Good day, and welcome to the Kingsway First Quarter 2024 Earnings Call. Please note this conference is being recorded. Joining me are J.T. Fitzgerald, Chief Executive Officer, and Kent Hansen, Chief Financial Officer. Before we start, I want to remind everyone that today’s conference may include forward-looking statements about future expectations such as revenue, operating margins, expenses, and business outlook. Actual results may vary significantly from these statements. For a discussion of risks and uncertainties that could lead to different results, please refer to the risk factors outlined in the company’s annual report on Form 10-K and subsequent filings. Additionally, today’s call may feature non-GAAP metrics that management uses to evaluate the company’s performance. A reconciliation of these metrics to the closest GAAP measures is available in the latest press release and our periodic filings with the SEC. Now, I would like to hand it over to J.T. Fitzgerald, CEO of Kingsway. J.T., please proceed.

Thank you, Holly. Good afternoon, everybody, and welcome to the Kingsway Earnings Call for the first quarter of 2024. It's only been a short time since our last earnings call in March. So thank you all for joining us again today. We finished the first quarter of 2024 with financial results that are largely in line with our expectations, particularly in light of current market conditions that are impacting certain of our operating entities. Most importantly, our strategy and investment thesis remains the same: execution of our operating businesses while growing through acquisitions to deliver sustainable long-term growth in cash flows and generating attractive returns for our shareholders. Let's first look at the consolidated financial results. For the first quarter of 2024, consolidated revenue was $26.2 million, roughly in line with the prior-year quarter. And adjusted consolidated EBITDA was $2.1 million compared to $2.4 million in the year-ago quarter. For the extended warranty segment and the KSX segment, combined adjusted EBITDA was $3.0 million compared to $3.5 million for the year-ago quarter. In our extended warranty segment, our vehicle service agreement, or VSA companies were again impacted by an increase in average claims expense and persistent macroeconomic conditions, namely tighter credit conditions and lower loan volumes compared to the same period last year, making for a challenging year-over-year comparison. Despite the revenue headwinds facing the industry, we were able to sell more contracts in Q1 2024 and at a higher average revenue per contract than last year. However, the claim severity we saw moderating as we exited 2023, ticked back up in Q1 with higher labor costs, driving higher claims expenses in the quarter. I would note that we didn't see claims inflation really pick up until Q2 and Q3 last year. So we expect more favorable comparisons in the quarters ahead. All in all, the challenges faced by the businesses in our extended warranty segment are moderating. And importantly, we remain focused on controlling what we can, improving contract production, and managing our costs. We are seeing positive improvement thus far in 2024 with performance in March better than when we started the year. And importantly, we continue to expect improving financial results in 2024 compared to last year. Moving to our Search Accelerator, or KSX segment. Higher revenues were primarily driven by the recent acquisitions of SPI and DDI in the second half of 2023. Ravix has continued to perform ahead of our original investment thesis. And in the first quarter, adjusted EBITDA improved compared to last year despite a slight decrease in revenue. Strong utilization and higher gross margins, combined with tight expense management, delivered improved EBITDA margins in the quarter. At C-suite, revenue and adjusted EBITDA were lower than the prior year. However, gross margins continue to be strong and expenses are down from the prior year. Looking ahead, the private equity and M&A environment is showing signs of reinvigoration and the team is bolstering its pipeline of new deals. While it is early in the year, we have begun to see business activity improve and both Ravix and C-suite have added business development talent to accelerate revenue growth. At S&S, consistent with market trends, the per DM business continues to perform well, while market demand for travel nurses has continued to be challenging. This has resulted in much lower revenue and adjusted EBITDA in Q1 2024 than a year ago. However, our travel business is rebuilding, and industry intelligence supports our view that travel demand is stabilizing and long-term demand for nurse staffing will be strong given the projected persistent shortage of registered nurses over the next several years. We remain bullish on this business for the long term. At Systems Products International or SPI, the team is developing and executing a strategy to grow annual recurring revenue or ARR. Since its acquisition, the company has signed new clients who are at various stages of implementation. Once onboarded, these customers should provide a nice lift to ARR. Additionally, SPI is executing several promising strategies to increase penetration and grow market share in its core market. The company is also expanding its high-value partnerships to bring innovative solutions to their new and long-standing customers. At Digital Diagnostics Imaging or DDI, revenue continues to grow both month-over-month and year-over-year with several new hospital customer adds in the quarter. Q1 revenue exceeded the prior year by over 20%. EBITDA trailed the prior year slightly as the company is investing to support the growth they are seeing. DDI is focused on building the internal infrastructure and processes to scale alongside the high level of demand they are seeing while also ensuring continued excellent levels of quality and care. Now turning to KSX search activities. 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 a transaction is challenging to predict, we are encouraged by the strength of our pipeline and continue to target the completion of 2 to 3 deals over the next year that can each generate $1 million to $3 million in annualized EBITDA. Given the recent performance noted above, our 12-month run rate adjusted EBITDA for the operating companies is now $16 million to $17 million. As a reminder, run rate is intended to capture the last 12 months' EBITDA of the businesses we currently own, including those we've recently acquired. It is not intended to be forward-looking. As a reminder, we currently have 4 highly talented operators and residents who are actively searching for opportunities and evaluating a number of potential acquisition targets. Our deal pipeline is the most robust that I have seen, reflecting both the hard work of our OIRs as well as the systems and processes we've put in place for effective sourcing. That, combined with an improving overall M&A environment, gives us confidence in our ability to execute our plan. We are also actively recruiting our next cohort of OIRs. We received interest from over 60 qualified candidates in the first quarter alone. As always, we will remain highly selective about who we bring into the program. We are focused on delivering long-term results for you, our shareholders. We continue to make great progress. With that, I'll now turn the call over to Kent for a deeper review of our financials.

