let's get started. First, let me start by saying that 2023 was a year of significant accomplishments. We delivered financial results that were largely in line with our expectations, given the current market conditions, and we completed two great acquisitions, which is in line with our previously described internal target of two to three acquisitions per year. Also, during the year, we repurchased a substantial amount of our warrants and common stock, and we completed the repurchase of a substantial portion of our subordinated debt that resulted in a much more simplified and stronger balance sheet. All in all, 2023 was a great year here at Kingsway.
Just dropped we had some technical difficulties with our service provider and then.
A fairly large queue to get those things out so I apologize on the short timing here.
So let's get started.
First let me start by saying that 2023 was a year of significant accomplishments. We delivered financial results that are largely in line with our expectations given the current market conditions and we completed two great acquisitions, which is in line with our previously described an internal target of two to three acquisitions per year.
Also during the year, we repurchased a substantial amount of our warrants and common stock and we completed the repurchase of a substantial portion of our subordinated debt that resulted in a much more simplified and stronger balance sheet.
All in all 2023 was a great year here at Kingsway.
John Taylor: Equally important, over the course of the year, we built a firm foundation to advance our strategy of growth through acquisitions and are really energized by the opportunities ahead of us. So we'll start with the financial results. Our first year, or rather, our full year financial results include consolidated revenue of $103.2 million, up 11% from a year ago, and consolidated adjusted EBITDA of $9.1 million. Combined adjusted EBITDA for the extended warranty segment and the KSX segment was $14.1 million for the year.
Equally important over the course of the year, we built a firm foundation to advance our strategy of growth through acquisitions.
And a really energized by the opportunities ahead of us.
So we'll start with the financial results.
Our first year I'd, rather our full year financial results include consolidated revenue of $103 2 million up 11% from a year ago and consolidated adjusted EBITDA of $9 1 million.
Combined adjusted EBITDA for the extended warranty segment and the <unk> segment was $14 1 million for the year.
John Taylor: We break this down; our extended warranty segment reported 68.2 million in revenue in 2023 compared to pro forma revenue of 74 million in 2022. Adjusted EBITDA for 2023 was $8.4 million compared to pro forma adjusted EBITDA of $10.7 the year prior. As a reminder, pro forma results exclude those of PWSC, which was sold in July of 2022. Throughout most of the year, as we discussed on the quarterly earnings calls, our Vehicle Service Agreement, or VSA, companies were impacted by an increase in average claims expense or severity and persistent macro-level revenue headwinds that impact consumers, primarily tighter credit conditions and high used car prices. In the fourth quarter, claim severity began to moderate as the rate of inflation related to parts and labor began to recede compared to earlier quarters.
We break this down our extended warranty segment reported $68 2 million of revenue in 2023 compared to pro forma revenue of $74 million in 2022.
Adjusted EBITDA for 2023 was $8 4 million compared to pro forma adjusted EBITDA of $10 seven the year prior.
As a reminder, pro forma results exclude those have PWM C, which was sold in July of 2022.
Throughout most of the year as we discussed on the quarterly earnings calls our vehicle service agreement. Our BSA companies were impacted by an increase in average claims expense or severity and persistent macro level revenue headwinds that impact consumers, primarily tighter credit conditions and high <unk>.
Used cars prices how used car prices.
In the fourth quarter claims severity began to moderate as the rate of inflation related to parts and labor began to recede compared to earlier quarters.
John Taylor: We've been able to reduce the impact of these headwinds through our tight focus on managing operating expenses. We've implemented price increases to reflect the higher claims environment and expect those to begin rolling through the book this year. IWS, Geminis, and PWI have also been very active on the business development front. IWS added several new credit union partners during the year, and Geminis and PWI have executed a significant reboot of their sales teams and the corresponding goals and incentives, which are starting to yield results. At Trinity, maintenance support business revenues were negatively impacted by decreases in its equipment breakdown and maintenance support services due to both smaller average job sizes and generally mild weather conditions, which resulted in fewer service costs. Equipment warranty sales were negatively impacted by softer demand and long lead times on equipment availability and installation, with some equipment lead times approaching as much as a year.
We've been able to reduce the impact of these headwinds through our tight focus on managing operating expenses with.
We've implemented price increases to reflect the higher claims environment and expect those to begin rolling through the book this year.
I Ws German S. MPW I have also been very active on the business development front IW.
<unk> added several new credit Union partners during the year and German S&P. The P. W. I have executed a significant reboot their sales teams and the corresponding goals and incentives which are starting to yield results.
At Trinity maintenance support business revenues were negatively impacted by decreases in its equipment breakdown and maintenance support services due to both smaller average job sizes and generally mild weather condition, which resulted in fewer service calls.
Equipment warranty sales were negatively impacted by softer demand in long lead times on equipment availability and installations.
With some equipment lead times approaching as much as a year.
John Taylor: As a reminder, our revenue from warranty equipment sales is not recognized until the underlying equipment is installed. Thankfully, these backlogs are starting to free up, and the Trinity team has also done a nice job adding new distribution partners over the past 12 months to offset these challenges. We expect positive momentum in 2024. In summary, for the extended warranty segment, while it's difficult to predict macroeconomic trends and the resulting impact on our business going forward, our companies remain focused on improving Salesforce production, strategically adjusting pricing, and managing our costs.
As a reminder, our revenue from warranty equipment sales is not recognized until the underlying equipment is installed.
Thankfully. These backlogs are starting to free up and the Trinity team has also done a nice job, adding new distribution partners over the past 12 months to offset these challenges.
We expect positive momentum in 2024.
In summary for the extended warranty segment, while it's difficult to predict macroeconomic trends and the resulting impact to our business going forward. Our company has remained focus on improving sales force production strategically adjusting pricing and managing our costs.
