Kingsway Corporation (KFS) Earnings Call Transcript & Summary

All right. Good morning, everybody. Why don't we get started? Thanks to all of you for being here today in this beautiful building on a beautiful Monday morning in New York and thanks to everyone also who are joining us online via the webinar. We have a great day plan for you. For those of you that are on the webinar, we're going to do some Q&A at the end of the formal presentation. And then again, at the end of the fireside chat, actually, I think we'll do it interactively during the fireside chat. So to the extent that you have questions, can you please e-mail them to james@haydenir.com. So that is james@haydenir.com. I'm J.T. Fitzgerald, CEO of Kingsway. We've got a great slate of presenters here today. Kent Hansen will be walking us through a little history of the company and how we're structured. I will revisit some of our core principles that I outlined in our annual shareholder letter every year and just sort of spend a little time talking about those. Last year, we, at this Investor Day, we talked about some of the reasons why search funds fail and how we were going to attempt to bend the curve in search by that sort of change the conditions to improve the probability of success. And so Charlie Joyce is going to spend some time walking you all through all of the wonderful work that he and the team have done to build our platform, our engine for successful acquisitions. And then we're going to transition to Peter Dausman, an OIR, now CEO of DDI. And he's going to walk you all through his journey here at Kingsway first as an OIR and now as President of a wonderful business. I'd be remiss if I didn't remind you all of our forward-looking statements at the beginning of the slide deck. I encourage you to read those and the risk factors in our SEC filings. Yes, so wonderful to be here. Thank you all for joining us, and with that, we'll kick things off, and I'll invite Kent up.

Thanks, J.T. Good morning, everybody, and thanks for joining us here in person and on the webcast as well. I'll be brief. I think people are becoming more and more familiar with us as a company and the things that we've done over the last few years, but we'd just like to recap a few different things. So we've been a company since 1989, originally founded in Canada, originally listed on the Toronto Stock Exchange. We're neither of those anymore. We're listed -- we're a U.S. company listed on the New York Stock Exchange. We have about 400 employees spread throughout our operating companies. You can see our financial metrics there. We're very proud of our net debt number has come way down over the past few years, and we'll have a little slide on that in a couple of minutes. And our share price continues to be strong. Going back to October 6, 2021, why that date? Well, that was our sort of first Investor Day under -- after we came out of blackout and what we call our dark period, and our stock has been up about 40% since then. Some investment highlights. Most of you are probably familiar with these. We're a collection of recurring revenue, high-margin, asset-light growing businesses. That's the sweet spot that we like. Our run rate EBITDA is $16 million to $17 million. I know this is -- we get a lot of questions on this metric. So I'll just take a minute to clarify that. This is backwards looking. It's not meant to be forward-looking. And it's a number if we had owned all the companies that we have now for the past 12 months, that's what we estimated our EBITDA would have been and we adjusted slightly for the market float on our extended warranty companies. And by that, I mean the funds that we invest in bonds and whatnot from those trusts. We continue to have a large NOL. It's about $626 million at the end of the first quarter of this year, and we continue to shield our federal income taxes. So that's a federal NOL and we pay almost no federal income taxes, which we think is a great advantage for us. We have our disciplined Kingsway Search Xcelerator, which Charlie will get into a little bit more in a bit. Significant insider ownership, directors and management, we own collectively about 55% of the company that came down a little bit from last year, and that's just because of all the warrants that we had exercised over the past year. So we did some share buybacks as well. And we've really simplified our capital structure over the last few years, getting rid of some non-core investments, some non-core debt. And I think our stories become a lot more understandable because of that we hope it has. Just briefly go over our structure, we have a lean mean holding company. There's 10 of us at the holding company based in Chicago. J.T. and I are part of that structure. Our corporate accounting team is part of that structure. We do things like consolidations, the SEC filings, taxes, all that fun stuff, but then that's where we also allocate capital and we oversee the investment funds that we do have. And then as I think people know, we have the extended warranty side of the business, currently for extended warranty companies. And then on the Search Xcelerator side, we have -- I always have to stop and count the things, it's about 5 now. So we keep growing on that side, and we'll have a little bit more financials on that in a minute as well. This is our EBITDA growth going back to 2018. That's when J.T. was appointed as CEO of the company. You can see kind of a high watermark in 2022. And then we did sell one of our warranty companies, PWSC in 2022. So those results have been removed after that year. This is not a pro forma. So it's included in the historical results. 2024, the TTM 2024, as we've noted in our past 2 earnings calls has really been impacted by higher claim severity on the extended warranty side. So really parts and labor inflation started to kick in around this time last year. So not a huge impact in Q1 last year, but definitely Q2, Q3 and Q4 going forward. So we would anticipate perhaps the comps year-over-year, we'll be getting better going forward. And also, the -- one of our companies, SNS is a nurse staffing company based out of Southern California and the travel -- the demand for travel nurse is really kind of swung the other way last year, and we think it's kind of swung too far, but we think the long-term prognosis remains pretty good for that business. Just a little bit deeper dive on extended warranty and Kingsway Search Xcelerator. So for the TTM period extended warranty is about 66% of consolidated revenue and about 59% of EBITDA. And again, it consists of those 4 companies, 3 auto companies, they sell auto extended warranties through dealers and credit unions, not direct to consumer. So we're not the postcards you get in the mail, we're not the ads you see on TV. If you're getting a loan at either an independent dealer or a credit union, they may be offering one of our products. And then on the Kingsway Search Xcelerator side, growing. These percents we would expect to grow over the next few years, but 34% of revenue and 41% EBITDA. And you can see there at the bottom, the companies that comprise that. And when we've acquired them and the most recent ones were SPI software company last September, and then DDI last October, which Peter is going to get into a lot more detail here later on this morning. We just kind of like to remind people what we've done is we're always looking forward, but sometimes it's good to sort of stop and sort of take a review of what we've done in over the last 18 months, we sold CMC, that railyard asset we used to have. So we sold that at the end of 2022. So that really cleaned up a lot of fixed assets off of our balance sheet as well as debt. And we'll see in the minute that's where our debt starts to go way down. We used to own a lot of commercial real estate property, and NLIG was the last one that we sold early last year. Also in Q1 last year, we bought back a substantial portion of our subordinated debt. We call it TruPs. We had 5 tranches. We bought back 4 of those for about $0.61 on the dollar. And we couldn't buy that last one back because it's stuck in the CDO somewhere. It's very difficult to buy those out. But we would like to do that if we could. Our preferred stock converted, we purchased SPI, DDI. We did purchase a substantial portion of warrants last year under our current stock buyback program. And we did have a substantial portion of warrants exercised during the year, which was a nice cash infusion to our balance sheet. As I said before, we've reduced our net debt significantly over the past few years, the big drop that you see from '21 to 2022 was the sale of CMC. That debt happened to be fully funded from the rental income. And then from 2022 to 2023, when we sort of cleaned up some of the other noncore real estate investments that we had. So net debt at the end of first quarter this year was about $34.9 million. We just have that one little slice left at corporate, and the rest is really debt at the operating companies that is nonrecourse to the parent company. So the operating companies, just a reminder, when we buy a company, we usually infuse equity and debt could be 50-50 depending upon the size of the transaction and then that operating company is paying down that debt out of its own cash flows. And then just before I hand it back over to J.T., just some things that we're doing. We do -- we still have our share repurchase program. It was set to expire in March of this year, but the Board renewed it for another year, and we have about $2.8 million left that we can buy through near the end of March next year. We do have that VA Clinic that we bought a few years ago that's currently being held for sale and being actively marketed with the national broker. And then as the rest of the team is going to talk about, we're targeting 2 to 3 acquisitions a year between $1 million to $3 million of EBITDA, and we're actively recruiting our next set of IOR candidates. So with that, hopefully, I didn't go too fast, but I wanted to leave enough time for the meat and potatoes to come. So I'll turn it back over to J.T.