Thank you, JT. 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 sold to the U.S. Spectra's Administration. As part of our strategic shift away from the leased real estate segment, VA Lafayette is included in discontinued operations, and assets and liabilities are reported as held for sale. The results of its operations are reported separately and not included in the results I'm about to discuss. Since JT already covered the results of the extended warranty and KSX, I won't rehash those now. I'll start with our balance sheet and cash flows. At the end of the first quarter of 2024, we had cash and cash equivalents of $12.1 million compared to $9.1 million at the end of 2023. In Q1 2024, we drew $3.5 million on our delayed draw term loan and $0.5 million on our KWH revolver. Given the delayed draw term loan expired at the end of February, we felt it prudent to have some dry powder on our balance sheet. Cash provided by operating activities from continuing operations was $0.2 million for the first 3 months of 2024 compared to cash used in operating activities of $22.8 million in the year-ago period. A large portion of the cash used in operations in the prior year was related to payment of deferred interest on the trust-preferred debt instruments that we repurchased during the first quarter of last year and payment of deferred interest on the remaining trust-preferred debt instrument that we did not buy back. We had total outstanding debt, which is comprised of bank loans and trust debt of $47.1 million at the end of the first quarter of 2024 compared to $44.4 million at the end of 2023. Net debt decreased to $34.9 million as of March 31, 2024, compared to $35.3 million at the end of 2023. In March of this year, our securities repurchase program was extended for 1 year through March of 2025. During 2024, we repurchased 8,000 shares of common stock for an aggregate purchase price of approximately $100,000. To date, the company has repurchased securities at a total cost of $7.2 million. That's the total under the program. In summary, the first quarter financial results were largely in line with our expectations. Our balance sheet remains healthy, and we are poised for improving results as we progress throughout 2024. Our Annual General Meeting of Shareholders and Investor Day will be held at the New York Stock Exchange on Monday, May 20, 2024. The AGM will begin at 9:00 a.m. Eastern and the Investor Day presentation will begin at 9:30 a.m. Eastern. Will Thorndike has agreed to join us for a fireside chat to share his thoughts on capital allocation, the power of long holding periods, and his experience as an original and long-term investor in the search fund ecosystem. Anyone interested in attending the in-person Investor Day as well as the off-site cocktail reception may RSVP by emailing [email protected]. His email's in today's press release. We hope to see you there. I'll now turn the call back over to Holly to open the line for questions.

