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. 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, everyone. Good afternoon, 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 Operating Investor in Residence 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 safe, and the region continues to recover. Image Solutions was one of the first IT providers to get back up and running and has been working tirelessly to help its customers and prospects get back to business. We believe any short-term impacts from the storm are delayed revenue rather than lost revenue, as hardware installations are being rescheduled to later this year. Operationally, the third quarter was again largely in line with our expectations. Consolidated revenue was $27.1 million, a solid increase of nearly 10% compared to the prior year quarter. Our consolidated adjusted EBITDA was $2.9 million, a 28% improvement over the $2.3 million in the year ago quarter. For the Extended Warranty segment and the KSX segment, combined adjusted EBITDA was $3.4 million in the third quarter, an increase of 5% compared to $3.2 million in the third quarter of last year. Digging into our Extended Warranty segment, a slight increase in the sale of warranty contracts and higher cash sales drove a 3.4% increase in revenue. Claims expense rose by 7.5% over the third quarter of last year, which is lower than the 12% increase that we experienced in the year-ago period. Year-to-date claims expense is up 7.3% over prior year, compared to an 11% increase in the year-ago period. Adjusted EBITDA of $2.1 million was essentially flat to prior year as an increase in claims offset gains from increased revenue and ongoing cost savings initiatives. While the impact from claims inflation has not abated quite as quickly as anticipated, they are improving. We also see opportunities for accelerating growth in our credit union and mechanical businesses. IWS' opportunity pipeline has returned to pre-pandemic levels and is currently onboarding two new significant credit union partners, while Trinity, our commercial HVAC and refrigeration warranty business continues to grow and hit record levels of revenue and profitability. We also believe that any future interest rate cuts from the Fed could have a positive impact on our extended warranty business as lower interest rates make auto financing more affordable for the end customer. In our Search Xcelerator or KSX segment, revenues increased 23% compared to the year ago quarter, primarily as the result of a favorable comparison due to the acquisition of SPI late in the third quarter of last year and the acquisition of DDI in the fourth quarter of last year. Q3 2024 results exclude those of Image Solutions as we only owned that business for a few days during the quarter. Within KSX, I'll talk about each one of those businesses. At Ravix, the team focuses on increasing utilization rates and managing costs to improve profitability. Gross margins improved slightly for both the third quarter and year-to-date, compared to prior year periods despite a slight decline in revenue. Adjusted EBITDA was down in the third quarter compared to the third quarter of last year. Overall, the venture market remained slow in the quarter with deal volume depressed as fewer new companies are being funded and in need of our services. However, the market is showing signs of recovery. October was a favorable month from a new opportunity perspective as the team's marketing efforts are starting to generate solid leads and the trend of closed deals over prior year turned positive for the first time this year in October. Similarly, at CSuite, persistent challenging market conditions were again an overhang for the business in the third quarter. The team has a solid pipeline of staffing requests. However, with a slower private equity deal market and macro uncertainty, the team is experiencing placement deferrals. Importantly, the placements are being deferred and not canceled, and we continue to believe the business has a healthy outlook and is headed in the right direction strategically. For the third quarter, revenue was lower than the prior year period, yet the impact of operating income and adjusted EBITDA was diminished by a lower cost of sales and lower G&A expenses. At SNS, our nurse staffing company, we made great progress on the rebuild of our travel business in the quarter. The number of total shifts increased 5% year-over-year, while travel shifts increased 73% year-over-year and the number of travel nurses on assignment has more than doubled since the beginning of the year. In spite of higher shift counts, competitive pressure on pricing caused revenue to decline roughly 1% in the current quarter versus last year. Adjusted EBITDA was also slightly down compared to prior year, but the magnitude of decline is much less than we saw in the first half of 2024. We're beginning to see a positive change in the industry and Charles continues to focus on margins, working capital management, technology upgrades and building a bench of top-notch recruiters. We remain optimistic about the outlook for the nurse staffing market and the prospects for this business. At SPI, our global software solutions provider for the management of share-owned properties, revenue increased. In fact, year-to-date revenue through the first nine months of 2024 is on par with the full year revenue number that we used to base our investment decision just a year ago. Since acquisition, SPI has grown its ARR, annual recurring revenue, by 16%, expanded its capabilities through disciplined recruiting and development of its team, added new clients and expanded with existing customers. Operational metrics are also up across the board with solid ARR growth and excellent gross and net retention dynamics. Drew and the team are building a solid pipeline of qualified leads for continued ARR growth. At DDI, our provider of fully managed outsourced cardiac monitoring services, investments that have been made in infrastructure and talent are beginning to pay off. The team opened its second operations center in Salt Lake City in the third quarter, which provides not only the capacity needed to grow but also reduces the business risk associated with having only a single operation center. Revenue continues to grow over prior year pre-acquisition periods, with revenue in the quarter up 20% year-over-year and up 19% year-to-date. Adjusted EBITDA was down modestly in the quarter and from prior year periods due to the aforementioned investments in growth. DDI has a robust backlog of new customers that will be onboarded over the next couple of quarters, and the near- to mid-term pipeline of opportunities also remains strong. We expect profitability to improve as the business scales. Based on the performance of our operating businesses, the 12-month run rate adjusted EBITDA improved to $18.5 million to $19.5 million. Those numbers include Image Solutions. 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. Of note, run rate adjusted EBITDA was negatively impacted in the quarter by a roughly 100 basis point reduction in the reinvestment market yield on our warranty float at quarter end. Last week, we announced that Rob Casper has joined Kingsway as our newest operator in residence. Rob previously led private equity-backed consolidations in the veterinary services and HVAC and plumbing industries and has developed a solid investment thesis targeting a couple of attractive service industries. Rob is a graduate of the United States Naval Academy and served three deployments as an officer in the Marine Corps. He holds a Bachelor of Science Degree in Systems Engineering from the Naval Academy and an MBA from Harvard Business School. Rob brings really terrific leadership and operational execution experience to the team and has hit the ground running. With the addition of Rob and Davide transitioning to CEO of Image Solutions, we currently have four OIRs who are actively searching for acquisition opportunities. We have a great current cohort of entrepreneurs and a solid deal flow pipeline to support our strategy of acquisitive growth within our Accelerator segment. To summarize, solid operational execution and disciplined management drove improved consolidated financial results for the third quarter, and we're seeing promising signs of further improving market conditions. We're excited about the opportunities with the addition of Image Solutions to our KSX portfolio and remain committed to our corporate strategy of growth through acquisitions. I'll now turn the call over to Kent for some additional commentary related to the financials.

