Earnings call transcript: Kingsway Q4 2024 sees revenue growth, strategic acquisitions

Kingsway Financial Services Inc. (KFS), with a market capitalization of $209 million, reported its full-year results for 2024, showing a 6% increase in consolidated revenue, reaching $109.4 million. The company also achieved a 17% increase in consolidated adjusted EBITDA, amounting to $10.6 million. Despite a slight dip in stock price during aftermarket trading, the company remains optimistic about its strategic acquisitions and growth in various segments. Notably, the stock’s beta of -0.04 indicates its movements often diverge from broader market trends.

According to InvestingPro, KFS shows several interesting characteristics, with additional exclusive insights available to subscribers. Two key ProTips reveal the company’s unique market position, with 3 more advanced insights available on the platform.

Key Takeaways

• Kingsway’s full-year revenue for 2024 grew by 6% year-over-year.
• The company completed strategic acquisitions, including Buds Plumbing and Image Solutions.
• Kingsway expanded its KSX platform, now comprising seven operating subsidiaries.
• The aftermarket stock price fell by 1.04% following the earnings announcement.

Company Performance

Kingsway demonstrated solid performance in 2024, with significant revenue growth across its segments. The KSX segment experienced a 16% increase in revenue, while the extended warranty segment saw modest growth. The company maintains a healthy gross profit margin of 67.7%, reflecting operational efficiency. The company’s strategic acquisitions and platform expansions played a crucial role in its diversified business model, contributing to its robust performance amid a stabilizing market environment.

Financial Highlights

• Full Year Consolidated Revenue: $109.4 million (+6% YoY)
• Consolidated Adjusted EBITDA: $10.6 million (+17% YoY)
• Extended Warranty Revenue: $68.9 million (+1% YoY)
• KSX Segment Revenue: $40.5 million (+16% YoY)

Outlook & Guidance

Kingsway is targeting 2-3 acquisitions annually, focusing on organic growth within its existing businesses. The company remains optimistic about its performance in 2025, particularly in B2B services, healthcare, software, and skilled trades. Future EPS forecasts for 2024 and 2025 are projected at $1.15 and $1.19, respectively, while revenue forecasts stand at $117.3 million and $121.41 million for the same years.

Executive Commentary

CEO J.T. Fitzgerald highlighted the company’s progress, stating, "Twenty twenty-four was a year of important progress. We grew and diversified our revenue base, executed on key strategic initiatives and enhanced our platform with new acquisitions." CFO Kent Hanson emphasized the company’s financial strategy, noting, "With a prudent debt profile and tax-efficient framework, we are well positioned to support future strategic initiatives that increase long-term shareholder value."

Risks and Challenges

• Market Saturation: Potential challenges in expanding market share in mature segments.
• Economic Conditions: Macroeconomic pressures could impact consumer spending and business investments.
• Talent Acquisition: Finding skilled personnel remains a critical challenge for growth.
• Competitive Landscape: Increased competition in B2B services and software markets.
• Regulatory Changes: Potential impacts from changes in industry regulations.

This comprehensive overview underscores Kingsway’s strategic focus on growth and diversification, positioning the company for continued success in the coming years. InvestingPro’s Fair Value analysis suggests the stock is currently slightly overvalued, with a detailed valuation analysis available in the Pro Research Report, part of the comprehensive coverage of over 1,400 US stocks on the platform.

Full transcript - Kingsway Financial Services Inc (KFS) Q4 2024:

Conference Moderator: Good day, and welcome to the Kingsway Full Year twenty twenty four 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 Hanson, 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 Forms 10 Q and Forms eight 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 the company’s 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.

J.T. Fitzgerald, Chief Executive Officer, Kingsway: Thank you, John. Good afternoon, everyone, and welcome to the Kingsway earnings call for full year 2024. ’20 ’20 ’4 was another year of significant progress in executing our corporate strategy. We delivered financial results largely in line with our expectations, successfully completed the acquisition of Image Solutions and divested our VA Lafayette subsidiary. At the same time, we made meaningful strides in refining and improving operations across our existing businesses.

Overall, 2024 was a productive year and importantly, we have a proven business model that continues to gain momentum. The sequential improvement in our quarterly results throughout 2024 is a validation of our corporate strategy and is a clear indicator of the progress we are making. Turning first to our financial results. For the full year 2024, consolidated revenue was $109,400,000 up 6% from a year ago and consolidated adjusted EBITDA was $10,600,000 up 17% compared to 2023. Notably, consolidated adjusted EBITDA improved sequentially in each of the four quarters of the year.

