Kingsway Financial Services Inc. (NYSE:KFS) Q3 2023 Earnings Call Transcript

Kingsway Financial Services Inc. (NYSE:KFS) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Good day, and welcome to the Kingsway Third Quarter 2023 Earnings Call. [Operator Instructions] With me on the call are JT Fitzgerald, Chief Executive Officer; and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone 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. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see the risk factors detailed in the company’s annual report on Form 10-K containing the subsequent field reports on Form 10-Q, as well as others that the company files from time to time with the 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’d like to turn the call over to JT Fitzgerald, CEO of Kingsway. JT, please proceed.

JT Fitzgerald: Thank you, Paul. Good afternoon, everybody, and welcome to the Kingsway third quarter 2023 earnings call. Thank you for joining us. We’ve been busy since our last earnings call, so let me go over the highlights. Our third quarter results were largely in line with our expectations with consolidated revenue of $24.8 million, up 11% from a year ago, while consolidated adjusted EBITDA decreased to $2.3 million in 2023 compared to $3.6 million last year. Combined pro forma adjusted EBITDA for the Extended Warranty segment and KSX segment was a total of $3.2 million in 2023 compared to a total of $4.55 million in the third quarter of 2022. We continue to repurchase a number of shares of our common stock and warrants, which Kent will detail later.

Our $5 strike warrants expired on September 15, 2023 with all but 39,000 exercising. We believe the overhang concerns that created are now largely behind us. In September, we acquired Systems Products International, or SPI. And in October, we acquired Digital Diagnostics Imaging, or DDI. Our fourth and fifth acquisitions under the Kingsway Search Xclerator platform. And in October, we signed a definitive agreement to purchase 95% of the shares of National Institute of Clinical Research, or NICR. This is a lot to unpack, so I’d like to start with our Extended Warranty segment, which delivered revenue of $17.3 million in the current quarter compared to pro forma revenue of $17.9 million a year ago. Adjusted EBITDA for the current quarter was $2.1 million compared to pro forma adjusted EBITDA of $3.8 million a year ago.

As a reminder, pro forma results exclude PWSC, which we sold in July last year. As we discussed on our last earnings call, our vehicle service agreement or VSA companies continue to be impacted by an increase in claims paid and persistent macro level revenue headwinds that impact consumers. Primarily, tighter credit conditions and persistently high used car prices. At Trinity, our maintenance support business revenues have been impacted by decreases in its equipment breakdown and maintenance support services due to mild weather conditions, which results in fewer service calls. Both of Trinity’s segments have also been negatively impacted by long lead times on parts and installations. However, we’ve been able to mitigate some of this impact through lower operating expenses at all of our Extended Warranty companies in 2023 as compared to a year ago.

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Q&A Session

In addition to these headwinds, last year, IWS had some very favorable realized gains from some of its investments in search funds coincidentally, as well as a release in GAP product reserves that didn’t repeat this year. Even with all of these challenges, it’s worth noting that the Extended Warranty segment had its strongest quarter this year with adjusted EBITDA up 23% sequentially from Q2 2023. Switching now to our Search Xclerator, or KSX segment. We had revenue of $7.5 million in the current quarter compared to revenue of $3.8 million a year ago. Adjusted EBITDA for the current quarter was $1.1 million compared to adjusted EBITDA of $0.8 million a year ago. These increases are due to CSuite and SNS acquisitions that were completed in November 2022 and to a lesser extent the acquisition of SPI in September of this year.

The Ravix, CSuite business is performing better-than-expected from a profitability perspective as higher operating margins more than offset lower-than-expected revenues. Ravix is performing slightly ahead of where it was last year in terms of operating income and adjusted EBITDA. Through the quality of services provided, Timi Okah and his team are retaining customers at Ravix and in certain instances have improved pricing. At CSuite, the team is rebuilding its pipeline and advancing new business opportunities to reignite growth. Both companies have recently added talent in the business development function to drive revenue growth. SNS is performing at or near our internal plans despite a shift in business mix from higher margin travel assignments to per diem assignments.

As we head into winter, we have not yet seen the typical spike in demand for travel nurses, but we are still early in the season. Importantly, we believe long-term demand for nurse staffing will be strong and the shortage of qualified nurses to deliver care persists. In September, we acquired SPI, a privately held vertical market software company. It was the fourth acquisition completed under our Search Xclerator. SPI fit our investment criteria with recurring revenue, strong margins, and low capital demands. It operates in a growing industry and we expect it will be immediately accretive. SPI has world-class software products for the timeshare and vacation rental industries. Its platform includes a comprehensive set of modules with software solutions that cover the entire vacation ownership enterprise.

Operator-in-Residence, Drew Richard, has transitioned into the day-to-day operating role as CEO of the company. In October, we acquired DDI, a provider of fully managed outsourced cardiac monitoring telemetry services. We are excited about this transaction because DDI has a high level of recurring revenue is scalable and operates in a stable growing market. DDI is the industry standard for outsourced telemetry and has established itself as a trusted partner to its customers through its focus on a dependable, high-quality service offering. Peter Dausman, the Operator-in-Residence for this transaction, has transitioned into the CEO role for DDI. We held separate conference calls to discuss each of the SPI and DDI acquisitions and I encourage you to listen to those replays if you weren’t able to make those calls.

Also in October, we announced the signing of a definitive agreement to purchase 95% of the shares of National Institute of Clinical Research, or NICR. The remaining 5% will remain with the seller. NICR is a provider of clinical trial site management and recruitment services for nephrology, cardiometabolic, infectious diseases, and gastroenterology clinical trials. NICR participates in the development of innovative and life-saving therapies through its dedication to, and focus on, clinical research. NICR was attractive to us because of its track record of growth and profitability with a strong pipeline of clinical trials with some of the world’s largest pharmaceutical companies. The outlook for clinical trial site management is favorable and NICR has an impressive reputation as a provider of quality services.

Its commitment to delivering the highest level of service to clients and patients is foundational and we are committed to continuing in this legacy. Dr. Davide Zanchi, the Operator-in-Residence responsible for finding and executing this transaction, has a successful career in pharma and biotech and will transition to Chief Executive Officer following the close of the transaction. We expect the closing, which is subject to certain closing conditions, will occur on first quarter 2024. Shortly after the deal closes, we intend to host a conference call to discuss NICR further. As we’ve said in the past, the timing of closing an M&A transaction is difficult to predict, but in recent weeks, we have taken several deals across the finish line. For several quarters, we have spoken about the quality of our pipeline and conveyed the confidence we have in our OIRs to identify attractive targets and execute transactions.