Q2 2023 Transcat Inc Earnings Call
Greetings and welcome to Transcribe, Inc, second quarter 'twenty twenty-three financial results.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Tom Barbados, Chief Financial Officer. Thank you 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, and our Chief operating Officer Mark Doheny.
To 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. It can be found on our website Trans cat Dot com in the Investor Relations section.
If you would please refer to slide number two as you are aware we may make forward looking statements during the formal presentation and Q&A portion of this teleconference. These 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.
These factors are outlined in the news release as well as in the documents filed by the company with the SEC.
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 as 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.
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've provided reconciliations of non-GAAP .
Two compared GAAP measures in the tables accompanying the earnings release.
With that I'll turn the call over to Lee.
Thank you Tom Good morning, everyone. Thank you for joining us on the call today yesterday, we announced our fiscal 2023 second quarter results that included significant revenue growth solid earnings and strong cash generation.
Consolidated revenue for the quarter was up 12% to $56 million service revenue grew 19% with organic service revenue growth of nine 3%.
Consolidated gross margin expanded 70 basis points to 29, 7% driven by expansion in our distribution and rental business margin.
Distribution margin was slightly offset by a 30 basis point decline in our service segment gross margin, primarily the result of startup costs associated with several new client based labs and a significant number of new technicians on boarded and trained to support future service growth.
Adjusted EBITDA grew 6% from prior year to $7.5 million in the second quarter.
Turning to a closer look at the service segment as expected we generated strong service revenue growth. Despite macro economic uncertainty, we continued to benefit significantly from a value proposition targeted to service the highly regulated life science and aerospace and defense industries, both industries among others inherent.
We have a high cost of failure, which makes him an ideal fit for trans cat a reputation for delivering consistent reliable services and solutions remained stellar across North America.
Service gross profit in the second quarter grew 18, 3% or $11.5 million on service gross margin of 32, 6%.
Strong organic growth continues to be fostered by inherent recurring revenue streams.
Our strategic acquisitions have increased our capabilities adjacent markets and expanded our geographic footprint.
Our acquisition strategy continues to outperform foundation foundational to our strategy is our focus on integration. So the chance cats portfolio of acquired companies become one entity over time.
This allows for uniformity and consistency and continuous process improvement for our customers, regardless of which trans cat lab. Our operation. They are engaged with our focus on integration also allows transkei <unk> to capture.
The anticipated synergies both from a cost and a sales perspective.
In the second quarter, we continued the successful operation of our new Transkei calibration training Center. The center turns out ice turned out an impressive number of new technicians to support both our current service organic growth as well as our new service pipeline that includes a significant number of traditional and client base lab opportunities new.
Technicians coming out of the chance got training center have gotten off to a great start and we expect they will continue to achieve higher levels of productivity as they gain experience in the field.
A trained technical workforce is a critical component of our business and we believe the new training center provides clear differentiation relative to our competition.
Moving onto our distributions segment revenue grew 2% to $21 $2 million, despite vendor lead times and supply chain shortages that continue to make it challenging to convert open customer orders order backlog is up 18% from prior year second quarter.
Distribution gross margin expanded 140 basis points to 24, 9%.
And as we progress through the third quarter distribution demand continues to be strong.
Acquisitions are important part of transcript long term growth strategy and we closed two deals right. After the close of our second quarter complete calibration located in Cork, Ireland is a small but very strategic acquisition. It provides transkei <unk> with a local kit Kat calibration capability and presence.
To support the robust life science market in Ireland and also brings expertise in the field of calibration robotics, our ultimate vision is to leverage this promising robotic technology in both Ireland and throughout North America.
When taken together with automation, we have the potential to drive additional differentiation.
Efficiency gains and improvement in our customers' instrumentation uptime.
Either be calibration located in Cleveland, Ohio specializes in calibration services related to the aviation industry.
We believe that we can leverage our national footprint and infrastructure to further accelerate the growth in E beam capabilities across the U S and Canada and.
