Good day and welcome to Kingsway Full Year 2022 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for question and comments after the presentation. [Operator Instructions] 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 everyone that today's conference call 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 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 risk factors detailed in the company's annual report on form 10-K as well as other reports that the company files from time-to-time with the Securities and Exchange Commission. Please note too, 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 metrics is available in our most recent press release, as well as in our periodic filings with the SEC. Now I'd like to turn the call over to J.T. Fitzgerald, CEO of Kingsway. J.T. please proceed.

Thank you, Paul. Good day everyone and welcome to Kingsway full year 2022 conference call. 2022 is a year of significant accomplishments and progress towards our strategic priorities. We delivered solid financial results dramatically simplified our capital structure and reallocating capital through the sale of certain assets and the acquisition of new operating businesses, all while making meaningful progress towards delivering our balance sheet. Our balance sheet looks quite different than it did even one quarter ago. But certainly compared to last year-end. Kingsway today is a much more streamlined company with operating businesses that align with our financial and strategic objectives. And our Kingsway search accelerator serves as a powerful engine for identifying additional acquisition opportunities that can provide an attractive return on invested capital. 2022 was a transformative year of moving our company from complex towards simple. As we look out on the coming year, our focus will be on transitioning from simplifying to a full focus on building for growth. We have a clean balance sheet, a cash flow engine in our existing operating companies, and a great strategy to grow the acquisition with our Kingsway search accelerator platform. Central to our strategy at Kingsway is our commitment to the strategic allocation of our capital to create long-term value for our shareholders. We aim to do this by monetizing nonstrategic passive investments, and redeploying this capital towards growing our portfolio of great cash flow positive operating companies. Earlier this year, we sold PWSC for 51.2 million in cash with net proceeds to Kingsway of 37.2 million. We sold this asset at an attractive price and freed up capital to pursue a repurchase of our trust preferred debt and acquire other great businesses just prior to yearend, we completed the sale of our rail yard in Texas for…

Thank you, J.T. At Kingsway, we focus on net income and non-GAAP adjusted EBITDA. In the past we also focused on non-GAAP adjusted net income. However, given the continued simplification of our balance sheet and capital structure, through actions such as selling our rail yard asset and other non-core real estate assets, as well as the expected repurchase of a substantial portion of our outstanding trust preferred that later this month. We believe that a total company adjusted EBITDA metrics, rather than our foreign former metric of non-GAAP adjusted net income will give a better view of the company's performance today and going forward. I would also like to point out that as a result of the sale of our railyard assets in our VA Clinic, business being classified as held for sale, as of December 31, 2022. We concluded that our former real estate reportable segment met the criteria for discontinued operations. As such, the company's financial statements have been updated to reflect the former real estate reportable segment in discontinued operations in 2022 and 2021. The exit of our real estate segment and the disposition of the final property in our net lease investment portfolio caused a lot of noise in the fourth quarter. First, while we recorded a gain on the disposal of the railyard asset of about 200,000, and received net cash proceeds of 21.4 million. We recorded a loss from discontinued operations of just under 16 million in the fourth quarter, mainly due to a management fee associated with the sale. Furthermore, while we originally reported income from continuing operations of 40.6 million for the nine months ended September 30, 2022, taking into consideration that the results of the real estate segment are moved into discontinued operations. The updated income from continuing operations is 37.4…

[Operator Instructions] We did have a question come from Adam Patinkin from David Capital.

Well, first, I just want to say congratulations, what a remarkable job. You guys have done cleaning up this balance sheet as well as cleaning up the capital structure and simplifying the business. I think that I and many other shareholders are super appreciative of all that you guys have done to make what was a very complex story, as you guys say, much simpler. So first, I just wanted to say thank you, and congratulations on all the progress.

Thank you.

I have three questions. The first one is just a last question on the simplification. So my understanding is that you have the VA Clinic to sell, the Minnesota real estate to sell and the insurance subsidiary to exit. And I'm wondering if you can give an update on expected timelines or outcomes of each of those pieces, as you kind of continue the work to simplify the balance sheet.