Your first question for today is from Adam Patinkin with David Capital Partners.

So I wanted to ask a few questions about your pipeline of new deals. I think that on the call today, you guys expressed a little bit more enthusiasm than we've heard in the past about what your deal pipeline looks like and how robust it is. And I'm wondering if you could share a little bit more color about that. So first, maybe if you could share maybe what kind of KPIs you look at when you judge how your pipeline is coming along. And then maybe if you could share a little bit more about kind of what systems and processes you've put in place, which I think you also alluded to or mentioned outright on the call, to help us just get a better feel for how you've improved your sourcing funnel over time.

Yes, I'm happy to discuss that. We break down our key performance indicators into lead measures and lag metrics. Lead measures are things that we can influence through our outreach initiatives and are predictive of our lag metrics. Specifically, lead measures include the number of industries we've identified and qualified, along with our initial outreach to primary business owners. This outreach can take various forms such as email campaigns, LinkedIn messages, traditional mail, or phone calls. On the other hand, lag measures consist of executed non-disclosure agreements, received sales information memorandums mainly from brokers and intermediaries, indications of interest, or discussions with business owners, and ultimately, letters of intent that lead to closed deals. This framework resembles a typical sales pipeline but distinguishes between lead and lag measures.

And so on all of those data points numerically?

Yes, we track data weekly, monthly, and quarterly through our CRM system called HubSpot. This system helps us manage our NDA execution and our electronic platform enables us to outsource some legal aspects while keeping track of all our NDAs. We also maintain internal repositories for standard forms related to NDAs and indications of interest. There was a significant amount of activity in the first quarter, as we initiated a new outsourced sales development resource. At our Investor Day, we will provide more details about our outreach efforts. In the first quarter, we made around 15,000 initial contacts with business owners, although the conversion rate into conversations is likely low single-digit percentages. However, we executed many NDAs and continued to progress through the sales funnel, indicating strong activity.

Got it. And you would say that this is more activity or the most activity that you've had?

Yes. There's just a lot of structure and rigor around both tracking and monitoring. I think what gets measured gets done. And the guys are really leaning into maximizing on the lead measures that are then hopefully predictive of the lag measure.

I understand. That's very helpful, and I look forward to learning more at the annual meeting on this topic. I noticed that Kingsway has recently posted applications for new OIRs to join the company. You mentioned that there have been over 60 applicants for one position. I assume that you only post these when you feel you are getting closer to potential transactions? If you could elaborate on this without indicating that you are committing to a transaction at any specific time, when do you decide that it's time to start recruiting for the next rounds of OIRs?

Yes. I mean I think part of it is ongoing. I mean I think that we firmly believe and have an expectation that each one of our current guys is going to get a deal done in the normal time frame. And so we want to be thoughtful about knowing that we want to bring new people on as they move into a President and CEO role that we want a backfill and don't want to be sort of behind the curve. And so a lot of it is an ongoing process. So I wouldn't read too much into the timing but just know that I think it's indicative of our confidence that we're still recruiting. And so we post those job descriptions and profile descriptions sort of quarterly, and then there's kind of ongoing a little bit more organic development that comes through other channels as well. And we'll speak about that at the Investor Day, too. That's a big part of our process is our talent recruitment pipeline and process as well.

