Q2 2024 Transcat Inc Earnings Call

Greetings and welcome to Transco, Inc. Second quarter fiscal 'twenty 'twenty four 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.

Please note. This conference is being recorded I will now turn the conference over to Todd Barbados CFO. Thank you you may begin.

Thank you operator, and good morning, everyone. We appreciate your time and your interest in Transcon.

With me here on the call today is our president and CEO, Lee Rudow, and our Chief operating Officer Mark Doheny.

We will begin the call with some prepared remarks, and then we'll open up.

Up the call for questions our earnings release crossed the wire after the market closed yesterday.

Both the earnings release, and the slides that we will reference.

During our prepared remarks can be found on our website transcon dot 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 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 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.

Okay. Thank you Tom.

Morning, everyone and thank you for joining us on the call today.

<unk> delivered strong performance across our entire business portfolio again in the second quarter of fiscal 2024 consolidated revenue was up 11% to $62 $8 million as demand for transplant services continued to be strong.

Consolidated gross margin expanded 230 basis points to 32% as margins expanded in both our service and distribution segments adjusted EBITDA like key metric for US given our successful acquisition strategy grew 24% for the prior year to $9 $3 million operating cash flow in the second quarter.

Was $8 5 million and $16 million a year to date.

Turning to our second quarter service segment performance are different differentiated suite of services continued to support performance at a very high level, we recorded our 58th straight quarter of year over year service revenue growth service revenue grew 17%, including double digit organic service growth of 10%.

Recurring revenue streams in a differentiated sustainable value proposition continue to foster durability and resiliency in our service growth model.

And we continue to benefit from strong demand throughout multiple regulated service industries that include pharmaceutical medical device, biomedical and as well as well as well our aerospace and defense service gross margin was 34% in the second quarter, which represents 140 basis point.

Increase over prior year.

Margin expansion was primarily driven by leverage on double digit organic growth increased productivity from automation and significant process improvements throughout our network of calibration labs.

Turning to distribution for the second quarter gross margins expanded 340 basis points from prior year, driven by growth and an increase in mix of our high margin rental business.

Both core distribution and rentals continued to drive a significant number of leads and opportunities into our service segment supporting consistent strong organic growth.

The combination of products rentals, along with calibration and Nexus cost control and optimization services remains unique.

We've executed well expanding our addressable markets and our value proposition has never been stronger.

Yes.

Overall strong performance for <unk> in the second quarter of fiscal 2020 for the 24% increase in EBITDA is due in part to our ability to achieve our revenue and cost synergy objectives on the companies we acquire.

We start by identifying and acquiring companies that are good strategic fit for trans cat, but those are only the first two steps, whether we acquired adjacent company to expand our markets or geographic foot print edition, our classic bolt onto our core calibration services. It is through integration.

Cat drives differentiation.

And we're very proud of the work our team has done on this front you can see it you see it in the results the results of their work as margins and profits increase and of course acquisitions will continue to be an important part of our overall growth strategy.

In the second quarter, we acquired axiom test equipment rentals, the largest acquisition in transcripts history and stare at quality of life Science service company specializing in commissioning qualification and validation services axiom is a great synergistic fit with Transcatheter traditional rental business that was launched organically.

In 2015.

Gross synergies between axiom and Trans cats traditional rental business include go to market selling and marketing go to market selling and marketing strategies with complementary inventories and customer base.

We expect the combined rental business to perform well as we capitalize on what we consider a one plus one equals three opportunity.

Their qual expands our addressable market within the next the cost control and optimization space.

Our call also Fortifies next is differentiated single source solutions model N S III.

In addition to the two acquisitions in the second quarter of fiscal 2020 for perhaps what stands out most is the completion of a public offering of our common stock, which was used to repay our credit facilities.

The highly successful offering displayed robust demand for transcon stock among institutional investors, who recognize understand and value our long term demonstrated track record of profitable revenue growth.

Spansion of addressable markets and.

And sustainable margin improvement and with that I'll turn things over to Tom for more detailed view of our fiscal 2023 second quarter results.

Thanks, Lee I'll start on slide four of the earnings deck posted on our website, which provides detail regarding our revenue on a consolidated basis and by segment for the second quarter of fiscal 2024 <unk>.

Second quarter consolidated revenue of $62 8 million was up 11% versus prior year service segment strength and slight growth in our distribution business.

Looking at it by segment service segment revenue growth remained very strong at 17% with 10% of the growth coming organically and the other 7% from acquisition.