Combined adjusted EBITDA for the Breaking this down by segment, in extended warranty, revenue grew modestly for the full year by 1% to $68,900,000 from $68,200,000 in 2023. While top line growth was modest, we did achieve a 3.6% increase in cash sales during the year reflecting healthy underlying demand for our warranty products. Geminis and IWS saw increased contract volumes, thanks in part to a higher number of service contracts sold and the onboarding of new credit union partners at IWS. Trinity also contributed slightly higher revenue as growth in warranty product sales offset a small decline in their maintenance services. PWI experienced a minor decline in contract count, but notably achieved stronger cash sales in 2024 than in 2023 on better product mix, which bodes well for future revenue recognition.

Extended warranty adjusted EBITDA came in at $7,600,000 versus $8,400,000 in the prior year. The year over year decline was primarily due to an increase in claims costs as inflation continued to impact parts and labor expenses in our auto warranty lines. We have been proactively adjusting pricing to mitigate these pressures. The good news is that we started to see relief in the back half of the year. The claims cost increases slowed in the second half of twenty twenty four and overall claims frequency declined.

This allowed us to deliver sequential improvement in adjusted EBITDA in each of the four quarters of twenty twenty four in the warranty segment. This trend gives us optimism that our margin pressures are easing. Despite the challenges, the extended warranty business remains solidly profitable and cash generative. The stability and recurring revenue of the extended warranty segment provide a strong foundation for Kingsway and we’re confident in its ongoing performance as we head into 2025. Turning now to our other business segment, Jingwei Search Accelerator or KSX.

As announced yesterday, we’re excited to add Buds Plumbing to our growing portfolio of operating companies. I’ll talk more about this acquisition in a few minutes. As a reminder, KSX is currently comprised of seven operating subsidiaries, including Budds that were acquired using our entrepreneur led acquisition strategy and platform. For 2024, KSX reported revenue of $40,500,000 an increase of 16% compared to $35,000,000 in 2023. KSX adjusted EBITDA for 2024 was $6,000,000 compared to $5,700,000 in 2023, an increase of 15%.

These increases were primarily driven by the acquisitions of SPI and DDI in September and October of twenty twenty three respectively and includes approximately three months of Image Solutions results. I’d like to begin with Ravix, our provider of outsourced finance, accounting and human resources consulting services. Since acquisition in October 2021, RAVEX has continued to perform ahead of our original financial model. In 2024, gross margin improved by 200 basis points compared to 2023 despite a modest decline in revenue. EBITDA declined very slightly in the year as gross margin improvements didn’t fully offset the lower revenues.

Management of RAVEX is realigning incentives, targeting their marketing spend and investing in sales training and development to reignite growth in 2025. Similar to RAVEX, C suite is a professional services firm that provides experienced Chief Financial Officers and other finance professionals to its clients. Its sales are driven in large part by the volume of private equity and M and A transactions. In 2024, Leadership effectively managed its gross and operating margins to soften the impact of lower sales due to overall lower deal volume in the capital markets. EBITDA for the year was down.

However, C suite finished 2024 with a strong fourth quarter with a nice positive year over year EBITDA variance and has good momentum entering 2025 as the M and A market is set to improve. Turning to S and S, at S and S, the team recently added new recruiting talent, pardon me, and completed upgrades to its operations to better support its clinician recruiting efforts. SNS provides nurse staffing services to hospitals on a travel or per diem basis, primarily in the state of California. The team has done a nice job of lowering its operating costs while building a team and technology to support its anticipated growth as the travel nurse market recovers. SNS also recently acquired several new hospital contracts, which should enable further growth in the number of per diem and travel nurse placements.

The improving trend we cited in Q3 continued to accelerate with total shifts increasing 8.5% in the fourth quarter, while travel shifts were up 42% in the quarter. We remain optimistic about this business. The industry appears to have stabilized and the long term outlook for nurse staffing is strong given the combination of an aging population and the projected shortage of registered nurses over the next decade. Turning now to DDI. DDI revenues grew nearly 20% from the prior year with zero outbound selling efforts as they continued to add new customers through word-of-mouth referrals.

While revenues grew nicely, EBITDA actually decreased slightly for the year as management invests in the company to support anticipated future growth. During the year, DDI opened a second monitoring facility in Salt Lake City and made meaningful investments in new talent to support anticipated volume and to mitigate the risk of having a single point of operations. As a reminder, DDI is a provider of outsourced 20 fourseven cardiac telemetry monitoring services to long term acute care and rehabilitation hospitals. This business has a high level of recurring revenue and high customer retention and operates in a fast growing and under penetrated end market. As the company builds its selling function this year, we expect to see continued growth and realize the benefit of operating leverage as our talent and new facility are more fully utilized.

