Q2 2024 Kingsway Financial Services Inc Earnings Call
<unk> licenses to analyze the company's performance a reconciliation of such non-GAAP metrics to the most comparable GAAP measures is available in the most recent press release as well as in our periodic filings with the SEC.
Unknown Executive: A reconciliation of such non-GATT metrics to the most comparable GATT measures is available in the most recent press release, as well as in our periodic filings with the SEC. Now, I would like to turn the call over to JT Fitzgerald, CEO of Kingsway. JT, please proceed.
JT Fitzgerald: For the extended warranty segment and the KSX segment, combined adjusted EBITDA was $3.4 million in both the second quarter of this year and last year. I'll now turn the call over to Kent for some additional commentary related to our financials.
Paul: Now I would like to turn the call over to JT Fitzgerald, CEO of Kingsway.
Now I would like to turn the call over to JT Fitzgerald CEO of Kingsway J T. Please proceed.
JT Fitzgerald: JT, please proceed. Thanks, Paul. Good afternoon, everyone, and welcome to the Kingsway earnings call for the second quarter of 2024. We had a solid quarter that was largely in line with our expectations. We saw improving performance in our extended warranty segment, which showed strong cash sales and moderating claims experience. And we exited the quarter with nice momentum heading into the back half of the year. Our KSX segment also performed well, with EBITDA improving sequentially and year over year. Additionally, this quarter has been marked by very positive, deal-related activity. We have a couple of promising high-quality prospects that we are working on, which, if completed, would significantly contribute to our growth trajectory moving forward.
JT Fitzgerald: Thanks, Paul Good afternoon, everyone and welcome to the Kingsway earnings call for the second quarter of 2024.
Speaker Change: Uh huh.
JT Fitzgerald: We had a solid quarter that was largely in line with our expectations, we saw improving performance in our extended warranty segment.
Which showed strong cash sales and moderating claims experience.
And we exited the quarter with nice momentum heading into the back half of the year.
Our <unk> segment also performed well with EBITDA, improving sequentially and year over year.
Additionally, this quarter has been marked by very positive deal related activity. We have a couple of promising high quality prospects that we are working on which if completed would significantly contribute to our growth trajectory moving forward.
JT Fitzgerald: For the second quarter of 2024, consolidated revenue was 26.4 million, a modest increase of 1% compared to the prior year quarter. All consolidated adjusted EBITDA was 2.4 million, a nice improvement over the 1.8 million in the year-ago quarter. For the extended warranty segment and the KSX segment combined, adjusted EBITDA was 3.4 million in both the second quarter of this year and last year. In our extended warranty segment, the pricing adjustments that were implemented beginning in the second half of 2023 are having a positive impact and helping to offset claims expense, which increased only 2.9% over the prior year.
JT Fitzgerald: For the second quarter of 2024 consolidated revenue was $26 4 million, a modest increase of 1% compared to the prior year quarter, while consolidated adjusted EBITDA was $2 4 million a nice improvement over the $1 8 million in the year ago quarter for.
JT Fitzgerald: You may recall that Q1 claims were 13.1% higher than last year. Also notably, our cash sales for the current quarter increased 4.6% over the prior year. So sequentially adjusted EBITDA increased 12% from the first quarter of 2024, driven by higher earned revenue, a higher mix of extended warranty revenue at Trinity, and our ongoing focus on controlling costs.
JT Fitzgerald: As we talked about during our last earnings call, the challenge is faced by the businesses in extended warranty has moderated, and we feel that we hit an inflection point in the second quarter. Turning to our search accelerator or KSX segment, revenues increased 2% over prior year, primarily due to a favorable comparison resulting from the acquisitions of SPI and DDI in the second half of 2023. Ravix continues to perform both ahead of our original investment thesis and is trending nicely in 2024. The team at Ravix remains focused on increasing utilization rates, optimizing pricing, and disciplined cost management.
JT Fitzgerald: While revenues were down in the quarter, gross margins continued to hold around 37%. A 200 basis point improvement over prior year. EBITDA was essentially flat year over year in the quarter. At C-suite, the team is building a solid pipeline, and we continue to believe the business has headed in the right direction, despite persistently challenging market conditions.
JT Fitzgerald: Revenue and Adjusted EBITDA were lower in the second quarter compared to the prior year period. However, cost of sales and general and administrative expenses were also down from the prior year. The pipeline of qualified new business opportunities looked strong, and the team is charting a course for accelerating revenue in the second half of 2024 and beyond. At SNS for the second quarter, revenue was flat sequentially, but both gross margin and adjusted EBITDA improved due to a higher mix of travel nurse shifts in the current quarter. Gross margin was over 200 basis points better in Q2 than in Q1.