John Taylor: We have seen significant positive progress thus far in 2024 and expect a better year ahead. Switching now to our search accelerator, or KSX, segment, which reported revenue of $35 million in 2023 compared to revenue of $19.2 million in 2022. Adjusted EBITDA for 2023 was $5.7 million compared to $3.8 million in 2020. These increases were driven by the acquisitions of C-Suite and S&S, which were completed in November 2022, as well as the acquisitions of SPI in September and DDI in October. Within the segment, Ravix performed better than expected from a profitability perspective, especially in Q4, as higher operating margins more than offset lower than expected revenue.
We have seen significant positive progress thus far in 2024 and expect a better year ahead.
Yeah.
Switching now to our search accelerator or <unk> segment, which reported revenue of $35 million in 2023 compared to revenue of $19 2 million in 2022.
Adjusted EBITDA for 2023 was $5 7 million compared to $3 8 million in 2022.
These increases were driven by the acquisitions of C suite, and SNS, which were completed in November 2022, as well as the acquisitions of Spi in September and DDI in October.
Yeah.
Within the segment <unk> performed better than expected from a profitability perspective, especially in Q4 as higher operating margins more than offset lower than expected revenues.
John Taylor: Since our acquisition, Ravix has performed very well and ahead of our original underwriting, C-suite experienced fewer interim engagements and inconsistent search placements amidst the challenging private equity and M&A environment, the team has bolstered its pipeline and is advancing new business opportunities to reignite growth. While it is early in the year, we have begun to see the M&A environment thaw a bit, and both Ravix and C-Suite have added business development talent to accelerate revenue growth. For SNS, the per diem business is performing quite well, partially offsetting an industry-wide decline in the use of travel nurses, which are typically billable at a higher margin.
Since our acquisition <unk> has performed very well and ahead of our original underwriting thesis.
C suite experience fewer interim engagements and inconsistent search placements amidst a challenging private equity and M&A environment.
Team has bolstered its pipeline and advancing new business opportunities to reignite growth.
While it is early in the year, we have begun to see the M&A environment saw that and both <unk> and C suite have added business development talent to accelerate revenue growth.
For SLS the per diem business is performing quite well, partially offsetting an industry wide decline in the use of travel nurses, which are typically billable at a higher margin.
John Taylor: To address the industry headwinds, the team recently added new recruiting talent and completed upgrades to its technology and operations to better support its clinician recruiting efforts. The team has done a nice job of building a tech-enabled platform to support its anticipated growth. Importantly, we believe long-term demand for nurse staffing will be strong, with a projected persistent shortage of registered nurses over the next decade. Additionally, secular demand for per diem and travel nurses is expected to remain robust.
To address the industry headwinds the team recently added new recruiting talent and completed upgrades to its technology and operations to better support it's clinician recruiting efforts.
The team has done a nice job of building a tech enabled platform to support its anticipated growth importantly, we believe long term demand for nurse staffing will be strong.
With the projected persistent shortage of registered nurses over the next decade.
Secular demand for per diem and travel nurses is expected to remain robust.
Yeah.
John Taylor: Growth through acquisitions is central to our corporate strategy. We have developed and follow an underwriting framework that evaluates opportunities based on a predefined set of performance criteria that reinforce the thoughtful and disciplined allocation of capital enabling us to acquire high-return cash flow generating operating companies at reasonable valuations. In short, we are targeting opportunities that deliver predictably high returns on tangible capital in large and growing end markets. In September, we acquired Systems Products International, or SPI, a privately held vertical market software company.
Growth through acquisitions is central to our corporate strategy, we have developed and follow in underwriting framework that evaluates opportunities based on a predefined set of performance criteria that reinforce reinforced the thoughtful and disciplined allocation of capital enable us.
And enable us to acquire high return cash flow generating operating companies at reasonable valuations.
In short we are targeting opportunities that deliver predictably high returns on tangible capital in large and growing end markets.
In September we acquired systems products international or Spi.
A privately held vertical market software company.
John Taylor: It was the fourth acquisition completed under our search accelerator and a great fit to our portfolio with contractual recurring revenue, low customer churn, strong margins, and low capital demand. It operates in a growing industry and, as we expected, was immediately accretive upon consolidation into KSX. In October, we acquired Digital Diagnostics Imaging, or DDI, a provider of fully managed, outsourced cardiac monitoring telemetry services. DDI is the industry standard bearer for outsourced cardiac monitoring in the long-term acute care and rehabilitation hospital space and has established itself as a trusted partner to its customers through its focus on dependable, high-quality service.
It was the fourth acquisition completed under our search accelerator and a great fit to our portfolio with contractual recurring revenue.
Low customer churn strong margins and low capital demands it.
It operates in a growing industry and as we expected was immediately accretive upon consolidation into <unk>.
In October we acquired digital diagnostics imaging or DDI that provider of fully managed outsource cardiac monitoring telemetry services.
DDI is the industry's standard bearer for outsource cardiac monitoring in the long term acute care and rehab hospital space and has established itself as a trusted partner to its customers through its focus on dependable high quality service.
John Taylor: This business has a high level of recurring revenue with high customer retention and operates in a fast growing and under-penetrated market. DDI has demonstrated an opportunity to grow at a very fast clip, with revenues growing in excess of 30% year over year in our first few months of ownership. The team at DDI is focused on building the internal infrastructure and processes to scale alongside this high level of demand while ensuring continued excellent levels of service and care. We held separate conference calls to discuss each of the SPI and DDI acquisitions.
This business has a high level of recurring revenue with high customer retention and operates in a fast growing and underpenetrated market.
DDI has demonstrated an opportunity to grow at a very fast clip with revenues growing in excess of 30% year over year in our first few months of ownership.
