Q2 2020 Earnings Call
[music].
Greetings and welcome to the Transco <unk> third quarter fiscal year 2020 financial results.
Time, all participants are in listen only mode.
Question and answer session will follow the formal presentation.
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I'll now turn the conference over to your hosts pregnant Holic Investor Relations Craig you may begin.
Yes, Thank you and good morning, everyone. Certainly appreciate your time today and your interest in Transcat.
I would say on the call today, we have our president and Chief Executive Officer, Lee Rudow, and our Chief Financial Officer My Chair.
After formal remarks, we will open the call for questions.
You do not have our news release the crossed the wire after markets closed yesterday. It can be found on our website at Transcat dotcom. The slides that accompany today's discussion are also on our website. If you would please refer to slide two.
As you are aware, we may make forward looking statements during the formal presentation and Q and a portion of this teleconference. They'll statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where we are today.
These factors are outlined in the news release as wells with documents filed by the company with the Securities and Exchange Commission you can find those on our website, where we regularly post information about the company as well as on the Fccs website at <unk> Dot Gov.
We undertake no obligation to publicly update or correct any of the forward looking statements contained in this call whether the result of new information future events or otherwise except as required by law.
Please review our forward looking statements in conjunction with these precautionary factors I would like to point out as well that during today's call. We will discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance you should not consider the presentation or this additional information in isolation or as a substitute for results prepared in accordance with gap, we have provided right.
Conciliations of non gap to comparable GAAP measures and the tables accompanying the earnings release, so with that let me turn the call over to lead to begin the discussion.
Thank you Craig good morning, everyone. Thank you for joining us on the call today.
He got this morning's call I'll provide an overview of fiscal 2023rd quarter results, then turn things over to Mike to provide a closer look at the financials I'll return to wrap things up with an outlook for the fiscal year and beyond yeah before we open up the line for questions.
We had solid growth in third in the third quarter generating $43 million across both segments. While growth was solid the third quarter was atypical October and November 2019 started out very strong with double digit organic growth similar to what we generated in the second quarter that momentum gave.
Wait to a very slow December which we believe was negatively impacted by holiday timing that drove an unusually high number of extended plant shutdowns the positive news and as we mentioned in our release sales in both our service and distribution segments bounced back as we move through January and into early February providing confidence.
In our belief that December was an anomaly.
Fiscal year to date, we generated $8.2 million in catch up 13.6%.
With active organic and acquisition pipelines. The strong cash generation is expected to continue to fund growth.
Growth and growth opportunities, turning specifically to our service segment in the third quarter, where industrial demand was reported to have weekend and we experienced a drag from the holiday schedule. Our service business continued to grow at a rate of 7.8%.
The growth demonstrates the fact is this the effectiveness Harbin and focused on the highly regulated life science and aerospace defense markets.
The third quarter represents our 40 threerd consecutive quarter of growth, that's almost 11 straight years.
Well the service business grew 7.8% in the third quarter. The month of December actually declined year over year and the lower than expected revenue was unable to fully offset the largely fixed costs related to the service business in fact.
This is particularly true this past December as we strategically built additional capacity into our operation throughout the year still service margins improved 10 basis points, which we see as a very good sign under the circumstances.
There are two primary drivers of the increase in service gross margins. The first driver is the tangible improvement in many of our service processes as we continue to drive operational excellence throughout our Latin network well, there's much work to be done we're pleased with the noticeable progress.
Second driver is the net increase of 37 technicians, which represents 12% increase over the prior fiscal year period. Our technicians today are the most are more season than this time last year, we believe we're well positioned to handle double digit growth.
Technology continues to play an important role across many fronts and important technology component is the development a faster and more effective acquisition integration tools. Some tools have been created others are still in the works. The calibration industry remains fragmented and continues to provide real opportunity for transcatheter expand geographically.
And leverage additional capability and synergies improved data analytics is another technology component.
Timely and predictive data is key to continuous process improvement and a competitive advantage in the market and of course driving automation into our calibration process remains high on our list.
The acquisition of Internet integral solutions in the second quarter fiscal 2020 continues to position Transcat nicely for the future I guess specializes in calibration automation software at present.