Got it. So then let me ask one last question, which is I saw that you guys added Tyler Gordy to your advisory board for KSX. Can you talk about how you utilize your advisory board? So you've got Tom Joyce, Tyler Gordy, and Will Thorndike on there. How do they interact with your OIR? Is it mostly before a deal gets done? Is it mostly after a deal gets done? Is there a regular line of communication? Is it more structured or informal? Can you just maybe talk through how you utilize that advisory board?

Yes. So the structured part is we meet in person full day 3 times a year. We met in March, and that is a fairly structured day. We start with identifying some critical kind of operating areas for new presidents. This year, we focused on talent and talent sort of development and coaching as the President of a small company, and we focused on time management for a new CEO, and we focused on investment underwriting and key criteria in search acquisitions. So on those 3 topics, Will took one of them, Tom took one, and Tyler took one. And they kind of did a workshop on that. So that was a big chunk of the day. The rest of the day was split between operating updates, key challenges, and issues for each one of our KSX CEOs, a little bit more of like a board meeting, if you will, for each one of those operating companies. And then the last sort of 1/3 of the day was pipeline, new opportunities, quick looks at deals we're looking at. Key beliefs are important bets to help them think about both the attractiveness of the potential target and valuation criteria. So that would be our sort of 3x a year more structured formal gatherings. And then each one of these advisers has encouraged our guys to develop more informal mentor-mentee relationships that I'm not involved in. And so there is, I think, a lot of natural back and forth via text and phone call whenever they have something that maybe they don't want to bring to me but want some advice on that kind of thing. So it's pretty amazing that they give their time, and we have, I think, very impactful gatherings when we all get together.

Your next question is from Douglas Ott with Ann Barry Associates.

My first question is regarding the extended warranty business. Even though there have been current headwinds, I'd just like for either or both of you to talk about why this is or isn't a good stand-alone business over the long term.

Yes, it's a great question. Obviously, when you have companies whose product sales are tied to the sale of used vehicles that you have natural exposure to the economic cycle, in this case, sort of consumer credit cycle, and so there is some cyclicality and we've been living with that for several quarters, call it, 6 quarters since the Fed started raising interest rates. Probably even before that, with the pandemic and the dislocation in the used car market and all of that. And so I start with there is some cyclicality to the business that would be viewed as a negative. But the underlying economic fundamentals of these businesses also tick a lot of boxes for us. So it is a diversified contractual revenue at a high margin and low working capital requirements, negative working capital. So these are prepaid contracts. And so the returns on tangible capital are infinite because they require negative capital. And so we like the economic characteristics a lot. We don't love the cyclicality.

And perhaps you could also talk about the pros and cons of the extended warranty business being paired with a business like KSX.

Yes, from the start, we have always considered the warranty business to be excellent generators of cash. There is some volatility due to the cyclical nature of the business, but they produce profits in cash. We have consistently viewed them as strong cash sources, and we have capable managers focused on organic growth. Over the years, we have managed to acquire a few at reasonable prices. Given the challenges of reinvesting the cash generated from these businesses into additional warranty acquisitions, we see them as a great source of cash flow that can support our cereal acquisition program through KSX. For now, it serves as a cash generator, and as KSX expands, it will continue to provide cash for future acquisitions.

Yes. Well, maybe I can ask a follow-up on that response. All things being equal, whatever that means to you, is there a preference for funding either KSX or the warranty business? Or would you like to do both as much as you can, given attractive opportunities?

Yes. The warranty businesses require 0 capital to scale because of the capital-light nature of the businesses. And so any capital that we're required to build more in the warranty would be via acquisition. And we have just found these are very attractive businesses and people really like them. And so we have found that a good business in the warranty industry is very difficult to buy. The valuations are much higher than we would be willing to pay. They trade at 15x. And so we're just not going to be a good buyer of those businesses. And so all things being equal, except valuation, we would rather direct our capital to backing really talented young people looking for businesses with similar attributes in the search Accelerator segment.

Next question for the KSX segment, I'd like you to remind us of a few of the most important things that you guys continue to do today that are going to benefit shareholders over the very long term.

