Good day and welcome to the Kingsway Third 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. [Operator Instructions] Please note, this conference is being recorded. 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 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. 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-Q and Form 8-K 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 in our periodic filings with the SEC. Now, I would like to turn the call over to J.T. Fitzgerald, CEO of Kingsway. J.T. Please proceed.

Thank you, John. Good afternoon, everybody and welcome to the Kingsway earnings call for the third quarter of 2024. Let me start by saying that we had another very 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 a continuing moderation of claims experience and exited the quarter with nice momentum heading into the fourth quarter. Our KSX segment also performed to our expectations with adjusted EBITDA improving sequentially and year-over-year. The third quarter was highlighted by our acquisition of Image Solutions at the end of September, marking our sixth acquisition in our accelerator portfolio. Image Solutions is one of the largest IT managed service providers in Western North Carolina with approximately 85% contractual recurring revenue with low churn, strong margins and impressive historical organic growth. We acquired the company for $19.5 million, roughly 6.3x TTM EBITDA, plus some transaction expenses and a small working capital adjustment in an all-cash transaction. As a service business operating in an industry with attractive long-term growth opportunities, established customer relationships and a high-margin asset-light business model with 12-month adjusted EBITDA of $3.1 million for the 12 months ended June 30, 2024, Image Solutions met all of our clearly defined investment criteria. Davide Zanchi led the deal and has since transitioned from his role as an OIR to the CEO of the company. Davide and his team will be focusing on scaling the business by further penetration of their existing market, expanding its service area geographically and eventually expanding its offerings to include services such as cybersecurity and cloud storage. As you may know, Image Solutions is in the middle of the area that was devastated by Hurricane Helene. Fortunately, our team members and their families were all…

Thanks, 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 is the U.S. Veterans Administration. In August, we completed the sale of the VA clinic. The final adjustment between the net carrying value of the assets and the selling price as well as the loss on disposal are recorded below the operating line in discontinued operations. As JT discussed, we acquired Image Solutions during the third quarter for $19.5 million plus transaction expenses and a working capital adjustment. The transaction was funded by $11.4 million in cash and $7.75 million in debt financing. The $11.4 million came primarily from the proceeds of the issuance of 330,000 shares of newly created Class B convertible preferred stock and proceeds from drawing on our existing KWH loan and cash on hand. The $7.75 million of debt financing was provided by Avidbank in the form of a 6-year term loan with a graduated amortization schedule that is nonrecourse to Kingsway. Also during the third quarter, we completed an accretive purchase of the 10% interest in IWS that we did not previously own, and as such, IWS is now a wholly owned subsidiary of the company. As of September 30, we had cash and cash equivalents of $6.5 million compared to $9.1 million at the end of 2023 and total debt outstanding of $58.5 million compared to $44.4 million at the end of 2023. Our debt balance is comprised of $44.8 million of bank loans and $13.7 million of subordinated debt. Net debt increased to $52 million as of September 30, 2024, compared to $35.3 million at the end of 2023, primarily due to the $7.75 million of acquisition financing for Image Solutions and a $1 million draw on the KWH revolver as well as a $6.5 million draw on the KWH delayed draw term loan. In March of this year, our securities repurchase program was extended for 1 year through March of 2025. Year-to-date, we have repurchased 312,850 shares of common stock for an aggregate purchase price of approximately $2.5 million. I'll now turn the call back over to John to open the line for any questions.

[Operator Instructions] Our first question comes from Joshua Horowitz with Palm.

A couple of questions. I guess what are you seeing out there? What industries are the most attractive as you look for new acquisitions and multiple years into this KSX model, like is the talent recruitment getting easier? Are you getting to some flywheel?

Yes. Maybe I'll take those in reverse order. In terms of talent acquisition, we sort of approach that several different ways. We try to maintain a fairly active presence on the campuses of the sort of the elite business schools that have ETA programs. So engage with their ETA clubs and do lunch and learns and post on their internal job boards. We attend ETA conferences as well. And -- but our best source of talent is, as you might suspect, from referrals from our existing OIRs. And so as the number of OIRs that become CEOs continues to grow, we get more and higher quality referrals from their personal networks. So yes, I think that there is a real flywheel element to that. And I think as a result, we're able to get really, really talented folks interested in the KSX program. In terms of industries, each one of our OIRs, we encourage them to develop a handful of industry thesis. I think that we have done sort of white papers on about 45 different industries to date. And they're sort of across the spectrum. But as you might suspect, given our focus on recurring revenue business models, high margin, low capital intensity, they end up being in kind of asset-light business services, vertical market software, things like that. So, I think we probably won't buy a manufacturing business, for instance. So -- but there -- to say industry, it's really sub-industries within sub-industries. We're really focused in trying to identify opportunities in the niches. That's where smaller businesses like what we're targeting have the ability to have a competitive advantage is in a specific niche.

