Q3 2021 Transcat Inc Earnings Call
Greetings and welcome to the Transcanada, Inc. Third quarter fiscal 'twenty year, 'twenty 'twenty, one financial results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to your host correct Mohali Congratulations for transplant you may begin.
Yeah. Thank you and good morning, everyone. We certainly appreciate your time today and your interest in Trans GAAP with me here on the call today, we have our president and Chief Executive Officer, Lee Rudow, and our Chief Financial Officer, Mark doing.
After formal remarks, we'll open the call for questions. If you don't have the news release that crossed the wire after markets yesterday, you can find it at our website at Trans got Dot com. The slides that accompany todays discussion are also on our website.
You would please refer to slide two as you are.
Are aware, we may make forward looking statements during the formal presentation and Q&A portion of this teleconference.
Those statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the news release as well as with documents filed by the company with the Securities and Exchange Commission you.
You can find those on our website, where we regularly post information about the company as well as on the SEC's website at SEC Gov.
We undertake no obligation to publicly update or correct any of the forward looking statements contained in this call whether a 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'd 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.
You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release, so with that let me turn the call over to Lee to begin the discussion.
Thanks, Greg Good morning, everyone. Thank you for joining us on the call today.
Some of you have already met with Mark spoken with Mark but being that this is his first earnings call with Transcanada like introduce him before we move on to the <unk> third quarter results. Martin was named CFO in November succeeding Mike Schiller, who retired at the end of the calendar year.
The transition went very smoothly mark is well versed in our business and strategy and is an excellent addition to the executive team.
We anticipate March extensive background in M&A and operations will be of great value in the execution and the acceleration of our strategic plan, including the continued investment in technology and technology based infrastructure.
Turning to our third quarter results. We are pleased by our performance, especially given the continued adverse condition caused by the COVID-19 pandemic the team's responsiveness and dedication throughout the pandemic has been impressive and the business continues to effectively provide critical support and service to many essential businesses.
Including the research manufacturing and distribution of the COVID-19 vaccines.
In the third quarter, we achieved consolidated top line growth driven by 12% growth in our service segment.
9% of which was organic.
The growth represents our 47th consecutive quarter of year over year service growth, that's nearly 12 years.
Okay.
The business continues to demonstrate resiliency and our unique value proposition continues to resonate.
<unk> Dot com, which we acquired in February last year continues to perform well.
And together with the recently acquired biotech services has strengthened our life science service portfolio and geographic footprint. It is our expectation.
But the two complementary businesses will be integrated quickly and achieve both sales and operational synergies over the next several quarters.
Service segment continues to deliver outstanding margin performance in the quarter gross margin increased 590 basis points and operating margin increased 570 basis points.
The increase in service margin was primarily driven by higher technician productivity and operating leverage on the organic service growth.
Distribution revenue was down eight 6% versus prior year, we anticipate the distribution will continue to be negatively impacted by the current pandemic.
Focus will remain on capitalizing on our unique position in the market by leveraging every distribution interaction and every distribution lead to organically grow our service business.
On the rental front the channel performed very well up 12% in the third quarter.
Operating income for the third quarter exceeded expectations and increased by 20% over the same prior year period.
To date in fiscal 2021, we have achieved outstanding cash generation of $15 $6 million driving the reduction of debt.
Supporting continued investment in technology infrastructure and growth opportunities.
With that I'll turn things over to Mark.
Thanks, Lee and good morning, everyone. It's great to be with you all today and I hope they are keeping safe and doing well I'm certainly excited to have joined the trans cat team at such an exciting time in the company's history and I look forward to contributing to our continued growth and success.
I will start on slide four of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment consolidated revenue of $44 1 million was up 2% from prior year and we showed growth for the first time this fiscal year, a notable achievement given the ongoing impact of the pandemic.
Turning to the segment performance as Lee mentioned strong search service segment growth of approximately 12% was one of the highlights of the quarter with about half of that segment's growth coming organically and the other half from acquisition growth with regard to the acquisition growth about $1.3 million of revenue came from pipe burst dotcom and less than a million.