All right. So I'd like to spend a little bit of time going through what we call our guiding principles. Gentleman named Larry Cunningham recommended to me that we create or document a set of fundamental concepts that we believe in as sort of a shareholder owner's manual. And I think that what we have here, you guys can count on as things that are fundamentally important to us as management of Kingsway. We created this little picture here. If the objective is to compound intrinsic value per share and the per share component is very important. We believe that we can build that on first, a foundation of exceptional talent, a very long-term perspective. And we are the fortunate beneficiaries of a very nice tax asset, but to sort of approach everything from a tax efficiency standpoint. And then the pillars of that, one is the importance of decentralization. Ken spoke to that a little bit in the intro. Execution. So execution at our operating businesses and effective capital allocation. So that's sort of a little picture of how we think that we're going to build something that will allow us to compound intrinsic value per share. I'll start with the concept of decentralization. This is very important to me. Our structure is what we call sort of hard form decentralization as Ken mentioned, 400 employees, only 10 of which sit at the holding company. Each one of the businesses we own have their own P&L and balance sheet specifically within the Search Xcelerator segment. They have their own full capital structure, bank financing, et cetera. And so they own their operating performance. And so why is decentralization important? I think, first and foremost, it's the only way to attract and probably more importantly, retain really talented people is to provide them autonomy and opportunity for growth. We also think it's incredibly important to have the decision makers, the people that are defining and executing the strategy for their businesses to be the ones that are the closest to their customers, we believe, in a concept called voice of customer. We listen to our customers. We want the people that are making the decisions to be the ones that are listening to their customers. And I just fundamentally believe that decentralization is really the only way to unlock the sort of entrepreneurial spirit to the absence of bureaucracy is what allows businesses to thrive. If you think about bureaucracy, I mean, I think it's sort of most genuine form I think it's their -- people think it's good for cost synergies, right? If we can just do some of this and spread some back office or things across a bunch of businesses, we'll save money. That's worse. It's there to prevent against incompetence or fraud. And I think that if you have really great people, you don't need any of that. And so that really comes down to the talent imperative. The hard forms structure will allow us to scale with a very lean holding company. The next pillar is accountability. We like to say that it's sort of entrepreneurs in a supportive environment with decentralization, we still do want to create an environment with, what we call, a cadence of accountability. And so all of our operating unit managers know that we expect transparency and accountability on a very important cadence, whether it's weekly, monthly or quarterly, depending on what we're talking about. And then we create incentives for our managers tied to their execution. Annual cash bonuses are tied to return on invested capital targets. And then within our KSX segment, their equity performance is tied to our performance as equity investors. We have, what we call it, entrepreneurship in a supportive environment to support our young CEOs with their execution. We've also created what we call the Kingsway Business System and have that documented in learning management system. And then we've created the KSX Advisory Board with some really talented people to help our OIR's turn presidents, be effective operators in small companies. One advisory board member's here today, Will Thorndike, and we're going to have a wonderful fireside chat later today. And the final pillar is capital allocation that is a very popular set of words to us, it means sort of what we do with our cash. And for us, the first is a focus on organic growth of the things that we own. We have this concept, we sort of bifurcate our expenses between strategic and nonstrategic expenses with the goal of cutting to the bone what we would qualify as nonstrategic expenses and redeploying those dollars to organic growth in our operating businesses. And that creates an investor mindset for our operators. How do I find the money to invest in organic growth. The next thing is focus on inorganic growth or acquisitions. And Charlie is going to talk about the work that we've done to build the engine to support 2 or 3 acquisitions per year in the KSX segment. And I think we've created a really nice platform that will allow us to scale that even more we talk about defining the spec, what good looks like in terms of the businesses we're trying to acquire and then create a set of processes in a system to deliver that spec. And then once you have that system in place, then you can really scale it. And as Kent mentioned, we also are infrequent opportunistic buyers of our shares. Our sort of goal on a share buyback plan would be -- it's one of the benefits of being a public company, quite frankly, is that from time to time, the market will allow you or afford you the opportunity to buy your shares back at a discount to your view of intrinsic value per share. And so that has allowed us to do some accretive repurchases of our stock. So the foundational elements, talent. I think that KSX is a very unique platform, particularly within a public company for us to attract really wonderful people. The search fund model, as many of you know, is very popular. We're just 1 flavor of that. But I think that there are attributes of what we have, the permanency of our capital, which creates this sort of long-term view, our tax asset and the infrastructure and support, both on the search phase and the operating phase that will allow us to attract what we think are really great people that have a set of attributes that we think are predictive of their ability to be successful managers in small businesses. So we start with horsepower. This is just a crude Rubrik here, 5H's as we call it. Horsepower to us, that means sort of mental agility and curiosity. I think that that's really important. The next is hunger, we sort of call that, sort of, the will to win, combined with hustle, right? You can have hunger and not hustle. So we want to see grit, tenacity, perseverance to do what it takes to win. Humility is incredibly important. So these are sort of an ascending order of priority. To us, humility is incredibly important. A lot of times, you'll find people with great horsepower, hunger and hustle that lack the humility. And we think as a new manager in a small company, this is like incredibly important. And that, to us, is sort of self-awareness, authenticity, the ability to connect with people across the spectrum and importantly, the willingness to both seek and take advice and act on it. And then the most important for us, I think, generally, but also important in a decentralized structure is honesty, unimpeachable integrity, transparency and accountability for results. And so that's how we screen for our OIRs. You'll meet one of them today. I think that he uses all of these things, and that will come through when you get a chance to speak with Peter. And so we're very focused on bringing wonderful people into our small company. The next foundational element is a Long-Tern View. I think that we're lucky that we have shareholders that also share this perspective. The permanency of our capital is sort of a unique feature of being a public company allows us to take a very long-term approach. We like to say that we're -- we think about things in 20-year time frames and that will -- and that guides our decision-making and also our incentive structures for all of our managers. And for us, so long as business that we own continues to exceed our internal hurdles for return on capital, our ideal holding period is sort of forever. I mentioned earlier that our job is to compound value per share over a long period of time. And the final foundational element here is taxes. The great quote here, gentlemen named Ian Cummings, co-CEO of Leucadia. "Earnings are good. Earnings without tax are even better." We're fortunate that we inherited, as a management team, over $1 billion of net operating loss carryforwards when we took over. We've used a lot of them, but we still have, I think that's a typo, roughly $623 million of NOLs as of year-end. And that those will allow us to shield both ordinary income and capital gains taxes for many years to come. And so with no leakage for federal taxes, we ought to be able to compound capital at higher rates than if we were a taxpayer quite simply. So we're very fortunate in that regard. And so just to kind of wrap it up. Our strategy for growth is to sort of grow organically in the businesses that we own. We try to buy businesses that have -- that are in industries that are supported by long-term secular tailwinds and then apply great operations, the focus on strategic versus nonstrategic expenses to free up dollars to invest more in organic growth. A lot of different ways to do that, whether it's just sort of penetrate your existing market, bring more products to your existing customers, move adjacently into new markets. And so we're thinking about how to grow these businesses organically all the time. And then the sort of second engine of growth is the growth via acquisition, and we think we have harnessed a really interesting model, right, sort of search fund investing in a public vehicle to grow via acquisition and own those businesses for very long periods of time and then scale that over time. And we have some wonderful businesses in warranty. I think I've said it before. We really like some of the fundamental attributes of warranty. The problem is, so does everybody else. And so I think that our ability to buy more businesses at prices we would be willing to pay, at least recently, has been a little bit challenging, but that doesn't mean that we aren't always looking. And so one, partner with exceptional talent, wonderful entrepreneurs, acquire a portfolio of great businesses, apply operational and strategic support and hopefully, compound capital at very high rates over a very long period of time. As I mentioned last year, we talked a bit about how we were going to bend the curve in search investing, identify the reasons why search fails. And then alter the conditions to improve the probability of success. And Charlie Joyce, who's going to come up next, and the team have spent the last year really focused on this and have built a wonderful set of tools, platform and processes to, I think, improve the probability of success in the search phase, stuff from as simple as executing NDAs when you're executing dozens a week, how do you get better and faster at that to industry game boarding and underwriting and outreach. So he's going to give you a deep dive, he's a little worried, it's a little too deep, but I think that it will be really interesting. The whole point -- you guys all know the business. I think this is an opportunity to get a deeper dive into how we're running our search process at KSX. So with no further ado, I'll turn it over to Charlie Joyce.

