Kingsway Financial Services [KFS] Conference call transcript for 2023 q3
2023-11-11 17:04:02
Fiscal: 2023 q3
Operator: Good day, and welcome to the Kingsway Third Quarter 2023 Earnings Call. [Operator Instructions] With me on the call are JT Fitzgerald, Chief Executive Officer; and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone 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 containing the subsequent field reports on Form 10-Q, as well as others that the company files from time to time 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 as in our periodic filings with the SEC. Now, I'd like to turn the call over to JT Fitzgerald, CEO of Kingsway. JT, please proceed.
JT Fitzgerald: Thank you, Paul. Good afternoon, everybody, and welcome to the Kingsway third quarter 2023 earnings call. Thank you for joining us. We've been busy since our last earnings call, so let me go over the highlights. Our third quarter results were largely in line with our expectations with consolidated revenue of $24.8 million, up 11% from a year ago, while consolidated adjusted EBITDA decreased to $2.3 million in 2023 compared to $3.6 million last year. Combined pro forma adjusted EBITDA for the Extended Warranty segment and KSX segment was a total of $3.2 million in 2023 compared to a total of $4.55 million in the third quarter of 2022. We continue to repurchase a number of shares of our common stock and warrants, which Kent will detail later. Our $5 strike warrants expired on September 15, 2023 with all but 39,000 exercising. We believe the overhang concerns that created are now largely behind us. In September, we acquired Systems Products International, or SPI. And in October, we acquired Digital Diagnostics Imaging, or DDI. Our fourth and fifth acquisitions under the Kingsway Search Xclerator platform. And in October, we signed a definitive agreement to purchase 95% of the shares of National Institute of Clinical Research, or NICR. This is a lot to unpack, so I'd like to start with our Extended Warranty segment, which delivered revenue of $17.3 million in the current quarter compared to pro forma revenue of $17.9 million a year ago. Adjusted EBITDA for the current quarter was $2.1 million compared to pro forma adjusted EBITDA of $3.8 million a year ago. As a reminder, pro forma results exclude PWSC, which we sold in July last year. As we discussed on our last earnings call, our vehicle service agreement or VSA companies continue to be impacted by an increase in claims paid and persistent macro level revenue headwinds that impact consumers. Primarily, tighter credit conditions and persistently high used car prices. At Trinity, our maintenance support business revenues have been impacted by decreases in its equipment breakdown and maintenance support services due to mild weather conditions, which results in fewer service calls. Both of Trinity's segments have also been negatively impacted by long lead times on parts and installations. However, we've been able to mitigate some of this impact through lower operating expenses at all of our Extended Warranty companies in 2023 as compared to a year ago. In addition to these headwinds, last year, IWS had some very favorable realized gains from some of its investments in search funds coincidentally, as well as a release in GAP product reserves that didn't repeat this year. Even with all of these challenges, it's worth noting that the Extended Warranty segment had its strongest quarter this year with adjusted EBITDA up 23% sequentially from Q2 2023. Switching now to our Search Xclerator, or KSX segment. We had revenue of $7.5 million in the current quarter compared to revenue of $3.8 million a year ago. Adjusted EBITDA for the current quarter was $1.1 million compared to adjusted EBITDA of $0.8 million a year ago. These increases are due to CSuite and SNS acquisitions that were completed in November 2022 and to a lesser extent the acquisition of SPI in September of this year. The Ravix, CSuite business is performing better-than-expected from a profitability perspective as higher operating margins more than offset lower-than-expected revenues. Ravix is performing slightly ahead of where it was last year in terms of operating income and adjusted EBITDA. Through the quality of services provided, Timi Okah and his team are retaining customers at Ravix and in certain instances have improved pricing. At CSuite, the team is rebuilding its pipeline and advancing new business opportunities to reignite growth. Both companies have recently added talent in the business development function to drive revenue growth. SNS is performing at or near our internal plans despite a shift in business mix from higher margin travel assignments to per diem assignments. As we head into winter, we have not yet seen the typical spike in demand for travel nurses, but we are still early in the season. Importantly, we believe long-term demand for nurse staffing will be strong and the shortage of qualified nurses