The team at DDI is focused on building the internal infrastructure and processes to scale alongside this high level of demand.
While ensuring continued excellent levels of service and care.
We held separate conference calls to discuss each of the Spi and DDI acquisitions. If you missed the original calls I encourage you to listen to the replays for a more in depth discussion of those transactions.
John Taylor: If you missed the original calls, I encourage you to listen to the replays for a more in-depth discussion of those transactions. We are eager to expand our KSX business, but we are also committed to disciplined decision making. The M&A environment is more favorable than it was 12 months ago, and we continue to believe this will translate into the completion of 2-3 deals over the next year. With the addition of Paul Vidal at the start of 2024, we currently have four fantastic operators and residents who are actively scouring the market and evaluating potential target opportunities. We remain encouraged by the quality of our pipeline and hold a high degree of confidence in our OER.
Okay.
We are eager to expand our <unk> business, but we are also committed to disciplined decision making.
The M&A environment is more favorable than it was 12 months ago and we continue to believe this will translate into the completion of two to three deals over the next year.
With the addition of pause at all at the start of 2024. We currently have four fantastic operators and residents who are actively scouring the market and evaluating potential target opportunities.
We remain encouraged by the quality of our pipeline and hold a high degree of confidence in <unk>.
John Taylor: We continue to believe that the future is extremely bright for our search accelerator platform, given the talent we have on our team, the quality of the opportunities they are pursuing, and the rigorous framework through which we evaluate acquisition candidates. Inclusive of our recent acquisitions, our trailing 12-month adjusted EBITDA run rate is $17 million to $18 million. This includes the extended warranty companies, the existing KSX companies, as well as pro forma results for SPI and DDI.
We continue to believe that the future is extremely bright for our search accelerated platform given the talent we have on our team the quality of the opportunities they are pursuing and the rigorous framework through which we evaluate acquisition candidates.
Inclusive of our recent acquisitions, our trailing 12 month adjusted EBITDA run rate is 17 million to $18 million. This includes the extended warranty companies the existing <unk> companies as well as pro forma results for Spi and DDI.
Kent A. Hansen: As a reminder, this metric is intended to capture the 12 month earnings businesses of the companies that we currently own and is not intended to be forward-looking. Looking ahead, our priorities for 2024 and beyond remain the same: operational excellence at our companies while strategically deploying the excess cash flows they generate to grow our portfolio of wonderful businesses. Our goal is to deliver sustainable long-term growth in cash flow from operations and provide an excellent return to our shareholders. We continue to target 2 to 3 new acquisitions per year that fit our clearly defined acquisition criteria and will generate annualized EBITDA in the range of $1 to $3 million each. And as we build our acquisition engine and our cash flows, we believe we are building the flywheel to scale our acquisition pace even further.
As a reminder, this metric is intended to catch capture the 12 month earnings businesses of the company.
That we currently own and is not intended to be forward looking guidance.
Yes.
Looking ahead, our priorities for 2024 and beyond remain the same operational excellence at our companies while strategically deploying the excess cash flows they generate to grow our portfolio of wonderful businesses. Our goal is to deliver sustainable long term growth and cash flow from operations and provide an excellent return to our <unk>.
Shareholders.
We continue to target two to three new acquisitions per year that fit our clearly defined acquisition criteria and will generate annualized EBITDA in the range of $1 million to $3 million each.
And as we build our acquisition acquisition engine and our cash flows. We believe we are building the flywheel to scale our acquisition pace even further.
Kent A. Hansen: I'll now turn the call over to Kent for a review of our financials. Thank you, JT. As a reminder, during the fourth quarter of 2022, we began executing a plan to sell one of our subsidiaries, VA Lafayette, which owns a medical clinic whose sole tenant is the US Veterans Administration. As part of our strategic shift away from the leased real estate segment, VA Lafayette is included in discontinued operations, and its assets and liabilities are reported as held for sale. The results of its operations are reported separately and are not included in the results I'm about to discuss.
I'll now turn the call over to Ken for a review of our financials.
Thank you J T.
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 our leased real estate segment VA. Lafayette is included in discontinued operations and its assets and liabilities are reported as held for sale.
The results of its operations are.
Our reported separately and not included in the results I'm about to discuss.
Kent A. Hansen: Given that JT covered operating results, I would like to focus on holding company expenses, cash flows, and some balance sheet highlights. Our ongoing holding company expenses, which include our KSX search expenses, consist mainly of employee costs for our 10 corporate employees and costs associated with being a publicly traded company. Total expense, excluding interest from our last remaining trops, was $7.7 million in 2023 compared to $7.3 million in 2022. However, 2023 includes the following items. $1,000,000 of stock-based compensation expense, which is non-cash.
Given that J P covered operating results I would like to focus on holding company expenses cash flows and some balance sheet highlights.
Our ongoing holding company expenses, which include our <unk> search expenses consists mainly of employee costs of our 10 corporate employees and costs associated with being a publicly traded company.
Total expense excluding interest from our last remaining Trups was $7 7 million in 2023 compared to $7 3 million in 2022.
However, 2023 includes the following items.
$1 million of stock based compensation expense, which is noncash.
Kent A. Hansen: 1.1 million of expense related to acquisitions and non-recurring items and about $600,000 in IBNR expense as our employee medical plan was self-insured in 2023, and we have since moved to a fully insured plan in 2024 and at a lower total cost. We continually challenge our holding company expenses, which has resulted in significant savings over the past few years. We believe our holding company will be able to scale as our underlying businesses expand and grow. Our ongoing KSX search expenses consist of employee costs for our active searchers, as well as the tools to support their searches.
$1 1 million of expense related to acquisitions and nonrecurring items.