JT Fitzgerald: Travel shifts increased 35.4% from the first quarter, and the number of nurses on travel assignment or TLA has more than doubled since the beginning of the year. For the first time in a long while, the company exits the quarter with more TLA than at the same point last year. We continue to believe the longer-term outlook for the travel nurse market is promising. At Systems Product International or SPI, the team delivered strong revenue and adjusted EBITDA in Q2, with revenues increasing 24% sequentially. The company is contracted with a number of new clients this year and is executing on its strategy to grow annual recurring revenue.
JT Fitzgerald: Since acquisition, the company has grown ARR by 12%. At Digital Diagnostics Imaging or DDI, revenue continues to be strong, increasing 14.6% over the prior year. EBITDA improved by 26.2% over the prior year period. To support its growth strategy and diversify its operational risk, DDI recently signed a new lease for a second operation center in Salt Lake City. We expect to have the location up and running in the second half of the year. The company continues to meet and exceed our original expectations. Based on the performance of our operating businesses, the 12-month run rate adjusted EBITDA remains at 16 to 17 million.
JT Fitzgerald: As a reminder, run rate is intended to capture the last 12 months of adjusted EBITDA for the businesses we currently own, including those we have recently acquired. Growth through acquisitions remains central to our corporate strategy, targeting opportunities that deliver predictably high returns on tangible capital in large and growing end markets. While the timing of completing transactions is challenging to predict, we are seeing a healthy level of activity related to potential transactions and believe we are on track to meet our target of two to three deals each year that can each generate one to three million and annualize adjusted EBITDA.
JT Fitzgerald: Capture the last 12 months of adjusted EBITDA for the businesses, we currently own including those we have recently acquired.
JT Fitzgerald: Growth through acquisitions remains central to our corporate strategy targeting opportunities that deliver predictably high returns on tangible capital in large and growing end markets. While the timing of completing transactions is challenging to predict we are seeing a healthy level of activity related to potential transactions.
JT Fitzgerald: And believe we are on track to meet our target of two to three deals each year.
JT Fitzgerald: That can each generate $1 million to $3 million in annualized adjusted EBITDA.
JT Fitzgerald: We currently have four highly talented operators and residents or OIRs who are actively searching for opportunities and are currently evaluating a number of attractive potential acquisition targets. In addition, we are actively recruiting new OIRs that can backfill and grow our bench of talent as our deal flow evolves.
JT Fitzgerald: We currently have four highly talented operators and residents or <unk>, who are actively searching for opportunities and are currently evaluating a number of attractive potential acquisition targets.
JT Fitzgerald: In addition, we are actively recruiting new OE ours that can backfill and grow our bench of talent as our deal flow evolves.
JT Fitzgerald: All in all, strong execution in the extended warranty businesses and continued progress against strategic objectives within our KSX businesses drove solid financial results for the second quarter.
JT Fitzgerald: All in all strong execution and the extended warranty businesses and continued progress against strategic objectives within our <unk> businesses drove solid financial results for the second quarter.
Kent Hansen: I'll now turn the call over to Kent for some additional commentary related to our finance. As a reminder, during the fourth quarter of 2022, we began executing a plan to sell one of our subsidiaries, VA Lafayette, which owns a medical clinic whose sole tenant is the U.S. Veterans Administration. As such, VA Lafayette is included in discontinued operations, and its assets and liabilities are reported as held for sale. The results of operations are reported separately and not included in the results reported today.
JT Fitzgerald: I'll now turn the call over to Kent for some additional commentary related to our financials. Thanks.
Kent: Thanks J T.
Speaker Change: 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.
Unknown Executive: As such, VA Lafayette is included in discontinued operations, and its assets and liabilities are reported as held for sale. The results of operations are reported separately and are not included in the results reported today.
Kent Hansen: Taking a look at our balance sheet and cash flows, at the end of the second quarter of 2024, the cash and cash equivalence of $9.6 million compared to $9.1 million at the end of 2023. Cash provided by operating activities from continuing operations was $500,000 for the first six months of 2024, compared to cash used in operating activities of $24.7 million in the year-ago period. Cash used in the prior year was primarily due to outflows related to the payment of fees, expenses, and interest related to asset sales and debt repurchases, which was partially offset by operating income from the businesses in our operating segments.
Kent Hansen: In May of this year, we amended our extended warranty loan to pay off all current extended warranty debt and replace it with a $1 million revolver, a term loan of $15 million, and a delayed draw loan of $6 million. A maturity date was extended to May of 2029. This amendment now gives us additional capacity to fund future acquisitions.
Kent Hansen: As of June 30th, 2024, we had a total outstanding debt, which is comprised of bank loans and subordinated debt of $47.3 million, compared to $44.4 million at the end of 2023. Net debt increased to $37.7 million as of June 30th, 2024, compared to $35.3 million at the end of 2023, primarily due to the extended warranty amendment.