As Lee mentioned, we continue to see high levels of demand in our services business.

Turning to distribution revenue of $21 4 million.

Grew 1% from the prior year, we continue to see growth in our higher margin rental business, which also benefited benefited from the axiom test equipment acquisition, which closed in mid second quarter.

Turning to slide five our consolidated gross profit for the first quarter of $20 1 million was up 20% from the prior year and our gross margin expanded 230 basis points in the second quarter.

Service gross margin expanded 140 basis points.

The service margin increase further demonstrates our ability to benefit from the inherent leverage in our operating model as well as higher levels of technician productivity supported by continuous improvement initiatives like automation and process streamlining within our networks of labs.

Distribution segment gross margin of 28, 3% was up 340 basis points from the prior year driven by a larger mix of higher margin rental revenue.

Turning to slide six Q2 net income of half a million dollars decrease from the prior year due to a nonrecurring noncash charge of $2 8 million for the previously disclosed amended next to earn out.

The next one earn out agreement was amended to recognize the expanded scope of the <unk> portfolio, which includes the acquisition of stairwell and this change is based on.

Current expectations of future business performance.

Diluted earnings per share came in at six the onetime earn out charge reduced earnings per share by 35 cents.

We report adjusted diluted earnings per share as well to normalized for the impacts of upfront and ongoing acquisition related costs Q.

Q2, adjusted diluted earnings per share of <unk>, 60 increased 16 or 36% from the prior year.

A reconciliation of adjusted diluted earnings per share to diluted earnings per share can be found in the supplemental section of this presentation.

Operator: Greetings. Welcome to Transcouting, second quarter fiscal 2024 financial results. At this time, all participants are to listen only mode.

Flipping to slide seven where we show our adjusted EBITDA and adjusted EBITDA margin, we use adjusted EBITDA, which is non-GAAP to gauge the performance of our business because we believe it is the best measure of our operating performance and ability to generate cash as we continue to execute on our acquisition strategy. This metric becomes even more.

Operator: A question and answer session will follow the formal presentation. If anyone should require operator systems during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded.

To highlight as it does adjust for onetime deal related transaction costs as well as the increased level of noncash expense that will hit our income statement from acquisition purchase accounting.

Tom Barbato: I will now turn the conference over to Tom Barbato, CFO. Thank you, you may begin. Thank you, operator, and good morning, everyone.

Tom Barbato: We appreciate your time in your interest in Transcat.

With that in mind second quarter consolidated adjusted EBITDA of $9 3 million was up 24% from the same quarter in the prior year and adjusted EBITDA margin expanded 160 basis points bolstered.

Tom Barbato: With me here on the call today as our president and CEO, Lee Rudow, and our chief operating officer, Mark Dohening. We will begin the call with some prepared remarks, and then we'll open up the call for questions. Our earnings release crossed the wire after market closed yesterday. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, Transcat.com, in the investor relations section.

Both segments had adjusted EBITDA growth compared to last 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 eight operating free cash flow significantly improved up $10 million versus the prior year, we have generated $16 million in operating cash flow in the first half of the fiscal year.

Tom Barbato: 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 recent 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 in the documents filed by the company with the SEC.

Q2 capital expenditures were $600000 higher than prior year and continues to be centered around service segment capabilities technology, including automation and future growth projects.

Slide nine highlights our strong balance sheet at the end of the quarter. We had a total net debt of $52 million with a leverage ratio of 1.37 X and $32 million available from our credit facility.

Tom Barbato: 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 is 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-gap measures, which we believe will be useful in evaluating our performance.

Subsequent to the end of the quarter the revolving credit facility was paid off using the funds from the secondary offering which closed early in the third quarter.

Lastly, we expect to file our 10-Q on November one and with that I'll turn it back to you Lee Thanks, Tom.

Transcon has consistently delivered exceptional results throughout the past decade and through various economic cycles, we expect profitable growth and sustainable margin improvement to continue.

Tom Barbato: You should not consider the presentation of this additional information in isolation, or as a substitute for results prepared in accordance with gap. We've provided reconciliations of non-gap to compare gap measures in the tables accompanying the earnings release.

As we increase shareholder value, we expect our successful and unique acquisition strategy to drive synergistic growth opportunities and expand our addressable markets, we expect to leverage continuous process improvement and automation, including robotics, which we're in the very early stages of developing as key enablers to future margin expansion.

Lee Rudow: With that, I'll turn the call over to Lee. Okay, thank you, Tom.