All right. Thank you very much, J.T. It's always easy to follow up J.T. when he does such a great job of laying out the foundational principles that form the basis for Kingsway. We're able to translate our approach in such a strong way because everyone on our team is able to quickly identify and call us around these simple principles which unify us. Since starting with Kingsway last year, there are 3 questions which we most commonly get from investors and folks interested in learning about our unique approach to small business acquisitions. And those are how do we set ourselves up for success in small business M&A. Can we close 2 to 3 deals per year as we set out as our goals? And can we potentially do more than that over time? I'm here today to share with you how we think about these common questions and maybe go a little bit deeper into what we are doing to actually make this a reality. So when you focus on Kingsway's response to those 3 areas, they really hit 3 themes that I hope will reinforce what you've just heard from J.T. First is quality. How do we design quality into our process. This is different from a manufacturing line where we're going to see a widget pop off the end and be able to inspect it right away. Our investments take time to mature and grow. And we want to make sure that we're making every possible attempt early in the process in order to weed out negative signals and characteristics that we understand correlate to positive outcomes and success. Repeatability. We want to make sure that we are consistently delivering the same results and applying the same vigor to our operators that we're supporting and the opportunities that they bring to us. In 2023, we've made substantial moves from being a person-driven company to a process-driven company by defining the spec that we are moving towards and building into our process, specific checks and balances that are going to help move our end product, the deal that we are investing in towards a higher quality outcome. And finally, scalability. We are creating the conditions for success 10 years out. It's really great organization where we are building in the open and actually showing folks the way that we are doing that and yet able to take a measured approach towards creating value in the long term. So what we're going to go through today is a quick refresher on the operating context of Kingsway Search Xcelerator, why we've chosen entrepreneurship through acquisition as our M&A model and who we are in the context of this emerging niche. How we approach M&A in order to design quality into that process by bending the curve towards success, as J.T. mentioned earlier, and specifically diving into the Kingsway Business System, which is how we deploy those founding guiding principles into our day-to-day processes. I'll take you through a couple of specific examples of what we've done in the last year in order to create those conditions for success. And then finally, go through an example of our target deal economics and show that powerful impact of compounding capital over a 10-year timeframe horizon. So starting off, Kingsway Search Xcelerator operates in a growing and underserved niche, which you come to know as search funds or entrepreneurship through acquisition. If you look at the number of search funds that have been formed in the last 10, 20 years. We've seen that number substantially grow year-over-year as interest in this model has grown, and the results have proven out to show that it is able to consistently produce high-quality investments. We, within this timeframe, sit in a unique place where actually, we've had the opportunity to participate in the ETA market for most of the time that it's been a relevant subset of private equity. JT brings to the organization his experience as an investor and search operator in the segment. And then when he joined Kingsway in 2017, that really set the company up on the current direction that we're in today. So since 2020, when we launched the Kingsway Search Xcelerator, we've executed 5 transactions across B2B services, health care and technology. And when you look at those characteristics of -- the key characteristics of the investments, they match up nicely against what we consider to be the median investment in the search fund space. This is something we're able to point to based on the great work done at Stanford University to bring together all of the different investors in the space and allocate and consolidate the data so that we can learn from each other and build in the open. And finally, as J.T. mentioned, exceptional talent is foundational to what we are building here at Kingsway. So we've had the opportunity to recruit really great operators who are both standing in the CEO seat of their small businesses today as well as looking for new acquisitions. Together with this model, we have experienced investors pursuing thoughtful capital allocation behind strong operators who have both the autonomy and incentives to execute. So what do we mean when we say bending the curve. Bending the curve towards success means altering the conditions in order to improve your outcomes. We're talking about designing quality into our process so that we can mitigate the causes of failure and help control for our returns. If we look at this illustrative example, we're really trying to address both search risks, the probability of not identifying a transaction and the financial risks, the probability that, that transaction might not actually return your total invested capital. So we've gone through the data offered to our cohort and given -- identified the key elements that are driving these causes of failure and then built into our process, the specific controls to help aid operators along their journey towards acquiring one great company that they can then operate for their careers. Looking in here, we've got the end-to-end investment process starting off with talent acquisition and recruiting and ending with your final acquisition. I've highlighted a handful of specific risks in here that we're going to go into examples of how Kingsway has addressed those in 2023, but want to frame up for the group that we have in just the small area addressed 5 of the top key risks that show up in small business acquisitions. First, getting the right talent on board. Small businesses are plagued with not having access to the right talent to help them succeed and grow. And the ETA model is a great partner to help solve for that by bringing unique incentives to bring in excellent talent to these small opportunities. We've defined the right candidate scorecards in order to identify those candidates and segment what behaviors they are going to be able to influence over their journey as a leader and what are really foundational to their personality. We figured out industry selection, how do we orient our operators from day one to pursue industries that have the highest outcomes as measured by investment returns. We want to look for industries that have positive cash flow economics, high margins and good industry tailwinds supporting long-term growth. And sourcing effectiveness. While there's a lot of different opportunities and approaches towards sourcing deals in today's private equity market, we are constantly studying those tactics and offering up the best practices to our OIR so that they are ready to proceed from day 1 running an efficient pipeline that can then be carried over year after year. And so with only a handful of these mitigants, we're able to substantially control some of the greatest indicators of failure in our search segment and even move towards a higher outcome for our operators in timelines that we hope are better than or in line with your average search fund acquisition. So you heard J.T. talk earlier about Kingsway Business System. And the way that I think about Kingsway is really taking best practices that are studied and applied at the best companies in the world and translating that to our experience for small businesses. We know leadership is incredibly important. Talent, as I've discussed, is a perennial problem for small businesses that are trying to grow and recruit the best operators. Setting out vision and strategy also helps the entire team coalesce around a unified goal and work together in a cohesive way. And then all of this comes down to execution. So when you think about KBS in action across these 4 areas, there's discrete examples of how Kingsway is helping their OIRs and their CEOs to be successful from providing tactical guidance on effective communication and time management on a leadership level from our Kingsway Advisory Board, to performance management processes that are supported by strong incentives specific to the ETA segment of small business. Vision and strategy is supported by strategic planning process where we're establishing clear measurable value creation goals for our operators, which as J.T. mentioned, tie back to the incentives and cash compensation that our CEOs receive. And then execution, all of this is supported by policy deployment and KPRs that support our culture of accountability. So similar to how we were here today, building in the open and showing all of our results, we do that on a weekly basis with our team to make sure that we are all holding ourselves accountable to the strongest decisions and execution that we can manage. So starting to design quality into the process means we've got to have our spec, have to have our process well-defined. And this is our simplified process map. So we've taken the familiar end-to-end process starting with talent recruitment and moving down through acquisition and then identified all of the key elements of our process, handing off opportunities through the funnel in order to get them to a closing. We've identified all of the individuals who must be responsible and engaged in those decisions and the systems and technology used to support them. And by starting with the spec, we can further refine what are the elements that are going to lead to failure in a process and make sure that we're supporting our operators with a coordinated process that really helps to address those causes of failure. As J.T. mentioned, something as simple as an NDA when you're doing 12 of them a week, 1,000 of them in a year can really be challenging. So finding a cost-effective and tech-enabled solution was a big uplift for us in managing the high volume of contracts. Talent network is incredibly important, maintaining a connection to all of the different outlets that we have from top MBA programs to ETA clubs and investor communities in the ETA space. So having this kind of end-to-end process really sets us up to manage who's responsible, how do we execute and how do we ensure a consistent product from our process. Bending the curve in talent recruitment. So finding the top candidates is a job and of itself. Similar to finding a deal we need to look through hundreds of candidates in order to find the best operators for our companies. While we understand this is not necessarily the most efficient way, we believe it's foundational to our investment approach because the talent we bring into the company will be determinant of the company we acquire will -- the operations and the ability of that business to scale. And so we really put a lot of effort into screening these candidates with a 12-step process built on top grading. Top grading is management recruiting and hiring methodology that has been designed to help reduce your miss hire rate by having really standard stages in the recruiting process and uniform deliverables that allow you to compare candidates and find the best result. So the structured process allows us to sustain quality, our scorecard specifically seeks for A players as defined by those who can learn and develop over time while having the core competencies necessary today for us to build on. A threat of reference check is an early signal into our process to allow candidates to know that we are going to take this very seriously and to vet all of the information provided, offering a more consistent and reliable information gathering process earlier on and then we conduct what is known as a chronological in-depth structured, or CIDS interview. Well, anybody can get up and tell their story for an hour, try doing it for 2, 3 hours in a room with J.T., that's where we really get down to the meat of our operators and show the clearest look at somebody's capacity to really stay out and run the long rates for our acquisitions. And as I mentioned before, we're looking not just at the behaviors that they're demonstrating in the room when we're interviewing but also taking a full picture of our candidates to understand how can these behaviors change over a career, understanding that we are not recruiting for 1-, 2-year position, but rather a long-term role that is going to align with our objectives of compounding capital for the long term. Today, we've been able to fill our operating residents class with network referrals, applications from MBA programs and other inbounds such as the search funder community, our website and conferences. We are seeing a lot of interest among top MBA programs that have new ETA clubs as the interest in small business acquisitions grows. So we have established relationships with all of these organizations to help engage with the students at these programs, tell them more about Kingsway, help searchers learn and understand about what's going on in the ETA market. And it's a great area to learn from as well because we see a lot of people actively building coming out of MBA programs. And so these are both beneficial to us as we look for talent and as we learn new ways of approaching the ETA space. We'll go through roughly 50 to 100 applicants per cycle. Generally, a cycle would be the first half or second half of the year when we're running a recruiting process and ending up with a highly selective process that yields 1% to 2% offer rates overall. So our strongest source of candidates are our in-network referrals. Those individuals who work with our team or through any of our deal partners, investors, where we were able to really rely on our internal network in order to find the best talent. But still, we're putting everybody through a highly restricted process. Next up on areas where we focus this year has been on industry selection. Industry selection is often cited as the #1 source for outcome in search, either failed outcome, meaning failure to acquire and return all your capital or for the top quartile returns are driven by strong tailwinds on the industry that they select. And so with this knowledge, we really want to focus our proprietary efforts that being the rudder that drives our strategy and allows us to choose where we want to end up on those industries which demonstrate the key criteria, we understand to correlate with positive returns. So those are large and growing supported by secular tailwind, fragmented opportunities without dominant competition and with many chances for shots on goal in acquisition as well as quality business model. So low capital intensity, strong margins, driving high cash returns. As we've seen with our search accelerator process, it's easy to fall in love with the deal. It's easy to spend time on a transaction, days become weeks, weeks become months, and ultimately, our operators are really interested in getting into the operating seat so that they can run these businesses. And so we are supporting them by providing the institutionalized knowledge that we've gained over our careers as investors to assess these industries and constantly identify what are the best trends that are going to get us 10 years from now to the return profile that we are setting up to build. Lastly, when we look at sourcing and how we are actually driving the efficiency of our funnel, we are starting with proprietary outreach where we want our operators to generally be spending about 80% of their time in a given week on engaging with business owners and identifying new opportunities. So in order for them to have a full funnel of business owners to talk to in a week, they need to first identify the leads and then engage them. And this translates to anywhere between 200 to 400 monthly leads [ fell ] into the top of your funnel every single month. Now when we bring on a new operator, we're always telling them, there's a lot of different ways that you can perform a search and that you can spend time depending on your background going very broad or you can spend time going very narrow. It all depends on the operator. The individual who we hire is tremendously important to the outcome and the business that we ultimately acquire. And so we have the operator set their own individual targets, leading into this culture of accountability where they are empowered to make their own decisions on exactly how they want to manage the trade-off between volume and engagement. As they set the targets, they're able to then fill this into a week-to-week process where we are identifying and engaging leads using the best-in-class data tools available in the market to get in front of business owners and set up conversations potentially identify new proprietary transactions that we can pursue. Understanding there's a reality to this process where you pick up a deal, you start engaging with a small business owner. It's very hard to simultaneously as a lean team, be managing your funnel. We've brought in additional sales development resources to help provide consistent high-volume outreach, that helps support our operators as a whole pool, providing that balance over time, we were able to actually get effectively double our volume from professional best-in-class resources that are showing us how to most effectively reach our targets from a technical standpoint. So thinking about spam filters, how do we use the best technology to ensure the right deliverability. These are all core competencies that market solutions bring to us when we are working with external partners on the sales development process. Equally important to the M&A process is intermediated sourcing. So while everyone would like to find a proprietary deal, the reality is many business owners today are going to intermediated processes in order to get the best valuation, get the best exit and potentially the most eyeballs on their transaction as the M&A process for lower middle markets becomes increasingly more efficient. So with our existing database and relationships, KSX is able to drive consistent deal flow within our target market of transactions around $2 million in cash flow. So we have a highly selective, highly specific database today that we work with and through ongoing business development, we'll look to 3x that in 2024 by engaging new active intermediaries and pursuing direct marketing to those individuals. With this intermediated sourcing engine would become the funnel through which we'll see the broadest spectrum of the market and be able to be highly selective for those that match our criteria. I used earlier the analogy of a rudder that's driving our strategy for proprietary. I often think about this as we're sailing on a river the intermediated sourcing is the market that's going to drive us, whichever way the wind is blowing, but we get to choose which direction we want to sail with the rudder of our ship. And so we want to be aware of everything happening on the market in order to get the broadest possible context on what's driving trends in lower market M&A while also being highly selective on those that we choose to spend our time towards. All right. So now going forward, looking at how do we scale this model for the next 10 years. We've set up the system, we've got the process down. We've moved out of the jungle into the more repeatable highway where we are now pushing our results and focusing on execution. So I want to go back to the foundational assumptions that go into our M&A model and illustrate how does this scale over the next 10 years? So as J.T. mentioned earlier, we're looking to acquire a business between $1 million to $3 million in EBITDA. We'll average that out and say our typical transaction is around $2 million in EBITDA. At this price point, we are imagining around 5 to 6x multiple, which is generally what we've paid for our transactions since 2020. We're also looking to apply 2 to 3x debt, a rather conservative figure, where we were able to get senior bank loans from 8% to 10% interest, generally 5-year amortization, maybe first year interest only. Partner that with efficient operations to grow the business 5% annually with leverage support from Kingsway, where we were able to actually identify low-hanging fruit in the operating efficiencies and the sales potential of the business. We think this is pretty reasonable. And then finally, the tax efficiencies that get us somewhere that many other investors aren't able to go. On a single deal, we're going to generate $2 million in EBITDA, pay very minimal interest and start to service that debt over the first 5 years. When we come into our sixth year and we're finally out of the amortization of that debt, we have substantially more cash available to reinvest into the business. We've also effectively doubled in those first 5 years of our acquisition, the available cash to invest by virtue of our NOLs. So the compounding effect over this is massive when you consider it for the next 10 years. If we continue to execute on our strategy of recruiting top talent and expanding the team while maintaining our velocity of a transaction after 18 months. Then we can increase the number of transactions over time, potentially from 2 to 3 to 4 to 5. So if we can leverage these M&A capabilities, increasing our team size while maintaining velocity will actually increase the number of deals that we're doing and want to really focus on staying true to what we've set out as our goal. So maintaining the transaction size and focus, which is lower market acquisitions with retiring business owners seeking not just capital but management talent to come in and replace them. We'll partner these with the long-term thinking in capital allocation that we've laid out, our goal is to help reinvest this capital, pay down our debt and grow our available cash flow substantially beyond what would have been achievable in a nontax advantage strategy. And so here, when looking out over the next 10 years, if we continue to acquire increasingly levels of cash flow, the ability to hit that exit trajectory and grow these businesses substantially will be differentiated from a lot of our peers in the market because we've set out and built ourselves up in a way that is intentional to do that. So it's this model that gets really exciting. And today, we're focusing really on the core execution of this. We're only in year 4 of this strategy. And we've seen great -- 5 great acquisitions to date. I'm excited to be able to hand the reins over to my colleague, Peter Dausman, who's going to share with you a little bit more about our recent acquisition of Digital Diagnostic Imaging.