What is the appropriate time frame to measure your success?

That's a great question. I think that we acknowledge that there will always be a bit of a J-curve when you transition a new CEO into a business that you just acquired from exiting founder. It starts with sort of assessing and building the team and then making investments in growth. And so you got to kind of get through that first 18 months once that high attribute, maybe low experience CEO learns and develops in the industry, then you start to see things really start to happen. So, I would say that you would then really start assessing how it's going kind of at the 3-year mark, right? So, Timi is right at the 3-year mark in his acquisition of Ravix. When we bought that business, TTM EBITDA was around $1.7 million. And then he got in, learned the business, assessed the team, built the team, optimized pricing, leaned into business development and has now almost doubled EBITDA at Ravix since we acquired it. And so -- and really starting to get some momentum after kind of a tough first 9 months of this year given the private equity M&A environment.

[Operator Instructions] The next question comes from Adam Patinkin with David Capital.

Congrats on the nice quarter and the continued business progress.

Thanks, Adam.

All right. I got a couple of questions for you. So first, I saw the release about the new OIR who you brought on board. Can you maybe share a little bit more color about him? What do you like about him? What are the categories that you're looking at? And what do you like about those categories?

Yes. So we've talked in the past at length about our 5 H's, right? The attributes that we think are indicative of someone being a successful operator in a small business. And Rob demonstrates those at a very, very high level. A little bit later in career than some of our other folks. I don't know exactly how old Rob is but after HBS, he spent 10 or 11 years in 2 different private equity-backed roll-up strategies. The first one was in veterinary care, rolled up 300 or so vet hospitals. And then more recently at Alpine, large West Coast private equity firm, interestingly with its origins in search, doing a roll-up in HVAC and plumbing. And so Rob's -- based on those experiences, Rob has developed some thesis around some very interesting service-related industries that are maybe in the very early innings, first inning of consolidation. And the goal there would be to buy a platform, run it and then use that as a basis to do follow-on acquisitions out in front of what he expects would be private equity-backed consolidation.

Got it. That's great and that's really helpful. To kind of shift to -- thank you for the updates on -- I know you did a little tour to force running through a bunch of the different businesses that you have on the KSX platform. But one of them that stood out a little bit was DDI and about how the growth seems really meaningful but maybe it hasn't been showing up in the financial statements yet in terms of EBITDA. In fact, I think you said that the EBITDA was slightly down year-on-year. I know that, that business has been adding people and expanding very quickly. So maybe that was just building out some costs ahead of that growth. But maybe could you fill in a little bit more color there about what that business has been up to? And where -- or kind of like when you think the EBITDA is actually going to start showing up in the financials from that business?

Yes. Great question and great insight. I would say that, that's sort of exactly what's been going on. They've been -- first of all, all of the growth is entirely inbound. They don't have a sales force yet. That will be a project we'll be working on. But given the high level of inbound interest to add this service, we're dealing with monitoring patients. And so there's a real focus and emphasis on safety and quality. And so we want to make sure that we aren't adding volume that we can't handle in a perfectly reliable way. And so the goal was to both bring on EKG techs in advance of onboarding those customers and get them trained so that we have sort of a perfect monitoring experience. And then also to derisk the business by opening a second operations facility. We looked at a lot of different geographies up and down the sort of kind of inland West and settled on Salt Lake City for a variety of factors, probably most importantly, the availability of really good talent. And so the investment in new people, bringing them on board so that we had the capacity to add these new customers that were in our pipeline and then the operations facility for redundancy and access to more talent so that we could continue to scale given the visibility we have into kind of the mid-stage of our funnel and the inbound interest we're having. So you ought to see our bottom line profitability start to scale now that we can bring on these customers.

Got it. So it sounds like a lot of that investment -- I mean, obviously, you got to build out a biz dev team eventually and do those things but a lot of the big investment is kind of behind you and you feel like it's not going to be super long before you start seeing at least a little bit of that operating leverage.

Yes, I think we ought to start seeing the operating leverage even in this quarter, fourth quarter.

Okay. Great. And then last question is just on your pipeline. So I know Josh asked a little bit about it but how are the KPIs tracking? What are you seeing? You've got 4 OIRs looking. How does it feel? I know that there was just a presidential election. So maybe that -- I don't know, I assume that there was some hesitancy ahead of that but maybe that would go away now. But I'm just curious what you're seeing in the pipeline and with your KPIs and key metrics there in terms of new deals.

