Q3 2023 Transcat Inc Earnings Call
Greetings and welcome to the Trans Cat third quarter of fiscal year 2023 financial results. 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.
A reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Mr. Tom Barbados, Chief Financial Officer for Transcon. Thank you you may begin.
Thank you Melissa and good morning, everyone. We appreciate your time and your interest in Transcatheter.
With me here on the call today is our president and CEO , Lee Rudow, and our Chief operating officer Mark to Hany.
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.
The earnings release, and the slides that we will reference during our prepared remarks can be found on our website Transkei <unk> com in the Investor Relations section.
If you would please refer to slide 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 material materially.
From where we are today.
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.
Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe will be useful in evaluating when 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 to comparable 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, yes.
Yesterday tranche cut announced excellent financial results for our fiscal third quarter, we experienced broad based strength across our portfolio of services that drove 19% service revenue growth.
Expanding gross margins and provided strong EBITDA growth of more than 20%.
We were particularly pleased with our organic service growth of 12%.
Organic growth has now been in the high single digits or better for the last eight quarters, despite COVID-19 related impacts inflationary pressure and economic uncertainty.
This consistent performance demonstrates the resiliency of our business model, which inherently performed well through various economic cycles, we continue to execute well in the highly regulated life science space as well as the aerospace and defense markets, where the cost of failure is high and the revenue streams are recurring when we.
Meet the rigorous and ongoing needs of our customers.
Yeah.
In the third quarter consolidated revenue increased 13% to $57 $4 million consolidated gross margin expanded 180 basis points to 26 to 28, 6% and was driven by margin expansion in both our distribution and service segments. Adjusted EBITDA are very important metrics.
For us given our level of acquisitive growth as I, just mentioned grew 20% from the prior year third quarter to $6 $6 million.
Our service segment continues to perform at a high level and recorded its 55th straight quarter of year over year revenue growth.
Expanding our addressable markets has been an instrumental driver of our consistent growth. We continued to make proactive investments to drive differentiation and position transfer had to make meaningful share gains in the regulated markets. We serve are Great example of this is the next the enterprise asset management platform.
<unk> suite of services, which includes asset and data analytics computerized maintenance management compliance quality and validation now positions Trans cat in both the U S and Ireland to serve as mission critical global manufacturers.
Revenue synergies between Nexsan Transkei continues to be outstanding and reinforces our sustainable longer term competitive advantage.
From a margin perspective in the third quarter, we reported service gross margins of 30%, which is up 30 basis points for the third quarter of fiscal 2022.
Moving onto our distributions segment demand remained strong as revenue grew 4% to $21 $4 million. Despite extended vendor lead times driven by high end electronic chip shortages that continue to make it challenging to convert some open customer orders.
Distribution gross margin expanded 370 basis points year over year to 26, 2% as we continue to see growth in our high margin rental business and to benefit from the strategic buys that we executed earlier in the year.
Acquisitions are an important part of trans Cat's long term growth strategy and we acquired two companies at the beginning of the third quarter ETP calibration located in Cleveland, Ohio specializes in calibration services related to the aviation industry. We believe that we can leverage trans cats current infrastructure and significant geographic footprint.
To further accelerate the growth in <unk> capabilities across North America.
In addition, we are nicely positioned to capitalize on the life science market in the greater Cleveland area.
In the first quarter since the acquisition performance and integration activities have gone very well and we expect this to continue.
Go complete calibration established our first calibration footprint in Ireland complete calibrations as a small but strategic acquisition for Trans cat the acquisition.
Establishes a local presence in Ireland, a country with a robust life science market.
Secondly, complete calibration offers transcatheter foray into calibration robotics that we believe over the longer term will be another differentiator for transcatheter.
All in all our third quarter, our third quarter results were strong across our portfolio of businesses and channels, our balance sheet remains strong and supportive of our acquisition strategy with a leverage ratio of 1.66 times in the third quarter year to date, we generated $6 $8 million of free cash flow and with that I'll turn things.
Over to Tom Barth beta for a deeper look into the third quarter financial performance Tom. Thanks.
Thanks Ali I'll start on slide four of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the third quarter.
Consolidated revenue of $57 4 million was up 12% versus the prior year, driven primarily by strength in our services segment.
Service segment revenue growth remained very strong at 19% with 12% of the growth coming organically and the other roughly 7% from acquisition.
Turning to distribution revenue of $21 4 million was up three 7% versus the prior year. We continue to see strong demand for our products, which is reflected in our open order backlog of $9 5 million, which is up 7% versus the third quarter of the prior year.