We're making our way through the programming stage for initial implementation, which we anticipate a launch in the next three to four months.
Moving to distribution revenue increased 3.5% in the quarter, our higher margin instrument rental business also increased 3.5% to $1.2 million in the quarter. This represents a lower growth rate than what we've seen recently, so we saw less favorable impact on distribution margins similar story here.
As with service, we believe the lower rental growth rate in the quarter was anomaly and we expect more typical growth rates for rentals moving forward.
The distribution business and the segment continues to differentiate our unique value proposition generate gross profit dollars solid cash flow and perhaps most importantly provide leads to foster strong organic service growth with that I'll turn things over to Mike.
Thanks, Lee and good morning, everyone I'll be referring this morning to the slides that we we did post this morning.
I'll start on slide four which provides detail regarding our revenue on a consolidated basis and by segment.
As a reminder, we have two reportable business segments service and distribution.
As Lee mentioned, we had another solid quarter with consolidated revenue of $43.2 million, which represents a record level for a fiscal third quarter with an increase of nearly 6% on a consolidated basis.
<unk> revenue for both segments was negatively impacted by the timing of the holidays in December, especially with Christmas falling on a Wednesday. This mid week holiday impacted customer operations and working hours more than we would expect to see the holiday was at the beginning or last day other work week.
Service segment revenue increased 7.8% to $22.1 million, which was all organic.
This increase in service revenue reflects new business from the highly regulated like science sector and includes new and ramping up multiyear client base lab contracts.
Growth in the S. A regulated aerospace and defense sector and in general.
Just real manufacturing.
Distribution sales were up 3.5% to $21.1 million. This growth rate was generally in line with our overall revenue growth expectations for distribution.
[noise] service segment gross margin improved 10 basis points over the prior year third quarter as Lee mentioned, but that progress as we had been making over the course of the fiscal year was muted by December is our service costs, especially our technician workforce, which we've been growing to meet the double digit growth we had been expiries.
And saying what's under absorbed is essentially a fixed cost.
However, as Lee described hiring retaining and training our technicians has been well continue to be a major focus for us.
The distribution gross margin was impacted by the 3.4% growth in our higher margin rental business.
Well in rentals is less than what we have seen in recent quarters, Although we do expect a stronger growth rate in the fourth quarter fiscal year 2020.
Rental revenue was $1.2 million in the quarter.
Slide five shows the drop through to the operating income and operating margin lines. We are encouraged with the start of our fiscal fourth quarter and when combined with our focus on service productivity metrics, we expect to see improvements in our various profit margins going forward.
Slide six shows our bottom line results.
Like the softness in a quarter, we're still generating earnings at a record pace as depicted on a trailing 12 month basis.
Our effective income tax rate was 22.1% in the third quarter and continued to be aided by the increased discrete income tax benefits related to share based awards due to stock option exercise activity.
As a result, we've adjusted our full fiscal year 2020 income tax rate expectations down slightly to range between 17 and 18%.
Looking at slide seven we show adjusted EBITDA and adjusted EBITDA margin.
Among other measures we use adjusted EBITDA, which is a non-GAAP measure to gauge the performance of our segments. Because we believe it is a good measure of operating performance and is used by investors and others to compare and evaluate performance of core operations from period to period.
I encourage you to look at the provided reconciliation of adjusted EBITDA to the closest GAAP measures, which for us our operating income and net income.
As one would expect the fiscal 2023rd quarter segment and consolidated adjusted EBITDA results reflect a early commentary around decembers impact on revenues and margins.
Slide eight provide some detail regarding our balance sheet and cash flow.
Year to date net cash provided by operations increased $1 million or nearly 14% to $8.2 million in was used for funding capital investments.
Acquisition related payments paying down debt uncovering tax withholding obligations for netting of share awards, which are shown as a repurchase of common shares.
Over the trailing 12 months, we've generated $13.6 million in cash from operations.
At quarter end, we had total debt of $19.7 million with $23.4 million available under our revolving credit facility.
Our debt level is down $1.3 million since the end of fiscal year 2019.