Turning now to SPI. SPI is another of our twenty twenty three acquisitions. This business was immediately accretive to our consolidated results and revenue continues to be strong. Pro form a comparisons are difficult due to the conversion of U. S.

GAAP software accounting post acquisition. SPI provides software products created exclusively to serve the management needs of all types of shared ownership properties. SPI enjoys recurring revenue under long term contracts, low customer churn, strong margins and low capital requirements. Operational metrics at SPI were up across the board in the year with solid ARR growth and excellent growth and net retention dynamics and rule of 40 metrics exceeding 40%. The company saw impressive gains in EBITDA growth, albeit from a small base and in its first full year under the KSX umbrella, it exceeded our baseline financial model.

The company is poised for continued momentum in 2025. Turning to Image Solutions. In September 2024, we acquired Image Solutions. The company provides information technology managed services for small to medium sized businesses. Despite the devastating hurricane that struck the Asheville area the day after we acquired the company, Davide and team have delivered strong operating results.

In spite of the short term crisis, EBITDA during our first quarter of ownership was essentially flat to prior year and no significant customers were lost. Davide is making investments in his team, processes and technology and we’re confident in the prospects for image solutions in the year ahead. And finally, as we announced yesterday, our latest acquisition is privately held MLC Plumbing or Buds Plumbing as it is known locally. We acquired this through our newly created platform, Kingsway Skilled Trades. Buds Plumbing is a 100 plus year old service and repair plumbing company serving residential and commercial customers in Evansville, Indiana.

We acquired it for $5,000,000 plus transaction expenses and a working capital adjustment in a transaction funded with cash on hand and a $1,250,000 seller note. OIR Rob Casper will be transitioning into the day to day operating role as CEO of Kingsway skilled trades following the transaction, while the previous owner, Mark Horn, will stay on as President of Buds Plumbing for a one year transition period. Our strategy is to support Rob to grow Skilled Trades into a much larger platform through a combination of organic growth and future acquisitions. Growth through acquisitions is at the core of our corporate strategy. We follow a disciplined framework to evaluate acquisition opportunities based on a predefined set of operational and financial metrics that drive our decision making.

We are targeting businesses that operate in growing attractive end markets, are asset light and deliver predictably higher rates of return on invested capital. We are eager to expand our KSX business targeting two to three deals per year, but prioritize strategic fit over speed or pacing, ensuring each transaction aligns with our long term objectives. In September, Davide Zanki transitioned from the role of OIR to CEO of Image Solutions. And as of last Friday, Rob Casper transitioned from the role of OIR to CEO of Kingsway skilled trades. With these acquisitions, we now currently have three full time OIR searching for our next target.

Our current pipeline, which consists of a growing number of high quality opportunities, the strength of our OIR team and our proven framework give us great confidence in our ability to execute our strategy. Our trailing twelve month adjusted EBITDA run rate for our operating businesses which includes the pro form a results for Image Solutions and Buds Plumbing is $19,000,000 to $20,000,000 As a reminder, this metric is intended to capture the last twelve months earnings of what we currently own or recently acquired and is not intended to be forward looking guidance. We’re excited about the road ahead for Kingsway. Twenty twenty four was a year of important progress. We grew and diversified our revenue base, executed on key strategic initiatives and enhanced our platform with new acquisitions.

The financial performance of our core segments and the early contributions from our acquired businesses give us confidence that we are on the right track. We have built a stronger, more diversified company that is equipped to capitalize on opportunities in 2025 and beyond. Our team is energized and focused on delivering continued growth in revenue and profitability per share. Our corporate strategy and priorities remain the same, operate the businesses we own with excellence, while strategically deploying cash to invest in and acquire a growing portfolio of high quality businesses that in combination contribute to a powerful flywheel to scale. I’ll now turn the call over to Kent for some additional commentary related to the financials.

Kent?

Kent Hanson, Chief Financial Officer, Kingsway: Thanks JT. Prudent capital allocation and managing our debt levels are critical elements to executing our corporate strategy. I would like to highlight a few of the actions we took in 2024 to achieve our goals. As JT mentioned, during the third quarter of twenty twenty four, we sold one of our subsidiaries VA Lafayette. 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.

