Kingsway Financial Services Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 5 speakers on the call.

Operator

Good day, and welcome to Kingsway First Quarter 2023 Earnings Call. At this time, all participants have With me on the call are J. T. Fitzgerald, Chief Executive Officer and Kent Hanson, Chief Financial Officer. Before we begin, I want to remind everyone that today's conference call may contain forward looking statements.

Operator

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. Been informed by the SEC. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward looking statements. Please see Risk Factors detailed in the company's annual report on Form 10 ks been informed by the SEC filings, as well as other reports that the company filed from time to time with the Securities and Exchange Commission.

Operator

Please note, too, that today's call may included 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 metrics is available in our most recent press release as well as in our periodic filings with the SEC. Busy. Now I'd like to turn the call over to J. T.

Operator

Fitzgerald, CEO of Kingsway. J. T, please proceed.

Speaker 1

Been busy. Thank you, Tom. Good afternoon, and welcome to the Kingsway First Quarter 2023 Earnings Call. Busy. Thank you for joining us.

Speaker 1

Let me begin by saying we are very pleased with our start to 2023 with solid financial performance and operating results that generally met our expectations despite an environment of macro uncertainty regarding interest rates and inflation. Been informed. Importantly, we further simplified and strengthened our balance sheet with the repurchase of nearly all our trust preferred debt and recorded a nice gain. Been busy with the cleaned up balance sheet and the liquidity and capital resources we have available, we are poised to execute on our strategy for future growth. Been participating.

Speaker 1

As of March 31, 2023, our trailing 12 month consolidated adjusted EBITDA was 11,500,000 an increase of nearly 80% over the comparable year ago period. Our trailing 12 month adjusted EBITDA run rate of our operating businesses been in the $18,000,000 to $19,000,000 range. Turning first to our extended warranty segment. Been participating in the press release. On a pro form a basis, 1st quarter warranty revenues increased 3% over last year and pro form a adjusted EBITDA increased by 17%.

Speaker 1

Been pleased with our performance results exclude PWSC, which was sold in Q3 of 2022. Been participating in our auto focused warranty businesses, higher used car prices and increasing financing costs continue to have a modest impact on industry wide demand. Been busy. Despite these macro conditions, our warranty businesses continue to execute and find opportunities for growth. As used car prices begin to normalize, been participating in the past.

Speaker 1

Particularly at the older end of the spectrum where our products are most relevant, we continue to expect that declining used car prices will offset some of the impact of higher borrowing been At our mechanical and HVAC focused warranty business, ongoing supply chain backlogs for new equipment continue to pose challenges. Been as the supply chain frees up and those machines are sipped and installed, we expect that the associated warranty revenues will revert to historical growth trends. Been. In our Search Accelerator or KSX segment, revenues grew by 131% compared to the Q1 of last year been muted. And adjusted EBITDA of $1,700,000 was up 93%.

Speaker 1

This segment of our business is currently comprised of 3 operating entities, been RAVEX, C Suite and Secure Nursing Services or SNS. As you may recall, in November 2023, We acquired C Suite, a national financial executive services firm to provide financial management leadership in the U. S. Been and SNS, a staffing agency for the nursing and healthcare vertical. Q1 2023 is the Q1 that includes a full period of results for these 2 entities.

Speaker 1

Kent will provide more details later in the call, but we are encouraged by the early performance of these acquired businesses. Been Turning to the balance sheet. During the quarter, we repurchased nearly all of our trust preferred debt or TRUPS debt as we call it been under option using available funds from working capital. We paid $56,500,000 for 5 of the 6 remaining trucks' tranches. Been with this transaction, we recognized a gain on extinguishment of debt of $31,600,000 As of the end of the Q1, we had a carrying value been been recognized and authorized the repurchase of up to $10,000,000 of our stock through March 21, 2024.

Speaker 1

Been we believe it is a good corporate practice to have a plan in place and the flexibility to allocate capital towards repurchasing shares. Been we are acutely focused on maximizing intrinsic value per share. And if market conditions provide opportunities, been we will allocate capital to accretive repurchases of our stock. Our priorities for 2023 beyond remain the same, been strategically allocating capital to build a business that delivers sustainable long term growth, generates positive cash from operations been recognized and provides an attractive return for our shareholders. We are targeting 2 to 3 new acquisitions per year that fit our clearly defined acquisition criteria and will generate annualized adjusted EBITDA in the range of $1,500,000 to $3,000,000 each.

Speaker 1

We aim to do this been impacted by in part attracting, developing and retaining world class talent within our KSX platform. We have a great team of talented professionals who are actively searching for acquisition targets that fit our defined set of criteria been and our acquisition pipeline is strong. Subsequent to the end of the Q1, we added a new operator in residence or OIR, been Mr. Peter Hurn to the KSX platform. Peter joins us from CenterView Partners, where he advised companies across a broad range of industries on key strategic and financial matters, been participating in the past, including mergers and acquisitions.