Our leverage ratio at quarter end also declined to 1.07 and as calculated under the credit facility as a total debt on the balance sheet at a period end divided by the trailing 12 months adjusted EBITDA, including giving credit for any acquired EBITDA.
Other companies may calculate such a metric differently.
Year to date capital expenditures were $5 million and primarily focused on technology infrastructure funding organic growth opportunities. It for the purchase of additional rental pool assets.
As noted in the press release and on Slide nine we have lowered our capex spend expectation for fiscal 2022 range of $6.8 million to $7.1 million from the previously provided a range of 7.8 $8.2 million.
This change is largely due to the timing of certain projects not having to spend as much on service lab replacement assets, Yes first estimated.
We continue to believe we have sufficient liquidity for any investment opportunities that meet our strategic criteria.
And lastly, we expect a timely file our form 10-Q aftermarket closing today.
Now I'll turn it back to easily okay. Thank you Mike.
As many of you know the fourth quarter historically is the most impactful quarter for Transcat, we got off to a good start in January in early February and we expect to have record revenue and profits for fiscal 2020 year.
We believe the increased service capacity would create throughout the year is a differentiator and provides a competitive edge moving forward with an increasing capacity, we are well positioned to support double digit service growth.
Our new business and acquisition pipelines are healthy inactive.
We expect operational excellence and technology initiatives to continue to drive improvements in productivity.
Improvements in productivity are expected to benefit gross and operating margins this fiscal year end into the future.
Confidence in our strategic plan and overall direction is high and we have strong momentum and high expectations heading into fiscal 2021.
With that operator, we can open the line for questions.
Thank you at this time, we will be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first set of questions come from a line of Gerry Sweeney of Roth Capital. Please proceed with your question.
Good morning rapidly and Mike Thanks for taking my call.
And your good morning.
So.
One question, maybe two parts to start off with.
I want to see if the bounce back in revenue that we're seeing a in January in early February sort of on par with the growth that you were saying in October and November.
And then a follow up to that what it would be.
The slowdown in December was any chance that Jeff.
Companies being a little bit more proactive earlier.
Just prepping for.
And longer.
At all or a holiday shutdown so.
You know this is Lee Jerry it's it's difficult to tell I mean, we had or you know really super strong activity. We had a strong second quarter. We saw that continue right into October.
Well one of our best month ever November held its own was pretty strong as well. So one could I don't know and and the data doesn't clearly show that there was pull forward and people are getting ahead of things there might have been some of that it wouldn't surprise me, but I have not looked it you know definitive data around that point. So I would just conclude that you know.
Ill.
Yeah, Mike and I and can you talk about this all the time Yeah, you take an average you do the math on the average impact of a day in terms of revenue for service and you figure out mid week holiday somewhere in online last 234 days and I don't think it's any more complicated than that we're not going down we look at.
Let me turn in pretty much straightforward is that something we'd spend a lot of time thinking about we saw coming we knew it was gonna be solved there's a little softer than we thought granted a couple of more days, but nothing that that really surprised us January I've got two really good start and so when you look at January.
You know I think it's performing right inline with expectations and a little bit better we know what our january's look like throughout fourth quarter, what happens with our business. They tend to scale right up until March in margins are last month of the year and we were pleased with with the way. We started so I'll leave it at that and and I think they have everything was inline with expectations for the star.
Thank you for.
One more question.
Again, a little bit nowhere.
Covering you guys bought back I think earlier last year, you added a a bunch of capacity and then in the press release, you're talking about 37 tax on a year over year basis did you add any tax in the last one or two quarters, because I know.
Selling costs were up a couple hundred thousand quarter over quarter and I do know it takes a couple of quarters to get them going so is this just.
Why did you add ending the last one or two quarters that should I, just anticipate sort of a gradual uptick every quarter attacks.
I would look at it as more gradual we add techs all the time. So the if the question is did we add Texan a third quarter. Yes. We did we hire for a couple of reasons right. If we landed new large account or new client based account will hire a employees you know to service that new work. So theres new work that we that we gear up for and then.
The planned hiring throughout the year, that's more gradual and you know kind of keeps pace with where we think sales are going in trying to get ahead of it that's a timing game.
In the past, we falling behind and I would say this you've done a really nice job of of staying ahead of things and being more predictive.