This sale, which was the last of our leased real estate assets netted cash proceeds of $1,100,000 to Kingsway after expenses. Also in the third quarter of twenty twenty four, we completed the purchase of the 10% interest in IWS that we did not previously own. This transaction was immediately accretive to our earnings and IWS is now a wholly owned subsidiary of the company. In September 2024, we sold and issued 330,000 shares of a new series of Class B convertible preferred stock in a private placement transaction for aggregate proceeds of about $8,300,000 These proceeds were used primarily to fund our acquisition of Image Solutions. Importantly, the successful acquisition of Image Solutions was carried out with a balanced mix of available liquidity and minimal new debt.

As a result of our strategic and financing transactions, as of 12/31/2024, we had cash and cash equivalents of $5,500,000 compared to $9,100,000 at the end of twenty twenty three. Subsequent to year end in February of twenty twenty five, we issued and sold 240,000 shares of a new series of Class C convertible preferred stock also in a private placement transaction for total proceeds of $6,000,000 These proceeds provided us with the cash needed to execute the Buds Plumbing acquisition. Total debt outstanding of $57,500,000 compared to $44,400,000 at the end of twenty twenty three. Our debt balance is comprised of $44,100,000 of bank loans and $13,400,000 of subordinated debt. Net debt increased to $52,000,000 as of 12/31/2024, compared to $35,300,000 at the end of twenty twenty three, primarily due to the acquisition of Image Solutions.

We continue to benefit from our net operating losses, which provide a meaningful tax advantage and enhance our cash flow generation. As of 12/31/2024, our NOLs totaled approximately $622,000,000 In March of twenty twenty four, our securities repurchase program was extended for one year through March of twenty twenty five. During 2024 and through January of this year, the company repurchased 355,750 shares of its common stock for an aggregate purchase price of $2,800,000 including fees and commissions. With the January repurchases, the company fully utilized the amount of the security repurchase program authorized by the Board of Directors. With a prudent debt profile and tax efficient framework, we are well positioned to support future strategic initiatives that increase long term shareholder value.

We believe our corporate strategy and financial discipline position us well for continued success in 2025 and beyond. I’ll now turn the call back over to John to open the line for any questions. John?

Conference Moderator: Thank you. There are currently no questions in queue. I’d like to turn the floor over to James Carbonara for any questions you may have via email.

James Carbonara, Investor Relations, Kingsway: Thank you, operator. Yes, a few did come in on email. The first one was, could you provide more color on the claims expense moderation you mentioned in the extended warranty segment during the second half of twenty twenty four?

J.T. Fitzgerald, Chief Executive Officer, Kingsway: Yes, great question. Maybe just sort of baseline. 2023, we saw claims increase roughly 10% year over year versus 2022. And for full year 2024, claims increased roughly 6.6%. So definitely some moderation there.

In Q1 of twenty twenty four, claims were actually up like 13% year over year. And so in Q2 through Q4, that subsided down to roughly 4.5% with Q4 being only 4.1%. So after 10% in 2023, ’6 point ’6 percent full year and then if you sort of Q2 through Q4 just north of 4%. So definitely seeing things calm down most benefit of declining frequency, but also

Kent Hanson, Chief Financial Officer, Kingsway: severity.

James Carbonara, Investor Relations, Kingsway: Great. Thank you. Next one is with the formation of your new skilled trade services platform, what’s your vision for growing this vertical within KSX?

J.T. Fitzgerald, Chief Executive Officer, Kingsway: Yes. First of all, I think it’s a huge opportunity within plumbing service and repair and mechanical services. And it’s just a great fit for Rob’s background. We posted his background when we announced him joining as an OIR. His professional background, he did consolidation first in the veterinary care space and then more recently in the plumbing and HVAC industry.

And so he came with a very sort of precise thesis around the opportunity for organic and inorganic growth in plumbing and HVAC. And so I think with BUDS, we’re absolutely first focused on organic growth, penetrate more fully penetrate their existing market through combination of pricing enhancements, search engine optimization, expanding into an adjacent market that’s very nearby, and then move to cross sell new plumbing services that they don’t have like hydro jetting and then eventually hopefully service line expansion into HVAC. We’ll see about that, but that would be a couple of years out. And so for any one of these plumbing businesses, Rob’s thesis would be that plumbing is the beautiful trade because of their service level agreements and the requirements in terms of the amount of time they have to serve their customer, it’s much easier to add complementary trades to a plumbing business than vice versa. So a lot of organic growth opportunities for the businesses we acquire, but also a lot of inorganic growth potential, growth via acquisition.