Lee Rudow: Good morning, everyone. Thank you for joining us from the call today. Transcat delivered strong performance across our entire business portfolio, again, in the second quarter of fiscal 2024. Consolidated revenue was up 11 percent to $62.8 million as demand for Transcat services continued to be strong. Consolidated gross margin expanded 230 basis points to 32 percent, as margins expanded in both our service and distribution segments. Adjusted EBITDA, a key metric for us given our successful acquisition strategy grew 24 percent for the prior year to $9.3 million, operating cash flow in the second quarter was $8.5 million and $16 million a year to date.

In other words, we expect to get bigger and we expect to get better that's the trans cat way.

As we work our way through the third quarter of fiscal 2024, we are still expecting high single digit to low double digit organic service growth for the full fiscal year, we expect gross margin expansion as well.

Perhaps most importantly, we expect to develop recruit and retain superior management and leadership throughout our organization. It's the people Transcatheter continue to move the needle and push the company to New Heights, we expect to continue that as we journey into the future.

With that operator, please open the line for questions.

Yeah, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Lee Rudow: Turning to our second quarter service segment performance, our differentiated suite of services continued to support performance at a very high level. We recorded our 58th straight quarter of the year-over-year service revenue growth. Service Revenue Group's 17%, including double digit organic service growth of 10%. Recurring revenue streams and a differentiated, defendable value proposition continue to foster durability and resiliency in our service growth model. And we continue to benefit from strong demand throughout multiple regulated service industries that include pharmaceutical, medical device, biomedical, and as well aerospace and defense.

Our first question is from Greg Palm with Craig Hallum Capital Group. Please proceed.

Yeah. Thanks, Good morning, everyone I wanted to start with service gross margin on an absolute basis was really strong and I think the improvement on a year over year basis was the highest in some time. So I I guess, it's kind of a continuation of what you've been.

Seen over the years, but in terms of kind of the greatest positive impact.

Lee Rudow: Service growth margin was 34% in the second quarter, which represents 140 basis points increased over a prior year. Margin expansion was primarily driven by leverage on double digit organic growth, increased productivity from automation, and significant process improvements throughout our network of calibration labs. Turning the distribution for the second quarter, gross margins expanded 340 basis points from prior year during my growth and an increase in mix of our high margin rental business.

Where are you seeing that and should we assume that level of year over year improvements for the remainder of the year or was there something kind of onetime in nature that drove some of that strength specifically in the quarter.

Okay, well I'll take that call that question, Greg you know, it's a combination of things that we alluded to.

No surprise that strong organic growth is going to always help our margins. He there's inherent leverage in this business model, we've talked about that through the year. So I think the volume helps our volume will continue to help so to the degree that we continue to grow organically at the rates that we have you'll see margins improve from that so also.

Lee Rudow: Both core distribution and rentals continue to drive a significant number of leads and opportunities into our service segment supporting consistent strong organic growth. The combination of products, rentals, along with calibration, and Nexus cost control and optimization services remains unique. We've executed well expanding our addressable markets and our value proposition has never been stronger. Overall strong performance for Transcat in the second quarter of fiscal 2024. The 24% increase in EBITDA is due in part to our ability to achieve our revenue and cost synergy objectives on the companies we acquire.

Automation you know, we're now probably in our third or fourth year of focusing on automation, we introduced it some years back and we're picking up some momentum as well there's no question in our minds as we track the data that that is a contributing factor and that will also contribute continue to contribute as you know we're certainly not at the end of our you know our opportunities there and.

Process improvement in general we've done a lot of work leaning out these labs working on our processes from you know are you know the the moment the product comes into our facilities at the moment. It leaves and I just think that when we look at these processes and some.

Some of the improvements we've made there contributing factor. So when you look forward and most of those things are going to continue but I am always hesitant to guide quarter by quarter on margins because there's different factors you see be else that can start up and have a short term drag there's other factors as well. So yes margins will continue to improve we would expect that over time and over the next few years.

Lee Rudow: We start by identifying and acquiring companies that are good strategic fit for Transcat, but those are only the first two steps. Whether we acquire an adjacent company to expand our markets, a geographic footprint addition, or a classic bolt on to our core calibration services, it is through integration that Transcat drives differentiation. And we are very proud of the work our team has done on this front. You can see it, you can see it in the results, the results of their work, as margins and profits increase. And of course, acquisitions will continue to be an important part of our overall growth strategy.

