Q1 2022 Transcat Inc Earnings Call
[music].
Greetings and welcome to the Transco, Inc. First quarter fiscal year 2022.5.
On to results call at this.
This time, all participants are in a listen only mode a brief.
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.
Minder. This conference is being recorded it is now my pleasure to introduce your host Mark still hany.
Our financial officer. Thank you Marc you may begin.
Thank you operator, and good morning, everyone. We appreciate your time and your interest in Trans Cat with me here on the call today is our president and CEO Lee Rudow.
We will begin the call with some prepared remarks, and then we will open up the call for questions.
Our earnings release crossed the wire after markets closed yesterday and can be found on our website Transkei dot com in the Investor Relations section.
The slides that accompany todays discussion are also posted on our website. If you would please refer to slide 2.
As you are aware, we may make forward looking statements during the.
This 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 can find those on our website, where we regularly post information about the company as well as on the SEC's website, we undertake no obligation to publicly update or correct any of the forward looking statements contained in this call whether as a result of new information future events or otherwise except as required by law.
The form lease review our forward looking statements in conjunction with these precautionary factors.
Additionally, 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 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 I'll turn the call over to lead to begin the discussion okay. Thank you Mark.
Good morning, everyone. Thank you for joining us on the call today.
In the first quarter of fiscal 2022, we got off to a very strong.
Ill start achieving excellent results across all our key metrics.
As I walk through the highlights of the first quarter. In addition to the prior year comparisons are going to compare our current performance to the first quarter of fiscal 2020 prior to COVID-19 to provide additional insight and context to our current performance.
Let's get started.
Our broad based performance was driven by consolidated revenue growth of 23% a first quarter record for Transcanada.
The quarter was highlighted by our service segment, which continues to perform at a high level.
Organic service growth was roughly 17.
17% as we continued to capture market share in the highly attractive highly regulated life science market throughout the pandemic. The life science market remained resilient and it continues to be strong.
Compared to the first quarter of fiscal 'twenty prior to Covid organic service revenue increased 12, 5%.
The second quarter represented our 49th straight quarter of service growth. We also delivered outstanding margin performance in the quarter gross margins for service increased 540 basis points to 31, 8%.
The margin improvement is a testament to our focus on continuous process improvement productivity.
And more than anything else inherent operating leverage in our service business as organic revenue volumes increase.
Compared to fiscal <unk> fiscal 'twenty first quarter prior to Covid service gross margins improved by 780 bps basis points.
Moving to distribution.
Reported revenue was up 27% on improving market trends and favorable comparisons to a significantly COVID-19 impacted prior year first quarter.
Distribution gross margins also improved to 23, 6%, a 260 basis point expansion from the prior year the expansion.
It was driven largely by favorable product.
Product mix.
Strong performance across both service and distribution led to first quarter adjusted EBITDA of $6.1 million up 75% from the prior year and up $2.2 million or 55% from the first quarter of fiscal 'twenty again prior to Covid our balance.
<unk> remained strong with a leverage ratio slightly under 1.
And it's important to note that in the quarter, we amended our credit facility to increase our revolving line of credit from $40 million to $80 million with very favorable terms. The increase revolver provides more flexibility support to support the execution.
<unk>, our strategic plan, which includes capitalizing on the robust acquisition pipeline, we have developed over.
Over the past couple of quarters on.
All in all our first quarter results demonstrate the talent and commitment of our team. The continued strength of our unique value proposition and the attractiveness and resiliency of the market.
Balance share.
With that I'll turn things over to Mark.
Thanks, Lee I will start on slide 4 on the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for our first quarter.
Consolidated revenue of $47.8 million was up 23% versus prior year on broad based strength broad.
Based strength across both of our operating segments.
Service segment revenue growth of 20% was stronger than we expected with 16, 6% of the growth coming organically and the other roughly 3% from acquisition.
We mentioned our highly regulated end markets, including life Sciences remained very strong.
We also saw improving trends with our customers more exposed to industrial markets and our growth level was also helped by an easier comparison to a COVID-19 impacted prior year.
Turning to distribution revenue of $22 million was up 27% versus the prior year as.