Good morning, everyone. So J.T. wanted me to talk a little bit about our last search fund acquisition, Digital Diagnostics. So just -- I started the search in October of 2021, and we closed the deal in October 2023. So just 2 years later. So Digital Diagnostics, just a high level on that. So Digital Diagnostics is a provider of cardiac telemedicine services to hospitals throughout the U.S. So we provide 24/7 cardiac monitoring focused on high acuity and moderate acuity inpatient settings. So historically, our core markets have been in long-term acute care and inpatient rehab hospitals. And we're throughout the U.S., we're in 42 states in Puerto Rico. And even just within the core market, revenue is growing at 30% to 40%, and that's for several reasons. Number one, very favorable macro tailwinds, dealing with cardiac monitoring, the need for cardiac monitoring; number two, demand for outsourced services that hospitals have; and then number three, what we discovered was a lack of qualified competition in our niche. And so those 3 things came together, and that's why it's growing so quickly. So right now, it's an exciting time for the business. We're working on preparing for that continued growth by building out our team, training our team further building out our leadership team further and opening up our next facility in the Intermountain West. So that's where we are now. How do we get here? I'm going to walk you through the search process, the industry diligence process, the deal on acquisition process and then first 6 months as an operator, we thought it would be helpful for the investors to see what Charlie just walked you through an action for a business and then for potential searchers who are interested in Kingsway model. This is a good look into that. So starting with the search process. As many of you know, the search market -- deal market has become increasingly more competitive as more searchers have entered the space. And so we spend a lot of time, as Charlie just walked you through optimizing our processes, so we can better adapt to the deal market and the search fund industry. So when kind of that first cohort went through, we didn't have everything that Charlie set up, but you're going to see kind of the first prototypes of that. And this is kind of 5 strategies we tried to follow during the search, so number one, starting at the beginning, something that's very important in the beginning for any searcher is to define what a qualified lead is and feel very -- have a high degree of conviction on it because that's what's going to allow you to turn down all the businesses that you should not pursue. Fortunately, we were able to tap into Will Thorndike's research into every single historic search run acquisition. So we were able to look at every single search on acquisition and what were the factors that led to success. We were able to have the correct answer to the question of what is the minimum gross margin you need? What is the minimum level of recurring revenue, things like that. And so that gave us the conviction we needed to say no to a lot of businesses. Second thing early on is you have to get out there and just start talking to business owners, this is a piece of advise Charles Mokuolo gave me. He don't want to overplan. And Kingsway was very supportive in this. And when I first started, we already had a tech stack in place that Timi Okah had developed that allows us to reach out to lots of qualified leads at once. And then the next thing I would say with this is how to do a deal execution. So another thing that's very important is you want to "fail fast" during a deal, and a lot of that comes down to pricing. So we might have a lead that we're pursuing and the pricing increases and basically being able to talk to J.T. at 08:00 p.m. at night in a very intense, fast-paced deal scenario. Doing that over and over again was critical to saying no to a lot of businesses and keeping the momentum going forward. So having that dedicated deal team that Kingsway has with J.T. and Charlie and we're growing, is really important in the beginning. When it comes to the industry focus, you always want to be a little bit exploratory. I personally looked at everything from security services to landscaping services. But I did want to focus on a couple of industries that I felt were a good fit with fit with my background. My previous experience in health care strategy, consulting and system engineering. So I focused on health care and SaaS. And Kingsway gave the searcher -- gives searchers complete autonomy, as Charlie mentioned, as to where to find an industry. And this is kind of a recurring theme you'll see throughout is this idea of autonomy and accountability where Kingsway wants to give the searcher of the freedom to find industries that are a good fit. But then you have to deliver results. And so those 2 things come together. So one other thing that we tried to do during the industry research process is when we found a business that we really liked. We did what we call a lightning diligence. And that week, we just doubled down in that industry, learn everything we could about it, and also the specific sector and the specific business. So that when you get on that first phone call with the CEO, the owner, who's looking to sell his business, you can really talk about it intelligently and not just the high-level industry, but the niche that, that business operates in, the nuances of that and the nuances of the business itself, and we got a lot of positive feedback from that because I think a lot of sellers right now with their experience is they'll have a financial company, send them a due diligence checklist and not really spend the time to get know the business. That can be the experience. And so it's an important differentiator. The next kind of big strategic decision that was made early on in the Search Xcelerator that Charlie touched upon was -- is that we want to make sure our margin of safety for any investment is driven by quality and not by price. So this is something that played through in every single business that we looked at. The key example I'll discuss today is there's a fire investigation business that we looked at. And this business, it checked all the boxes, and we were far into the diligence. And then towards the end, we discovered that the recurring revenue profile was not quite as attractive as we thought it was. So I remember this converse patient specific with J.T. and I said J.T., this is a great business. I feel like we can find a better one, though. And J.T. didn't [indiscernible] he's just like, just keep going with the search. He was fully supportive of me turning down that maybe 8 out of 10 deal, so we could find a 9 or 10 out of 10. And I just being surprised at how supportive that is and that is -- being able to turn down those deals is what allows us to eventually find the right deal. So we think that played out with this example. So the next thing I'll talk about is Kingsway's positioning is a long-term holding company. This is very helpful when speaking to founders and sellers. They want to think about who are they turning their business over to, are you going to operate like a private equity firm and just -- and maybe significant impact on the organization a lot of times and maybe you're going to sell it in 5 years. So we're able to offer a unique alternative to that because of our long-term holding model, and we had a lot of feedback from sellers on that. And then you always want to couple that with the searchers personal commitment for the long term. So that was another kind of key strategy. And then lastly, I'll touch on geographic focus. So as a searcher, I had complete autonomy to pick what geography I wanted to focus on for my search. And this goes back to what J.T. was talking about with decentralization of leadership that allowed me to have the support network I needed. I pick the East Coast because my family is on the East Coast. On a personal note, I actually met my wife during the search. So that just goes to show the impact that has. And it's autonomy and accountability. And so you're giving the free rein to pick the geography within reason and then -- but there's the accountability to find a business there. All right. So that was kind of the search process. At a certain point in the search, we found this business called Digital Diagnostics. So Digital Diagnostics, I kind of gave you a high level before, and one of the things that we start off when we evaluate businesses is developing what we call [ mekko ] Map, it's a [ mekko ] map. So [ mekko ] map, basically, this is looking at all of the different sectors within the hospital industry. And our core market is this long-term acute and rehab, these 2 markets. And what we realized early on was, number one, the size of the total addressable market, it was growing, but just within the core market, and that's that far bar on the right, we were the only qualified competitor. And when we first did our initial diligence, we were very skeptical of this. We kept investigating, and we couldn't find anyone else. And that was very exciting because we realized we had 87% left to go in the market and now is our chance to make the most of that. And so -- that was something very early on that we discovered. And the other thing I'll talk about is the long-term secular trends. So in addition to kind of that very exciting growth potential in the core market, from a high level, ECG technology is going to continue to be the sole method for predicting and diagnosing heart-related issues for the core markets. We're not going to change the biomarkers or anything like that. And then the core market cardiac monitoring services in general is growing very quickly right now. Our core market is focused on rural hospitals and LTACs, which are long-term acute care hospitals and rehabs, and that market is actually growing a little bit faster even than the total hospital market. When it comes to the hospital home movement, because we're focused on high acuity and moderate acuity patients, only less than 5% is what we determined of those patients are going to move to the home in the next 15 years. So when we hear a lot about advancements in the cardiac monitoring industry, typically think about the outpatient consumer wearable market. This is a very different sector. So we like that. As I mentioned the only qualified vendor. And then on the FDA side, no anticipated FDA regulations for this sector. So very stable there. So I mentioned that we're the only qualified player. And that is in a specific niche in the hospital industry. So let's simplify the medical industry for a second. So looking at the -- all hospitals in the U.S., you have your short-term acute care hospitals. That's what you think of with a typical hospital in an urban setting with an ICU, okay? And those patients often have emerging treatment leading to stabilization and there's other wings. One step down in terms of acuity is the long-term acute care hospital, okay? And that's more complex, long-term acute care. The emergency has been stabilized, but still very sick patients. And then 1 step down from that is the rehab sector. And now you're more in rehab leading to recovery and then finally get to the hospital home movement. Obviously, there's a lot more hospitals, hospital types than these 4 but this is kind of how you want to look at it. And Digital Diagnostic customers are in this middle niche. We're not serving hospitals where you have to have an EKG tech on-site. That is -- that's in the emergency ICU. You have to have them there in person. We're also not servicing hospitals during the hospital home movement because that does not require 24/7 cardiac monitoring for sick patients. It's in this middle niche. And so we like the fact that it was a niche, and it was an expert in that sector. So these things were starting to come together. We realized this was a great opportunity, and we wanted to close the deal, and it took a while. So it was a 6-month process. And these are kind of the competitive deal metrics. 163 competitor NDA signed. So the broker provided this to us, 30 competitor IOIs, 12 competitor LOIs -- and then in addition to that, the broker was receiving 3 e-mails of interest a week during the deal. And so it was alarm process, very competitive. And so how do we win the deal? So we think that there's a number of factors that came into play here. Number one, just the credibility that comes from being a publicly traded company. So they know that we have the money to spend and the owner actually told me, he said, "I never invested with a publicly traded company before." He had sold a business before. Second thing, there is definitely a strong cultural alignment with the seller and the team. I went there in person, I met more of the team and we clicked. And I think that was an important factor for the seller. I mentioned that 24/7 deal team availability. So we have an awesome legal team led by Paul Hogan. J.T. and Paul were available at any time of night to discuss everything from negotiating a price to redoing a contract, and that was just absolutely critical because time kills all deals and you really have to be available all the time. So Kingsway diligence processes. So we have, as Charlie walked you through, Kingsway has a lot of experience investing in the search fund sector, and that was invaluable just being able to lean on that on checklist that we know are proven. And then finally, our relationships with banks was very important as well. It's harder to lend to a smaller business. And so our relationships became even more important at that point. So we closed the deal, and this is just kind of a high level of what we've done since then. So Kingsway has a -- we have a phrase called listening, learning, engaging. And this is kind of our posture for any operator entering a business as for the first 6 months -- the first 6 months, you're not doing anything. You were just taking notes, building relationships, learning as much as you can from every industry participant and then once you learn more, then you move forward. So some of the stuff we started to do is we started to improve the employee training and leadership development at the company. And we've also instituted some new employee benefits and HR processes. We think the result of this is what you see here. We've reduced voluntary employee turnover from 29% to 0%. So -- as you know, turnover is just in the amount of people that have lapped at the beginning of a period to the next period. So from October to October prior to the acquisition, employee turnover was 29%. So about 1/3 of the employees are leaving voluntarily. In the first 7 months, we have not had a single employee do that. So I'd like to see that as an initial success factor that we're improving the business. We hired a new medical director. We've grown customer count at all current system-level relationships. We've begun 2 new system of relationships. So that was the first 6 months. For next steps, we expect to -- our revenue growth rate to continue. And so how do we prepare for that? So one of the big next steps we're going to be taking is we're going to open a new facility, and we're going to do that in the Intermountain West. And that's for a lot of reasons. There's no hurricanes, tornadoes, snow storms. It's very reliable from a utility standpoint. And you can tell from the nature of our business, that's important. So we're going to be doing that in the next few months. And we're going to continue to build on our leadership team and our advisory board. So obviously, this business, it's very important to invest in operations and training and quality. So with that, I'm using my background in the nuclear industry to help the organization adopt human performance improvement methodology, which is a methodology to improve the culture and reduce human error and high-reliability organizations. And so we've started doing that. And then another thing that we're working on is an EMR software called Cardiac Connect that's going to allow us to have a tighter connection with our customer systems and make just kind of staff satisfaction and hospital satisfaction higher because they can access our data more easily. So with that, I'll turn it back to J.T.