Yes. No, we're very active, right? I think we were just going through our monthly KPIs yesterday with the team and incredible activity. We kind of focus on lead measures, kind of the things that we can do kind of activity-based lead measures that we think are both sort of influenceable and predictive of lag metrics. Our lag metrics are obviously letters of intent with the ultimate goal of doing acquisitions. And so in terms of top-of-the-funnel proprietary outreach, NDA signed, conversation with business owners, we are knocking out of the park relative to our internal goals. And so there's a lot of activity and just sort of working things through the pipeline. We did experience some costs in the quarter that show up in SG&A., some broken deal-related fees. So we're working on stuff. It's the reason we do due diligence that you end up finding things and not closing things. So we're definitely very active. And I would anticipate that we would continue to hold with 4 OIRs. We ought to expect to be able to do 2 to 3 acquisitions in any 12-month period, obviously, subject to the sort of serendipitous nature of lower middle market buyouts.

We have no further questions from the phone lines. I'd like to turn the floor back to James Carbonara for any questions he may have via e-mail.

Sure. Thank you, operator. Yes, we do have a number that came in on e-mail. First one is on claims. Why is claims moderating? And then there's a second part to the question which states current warranty claims expense growth has moderated to 7% from 11% last year. What's a normal percentage? And when do you estimate it returning to that level?

So why is claims moderating, I think, was the first one. Look, we track this at a very macro level. If you look at sort of monthly CPI report deep in the tables, they break it out and there's one line item, CPI for vehicle repair, not service and maintenance but the repair. And we've just sort of been tracking that every month. for a long time but especially over the last year. And like in September, the September over September change was 6%. I think at its peak about a year ago, it was in the 14%, 15% range. So it's continuing to step down. Claims severity, the cost per claim is not going down. It is just not going up as fast. Claims expense is a function of parts and labor. And I think labor was the driving factor over the last several years, largely absence of qualified technicians to work on cars and then also just sort of what we've all seen in the labor market up until recently. So I would think that normal, historically, we would always see that parts and labor inflation kind of closely mirroring CPI. And so I would expect that to moderate over time as increases in labor rates moderate but that's just speculating.

Great. And the next one comes in on Image Solutions. It says Image Solutions does $3.1 million in EBITDA annually and simplifying that $775,000 -- sorry, $775,000 quarterly. What is the expected EBITDA impact in Q4 and 2025 from Hurricane Helene delaying the hardware installations?

Yes. I mean I probably want to kind of try to sidestep providing any guidance. I think we spoke in the prepared remarks about the fact that the portion of their revenue that comes from equipment installs is just delayed, not gone. And so as businesses come back online in the region and can focus on replacement of their existing technology, we will be able to get back in those facilities and install the hardware. A big portion of that business is monthly contractual recurring service and IT help desk revenue which was not impacted at all. So I don't want to give guidance but just I think that we believe that the hardware sales and install is really just pushed out 2 months kind of thing as opposed to gone.

Got it. Understood. And then the next one was on Ravix and CSuite. A business volumes likely to always be tied to the venture market for Ravix? Or do you see opportunities to diversify into new verticals? And the same on CSuite, are there opportunities to diversify away from private equity? Or are they likely always to be tied to that market?

Yes. I mean I think in terms of the original -- part of the original thesis on the CSuite acquisition is that there would be opportunities to cross-sell complementary services into those sort of different verticals. Ravix was historically kind of venture exposed and CSuite was historically private equity exposed. And so both of those businesses are sort of cross-selling into those -- each other's verticals. In terms of diversifying away from private equity venture capital, one, it's -- there's like always an acute need on a sort of new investment by a PE or VC fund to have like more sophisticated accounting but maybe not the necessity for a full-time resource. So we think it's a really good fit for fractional accounting and obviously, interim and the placement business at CSuite. And so -- but then like stepping back, when we think about the strategy, like we use this framework called the ANSOFF Matrix. And so where we focus is kind of the penetration quadrant of that matrix, start with pricing optimization, right? Timi did a great job of that, then move to upsell and cross-sell. And we've been doing that with the CSuite acquisition, the ability to cross-sell to those 2 different verticals and then penetrate those existing markets and add new customers, right? And so, I think that there's still just a lot of room to go in penetrating those verticals before you would move to the next harder thing to do which is to take on a new vertical. And so I think we would want to fully exhaust that quadrant of the ANSOFF Matrix before we move to something that is harder to execute.