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 J.T. 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 one 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.

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 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. 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 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 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, 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. We recognize that there is often a J-curve effect when bringing in a new CEO for a business acquired from its founding owner. The process begins with evaluating and building the team, followed by making investments for growth. You typically need to navigate through the first 18 months, during which a highly capable but perhaps less experienced CEO learns and adapts to the industry before you start seeing significant progress. I would suggest that the best time to evaluate performance is around the three-year mark. Timi is currently at that three-year point with his acquisition of Ravix. When we acquired the company, the trailing twelve-month EBITDA was approximately $1.7 million. He took the time to understand the business, assess and strengthen the team, optimize pricing, and focus on business development, which has allowed us to nearly double EBITDA at Ravix since the acquisition. We're now beginning to gain momentum after facing a challenging first nine months of the year due to the private equity M&A climate.

Our 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?

We have previously discussed our five H's, which represent the qualities we believe contribute to success in small business operations. Rob exemplifies these traits exceptionally well, though he is further along in his career compared to some of our other team members. While I’m not certain of Rob's exact age, after graduating from Harvard Business School, he spent about 10 or 11 years working on two different private equity-backed roll-up strategies. His first experience was in veterinary care, where he helped consolidate around 300 veterinary hospitals. More recently, he was at Alpine, a significant private equity firm on the West Coast, where he engaged in a roll-up strategy in the HVAC and plumbing sectors. Through these experiences, Rob has formulated some insights regarding certain service-related industries that are in the very early stages of consolidation. The objective is to acquire a platform, manage it effectively, and then use it as a foundation for subsequent acquisitions, anticipating a wave of private equity-backed consolidation.

Got it. That's great and really helpful. Thank you for the updates. I know you conducted a tour of the various businesses on the KSX platform. One that stood out was DDI, with meaningful growth that hasn't yet appeared in the financial statements regarding EBITDA. In fact, I believe you mentioned that EBITDA was slightly down year-on-year. I understand that this business has been rapidly adding personnel and expanding, so perhaps the costs were incurred in anticipation of that growth. Could you provide more details about what that business has been doing and when you expect the EBITDA to start reflecting in the financials?