Kent Hansen: In March of this year, our Securities Repurchase Program was extended for one year through March of 2025. Year-to-date, we have repurchased 141,550 shares of common stock for an aggregate purchase price of approximately $1.1 million.
Kent Hansen: Also, note, in July 2024, we completed the purchase of the minority 10% interest in IWS that we did not previously own, and as such, IWS is now a wholly owned subsidiary of the company.
Paul: I'll now turn the call back over to Paul to open the line for any questions. Paul? Certainly, at this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star 1 on your phone at this time if you wish to ask a question.
Paul: And once again, that's star 1 on your phone at this time if you wish to ask a question.
Adam Patinkin: The first question today is coming from Adam Patenkin from David Cap. Adam Irina's life. Hey guys, thanks for taking my question today. I just wanted to ask quickly about the warranty business if you don't mind. So I think that you gave a little bit of color that the cost inflation there has moderated pretty significantly, and I think JT that you said it was up 2.9% year over year. Can you kind of provide a little bit more color there in terms of where your rates are trending relative to cost inflation? And how do you expect both of those to trend going forward over the duration of the year?
JT Fitzgerald: Yeah, hi Adam. Thanks for the question. Yeah, so warranty claims were up 2.9% or so in the quarter, mostly driven by severity, not frequency. As you know, we started taking rate back half of last year and into this year, and I think in the aggregate across the businesses, the sort of price increases were in the kind of high single digits. How much of that sticks and how much of that comes through in shifting mix and stuff is always a little bit hard but we're to determine, but we're seeing probably about 4 or 5% of that come through.
JT Fitzgerald: In rate and so also, as you know, beginning in late second quarter and really in the third quarter of last year, we saw accelerating claims inflation, severity inflation, predominantly parts in labor, and so we're coming up against much easier comps in the second half of the year for claims dollars. And so I would expect that year-over-year inflation will be much lower and that rate that I mentioned will still continue to come through.
Adam Patinkin: Got it. That's really helpful; I appreciate it.
Adam Patinkin: Thank you, guys, and rooting for some of these acquisitions to come through that I know you're getting close on or it sounds like you're getting close on. Appreciate it, guys. I'll go back in the queue. Thanks, Adam.
Paul: Thank you, and once again, if there were any other questions at this time, please press star one on your phone.
James Carbonara: And there were no other questions from the lines, and I'd like to pass the call to James for some email questions.
JT Fitzgerald: Thank you, operator. Yes, we did have two questions come in on email. The first one is, it says JT, you said at the investor day you were very happy with the two most recent acquisitions. Although they are recent, the reported numbers of both these businesses don't yet demonstrate their superior attributes and performance. Can you talk about why you still like these businesses and how long before the performance starts to show up in the financials?
JT Fitzgerald: Yeah, I mentioned a little bit in the prepared remarks, SPI, which we acquired in September of last year, vertical market software business serving the fractional ownership, vacation property industry. Has grown ARR since acquisition by roughly 12%. They've also added several new clients that they're in the process of onboarding, and so I would expect by the end of the year that we would have that we will have grown ARR by roughly 20% since inception. So I think that's really strong growth. Drew has done a great job transitioning in there and is focused on investing in growing the number of new customers on their software platform.
Speaker Change: Added several new clients that they are in the process of Onboarding and so I would expect by the end of the year that we would have that we will have grown.
Speaker Change: Our or by roughly 20% since inception, so I think that's really strong.
Speaker Change: Growth drew has done a great job transitioning in there and is focused on investing in and growing the number of new customers on their software platform and so.
JT Fitzgerald: I think a little bit of that would be sacrificing a little bit of near-term profitability for growth in recurring revenue, very high margin recurring revenue, to go out and capture more market share in his addressable market. And then DDI, as I mentioned, revenue in the quarter increased roughly 15% over the prior year, prior to our ownership, and EBITDA improved even more dramatically. And so, that financial performance is starting to come through in the financial statements, and it's just a really incredible opportunity here. Peters is doing a great job really growing with the customers that he currently has, who are sending him more facilities to onboard.
Speaker Change: I think a little bit of that would be sacrificing a little bit of near term profitability for growth in recurring revenue.
Speaker Change: Very high margin recurring revenue.
Speaker Change: To go out and capture more market share in his addressable market.
Speaker Change: And then DDI as I mentioned revenue in the quarter increased roughly 15% over the prior year prior.
Speaker Change: Prior to our ownership.
Speaker Change: And EBITDA improved even more dramatically.
Speaker Change: And so those that financial performance is starting to come through.
Speaker Change: In the financial statements.
Speaker Change: It's just a really incur.
Speaker Change: Incredible opportunity here, Peter is doing a great job.