In addition, there's an attractive life science market in the greater Cleveland area, which we are now nicely positioned to capitalize on.
All in all we are pleased with our solid performance in the second quarter of fiscal 2023, we continue to see strong levels of demand for our calibration and asset management services that support our longer term growth objectives, our balance sheet remains strong with a leverage ratio of just over 1.8 times.
We are positioned well to effectively execute our acquisition strategy and to work through what is currently a very strong acquisition pipeline.
With that I'll turn things over to Tom for a deeper look into our second quarter financials and I'll return upon completion of Tom Tom's narrative to discuss our outlook.
Thanks Lee.
I'll start on slide number four of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the second quarter.
<unk> revenue of $56 4 million was up 12% versus the prior year, driven primarily by strength in our services segment.
Services segment revenue growth remained very strong at 19, 4% with nine 3% of the growth coming organically and the other roughly 10% from acquisition.
Turning to the distribution or turning to distribution revenue of $21 2 million was up one 6% versus the prior year. We continue to see strong demand for our products, which is reflected in our open order backlog of $9 1 million.
Which is up 18% versus the second quarter of the prior year.
Turning to slide five our consolidated gross profit of $16 8 million was up 15% from prior year and our gross margin expanded 70 basis points to 29, 7%.
Service gross margin declined 30 basis points from the prior year as Lee mentioned earlier there was.
This was primarily the result of start up costs associated with several new client based labs and a significant number of new technicians on boarded and trained to support future service growth.
Distribution segment gross margin of 24, 9% was up 140 basis points from prior year on continued strength in our rental business and a favorable sales mix.
Turning to slide six consolidated operating income of $3 6 million was up 1% from the prior year.
Increases in operating income in the distribution segment were partially offset by declines in the services segment.
Turning to slide seven Q2, net income of $2 4 million decreased $700000 from the prior year and our diluted earnings per share of 31 cents per share were down nine cents per share.
In comparing net income and diluted earnings per share to the second quarter of the prior year increased interest and tax rates accounted for all of the year over year decline of nine cents per share we expect our full year fiscal 2022.
Three tax rate to be in the range of 22% to 24%.
Flipping to slide eight where we show our adjusted EBITDA and adjusted EBITDA margin, we use adjusted EBITDA, which is a non-GAAP measure to gauge the performance of our segments. Because we believe it is it is the best measure of our operating performance and ability to generate cash. Additionally.
As we continue to execute on our acquisition strategy. This metric becomes even more important to highlight that it does adjust for onetime deal related transaction costs as well as the increased level of noncash expenses that will hit our income statement from acquisition purchase accounting.
With that in mind consolidated adjusted EBITDA of $7 5 million it was up 6% from the prior year.
As always a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation.
Moving to slide nine cash flow from operations was in line with expectations for the quarter apart from strategic inventory buys that were made to counteract both vendor price increases and ongoing supply chain lead time challenges. This inventory is expected to largely sell through during the balance of the fiscal year.
Year to date capital expenditures through the end of the second quarter were $4 8 million compared to $3 8 million year to date in the prior year.
Continues to be centered around service segment capabilities, and technology, including automation and Peter future growth projects.
Slide 10 highlights our strong balance sheet at quarter end, we had total debt of $58 million with a leverage ratio of 1.81 X. We.
We had $36 7 million available from our revolving credit facility.
Lastly, we expect to file our 10-Q later this week.
With that I'll turn it back to Lee.
Thank you Tom.
Looking forward, we expect our unique differentiated value proposition to continue to drive long term sustainable competitive advantage for trans cat in.
In the short term amidst a fair amount of economic uncertainty, we are well positioned to deliver strong performance and to demonstrate the continued resiliency of our business model.
Longer term, we expect a rigorous execution of our strategy.
To drive consistent growth in revenue margin cash flow and ultimately shareholder value.
At the heart of our strategy is strong organic service growth, we expect organic growth in the high single digit range for the balance of the 2023 fiscal year.