to deliver care persists. In September, we acquired SPI, a privately held vertical market software company. It was the fourth acquisition completed under our Search Xclerator. SPI fit our investment criteria with recurring revenue, strong margins, and low capital demands. It operates in a growing industry and we expect it will be immediately accretive. SPI has world-class software products for the timeshare and vacation rental industries. Its platform includes a comprehensive set of modules with software solutions that cover the entire vacation ownership enterprise. Operator-in-Residence, Drew Richard, has transitioned into the day-to-day operating role as CEO of the company. In October, we acquired DDI, a provider of fully managed outsourced cardiac monitoring telemetry services. We are excited about this transaction because DDI has a high level of recurring revenue is scalable and operates in a stable growing market. DDI is the industry standard for outsourced telemetry and has established itself as a trusted partner to its customers through its focus on a dependable, high-quality service offering. Peter Dausman, the Operator-in-Residence for this transaction, has transitioned into the CEO role for DDI. We held separate conference calls to discuss each of the SPI and DDI acquisitions and I encourage you to listen to those replays if you weren't able to make those calls. Also in October, we announced the signing of a definitive agreement to purchase 95% of the shares of National Institute of Clinical Research, or NICR. The remaining 5% will remain with the seller. NICR is a provider of clinical trial site management and recruitment services for nephrology, cardiometabolic, infectious diseases, and gastroenterology clinical trials. NICR participates in the development of innovative and life-saving therapies through its dedication to, and focus on, clinical research. NICR was attractive to us because of its track record of growth and profitability with a strong pipeline of clinical trials with some of the world's largest pharmaceutical companies. The outlook for clinical trial site management is favorable and NICR has an impressive reputation as a provider of quality services. Its commitment to delivering the highest level of service to clients and patients is foundational and we are committed to continuing in this legacy. Dr. Davide Zanchi, the Operator-in-Residence responsible for finding and executing this transaction, has a successful career in pharma and biotech and will transition to Chief Executive Officer following the close of the transaction. We expect the closing, which is subject to certain closing conditions, will occur on first quarter 2024. Shortly after the deal closes, we intend to host a conference call to discuss NICR further. As we've said in the past, the timing of closing an M&A transaction is difficult to predict, but in recent weeks, we have taken several deals across the finish line. For several quarters, we have spoken about the quality of our pipeline and conveyed the confidence we have in our OIRs to identify attractive targets and execute transactions. In the third quarter, we added a new Operator-in-Residence, or OIR, Miles Mamon to the KSX platform. Miles joined us from Morgan Stanley, where as Vice President he was responsible for acquisitions and asset management within the Merchant Banking and Real Estate Investing group. He began his career as an air and missile defense officer in the United States Army, where he served in a patriot missile unit supporting a NATO operation to protect the Turkish southern border during the Syrian Civil War. Miles holds a JD and an MBA from Northwestern and also a BA from Northwestern. We continue to believe that the future is extremely bright for the company given the talent we have on our team and the quality of opportunities they are identifying, pursuing, and closing. I'd like to turn now to our trailing 12-month adjusted EBITDA run rate. On our last earnings call, we reiterated our range of $18 million to $19 million and indicated it was likely closer to $18 million than to $19 million. As a result of our recent acquisitions, we are increasing our trailing 12-month adjusted EBITDA run rate range to $19 million to 20 million. This includes the Extended Warranty companies, the existing KSX companies, as well as SPI, DDI, and NICR results. Kent will unpack this further in his comments. Looking ahead, our priorities for 2023 and beyond remain the same. Operational excellence, while strategically deploying capital to build a business that delivers sustainable long-term growth, generates positive cash flow from operations, and provides an attractive return for our shareholders. We continue to target 2 to 3 new acquisitions per year that fit our clearly defined acquisition criteria and it will generate annualized EBITDA in the range of $1.5 million to $3 million dollars each. I'll now turn the call over to Kent for a review of our financials. Kent?