1.1 million came from biotech a little under 100000.
As you know biotech closed towards the end of our fiscal quarter I will mention that we are approaching the one year anniversary of our acquisition of Pipettes Dot Com, which was acquired on February 21st of last year. This will of course impact the level of our year over year acquisition growth beginning in our fiscal fourth quarter.
Turning to distribution segment sales up 19.3 million were down approximately 9% from prior year in line with our expectations.
As Lee mentioned in his opening remarks. This segment continues to be significantly impacted by the pandemic as certain end markets. It participates and continue to be soft.
Turning to slide five.
Our consolidated gross profit was up 13% from prior year and our gross margin expanded 250 basis points to $25 five per cent.
Service was up an impressive 590 basis points to 27, 9% on continued traction from our technician productivity initiatives tight cost controls and operating leverage on our costs that are more fixed in nature as well as strong performance at <unk> Dot com, which has a higher margin profile distributions.
Gross margin was down 150 basis points from prior year, which reflects the lower volume and reduced co op advertising and rebate programs as vendors continue to look for ways to lower their costs.
Turning to slide six and our overall operating performance consolidated operating income of $2.5 million was up 20% from prior year and exceeded our expectations.
Service segment operating income increased over $1.5 million and 570 basis points as a significant portion of the gross profit increase fell through to operating income.
Distribution operating income of <unk> 6 million was easily our best quarter of fiscal year 2021, but were still down a million from the prior year quarter largely on the lower gross profit.
Turning over to slide seven Q3, net income increased 19% and our diluted earnings per share of <unk> 23 cents were up three cents from prior year. A result of our strong operating performance. Our effective tax rate was just north of 23% and we continue to expect our full year fiscal year tax rate to range between 22.
Two and 23 per cent.
Which includes federal various state and Canadian income taxes.
Slide eight where we show our adjusted EBITDA and adjusted EBITDA margin. Among other measures we use adjusted EBITDA, which is non-GAAP to gauge the performance of our segments. Because we believe it is a good measure of our operating performance and our ability ability to generate cash a reconciliation of adjusted EBITDA to <unk>.
Operating income and net income can be found in the supplemental section of this presentation, which as a reminder is posted on our website.
Consolidated adjusted EBITDA was up 12% in the quarter and our adjusted EBITDA margin was $10 four per cent.
We were particularly pleased with the service segments 80 per cent increase in adjusted EBITDA to $3 4 million or $13 nine percentage of sales.
Moving to slide nine where we provide some detail regarding our cash flow year to date net cash provided by operations nearly doubled to $15 6 million and was and was a function of our improved EBITDA and reductions to working capital.
Year to date capital expenditures were $4 3 million and were largely focused on technology infrastructure service segment capabilities and rental pool assets.
With regards to capital expenditures, we now believe our full fiscal year 'twenty 'twenty, one capex will be in the range of 6 million to $6 5 million, which is a more narrow band versus the five 5 million to $6 $5 million range. We had communicated at the end of our fiscal second quarter.
Slide 10 highlights our strong balance sheet at quarter end, we had total net debt of $23.4 million, which was down $6 4 million from fiscal 'twenty 'twenty year end, where this reduction our leverage ratio also came down and was 1.24.
This is calculated as the total debt at the period end divided by the trailing 12 months adjusted EBITDA, including giving credit for any acquired EBITDA.
And finally, we had $26 8 million available under our revolving credit facility at the end of the quarter.
Lastly, we do expect to file our form 10-Q Tonight after the market closes and with that I will turn it back over to Uli.
Okay. Thank you Mark.
As we progress through the fourth quarter and into fiscal 2022, we will continue to focus on the execution of our strategic plan. We expect the combination of mid to high single digit organic growth and acquired growth to drive overall double digit service growth.
Consistent with our strategy, we expect the bulk of our service growth, we generated in regulated industries, including life Sciences Aerospace and defense.