Yes, that's a great question and I appreciate your insight. That's precisely what's been happening. All of our growth is coming from inbound interest since we currently do not have a sales team in place. This is something we will focus on in the future. With the significant inbound requests for this service, we are prioritizing patient safety and quality. It's essential for us to ensure we do not take on more volume than we can manage reliably. Therefore, our strategy includes hiring EKG technicians before onboarding new customers and getting them properly trained to provide an optimal monitoring experience. Additionally, we're working to minimize risks by establishing a second operations facility. We evaluated several locations across the inland West and chose Salt Lake City due to several factors, most notably the availability of talented individuals. By investing in new hires, we aim to prepare for the influx of customers in our pipeline. The new operations facility will provide us with redundancy and access to more talent, allowing us to scale effectively given the visibility into our sales funnel and the ongoing inbound interest. As a result, we expect to see our bottom line profitability increase as we start onboarding these customers.

Got it. It seems that much of the investment has already been made, and while building out a business development team is necessary, you believe that the major investments are mostly behind you, and you expect to start seeing some operating leverage relatively soon.

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

Okay. Great. And then the last question is about your pipeline. I know Josh asked a bit about it, but how are the KPIs tracking? What are you observing? You have four OIRs looking. How does it feel? I understand there was a presidential election, which may have caused some hesitancy, but that might fade now. I'm curious about what you're seeing in the pipeline and your KPIs and key metrics regarding 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, conversations 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 four OIRs. We ought to expect to be able to do two to three 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 reports, deep in the tables, they break it out, and there's one line item, CPI for vehicle repair, not service and maintenance but 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 due to the 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 normally, 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 to $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 the 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 are really just pushed out by two months kind of thing as opposed to gone.

Got it. Understood. And then the next one was on Ravix and CSuite. A business volume 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 believe that part of the initial plan for the CSuite acquisition was to identify opportunities to cross-sell complementary services across different sectors. Ravix has historically been associated with venture capital, while CSuite has been linked to private equity. Both businesses are now working on cross-selling into each other's sectors. In striving to move away from reliance on private equity and venture capital, there's a consistent demand for sophisticated accounting services from PE or VC funds, although they may not require a full-time resource. This creates a strong opportunity for fractional accounting and the interim and placement services at CSuite. When considering our strategy, we utilize a framework known as the ANSOFF Matrix. Our focus is primarily on the penetration quadrant, beginning with pricing optimization, which Timi executed successfully, and then advancing to upselling and cross-selling. We've been applying this approach with the CSuite acquisition, enabling us to cross-sell between the two sectors and engage in current markets while attracting new clients. Therefore, I see a significant opportunity to further penetrate these sectors before considering entering a new one, and we aim to fully explore this area of the ANSOFF Matrix before taking on more challenging endeavors.

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. At a high level, the long-term dynamics in the market are driven by supply and demand. On the supply side, there is a significant and ongoing shortage of nurses in the U.S., which is unlikely to improve any time soon. The number of nursing students and schools isn't sufficient to replace the aging workforce or meet the growing demand for healthcare services due to demographic shifts. Recently, there was a notable increase in demand for nurses following the pandemic, prompting hospitals to turn to the travel labor market, which increased costs for these hospital systems. Additionally, many new staffing businesses entered the market during this surge. Over the past 12 to 18 months, the industry has been undergoing a sort of consolidation process, with hospitals attempting to reduce reliance on contingent labor and negotiate harder on pricing. Some of the new entrants in the travel market may not survive this period. I believe the business is well-positioned to leverage the long-term trends in supply and demand as we navigate through this sorting phase. In the last quarter, we saw a 73% year-over-year increase in travel shifts. Although our per diem business experienced a slight decline, we expect a rebound with the upcoming cold and flu season. Charles has effectively modernized that segment of the business, transforming it from a basic pen-and-paper operation to one supported by a new technology infrastructure and skilled recruiters, positioning us well once the market stabilizes.

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 organic growth or possibly tuck-in acquisitions or more sales hires?

Yes. When we made the acquisition, we held an investor call to announce it. As part of Drew's strategy, it was not an either/or scenario but rather a focus on both. The initial priority was to emphasize organic growth since the market for this company's software is expanding faster than GDP. There is potential for adding customers and increasing adoption. Drew is currently very focused on organic growth and will continue to do so until we fully explore that approach. However, the strategy also includes creating vertical market solutions within the holding company. Once Drew has gained experience managing a small vertical market software business, he will be able to apply those practices to pursue more acquisitions in that area. We're pleased with his progress; he has increased annual recurring revenue to 16%, achieved gross retention in the mid-90s, net retention well over 100%, and is just beginning to tap into the potential.

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. That's one of the value creation levers that we have. 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. If your cash conversion cycle is 30 days, right, your customers are taking longer to pay you than you're 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?

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.