Q1 2024 Earnings Summary
- Strong Deal Pipeline and Acquisition Activity: Kingsway has expressed confidence in their robust acquisition pipeline, aiming to complete 2 to 3 deals over the next year that can each generate $1 million to $3 million in annualized EBITDA. They have enhanced their sourcing processes, with increased activity and structure, including approximately 15,000 outbound contacts in the first quarter, leading to a healthier pipeline than before. This focus on strategic acquisitions is expected to drive significant growth.
- Growth in Key Operating Segments: The software business SPI has added 8 new enterprise customers, which once onboarded, will lead to a significant uplift in Annual Recurring Revenue (ARR). SPI is targeting the "rule of 40" with ARR growth plus EBITDA margin greater than 40%. Additionally, DDI is rapidly expanding, adding new hospital customers every 1.5 weeks, with upfront costs yielding extremely fast paybacks, indicating strong future profitability. Furthermore, the nurse staffing business SNS is showing signs of recovery, with the number of travel nurses on assignment up 40% from the end of December, suggesting the industry has "found the bottom".
- Cash Generation from Warranty Business Funding Growth Initiatives: The extended warranty businesses are wonderful cash-generating businesses with high margins and negative working capital requirements, providing infinite returns on tangible capital. These profits are used to fund growth in the KSX segment, enabling Kingsway to invest in higher-return opportunities and support long-term value creation. Management believes that combining the cash-generating warranty business with the growth-focused KSX segment creates a synergistic model that benefits shareholders over the long term.
- The extended warranty business is significantly exposed to economic cycles, particularly the consumer credit cycle, leading to cyclicality and volatility in performance. The company has been experiencing these challenges for several quarters due to rising interest rates and dislocation in the used car market.
- New acquisitions may cause short-term earnings drag due to incremental overhead costs, such as audits, new accounting systems, and integration expenses. Additionally, young managers and first-time presidents may make mistakes during the learning process, potentially impacting financial results negatively in the initial quarters after acquisition.
- Financial improvements in the software and cardiac monitoring businesses are delayed, as upfront investments and onboarding costs are required before seeing positive momentum in EBITDA. This could lead to near-term pressure on financial performance, despite growth in revenues and customer additions.
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Business Outlook and Signs of Improvement
Q: Can you share signs of improvement in your businesses over the next 6–12 months?
A: Yes, we're seeing encouraging developments across our divisions. In the warranty business, cash revenue in the quarter was up 1.5% year-over-year, and operating expenses were down 4%. At Trinity, equipment backlogs are clearing up, boosting business activity. IWS has signed a very large new credit union customer, slated to launch in late second or early third quarter, which could be a significant needle mover. In KSX, our nurse staffing business SNS saw travel nurses on assignment increase by 40% from December to March, and this positive trend continues. DDI is onboarding new hospital customers every 1.5 weeks, driving significant growth. -
New Acquisitions Before Year-End
Q: Will you close on two new acquisitions before year-end 2024?
A: While acquiring small businesses is challenging, we're confident given our robust pipeline and level of activity. However, it's hard to predict exact timelines. -
Extended Warranty Business Prospects
Q: Is the extended warranty business a good long-term standalone business?
A: Yes, despite some cyclicality tied to the consumer credit cycle, the extended warranty business has strong underlying economic fundamentals. It features diversified contractual revenue at high margins with low working capital requirements and generates significant cash flow. -
Impact of Acquisitions on Early Financials
Q: Do new acquisitions cause economic drag in early financial results?
A: Yes, we often experience initial drag due to added overhead like audits, new accounting systems, and professionalization efforts. These investments create a foundation for future growth, and we expect improved performance over time. -
Software and Cardiac Monitoring Businesses
Q: When will financials reflect positive momentum in software and cardiac monitoring?
A: At SBI, we're adding new enterprise customers, which will increase ARR once onboarded. DDI is experiencing rapid growth, onboarding new hospitals every 1.5 weeks, with upfront costs leading to quick paybacks. -
Outlook on EBITDA Growth
Q: Will EBITDA growth turn positive in the next 2–3 quarters?
A: We believe, without giving guidance, that we should see favorable year-over-year comparisons going forward, as claims expense started increasing about a year ago. -
New Deal Pipeline and KPIs
Q: How is your new deal pipeline progressing?
A: We're seeing increased activity with structured tracking of lead measures like industries identified and outreach, and lag measures like NDAs executed. In Q1, we made around 15,000 initial contacts, leading to dozens of NDAs. There's more activity and rigor now than before. -
Use of Advisory Board
Q: How do you utilize your advisory board?
A: We meet in person three times a year for structured full-day sessions covering key operating areas, with workshops led by board members. They also mentor our OIRs informally. -
Funding Preference: KSX vs. Warranty Business
Q: Do you prefer funding KSX or the warranty business?
A: We'd prefer allocating capital to backing talented individuals in KSX, as warranty businesses require minimal capital to scale and are expensive to acquire at current valuations. -
Communications with Potential OIRs
Q: Is communication with potential OIRs outbound or inbound?
A: It's both, but higher-quality communication is inbound through strong networks. Our OIRs and advisors act as brand ambassadors, enhancing our recruitment efforts. -
Float at Insurance Companies and Yield
Q: What's the current yield on your insurance companies' float, and when will it reach market rates?
A: Our bond portfolio is about $40 million with a 2-year duration, currently yielding in the low 3% range. As maturities roll over, we expect to reach market rates above 5% in about a year.