Ours, and it will be pretty consistent I don't want to get into a quarter by quarter guidance on that but but much of what you've seen in the past I think youll see in there in the near future.

Okay Fair enough and then if I could just switch gears to distribution and talk a little bit about axiom, what kind of overlap is there maybe you can dive into a little bit of the potential revenue synergies that could could play out and then just in terms of you'll rentals as a mix of.

Lee Rudow: In the second quarter, we acquired Axiom Test Equipment Rentals, the largest acquisition in Transcat's history, and Sterequal, a life science service company specializing in commissioning, qualification, and validation services. Axiom is a great synergistic fit with Transcat's traditional rental business that was launched organically in 2015. Growth synergies between Axiom and Transcat's traditional rental business include go-to-market selling and market go-to-market selling and marketing strategies with complimentary inventories and customer base. We expect to combine rental business to perform well as we capitalize on what we consider a 1 plus 1 equals 3 opportunity.

Of of total distribution revenue, where does that get you now and maybe you can just remind US you know of the margin structure of rental versus equipment sale.

Well I'll start I'll, let Tom talk about axiom as a percent of our total distribution revenue I'll I'll talk but I'll talk to the synergies Greg. So there's some really great synergies with this deal and that's why we were excited from from the outset, then we've got inventories a potential rental equipment on their side of the business that very much will.

Lee Rudow: Sterequal spans our addressable market within the next the cross-control and optimization space. Sterequal also fortifies next the differentiated single source solutions model, NS3.

Help us with our core customer base and it goes both ways you know a higher inventory and their inventory there is some overlap, but not a lot and so we expect to sell our respective inventories to each other's customer base and that's a big one the way we go to market.

Lee Rudow: In addition to the two acquisitions in the second quarter fiscal 2024, perhaps what stands out most is the completion of a public offering of our common stock which was used to repay our credit facility. The highly successful offering displayed robust demand for Transcat stock among institutional investors who recognize, understand, and value our long-term demonstrated track record of profitable revenue growth, expansion of addressable markets, and sustainable margin improvement.

Transcon is more driven by our sales are driven by marketing robust marketing plans.

The domain authority on the web link equities that we have where people recognize us from.

From a digital world they do a lot of traditional selling so again this is a synergy because we're going to use our marketing.

Expertise to help them grow their business and they're going to be using their feet on the street. So to speak salespeople to help us with our so two great synergies in the customer bases themselves are different and so I just we like this deal for all those reasons as far as you want to address time, yes, I think Greg I mean, if you think of the the combined distribution business now you know the rentals.

Tom Barbato: And with that, I'll turn things over to Tom for a more detailed view of our fiscal 2020-23 second quarter results. Thanks, Lee. I'll start on slide four of the earnings deck posted on our website, which provides detail regarding our revenue on a consolidated basis and buy segment for the second quarter of fiscal 2024. Second quarter consolidated revenue of $62.8 million was up 11% versus prior year on service segment strength and slight growth in our distribution business.

2025, 20% to 25% of the the combined distribution.

Distribution now when we take what we had in and add the axiom business do it.

And just remind us on the margin structure of rentals versus at all and equipment. So.

Tom Barbato: Yes, looking at a service segment revenue growth remained very strong at 17%, with 10% of the growth coming organically, and the other 7% from acquisition. As Lee mentioned, we continue to see high level demand in our services business. Turning to distribution revenue of 21.4 million grew 1% from the prior year. We continue to see growth in the higher-margin rental business, which also benefited from the axiom test equipment acquisition, which closed in mid-second quarter.

Yeah, I mean, we had when we had acquired axiom weird kind of disclose as you know the margins were 55% or better on there on the rental business the combined rental business.

Okay, Great Alright, I will I'll leave it there thanks best of luck.

Thanks, Craig.

Our next question is from Ted Jackson with Northland Securities. Please proceed.

Thank you very much and congrats on a very very solid quarter.

Okay. Thanks, Doug.

Tom Barbato: Turning to slide five, our consolidated growth profit for the first quarter of 20.1 million was up 20% from the prior year, and our growth margin expanded 230 basis points in the second quarter. Service growth margin expanded 140 basis points. The service margin increase further demonstrates our ability to benefit from the inherent leverage in our operating model, as well as higher levels of technician productivity supported by continuous improvement initiatives like automation and process streamlining within our networks of labs.