We will continue to capitalize on the strength of our acquisition pipeline as we target additional capabilities broadening our geographic footprint and expanding our addressable markets. We believe the combination of these acquisition drivers will increase the trajectory of our business.
Operationally, we will continue to leverage continuous process improvement and automation to generate sustainable margin improvement over time.
The team has done a terrific job driving service margin improvement into the operation still theres work to be done and we have a great plan to continue margin expansion over time.
As I mentioned earlier transcripts ability to perform well and grow and more moderate economic conditions has been a hallmark of our business model over the years.
With the acquisition of <unk> asset management.
Last year now we have another suite of services that inherently deliver strong performance in both growing and moderated economic environments. Our strong balance sheet supported by healthy cash flow has supported both organic and acquisitive growth. We expect this to continue as we make our way through the back end of 2023 fiscal year and into the future.
And with that operator, we can open the line for questions.
Yeah.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is there any question you May press star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before.
The Starkey.
Our first question comes from the line of Greg Palm from Craig Hallum. Please proceed with your question.
Yeah. Thanks, <unk> morning, everyone and congrats on the good results.
Morning, Greg.
I wanted to first dig into the recent acquisition activity. So maybe first can you talk about the growth opportunity in you know Ireland, specifically with the opening of the new labs. So maybe start with organic and then you know from like an inorganic standpoint.
You know, what's the opportunity to use this maybe as a starting point to expand you know obviously within the region, but you know across other countries in Europe as well.
Okay I'll take that this is Lee so good question and we.
We look at Ireland two ways, one we will continue.
Continue to build out that lab that we acquired so that it becomes a really nice general purpose lab, we have a lot of customers in the U S. That also do business in Ireland, and it's our ultimate goal to be able to service them in Ireland and in the United States and we think that that will be a differentiator for us and we can work with some of our.
You know efficiency programs and continuous process improvement and our customers by virtue of that factor.
But with the acquisition of complete calibration, we also pick up some robotics expertise and it's our goal also to work one discipline at a time so that some of the robotic capability. There can be brought to the United States and then ultimately help us with efficiency and margins. So we've kind of got a dual play there as far as expanding them.
On Ireland, I mean, Nexstar has over 40 50 employees in Ireland, and ultimately they're able to provide their services really kind of throughout Europe on a project by project basis. So in a sense. We're prepared for that today, we don't have any imminent or immediate plans for expanding our calibration activities, we're going to really focus on getting that lab up and.
Running in the short term that's really our focus.
Okay, Yeah that makes sense in that kind of dovetails into my other question because the.
Robotic technology and you know automation opportunity just seems shows significant so you know maybe help us understand.
How they you know incorporate that into everything and and I'm not sure. If there's any like efficiency metrics that you can give us either.
What the margin profile is how different it is you know revenues by employees, but my my My guess is you know there probably able to you know become a much more efficient organization. When you incorporate that kind of technology into the business. So I don't know anything that you can expand upon that what were really helpful.
I'm not going to be able to expand much in terms of our.
Data like like you've requested but I will say that.
Robotics.
Robotics in general have a couple benefits right. It improves always always improves the quality of the calibration versus a human calibrations and really at the end of the day. It allows us to use more of our operators. If you will versus calibration technician that drives the cost of labor and Ah down overtime increases the availability of labor So you've got a law.
Benefits from quality to labor savings to efficiency, even the time, we're doing calibration being run 24 hours. A day. These are all potential benefits and you're right over time in theory, they should have a.
Significant impact on margins and we would anticipate getting some of that over time, but it's not going to happen overnight and it's early days and we're just beginning to understand some of the potential so I would say, Greg just stay tuned.
With respect to robotics is very small almost theoretical today, but but we absolutely will be driving that over the long term into our operation that's our goal.
Well, let me ask you at maybe in a different way I mean is there any you know sort of structural reason why you couldnt incorporate at least some or all of that technology into you know calibration centers here in the states.
No we it's our it's our it's our goal to develop.
<unk> developed technology enhance the technology, that's already in Ireland and bring it to United States that is our expressed goal over the next couple of years and we will be doing that.