Kent Hansen: Thank you, JT. Before I get started, as a reminder, during the fourth quarter of 2022, we began executing a plan to sell 1 of our subsidiaries, VA Lafayette, which owns a medical clinic whose sole tenant is the U.S. Veterans Administration. As part of our strategic shift away from the Leased Real Estate segment, VA Lafayette is included in discontinued operations and its 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. Loss from continuing operations was $797,000 for the third quarter of 2023 compared to income from continuing operations of $38.9 million last year. The third quarter of 2022 includes a one-time net gain of $37.9 million on the sale of PWSC. Consolidated adjusted EBITDA was $2.3 million for the third quarter of 2023 compared to $3.6 million last year. Combined operating income for Extended Warranty and KSX was $2.8 million for the third quarter of 2023 compared to $3.2 million in the prior year. While the combined pro forma adjusted EBITDA, which excludes the results of PWSC that was sold last year, was $3.2 million in the third quarter of 2023 and $4.6 million in the third quarter of last year. Now, I'd like to break these down by reportable segment. In Extended Warranty, pro forma adjusted EBITDA was $2.1 million or 12.3% of pro forma revenue in the third quarter of 2023 compared to $3.8 million or 21.1% of pro forma segment revenue in the third quarter of last year. This decline was attributable to decreases in revenues, an increase in VSA claims, and a decrease in realized investment gains, which were partially offset by lower operating expenses. First, let me go through the revenue decline. Revenues were down at both our VSA companies and Trinity. VSA revenues were down only 1.1% from prior year due to the continuing impact of payment pressures on end consumers resulting from higher interest rate environment and continued higher-than-expected price of used automobiles. While the price of a used automobile has fallen since the beginning of this year, the declines for the end consumer are not occurring as quickly as anticipated. It is difficult to predict when these macroeconomic trends will begin to ease. However, a bright spot is IWS, which sells through credit unions where the decline in IWS contracts sold is much lower than the overall market decline in loans placed. At Trinity, as JT discussed, lower revenue was due to decreases in equipment breakdown and maintenance support services as a result of mild weather conditions, which results in fewer service calls and as well as long lead times on parts and installations. However, we continue to have strong backlog of orders in the Trinity Warranty business and as the supply chain frees up and machines are shipped and installed, we expect that the associated revenues will revert to historical growth trends. Next, the increase of VSA claims is due to an increase in the cost per claim or severity, while the number of claims or frequency was relatively stable. The increase in severity is a result of rising labor and parts costs, which continue to increase at rates higher than the general market inflation. Claims in the third quarter were $600,000 higher than the prior year, but were slightly down from Q2 2023 on both an absolute dollar basis and as a percentage of revenue. We continue to proactively assess our pricing to ensure that we are staying in front of any persistent claim severity increases. Operating expenses across all Extended Warranty companies were down about $600,000 excluding PWSC, which reflects initiatives put in place at Geminus and PWI since Brian Cosgrove took over both businesses about a year ago, as well as a continued scrutiny of all expense line items. Also contributing to Extended Warranty results is the investment income earned from our float and any gains or losses on other investments. As JT discussed, in the second quarter of -- sorry, the third quarter of 2022, IWS had very favorable realized gains from some of its investments, as well as a release of GAP product reserves, that's G-A-P product reserves. These totaled about $1.1 million and we didn't realize similar results in 2023. As we've discussed before, we invest our float, which was about $45 million at September 30, 2023, in U.S. bonds, municipal securities, and high-quality corporate bonds with an average duration of 2 to 3 years. As prior investments mature, we are able to reinvest at the current higher interest rates. This has resulted in TTM investment income as of 9/30/23 of $953,000 compared to just $369,000 for the year ago period. We believe the long-term outlook for Extended Warranty remains healthy and we continue to believe this is an attractive business to hold in our portfolio. At KSX, adjusted EBITDA was $1.1 million or 14.5% of segment revenue in the third quarter of 2023 compared to $778,000 or 20.4% of segment revenue in the third quarter of last year. And as a reminder, last year included just Ravix. At Ravix, profitability was up slightly compared to the prior year as the decline in revenue was essentially offset by a higher gross margin of 34.7% in the third quarter of 2023 versus 28% in the year ago quarter. The decline in revenue was due to a decrease in billable hours from lower-than-expected number of new clients that was partially offset by an increase in billing rates, the latter due to a shift in services mix, as well as price increases. CSuite delivered gross margin of 35.6%, which was in line with our expectations, but on lower-than-expected revenues. CSuite continues to rebuild its pipeline, which was disrupted during the acquisition process and has hired a business development team member