I'm going to go into some weeds I'm, sorry about that but I was too Oh, you did with the with the transaction closing in the money that you raised I mean, it clearly wasn't in the current quarter, you're paying off the credit facility. So how much money did actually come in with the with the deal I mean, I think it was supposed to be 60 to 65 million.

Dollars or so and then the last quarter of the credit facility was at 42 43 million. So when I look at your balance sheet, you know as we kind of think about that how much cash is on your balance sheet.

Tom Barbato: Distribution segment growth margin of 28.3% was up 340 basis points from the prior year, driven by a larger mix of higher margin rental revenue. Turning to slide six, Q2 net income of half a million dollars decreased from the prior year, due to a non-recurring non-cast charge of 2.8 million for the previously disclosed amended next to earn out. The next to earn out agreement was amended to recognize the expanded scope of the next portfolio, which includes the acquisition steer qual and this change is based on current expectations of future business performance.

And am I correct, whether it'd be just take the you know call it 65, and subtract out 43 and <unk>.

Sure I'm going with this and your debt's down by 43, and then the differentials on in cash on your balance sheet.

Yeah, So Ted it's Tom right. So we the the net proceeds were about $75 million right. Because we did the initial deal was 70.

Another I don't know a half under the green shoe that was done right. So we netted about $75 million.

Kinda talk round numbers 50 of that went to pay off our credit facility.

And we've got about 25 million net cash.

Cash.

Tom Barbato: Deluted earnings per share came in at six cents. The one time earn out charge reduced earnings per share by 35 cents. We report adjusted deluded earnings per share as well to normalize for the impacts of upfront and ongoing acquisition related costs. Q2 adjusted deluded earnings per share of 60 cents, increased 16 cents or 36% from the prior year. A reconciliation of adjusted deluded earnings per share to deluded earnings per share can be found in the supplemental sections of this presentation.

No.

Subsequent to that the <unk>.

Bolivar being paid off we've got about four and a half to $5 million of term debt that remains.

Roughly.

You know 4% interest.

So that that'll be the only ex interest expense.

We have until we kind of tap into that cash balance.

Okay.

Sure.

That was very helpful.

Any chance you can give me just kind of the breakdown and services between service third party and freight at least not a percentage basis just to clean up my model.

Tom Barbato: Putting the slide seven, where we show our adjusted EBITDA in adjusted EBITDA margin, we use adjusted EBITDA, which is non-gap, to gauge the performance of our business because we believe it is the best measure of our operating performance and ability to generate cash, as we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for one time deal related transactions costs, as well as the increased level of non-cash explains that will hit our income statement from acquisition purchase accounting. With that in mind, second quarter consolidated adjusted EBITF of 9.3 million was up 24% from the same quarter in the prior year, and adjusted EBITF margin expanded 160 basis points Both segments had adjusted EBITF growth compared to last year.

Yeah, it's in the Q, which will be filing tomorrow, I don't I don't have that I.

I don't have that off top of my head and I apologize.

That's okay.

Then.

With regards to going back into the margins because margins were really were fabulous.

Wallace.

I mean are we when we when you know when when I think about you know in particular on the distribution side of margins in <unk>.

The strength you had there is it just fair to say that with the new mix in the rental business that that's kind of the new baseline for rent.

For our distribution margin on a go forward basis.

Yeah, I mean, we when we when we did the acquisition of axiom and.

Tom Barbato: As always, a reconciliation of adjusted EBITF to operating income and net income can be found in this supplemental section of this presentation. Moving to slide 8, operating free cash flow significantly improved up 10 million dollars versus the prior year, we've generated 16 million in operating cash flow in the first half of the fiscal year. Q2 capital expenditures were $600,000 higher than prior year, and continued to be centered around service segment capabilities, technology, including automation, and future growth projects. Slide 9 highlights our strong balance sheet. At the end of the quarter, we had a total net data $52 million, with a leverage ratio of 1.37X, and 32 million available from our credit facility.

We said that we expected go forward once we got kind of into steady state that the distribution margins would be in the 28% to 30% range. So we're kind of already at the low end of that range and where we still feel comfortable with that range.

For distribution in total.

And then.

On Opex.

You actually had some little better leverage in there than I expected just in terms of.

The different acquisitions and everything that's happened as of as of late you know how should we think about opex with regards to at least what kind of like a step up from Q.

Quarter to third quarter.

What kind of how I should how should we think about how that scales out as we go forward.

Tom Barbato: Subsequent to the end of the quarter, the revolving credit facility was paid off using the funds from the secondary offering, which closed early in the third quarter.