As we mentioned we saw improving market conditions.
And a recovery in our base business was the primary driver for the significant year over year increase.
Turning to slide 5 our consolidated gross profit of $13.5 million was up 44% from prior year and our gross margin expanded 410 basis points to a first quarter record of 28.3.
Percent.
Service gross margin was up an impressive 540 basis points to 31, 8% as we experienced significant operating leverage on our fixed cost from the high level of organic growth and our technician productivity remained strong.
Distribution segment gross margin was up 260 basis points from prior year and.
Mentioned, a more favorable sales mix.
Turning to slide 6 consolidated operating income of $3.7 million was up $2.7 million from prior year.
Service segment operating income increased to $1.9 million and operating margin expanded 590 basis points as a significant portion of the gross per.
<unk> increased fell through to operating income.
Distribution operating income of $7 million improved by $9 million from prior year, which was significantly impacted by the onset of the COVID-19 pandemic.
Turning to slide 7 Q1, net income of $3.7 million increased $2.9 million from prior.
Prior year, and our diluted earnings per share of <unk> 49.
We're up 38 from prior year, a result of the strong operating performance. The first quarter also included a favorable discrete tax benefit due to tax accounting associated with share based awards and stock option activity.
With this in mind we.
We now expect our full year fiscal 2022 tax rate to be in the range of 16% to 18%, which is down from our previous expectation of 20% to 22%.
Flipping to slide 8 where we show our adjusted EBITDA and adjusted EBITDA margin.
Among other measures we use adjusted.
<unk> EBITDA, which is non-GAAP to gauge the performance of our segments. Because we believe it is the best measure of our operating performance and ability to generate cash a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation.
Consolidated adjusted EBITDA of $6.1 million was up 70.
<unk>, 5% from prior year, and our adjusted EBITDA margin increased to 12, 8%.
Both segments showed strong improvement from prior year, and we were particularly pleased with our service segments, adjusted EBITDA margin, which increased 460 basis points to 17, 1%.
Moving to slide 9.
Cash.
Some operations, while down $1.9 million from prior year was in line with our expectations as we paid out a certain performance based accrued employee expenses and working capital increased on the strong organic revenue growth.
First quarter capital expenditures were $1.2 million and we continue to expect our full year fiscal 2022 capital.
Capital expenditures to be in the range of 7.5 million to $8.5 million.
Slide 10 highlights our strong balance sheet.
At quarter end, we had total net debt of $21.9 million with a leverage ratio just below 1 and we had $27.9 million available under our revolving credit facility.
<unk> will openly as we mentioned we did amend our credit facility to increase the revolver to $80 million from 40, along with certain other term adjustments, which included a reduction to the LIBOR LIBOR floor on our revolving line of credit borrowings and a modestly reduced interest rate on the term loans.
Lastly, we expect to file our form 10-Q.
Q on Tuesday August 3rd.
With that I'll turn it back over to Uli. Thank you Mark.
As we look forward, we're pleased with the strength of our balance sheet and we're pleased with the strong demand for our products and services, we expect our second quarter to be another quarter of growth in both of our operating segments from a margin perspective.
<unk>, we continue to run ahead of schedule, but by all means we will continue to leverage technology and process improvement to further gains and sustainable margin margins automation will continue to be a focus as we believe expanded use and adoption of automation will drive a defendable competitive advantage.
And the market's Trans cat serves.
Service, we are projecting similar organic growth as we just achieved in the first quarter of fiscal 2022, we expect service growth gross margin to moderate in the second quarter compared to what we experienced in the last couple of quarters as technician productivity comparisons are becoming much.
More challenging, especially starting in the second quarter of last year.
Distribution market contingent on our market conditions improved in the first quarter and we expect that to continue.
We anticipate high teens growth in the second quarter, when compared to prior year on improved market conditions and with comparisons to Covid impacted second.
Quarter of last year.
I'd like to conclude with a few comments related to acquisitions.
At this time last year, we made a commitment to resource the development of a more active and impactful acquisition strategy. Today. We are pleased with the progress we've made which.
Which includes both the level and quality.