Peter: Really growing with the customers that he currently has who are sending him more facilities to onboard and as I mentioned in support of that growth and to create redundancy operationally and also tap a new labor pool for high quality EKG tax we're opening.
JT Fitzgerald: And as I mentioned, in support of that growth and to create redundancy operationally and also tap a new labor pool for high quality EKG text, we're opening a new facility in Salt Lake. So, yeah, I think we're really excited about the trajectory of both of those businesses.
Speaker Change: Our new facility in Salt Lake So.
Speaker Change: Yes, I think we're really excited about the trajectory of both of those businesses.
JT Fitzgerald: Excellent. And the last question, again, something you may have touched on in opening remarks, but maybe something to reinforce and reiterate the question is: are you seeing any signs of a turnaround in either C-suite or the nursing business? What facts might lead you to believe that better days are ahead for these two businesses?
Speaker Change: Excellent.
Speaker Change: The last question.
Speaker Change: Again, something you may have touched on in opening remarks, but maybe something to reinforcement and reiterate the question.
Speaker Change: Are you seeing any signs of a turnaround.
Speaker Change: In either C suite or the nursing business what might.
Speaker Change: What's that might lead you to believe that better days.
Speaker Change: Our head off of these two businesses.
Speaker Change: Yes.
JT Fitzgerald: Yeah, SNS will start there; the nurse staffing business. For the first time, we exit the quarter with more travelers on assignment than we had at the same point in time last year. So, that's a great fact. And our T-O-A shifts in the quarter increased 35% over the first quarter of the year. And so, Charles is doing a great job of recruiting nurses onto the platform and getting more T-O-A shifts. And so, that's been really nice progress there. I think broadly, the industry is seeing gross margin compression start to abate and feels like we're kind of settling into a steady state.
Speaker Change: Yes.
Speaker Change: We will start there the nurse staffing business for the first time, we exited the quarter with more travelers on assignment than we had at the same point in time last year. So that's a great fact.
Speaker Change: And our and our TRA shifts in the quarter increased.
Speaker Change: 35% over the.
Speaker Change: The first quarter of the year and so Charles is doing a great job of.
Speaker Change: Recruiting nurses onto the platform and getting more toi shifts and so that's been really nice progress there I think broadly the industry is seeing.
Speaker Change: Gross margin compression start to abate and feels like where we are.
Speaker Change: Kind of settling into a steady state and always in the second half of the year seasonally there is more demand for.
JT Fitzgerald: And always in the second half of the year, seasonally, there's more demand for travel and per-diem nurses as hospital census increases during cold and flu seasons. So, I think we're in a good position to capture that growing demand in the back half of the year.
For travel and per Diem nurses as hospital census.
Speaker Change: Increases during the cold and flu season, So I think we're in a good position to capture that.
Speaker Change: Growing demand in the back half of the year.
JT Fitzgerald: C-suite, I mentioned that the challenges are a bit persistent. A lot of their business is recruiting for permanent placement of accounting staff at private equity portfolio companies. I think with some challenges around business optimism, people have been slow to hire. We've got a huge backlog of retained searches, and as well as interim CFO work, it's getting people to pull the trigger and close those deals. I think Timmy's been really trying to push those along, and we're hopeful that the sentiment improves in the second half of the year. Still hard to tell, but he's been, you know, the backlog or pipeline of deals that he has is as strong as we've seen it.
Speaker Change: C suite.
Speaker Change: Okay.
Speaker Change: I mentioned that the challenges are a bit persistent a lot of their business is.
Speaker Change: Recruiting for permanent placement of accounting staff at private equity portfolio companies I think.
Speaker Change: With some challenges around business optimism people have been slow to higher we've got a huge backlog of retained searches and.
Speaker Change: As well as <unk>.
Speaker Change: Interim CFO work.
Speaker Change: Getting people to pull the trigger and close those deals I think Tim has been really trying to push those along and and we're hopeful that.
Speaker Change: Sentiment improves in the second half of the year.
Speaker Change: Still hard to tell but he has been.
Speaker Change: The backlog or pipeline of deals that he has is as strong as we've seen it.
Unknown Executive: Great.
James Carbonara: Thank you, JP and operator. That's all from the questions on email. Okay, great. There were no other questions from the lines at this time.
Operator: Great. Thank you Jackie and operator, that's all from the questions on email.
Speaker Change: Okay, Great there were no other questions from the lines at this time, so would you like to conclude the call now.
JT Fitzgerald: So would you like to conclude the call there? Yeah.
Paul: Thanks, everyone. Have a great evening. Appreciate your participating on the call. Thank you.
Speaker Change: Yes, thanks, everyone have a great evening appreciate your participating on the call.
Operator: This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Speaker Change: Sure.
Speaker Change: With respect.
Speaker Change: With regard.