That's a great question. So I think it's a very unique model, Doug. I've been involved in search for a long time. But the idea of matching really wonderful talent to go into a small business that otherwise probably couldn't attract it. Alignment of incentives and then focus on buying the right kind of businesses, large and growing industries where that growth is supported by long-term secular trends. And then within that industry businesses that have great business models, recurring revenue at high margins and low capital intensity and then paying very fair multiples for those businesses. History has proven that we can buy great businesses in growing industries from a founder or retiring founder for under 7x EBITDA and then take a really talented young entrepreneur and put them in and accelerate growth. And that's been the model in search. That's what we're doing in Kingsway. And I think Kingsway is like a really exciting platform to do that in both some long-term nature of our outlook and our ability to hold businesses for a long time and the tax efficiency because of our NOLs.

Got it. And one last kind of nitty-gritty question. I'm curious from the prior questioner when it comes to communications with potential OIRs, I'm just curious how much of the communication is outbound versus inbound. And has that changed any at all over time?

Look, I think it's both. We do outbound just to build awareness, but the best quality is inbound through the networks that continue to get stronger and bigger. Each one of our current presidents and OIRs have large networks Tyler, Will, Tom, et cetera. And so the communication is both directions, I would say, the higher quality communication is inbound.

There are no further questions from the phone lines. I would now like to turn the floor over to James for e-mail questions.

Thank you, operator. Yes, a number of questions did come in on e-mail. I'll start with the first one. As you have talked about how you think the business conditions that many of the company divisions look to improve over the next 6 to 12 months? Can you give 2 or 3 anecdotes or signs of improvement in these businesses?

Thank you, James. To start with the warranty businesses, cash revenue for the quarter increased year-over-year by about 1.5%, while our operating expenses decreased by 4%. This reflects the pricing adjustments we implemented at the end of last year, which will positively impact earned revenue over time. Additionally, Trinity's equipment backlogs seem to be clearing up, and that sector is beginning to recover, which is encouraging. In IWS, our vehicle service contract company working with credit unions, we've recently secured a large new credit union customer. Although we've onboarded several new clients this year and last, this particular deal is set to launch in late second or early third quarter, which could significantly boost our performance. In KSX, the primary setback for several quarters has been SNS, our nurse staffing division. We believe the industry has reached its lowest point, as demand for travel nurses has stabilized. Over recent months, our team, led by Charles, has built an internal tech infrastructure and brought on three new recruiters, resulting in a 40% increase in the number of travel nurses on assignment from year-end to the end of March, with continued growth in April as our recruiters become fully operational. This upward trend indicates that the decline we observed last year is reversing, and we anticipate a stronger second half of the year. Regarding DDI, it has experienced significant growth without a corresponding increase in EBITDA. They are onboarding new hospital customers approximately every 1.5 weeks, which incurs initial costs for technology and sometimes equipment, such as monitors. Many of these expenses are expensed upfront, but they tend to have quick payback periods. The business is growing rapidly, and we are focused on keeping pace with this growth while ensuring we maintain the high quality of patient care and services. Overall, we are optimistic about the current developments.

Great. And I think you answered a few of the other questions here, but there are some additional ones that came in. It says, can you talk about how the first quarter or 2 of results might look at new businesses we buy? Do you experience some economic drag in the early financial results even if the businesses are doing well and meeting or exceeding expectations?

That's a great question. First of all, we have a long-term perspective, so one or two quarters won't impact our overall thesis. We do expect some initial challenges in the first couple of quarters. When we acquire small businesses, they are generally small and not very sophisticated, often having no experience with public company reporting. This means we need to do a lot of work upfront, which adds some overhead for things like audits, implementing new accounting systems, and improving HR and benefits. We focus on professionalizing these small businesses and building a foundation for their growth. While there's likely to be a couple of quarters of challenges, things will eventually improve. It's important to note that these are often young managers and first-time leaders, and mistakes will happen as we navigate this process and learn from them. Therefore, some initial setbacks are to be expected.