Yeah, I mean, I think we should expect.

Some continued investments you know we've talked about some of the heavy lifting being behind us, but I think.

Lee Rudow: Lastly, we expect the file, or 10Q, on November 1st, and with that, I'll turn it back to you, Lee. Thanks, Tom. Transcanons consistently delivered exceptional results throughout the past decade, and through various economic cycles, we expect profitable growth and sustainable margin improvement to continue, as we increase shareholder value. We expect our successful and unique acquisition strategy to drive synergistic growth opportunities and expand our dressable markets. We expect a leverage continuous process improvement and automation, including robotics, which were in the very early stages of developing, as key enablers to future margin expansion.

Sure.

You know, we should expect some some moderate increases.

Going forward.

We continue to invest in sales, we continue to make some investments in it.

In cyber security, which you just need to do but.

We believe a lot of the heavy lifting is behind us with the.

The increases that we saw in last year the year before.

Okay and then one last question and then I'll get out of line and on the customer base lab front.

Can you talk a little bit about you know kind of pipeline and activity on that front.

Yeah, I'll take that one Ted this is Lee yeah. The the CBL pipeline is pretty solid in fact, I would say its very solid as solid as it's ever been we expect that to continue I mean as long as the labor market is tight and you know what.

Lee Rudow: In other words, we expect to get bigger, and we expect to get better. That's the Transcat way. As we work our way through the third quarter of fiscal 2024, we are still expecting high single digit to low double digit organic service growth for the full fiscal year, and we expect gross margin expansion as well. Perhaps, most importantly, we expect to develop, recruit, and retain superior management and leadership throughout our organization. If the people transcat, they continue to move the needle and push the company to new heights. We expect to continue that as we journey into the future.

I'm not going to suggest we're the only company that debt that services CBS, but its certainly where we have an expertise level and that that is different than our competition and I think we're really well positioned to do well in that space. So I would expect so.

About the remainder of this year and into next at the pipeline, we have will support strong growth there.

Okay I'll get out of line again, Greg Congrats on the quarter. Thanks for taking my questions.

Operator: And with that operator, please open the line for questions. Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For a participant using speaker equipment, it may be necessary to pick up your hands that before pressing the star keys.

Thank you Todd.

Yeah.

As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Martin Yang with Oppenheimer and company. Please proceed.

Good morning. Thank you for taking my question and Tom can you maybe talk about next give us sense of.

You know how the business that's grown by itself and what are the synergies, especially revenue synergies you have seen between nex and youre calibration and distribution business, thus far and the finally, maybe the outlook for the next a combined with sterile coral how that'll Broncos dosing.

Greg Palm: Our first question is from Greg Palm with Craig Hallum Capital Group, and Prestige? Yeah, thanks.

Lee Rudow: Good morning, everyone. I wanted to start with service gross margin on an absolute basis was really strong. And I think the improvement on a year over your basis was, you know, the highest and sometimes. So I guess it's kind of a continuation of what you've been seen over the years. But in terms of kind of the greatest positive impacts, you know, where are you seeing that? And should we assume that? That level of year over your improvements for the remainder of the year was something kind of one time in nature that drove some of that strength specifically in the quarter.

Can grow.

In the longer term thanks.

Okay. So we we acquired nex it seems like about two and a half years ago roughly so the business has done really well we acquired at the time.

That essence doubled in size more than doubled in size in that period of time, and we think it's performing we think it's very well. It's there's a lot of synergies Martin that we've been able to leverage take advantage up between Trans Cat next up mostly.

Lee Rudow: Okay, well, I'll take that call that question, Greg. It's a combination of things that we alluded to. No surprise that strong organic growth is going to always help our margins. You know, there's inherent leverage in this business model. We've talked about that through the years. And I think volume helps volume. We continue to help so to the degree that we continue to grow organically at the rates that we have. You'll see margins improve from that.

But there's two avenues of synergies that we've performed well and one is we've given next access to our customer base and some of that growth since they've more than doubled comes from transkei traditional customers, who are interested in mix of services and that's been very clear and evident.

That's very clear and evident synergy for us. The second one has been when when transfer that goes to the table and is trying to win a new opportunity whether it be a CBL or our traditional onsite or body traditional body of work.