Yeah, Okay, yeah, it sounds pretty interesting and I guess just last one just a quick update on the C. B LS anyway to quantify what the impact on margins were in the quarter. How many are currently ramping up and just any expectations for the go forward period two things.
Yeah, we won't we won't put a number on it but there are between first quarter second quarter. There had been several new cbl's of a significant size that have had a somewhat.
We'll drain on short term margins as they always do that's expected and and because the lifetime value of these CBL does is very.
We are very high you know, it's well worth the effort, but so we wanted to make sure we call that out the pipeline for CBL is also strong and so this is good news for US you know coming out of the Covid environment. This is what we would expect to pick up and carry on the momentum that we had prior to COVID-19, but when you do land several in one quarter, you're going to see some drag on on margins there.
It usually takes about a quarter or two.
To work itself through so we're right on schedule.
Yeah makes sense, Okay special work going forward. Thanks.
Okay, Greg thicker.
Our next question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.
Hey, good morning, lean Mark and Tom Thanks for taking my call.
Hey, Jerry Hadrian.
You answered my question on the CBL and how long it's going to work its way through but the other thing I was just curious about.
Hum.
Service seems to be doing well, you're hiring you've got a good pipeline of cbl's, but we're seeing it interspersed warnings on the economy.
Are you seeing any of this or is this just.
Everybody's talking about higher interest rates and a cautious on the economy.
Well, it's interesting I mean, we would expect Jerry to feel the impact of the economic slowdown first in our distribution business, that's always sort of a leading indicator for us it's almost real time and I've seen this over 2025 years.
And I'm kind of surprised to be honest that so far to distributions business held up really well I mean, it's grown margins have expanded so that business is holding up.
Secondarily, we might see some softness over time in sort of a lagging effect on our service business, which we have not seen and that even if there is an environment where the economy.
Softens enough that it affects our service business, it's usually just a slight impact because remember and that's that's kind of the resiliency and we talk about with our model. This is a regulated environment in the life Sciences. So we're talking medical devices pharma biomedical we're talking on aerospace aircraft engines. These are not areas that are affected.
By normal economic slowdowns and so that's again, that's foundational to the way, we think about our business and our business model. So you might expect some softness a little bit but it but it's not been very impactful through the years on our service business or kind of a recession resistant and in that sense and then the other thing I'd add Lee. This is mark Jerry is the <unk> business.
You know now that we have you know.
For 13, 14 months, we're getting a lot of inquiries. There is and you might had some of our customers heading into a more uncertain economic times, if we have that and which is also held up well.
You know going into what could be another you know.
The macro uncertainty I guess is ramping up a great point the whole business model. The next operates is to increase efficiency and decrease the cost of calibration programs. So inherently in our in AR and AR.
Sort of a tightening environment their services become more valuable and sought after so I think that'll play well as well.
And I know you talked about life Sciences.
<unk> et cetera, but.
A bigger emerging theme is sort of a match.
Manufacturing Renaissance in the United States, you know, we're seeing a semiconductor chips being plants being announced et cetera. You know went up in Syracuse. The other week is this an opportunity for you longer term as well how do you look at that.
Well I think anytime the manufacturing output increases in the United States that is going to be good for our business.
Through regulated and less regulated environments that can only be good news.
So we'll be prepared for for any growth in.
In manufacturing for sure.
Got it and then final question.
How much.
Has rentals become of the distribution business. It's you know it's been growing I think you even called out some very good growth.
In that area do you break can you break that out or will you break that out or or or give a little bit of a view towards that.
Well I won't I won't break out numbers, specifically as a percentage of our growth and.
Segment, However, rentals has done very well and it has done well for a number of years now I think it was back in maybe 2016.
Timeframe, when we launched that business to stabilize the distribution business over time.
That was the first go the second goal was to create a bridge between distribution.
And service and so I think rentals has accomplished both of those initial goals continues to be strong it continues to do well in.
