KINGSWAY FINANCIAL SERVICES INC Q3 FY2024 earnings call

• Quarterly performance overview: Consolidated revenue was $27.1 million, a solid increase of nearly 10% compared to the prior year quarter. Consolidated adjusted EBITDA was $2.9 million, a 28% improvement over the $2.3 million in the year - ago quarter.
• Acquisition of Image Solutions: Acquired Image Solutions at the end of September, one of the largest IT managed service providers in Western North Carolina with approximately 85% contractual recurring revenue, low churn, strong margins, and impressive historical organic growth. Acquired for $19.5 million plus transaction expenses and a small working capital adjustment in an all - cash transaction. Team is focused on scaling the business by penetrating existing market, expanding geographically, and expanding offerings. Impact of Hurricane Helene on Image Solutions is delayed revenue rather than lost revenue as hardware installations are rescheduled.
• Operational highlights: Third quarter was largely in line with expectations. Addition of Rob Casper as new operator in residence, and Davide Zanchi transitioning to CEO of Image Solutions. Currently have 4 OIRs actively searching for acquisition opportunities.

Extended Warranty segment

• Revenue increased 3.4% due to a slight increase in the sale of warranty contracts and higher cash sales. Claims expense rose by 7.5% over the third quarter of last year, lower than the 12% increase 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 was $2.1 million, essentially flat to prior year as an increase in claims offset gains from increased revenue and ongoing cost savings initiatives.

KSX segment

• Consolidated revenues for KSX segment increased 23% compared to the year - ago quarter, primarily due to favorable comparisons from prior acquisitions. Within KSX:
  • Ravix: Gross margins improved slightly for both the third quarter and year - to - date despite a slight decline in revenue. Adjusted EBITDA was down in the third quarter compared to the third quarter of last year due to a slow venture market, but October showed signs of recovery with positive closed deals over prior year.
  • CSuite: Persistent challenging market conditions in the third quarter, with a solid pipeline of staffing requests but placement deferrals due to a slower private equity deal market and macro uncertainty. Revenue was lower than the prior year period, but operating income and adjusted EBITDA were less impacted due to lower cost of sales and G&A expenses.
  • SNS: Made great progress on the rebuild of the travel business. The number of total shifts increased 5% year - over - year, 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. Revenue declined roughly 1% versus last year due to competitive pressure on pricing, but adjusted EBITDA decline was less than in the first half of 2024.
  • SPI: Revenue increased, and year - to - date revenue through the first 9 months of 2024 is on par with the full - year revenue number used to base the investment decision a year ago. ARR has grown by 16%, and operational metrics are up with solid ARR growth and excellent gross and net retention dynamics.
  • DDI: 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 investments in growth, but has a robust backlog of new customers and strong near - to - midterm pipeline.

• 12 - month run rate adjusted EBITDA improved to $18.5 million to $19.5 million, including Image Solutions.
• For Image Solutions, hardware sales and install due to Hurricane Helene are delayed rather than lost, and will be recovered as businesses come back online and focus on replacement of technology.
• Expect to see operating leverage in DDI's bottom line profitability starting in the fourth quarter as they can bring on new customers now that investments are in place.

• Claims inflation have not abated quite as quickly as anticipated.
• Hurricane Helene caused short - term delays in revenue for Image Solutions due to hardware installation rescheduling.

Q: 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?

A: In terms of talent acquisition, best source of talent is referrals from existing OIRs. For industries, OIRs develop industry theses, focusing on recurring revenue business models, high margin, low capital intensity, asset - light business services, vertical market software etc.

Q: What is the appropriate time frame to measure your success?

A: Acknowledge J - curve when transitioning new CEO into acquired business. Start to assess well at the 3 - year mark, e.g., Timi at Ravix has almost doubled EBITDA since acquisition.

Q: Can you maybe share a little bit more color about new OIR Rob Casper? What do you like about him? What are the categories that you're looking at? And what do you like about those categories?

A: Rob previously led private equity - backed consolidations in veterinary services and HVAC and plumbing industries, has solid investment thesis targeting attractive service industries. Looks for industries in early innings of consolidation.

Q: 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. When do you think the EBITDA is actually going to start showing up in the financials from that business?

A: DDI's investment in headcount and opening a new facility was in advance of volume coming online. Ought to start seeing operating leverage even in the fourth quarter.

Q: How are the KPIs tracking? What are you seeing? You've got 4 OIRs looking. How does it feel?

A: Very active, focus on lead measures. Top - of - the - funnel proprietary outreach, NDA signed, conversation with business owners are knocking out of the park relative to internal goals. Expect to be able to do 2 to 3 acquisitions in any 12 - month period.

Q: Why is claims moderating? What's a normal percentage? And when do you estimate it returning to that level?

A: Claims moderating as claims severity cost per claim is not going down but not going up as fast, with claims expense a function of parts and labor. Normal historically would mirror CPI, expect to moderate over time as labor rate increases moderate but hard to specify exact return level.

Q: What is the expected EBITDA impact in Q4 and 2025 from Hurricane Helene delaying the hardware installations for Image Solutions?

A: Hardware sales and install is really just pushed out 2 months kind of thing as opposed to gone, monthly contractual recurring service and IT help desk revenue was not impacted at all.

Q: 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?

A: For Ravix and CSuite, there are opportunities to cross - sell complementary services into different verticals. Focus on penetration quadrant of ANSOFF Matrix first before moving to new verticals.

Q: Can you reiterate those attractive dynamics of the SNS market and business?

A: Long - term, acute and persistent shortage of nurses in the U.S., with travel market having progress, new tech stack and recruiters hired, well poised to take advantage of opportunity once things settle out.

Q: 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?

A: For SPI, initially focused on organic growth, growing ARR to 16%, gross retention in the mid - 90s, net retention well over 100%, and will explore tuck - in acquisitions once organic growth is exhausted.

Q: Would you possibly use debt in the future for expansion or always self - fund your expansion?

A: Used acquisition debt, focused on paying down debt. Plan is to use cash flow to delever and fund growth which is mostly in the form of working capital.

Q: Aside from Rob Casper, who is brand new, how long have your other OIRs been with the firm now?

A: Peter Hearne joined in May of last year (about 17, 18 months), Miles joined in September of last year (about 14 months), Paul Vidal joined at the beginning of this year.

Q: Can you share or reiterate what was the financial impact with respect to the VA?

A: Got about $1 million of cash out of the sale of VA clinic, and P&L would be shown in discontinued operations