<unk> opportunities we are currently pursuing.
And overall, we think we're well positioned to continue to execute our strategy in combination with improved macro economic conditions, our value proposition and leading place in the market and the industry. All of this should allow us to enhance shareholder value.
We have on our fiscal 2022 and beyond.
That operator, we can open the lines for questions.
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1 moment, please while we poll for questions.
Yes.
Thank you. Our first question is from Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Alright, Thanks, good morning, everyone and first off congrats on the results again on execution has been a really impressive the last few quarters.
Thanks, Greg appreciate it.
So you know revenue I guess, starting with the topline revenue was well ahead of the guidance that you put out you know chevik mid may and obviously our expectations. I mean is it fair to assume that you saw a big uptick in the month of June or how would you characterize kind of the activity or the cadence throughout the quarter.
I think Greg we we saw.
Nice patterns are nice revenue flows both segments really the whole quarter, we ended the year strong.
In fiscal 'twenty, 1 we had we had nice pipelines going into the year and they delivered and beyond and so we did see.
Good revenue flows and I and I think they they they stayed steady and and maybe even increase throughout the quarter, but that's how I would characterize it.
Got it and you know in terms of industry growth versus you know share gains how how do you think about that.
Yeah, I think what.
So we ask ourselves that question all the time, we're studying the data Mark and I on the team. We look at this it's been difficult to pinpoint exactly how much is pent up demand versus market share growth versus industry growth.
I would probably say comfortably it's a combination of all those things. There is no question. There is some pent up demand.
There.
We have no question at particularly in service, where you know we continue to take market share and we know that by the competitive activities that we're involved in so I think it's a blend of all 3.
And we'll see if it sustains, but right now.
Things look pretty positive getting through second quarter.
Okay, great and.
And then just in terms of M&A.
I know you've made some interest and changes you you talked about this.
In terms of the revolver, how should we think about the pace of M&A and we've been kind of talking about you know increasing pairs for quite some time and when would you be disappear.
Disappointed if you didn't complete a transaction or to the remainder of the calendar year or is this your sort of you know getting things ready for maybe a more active year in the next kind of 12 to 18 months.
Right. That's a good question. So when we look at the pipeline, let's say prior to.
On the renewed initiative.
Started about a year ago, which I just referred to the pipeline would always have a handful of opportunities in it that we would go through and sort of exam. These opportunities for strategic fit so on and so forth I think when we look at it today. It probably takes about a year to go from that pipeline a traditional pipeline to something.
That was debt debt, we were striving for as part of our strategic plans. So here. We are 1 year later and you look at the same pipeline and what you see is just really kind of a night and day difference and again I alluded to the size and quantity and the quality of just things. We're pursuing I think it's ample and so ample enough to complete our strategy execute it so ought.
<unk> more directly I would be surprised of course, if I didn't see a deal get done in this fiscal year, Let's just say for example, our time myself to multiple deals or even the calendar year, but where fiscal 2022 and I do see activity getting accomplished.
This year for sure.
Okay, that's great well best.
To answer for it thanks.
Okay. Thank you Greg.
Thank you. Our next question comes from Scott Buck with H C. Wainwright. Please proceed with your question.
Hey, good morning, guys. Thank you for taking my questions first I am curious if there are any areas within your kind of.
A lot going into markets, where maybe activity remained slow and hasnt really kind of picked up here post pandemic.
Relative to.
Oil and gas, let's say on the distribution business, we've seen a really nice recovery, but we're still not at 100% of where we were in FY 'twenty we may be.
And using thing like 90% recovered so there's still a little bit of of.
Drag on that market relative to products on in service I think things are as expected, mostly life science, but we've got some nice aerospace and defense and Theyre in industrial as well there's been pickups across the board. So that's how I would characterize it.
Okay. That's helpful guys and then.
For the additional commentary around M&A, but I'm just curious any changes to what has been kind of the historical strategy of bolt on and adding either a new geographic region of new service capability. I mean are you looking at anything kind of outside the box or is it.
Should we expect kind of more of the same.
Yeah, I would say I would say all of the above and by that I mean, there's no question that.