All right. Well, thank you, everyone, for your components of the presentation. Hopefully, everyone got a deeper sense of both what we're doing at the Search Xcelerator and then [ funda ] follow along Peter's journey as first an OIR and now a successful CEO in one of our acquired businesses. We like to say he sort of got the tiger by the tail there, but his background as a systems engineer in a nuclear setting, I think, makes him uniquely qualified to set up important processes and quality systems that are focused on patient safety. So great job. Before we go to this wonderful fireside chat, my thought maybe just a quick Q&A on this component of the presentation, and then we'll welcome our guests up here for the fireside chat. So if anyone has any questions, raise your hand, we'll try to do the microphone so that it can get picked up for the webinar. And I may have to ...

Christian Solberg, Sun Mountain Partners. This question is for Peter. Peter, thanks for walking us through that. That was super, super helpful to get the context for what this all really means. You mentioned there's no indications that large hospital systems will provide remote cardiac telemetry for the smaller rural hospital market. Could you just expand on that a bit, why that is, why they're not interested in this market?

Yes. So are you talking about the move to hospitals.

I'm not sure. I'm reading the -- from this slide right here with the large hospital direct competition. Why the large hospital systems won't become competitors, I'm assuming.

That is -- there is some level of consolidation in the market. But in general, it's fragmented enough that it makes more sense for the smaller hospital systems to do it themselves. So it's not a significant threat. The larger the system gets when you get to your Cleveland clinics, probably a couple of steps down below that, then you're going to have centralized telemetry for those systems, but there's enough smaller hospital systems that...

Why does it not make sense for the smaller systems to do it themselves?

That has to do with just kind of the cost structure of the business. So they have so many irons in the fire and they're focused on so many different aspects of the operations that it's a very clear outsourcing opportunity. So it's they could invest in that, but they don't want. They want to focus on their operations, basically.

Thank you. You mentioned you have internal return on investment hurdles for your team? What are those hurdles?

Yes, we look at it levered and unlevered sort of pretax returns. And I think for us, as a nonfederal taxpayer, pretax and after tax are pretty similar. And so unlevered 20%, levered 35%. We also look at multiple invested capital as well.

And just one other question. You mentioned you repurchased stocks. How do you estimate your intrinsic value. How do you go through that process like ...

It used to be a little harder when we had a lot of dogs and cats and sort of balance sheet assets. But now it's becoming quite a bit simpler. You sort of look at the package of businesses that you own, apply an appropriate sort of multiple of EBITDA to those businesses, add or subtract net debt, in this case, subtract because we have some debt and gets you to sort of an enterprise value calculation and then sort of in the numerator and denominator, you have the number of shares outstanding, gets you to kind of a view of intrinsic value per share. And then we ascribe a probability to our ability to monetize the remaining NOLs and the value per share for that.

And just one last question. So you're purchasing businesses at 5x or 6x EBITDA, and you're trading at 10x or 12x now. Why won't you have massive amounts of competition, say, in 10, 12, 14 years. I mean -- it's like a magic money machine.

Well, I think it's really hard to do, right? And to do well, I think that we're building the muscle to be successful at it. I think that most people start out at the lower end of the lower middle market and then migrate higher over time. And as a result, pay higher multiples for the businesses they acquired. I think we found a really unique sweet spot, but it's hard to do. And so I think that the search fund model is a very uniquely shaped tool to solve that problem, right, by bringing really talented people in who are focused on searching for 1 business and then transitioning it and run it. It helps solve for the hard to do at scale.

Charlie Fischer, Shareholder Director. Can you talk a little bit about the quality of the business and the multiple we pay in the classic story of Warren Buffett buying See's candy and he didn't want to pay up. But in hindsight, it was a great business. It was worth paying more, how does the multiple versus the quality of the business factor into your acquisition?