More accurate in our in our predictions that I think it's played out well and I think.
The volumes that we anticipate in Q4 come through you're gonna see good margin than an answer because we've got ahead of it.
Got it perfect. That's what I know thank you very much.
Thanks Jerry.
Our next set of questions come from the line of Mitra Ramgopal of Sidoti and company. Please proceed with your question.
Yes, hi, good morning, Thanks for taking the questions first just wanted to follow up on the last question as it relates to adding a tech savvy should give us a sense a study.
Labor market than the ability to continue to add if necessary.
So I would say it's been it's been a positive.
In calendar in the last 60 90 days Mitra, we've we've really done a nice job. So so it starts with us in increasing our recruiting staff here a year before and having that team be more experienced an effective and we feel about the last 60 90 days. We've we've had our you know we've not had a difficulty finding the people we need to support our growth I wouldn't say.
That a couple of quarters before that but I think the processes turn for US and you know we've done well I think the other thing. We've also seen in addition to those improvements in the hiring in the Onboarding is the retention of those stocks through the various training and development plans that are now in place for that piece of the workforce.
Turnover is expensive so we can hire the right people and keep them.
It helps our productivity going forward.
Yeah, that's that's a really good points there turnover as a byproduct a better training and better management I think we've accomplished a lot of both both fronts.
Okay, and then on the question of training and productivity typically how quickly did you say someone is up. So we are you would like them to be upon up being hired.
So so if you're hiring a somewhat its new to the industry and not a calibration take this I'll just put that aside for a moment, we'll get to that but if you hire someone that has some calibration experience. The learning curve is is you know dependent upon their ability to pick up our systems and that usually takes about 30 to 60 to 90 day, so good quarter for them to.
Get productive and experienced person productive with our processes in our methodology, but a second quarter and third quarter, they're up and running and I'd say the process takes two to three quarters before they're doing what we expect in reaching the.
The the expected levels, if you're new to the industry and were breaking in people in the lower end disciplines that are that don't require the experience level out. It's a good six months before a technician starts let's call it breakeven, meaning they're doing enough work to pay for themselves. It takes a good year for them to get profitable and so it.
Let me try it changes depending varies depending on the level technician, we bring in but anywhere from.
Quarter, or two three or four quarters and it sort of runs the range.
No that's great very helpful. Thanks.
And then switching on the acquisition opportunities I know you said you know you have a pretty strong pipeline there and I just wondering if there's any incremental color you might add in terms of just the environment and things like pricing et cetera, if that's changed.
Right. So from a multiple perspective, you know we're seeing things in line with with our historic you know trends in terms of acquiring maybe you know some of the deals we were yet about half a turn or two more you know so instead of four to six X we might be looking in some cases, it's seven we've looked even eight but all the deals or.
Streamline accretive for us and so we're going to keep an open mind in terms of multiple in that range. So generally the same maybe a little bit of escalation. There I would characterize the pipeline if I take a word that I'm comfortable with it would probably be active. So I'm you know, it's a big part of our strategic plan to.
To grow through acquisition. In addition to our strong organic growth and we haven't we have an active pipeline it'd be too it's kind of just following up on the Oh the valuation in the multiples that we're saying it's not like there is deals that were losing to others. It's been pretty quiet we've talked in the past that it really is cross skills. The only other third.
I'd provider, that's buying any companies they've been pretty quiet in the U.S. over the last quarter. So it's not like we're seeing big multiples that we are losing and bidding contests, a there's still a lot of good companies out there for very accretive prices.
Okay, that's great.
And then I know you talk about in terms of adding some.
You are lab based contracts and I, just wondering if there wasn't or like wins, you're getting from competition or is it a case, where someone is now maybe you might have been doing it in house and there's no oh sourcing it for the first time.
In most cases.
Our success with Cbls client base last we now have or 21 or 22 with them have been a result of in house labs externalizing, the work and and outsourcing the work and we have positioned ourselves over the last couple of years me try to be you know the the ideal company did.
Take on that that opportunity. So we positioned ourselves to do a nice job with outsourcing and we continue to do that it's not to say others can't do it but when we do run into competition for some of these larger deals we've had a very very high success rate and win rate I see that continuing continuing and I think that we're still position to do really well in that space and most of it.