And about 600000 in IV in our expense as our employee medical plan was self insured in 2023.
And we have since moved to a fully insured plan in 2024 and at a lower total cost.
We continually challenge our holding company expenses, which has resulted in significant savings over the past three years.
We believe our holding company will be able to scale as our underlying businesses expand and grow.
Our ongoing <unk> search expenses consist of employee costs for active searches as well as the tools to support their searches.
Kent A. Hansen: Total expense was $1.3 million in 2023 compared to about $600,000 in 2022. The increase is mainly due to the average number of OIRs in 2023 increasing over 2022. Due to the addition of our VP of business development in 2023 and due to having a full year of the strategic advisory board in 2023 as well as expanding it by one member this year, we would expect KSX search expenses to fluctuate as we hire new OIRs and existing OIRs close deals and move into the newly acquired businesses.
Total expense was $1 3 million in 2023 compared to about 600000 in 2022.
The increase was mainly due to the average number of OE ours.
2023, increasing over 2020 to.
The addition of our VP of business development in 2023.
And due to having a full year of the strategic advisory Board in 2023, as well as expanding it by one member this year.
We would expect <unk> expenses to fluctuate as we hired new a new OE hours and existing OE hours closed deals and move into the newly acquired businesses.
We view these expenses as a long term investment that will fuel the growth of the entire Kingsway organization.
Okay.
So turning to our balance sheet and cash flows at the end of 2023, we had cash and cash equivalents of $9 1 million compared to $64 2 million at the end of 2022.
Kent A. Hansen: We view these expenses as a long-term investment that will fuel the growth of the entire Kingsway organization. Turning to our balance sheet and cash flows, at the end of 2023, we had cash and cash equivalents of $9.1 million, compared to $64.2 million at the end of 2022. Cash used in operating activities from continuing operations was $26.8 million for the 12 months ended December 31, 2023, compared to $2.6 million a year ago
Cash used in operating activities from continuing operations was $26 8 million for the 12 months ended.
31, 2023, compared to $2 6 million a year ago.
Our cash balance was impacted by the following significant items in 2023.
First the repurchase of the majority of our trust preferred debt first $56 5 billion, which retired $96 7 million in principal and deferred interest that was done in the first quarter.
$5 million payment of Trups deferred interest.
Kent A. Hansen: Our cash balance was impacted by the following significant items in 2023. First, the repurchase of a majority of our trust preferred debt for $56.5 million, which retired $96.7 million in principal and deferred interest. That was done in the first quarter.
Also in the first quarter.
$2 million for the release of the Mendota escrow in Q1.
$1 8 million of management fees paid in Q1, and Q2 related to the final sale of commercial real estate investments.
Seven 2 million paid for the repurchase of our warrants and common stock.
Kent A. Hansen: $5 million payment of Trump's deferred interest, also in the first quarter. $2 million for the release of the Mendota escrow in Q1. 1.8 million in management fees paid in Q1 and Q2 related to the final sale of commercial real estate investments.
Principal debt payments of $9 1 million in 2023, excluding the trups repurchase.
And then also we had $16 7 million of cash received from holders exercising of warrants and $3 3 million from the sale of Limbach stock.
We had total outstanding debt, which is comprised of bank loans in trups debt of $44 4 million at the end of 2023.
Kent A. Hansen: $7.2 million paid for the repurchase of our warrants in common stock, principal debt payments of $9.1 million in 2023, excluding the TROPS repurchase, and then we also had $16.7 million of cash received from holders exercising our warrants and $3.3 million from the sale of Limbox shares. We had total outstanding debt, which is comprised of bank loans and Trump's debt, of $44.4 million at the end of 2023, compared to $102.1 million at the end of 2022.
Compared to $102 1 million at the end of 2022.
Net debt decreased to $35 3 million as of December 31, 2023, compared to $37 9 million at the end of 2022.
As we've mentioned before in March 2023, the board approved a one year securities repurchase program.
Through February 29, 2024, we repurchased nearly $1 1 million of our warrants and repurchased just over 400000 shares of our common stock under this plan.
Kent A. Hansen: Net debt decreased to $35.3 million as of December 31, 2023, compared to $37.9 million at the end of 2022. As we've mentioned before, in March 2023, the board approved a one-year securities repurchase program. Through February 29th of 2024, we repurchased nearly 1.1 million of our warrants and repurchased just over 400,000 shares of our common stock under this plan. The repurchase of common stock is being held as treasury stock at cost and has been removed from our common shares outside.
The repurchase of common stock is being held as treasury stock at cost has been removed from our common shares outstanding.
In summary, we continue to make progress reducing our net debt. We have said most of the remaining non core assets and we were able to repurchase a meaningful amount of our securities all of which we believe will provide a more who will provide more flexibility in pursuing our strategic object objectives.
I'll now turn the call back over to John the operator to open the line for questions John.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
John Taylor: In summary, we continue to make progress reducing our net debt, we have shed most of the remaining nine core assets, and we're able to repurchase a meaningful amount of our securities, all of which we believe will provide more flexibility in pursuing our strategic objectives. I'll now turn the call back over to John, the operator, to open the line for questions.
The Star Keys, one moment, please while we poll for questions.
Once again, please press star one if you have a question or comment.
The first question comes from Adam Patinkin with David Capital. Please proceed.
John Taylor: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Hey, guys congratulations on the good year and on the continued progress.
Thanks, Adam Thanks, Adam.
So, let's see I've got a few questions that I wanted to go into and granted that it didn't have a ton of time to read through the results, but first I wanted to ask just.
Adam Patinkin: You may press star two if you'd like to remove your question from. Please note that, for participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we pull for questions. Once again, please press star one if you have a question or a comment. The next question comes from Adam Patinkin with David Capital. Hey guys, congratulations on a good year and on the continued progress. Thanks Adam. Thanks Adam. Let's see, I've got a few questions that I wanted to go into. And, granted, I didn't have a ton of time to read through the results.