Expanding our geographic footprint to be more comprehensive and areas, where we have gaps is going to be a driver you are right about that expanding capabilities is going to be a driver.
Ivor bolt ons, we will make.
Frequently whenever we can find them. They just make a whole lot of sense from from a from a strategy perspective and.
Ive messaged.
Net of repeatedly through the last few quarters that it's important that we identify adjacent markets and expand our addressable markets where it makes.
Cents per trans cat, and so I think that very much as part of the strategy as well and so it's a combination of all the things you mentioned.
Okay. That's great and then last 1 from me I'm just curious if you can get kind of an update on the rental business.
It's kind of yes.
Slid out of the deck. The last couple of quarters I'm, just kind of curious what the trends on that.
No Scott its mark and actually its really favorable trends on the rental business and you saw the improvement in our gross margins sequentially.
Sequentially and year over year part of that the rental business is very strong it's a it's.
On a nice environment for the rounds business, where it's difficult to get new equipment.
Across the board in this sort of economy. So.
I think that's been helpful for the rental business so.
I'm very pleased with the performance of their own business.
Alright, great guys. Thanks for the time.
Thanks, Scott Thanks.
Yeah.
Thank you. Our next question comes from Jeff <unk> syndrome.
B Riley and company.
Please proceed with your question.
Hi, Good morning, everyone. Let me add my congratulations couple of multipart questions. Here, if you can bear with me a little bit.
I understand you've seen a pickup overall so far.
But I guess is it fair to say that youre not seeing any negative change at all in customer.
<unk> video over the last month or so with the resurgence of Covid and I guess overall how.
How are you thinking about the potential impact of delta beyond the current quarter or have we just kind of reached a juncture, where most customers simply must do the service work now that slowed during COVID-19.
Right so.
Active so it's good question, we have not seen any impact from service, but remember and we saw this throughout COVID-19, while it was peaking.
Debt service business has to get done for the most part and so it's a resilient business and it's highly driven by regulation the high cost of failure.
So we wouldn't expect to see it in service and we haven't seen it in service, where you would see it talking about the variance in the Delta.
Resurgence, where you'd see that would be on distribution, but right now.
We sit in a position where I'm not seeing it I don't think we're seeing it I mean, our service our distribution businesses.
Up let's call that a leading indicator right that would be affected first and it has not been affected.
So far in this fiscal year now could that change I mean, yes. It could I don't I don't see it changing on service could change on distribution has not changed yet not for Transcanada.
Okay great.
And then just.
Turning to your acquisition pipeline are you finding anything that could be transformational.
As the environment changed at all on the last couple of months.
Is there anything I guess in the context of the Covid backdrop has changed and also just kind of specifically wondering about the acquisition.
ROE opportunities around the life Sciences area.
Right.
I'm reluctant to add any more color then on the earnings script and I'd, rather not get down the road too are working on something transformational I would say that it's a good pipeline. We're in I think the opportunities are compelling.
Impelling I think are good for the business.
This is what we guided that we'd be working on and we are working on it and I expect to see results. This year and I'll just leave it at that I think thats probably appropriate.
Okay fair enough. Thanks for taking my questions.
No problem. Thanks, Jeff.
Thank you. Our next question comes from Gerry Sweeney with Roth Capital. Please proceed with your question.
Good morning, Lee and Mark Thanks for taking my call.
Hey, Jerry good morning.
I wanted to circle back to revenue.
Obviously, great organic growth are you seeing any fundamental.
On a mental changes out there in the marketplace.
Which means.
Maybe a shift towards more outsourcing obviously labor is an issue.
That could be a positive or negative for you, but just curious if youre seeing any fundamental shifts that may be driving some of that organic growth as well, especially since we're coming out of COVID-19.
Those are time yeah.
It's an interesting question I was thinking about that myself.
<unk> and 1 of the things I think is occurring in this is conjecture for sure and this is not a back by any stretch but.
When you have events like the pandemic and similar macro events.
The strong tend to get stronger and you've heard that before and sometimes the weaker get weaker I think trans cap. It's just been a really strong company for a really long time and when you get through something like Covid.