Tends to be outsourcing from what was previously in house lab for manufactured particularly life science in aerospace and defense.
Okay. That's great. Thanks, again for taking the questions like Russia I appreciate the questions.
As a reminder, if he would like to ask your question. Please press star one on your telephone keypad.
Our next set of questions come from the line of Crystacomm of singular research. Please proceed with your question.
Chris you there.
Chris could you check up your phone is on mute please.
Operators any other calls a as we wait to see where Chris what.
Mitra has skewed backup.
Okay, maybe we'll take is and will wait to see what happened to Chris.
Sounds good meet your your acute backup. Please proceed okay.
Yes, Thanks actually I just wanted to follow up a little on Canadian market, Oh, I know youd highlighted as a little and I was just wondering how based on the recent acquisition you made if you're sort of getting any additional traction as a result.
Well I'll start just don't just to clarify the acquisition of I guess, which was a software company. It was not a calibration service company like we've made other acquisitions for so I'll just kind of clarify that did it wasn't that we bought a no book of business and employees, who was the software play.
For that automation software, yeah, and and relative to the strength of the Canadian market. You know we've been we've been really pleased with the with the performance. This year. If you go back to the prior year. It was a soft market for Canada, we talked about a quarter to quarter. Most of it was the no volatility of trade agreements and uncertainty.
The in in their economy, but I think there's been some pent up demand you know that that is making its way to the market and.
That that year is behind us so each quarter, we've had a strong quarter for Canada year over year back to what we would call Me Trail you know our typical unexpected expect result, we see that continuing good start you off fourth quarter as well and so I wouldn't I would expect candidates industrial yeah. That's been nice to see that's going abroad base to both and.
In aerospace and defense.
As well as in life Sciences, So it's been encouraging year for them.
Okay and is there any impact the or benefit for for you as a result of the a recent trade agreement.
I think just be a lack of uncertainty meter is gonna be a positive for us and we haven't gotten any direct feedback in terms of the secure elements of the agreement and favorability might provide but I think overall, just having having the uncertainty behind this is going to be a plus.
Okay. That's great. Thanks again.
Thanks Pedro.
Our next set of questions come from the line of course, the Guy if singular research. Please proceed with your question.
Oh, hi, everyone, sorry for the technical difficulties.
The question.
Hello can you hear me, yes, we know Christmas season here you all day.
Go ahead.
I think you Uh Huh, maybe you talked about this I just want to know about.
Oh, how business in Canada was doing.
Yeah. We judge you must have been dialing in we just referred we just answered that question and in a 10 seconds or last up business in Canada doing very well odds of recovery year for each quarter has been a better than the prior years quarter.
We think it's gonna be a strong finish and a lot of the uncertainty of the of the prior years behind US and you know we're on we're going forward you know more optimistically and we expect good results.
In a nutshell okay.
Great and then I will see a integration of.
Oh I asked away.
It's it's doing pretty well, so I guess with a unique supplier a developer of automation software for the calibration process, we acquired them with the goal of taking a year or so and programming developing onto their platform. We are doing that in in my presentation, just a few minutes.
I mentioned that I think somewhere in the first quarter in the next three or four months, we're going to launch our first instead of automation protocols around pressure calibrations and that will be based on the iOS software. So that'll be our first time using it in the market and I'm sure there'll be some learning curve, but we're looking forward to it so.
So it's a we would expect to expand beyond pressure you know once we get that down.
Okay, great. Thanks, that's that's all the questions I had.
Thanks, Chris appreciate it.
We have reached the end of the question and answer session I will now turn the call back over to management for any closing remarks.
Okay. This is Lee and I. Thank you all for joining us on the call. Today. We appreciate your continued interest in Transcat. That's for sure I'm will be participating in the raw annual conference in Dana point in California on March 16, well also be participating in the Sidoti Spring Conference in New York City on March 26, so feel free to reach out.
Now onto us at those events or really at any time, otherwise, we will afford to talk to everybody get after the completion of our fourth quarter. Thanks again for participating on call take care.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.