We'll take those in reverse order. So I think the insurance subsidy you're referring to is a Miko which we had put in runoff several years ago, we had applied to surrender our licenses with the Florida regulator late last year. And actually, earlier this week, we received final approval. So we're no longer in the regulated insurance industry. The Minnesota property was part of our net lease portfolio. And as I think I said in my opening comments that we did sell that in February 2023, which resulted in proceeds to Kingsway of about 8.3 million. So it was wonderful to have that close as well. And then I think the last one was the VA Clinic, we started actually marketing that at the end of December, it's sort of with a broker right now, we continue to get interested in it. And it's really sort of been probably just really on the MLS or the commercial equivalent of that for three or four weeks now and we're getting some good indications of interest.

And so do you have any expectation of timing to exit that? Or is it just whenever the practice plays out? You'll be out of the real estate industry.

Hard to predict when we'll get an offer that we would be willing to accept, but we're actively marketing it. And our goal would be to get that done this year for sure.

So then, with that kind of out of the way, I wanted to pivot to just two questions on growth. So I know it was part of your opening script J.T. to talk about how maybe 2022 was about going from complex to simple and now it's 2023 and beyond is about building for growth, I think was the phrase that you use. Can you maybe put a little bit more meat on that comment. Can you maybe talk through, what are your strategies to build and to grow the existing companies that you own? So the warranty business, SNS, Ravix and C suite, what are your strategies in each of these operating businesses that give you kind of confidence that EBITDA those businesses can grow at an attractive rate over time? I just love to hear some color on your strategies with each one.

Yeah, look, first and foremost, yes, sure, happy to do it. Obviously, predicting organic growth and an uncertain macroeconomic environment is always tough, right. But what I will come back to is that we have great managers in place at these businesses who have demonstrated an ability to do that, historically, continue to grow. And so we would expect those trends to continue, and are properly motivated through their incentive compensation structure to grow EBITDA. And so I don't come up with their strategies for them, they present their strategies to me. And so if you sort of break this down company by company IWS distributes exclusively through the credit union channel, the credit union channel, in and by itself is growing visa vie to traditional commercial banks. And the strategy there and what they've been doing for a long time from a business development perspective is to continue to grow the number of credit union relationships that they have, where their product is distributed on an exclusive basis. And so they are actively adding new credit union distribution partners to the company. Credit unions are also sort of uniquely position visa vie other traditional financing sources in the current environment, they're a lower cost lender than other alternatives. And so we think that there are some things about the credit union channel in general that insulate them from a higher interest rate environment for instance. PWI and Geminus and I'll just put those two together. We brought Brian in February of 2020, right before the pandemic. And so, he had an interesting first 12 months running that business. But if you recall, some of you may recall that, Brian, before we hired him, had been the president at PWI. And had grown that business pretty significantly, while he ran…

So maybe to just move to my last question, which is I think you've talked about your strategies for growing your existing businesses. Can you talk about on the acquisition side, I think that you mentioned in your introduction, that you're hoping to make maybe two to three acquisitions a year. And each of those acquisitions to be between 1.5 million to 3 million of EBITDA on average. Can you maybe talk about, I know so much of it is just market dependent, whether you can find the right businesses to buy as businesses to buy in the right partners and at the right prices, but can you maybe talk about, do you feel comfortable that having three operators in residence is enough? Is that a number that you could grow? How do you feel about the acquisition targets that are out there, I just love to understand a little bit more about how you view the growth lens from the M&A side through your searchers?

Yeah, so we have right now three searchers on the platform out in the market every day looking for opportunities, right both on the sort of direct source model where they're reaching out directly to business owners. And then through intermediary network brokers and investment bankers, we have a database of 4000 or 5000 investment bankers that they're connecting with, periodically to make sure that we're seeing all the deal flow. But like you said, our ability to do transactions, the way that we want to do them will always be a little bit serendipitous. Right. And so we think that with three and I think I'll get to the, how many searchers at any given time, but three or four searchers that two to three acquisitions per year is certainly a reasonable expectation. It's not a goal. It's not a quota, but it is a sort of an expectation, informed by our history in search, right. And so if you look at search from inception, sort of typical kind of mean time to close for a searcher from the time they start searching until they close an acquisition is around 16 months. And so if you have, if you just kind of do the math, you would expect it, if you had four searchers actively searching, they might be able to do two acquisitions, two and a half acquisitions a year kind of thing. I think we can bend the curve in our favor in that regard, because of our platform, and speed up that sort of up the curve process. But that would be where that sort of two to three acquisitions a year expectation comes from. I say expectation, but it's sort of what we would think we could be able to do with the number of oars we have on the platform, but always add them I will come back to you know our discipline in investing, right. We've gotten close on lots of deals, but they just you know, and the difference between yes and no can be very small, but we have to be disciplined and hold to our hold to our criteria and our hurdle rates.