Throughout fiscal 2021 operational excellence and technology have helped drive significant improvement in our service gross margin. We expect the margin expansion to continue over time as we increase the level of technology, including automation into our network of 42 calibration labs.
We also expect.
Emphasis to continue on the development.
And acquisition of talent across all levels of the organization to Shepherd Trans cat through our next phase of growth.
And I will close with an update on our acquisition program as anticipated. Our M&A pipeline is very active our acquisition objectives are supported by a strong balance sheet and our ongoing investments in the development of integration tools.
Both will enable us to execute and capitalize on the increased number of opportunities going forward.
We are seeing some upward trend in historical multiples. There is no shortage of opportunities that are within the parameters. We believe are competitive.
Accretive and offer attractive internal return rates.
As we stated in our earnings release, we expect consolidated operating income in the fourth quarter of fiscal 2021 to be similar to the fourth quarter of fiscal 2020 our.
Our stability and strong performance in an environment that continues to be challenging.
Reinforces our strong position in the markets we serve.
Looking ahead, we believe the combination of our talented team a strong balance sheet and our demonstrated ability to execute our strategic plan positions translate to perform well as we drive hard to the finish line in fiscal 2021.
And beyond.
Operator with that we can open up the line for questions.
And at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment.
It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And our first question is from Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Thanks, Good morning, Lee and.
Mark Congrats on the good quarter here.
Thank you.
Hey, Greg.
So maybe we start with.
Service segment and in the return to organic growth. There curious if you can maybe go into a little bit more details on the primary drivers of that I mean is it is it outsized growth in life Sciences is it just a continued recovery elsewhere, maybe there were some share gains in that.
Yeah, Greg I think it's kind of a combination. So I think we saw I would characterize it as some flow through on pent up demand. The first couple of quarters and service were more flat.
We knew we had a nice pipeline we are having good conversations so some of that flow through came about I think.
General sales level activity has increased our pipelines are solid when they're on the organic side of the business and I'm not at all surprised that it just in time and in this fiscal year, we'd see some of that growth. So I think you'll see it continue for the most part in next few quarters.
That's how I would characterize it.
Yeah do you get the sense that there's still a decent chunk of pent up demand out there and I guess, what's your confidence level that you can sustain this kind of mid to high single digit organic growth rate, even even in sort of a challenging and volatile end market scenario, where we're still in.
Yes, I think its relatively high I mean, the one thing that.
Leads me to to make that kind of comment is we've got a number of large opportunities that had been working their way through the pipeline throughout the pandemic and while we won a number of them, they're still they're still sort of an interesting number of opportunities still out there and I think we're going to be.
When our percentage of those and we have a high confidence level and that in addition to pent up demand and in addition to just general levels of calibration picking up based upon you know pipeline activity I think the combination of those three things drive our confidence level and make the statement, we do around the organic growth.
Okay. Good.
One we're almost a year into this pandemic and I'm curious what sort of long term trends are starting to emerge within service you know I'm thinking along the lines of maybe theres more pickup and delivery versus periodic onsite or in house. So I'm just kind of curious how much of this you know some of these new trends how much.
That might stick in one of the P&L implications if any.
Let's say, it's an interesting question I I don't know I'm not ready to comment on any long term changes.
As a byproduct of the pandemic I mean, we've all learned to manage our business accordingly.
Been less on sites, even less pickup and delivery more people, sending stuff to us and I think we're going to return to normal rates in time and I also think that the one thing that we didn't see this year was the the trajectory continue on our growth and Cbl's, we had a two year period.
As you recall, Greg where.
We landed a really healthy number of new CBL client based labs, and you know there is larger opportunities and while they are in the pipeline. They just virtually stopped during the pandemic that I would anticipate would return.
At some point in the near future and so other than that I think will.
The business will return to a normal state at some point no long term lasting effects that I would identify today.
Sure makes sense all right I'll leave it there thanks and best of luck going forward.
Oh, great. Thanks.
And our next question is from Kara Anderson with B Riley Securities. Please proceed with your question.
Hi, good morning.