to focus on its pipeline of opportunities. SNS delivered gross margin of 26.9%, which was higher than our expectations, but on lower-than-expected revenues. We continue to see a shift in mix from travel staffing to per diem staffing. Year-to-date, 58% of the shifts were per diem, which is the same year-to-date figure as the first 6 months of 2023. Also, the total number of shifts in Q3 2023 was down 20% to that in the year ago quarter. As a reminder, when we purchased SNS, our purchase price was based on go-forward results being lower than recent historical results at the time of acquisition, as we believe that staffing rates and the number of shifts were referred to levels more in line with those experienced pre-pandemic. At SNS, near-term growth is expected to come from expanding its base of travel nurses, as well as an expansion into new geographic areas. SNS has more seasonality than our other businesses, and the number of travel shifts is expected to improve as travel demand increases during the upcoming cold and flu season. Given we acquired SPI in early September, its contribution to the current quarter results was minimal. We plan to discuss SPI more on future calls. Turning now to our balance sheet. At the end of the third quarter of 2023, we had cash and cash equivalents of $20.2 million, compared to $64.2 million at the end of 2022. Cash used in operating activities from continuing operations was $9.6 million for the 9 months ended September 30, 2023, compared to cash provided by operations of $4.9 million in the first 9 months of last year. Our cash balance has been impacted by the following items this year: $5 million payment of TruPS deferred interest in Q1 of 2023; $2 million for the release of the Mendota escrow in Q1; $1.8 million of management fees paid in Q1 and Q2 of this year related to the final sale of commercial real estate investments; lower operating income from the Extended Warranty segment; $16.7 million of cash received from holders exercising warrants; and $3.3 million from the sale of Limbach stock. Our total outstanding debt is comprised of bank loans and 1 remaining trance of TruPS debt. Debt associated with the VA Lafayette is included in a separate line item on our balance sheet as liabilities held for sale. As a result, we had total outstanding debt of $40.9 million at the end of the third quarter of 2023, compared with $102.1 million at the end of last year. Net debt decreased to $20.8 million as of September 30, 2023, compared to $30.9 million at the end of last year -- I'm sorry, $37.9 million at the end of last year. Earlier this year, the Board approved a one-year securities repurchase program. Through October 31, 2023, we have repurchased 1,093,861 of our warrants and repurchased just over 250,000 shares of our common stock. After considering both stock and warrant repurchases, $4.1 million of stock repurchases or securities repurchases could be made through March 22 of next year. The repurchase of common stock is being held as treasury stock at cost and has been removed from our common shares outstanding. As you may recall, the company had a number of outstanding $5 strike warrants that expired on September 15, 2023. After accounting for warrants repurchased by the company, all but 39,000 warrants were exercised prior to expiration. In 2023, just over $3.3 million of our warrants were exercised, resulting in $16.7 million of cash to the company. You can see a breakdown by quarter in today's earnings release. During Q3, 2023, we completed the sale of all stock held in Limbach Holdings, Inc. and recorded a realized gain of $600,000. Total cash proceeds from the sales were $3.3 million. I would like to close by discussing our trailing 12-month adjusted EBITDA run rate. As JT indicated, our range is now $19 million to $20 million. We often get questions from investors about this metric, so I would like to explain a few things. This metric is not intended to be guidance by management regarding the future earnings of the company. Rather, it is intended to capture the 12-month earnings of what the company currently owns or has recently acquired. As such, it includes the following: the actual operating results of our Extended Warranty businesses for the prior 12 months, which includes the recent declines; the investment income associated with our Extended Warranty float adjusted to reflect higher earnings associated with the current interest rate environment; we do not factor in any expectations on realized gains or losses, much like we had at IWS in Q3 of last year. It also includes Ravix 12 months actual results, as well as CSuite actual 12 months results both pre- and post-acquisition. It includes 12 months of SNS results based on actual results since acquisition and adjusted results in order to reflect management's view that performance would revert to levels more in line with pre-pandemic results. And 12 months of results for SPI, DDI, and NICR based on adjusted results from our quality of earnings due diligence reports. In summary, while our Extended Warranty segment continued to experience some softness due to claims expense, it continued to perform and deliver the best quarterly results so far this year for the segment. We have added 2 companies to our KSX portfolios and hope to add a third early next year, which will enable us to deliver on our strategy of growth. Finally, we made further progress reducing our net debt, we were able to repurchase a meaningful amount of our securities, and we have a robust pipeline of acquisition opportunities in front of us. I'll now turn the call back over to the operator to open the line for questions. Paul?