And there were no other dialing questions at this time. I would now like to hand the call to James Carbonara for some emails, questions.

Thank you. Yes, 18 counts a few payments on email. I'll go through them. Now hopefully, they're not duplicative of what we just heard. But if they are certainly feel free to note that. The first one that came in as you close on the nursing business and C suite and late 2022, are they meeting your expectations? Would you be willing to buy them at the same price you paid? And why?

Yeah, I think we said in the call, you know, they're certainly meeting our early expectations, right there off to a good start and obviously transition is always challenging, right, but you bring them into the family. And Charles has done a great job. Stepping into the CEO role moved out to LA and is getting up to speed in a new industry for him right and transitioning out the former owner operator. Would we want to buy them again? Absolutely. Right. I think that they're very attractive businesses. And as I described, in my answer to Adam, in industries that have what we believe, like really nice secular long-term, growth trends based on imbalanced between supply and demand. And so I definitely think, use whatever reference you want or wind at our back, swimming downstream, whatever it is, I think that we're well positioned. We buy great businesses with opportunities to grow and professionalize. And great operators there that have really aligned incentives. And so yes, we would absolutely do those acquisitions again.

And then the next one relates to the last question is, how many searchers would you like to have available as we move forward? And are potential searchers still interested in working at Kingsway?

Like I said, I think it really is a function of how many we that we think that we can do a great job of supporting and helping be successful in their entrepreneurial endeavor. I think given our lean holding company staff and our desire to stay lean, we can certainly support four or five searchers at any given time, maybe more. But the goal would be, rather than having more and more searchers, would be to accelerate the cycle time from coming on board to getting an acquisition done. And I think there are things that we can do to speed up that process. And so that's what we're working on. And are they still attracted? I mean, I think so we talked to a lot of candidates, and we've got several that we're currently talking to. And I think that as this gets momentum, it has a really nice feedback loop. And so not only do they see the success, for instance, the sale of PWSC with Tyler, that was a great demonstration of what can happen in the model. They see the success of Timmy and now Charles, buying businesses and stepping into the CEO role. And then so the great feedback loop there, and then also with the expanding networks of our OIRs and CEOs, and the people in their spheres, who learn about it through them and come to us, as opposed to us reaching out to them. And then I would just sort of add to that the advisory board and the quality and talent of the two people that have chosen to in agreed to help us out with this. I think is just a really incredible asset. And people are really attracted to the idea that they will get sort of operational coaching from Tom Joyce, and capital allocation coaching from Will Thorndike. So, yes, I think absolutely not only is it still attractive, I think it's getting more attractive every day.

There's two more remaining from the email. The first one is, is the rise in interest rates having any impact on the pricing of deals you are now reviewing about the availability of credit?

The lower end of the lower middle market, the deal multiples and where we play probably not impacted as much by sort of availability of credit. Obviously, cost of capital will change valuations a bit. And maybe there's a little bit of a sorting out as sellers have to readjust their expectations at the business, their business may not be worth the same multiple of cash flow as they thought it was. But I think anything that I could say to that would be just sort of based on my own limited data set. But I would say not really but you have to expect that it might a little. And then in terms of the availability of capital. I haven't seen that. Obviously, the cost of capital sort of debt capital is higher. But it hasn't impacted the availability of capital, especially not the types of lending structures that we're using, which is traditional kind of straight amortizing bank that at low leverage ratios.

Great. And then finally, can you talk about the costs and advantages of obtaining the $10 million loan from CIBC?

Yeah, so the cost, there's a small commitment fee to have that there. I think --

We paid $25,000 at close, and then any future draw would be 75 basis points of that draw? Yeah, so it's a small cost, I think to have some nice drop dry powder.

Yeah. And so the benefit of that is, you know, we're going to use up a lot of our cash that we have at the holding company here pretty shortly to repurchase our trust preferred current on the first interest on the sixth tranche, and potentially redeem some of the non-converting preferred. We thought it would be prudent to have a standby facility to provide us additional dry powder if we had an acquisition to do in the not-too-distant future.

Great. So that was the last email question. I'll pass it back to you JT for any closing comments.

Okay. Well, thank you everyone for your participation. This concludes our 2022 earnings call. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.