Kingsway Financial Services Q2 2024 Earnings Call Transcript

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August 6, 2024

There are 5 speakers on the call.

Operator

Good day, and welcome to the Kingsway Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. With me on the call are J.

Operator

T. Fitzgerald, Chief Executive Officer and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everybody that today's conference 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.

Operator

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 ks and subsequent Form 10 Qs and Form 8ks filed with the Securities and Exchange Commission. Please note also that today's call may include the use of non GAAP metrics that management utilizes to analyze the company's performance. A reconciliation of such non GAAP metrics to the most comparable GAAP measures is available in 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 J. T.

Operator

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

Speaker 1

Thanks, Paul. Good afternoon, everyone, and welcome to the Kingsway earnings call for the Q2 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.

Speaker 1

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. For the Q2 of 2024, consolidated revenue was $26,400,000 a modest increase of 1% compared to the prior year quarter, Our consolidated adjusted EBITDA was $2,400,000 a nice improvement over the $1,800,000 in the year ago quarter. For the extended warranty segment and the KSX segment, combined adjusted EBITDA was $3,400,000 in both the Q2 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.

Speaker 1

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. Sequentially, adjusted EBITDA increased 12% from the Q1 of 2024 driven by higher earned revenue, a higher mix of extended warranty revenue at Trinity and our ongoing focus on controlling costs. As we talked about during our last earnings call, the challenges faced by the businesses in extended warranty have 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 twenty twenty three.

Speaker 1

Ravex continues to perform both ahead of our original investment thesis and is trending nicely in 2024. The team at Ravex remains focused on increasing utilization rates, optimizing pricing and disciplined cost management. While revenues were down in the quarter, gross margins continue 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 is headed in the right direction despite persistently challenging market conditions.

Speaker 1

Revenue and adjusted EBITDA were lower in the Q2 compared to the prior year period. However, cost of sales and general and administrative expenses were also down from prior year. The pipeline of qualified new business opportunities look strong and the team is charting us course for accelerating revenue in the second half of twenty twenty four and beyond. At SNS for the Q2, 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.

Speaker 1

Travel shifts increased 35.4% from the Q1 and the number of nurses on travel assignment or TOA 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 TOA 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 has contracted with a number of new clients this year and is executing on its strategy to grow annual recurring revenue.

Speaker 1

Since acquisition, the company has grown ARR by 12%. Percent. 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.

Speaker 1

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 $16,000,000 to 17,000,000 dollars 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 remain 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 2 to 3 deals each year that can each generate $1,000,000 to $3,000,000 in annualized adjusted EBITDA.

Speaker 1

We currently have 4 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. 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 Q2. I'll now turn the call over to Kent for some additional commentary related to our financials.

Speaker 2

Thanks, J. T. As a reminder, during the Q4 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.

Speaker 2

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. Taking a look at our balance sheet and cash flows. At the end of the Q2 of 2024, we had cash and cash equivalents of $9,600,000 compared to $9,100,000 at the end of 2023. Cash provided by operating activities from continuing operations was $500,000 for the 1st 6 months of 2024 compared to cash used in operating activities of $24,700,000 in the year ago period.

Speaker 2

Cash used in the prior year was primarily due to outflows related to the payment of fees, expenses and interest related to asset sales which was partially offset by operating income from the businesses in our operating segments. In May of this year, we amended our extended warranty loan to pay off all current extended warranty debt and replace it with a $1,000,000 revolver, a term loan of $15,000,000 and a delayed draw loan of $6,000,000 Maturity date was extended to May of 2029. This amendment now gives us additional capacity to fund future acquisitions. As of June 30, 2024, we had total outstanding debt, which is comprised of bank loans and subordinated debt of $47,300,000 compared to $44,400,000 at the end of 2023. Net debt increased to $37,700,000 as of June 30, 2024 compared to $35,300,000 at the end of 2023, primarily due to the extended warranty amendment.

Speaker 2

In March of this year, our securities repurchase program was extended for 1 year through March of 2025. Year to date, we have repurchased 141,550 shares of common stock for an aggregate purchase price of approximately $1,100,000 Also of 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. I'll now turn the call back over to Paul to open the line for any questions. Paul?

Operator

Certainly. At this time, we'll be conducting a question and answer The first question today is coming from Adam Patinkin from David Capital. Adam, your line is live.

Speaker 3

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.

Speaker 3

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 you expect both of those to trend going forward over the duration of the year?

Speaker 1

Yes. Hi, Adam. Thanks for the question. Yes, 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.

Speaker 1

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 in rate. And so also as you know, beginning in late Q2 and really in the Q3 of last year, we saw accelerating claims inflation, severity inflation, predominantly parts and 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.

Speaker 3

Got it. That's really helpful. I appreciate it. 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.

Speaker 3

I'll go back in the queue.

Speaker 2

Thanks, Adam.

Operator

Thank you. And there were no other questions from the lines. I'd now like to pass the call to James for some email questions.

Speaker 4

Thank you, operator. Yes, we did have 2 questions come in on email. The first one is, it says, JT, you said at the Investor Day, you are very happy with the 2 most recent acquisitions. Although they are recent, the reported numbers of both these businesses don't doesn'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?

Speaker 1

Yes. I mentioned it 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.

Speaker 1

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. And so 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 those that financial performance is starting to come through in the financial statements.

Speaker 1

And it's just a really incredible opportunity here. Peter is doing a great job, 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 techs, we're opening a new facility in Salt Lake. So, yes, I think we're really excited about the trajectory of both of those businesses.

Speaker 4

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 might what facts might lead you to believe that better days are ahead for these two businesses?

Speaker 1

Yes. SNS, we'll 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 TOA shifts in the quarter increased 35% over the Q1 of the year.

Speaker 1

And so Charles is doing a great job of recruiting nurses onto the platform and getting more TOA 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 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 season. So I think we're in a good position to capture that growing demand in the back half of the year. C suite, it's I mentioned that the challenges are a bit persistent.

Speaker 1

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 has been really trying to push those along and we're hopeful that the sentiment improves in the second half of the year.

Speaker 1

It's still hard to tell. But he's been the backlog or pipeline of deals that he has is as strong as we've seen it.

Speaker 4

Great. Thank you, JT. And operator, that's all from the questions on email.

Operator

Okay, great. There were no other questions from the lines at this time. So would you like to conclude the call, ma'am?

Speaker 1

Yes. Thanks, everyone. Have a great evening. Appreciate your participating on the call.

Operator

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

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Key Takeaways

  • Consolidated revenue for Q2 2024 rose 1% year-over-year to $26.4 million, while adjusted EBITDA improved to $2.4 million from $1.8 million a year ago.
  • Extended warranty segment saw cash sales up 4.6% and claims expense rise just 2.9%, with pricing changes from H2 2023 driving a 12% sequential increase in adjusted EBITDA.
  • KSX segment delivered 2% revenue growth, with SPI revenue up 24% quarter-over-quarter (ARR +12% since acquisition) and DDI revenue +14.6% (EBITDA +26.2%), and the company is targeting 2–3 deals per year from a strong pipeline.
  • SNS nurse staffing improved mix lifted gross margin by over 200 bps, travel nurse shifts increased 35.4% sequentially, and travel assignments have more than doubled year-to-date.
  • Balance sheet enhancements include $9.6 million in cash, a restructured extended warranty facility with $22 million in capacity for acquisitions, net debt of $37.7 million, an extended share repurchase program, and acquisition of the remaining 10% of IWS.
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Earnings Conference Call
Kingsway Financial Services Q2 2024
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