And we've done the right things both both from a outwardly reaching market perspective, and marketing and delivering good services and.
Internally, where we've taken care of our employees and we've gone over and above to make sure that they were safe and well cared for from an employee perspective, you put it just makes for a good company and so good companies come out of pandemic strong and I think that's part of the longer term success of this company has this reputation that we built in.
In England externally for getting our work done and getting it done right.
And I think we're reaping some of the rewards of that as you see the continued growth okay.
Okay. That's helpful.
To fully understand the shifting gears little bit to margins.
I'll just start with this can you.
Bucket out or qualitatively quantitative.
However, you would want to do it but how much of this margin improvement maybe it was mix.
Average of overhead.
Obviously, we've always talked about automation is any automation is starting to play a role on some of that margin improvement as well.
Hey, Jerry it's Mark Yeah, certainly we can provide some more.
Color and.
When you should experience as sort of our organic growth almost 17% for the service business. The vast majority of the margin improvements. We saw was around that fixed cost leverage and I think we mentioned in his prepared remarks. This business hasnt kind of reaffirms that it has an inherent amount of operating leverage to it.
Strong amount of operating leverage so that was the big call out technician productivity are starting to hit more difficult comps. So there was much more modest improvement versus versus prior year that was helpful.
You would have a slight increase on the number of on site versus prior year.
<unk>.
So it's not something that we called out as a big drag in the press release on our earnings deck I would I would continue to go back to the operating leverage on our fixed costs and continued strong technician productivity is really the drivers.
Got you and then just on the technician side. This is moving out of curiosity can tax.
<unk> sort of shift from industry to industry.
If there is an increased demand say in life sciences, and less demand in industrial or are they sort of trained up on a certain process and techniques.
Yes, generally speaking all of our technicians are capable and in most cases are trained across the spectrum.
Spectrum, so whether we're doing temperature work for a life Science company, our pharma company or whether we're doing temperature work for an industrial manufacturer or chemical or some sort of process.
The same there are nuances by industry, but generally speaking.
The disciplines carry across across the spectrum, so it's flexible and.
And to the degree that.
Someone as experienced as the technician, that's great but through the years in the last 5 to 7 years, we bring people into the company train them up and they just need to have technical aptitude, you don't always get experienced clinical calibration technician, sometimes you do but but you gave guidance with technical engineering aptitude math.
<unk> aptitudes and these guys take about a quarter or 2 to get up and running and then we usually have them.
Pretty productive.
Got you okay, great congrats on a great quarter and thanks again for your day I appreciate it. Thanks. Thank you Gerry.
Thank you. Our next question comes from <expletive> Ryan.
And with Cologuard. Please proceed with your question.
Thank you.
Your comment on gross margin for Q2, the moderation are you talking from the.
Absolute levels that we saw on Q1 and Q4, the roughly 30% to 33% level or are you still talking about moderate.
Cash and of the growth year over year, which had been 4 or 500 basis points.
Hey, Jack its mark yes, it's the moderation of the growth year over year, we think we have sustainable gross margins.
Describing the Q1 and our guide for Q2 the compare.
Moderations on the technician productivity as that get more difficult on later in the year and EBIT from Q1 to Q2. So again, while we expect some growth year over year in Q2 on gross margins, it's not going to be to that same degree you'll still get the operating leverage but that technician productivity comparison is much more difficult.
So that's the way to think about it.
Okay, and then in the past you've had comments either on Opex, our op income any anything you'd care to share on that line item.
Yes.
From what we just for example, if you look at our SG&A Opex from this past quarter.
Impair something around that level, maybe slightly up from that would probably be the best way to think about that.
Okay.
What what percent of Love services Life Science now.
It's right around 50% debt.
Okay.
Let's do 1 last 1 for me on the CBL side, it looks like Youre still kind of in that 20.
20, <unk> kind of centered in the northeast and southwest.
What the attitude to kind of grow that or is that just going to be.
Is that not a primary.
Pillar of growth for <unk>.
How do you state the business case for the CBL.
Yes, I think the CBL.