Yes. Great question. I think that Peter touched on it. I think that we like to say and we've borrowed very liberally from Will, who's here that margin of safety, which we're focused on return of capital before return on capital. Margin of safety comes from business quality, not price paid. And so we, very much, focus on a high-quality business. And so for the best businesses, you might be willing to pay more, right, I think is where you're going. And so I think that we're learning, we have some crude heuristics around quality of revenue, gross and net retention relative to EBITDA, multiple things like that. But in the lower end of the lower middle market, I think that we're -- because of the frictions, there are a lot of them. Probably the biggest one is the businesses we're buying have a founder who is looking to retire, which shrinks the universe of potential acquirers, combined with the lack of sort of debt capital at sort of large leverage multiples has kept the multiples of businesses in that size range, even the best quality ones pretty low, like under 7x. And so I think for the best quality businesses, we'll still be able to buy them in that 5.5x to 6.5x range even for the very best businesses. But we -- for -- Peter's business growing at 30% per year with 33% free cash flow margins. I think that we probably would have, in retrospect, been perfectly happy to pay a little bit more than we did. We just didn't have to. Does that make sense?

Perfect sense, J.T. And can you talk about what conditions it would take to increase the number of searches from that 4% to 5% range to 5% to 6% or 7% to 8% over time?

Yes. Charlie did a great job of talking about defining the spec, right? So it's like kind of a manufacturing context, first to find the spec, what quality looks like and then create a set of processes to deliver that spec within type tolerance before you start to scale. And so we want to be able to consistently deliver us back both the quality of the searcher and the quality of the business that we buy before we start to scale. I think we're at that point now. And so I think that you'll see us starting to lean in and try to put more units through the process over time, which Charlie built that wonderful bar graph. Obviously, that's all forward-looking and hypothetical. But if you go from 2 acquisitions to 3 and then 4 and then ultimately 5 or 6. You do have this incredible flywheel effect, and it goes a little parabolic, so you hit putting that on the page, but it is very powerful, particularly when you're not also, not -- you don't have leakage for tax. So I would expect to see more of that in the future.

And J.T., when you think about recurring business from existing customers. When I think about Peter's business, it's an effort for a customer to not use our business, which is they have to stop doing what they're doing and actually find a solution. We've looked at other businesses where the customer just pulls back a little bit and doesn't use us and it doesn't require them to rethink that. So as you think about your business selection going forward, how do you think about the recurring business that, is that becoming more important, less important as you're looking to buy the next 3, 4, 5 businesses?

I would say for Kingsway, and I think search fund investing in general over time through sort of the school of hard knocks and scar tissue and things, pattern recognition that the focus on revenue quality has become more and more -- and certainly, for us, at the Search Xcelerator, like if you look at the CSuite acquisition or SNS, I don't know that we would have -- I think we would have been higher scrutiny on those businesses today. And when I say revenue quality, we start with sort of the gold standard, diversified contractual revenue on a take-or-pay basis, like Drew's business, the vertical market software business. Or in Peter's case, it's maybe not -- it's contractual, it's not take or pay, but the switch costs are very hard -- high and hard to do. And so there's very strong stickiness there. And so that's super important, right? And so I think that you'll find us focused. It's like the #1 thing we think about is revenue quality.

So what happens if like the Digital Diagnostics, it is such a good business that they could use hundreds of millions of dollars or I mean tens of millions of dollars to grow the business, but much more rapidly. Do you have a situation where instead of making acquisitions, you just keep draw in more money in a particular business?

Yes. So the question for people online, for a fast-growing business that could consume a lot of capital to grow organically, do you envision a scenario where you're putting more capital into the organic growth as opposed to buying more businesses? And the way I would answer that is that I think that where we're focused, the attributes of the businesses we're acquiring are also very capital light. So Peter's business, while it is growing quickly, does not require a lot of capital to grow. It's computer monitors and hiring people. It's not significant CapEx. It's not -- there's probably a little bit of working capital, but his working capital dynamics, I think this cash conversion cycle is about 15 days. And so it actually doesn't require much capital to grow. And so he can grow organically at very high rates of return while still throwing off a lot of cash, not consuming it. And so we're very much focused on and we talk about revenue quality, but another thing we focus on is return on tangible capital and making sure that we're buying businesses with low capital intensity and by default and high returns on tangible capital.

J.T., another one. Are you familiar with the Buffett term of owner earnings? So basically, the cash that you have available at the end of the year to reinvest in something after you've serviced all the debt and all of that. With your answer to Charlie's question about scaling the number of searchers and starting to lean in there, does the business have sufficient owner earnings to start increasing the number of acquisitions every year. It's a bit tough for me to tell from the financials sometimes, so -- or would there potentially be the need to issue some equity at a higher multiple to buy these companies at a lower multiple as you want to scale to the level that you want to over the next few years?

Yes. So I would say that we have sufficient owner earnings to currently support our 2 to 3, right? But as -- and that will improve over time as these businesses delever. But we also have the ability to sort of dividend recap, like, for instance, our warranty businesses as they've delevered, you could recap those businesses with traditional sort of not crazy leverage levels of bank debt to actually increase your ability to do more and then same with the businesses that we currently own as they delever dividend recap. And so we say we're very much focused on sort of intrinsic value per share. We view equity capital is very precious by that to be treated kindly and nicely. And so the idea of an equity capital raise is probably unless it was in a unique structure of some sort of out of market, sort of, convert or something we probably wouldn't just be issuing common shares.

So it takes roughly 6 years to delever each of these acquisitions.

It's actually -- that's sort of the mathematical in the contract, but they all have an excess free cash flow recapture component typically 50% or so that goes to the bank of excess free cash flow, so they actually delever more quickly than that.

Okay. So thinking about the cash flow profile, at what point do you think the extended warranty businesses will be ready for a dividend recap?

I think they're probably ready now.

Okay. So it sounds like you feel like if you wanted to scale, say, next year, I'm not saying that you are saying that, but if you wanted to scale the number of deals past 2 to 3, you have some options in terms of financing those internally without needing to issue shares?

Yes. Look, I'm not trying to be coy here. I want to be careful about what I say. I think there's a reason for the first time, we've talked about now scaling the KSX. We've historically in our conversations going back to the beginning, said we're going to focus on two acquisitions. Maybe it was even 1 to 2, then 2 to 3 now, we're talking about leading into it. Part of it was making sure that we had a set of standard processes that were scalable and also the access and availability capital to actually do it.

Yes. That's great. Thank you. That flywheel is super exciting.

Yes.

A couple of questions on the numbers. In that presentation near the beginning, you said strong record of OpCo adjusted EBITDA growth, and it was $13.6 million trailing 12 months, and then you showed $16 million to $17 million run rate. But when I go to the Q1 release, it looks like you add up the KSX and the extended warranty for Q1, you got a below under $3 million, which is down year-over-year. So times 4, that's $12 million. So what isn't being included there to get you to the run rate $16 million to $17 million.

Well, seasonality for one, right?

But it's below -- it's down year-over-year, right?

Yes, Q1 comp versus Q1 last year was down slightly.

And then the run rate is quite a bit above '23.

Yes, we acquired 2 businesses in late 2023. And so now those are included in...

So that's the -- okay. And then for 2022 to 2023, the OpCo adjusted EBITDA growth is about down -- it was down about 10%. And it looks -- you don't have corporate overhead here, but it looks like that was up about 20% from about 4.3 to 5. Just -- I'm just taking the 2022, 2023, the aggregate EBITDA, which the delta there is the corporate overhead. So what is just corporate overhead going ahead, how do you see that scaling?

So just kind of unpack it a couple of different ways. And historically, there's a lot of noise in the corporate overhead as we were sort of spinning out some things. But just like our core team of 10 people at the Holdco, I think that we view plus the Board and the cost of being a public company, I think we view our cash -- annual cash expenses, I think we've said is $4 million to $5 million. We really don't anticipate that growing other than sort of inflation. That's the whole scalability. Now also, we support these OIRs, and we pay them sadly for them not very much, while they're searching and we would expect that to scale. But we view that as like an investment in the deal process, right? So that would -- might go up a bit as we add to OIRs, but the core holding company costs of running the railroad, we don't anticipate scaling per se.

So when the acquisitions get made, the OIR that gets kicked over into the segment EBITDA. And so if those numbers flow through and someone else pointed out, you make acquisitions at these multiples, and it all works, hard to do. EBITDA growth is terrific. So in 5 years, if it grows like that 1 chart, that will, whatever 2x-3x but you anticipate corporate would be much, much, much lower.

Yes. I come back to that core principle of the power of decentralization and the sort of the other side of that is that you get a lot of operating leverage from maintaining a small corporate staff. And so sort of by design, creating this thing that allows us to scale and not have kind of overhead going up at the same rate.

And then final one, just on competition. Are there any other public companies doing -- there are some -- a number of other companies that aren't doing a search model, but a lot of in U.S., a lot of New York making these, look, if you can make niche acquisitions of high-quality companies, the 5 to 6x EBITDA, it's going to work out great. Are there any public companies who is the public company in the U.S., most similar either doing that straight up within an industry or through -- is there anyone else doing the search model type of thing like you guys are?

I'll answer the second part first, not to my knowledge, right? I don't know that anyone is leveraging sort of ETA model to do serial acquisitions inside of a public company.

What about -- who's your kind of toughest competitor? Is there any other kind of not one-off but organization who you bump up against frequently?

No. I mean I think traditional search is where we would bump up the most. There are a couple of private search incubators as well that are sort of leveraging the model, but they're not a public company. And so I think specifically within ETA or surge, there is some competition for sure. But I think that because of some of our attributes, we're able to differentiate there. And then -- but then within sort of public companies, serial acquirers; one, I don't think there's any one leveraging search in the U.S., and then in the U.S. serial acquirers doing small deals. There are obviously all kinds of serial acquirers, whether they're sort of specialists like a Constellation software. They're doing small deals, but they're very specialized in BMS and then there were Roper, a little bit bigger, or there are maybe some general, as you think about, like the Nordic companies, Addtech and Lifco and Lagercrantz, things like that. But those are pretty much, I don't think that they're doing much in the U.S. So we don't really see a lot of competition from serial acquirers that are public companies. I would say, if anywhere, it's in sort of traditional search fund model or the handful of search incubators.