A variety of economic conditions, and so we're going to continue to to fund that business and it's an important part of our value proposition and it also makes us unique as a differentiator as well.
Got it I appreciate it thanks for taking my question.
No problem. Thank you Gerry.
Okay.
Our next question comes from the line of Scott Buck with H C. Wainwright. Please proceed with your question.
Hi, Good morning, guys. Thank you for taking my question.
We talk about the service segment gross margin a lot, but I'm curious.
On the distribution side, what's the ceiling on the gross margin because we've seen it come up here.
The last few quarters versus a year ago. I was just wondering if you can get this into the you know kind of higher <unk>.
Per cent range.
Hey, Scott, It's Tom Barbados, I would say that you know.
We're probably we're probably at or near the ceiling on the on the distribution margins I mean, we're able to as I mentioned in my commentary, we're able to do some strategic.
Strategic buys over the past six to nine months it allowed us to kind of get ahead of some of the vendor price increases, which is giving us a little bit of boost the margin as well, but you know that that's going to you know kind of dry up a little bit over time as things moderate and.
We'll be able to continue to leverage the growth in the rental but I think you should think of where we are now kind of as a as a ceiling.
Yeah.
Alright, Thanks, Tom that's helpful and then on the rental business.
I don't think I saw there's anywhere but what are you guys spending in terms of annual capex in terms of keeping that business growing.
Yeah, I mean, we generally target you know two to $2 $5 million of our annual budget towards our towards rentals.
Okay, great. Thanks, and then last one if you guys give us a little more color on the acquisition pipeline in terms of what kind of deals youre looking at now are there some larger opportunities out there or the opportunities in Europe .
More attractive in the U S. I mean, just kind of any color there would be helpful.
Okay. Scott. This is Lee I would I would characterize our acquisition pipeline as strong it has a variety of opportunities that we're engaged with them. They are not in Europe . The airline in the United States at this point, which is which is our strategy and we will continue to implement we've got.
You know kind of runs the gamut of small medium and large size opportunities. We're always looking for something transformative for the business and and if that opportunity arises we'll be ready for it but in the meantime, our drivers are as they had been in the past we are looking to increase our capabilities, our geographic footprints footprint and.
Our addressable markets, where we can like we did with the next day business and we think theres opportunities to do that up opportunities to pick up services that are adjacent to our core calibration will be looking for those so three main drivers.
And mostly in the U S and I would say a really strong pipeline of acquisition opportunities.
Okay greatly appreciate the time guys. Thank you.
Alright take care Scott.
Yeah.
Our next question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question.
Good morning, and congratulations on a solid quarter.
Thank you.
Good morning.
All all the fun questions were asked so most of my question is gonna be around your financial.
So I'm going to start out with regards to the services business. You know you typically have a little breakout in terms of like calibration third party freight can you just give those percentages.
I think I think Ted you are probably referring to what we put into the queue.
K I'm not sure if you have those handy right now for the quarter Tom.
I haven't got me in the queue, yeah there'll be in the Q, which is we're actually targeting to file at market close tomorrow afternoon, but I wouldn't expect a huge change.
From what we typically report in any given quarter.
Okay and then what's the what are you what's your view for Capex for the remainder of the year.
We're about halfway.
There we were at $4 8 million and.
We expect to be in the $9 million to $10 million range for the full year.
Okay, and then just maybe something more more fun, but going back over to Ireland and the opportunities within Europe and such you know now that you have a toe hold within that region, what kind of and you know obviously you've already commented that you are putting some investment into that lap I guess bring it up to <unk>.
<unk>. So that you can tackle island as an opportunity beyond that what kind of infrastructure do you need to put in place to grow that business in terms of you know.
People equipment.
You know people, what kind of skills I assume that there is a.
Clearly an opportunity over the longer term to run a similar consolidation strategy in Europe as there is as you've done successfully here in the U S and what kind of talent you need to do that just kind of you know.
How do you see yourself investing in that business over the long haul.