Good morning, Karen.
I jumped on a little bit late.
Sorry, if you already discussed this but talk about the nature of the biotech acquisition and how it could be why you saw that mall attracted calibration services when you want it.
Right, absolutely so about a year ago, the best place to start with Pipettes dotcom about a year ago. We acquired in February of <unk> Dot Com and basically both companies biotech and pipe assets do pipe assets almost not exclusively but it's the lion's share of the work that day they produce.
The difference between them and why we were interested in biotech is because pipe. It is generally a boston based operation that does most of its work in the new England region and does very little if any on site work. So they if people want to send pipe burst from anywhere in the country. They can send them, but most of that work.
Through new England.
Biotech as a small company you are right, but the.
The entire company is based on on site services for Pipettes. So when you look at that sort of roadmap and you say well if we can combine the biotech onsite service with what we call the depot, New England based by best Dotcom, you've really got a powerful combination and that's why we talk about sales synergies and getting to them fast and there is even.
Cost synergies and this one you know because you're going to combine these operations and they would probably have some redundancy in.
And the administration of the combined business. So it was small we never would have bought it as a standalone.
It's a bolt on to <unk> com makes a lot of sense for us.
And are there any other technical capabilities.
You are looking for where you can kind of do these kind of acquisitions, where he just fine I don't want to bolt on and you kind of just jumped out at.
Our new category, if you will.
Well you know one of our three drivers when we look at acquisitions in general is to increase our capabilities or bring one expertise. We don't have the day. That's a main driver in addition to expanding our geographic footprint and just in general you know bolting on operations when they're when they're close in vicinity of out of an infrastructure.
You already have in place so yeah, there's a lift and we it's.
It's too much too it's not appropriate to go into the details in this call, but you've got disciplines and variables and parameters that we don't measure today that we actually outsource 90, 85%, 90% of our own work, but we still outsource care of about 15% of that working in all calibration companies do that nobody does a 100% because the economies of scale and such but.
Yeah, I would think that we always look at that list, whether it's flow or different technologies that are new to come out we always want to look to bring them on board and make them core and one way to do that is through acquisitions, where it makes sense.
Got it and then just one last related question about kind of M&A are you seeing a change in the size of opportunities at all.
So a part of our pipeline, which is which I alluded to on the call is very robust a part of that pipeline I would characterize as fitting.
Fitting sort of our core historic pipeline you are sweet spot.
Much of the same if you will and I would also say that what makes this pipeline a little bit different is we are starting to see activity levels and opportunities present themselves and sort of the next level up upstream in terms of size. So that is something we thought we would add debt we would encounter and in fact, we are so it's kind of a combination of.
Of.
The historic sort of pipeline in transit and some new somewhat larger opportunities as well, yeah, and just to add to that I think you know, adding Jim Jenkins, you know four months ago to to really.
Dedicate a lot of his time to developing that pipeline and the relationships that we need to as has really improved the pipeline.
And a lot of areas even in the last 120 days from since since I've been here really good timing with the market, making that investment.
Great. Thank you.
Thanks Kara.
And our next question is from Scott book with H C. Wainwright. Please proceed with your question.
Hey, good morning, guys.
You mentioned earlier in the call the kind of mix in the servicing segment between male in an on site can you remind us what the margin differential is between some of those different components.
So the yes, let me let me address that need the largest in terms of profitability. The profile. That's most attractive to US is our depot work we call it in house or depot and that is when a customer.
Scott sends their equipment to us because theres very little incremental costs, just imagine 10 units coming into lab, you don't have to spend capital you don't have to hire people to do it it kind of flows through at high incremental tech revenue.
Another service level, we have is pickup and delivery and again that work is picked up at the customer's location brought back to the lab and so that does have the same profitably profile as the in house work, except we have to go pick up and delivery. So there's a little bit different cost profile additional increased costs to get that done but not a lot.
Then we have on site work, where we send a crew of people and a band pool of assets to a customer's location and these are periodic on sites might be three technicians for a week it might be one technician for a day it really varies but but you have your assets sort of isolated and captive to that customer at that time.