Just about the VA Lafayette process, I know that that asset has been for sale for a little bit and it's been held as a under discontinued operations can you maybe provide an update on where things stand there.
Yeah, Adam this is Kent.
We currently have a V a N or an LOI.
And so were progressing through the process at this point.
Okay, Great that's really helpful.
The second question I had is just I'm trying to understand the run rate EBITDA metric. So I guess my question on that is.
When you when.
When you do the calculation for run rate EBITDA for the operating businesses are you taking that 12 months trailing operating profit in other words does the $17 million to $18 million is that essentially including the depressed warranty results from 2023 or are you normalize.
Adam Patinkin: But first, I wanted to ask just about the VA Lafayette process. I know that that asset has been for sale for a little bit and has been held as a discontinued operation. Can you maybe provide an update on where things stand? Yeah, Adam, this is Kent.
Kent A. Hansen: We currently have the VA under an LOI, and so we're progressing through the process at this point. Okay, great. That's really helpful.
<unk> that say hey in a normal year once we put through some of the.
Different things.
Adam Patinkin: The second question I had is just I'm trying to understand the run rate EBITDA metric. So I guess my question on that is, when you do the calculation for run rate EBITDA for the operating businesses, are you taking the 12 months' trailing operating profit? In other words, does the 17, 18 million, is that essentially including the depressed warranty results from 2023? Or are you normalizing that to say, hey, in a normal year, once we put through some of the different things that you mentioned on the call already to improve the profitability of that business, are you taking those into account the improvements you're making, or is it literally just, hey, here's the 12 months trailing, so you' Yeah, great question, Adam; this is JT. So run rate EBITDA, the way we define it, it's probably a little bit of a misnomer, right?
Things that you mentioned on the call already to improve the profitability of that business.
Are you taking those into account that the improvements you're making or is it literally just hey, here's the 12 months trailing so youre, including kind of a depressed warranty EBITA number.
Yes, Great question. Adam This is J T. So run rate EBITDA. The way we define it is probably a little bit of a misnomer right. It is truly the last 12 months of earnings power of the businesses. We currently own. So it is the latter trailing 12 month of all of the warranty businesses.
The trailing 12 months of C suite.
<unk> and SNS and then the last 12 months of operating performance of DDI.
And Spi as if we had owned them for the whole 12 months.
The only normalizing adjustment Adam we make is to make an estimate of the.
The increase in investment income.
We would receive on the warranty float if.
John Taylor: It is truly the last 12 months of Earnings Power of the businesses we currently own. So it is the trailing 12 months of all of the warranty businesses, plus the trailing 12 months of C-suite, Ravix, and SNS, and then the last 12 months of operating performance of DDI and SPI as if we had owned them for the whole 12 months. The only normalizing adjustment we make is to make an estimate of the increase in investment income we would receive on the warranty float if we reinvest all of that at the current market yield.
If we reinvest all of that at current market yields that that normalizing adjustment has compressed over time as we.
Have rolled over a lot of those securities.
Got it that makes sense. So if I'm trying to think about it and I think the way that most investors think about.
The companies that they invest in us thinking about what are the prospective cash flows of the business in other words, what's the earnings power today and going forward. So if I'm going to think about what kind of a normalized earnings power is here it actually should be a good bit higher than that number that you've provided just because I think the hope.
Adam Patinkin: That normalizing adjustment has compressed over time as we have rolled over a lot of those security measures. Got it. That makes sense. So if I'm trying to think about it, and I think the way that most investors think about it, Douglas Ott, CFO of Alphabet and Google, are going to recover from kind of this depressed year for all the reasons you outlined. And then, obviously, each of your businesses; you're continuing to grow them and improve them. You just got SPI and DDI under your umbrella, etc. Is that a fair comment to make?
Our expectation would be that the warranty businesses kind of recover from kind of this depressed year for all the reasons you outlined and then obviously each of your businesses you are continuing to grow them and improve them you just got Spi in TDI under your umbrella et cetera is that a is that a fair comment to make.
I think thats, a very fair comment I think that you heard in my prepared remarks that we feel pretty good about where we stand today certainly vis vis.
Several months ago, and they're nice things happening. So we believe we have momentum and therefore I think that's a fair comment.
Adam Patinkin: I think that's a very fair comment. I think that you heard in my prepared remarks that we, you know, feel pretty good about where we stand today, certainly vis-a-vis with, you know, several months ago, and that there are nice things happening. So we believe we have momentum, and I, therefore, think that's a fair comment. Okay, great. I appreciate that.
Okay, Great I appreciate that.
And the clarity around that just one last question, which is in your press release in your commentary you noted that the transition has gone smoothly for Spi and DDI and <unk>.
You said some positive things about those businesses.
Would you mind, just providing a little extra color on Spi and DDI, how those transitions have gone with the new.
John Taylor: And the clarity around that. Just one last question, which is: in your press release and in your commentary, you noted that the transition has gone smoothly for SPI and DDI. And you said some positive things about those businesses. Would you mind just providing a little extra color on SPI and DDI, how those transitions have gone with the new OIRs taking over? And, you know, how those deals have been performing so far, just a little bit more granularity, so we can get a feel for those two kinds of new businesses under the KSX umbrella. Yeah, great. We'll start with SPI. That is led by Drew Richard, a really talented young guy.
Oh, IRS taking over and.
How those deals have been performing so far just a little bit more granularity. So we can get a feel for for those two kind of new businesses under the <unk> umbrella.
Yeah, great well start with Spi.