Turning to slide five our consolidated gross profit of $16 4 million was up 20% from the prior year and our gross margin expanded 180 basis points to 28, 6%.
Service gross margin improved 30 basis points from the prior year distribution segment gross margin of 26, 2% was up 370 basis points from the prior year and continued strength in our rental business and a favorable sales mix.
Turning to slide six Q3 net income of $1 6 million was flat to prior year and our diluted earnings per share of 21 cents and adjusted diluted earnings per share of 35 cents.
Were also essentially flat.
Comparing diluted earnings per share and adjusted diluted earnings per share to the third quarter of the prior year.
Important to note that increased interest expense negatively impacted both EPS metrics by approximately <unk> <unk> per share.
We expect our full year fiscal 2023 tax rate to be in the range of 21% to 23%.
Flipping to slide seven 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 the best measure of our operating performance and ability to generate cash.
Additionally, as we continue to execute on our acquisition strategy. This metric became becomes even more important to highlight as 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 $6 6 million was up 20% from the prior year.
As always a reconciliation of adjusted EBITDA operating income and net income can be found in the supplemental section of this presentation.
Moving to slide eight cash flow from operations was in line with expectations for the quarter year.
Year to date capital expenditures through the end of the third quarter were $7 1 million compared to $5 9 million year to date in the prior year.
And continued.
To be centered around service segment capabilities, and technology, including automation and future growth projects.
Slide nine highlights our strong balance sheet at quarter end, we had total debt of 40 to $49 2 million.
Dollars with a leverage ratio of 166 X, we had $37 8 million available from our revolving credit facility.
Lastly, we expect to file our 10-Q after the market closes tomorrow with that I'll turn it back to you Lee. Thank you Tom.
Turning to the fourth quarter and the fiscal 2024 year ahead, we are well positioned for continued revenue and margin growth.
We also expect the strength of our value proposition to increase as we further develop our recently expanded addressable markets.
Fiscal 2023, we continued to make great progress in that respect as both Nexstar and our pipettes business have performed very well.
Serving highly regulated end markets with our unique differentiated value proposition makes our business model inherently durable and we expect demand for our services remained strong despite the economic uncertainty that lies ahead.
Fact differentiation is the key to our strategy along with strong execution differentiation will secure our competitive advantage and foster our ability to gain market share in the industries. We serve strong organic growth remains at the heart of our strategy and in the year ahead, we expect growth to remain in the high single digit range.
We continue to identify and pursue strategic acquisition opportunities that will expand our addressable markets and geographic footprint as well as leverage our current infrastructure with bolt on opportunities. Ultimately all of these drivers are designed to increase the trajectory of our business our balance sheet remains strong and is supportive.
But our very active M&A pipeline.
We will continue to leverage continuous process improvement automation and now robotics with the addition of complete calibration in Ireland to generate sustainable margin improvement in the future. We believe translates future looks bright and that we will continue to outperform in the years ahead and with that operator, we can turn we can open the line for questions.
Yeah.
At this time, we'll 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. Kim You May press star two if you'd like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.
Good morning.
Morning, everyone. Thanks for taking my questions here.
And what Gregg Hey, Greg.
I wanted to start with service graph.
You saw a nice acceleration there up 12% on an organic basis in them.
Curious if you can maybe pinpoint.
I dunno areas of outperformance relative to prior quarters, whether that's oh.
And market standpoint, maybe it's increased synergy contribution from next gen. Although that's.
<unk> lapped a year plus just wanted to get some broader thoughts on that.
Hey, Greg basically its a combination of all those things and probably some others as well you know we did lap the year with Nexus. So their growth, which has been impressive is is counted towards our organic numbers, but across our channels and our business is really that the company as we as we said in our stated remarks prefer.
Well across the board so.
That was encouraging we saw strong retention, we saw growth in in different businesses, including Nexium. So I'm really kind of broad based strength in the quarter. Okay. Okay. Good I didn't hear much in the way of CBL and I'm wondering if you could give us an update there on pipeline you know what.
Some of the recent activity and I'm also curious if there's any way you can quantify the gross margin headwind associated with that just for us to compare that on a year over year basis.
Yeah, I would say that when we look at our growth CBL is as it has for many years.
Save the Covid years been a contributing factor we did land some CBL.
<unk> in the beginning of the year that were new that were incremental coming out of Covid, which is good to see and and we anticipate it will always be a part of a factor in our growth, but nothing out of the as the usual you know no high percentage of our concentration of our growth what I attribute to cbl's as far as the C. B cells are the two.