And you've got technicians out doing the work and so that profile a little bit more expensive, but something we're always interested in and one really important way to grow. The business. Then we have client based labs and this is where we have our technicians.
345, 10, sometimes 15.
<unk> technician to show every day at a customer's location, that's where they work they very rarely ever go to a transplant core lab and we have assets there sometimes it's the customer's assets, sometimes we own the assets and they perform the work that's high volume work. Many of these are you know high six figures into seven figures the margin profile is a little bit less by <unk>.
Couple of hundred basis points, but it's a very sticky.
Part of our business high lifetime value in fact to date and the eight or 98 nine years I've been here. We've never lost one of these client based labs that we started and so you've seen a little bit on margin for that stickiness over time. So those are the four main.
Service levels and the margins associated with it.
Great that's very helpful second.
How do you guys think about long term margin targets in the services segment I know you're undergoing some.
Technology improvements and additional automation.
Over the next five years can margins in this segment get too.
Now mid thirties.
Yeah, I think mid <unk> is not an unreasonable target at this point. We started this campaign of margin improvement in technology back when we were I'd want to say it was 24% gross margin we talked about a two to three year journey several year journey to get closer to 30% and so.
Were there right.
Won't be every dollar that we're 30% we've done hire will this past Q3, a little bit lower but we're in that range. So I think when we look at the business and the margin profile and while we have on tap in terms of investments I think.
We're thinking the same as you suggested mid <unk> is not a reasonable it's not going to happen overnight. So I can happen every single quarter.
But I think we'll be up into the right.
To that range over the next couple of years for share.
That's perfect guys for the time.
Yeah.
Good question. Thank you Scott.
And our next question is from mutual Graham go Paul with Sidoti. Please proceed with your question.
Yes, hi, good morning, Thanks for taking the questions.
First I just wanted to get a sense Ali in terms of as you talked about the investments you're making in technology.
How far along are you on that front in terms of where you'd like to be in.
As it relates to adding technicians.
How is the market bearing in terms of being able to.
Recruited.
Without having to necessarily overpay.
And is it really a reflection of the visibility or comfort you have in the business unless you look out over the next couple of years in terms of making these additions.
Well from a technology perspective Mitra.
We've been on a three to four well three year journey of starting from an infrastructure that really sort of lacked some of the technology advancements that we needed and we've been.
Working day and night to catch up and I think the team has done a really good job we've hired some really good people.
Hmm.
I have a pretty good idea of where we are where we need to go and how we're going to get there. So I've been very impressed with the team effort around technology, but but there's a lot to do.
Yes, we love the margin improvement, we love some of the tools that we built for integration, but if I were to use the analogy of a base based on 19 baseball game I would say gosh, we're probably in the fourth inning at best technology. So a lot of a lot of upside there and we're looking forward to it technician availability well with flat organic.
Growth through the first couple of quarters.
We certainly werent aggressive about going out and getting technicians, and we had the right number we had the capacity to service that work.
The pipeline is healthy we saw organic growth in the third quarter, we anticipate organic growth for the most part going forward. So we will need to hire technicians at some point I think that's perfectly fine.
That's part of our game plan to do so I'm not worried about the long term organic growth potential of the business. So that they would hold me back from hiring and I think.
We'll hire as appropriate to manage manage the growth and I think the type of tools, we have the technology in place today, there's a lot of data that we didn't have a couple of years ago around productivity capacity planning and these are the tools. We talked about this is where you see the margin enhancement, but these tools also help us identify when and where to put technicians and at what time.
Is the optimal time to do that so that data availability has helped us make those decisions. So we're moving.
High level confidence, we will get it right.
Okay. Thanks, and then quickly on the life Science business I was just wondering if youre seeing any heightened interest so or conversations.
Because of the pandemic, maybe driving you can see.
Development for vaccines and other things I'm, just curious if youre getting any tailwind out of that.