<unk> is led by drew Richard really talented young Guy. If you recall this was a sort of a family owned small software business.
We really like the fundamentals of it the business as is often the case in these small founder led businesses probably had a lot of unlocked.
John Taylor: If you recall, this was a sort of family-owned small software business. We really liked the fundamentals of it. The business, as is often the case in these small founder-led businesses, probably had a lot of unlocked opportunity, particularly around organic growth. And so, obviously, in the first 100 days, Drew has to transition in, establish sort of the new regime and get to know all of the folks there and build rapport, and then, you know, talk to customers and, based on that, start to begin articulating a vision for the business and the strategy to achieve You know, Drew's thesis is that there is an ample opportunity to grow this company organically through new customer acquisition in its existing market segment.
Opportunity and particularly around organic growth and so obviously.
Obviously first hundred days drew has to transition in established sort of.
The new regime and get to know all of the folks there and build rapport and then talk to customers.
Based on that sort of start to begin articulating a vision for the business in this strategy to achieve that vision.
Juice thesis is that there is ample opportunity to grow this company organically through new customer acquisition in its existing market segment and so we've got a wonderful new head of sales there that had only been on.
John Taylor: And so we've got a wonderful new head of sales there who had only been on board at the company for a couple of months prior to our closing, and they've been building out their sales process or top of the funnel all the way down, and they have, you know, had some early success in adding new customers onto the software platform. So that will probably take some time as they're kind of starting from scratch to build this sales team and processes, but so far, things are going really well, and we're very pleased with the company we bought. Turning to DDI, again a founder-led business. The founder has largely transitioned out. Peter Dousman is our president there.
The board of the company for a couple of months prior to our closing and they've been building out their.
Their sales process sort of top of the funnel all the way down through and have had some early success on adding new customers.
On to the software platform so.
That will probably take some time as they kind of starting from scratch to build this this.
Sales team and processes, but.
So far things are going really well and we're very pleased with with the company we bought.
Yeah.
Turning the DDI again, founder founder led business, the founder has largely transitioned out.
Peter Dowsman is our president there and this is sort of a unique situation where.
John Taylor: And this is sort of a unique situation where DDI has been growing pretty rapidly. As I mentioned in the prepared remarks, in our first couple of months of ownership in 2023, year-over-year revenues were up over 30%. And that's through existing customers trying to expand their business in new rehab and LTAC hospitals, and more recently, some inbound interest from other hospital systems. So Peter is very busy, creating the internal processes, structure, and team to be able to support a really wonderful opportunity to grow, but do it in a very thoughtful way so that we, most importantly, ensure a very high quality level of service and quality of care for the patients that we're monitoring And so that's the dynamic he's balancing, but I think that he's got a really nice growth runway ahead of him. Great, I really appreciate the color guys. I'll step aside. Thanks, Adam.
DDI has been growing pretty pretty rapidly.
As I mentioned in the prepared remarks, and our first couple of months of ownership in 2023 year over year revenues were up over 30%.
And that's.
That's through.
Inbound existing customers trying to expand their business in new.
Rehab and <unk> hospitals, and more recently some inbound interest from other hospital systems. So Pete.
Peter is very busy.
Creating the internal processes structure in.
The team to be able to support.
Really wonderful opportunity to grow but do it in a very thoughtful way so that we most importantly, ensure a very high quality level.
Our level of service and quality of care for the patients that we're monitoring and so that's the dynamic he's balancing but I think that he's got a really nice growth runway ahead of them.
Great I really appreciate the color guys I'll step off.
Thanks, Adam.
James Carbonara: Operator, before you take the next question, I just wanted to point out to people on the call that we do get a lot of questions about run rate, and we published an investor deck in January of this year. And in the appendix, we did add a slide giving a little bit more color on that. So I encourage people to take a look at that. And hopefully, it will help digest, you know, what we're trying to communicate with you. If there are any remaining questions, please indicate so by pressing star one on your. Okay, it looks like we have no further questions in queue from the lines. I'd like to turn it back to James Carbonara for any questions he may have via email. Thank you, operator. Hi JT and Kent.
Operator, we're ready to take the next question I just wanted to point out to people on the call that we do get a lot of questions about run rate and we published an investor deck.
In January of this year and in the appendix, we did add a slide.
Giving a little bit more color on that so I encourage people to take a look at that and hopefully it will help.
Digest, what we're trying to communicate with that.
If there are any remaining questions. Please indicate so by pressing star one on your Touchtone phone.
Okay. It looks like we have no further questions in queue from the lines I'd like to turn it back to James Carbonara for any questions you may have via email.
Thank you operator.
James Carbonara: Yeah, we have had a few come in on email. Many were already answered. I'll start with this one that I know you touched on in the paired remarks. But we'll go ahead and ask anyway.
<unk>, Yes, we had a few come in an email many were already answered.
I'll start with this one that I know you touched on in the prepared remarks, but we'll go ahead and add.
John Taylor: It says now that we are in March, are you still hoping to close two to three new acquisitions by the end of 2020? Yeah, that's certainly the goal, right? Four OIRs out pounding the pavement every day.
Anyway. It's just now that we are in March but are you still hoping to close two to three new acquisitions by the end of 2023.
Yes, that's certainly the goal right for <unk> out.
Pounding the pavement every day and we have a set of sort of what I would call leading measures that we think are both predictive and influence will by our guys and predictive of the lag metric, which is getting these acquisitions done and so.
John Taylor: And we have a set of sort of what I would call leading measures that we think are both predictive and influenceable by our guys and predictive of the lag metric, which is, you know, getting these acquisitions done. And so, you know, the activity is great. We've been engaged in a lot of conversations with business owners. And so standing here today, that's still certainly our hope.
The activity is great.