Operator: [Operator Instructions] And there were currently no questions from the lines. I would like to hand the call to James Carbonara for any questions submitted via e-mail.
James Carbonara: Sure. We did have a few questions come in on the e-mail. The first one is a 2-part question. It says, what is run rate EBITDA pro forma for the recent acquisitions? What is pro forma debt at KFS? And what is the run rate interest expense for the acquisitions and current base rates? I can re-read any of that, if necessary.
JT Fitzgerald: Okay. Yes, I think I got it. So first, run rate EBITDA pro forma for the recent acquisitions, I think Kent just walked through that. We have increased that to $19 million to $20 million range, and that's sort of the TTM EBITDA of the things we own, plus the things that we expect to own. Pro forma debt, net debt at 9/30 was roughly $20.8 million. And then pro forma, I guess, would include the new acquisitions. We borrowed an additional $5.6 million to help finance the DDI transaction. And we anticipate borrowing another roughly $3 million or so to finance the NICR acquisition. We didn't use any debt to help finance the SPI acquisition. So, I guess, if you add all of that up, $5.6 million plus $3 million plus $20.9 million would get you $29.5 million of net debt. And then, James, sorry, what was the final question -- part of the question?
James Carbonara: Sure. It concluded with, what is the run rate interest rate expense for the acquisitions and current base rates?
JT Fitzgerald: Yes, I'll take that in reverse order. So current base rates, the DDI acquisition debt has an interest rate of prime plus 50 basis points. So prime is at 8.5% today, I think. So that would be 9%. And we would expect similar pricing on the NICR acquisition debt. So base plus spread. And that translates into an additional $500,000 of interest expense, give or take, at DDI. And somewhere around $270,000 or so of interest expense at NICR.
James Carbonara: Great. And I do see we have a live question in the queue. Operator, can we take that before reverting back to these e-mail questions?
Operator: [Operator Instructions] And we have a question coming from Adam Patinkin from David Capital.
Adam Patinkin: Congratulations on a nice quarter and all of the progress along the way. Great. So I have a few questions that I wanted to jump through. And I'm sorry, they're a little bit disjointed. So they're kind of unrelated to one another. So my first question is, I guess, the way that I think about the value of the company is based on what, I guess, you would call normalized earnings would be or what go-forward earnings would be. And so, I guess, what I'm trying to do is to track the trailing 12 months adjusted EBITDA number of $19 million to $20 million, which is a really helpful number to know. But then to try to look forward. And obviously, there's no guidance and you're not predicting. But I can do some of that math where I say, "Hey, this is where I think the growth might be in some of the acquisitions that you've made through the KSX Xclerator". The one that I'm a little less clear on is warranty. So you've talked about how maybe warranty has been going through a tougher period, but there is an opportunity for it to maybe revert to the mean, which I think is partly underway with the improvement in profits this quarter versus last quarter. You mentioned on the call like a $600,000 reduction. And so, if I annualize that, I get to between $2 million and 3 million of EBITDA above where you currently are, maybe in a more normal environment. So I'm not talking about a peak environment, but I'm also not talking about a poor environment. Is that the right way to think about it? Or how do you think about what kind of a normalized earnings power would be for the warranty business compared to where you have it over the last 12 months?
JT Fitzgerald: Yes, that's a great question. A lot of ways to sort of attack that. First and foremost, I would say, TTM is our sort of best predictor of the future in a more normal environment. Obviously, warranty isn't there right now, Adam. And so, yes, they have been very focused on cost rationalization and maintaining sort of very lean operating environment in what is a challenging both sales and claims environment. And so, the way I think about it is that, the cost reductions have essentially offset the reduction in revenue and that claims are in the quarter were sort of $600,000 higher than prior quarter. And as we move forward, we're going through a pretty comprehensive pricing exercise, both moving vehicles, mileage bands into different rate classes and things, and also taking price kind of across the entire book. And so, if those -- just kind of to play on your question here, as those price increases work their way through the book, and we're talking sort of mid- to high single-digit price increases, that would offset the claim severity. And if the operating expense improvements are sustained, then you get back to that sort of $2 million in improved profitability, right? That isn't guidance, but that's just me kind of working through the math the way I think about it.