Three that we had sort of mentioned and guided towards in the beginning of the year you know they take a couple of quarters to normalize and during that period of time when you land several in in one quarter, there's a bit of a drag in that drag did exist and we're probably well probably see us ourselves coming out of that a little bit more in the fourth quarter.
As we enter the first quarter Thats normal.
We're not going to guide towards you know exactly what the number of associated you know sort of basis points would be but it's a typical two to three quarter drag and you should see us starting to come out of the ones at least that we landed in the first quarter as we as we close out the year.
Yeah. So I appreciate the question.
Makes sense and then I guess just last one distribution.
Margin was was strong it sounded like some.
Some or most of that is attributable to our.
Rental maybe maybe mixes as well, but can you can you give us a update on where.
Rental is you know from a contribution standpoint growth just be curious to get a little bit more detail on the strength there.
Yeah, I would just say, Greg I would characterize it as you know rentals and the impact of the strategic buys that that Lee referenced kind of probably contributed fairly equally to the to the performance in the in the quarter.
As I mentioned on the last call as you know those strategic buys are going to.
Kind of dry up on us at some point here in the as we approach the end of the year and into early fiscal 'twenty four but.
We expect that the.
The growth in rental business will continue to offset those those impacts so.
I view I view the margin and.
You know in the quarter as you know kind of on a robust side and we would see that normalize a little bit going forward.
Okay, Great Alright appreciate all the color best of luck going forward. Thanks. Thanks.
Thanks, Greg.
Thank you. Our next question comes from the line of Scott Buck with H C. Wainwright. Please proceed with your question.
Hi, Good morning, guys. Thanks for the time piggybacking, a little bit on Greg's last question on the rental business.
Are you seeing cannibalization there from from sales with the increased rentals or.
Or are they you know entirely separate from from one another.
Generally Scott there theyre separate we're not seeing cannibalization I mean, I'm not saying it doesn't it's never occurred but it's I'm not seeing any numbers that would lead me to two point in that direction I think it's it's it's when we look at our value proposition you know distribution has its place and I think there's a discreet place for rentals rentals if any.
<unk> it.
It is strategically a bridge between services and distribution, it's kind of a service in and of itself, but we have not seen cannibalization. So.
That's a good thing for the business. It's been incremental from are you now in that respect.
Thanks, that's helpful and could you tell us what kind of capex expectations are for calendar 'twenty three and in the rental business.
And if theres any meaningful change from a year ago.
Yeah, no not a meeting for full change.
The the the rental pool, it's kind of a dynamic.
Population of equipment, but something in the $2 million to $3 million range is what we would expect.
To be at this year and would see you know when the in the near future as well going forward.
Okay. That's helpful and Tom generally how should we be thinking about opex growth from from here.
Is there any significant hiring you guys need to do on the corporate side or anything like that that would drive a meaningful increase there.
No I think.
The goal.
You know longer term is obviously to start seeing some leverage from a from an opex standpoint and.
I think that's a reasonable expectation in a reasonable way to think about it going forward it's not.
You know going to happen overnight, but as.
As we think of our longer term plan, that's certainly what we're shooting for.
Great and then just last one for me.
When you look at some of the efficiency gains on the service side, how far are you through those.
Grams and when.
When should we expect kind of the.
All the fruit of that labor.
It can be in T mobile gross margin.
Yes, Scott. This is Lee we you know, we we still see ourselves.
More towards the beginning I would characterize then the and you know in that margin enhancement journey and when we started out in the low 20 fours on the service side, we got it to the low thirties now, but you know between automation some robotics, we're putting a lot of sort of.
Enhanced processes in place that are showing good early signs in terms of improving efficiency and productivity. So I would say you know I'm not going to put an exact timetable on it in this call, but like we've talked about in the past we see this company. The next stage for us in the mid thirties, and I think that's achievable in a reasonable amount of time and in our initiatives that we have it.
<unk> should get us there beyond that it.
We will continue to work on process will continue to see what percentage of the business can be automated. It's it's it's not like it's over in the mid <unk>, but you know I think it's premature to get into too much detail. So then the next stop is the mid thirties, and we think we're going to get there and we've got good plans in place to do just that.
Okay, well I appreciate the additional color guys congrats on the quarter.
Okay. Thanks, Scott.
Thank you. Our next question comes from the line of Gerry Sweeney with Roth Capital Partners. Please proceed with your question.
Thanks for taking my call.
Gary.
Two questions if I could start with.
Maybe just next I know you just discussed are part of your.
Part of the strong growth, we're seeing but I'm just curious very complementary business.
What how much of an opportunity is there for cross selling or how big of a opportunity to nextera open up for growth.