Been engaged in a lot of conversations with business owners and so standing here today.
That's still certainly our hope.
John Taylor: Again, you know, these things have some serendipity to them, and so it's hard to make a hard target, but based on the level of activity we're seeing, that's definitely our hope. And you did touch on this before with Adam, but it talks about the warranty business and how you see it performing in 2024, if you just wanted to reiterate your outlook. Yeah, look, 2023 was a tough, a tough year in the warranty businesses, from a revenue standpoint, and on the claim severity, claim severity seems to have receded a bit. Certainly, in terms of inflation, kind of year over year inflation, we're starting to see that moderate.
Again these things there is some serendipity to them and so it's hard to make a hard target, but based on the level of activity. We're seeing that's definitely our hub.
Great and.
You did touch on this before.
With Adam but it.
Talks about the warranty business and how do you see it performing in 2024, if you just wanted to reiterate your outlook.
Yeah look at 2023 was a tough.
It's a tough year in the warranty businesses.
From a revenue standpoint, and on the claims severity claim severity seems too.
Have receded a bit.
Certainly in terms of the inflation kind of year over year inflation, we're starting to see that moderate.
John Taylor: And, you know, all of those businesses have done a really nice job in spite of some of the revenue headwinds, adding new distribution partners, new distribution channels, increasing the activity with existing customers, and so we feel pretty sanguine about how they're going to do this. Yeah, without giving guidance, obviously, but you know, fairly optimistic. Great. Another question was, if you buy businesses for five to seven times EBITDA, why should Kingsway trade at a higher multiple than those acquisitions? Okay, that's a good question. That's one we get from time to time first. I would say, I'm not going to say why something should or shouldn't be done. Probably not.
And all of those businesses have done a really nice job in spite of some of the revenue headwinds, adding new distribution partners new distribution channels.
Increasing the activity with existing customers getting higher conversion and attachment rates and so.
We feel pretty sanguine about how they're how they're going to do this year.
Without giving guidance obviously, but.
Fairly optimistic.
Great.
Another question was if you buy businesses for five to seven times EBITDA wife's at Kingsway trade at a higher multiple than those acquisition multiples.
Okay. That's a good question Thats when we get from time to time first.
I would say.
I'm not going to say why something should or shouldnt.
Probably not.
John Taylor: It is not my role to say what someone should or shouldn't do, but I can give you my perspective. And so I think first, kind of unpack it from like, why are these businesses available to these high-quality businesses to acquire for five to seven times? And, you know, I would say first, every one of these small companies probably has some amount of what I would call hair on them, you know, cash basis financials filed in QuickBooks, etc. In essentially every case, you've got a founder, operator, and leader who's looking to retire, and for that reason, and these and these processes take a very long time, and we're sourcing them, more often than not, proprietaryly, and that's just really hard to do.
My my my role to say, what someone should or Shouldnt do but I can give you my perspective.
<unk>.
And so I think the first kind of unpack it from like why are these businesses available to these high quality.
Polity businesses acquired available to acquire for five to seven times EBITDA.
And.
Yes, I would say first every one of these small companies probably has some amount of what I would call hair on them.
Cash basis financials filed in Quickbooks, etc.
In essentially every case, you've got a founder operator leader who is looking to retire.
And.
For that reason.
And these processes take a very long time, and we're sourcing them.
More often than not proprietary really and that's just really hard to do and so.
John Taylor: And so, as a result, there's a relatively small universe of buyers out there relative to the number of companies in that size range that, because of the demographics we've discussed in the past, are coming available for sale. And, you know, on the flip side, why should, why should not, why I think that they should trade at higher multiples and think about what happens to those businesses when they come into Kingsway and onto the KSX platform. First, they get cleaned up, right? We put them through what we call the Kingsway car wash, right?
As a result, there is a relatively small universe of buyers out there relative to the number of companies in that size range that because of the demographics. We've discussed in the past are coming available for sale.
And on the flip side why should.
Why should why I think that they should trade at higher multiples than to think about what happens to those businesses when they come in to Kingsway and onto the <unk> X platform.
First they get cleaned up and put them through what we call the Kingsway Carwash right. So.
John Taylor: So, consistent accrual-based audited financials, internal control environments, risk mitigation, et cetera. And then we install really great leadership to unlock that latent growth that often is there, certainly what we're targeting, www.kincaronagg?com. We shield those cash flows from taxes because of our and Awel, our tax address, and, You know, each one of these small companies also has some risk, you know, often I would say that, you know, a portfolio of those businesses is probably less risky than buying each one individually, and that it would be hard to reconstruct that.
Consistent accrual based audited financials internal control environments risk mitigation et cetera.
And then we install really great leadership to unlock.
That latent growth data that often is there certainly what we're targeting.
We shield those cash flows.
From taxes because of our.
Nols or tax attributes.
And.
Each one of these small companies also has some risk.
Often there is customer concentration or something like that I would say that our portfolio.
Portfolio of those businesses is probably less risky than buying one individually.
And it would be hard to reconstruct that portfolio.
John Taylor: And then I think my final thought would be that, you know, the highest multiples are afforded to those that can reinvest their free cash flow at very high rates of return for a long time, and I think that we're building that with the KSX platform. This demographic silver tsunami of opportunities to buy great businesses, combined with our pipeline of talent, and the cash flow to redeploy, I think creates a really nice flywheel that Great And then the last one, just on the software business, it says: it's a two-parter.
And then I think my final thought would be.
<unk>.
The highest multiples for companies get afforded to those that can reinvest.
Our free cash flow.
At very high rates of return for a long time.
And I think that we're building that with ASX platform.
This demographic silver tsunami of opportunities to buy great businesses.
Sure.
Combined with our.
Pipeline of talent.
And the cash flow to redeploy I think creates.