Adam Patinkin: Got it. That's super helpful. I mean, that's -- essentially that's what I'm trying to get at is to say, okay, in a more normal environment, and I'm confident the car market will head back towards that. Obviously, you can see the declines in car prices that are coming through with I think more to come. But in a more normal environment that I'm confident the business will do maybe what it's done in the past. And that's really helpful to know that maybe normalized warranty means that adjusted EBITDA number might be more like $22 million or $23 million or whatever it whatever it would end up being. Let's see, my next question is on the VA Lafayette. Can you give any update on that sales process?
Kent Hansen: Yes, Adam, this is Kent. So we continue to have it being marketed by a national broker. We've had a number of interests in that. And we just continue to -- the commercial real estate market has been a little bit challenging this year, but we continue to market it towards targeted people or companies that we think would be interested in that particular profile. It does have some debt on it that some people find attractive. Some buyers need some depreciation recapture before the end of the year. So it's still a very active market right now.
Adam Patinkin: Got it. Great. That's helpful. And then my next question is just on your searchers. You've got 2 searchers going right now. And I know your goal is to bring on a couple more searchers. Can you maybe speak to both of those? How's it going with the current searchers? And how are they progressing in their searches? And then also, can you speak to your confidence level about attracting high-quality candidates to join as your next 2 searchers?
JT Fitzgerald: Yes, sure. Happy to talk about it. So Peter Hearne joined us in early May and then Miles just joined us at the end of the summer, mid to late August. And now as we've launched both Drew and Peter Dausman and soon to launch Davide, we've been actively recruiting and fielding inbound interest through concentric circles of networks of our current CEOs and OIRs talk to dozens and dozens, 60-plus candidates, really high-quality group of folks that we've been talking to. We're in pretty advanced stages with a handful of them. And the goal would always be to have 4 to 5 people actively looking for acquisitions in support of that 2 to 3 acquisitions a year. And so, yes, we're making great progress. Again, we want to maintain our discipline and really target folks that have that set of attributes that we think will make them both effective searchers, but more importantly, great CEOs and small businesses. And so, that work is ongoing. And with respect to Miles and both at Peter, early days, we've built a really nice set of processes around proprietary search, as well as intermediated search. They've got a handful of industries that they're very interested in and they're running that playbook. But I would always go back to sort of average time to close a transaction is probably 17 or 18 months. We've seen that here at Kingsway, right? Some searchers close very quickly, like Davide. Peter Dausman took him over 2 years to finally close a transaction. And so, we're going to support them, focus on what we say is, we derive our margin of safety from business quality. And so, really making sure that we maintain our discipline around the types of acquisitions we're pursuing. And so, they're doing all the right things and we're very optimistic about their prospects, but we also want to maintain discipline.
Adam Patinkin: Got it. That makes a lot of sense. And then maybe this is a question I'm just going to ask 1 last question, which is maybe you haven't gotten there on this, but I just wanted to ask you. So as you acquire more businesses through the Kingsway Search Xclerator, your business is kind of mix shifting away from warranty, which is a wonderful business. But maybe a little lower growth business and towards some of these higher growth businesses and you think about something like the last 2 acquisitions that you've made here as being really growthier businesses. And that's going to be more and more of the Kingsway portfolio over time, which I think should be positive when you think about the business quality and positive about the earnings growth ahead of the company, just the mix in a way is a little bit growthier. How do you guys think about disclosures over time? In terms of disclosing where each of the businesses are in terms of their EBITDA or whether you prefer to kind of lump them all together or maybe get snapshots every now and then? I don't know if you guys have had settled on an approach there, but hopefully, there will be a lot more acquisitions to come. And I'm just trying to understand how you are thinking about sharing that information with the market. And I'll step off. That's my last question.
JT Fitzgerald: Yes, it's a great question, Adam. And right now we have a reportable segment that means certain things to under GAAP and things about how we manage those businesses. We think of them within KSX is all fitting a very similar profile and we're focused on the same types of things. And so, that becomes its own reportable segment. And then like today, we sort of unpacked within that segment the performance of each one of the individual businesses. And I would expect that we would continue to do that. Certainly also as we update our investor deck for Q3, break out that performance. And that would be something that we intend to do quarterly going forward. So people can see under the hood how each one of these businesses are doing within that Search Xclerator segment. And the same is true at warranty, maybe a different growth profile. We really like those businesses, combination of diversified contractual prepaid revenue and the investable float. Just maybe a slightly more mature market. So, I don't know if that fully answered your question, Adam, but we would certainly -- I don't think we'll have separate reportable segments within KSX, but we'll break them out and talk about the underlying performance of each one of our businesses every quarter and in the investor deck.