If I were I wouldn't focus on they are overly focused on it we're going to we're going to grow the service business, we have growth targets they've always included.
<unk> Cbl's they'll include <unk> in the future, but it's not as if that's what we're focused on and it's going to represent.
A large percentage of our growth during COVID-19, there were no CBL sales and thats completely understandable and building up that pipeline and in the future.
Pretty confident that's going to happen and it will be part.
Part of our growth.
But we're going to grow either way. So we've got transactional business, we've got sort of what we call. The 20 to 120 to mid sized companies and then we have these large Cvs I would expect to make progress in each in each of the.
And your channels.
Okay, great, Thanks, and congratulations on the nice quarter.
I appreciate that thank you.
Thank you. Our next question comes from Mitra <unk> with Sidoti <unk> Company. Please proceed with your question.
Yes, hi, good morning, congrats on great quarter.
Couple of questions first.
On the margin side I know.
I think 1 of the things you highlight there was a technician productivity and I was just curious as you look at your existing work force today.
If you feel the need to maybe.
Upgrade even further as we saw on the past and Thats, obviously bearing fruit now.
On a pretty good spot in terms of.
Being able.
<unk> existing needs with what you have.
Yes, I would say that 17% organic growth was higher than we anticipated and so.
We weren't staffed up the way, we'd want to be or that we need to be in the future to be able to maintain anything anywhere near that type of growth. So when you have 17%.
To meet you are not likely to be as ready. So what does that mean that means you know more over time and you know you've got a train up new technicians, Quaker theres, a little bit of drag sometimes on margin, we didn't really see it which is a good sign but it could be I think.
We're going to we're going to continue to grow we're getting continue to add technicians right and we're in that frame.
We're now we didn't add a lot of technicians last year for the first 3 quarters. We started doing that in Q4, and we've absolutely had to do it on Mitra in Q1 I anticipate the same thing will continue as we continue to growth.
Okay, No that's great and then on the.
Delta V oriented I mean, who knows how this plays out but we're starting to see.
Minor changes in policies or mass mandates in the workplace et cetera.
And if you could remind us.
In terms of your staffing et cetera.
Any concern of if.
It should become a bigger issue that you're better prepared.
I'm around versus a year ago to deal with it.
Yeah.
Yeah. So.
Of course, it was a challenge last year, but we got through it we have a really good leadership team and management team we tend to follow the state law. So whatever's required wherever we're working.
We adopt those policies and some of them have been changing and we have been changing with them and I think we've broadcast of that and communicated.
That pretty well throughout our organization. So it gets to be not really a transcatheter cision our employees understand that we're going to follow the local guidance on the local laws and where I think that's the best way to do it for now so we did last year wasn't easy on anybody of course, but I think people understood will continue much the same as need be.
Okay, Great and then finally I don't know.
Some companies depending on the industry sensors with the pandemic has changed I'm just thinking for a lot of there are actual customers and throw them, maybe being more willing to outsource their business then they might've been in the past as a result of what happened.
Curious if you're starting to see maybe increased interest.
More conversations around that from potential.
<unk>.
Moving to customers.
Yes, I mean, there's multiple drivers for the healthy pipelines that we have and I'm sure somewhere.
Within that group.
They are outsourcing opportunities I'm quite sure whether it's a.
Or book of Covid or non Covid I mean, it would be difficult for me to characterize it.
We have healthy new business go forward pipelines, it's really good for the business and we're pleased to see it and I'm sure. It's a combination of that and many other things. So we'll just we'll just keep.
Keep moving forward with that with that in mind Micha.
Okay great.
Results for taking the questions.
Our pleasure. Thanks, Thanks for the question.
Thank you there are no further questions at this time I would like to turn the floor back over to management for any closing comments.
Okay, well this is Lee and I just want to thank everybody for joining us on the call today, we certainly.
Thanks. Appreciate your continued interest in transcon, we will be participating in the virtual Oppenheimer Technology Conference on August 11th in the Colliers Investor Conference on the ninth so feel free to check in on us than not otherwise, we're always available feel free to check in and we'll talk to everybody after our second quarter results.
Certainly it will take care. Thank you.
Yes.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.