It’s a very large and fragmented industry and Rob will be focused on opportunities in sort of what we would call Tier two and Tier three markets, where we can partner with a number one or number two incumbent in that market. And so I think that you will see us in addition to trying to grow organically the business as we acquire a strategy around growing via consolidation, which is a great fit for his background.

James Carbonara, Investor Relations, Kingsway: Great. Thank you. The next one says the earnings release mentioned acquisition opportunities in your pipeline. Are you targeting specific verticals within your existing segments or is most of the pipeline new industries that you are not currently operating in?

J.T. Fitzgerald, Chief Executive Officer, Kingsway: Yes, great question. I would say it’s probably a bit of both. I mean, sort of think about the KSX industries, we sort of bucket them into four broad verticals, B2B services, healthcare services, vertical market software and now skilled trades. And so our existing OIRs are definitely focused on things in B2B services like accounting services and IT and cyber MSP. They’re focused on opportunities in vertical market software.

And maybe not directly plumbing and HVAC, but other skilled trades as well. And maybe some field service stuff like pest control or fire and life safety.

James Carbonara, Investor Relations, Kingsway: Great. Looks like there are two more. First one is, can you refresh us on how long each existing OIR has been searching for and how many you still need to backfill? Is it just Casper?

J.T. Fitzgerald, Chief Executive Officer, Kingsway: Yes. So we have three current OIRs. Peter Hearns, probably the longest tenured. He’s been here coming up on two years in May. Miles has been here roughly eighteen months and Paul Fidel just over a year.

And so obviously with Davide launching and now Rob launching in order to maintain our current pacing, we’ll probably want to be backfilling. Like I mentioned in previous calls, we talked to over 130 prospective OIRs last year. So we have great inbound interest in the platform. And for us, it’s about maintaining the discipline around getting the people with the right set of attributes and competencies and background that are a great fit for this what is a really hard entrepreneurial endeavor.

James Carbonara, Investor Relations, Kingsway: Excellent. And then the last one is, notwithstanding macro factors, were there areas Kingsway did not do well in 2024? And what are your plans to improve them?

J.T. Fitzgerald, Chief Executive Officer, Kingsway: Yes. Great question. Where do I start? Yes, absolutely. While we had several notable successes, there are always lots of areas we could perform better.

One of our core values here at Kingsway is a culture of Kaizen or continuous improvement. And so we’re always looking for opportunities to be better. Certainly within warranty, I think an area of focus and kind of root cause and countermeasure analysis is around pricing, continuously re underwriting our book to make sure that we’re getting adequate price to offset this claims inflation. Even though that’s subsiding and we have been taking price, that’s an area that we will continue to focus. Kind of one area really under the hood, a lot of the claims inflation was at one company, Geminis, Penn Warranty in a product called GAP, G A P Guaranteed Asset Protection, which is basically protection against negative equity in your car loan and just sort of the macro environmental factors of declining used car prices, high loan to value going back to 2023, we saw really tough environment for GAAP pricing.

So we’ve that we probably weren’t out in front of and fast enough. We’ve taken significant price increases, think like 50 price increases that will probably impact volume and revenues in that product, but will protect our earnings in 2025. And then I think looking at KSX, I think certainly one of the areas that we could always get better at is around talent. I know SNS and C suite both brought on new folks that they were very excited about, in some cases didn’t work out quite as well as we had hoped. And so we use a process here for talent identification and screening called top grading.

I think that we’re just trying to improve our hit ratio on the people that we bring on board, but always room for improvement there. And then finally, I think at KSX, we have a stated goal of two to three acquisitions per year. We only did one. Fortunately, it was a little chunkier in terms of the size, but certainly had a few misses throughout the year. I think that in some ways is a testament to our discipline, but we would like to improve the velocity of getting things through our deal flow pipeline from indication of interest through to closing.

James Carbonara, Investor Relations, Kingsway: Terrific. Yes, I see no further questions on the email at this time. JT, I’ll throw it back to you for any closing comments.

J.T. Fitzgerald, Chief Executive Officer, Kingsway: Okay, great. Thanks, James. Well, I guess I can say I’d like to thank all of our dedicated employees across all of our businesses for their hard work and innovation. They are the driving force behind our success. We also thank our customers and partners for their trust and importantly our shareholders for their continued support.

Kingsway enters 2025 with momentum and optimism. We remain committed to executing our strategy, serving our customers with excellence and creating long term value for our shareholders. So thanks to everyone who joined us today and for your interest in your company. We look forward to updating you on our progress in the coming quarters.

Conference Moderator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.

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