We think it's substantial so we've been with next day for about what 16 17 months now coming up on a year and a half and so you know right out of the gate, we were able to sit at the same table. If you will both trans cat and next up with certain strategic customers of ours and and the combined pitched the valley.
[noise] proposition that we were communicating resonated really well and we even had some early wins you know literally a quarter. After the acquisition took place we've seen that continue throughout the subsequent three or four quarters and when we look at our pipeline now and we look at how we're managing that relationship how we're managing the synergies, which obviously are getting better in <unk>.
Or as we get to work with each other I think theres a lot of upside there I think our sales team thinks that the next team thinks that and that goes both ways, which is actually kind of interesting. They have picked up business by virtue of our customers and vice versa. So substantial would be the word I would use over time, it's a great question and we're encouraged by by the REIT.
Since the acquisition would you say pipeline continues to expand as that of <unk>.
Yeah, he bring deeper.
I think that's reasonable.
Got it.
Second question.
Just a little bit more further out on the curve, obviously complete calibration I think it's your first lab will say in Europe .
Is this a toe hold are you looking at other opportunities in Europe , I know, Ireland has a lot of life sciences, but maybe mainland or any thoughts on that.
Well it's interesting.
When you think about the calibration lab that we bought in.
In Ireland.
Characterized it two ways, there's two things going on in Ireland. One is calibration, yes, we have a we have a foothold that we're going to build a lab.
We will have a lab there we will go after calibration business in Ireland. When you have the calibration services you have to think of that as almost a local business. So calibration and lab can service, Ireland pretty well not to say, we Couldnt service outside of Ireland from Ireland, but generally speaking you think of that as a local business, but we have 40 or 50 employees in Ireland.
In working on the Nexus side of the business you know, we can always call. It professional services, where they're doing the consulting work and some of the things we alluded to in the script and that is not calibration services and what's interesting about that particular channel. Jerry is that you can expand further out beyond the borders of Ireland fairly easily so most of that.
Work.
He has done in front of a computer you know you do a site visit and then most of your work can be done anywhere and so I see that platform in particular being able to expand at a faster rate and at a greater rate than the calibration lab, which yes, we were in Ireland and we plan on developing our Calvert as Cal business. There. So I look at it got it both ways.
Understood I got it.
I appreciate it thanks for your time and congrats on a nice quarter.
No problem take care.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Mitra.
Ram Gopal with Sidoti and company. Please proceed with your question.
Yes, hi, good morning, Thanks for taking the questions.
Just a couple on the acquisition front.
Lee, obviously, and it's a big part of the growth strategy, but as you look in terms of an environment of rising interest rates. How comfortable are you in terms of levering the balance sheet up or being aggressive on the M&A front and while trying to balance accretion from any transaction you might consider doing.
Right well, it's it's an industry question I mean, typically you know our line as it stands today allows us to lever up to about three times, we've always been more comfortable in the mid twos there've been times in the last five to seven years, when we've lingered more around 227 I think at one point were one six now so anywhere in that range.
<unk> Mitra I think we're comfortable we have a shelf in place I mean, there are other depending on our strategy and how well we execute it and the changes in the market availability of these acquisitions I think there's a variety of ways to get them done even using stock as currency I mean, it's just different methods that we talk about and we'd use and deploy any of those if it made sense.
So I think we're well capitalized in that sense and as far as the market and acquisitions yet.
It's fairly dynamic for us and you know, we're kind of doing our thing so.
No issues I would just add that you know.
Assuming we continue to make good decisions on acquisitions, and we're adding businesses that are contributing well from a profitability standpoint that.
That mitigates the impact from a from a leverage standpoint, as well and I think we've demonstrated the ability to do that consistently over time.
Thank you exactly okay. Thanks for that.
And then just trying to get maybe some color on if you look at acquisitions like tangent, obviously got you into some new geographies or new markets Indianapolis and Huntsville, just curious if maybe a year later.
Are you being able to.
Really benefit from that.
New geography in terms of growing the local business beyond what I expected.
Yeah, you know.
The best way to answer that Mitra is to start off by talking about discipline. We are disciplined buyer of companies in our business space and by the time, we make a decision to say well you know whether it's a small company mid size or a little bit on the larger size for us they have to fit our strategy they have to satisfy our drivers and so we kind of.
Get a pretty good feel upfront.
What degree of success, we're gonna have just we just have to execute well we've got a great track record here.
Doing well in that respect and so I just wanted to make that general comment when we look at alliance in in in Ohio, We look at.
Tangible the two territories that brought us in Edp in Cleveland.
All of these deals have done rather well for us I mean, you know not all of them are exactly the same but I would I would characterize them.