Lee Rudow: So also automation, you know, we are now probably in our third or fourth year focusing on automation. We introduced it some years back and we're picking up some momentum as well. There's no question in our minds as we track the data that that's a contributing factor. And that will also contribute, continue to contribute as you know, we're certainly not at the end of, you know, our opportunities there. And process improvement in general, we've done a lot of work leaning out these labs, working on our processes from, you know, the moment the product comes into our facility to the moment it leaves.

We have next is sitting at the table with us often and so not only are you talking about winning an opportunity that we currently don't have.

That our competition has already in house lab is running and with Nexus thing by our side, we're able to.

<unk> strengthened our value proposition our chances of winning increased significantly we've won deals that we would've otherwise not one on the traditional transkei side, because next up partnered with us in our proposal. So I think it goes both ways the synergies and we've done a really nice job and I see that continuing and maybe even improving as we go forward and get to know how to work with.

Lee Rudow: And I just think that when we look at these processes and some of the improvements we made, they're contributing factor. So when you look forward, and most of the things are going to continue, but, you know, I'm always hesitant to guide quarter by quarter on margins, because there's different factors, you know, you have CBLs that can start up and have a short term drag. There's other factors as well. So yes, margins will continue to improve. We expect that over time and over the next few years. And it will be pretty consistent.

I worked with each other better get to know each other's companies. This is just the early read nearly REIT spin been strong stair qual folds up really nicely.

Under the Nexus suite, because next it didn't offer commissioning services and and now now they can and they do validation as well, which is something that the next it did offer but it but it advances that value proposition as far as working together, we expect growth to obviously be at a higher rate since we have more to offer and we're not going to guide beyond.

Greg Palm: I don't want to get to a quarter by quarter guidance on that, but much of what you've seen in the past, I think you'll see in the near future. Yep. Okay, fair enough.

Lee Rudow: And then if I could just switch gears to distribution and talk a little bit about axiom, you know, what kind of overlap is there? Maybe you can dive into a little bit of the potential, you know, revenue synergies that could play out. And then just in terms of, you know, rentals as a mix of total distribution revenue, where does that get you now?

That at this point other than to say that the outlook.

With Nexsan stirrup altogether is stronger than just next to by itself because the suite of services has expanded and stare calls are really nice small boutique company I think we can help them with some of the traditional ways, we run and grow our business.

Tom Barbato: And maybe you can just remind us, you know, of the margins structure of rental versus equipment sale. Well, I'll start off. I'll talk about axiom as a percent of total distribution revenue. I'll talk, but I'll talk to the synergies Greg. So there's some really great synergies with the deal. That's why we were excited from the outset. And we've got inventories of potential rental equipment on their side of the business that very much will help us with our core customer base.

Beneficial to them and it's also been beneficial in excess so that we expect that trend to continue for those reasons as well.

Okay.

Does that answer your question Martin.

Yes, sorry, I was on mute.

Thanks, Lee So one more question for me is on gross margin axiom can you just talk about the <unk>.

Positive benefit on gross margin due to accidents integration.

Tom Barbato: And it goes both ways, you know, our inventory and their inventory. There's some overlap, but not a lot. And so we expect to sell our respective inventories to each other's customer base. And that's a big one. The way we go to market, Chad has more driven by our sales are driven by marketing, robust marketing plans, you know, domain authority on the way of link equities that we have where people recognize us, you know, from a digital world.

Last quarter, and then do you expect a meaningful contribution on gross margin uplift from.

The full integration of axiom in fiscal <unk>.

Yeah, so Marty the impact.

The impact in this past quarter was was not significant I mean, we don't we only have seven weeks and in the quarter. So it did positively impact distribution margins, but.

We will see more of a full <unk>.

Tom Barbato: They do a lot of traditional selling. So again, this is a synergy because we're going to use our marketing expertise to help them grow their business. And they're going to be using their feed on the street so to speak salespeople to help us with ours of two great synergies. And the customer bases themselves are different. And so I just, we like to steal for all those reasons as far as you want to address.

Order impact.

And this upcoming this.

This upcoming quarter, but our intent is not to really talk about the specifics of.

Margin in distribution and break it down into the individual pieces kind of on a go forward basis. So we.

We expect as we've said before that.

Tom Barbato: Yeah, so I think Greg, I mean, if you think of the combined distribution business now, you know, the rentals is, you know, 2025, 20 to 25% of the combined distribution now when, you know, we take what we had and add the vaccine. I just remind us on the margins structure of rentals versus an equipment sale. Yeah, I mean, we had, when we had acquired asking, we had kind of disclosed that, you know, the margins were, you know, 55% or better on the rental business, the combined rental business. Okay, great.