Speaker 1

We welcome Peter to the team and look forward to supporting him in his search for a great company to acquire and run. Been busy. Also subsequent to quarter end, we announced that we welcome Charles Joyce to Kingsway as Vice President of Business Development for our KSX platform. Been this is a new position at the company. Charlie joins us from Forest Circle LLC, a search investment firm where he was responsible for been participating in the past several years.

Speaker 1

We are delighted to welcome Charlie to the team as we build out our deal sourcing engine for future acquisitions. Been busy. And finally, before I turn the call over to Kent for a more in-depth discussion of the numbers, I'd like to remind everyone that we are hosting our in the Investor Day at the New York Stock Exchange next Tuesday, May 16. The AGM will begin at 9 am Eastern Time and the Investor Day presentation will follow immediately thereafter. Been busy.

Speaker 1

I'll now turn the call over to Kent for a review of our financial results.

Speaker 2

Kent? Thank you, J. T. Before I get started, as a reminder, been participating in the Q4 of 2022, we began executing a plan to sell one of our subsidiaries, VA Lafayette, impacted by the acquisition of D. A.

Speaker 2

Lafayette is included in discontinued operations been reported as held for sale. The results of its operations are reported separately and not included in the results I'm about to discuss. Been Income from continuing operations was $27,700,000 for the Q1 of 2023 compared to a loss from continuing operations of $4,000,000 in been participating in the Q1 of 2022. The current period includes a $31,600,000 gain on the extinguishment of debt related been in the repurchase of our troughs as well as interest expense on all six tranches through the date of repurchase. Been participating in the press release.

Speaker 2

Consolidated adjusted EBITDA was $2,400,000 for the Q1 of 2023, a $1,400,000 or been 135% increase compared to consolidated adjusted EBITDA of $1,000,000 in the Q1 of last year. Been Combined operating income for extended warranty in KSX was $3,000,000 for the Q1 of 2023 been compared to $2,500,000 in the prior year. Combined pro form a adjusted EBITDA, which excludes the results of PWSE that we sold been in July of 2022 was $3,500,000 in the Q1 of 2023 $2,400,000 in the Q1 of last year been or an increase of 44%. Breaking this down by reportable segment. In extended warranty, Q1 2023 pro been.

Speaker 2

Adjusted EBITDA was $1,800,000 or 10.9 percent of pro form a extended warranty revenue, compared to $1,600,000 been impacted by the following items. Been participating in the press release. 1st, at Trinity, lower revenue was due to an unseasonally mild winter and parts availability issues been impacted by lower cost of goods sold due to the variable cost nature of those expenses. Been Trinity leadership is focused on expanding its offerings in offering of warranties in the HVAC and Refrigeration sectors, and we believe there's a lot of room for growth in this area. Next, slightly higher revenue at PWI been impacted by lower general and administrative expenses that were partially offset by higher commission expenses.

Speaker 2

As mentioned on prior calls, been Brian Cosgrove took over the leadership of PWI in the second half of twenty twenty two and continues to implement strict cost discipline, been participating in new leadership to the sales organization. And finally, higher revenue at IWS was partially offset by an increase in commission expense been impacted by the impact of the increase in the number of claims that was more than offset by an increase in the average cost of a claim. Been. For extended warranty on a trailing 12 month basis, pro form a adjusted EBITDA was $10,000,000 or 14.3 percent of pro form a revenue, been compared to $7,700,000 or 11.5 percent of pro form a revenue in the previous trailing 12 month period. Been busy.

Speaker 2

Turning to KSX. Adjusted EBITDA was $1,700,000 or 17.1 percent in the Q1 of 2023 compared to $861,000 or 20.7 percent of segment revenue in the Q1 of last year. Been the Q1 of 2023 was impacted by the following items. First, at Rabix, lower revenue been impacted by the increase in billable hours that was partially offset by an increase in billing rates, a shift in mix to higher level positions been impacted by lower general and administrative expenses. The decline in billable hours is mainly attributable to the decline in general M and A activity been in the range of $1,000,000 and $1,000,000,000 and $1,000,000,000 and $1,000,000,000 in the Q1 of 2023 compared to 29% a year ago.

Speaker 2

Been busy. For the quarter, Ravex had adjusted EBITDA of $900,000 As Timmy O'Cobb will cover more at our Investor Day next week, been Since Kingsway acquired Ravex in October of 2021, TTM revenue has increased 21%, been TTM adjusted EBITDA has increased 40% and the number of clients have increased 18%, all without increasing headcount. Been KSX also benefited from a full quarter of financial results from C Suite and SNS. Been Timmy, who also leaves Rabix, took over the leadership at C Suite upon its acquisition. C Suite's revenue is being impacted by similar factors as Rabix, been muted, as well as a higher mix of revenue from search, which is generally lower margin.