Kent Hansen: Yes, this is Kent. So I'll just add, the U.S. GAAP rules sort of are complicated when it comes to determining your reportable segments. And it's hard to determine if we'd be required in our filings to sort of break apart KSX that will depend on the profile of future acquisitions and how closely they are sort of related to each other. But internally, right now, we sort of look at KSX as a segment internally and the Board looks at it that way. And -- but we'll continue to try to give as much color as we can without also perhaps disclosing too much information that a competitor might pick up as well.
Operator: And there were no other questions from the lines. Back to you, James.
James Carbonara: Yes, we have three more questions from the e-mails, actually 1 that just came in live. And if you do have a question, you're listening on the webcast, feel free to shoot it over to james@haydenir.com. Happy to get the question teed up. The most recent question that came in was on CSuite. It says, why was CSuite's pipeline disrupted during the acquisition process? Yes, that's all the questions for JT or Kent.
JT Fitzgerald: Yes, great question. So, Arthur, the seller, was the primary business development person at his company. And so, as he got deeply involved in the sale of his business, his pipeline of new business suffered a bit, I would say, just through distraction. And so, Timi has internally promoted someone at the company to transition Arthur out. He is now no longer with the company. He satisfied his 1-year consulting agreement. And Timi is now focused on rebuilding that pipeline and has been most of the year as well. But I would say, that the pipeline of new business activity took a backseat during the sales process because Arthur was selling his business and not focused on business development.
James Carbonara: Got it. And the next one was, how does management feel about levered acquisitions given the current interest rate environment? What spreads are they able to get on acquisition debt currently?
JT Fitzgerald: Yes, I think we talked about the spreads on acquisition debt. Acquisition debt is sort of 50 basis points over prime on our most recent deal. And that's been pretty consistent in all of our acquisitions. And then levered acquisitions, given the current interest rate environment, I think it's important to point out that we have and will continue to use what we believe to be a relatively conservative amount of leverage in support of these transactions. So 3x senior funded debt-to-EBITDA or less at closing. And so, obviously, the cost of capital, the debt capital is higher. But interestingly, if you sort of model that out in our acquisition models, then because of the amortization of the debt and things, the impact on our modeled IRRs, if you go from sort of 6% debt cost of capital to 9%, only decreases by 100 basis points or so over 6 years. So, the higher cost of debt doesn't really have a big impact on the modeled returns. But as I've said before, we want to use a modest amount of debt to enhance those equity returns, but we're probably more focused on striking the appropriate balance on returns to our invested capital with adequate covenant headroom, right? And so, we want to give these operators plenty of cushion out of the gate. So we don't take on a ton of debt so that we're not in senior funded debt-to-EBITDA [PICLs] or fixed charge coverage ratio challenges. And so, the current rate environment at our level of leverage hasn't really impacted things.
James Carbonara: Great. And the last question we have here is, does management have a lower bound for interest coverage, i.e., would they pull back on the acquisition pipeline if interest coverage fell below 1x or a different threshold? You may have just answered that, but just sharing that last one that came in.
JT Fitzgerald: Yes. Certainly, if interest coverage was below 1x, that would be not good. So we would absolutely pull back. But it is a good question. I think that it's important to point out that each one of our acquisitions is financed independently. And so, for instance, the DDI debt that we just used to support that acquisition is non-recourse to Kingsway, the parent company, and it is secured only by the cash flows and assets of DDI. And that loan facility has financial covenants that include that sort of maximum senior leverage ratio and a fixed charge coverage ratio of like 1.2x, which includes both principal and interest. And so, we would never get anywhere close to 1x interest coverage at the sort of lower bound. And we're kind of bound to a fixed charge coverage, which includes, again, both principal and interest of 1.2x. And when we model these things out, they have plenty of cash flow coverage on fixed charge.
James Carbonara: Got it. Yes, I think that's it. I'm looking at the e-mail and I'm not seeing any additional questions in there. JT, had you finished answering the question?
JT Fitzgerald: Yes, that's great. I think if there are no more questions, we'll hand it back to the operator. Thank you, everybody, for participating on the call.
Operator: Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.