Great. And then continuing along and feel free to say you have nothing additional to add if you feel like you've already answered it. But the next one is it sounds like the software and cardiac monitoring businesses are doing well, but the financials don't yet reflect our upward trajectory. Can you speak to this and tell us when the financials will start to show positive momentum in these 2 businesses?

Yes. I mean, I think I spoke to it. I'll just sort of underscore it. SBI mentioned in the prepared remarks, we added 8 new enterprise customers. And once those customers get onboarded, there's a little bit of customization of the software once they come on, that will see a nice uplift in ARR and Drew is very focused on continued penetration in his markets and got a great strategy and a great team. And yes, so I'm very happy about that. And software business is really in his case, about growing ARR talking about the rule of 40, right, ARR growth plus EBITDA margin greater than 40%, and that's what he wants to be there. And so right now, he's leaning into ARR growth as he more fully penetrates this market, the focus may shift towards improving EBITDA margins. But for now, he wants to make it a much larger business. And DDI, as I said, there's a lot of upfront investment to onboard these new hospitals, tech installations. Those are upfront costs, but they have an extremely fast payback, and he's growing very quickly in terms of new hospital adds.

Excellent. Okay. And one of the questions is, can you talk about the float at the insurance companies and the size of the portfolio? What is the yield today? And how long will it take to get closer to a market rate at 5% plus?

Yes, I believe they are referring to warranty, not insurance, which is an important distinction. So, regarding the float, we have approximately a $40 million bond portfolio and about $8 million in restricted cash. The bond portfolio is managed externally, and currently, it has a duration of around two years. This duration has been decreasing over the last couple of years to align with the optimal yield curve, which is around the two-year mark for maximizing yield. With a two-year duration in this higher interest rate environment, I anticipate that as these maturities mature over the next year, we will be fully invested to reach the market rate of over 5%. Currently, the market yield on the portfolio is above 5%. As we go through the rollovers, this adjustment should occur in about a year.

I would think so. Yes, we're currently yielding looks to say low 3s right now. So that continues to go up as the portfolio continues to turn over.

Okay. The next question is, do you think we will be able to close on 2 new acquisitions prior to year-end 2024?

Well, with all of the safe harbor language that Holly gave since the beginning of the call, yes, look, I mean, I think we've demonstrated our ability to do it. I feel really good about both the level of activity. We talked about those lead measures that Adam asked about and the amount of deals our OIRs are turning over and a very healthy pipeline. I feel very good about it. But buying a company, buying 100% of a small business is always a very hard endeavor and with risk and things that go wrong. And so with the proper caveat, that it's hard to predict.

Got it. And then the last one here is, without giving guidance, do you think that EBITDA growth will start to find positive as we go through the next 2 or 3 quarters?

Yes. Just because JT mentioned on the warranty side, the claims expense really started to increase about this time a year ago, in Q2 and Q3. So we just believe with not giving any guidance, but keeping at our pace, we should have favorable year-over-year comps going forward.

Great. I see no further e-mail questions. I'll pass back to the operator.

There are no further questions from the phone lines. I'll turn the floor over to management for any closing remarks.

Okay. Thank you, Holly. No additional remarks other than we hope to see you all at our Investor Day in New York on May 20. We'll do kind of a management presentation, a deep dive on KSX. Under the hood on DDI, Peter Dausman will be there to talk about his business. And then a wonderful fireside chat with our KSX Advisory Board member, Will Thorndike. In addition to talking about his book, Outsiders, and his podcast, we'll talk about his experience as a search fund investor and some of the research he's done around that asset class and the power of long-term holding periods. So I think it will be a really nice way to tie it together a bunch of interesting threads and hope you're all there. I think for those that come, I think we have purchased copies of Will's book, and we probably signed them for you. So that would be fun.

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