Speaker 2

Gross margin was 30% for the Q1 of 2023. Been. For the quarter, C Suite had adjusted EBITDA of $135,000 At SNS, we have seen a shift in mix from travel staffing to

Speaker 1

been in the range of 2

Speaker 2

per diem staffing, resulting in a nearly fifty-fifty split for Q1 of 2023. Been muted. While the total number of shifts is down slightly from prior year, the average billing rates are holding at a higher level than anticipated. Been Charles is doing a nice job transitioning the business from the former owner and is already looking to expand into other geographic markets. Been gross margin was 26% in the Q1 of 2023 and S and S had adjusted EBITDA of about 650,000 Turning now to our balance sheet.

Speaker 2

At the end of the Q1 of 2023, we had cash and cash equivalents of $8,300,000 compared to $64,200,000 at the end of 2022. This decrease was largely driven by the TruPS repurchase of approximately 56,500,000 been we also received $6,200,000 in cash proceeds from holders of our warrants exercising during the quarter. Been participating in the past. As of March 31, 2023, dollars 3,200,000 of our $5 strike warrants remained outstanding.

Speaker 1

Been participating in our financial statements.

Speaker 2

Our total outstanding debt is comprised of bank loans and the remaining TRUPS. Been debt associated with VA Lafayette is reported as a separate line item on our balance sheet as liabilities held for sale. Been participating in the past. As a result, we had total outstanding debt of $42,800,000 at the end of the Q1 of 2023 compared with $102,100,000 at the end of 2022 and an originally reported amount of $292,700,000 been at the end of 2021. So since the end of 2021, we have reduced our total debt by 85%.

Speaker 2

Been recognized and as of March 31, 2023, our deferred interest was 0. I would also like to note that all but 30,000 of our Class A preferred been participating in the Q1 and the remaining 30,000 are expected to convert during the Q2. As a reminder, conversion requires 0 cash outlay by the company. Been On a quick side note, our VA clinic is listed for sale and is actively being marketed by a national broker. Been receiving a lot of serious interest and hope to have the VA clinic sold during 2023.

Speaker 2

As J. T. Mentioned, the Board approved a 1 year share been repurchased during the 3 months ended March 31, 2023. Been busy. In summary, our business performed well in the Q1.

Speaker 2

We have substantially delevered and simplified our financials, and we have the financial flexibility to be selective and opportunistic as we deploy capital. With that, I look forward to seeing you at our upcoming Investor Day. And now I'll turn the call back over to the operator to open the line for questions.

Operator

Been conducting a question and answer session. Ladies and gentlemen, the floor is now open for questions. Been been been muted while we poll for questions. We do have a question from Adam Petenkin. Adam, your line is live.

Operator

Been

Speaker 3

busy. Hey, guys. Congratulations on a nice start to the year.

Speaker 1

Thanks, Adam. Nice to meet you.

Speaker 3

Been Yes, likewise. So I guess I have just a few quick questions. So my first one is, I was interested in the hiring of Charlie Joyce. Been can you expand on his role and what you expect him to bring to the team and what that might mean for your ability to maybe attract additional OIRs and to conclude purchases of businesses in the KSX segment.

Speaker 1

Yes. So Charlie, great background, was doing a self funded search been and so understands the ETA community very broadly. And the thought process here is to really lean into been our sourcing process here at KSX to allow our OIRs to focus on more direct sourcing in specific industries of interest. So Charlie will be predominantly focused on building out our database been participating in the process of intermediaries, brokers and investment bankers and enhancing our outreach process to describe the Search Accelerator, been our acquisition criteria and the solution that we provide to lots of business owners who are looking to transition into retirement. Been And so the hope is that we will be able to see a lot more opportunities that are coming through traditional broker intermediary channel been with someone single point of contact at the Search Accelerator that can focus on that.

Speaker 1

That will also provide continuity been in that sourcing engine as new OIRs come onto the platform and other OIRs leave when they get an acquisition done. Been. He'll also spend some time focused on our recruiting efforts. He's very plugged in, in the ETA community, as I said. And so he will been appointed presence for the Search Accelerator at ETA conferences, on business school campuses, etcetera.

Speaker 1

So been I think that it really enhances our product offering for OIRs to come on board. If they can step into been very vibrant and powerful pipeline of ongoing deal flow through that channel. And I think it will also help that he's out getting the word out been in the

Speaker 3

community. That's great. That's a really exciting person to bring on board and it sounds like a really nice fit. Been maybe to kind of transition to something you touched on there. Now you have 4 OIRs and I know you reiterated during your been prepared remarks that you're still targeting 2 to 3 acquisitions per year.