Last question. If you -- on a 1 to 10, 1 being no competition, 10 being just totally brutal for acquisitions, how would you say the environment is today versus maybe 5 years ago or 3 years ago.

It's a great question. I think that we'll talk about it with Will a little bit because he's got a lot of history there as well that we can lean on, but I would probably say it's a 3 to 4. And I think it comes back to this demographic, where we call it the Silver Tsunami, right? The number of businesses that were formed over the last 40 years by people who now are in a position where they need to retire and who do not have credible succession sons or daughters in the business or because the business is so small, the next level of management that could step up and run it and yet private equity whose model is based on backing management teams or the other succession alternative is strategic, either to private equity who already has a platform or to a true strategic and a lot of those founders are rightfully squeamish about selling to a strategic because of what that means for their people, their brand, their legacy. And so I think historically, the search fund model has been this solution for that seller. And I think that we have a long runway based on demographics. Okay. So that's it for the Q&A session. Why don't we take just 10 minutes and then we will reconvene for our fireside chat. [Break]

Okay. Well, we have a very special guest with us here today. I'm thrilled to have a friend, mentor, adviser and fellow shareholder joining us here for a fireside chat. He's the founder of TTCER, a private investment partnership and the managing partner of the Cromwell Harbor Partnership, a private investment company and also a cofounder at Compounding Labs, an investment collaboration focused on long-term consolidations. Prior to Cromwell, TTCR and Compounding Labs, he founded Housatonic Partners, a leading private equity firm with over $1.5 billion in capital under management. He is the Chairman of CNX Resources and the Co-Chairman of Perimeter Solutions, both NYSE-listed companies. Many of you probably know him as the author of the critically acclaimed book, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, a copy of which you have today. It's a book that was very enlightening and influential to me. He's also the host of the outstanding podcast, 50X. What many of you may not know is he's also one of the OGs, the Dean of the search fund community as one of its both earliest pioneers and most prolific investors and thought leaders. He's a graduate from Harvard College and the Stanford Graduate School of Business. In addition to that incredibly busy schedule, we are incredibly grateful that he generously gives his time as a strategic adviser to our KSX platform entrepreneurs. Please welcome Mr. William Thorndike.

Thank you, JT. I want to say at least [indiscernible] to that part of it.

Too good. I thought we'd make this more collaborative. Originally, we had thought about having the Q&A at the end, but I think that as we go along to the extent that you guys have questions, just raise your hand, and we'll be happy to -- I'm sure we'll be happy to answer them. So Will, as we talked about, it's probably pretty interesting. Professionally, you're a private equity investor and a search fund investor, but a lot of people know you for your book. I want to focus on the investor side first. How did you first get involved in investing? And maybe more specifically, how did that lead you to search fund investing.

Yes. Let's see. So I was hired by 2 private investors out of business school to identify private company investments for their personal account. And that was an extremely entrepreneurial undertaking. I worked at that time out of an office in a closet and an office in the back bay of 6 x 8-foot closet for about 4 years and then proceeded to grad and trying to find equity investments initially for their capital. And pretty quickly, we brought on a group of outside co-investors, mostly friends and business contacts of theirs. And search funds were in their infancy then, we're talking about early 90s now. And I have been exposed to them at business school, the GSP. And they were an initial proprietary source of transactions for that very nascent private equity business which eventually acquired the name, Housatonic Partners. And over the first about 5 years of Housatonic's history, we were the pioneering institutional investor in search, we were involved, sort of, from transaction #4, probably to about transaction #12. So we were pretty active within that of our original investments. So more than half of them were search-related. Two of them, we own still to this day over 25 years later, kind of interestingly. And after about 5 years, as our fund sizes grew, it became harder for us to make search investments, investments in the search funds themselves. And so I began to invest in them individually and I have been doing that now for 25 years plus. And the reason, as I say, the reason to initially invest in search was that it was a proprietary source of deals, noncompetitive proprietary source transactions. There was not yet enough of a record for search generally to be able to look at the data that you guys have been able to present and that Stanford collects on a biannual schedule now, but there was a general sense that those very early deals had gone well. They had been bought at attractively low multiples relative to growth rates and other economic characteristics. And so that was the reason for some initial time allocation there.

And so based on your experience, and I know you have access to the Stanford data, which I think is pretty comprehensive. There may be some survivor bias in there, I don't know. But for you, how have search funds performed as both sort of an asset class and then also for you as an investor. And then maybe expound on why you think that is.

The short answer is that they performed exceptionally well, both within the Housatonic investing, we did in search and in the years since, I would say, exceptionally well measured relative to returns more generally for private equity. So the returns both at Housatonic and for me personally, if you took the median return, there's a large data set there, so north of 100 companies. The median is actually, I think, a really good way to think about it. The median returns have been kind of right on top of the Stanford study returns, meaning kind of low 30s IRR, pretty consistent net MOICs to investors in the 4 to 5 range. If you included the full data set and you look at the mean, those returns would be substantially higher because we were fortunate enough to invest in some of the outlier transactions over the years in search. So it would skew the data, both on an IRR and an MOIC basis north of that. So I think the median math is really the most conservative way to think about it. And we're sitting very much in line with the broader industry over time, both me individually and Housatonic before that.

Yes. what would you say has happened sort of the dispersion of returns over time?

Yes. That's fascinating. I mean I think the most significant development in search is over the last 10 to 12 years, there's been an emerging consensus about what constitutes an attractive industry for search. And those criteria, and there are 3 very specific ones have tightened very considerably, and the 3 are going to sound very familiar, I think, to Kingsway investors and you, JT, but basically organic revenue growth. We can break these out into -- we can get into more detail, but organic revenue growth kind of the very minimum threshold there is at least 2x normalized GDP and you're talking about secular growth rates. So long-term growth rates from the time of acquisition looking forward, that's number one. We can go into more detail on that. Number two is what I would call recurring revenues, the purest form, but revenue quality, revenue predictability and the metrics there that have emerged are you basically want the majority of your revenue to be coming from predictable sources. I would say that sort of 60% to 80% of total revenue coming from predictable sources. And then within that recurring revenue stream, you're looking for low churn. I'd say the threshold there is generally 20% annual churn or less. But really, you're looking for single-digit churn if you can find it, single-digit annual customer churn. Okay. So that's organic revenue growth, predictable recurring revenues, one and two. And actually, I wouldn't -- well, actually, I would probably rank them one and two. And number three is capital efficiency, critically important that these businesses have high returns on tangible capital, meaning low net working capital requirements and low CapEx requirements -- low maintenance CapEx requirements. So basically, businesses that are translating their EBITDA at a pretty high rate into free cash flow. It turns out, those 3 things in combination are incredibly powerful and search. It took search a long time to arrive at consensus around them as a criteria. As I say, it's only the last 10 to 12 years out of a roughly 30-year history in search. And years ago, all kinds of things were purchased out of search funds. Hinged manufacturers and party rental companies and all kinds of things. Some of them actually businesses that might be interesting on some of those 3 criteria, but now it's very, very rare that a searcher will bring forward a transaction that doesn't check those 3 boxes. And so what's happened is that's happened is that the dispersion, to your point, has dramatically tightened dispersion of outcomes. And so returns have gotten a lot more consistent than they were in the 15, 20 years before that.

Yes. Amazing. Is it just left tail? Or do you still see some of the right tail outcomes, I know that some of the earliest searches were incredibly subsiding?

It's a really good question. I think it kind of gets to one of the structural advantages that you have here, JT, at Kingsway, which is if you look at the returns over the last, as I say, 10 years or so, you'll see this very consistent pattern of kind of the top quartile outcomes getting sold around year 4 or year 5 at a 4 to 5x net MOIC outcome-ish. And there are some structural reasons for that, which we can get into. But you're seeing fewer of those elite performers held for 10 years or more, which, of course, is how you get to really high MOICs that some of those earlier transactions have had. I think there's some structural reasons for that, but one of them is that there's an incredibly talented group of investors who have raised funds. Typically, who are successful CEOs themselves and search companies after selling those companies, they've raised funds. They're terrific, very talented investors, operators, partners in these deals. They're delightful to be around, but they've raised money in fixed life fund structure, which means they're going to have to eventually achieve some liquidity for their investors. And that's been -- that's part of what's driving this tendency along with the way that search economics are structured. These tendency to sell things sort of 4, 5 years in, pretty frequently, not all the time but pretty frequently. You guys, of course, have the advantage of effectively a perennial fund life, right? You can just be very rational and own something for as long as you think it makes economic sense as long as the incremental returns are high, that's a structural advantage and I'd say, increasingly so.

We hope so. Why do you think search funds are attractive for aspiring entrepreneurs. There are a lot of different ways to do entrepreneurship? What is it about search funds that makes it attractive place to go as a graduate or alumni of a top-tier business school?

Yes. I think search is now pretty far along. It's no longer in its infancy. It's 30 years old and pretty well established. And so I think if your goal coming out of business school is to be a CEO, very early in your career of an operating business in which you have a significant equity stake. If that's your goal, search is an incredibly efficient engine or machine for accomplishing that. And the data set is now large, the end is now large. So it's not speculation. It's -- and so it's really emerged as an independent new career path alternative for graduating top-tier MBAs. Most of these searchers are still MBAs, not all of them, but 80-plus-percent are, as opposed to other options that existed over a longer period of time working for a larger operating company and then doing something on your own or working in consulting. And this is now -- ETA as it's now known, and as you guys know, has become a really viable career alternative. And you can sort of see it spreading business school to business school as they develop their own each couple of alumnus who will end up running classes and then they slowly build over time, and it's happening kind of as we speak.