A really nice flywheel.
That will give us a very long and wide runway.
Great and then the last one.
Just on the software business. It says it's a two part it says do you think you will be able to organically grow the software business.
John Taylor: It says, Do you think you will be able to organically grow the software business? And do you have any concrete examples you were able to offer regarding this? Yeah, I touched on this briefly with Adam. I do think more importantly Drew thinks, you know, he's the president of the company. We run a very decentralized operation here. I fundamentally believe in the power of decentralization, both in the ability to attract and, more importantly, retain really great people.
Do you have any concrete examples you were able to offer regarding growth.
Yes.
Touched on this briefly with Adam I do think more importantly, drew thanks, Sierra He's the president of the company, we run a very decentralized operation here funding.
Fundamentally believe in the power of decentralized decentralization.
Both in the ability to attract and more importantly, retain really great people.
John Taylor: And Drew absolutely believes that he has the ability to grow that organically because this is mission-critical software for its customers. And so the sales cycle is a little longer. But yeah, in terms of concrete examples, I think that we have early successes with some new client ads that they're onboarding now, and Yeah, I'm very sanguine about his opportunity to grow that. I see no further questions coming in on the email. Operator, I'll turn it back to you to close out the... Oh, you know what? I apologize, JT, and Kent, if you guys are still around.
And drew.
Absolutely believes that he has the ability to grow that organically.
This is mission critical software for its customers and so the sales cycle is a little longer.
But yes, I think in terms of concrete examples I think that we have early some early successes with some new client ads that they're onboarding now in.
Yes, I am very sanguine about us.
Opportunity to grow that organically.
Great I see no further questions coming in on the email operator, I'll turn it back to you.
To close out the <unk>.
I apologize J T.
And Ken if you guys are still there there is one question on the email, let's say due to the shortage of nursing staff available how does the demand for nurses.
John Taylor: There is one question on the email that says, due to the shortage of nursing staff available, how does the demand.., for nurses. How does the demand for nurses that benefits SNS compare with the challenge SNS faces in hiring travel? Yeah, so I would say the demand challenge in 2023 was sort of a post pandemic hangover, you know, that during the pandemic hospital systems had to be very reliant on contingent labor, which is obviously a lot more expensive, and.., push back very hard to eliminate contingent labor in those hospitals, maybe overly so, and that impacted the in the near term the demand for travel nurses, for, SNS, they have contracts with several 70 or so hospitals in the state of California.
How does the demand for nurses that benefits us and that's compare with a challenge ethanol spaces and hiring travel nurses.
Yes, so I would say is.
The demand challenge in 2023 was sort of a post pandemic hangover that hospital during the pandemic hospital systems had to be very reliant on contingent labor, which is obviously a lot more expensive.
And they.
Pushed back very hard to eliminate contingent labor in those hospitals.
Maybe overly so.
And that impacted in the near term the demand for travel nurses.
Four.
SNS they have contracts with several.
<unk> 70, or so hospitals in the state of California, and there is demand that is unmet and so hiring recruiters to bring more nurses onto our platform to satisfy the requirements and criteria for those open positions is Charles is strategy to rebuild the travel.
John Taylor: And there is demand that is unmet, and so hiring recruiters to bring more nurses onto our platform to satisfy the requirements and criteria for those open positions is Charles's strategy to rebuild the travel business. In the meantime, the per diem business, which is harder to fill, is something that the company has done very effectively for a very long time. And he's done a nice job of continuing to grow that per diem business. So I don't know if that fully answers the question, but I appreciate that, and I'll, Ron sent that in, so I'll reply to him and see if it does. There was one that kind of hung over from the email questions that you may have answered with Adam, but it asks about the cardiac monitoring business. It says, "How are you working towards managing the potential strong growth of the business?" Yeah, so I think it's just sort of a crawl, walk, run to get there, right?
This.
In the meantime, the per diem business, which is harder to fill is something that the company has done very effectively for a very long time and he has done a nice job of continuing to grow that per diem business. So I don't know if that fully answers the question but.
Appreciate that and all that.
Ron and Bill I'll reply to him on that.
It does yes, there was one that kind of what was hanging over from the email questions that you may have answered with Adam but it asks about the cardiac monitoring business. It says how are you working towards managing the potential strong growth of the business.
Yeah. So I think it's just sort of.
Crawl walk run their new manager New company.
John Taylor: New manager, new company, get in, understand your team, your people, your customers, their needs and desires. And we talk a lot about glass balls and rubber balls, and just make sure you don't drop any glass balls. And he is building and professionalizing his background as a nuclear engineer and building all kinds of processes and protocols around safety. And, and so as he builds that foundation, I think that he will be able to lean into that growth. The demand is there, and it's about being very deliberate about how quickly you want to onboard new hospital locations while still delivering a very high standard of care, given that patients' lives are being monitored. Great. And that's Peter's background.
Get in understand.
Your team your people your customers their needs and desires and we talk a lot about glass balls in rubber balls and just make sure you don't drop any glass balls.
And he is building and.
Professionalized his background.
Nuclear engineer and.
He is building all kinds of processes and protocols around safety.
And so as he builds that foundation I think that he will be able to lean into that growth.
The demand is there.
And it's about.
So we're being very deliberate about.
How quickly you want to onboard.
New hospital locations, while still delivering.
A very high standard of care.
Given that patients' lives are being monitored.
Great and then Peters liters background, he's going to do a great job.
John Taylor: He's going to do a great job. Perfect. Thank you so much, JT. And that does conclude the email questions. Operator, I'll turn it back to you to close out the call. Thank you, very much. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Perfect. Thank you so much J P and that does conclude the email questions operator, I'll turn it back to you to close out the call.
Thank you absolutely. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.