Right, it's difficult to tell because we were always life science oriented we do business with most pharmaceutical companies and med device. That's always part of our normal business I would say for the most but I guess I get what you're asking Mitra and I would say for most part.
The business.
The sort of stable environment in terms of revenue. This year has just been core life Science business. No question, where we're dealing with pharmaceutical companies that are involved with vaccines, but I don't think its been all that much in terms of incremental I think it is just the business that we do these companies have held up these companies had been stable and resilient and so we've been stable in <unk>.
<unk> I think when the when the Covid when Covid passes and we get beyond it.
I think it's upside for our business because.
The general industrial market is going to open back up so we've done really well in life Sciences, but I think there is upside to the general market returning and that was just mentioned to you know there's there's pockets within life Sciences like for example, the pipette Satcom business that's definitely been.
Impacted at a very favorable way over the last 11 months and since we've owned them. So you have pockets of it.
Okay No that's good thank you.
Alright.
Thanks Peter.
And our next question is from Big line with Colliers. Please proceed with your question.
Okay.
Finally, switching that maybe distribution are you seeing any green shoot opportunities in that part of the business I know oil and gas has been negatively impacted and whatever but are you seeing any positive.
Or any suggestions of positive momentum emerging.
Yeah moderate at best we do see some.
We did see a little bit excuse me.
We actually had a lot of back orders, leaving the third quarter and entering the fourth quarter that I think will.
Sort of Covid related supply chain slowdowns some of that will help the fourth quarter, but your question is more about.
The general environment, I think there will be some pent up demand.
On the industrial side for distribution, but it's not like we've seen a ton of it yet we do anticipate that coming.
This has been you know it's been what it's been and that is it's off single digits now from last year, but its stable and we're going to continue like I said in the earnings call. We're going to continue to leverage those interactions thats really what we focus on that day.
Okay, maybe one marks direction.
You know Opex, you probably had some savings early on with less travel and other pandemic limitations that you were able to do or any of these costs kind of coming back into the fold and maybe how should we look at opex going into fiscal 'twenty two.
Yeah, and it's it's it's a it's a great question. One we spent a lot of time on understanding, especially at the service gross margins. An example, how much is sustainable and how much could potentially be hey, you know we're not traveling as much you know maybe we're not spending as much in certain areas. There's a very little there's a little of that going on I would say you know when we do start traveling again.
There'll be a little bit there, but it's it's it's really not meaningful I would say.
So as you think into going into next year, you could see a little bit of an uptick in some of those sort of discretionary costs travel probably being the biggest one we get sort of a normal operating environment, but it's not something that's that I would highlight is a big driver of some of our is.
Operating income and gross profit improvement.
Improvements.
How I would answer that.
Okay. Good thanks, and congrats on the good execution.
Thank you.
Okay.
And as a reminder, if you have any questions you May press star one on your telephone keypad doing so wasn't sure. If you are joining the question queue.
And our next question is from Chris Sakai with singular research. Please proceed with your question.
Hi, Good morning, Lee and Mark I'm, just had a question Arnie.
Uh huh.
Distribution gross margin I just wanted to know if you could shed some light on there when you when you guys might see some improvement.
Yeah, that's a that's a tough one to call you know you've got a couple of things happening there of course, the lower volumes, which we've talked about due to the market, but our vendors have have reduced.
They are co op advertising and rebate programs. So we're working closely with them. That's really when you look at the year over year change in margins that's the.
The biggest contributor to the decline so depending on how things progressed with the pandemic.
It's tough for us to plan any big bounce backs and that at this point, but I know our teams on the distribution side of working closely with the vendors to see the opportunities there that would help the margins.
Okay alright. Thanks.
Thanks, Chris Thanks.
We have reached the end of the question and answer session and I'll turn the call over to management for closing remarks.
Yeah.
Okay, well. Thank you all for joining us on today's call. We appreciate your continued interest in Trans cat feel free to check in at any time with us with me or with Mark.
We look forward to talking to everybody again after the fourth quarter results.
Come out and again, thanks for thanks for participating.
Yeah.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.