Generally as good to very good to excellent deals you see next at the top excellent and you'd see a tangent for example, I would call a good deal in there and there and there's a few in between so they've satisfied the drivers we've done well executing we've done well with the integration. It's always it's always our idea to.
Part of our plan to integrate and so we're really satisfied and were going to keep this going we got a great track record and a great team working on this so yes, we're satisfied with the results and we expect it to continue.
Okay, Great and then finally I don't know if you could provide maybe some color also on the Canadian market in terms of what Youre seeing there and the potential opportunities for the growth.
With three lives in Canada, Ottawa, Toronto, and Montreal generally speaking I think Ken has had a really good year.
Coming out of Covid I think we've been pleased they've hit their numbers that we've set as expectations, they've actually exceeded them in some cases and I would expect looking at their pipelines and the general environment. There that that will continue there's no reason to believe that it won't at this point, but yet Canada has had a good year for us and we mentioned Lee. This is mark <unk> at the end of last year.
We invested in a neutral on a lab that greatly expands our capabilities and capacity. So that's that's going well and probably helping that that area. There was very attractive.
Very good.
Okay. No that's helpful and then maybe finally.
Weighing down in fiscal 'twenty, three and look out to fiscal 'twenty four.
Obviously, it's a dynamic environment right now, but what do you see if.
If you have any maybe a potential big are a headwind for you.
That we should be more cognizant of.
Well you know what.
No we're always thinking about the economy, we think about interest rates and inflation and.
Eventually you'll you'll see the impact of rising interest rates on the economy in general as I said before in the past as we demonstrate in the past, which is probably more important even though what I say is that we have a nice business in terms of being.
Recession resistance, probably the best way to characterize it you know our service business.
It's driven by that regulation the services has to take place regardless generally speaking of the economy. So I think the economy will be a headwind, but I think we're well positioned and I would say, that's where we're better positioned today than even five years ago or seven years ago, because our value proposition has gotten stronger the rental business I think is.
Fate is it favorable.
Attribute in terms of uncertainty for the distribution segment, we didn't use to have that now we do and I think even our service business has gotten more into life Sciences life Sciences tend to hold up well so for a variety of reasons I like where we are nothing's perfect. Nothing is totally recession proof, but we're in a really good position I think relative to <unk>.
Others in our industry and I think the next value proposition strengthens as the correct economic uncertainty grows as well. So that's something we didn't have even two years ago. That's correct combination of all these things Mitra.
Alright.
Great again thanks.
For taking the questions and nice quarter.
Pleasure. Thank you.
Thank you. Our next question comes from the line of Ted Johnson with Northland Securities. Please proceed with your question.
Thank you and good morning.
Almost all my questions have been asked so I've just got a basket, perhaps on the <unk> business because it's a business I know you all are excited about it and see great growth. If you could just provide a little color around it in terms of.
Growth trends, youre seeing and kind of.
Where that business is going.
Just.
Basically just kind of fill in some blanks in terms of like how is it how much is it contributing to your business what are the growth.
The growth profile or and how do you see it going forward. Thanks.
Oh no problem. So we loved the <unk> business for probably a couple of reasons that stand out its a life science oriented business, which is which is where we tend to focus a lot of our time for all the reasons that we stated Ted.
Business is a recurring revenue stream and we do a nice job, it's got nice margins and nice growth potential. So today, we run our main operation at the New England area as we speak.
We're opening up a west coast facility, it's our goal to do that and we're working on it so that even though the business doesn't necessarily have to be local it's nice to have something in the general region. The reason why it's in our plans to do that is because we see growth opportunities with this business pipe burst in general tend to be a nice kind of bridge between normal Cali.
Abrasion and life Sciences.
And he kind of the base work and additional opportunities are brought via via Pipet. So lots of reasons. Good attributes good margins. The business is really well run we started through an acquisition that would be an example of extending our addressable markets. So that's come to fruition really well.
I will continue to develop that business for sure.
Is that a business that you'll grow.
Per say organically kind of bringing it all along or is it a business as you look at your M&A funnel that you're actively pursuing building onto.
I think you'll see both.
Okay, Thanks, and very nice solid quarter look forward to next quarter as well.
Take care.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. <unk> for any final comments.
Okay well. Thank you. Thank you all for joining us on the call today. We appreciate your continued interest in Trans Cat, we will be participating in the 35th annual Roth Conference I think that's March 13th of March 14th out of Dana point.
We'll be there presenting so feel free to check in on us.
Or check in on us at any time, otherwise, we look forward to talk to you all again after the fourth quarter results come out and thanks, Thanks for participating on the call today.
Care.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.