Got it. Okay. The next one here is on SNS and it's glad to hear you are optimistic about the outlook for the market and prospects for the business. Can you reiterate those attractive dynamics of the SNS market and business?

Yes. I mean I think at a very high level, long-term, big picture macro, the attractive dynamics are a function of supply and demand, right? On the supply side, there is an acute and persistent shortage of nurses in the U.S. and that doesn't get resolved anytime soon as far as I can tell. Like if you look at the number of people in nursing school, the number of nursing schools, they're just not going to churn out enough nurses to even kind of refill the aging demographic in that workforce, let alone meet the expanding demand for health care services because of demographic trends. So that's sort of the attractive dynamic of that. Now obviously, more recently, sort of we had a big pandemic boom that a lot of demand for nurses. And so the hospitals rushed into the travel market to get contingent labor. And that put a lot of pressure on those hospital systems from -- on the cost side. And you also had a lot of new kind of upstart staffing businesses enter the market during those boom times. And so for the last 12 to 15 months or 12 to 18 months, there's been kind of a large sorting out in the industry, hospitals sort of pushing back and trying to minimize or limit the amount of contingent labor they're using, pressing the boundary on staffing levels, being tough negotiators on price. And you've also seen some sorting out of those sort of new entrants into the travel market. And ultimately, some of them will probably go away. So, I think the business is really well positioned to take advantage of those long-term secular trends around supply and demand and we're just kind of going through this sorting out period. And I feel like in the quarter, we finally sort of turned the corner. Travel shifts were up 73% year-over-year in the quarter. Our per diem business was down a little bit but some of that is kind of hospital census driven and we're seeing that come back in cold and flu season. So, I think Charles has done a good job professionalizing that business. It was a pen and paper business when we bought it. He's put in a whole new tech stack. It's hired some great recruiters and I think well poised to take advantage of the opportunity once things sort of settle out.

Excellent. The next one comes in on SPI and it says congrats on SPI. What steps do you take in the business when it's growing so well? Do you continue to focus on the organic growth or possibly tuck-in acquisitions or more sales hires?

Yes. If you go back to that, we had a -- no reason why anyone on the call would remember but we -- when we did the acquisition, we had an investor call to announce the acquisition. And as part of Drew's strategy, it was kind of a not exactly either/or but yes and type strategy. And the first was to really focus on organic growth. We felt like the market in which this company provides its software is growing faster than GDP. There is some white space there, opportunity to add customers and get adoption. And so he's really right for now, really focused on growing organically. And unless and until we sort of exhaust that thesis, he's very focused on growing the business that he has. But the kind of and part of the yes and strategy was always that we created vertical market solutions, the holding company and that once Drew got his sort of muscle built, developed on running a small vertical market software business, he could use those practices to explore doing more acquisitions of vertical market software businesses. But we're really happy with the -- with what he's done. He's grown ARR to 16%, gross retention in the mid-90s, net retention well over 100% and just getting started, really just getting started.

Terrific. And the next one comes in on DDI and it says, would you possibly use debt in the future for expansion or always self-fund your expansion?

We used acquisition debt. So we're focused on paying down debt, right? That's one of the value creation levers that we have, right? And as is the case with most of these businesses, they're generally fairly capital light and so don't require a lot of incremental cash to grow. In the case of DDI, we got to lean into headcount and open a new facility in anticipation of that volume coming online. But I think that the plan here would be to use cash flow to delever and fund the growth which would mostly be in the form of like working capital, right? If your cash conversion cycle is 30 days, right, your customers are taking longer to pay you than you paying your suppliers and with growth, there will be a natural investment in working capital. And so I think that, that would be the only sort of source of -- rather use of cash to grow.

Great. And last couple here. First is OIRs. Aside from Rob Casper, who is brand new, how long have your other OIRs been with the firm now?

Yes. So Peter Hearne joined us in May of last year. So that's about 17, 18 months. Miles joined us in September of last year, so 14 months or so. And then Paul Vidal joined us at the beginning of this year. So we kind of got a nice sequence here of OIRs and where they are in their gestation period, if you will. And so just kind of continue to bring these guys on board kind of a quarter kind of thing and hopefully match that cadence with new acquisitions, at least that's the goal.

Great. And the last one was just on the VA. Can you share or reiterate what was the financial impact with respect to the VA?

Kent, do you want to take that one?

Yes. We got about $1 million of cash out of that sale.

No P&L impact?

P&L would be shown in discontinued operations.

Great. That concludes the questions from e-mail. I'll pass it back over to you, operator.

Thank you. We have no further questions from the phone lines. This does conclude today's conference call and you may disconnect your lines at this time. Thank you for your participation.