Well, there's no reason why we can't establish a highly functional calibration lab in Ireland connect the dots between our customers here and there and hire the right people train them put some capital into the labs to increase the capabilities. I mean that is that's kind of what we do we've you know we've done that in the U S. In the past and we're pretty.
With our ability to to be successful doing that in Ireland, which is really part of your question. The second part of your question is no.
What our long term plans to expand beyond Ireland.
I would say that right now I don't want to get too too ahead of ourselves too much ahead of ourselves in terms of laying out plans I mean, clearly once we're there and doing business.
If there are opportunities to expand down the road, we will always be open to that it.
It is a foothold for us, but we're going to focus on getting that lab up and running and remember also we have the next of business. There. So between the services that they offer and the core calibration.
We certainly got a lot of runway to.
No focus our time and attention on longer term.
I don't see any reason why we would be open to expansion beyond that.
Yeah.
Alright, well I'm going to step out and again, congratulations on a great quarter.
We appreciate it thank you.
Our next question comes from the line of Mitra <unk> from Sidoti. Please proceed with your question.
Yes, good morning, and thanks for taking the questions first I was just curious on the service side.
As we look at a potential recession next year.
How much of the business or service revenue comes from life Science, given that that's probably your most stable or defensive.
Business.
Today, it's in the 60%, maybe 63% range low sixties.
Okay. Thanks.
Finally, I believe you know maybe a quarter ago, even two quarters ago labor shortages were sort of.
An issue for you it seems I'm so far from the commentary it it's not as much of a concern today, especially.
Especially given the new CBL is any influx of new tax, but I know you're still looking to hire employees to support future growth. So maybe if you can help me how we should think about the.
<unk> additions and investments there.
Well you know are having.
Having employees of technical staff is really the key to our growth strategy and so that's why we as I mentioned in my narrative, we set up a training center, we put 48 people through that training center.
First I guess, two and a half quarters of that.
48 people I think 46 are in the field and working at their respective labs. So that's really good news down their productivity isn't what it's going to be a couple of quarters from now or even a couple of years from now, but they're they're up they're running they're in the field and we built our own I think that's fantastic news.
Longer term, we will continue to do that mitra and longer term.
Automation is important because.
It requires more of an operator profile versus a technician and that will be easier for us to find lower cost and so we're kind of we're kind of working the labor the technical labor from several angles at once right, where we're working on the automation. We are working on process improvement. We're also building our own tests.
We have a really great reputation also in the industry and so if techs are available we've always and maybe this is a sort of internal view, but we always think we're a desirable place that attack with land and want to work for we've got a great culture. We've worked really hard on being an attractive place for a technical workforce to <unk>.
Age in grow in developing so I like the position we're in.
Okay. No. Thanks, that's great and again, you know looking out the next year.
A lot of point there is still no recession companies I'm concerned about labor Roma is it raw materials cost inflation, if you can name it.
Out there, but I was wondering for you now as you look out to next year, what do you see as maybe.
The biggest headwind for you if any.
Well I mean, we like everybody else you know, we have sort of a cautious optimism.
We see the same headwinds that everybody else sees but I've been in this business for 35 years and.
Through a lot of economic cycles, and I, just the calibration business and to degree that you spend your time and your efforts in regulated markets.
We're well, we're well positioned for for an economic slowdown it hits every business in one way or any or the other but I think that where our business model is a pretty good hedge against.
The normal effects that you see from a slowdown so let me try let I like the model that we're running and I think we're in a good position should things slow down.
Okay. That's great. Thanks for taking the questions.
No problem.
Yeah.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Well. Thank you all for this is Lee. Thank you all for joining us on the earnings call. Today. We appreciate your continued interest in trans cap Transco will be presenting in person at the ideas conference in Dallas, which is November 16th and the Craig Hallum Alpha Select conference. The next day in New York City, which is November 17th so feel free.
To attend our presentation or sign up for one on ones of Youre going to be at those conferences, otherwise feel free to check in with us at anytime we don't hear from you. We look forward to talking with everybody again after our third quarter results. So thank you for joining us.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yeah.