Yes, which brings me my next question. Obviously, we've all seen a fairly explosive growth and interest in the model in the last 10 years or so. I mean I think back to when you were first investing, you said 8 out of the first 12. That was probably a couple -- a handful of year, right? And when I did my search in 2002, I think there were half a dozen. That was a big year. It was a bumper crop, but now hundreds per year. Based on that growth: a, how do you think the model has evolved. There are a lot of different ways to do it. But maybe to the question we got earlier, do you think that, that associated competition with expanding interest will have an impact on prospective returns vis-a-vis Housatonic?

Yes. I mean -- I think it's a valid question. I think that if you just look at the math around that, search is typically targeting $1 million to $3 million EBITDA, maybe it's $1.5 million to $3 million. It depends on which -- how you think about it, $1 million EBITDA businesses. And any chart of industry structure, that's the fattest band on the chart, right? So there's just -- it's a gigantic -- as new venture capitalists would say, it's a gigantic TAM market. They're just being fed actuarially by this silver streak, silver, whatever...

Tsunami silver.

Silver tsumani is feeding it. And so you know in a typical year in the U.S., and it's growing very rapidly internationally too. But in the U.S., I don't know maybe they're 125 or 150 traditional searches raised round numbers. I mean, that compares to tens of thousands of candidate companies, right? So it's just a long way from, I think, any sort of over competition. Occasionally, searchers will run into each other. You see this in some industries occasionally now, but it's a long way from being a situation where searchers are bidding up overall valuations with each other. I just haven't seen that happening and don't expect it to happen for some time. And for what it's worth, I'm now investing personal capital, right? I mean continuing to invest as actively as ever in search, no change in that.

Are there specific attributes of searchers or searcher CEOs that you think are indicative of success as an operator?

Yes. I'll give you some, but my first comment would be it's very hard to predict searcher effectiveness in my experience, meaning it's not -- it doesn't lend itself perfectly to a formulaic approach. When you find a company, I think you can much more accurately have a point of view about future potential over the ensuing 5 years. It's much harder with individuals, particularly 30-year-olds who are, by definition, are early in their career and have less record to sort of build on. But some of the things that I think are predictive are sort of a combination of humility and curiosity, voraciously so in the case of the curiosity, as you know sort of people who are just really trying to constantly learn and drive their learning. Time management turns out to be a really predictive, particularly for solo searchers, a really predictive thing. It's predictive during the search phase of success during the CEO phase, people who are really disciplined about time allocation, which means they have to be able to say no to the right things and walk away from things efficiently and spend time in the right areas, again, particularly solo searchers. And I think there's sort of a related quality of -- which is very qualitative as all these things are, but of crispness in communication in my experience has tended to correlate with good outcomes, both during the search phase and during the run-the-company CEO phase.

Wonderful. I can talk about search all day with you, but maybe switch gears a bit, talk about your book, The Outsiders. Wonderful book, really impactful on me and probably a lot of you here. Maybe just tell us how the book came to be originally? And then maybe touch on a couple of interesting and maybe sort of surprising findings, core themes in the book?

Yes. Great. So the book arose, I'd say, pretty improbably out of a presentation that I agreed to do, probably close to 15 years ago now at our biannual CEO conference or conference for CEOs at Housatonic. So those would be our current CEOs or alumni who run companies we had invested in and the group that we were wooing for future CEO roles. And a long time ago, I raised my hand and said I'll do one of those. I had to figure out who was going to talk about and I decided I would do an in-depth profile of a great CEO, CEO with a great long-term record and then see what lessons from that deep dive I could share with those CEOs. And so I reached out to -- I needed someone to help me with the research partly because I didn't go to Harvard and the best place to get the data for a study like that is the Baker Library, the Harvard Business School. And there was a guy who worked for us that summer between his years, first and second year, it was great, and I went to him to see if he wanted to do an independent study for credit to do this deep dive. He was a tennis player, a very good tennis player, a college tennis player. And he told me that no, unfortunately, he just agreed to another independent study, but his doubles partner was liking. So I reached out to his doubles partner who was a wonderful guy named William Chaudhary, who agreed to do it. And together, we did an extremely deep dive on the first company, which was run by a guy named Henry Singleton, '60s era conglomerate. And then we looked at the detailed operating history of that company in comparison to its peer group. And we did a very deep analytical dive and then we went and met with everyone alive who'd had anything to do with the company. Unfortunately, Singleton recently passed way, but we met with a bunch of his management team. We really met with everybody. And as I was writing that up to give the talk, Aleem came in to me and he said, "Hey, if you want to do another one of these next year, I've got a really talented guy, I know, in a class behind me." And so -- and I really -- I had really enjoyed it. So I basically got into this talented vein of HBS second years who all did it for a full year credit for credit, deep-dive study. We had a professor who was great and sponsored them, but it took me for -- look, for such a short book, it took me forever. It took about a year a chapter, but it evolved from the kernel of that first project.

Yes. What were the criteria for inclusion. I think you talked about it in the book, but...

Yes, basically, every CEO had to meet exceptional long-term performance would be the short answer, but each of them had to meet 2 very specific quantitative tasks. They had to have better returns relative to the S&P over their tenure. And generally, we were looking at longer-tenured CEOs. So across at least 2 business cycles is the way we thought about it. So better than Jack Welch had during his time at GE. Jack Welch has dramatically fallen from favor since the time I was working on the book, but his numbers are still really good. So you had to beat his period of time in the seat, so to speak. And then maybe more importantly, the second test was they had to dramatically outperform their peer group, what I would call kind of the duplicate bridge test. And that idea is basically over long periods of time. Companies in an industry are generally dealt the same hand. And if one company massively outperforms the peer group, that's worthy of study. So all 8 had to meet both of those tests.

Yes. And what were some interesting findings, some attributes maybe that emerged...

Yes. I mean the biggest 2 was a surprise to me. When I started down the path of that book, I thought it would be -- or doing these chapters, I thought it was going to be like a book called the Money Masters, which I would recommend you read if you hadn't. It's a great book about investing in which a guy goes out and he basically profiles 8 great investors from sort of '60s and '70s periods, so it's earlier in time. And his message was there are different paths to heaven, right? Lots of investors have been successful with different investments. Buffet was an example. But there are other examples of people who had success with different approaches. What I found after doing the work was that there was this incredibly surprisingly tight pattern across the 8, right? So to the way they created value. And there were commonalities in the primary -- significant commonality and the best known of them is capital allocation, which you have talked about a lot today already. We can talk about that. But very specific approaches to capital allocation that we're very different than their peer group, but I would also say they had different patterns. I would say it's more generally resource allocation, is how I would describe it. So there's capital, capital allocation. There's a whole piece around sort of human resource and talent management allocation that was differentiated. Decentralization was at the center of that and some other things too. And then the third thing was how they manage their own time, right? And across each of those, they were incredibly consistent with each other, but also extremely different from their peers, And so that was one theme. And then like personality-wise, people think of CEO -- people when they think about CEOs, they often default to certain adjectives that are typical, so charismatic, visionary, strategic. None of those would apply to these 8, none of them. Instead, it would be words like pragmatic, flexible, cool, rational, agnostic, frugal, just a bunch of totally different. So those were the 2 kind of patterns across the 8. One...

Yes. Amazing. I want to maybe just double-click on frugality, operational efficiency. To me, that's kind of capital allocation to some degree, right? Like maybe provide an example of that, that was from the book. I know there are a couple of great ones. Why you think that's important?

Yes. I think it's -- I think that frugality is inextricably tied to hard form. I like your term, hard-form decentralization, companies that are kind of extreme decentralizers, and those patterns get set in the very early days of these companies, and they tend to persist over decades in the cultures and the best companies anyway. Probably the best example of that is a company called Capital Cities, which was an operator of TV stations and radio stations and media properties more generally. It eventually bought Disney -- sorry, it eventually bought ABC and ended up getting purchased by Disney, but it eventually bought ABC, which was a much bigger, and it just had phenomenal long-term returns. And the foundational story there is that the guy who founded it was hired by the original owners to go run a VHF TV station in Albany, New York. And the guy who hired him said, "Listen, you go out there, you got to figure out how to make this thing profitable. It's losing money. We're going to leave you alone. All we ask is that you paint the building that the station is in and then try to make it profitable as efficiently as possible because it's not profitable now." So this guy, Tom Murphy, who is the CEO. Went out there, sort of figured out the situation. Eventually, very quickly, made it profitable. But he famously painted the 2 sides of the building facing the road and not the other 2 sides because he wanted to do saving on paint expenditures, right from early on. So he was sort of modeling that behavior. I went to interview Tom Murphy well after he had retired after his phenomenal career. He had an office in Lincoln Center -- the ABC office in Lincoln Center. He had an office in there still. And the picture of that original station was on the wall in his office still. So it was very much in the culture. And everyone who ever left Capital Cities to go run a radio station, a TV station was told that story before they left and it sent a very clear, powerful mess.

Yes. But not only is it a funny story, but it just sort of speaks to the power of that lore that persists over time that reinforces the behavior, right?

Yes, definitely.

That mindset.

Definitely, yes.

Wonderful. Maybe quickly on capital allocation. I know that means a lot things to a lot of different people. I think you do a really good job of articulating what that is and the various levers that are available to people have -- who are assigned to allocate capital and how that can be so powerful for compounding value per share?