Speaker 3

Can you maybe talk about what you're seeing out there in the market? How your pipeline looks been compared to last quarter or a few months ago. Just would love any update been the progress around the OIRs and making business acquisitions.

Speaker 1

Yes. Look, I think broadly the general M and A environment been very busy. I think you probably read about it. At the lower end of the lower middle market, I think that it remained pretty solid. Credit conditions tightened up a bit, valuation expectations probably been a little mismatched between sort of buyers' cost of capital and sellers' expectations, but I fully expected that to kind of revert and been the broader sort of M and A environment to unthaw here as we head into the summer.

Speaker 1

Our pipeline looks pretty strong. Peter and Drew are been up to sort of full speed and cranking along. We have Peter Hearn just joined us, so expect to get him up and going. And then obviously, the things that Charlie is doing been we'll only enhance that. We did part ways with 1 OIR subsequent to quarter end.

Speaker 1

So been We're still at a total of 3 OIRs with the addition of Peter.

Speaker 3

Got it. Okay. That's helpful to know. And then been maybe just one final question on a slightly different topic, which is I was just scanning through the 10 Q been after you guys released it and noticed that you had a $1,100,000 gain or an unrealized gain and it looks like it's related to Limbach shares and I noticed the LinBox stock price was up a whole bunch today. Can you maybe comment on what that is and been what you plan to do with that and obviously anytime you see a $1,000,000 gain that seems like a positive thing, but would love to understand kind of a little bit more about what's going on there.

Speaker 1

Yes. So that gain is related to warrants been that we received in Limbach as part of the SPAC sponsorship that Kingsway sponsored all the way back in been 2016 when Limbach went public via a reverse merger. There are $400,015 strike warrants been And so, and they're available to cashless exercise and they expire in July. Been provided the stock price is higher than the strike price, we will cashless exercise for Limbach been Those shares will be restricted for 6 months, I believe. And then we would be able to monetize that asset.

Speaker 1

Been

Speaker 3

Got it. So have you already exercised that? Or how does that work in terms of So I guess that's a really good thing that the stock was up 17% today. But, yes, maybe if you could give a little bit more color on Whether you've exercised it or not or what your plans are?

Speaker 1

We went through a process to just test the cash flow exercise to make sure that we had all of been machinations of that understood and could do it timely. So we exercised a small portion of them in the last been a week or so. And I think the thinking was we would wait to get through earnings and the potential that they would get added to the Russell and see what the momentum in the stock been heading into the expiration. And so we'll continue to monitor that with a view to been maximizing the value. You get a little leverage by not exercising them if the stock price continues to go up.

Speaker 1

So we're keeping an eye on it. The

Operator

been busy and there are no further questions in queue at this time. I would now like to turn the floor back to management for closing remarks.

Speaker 1

Been James, did you have any questions that were sent via email? I want to make sure that if people submitted questions via email that we had an opportunity to address those.

Speaker 4

Absolutely. Yes, 3 did come in. The first question that came in was, is there a targeted been in the accelerated segment or these investments entered into with the

Speaker 1

Yes. I think that what I would say is that our general preference would be to hold a great asset indefinitely. We don't go into an investment with a preconceived an idea of an exit. That said, if like the question asked, if we got a compelling external bid that allowed us to realize a return and redeploy that capital at a higher rate of return, then we would certainly do that. But I think that our goal here is to build and compound been with the great businesses that we're buying with sort of an indefinite horizon.

Speaker 4

Been Great. Thank you. And the second question that came in was, can JT or Ken comment on the run rate operating costs of the HoldCo? Been contemplating the same level of consolidated EBITDA is required for KFS to cash flow?

Speaker 2

Yes. Thanks, James. This is Kent. So I think I'll talk about the HoldCo run rate expenses. And When I say holdco, it means the corporate team as well as the KSX team that hasn't sort of migrated to one of the operations yet.

Speaker 2

So been If we look at sort of like the cash only spend and not taking into account interest expense because that's variable and it's only a small part of our troubles that are left. So, we are targeting run rate cash expense of say $1,000,000 to 1.2

Speaker 4

been recorded. Great. And the third and final question that came in online was, been What would the management team need to see to engage in buybacks? What are the targets that would trigger them? It does close with saying looking forward to discussion in next week's Investor Day.

Speaker 1

Yes. I think I touched a little bit on that in my comments been in the presentation. I think that our goal would be to do buybacks in a way that is accretive to our view of intrinsic value per share. Been and so any buybacks we do would be at a discount to that view. And so that's where we would be looking to repurchase shares.

Speaker 4

Been Great. That does conclude the questions that came in online. J. T, I'll throw it back to you for any closing comments.

Speaker 1

Okay. Well, thanks everyone for participating in the call this afternoon. Really appreciate your attendance and look forward to seeing been participating in the call for our Investor Day. Thanks and have a great afternoon. Been busy.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Kingsway Financial Services Q1 2023
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