Going forward, we expect distribution margins in total to be in that 28% to 30% range and we're already in the low end of that range. So I think.

You can kind of take it from there.

Thank you Tom that's all for me.

Yeah.

And our final question is the.

Follow up question from Ted Jackson with Northland Securities. Please proceed.

Great. Thanks, Hey, I, just wanted to touch base on both automation and kind of what's going on within Ireland.

Kind of the that would be acquisitions, you had in that front you brought up an automatic autumn below excuse me automation as one of the drivers for margin I know, it's been an area that you have.

Greg Palm: All right. I will leave it there. Thanks, best of luck. Thanks, Greg.

Ted Jackson: Our next question is from Ted Jackson with Northland Securities. Please proceed.

<unk> been focused on and you kind of.

You've been kind of slow and methodical with it so maybe kind of an update on kinds of things that you're automating and kind of where things stand with regards to that effort and then behind that kind of the a progress report with regards to the penetration of the Irish market.

Ted Jackson: Thank you very much and congrats on a very, very solid quarter. Thanks, Beth. Thanks. I'm going to go into some weeds. Sorry about that, but I always do. With the transaction closing and the money that you raised, it clearly wasn't in the current quarter. You're paying off the credit facility. So how much money did actually come in with the deal? I mean, I think it was supposed to be 62, I mean, 65 million or so.

Ted Jackson: And then the last quarter of the credit facility was at, you know, 42, 43 million. So when I look at your balance sheet, you know, as we kind of think about that, how much cash is on your balance sheet and, you know, in the end of my correct, would I just take the, you know, call it 65 and subtract out 43. And, you know, sir, I'm going with this and your debt's down by 43 and, you know, then the differentials on cash on your balance sheet.

Okay first I'll talk about automation and a small subset of that will be robotics. So automation is a very difficult.

<unk> to execute.

We knew that going in but we also knew that once we did it and for each.

When we made progress each element of progress that we make.

Tom Barbato: Yes, so Ted, it's Tom, right?

Tom Barbato: So we, the net proceeds were about 75 million, right? Because we did the initial deal at 70. Oh, yeah, that's right. Another 10 and a half under the green shoe that was done, right? So we netted about 75 million.

Hello going in <unk>.

But the results in the last few quarters, you can just see the margins and we can track it back to the number of technicians that we have how efficient. They are we have productivity ratings for each technician, how often are they on the bench how effective are they when they are on the bench how much automation are they using how many calibrations are they doing that.

Tom Barbato: And I'm going to talk around numbers of 50 of that went to pay off our credit facility. And we've got about 25 million that, you know, cash, you know, subsequent to the revolver being paid off. We've got about 4.5 to 5 million of term debt that remains and roughly, you know, 4% interest. You know, so that'll be the only interest expense we have until we kind of tap into that cash balance. Okay.

Ted Jackson: That was very helpful.

Done that to the time they spent doing an automated cowen user type of Kpis were tracking so we know it's working and we'll continue to work what inning are we in if I had to characterize it I used to say when it first second inning, we're probably in the fifth inning of that game.

We've progressed from the first second third to the fifth inning, there's still plenty of work to do robotics is a subset of that the Irish company we bought.

Robotics company and we are now doing.

Ted Jackson: Any chance you can give me just kind of the breakdown and services between service third party and freight, at least not a percentage basis.

Mass Calibrations for example in Philadelphia in our L. A last year of two robots in each lab.

In Ireland.

Tom Barbato: Just a, let me clean up my model. Yeah, it's in the queue, which we'll be filing tomorrow.

Robotics team and they are now working on digital multi meters and I think on deck as temperature and pressure after that so again, not a fast process, but robotics is actually faster than than traditional automation and we've like I said, we've already got robots running and so these are things that are going to help us get to that high <unk> from the mid <unk> and beyond.

Ted Jackson: I don't, I don't have that. I don't have that off the top of my head. That's okay.

Tom Barbato: Then with regards to going back into the margins, because margins were really, were fabulous. I mean, when I think about, you know, I'm particular on the distribution side of margins and, you know, the strength you had there. Is it just fair to say that, you know, with the new mix and the rental business that that's kind of the new baseline for, you know, for a distribution margin on the Go Forward basis?

And that's our ultimate goal. So we're pleased with that progress the Irish market itself as far as developing it for the calibration business. We bought that very very small company. We've got some interesting plans in the works to try to grow that organically. It's really early for us to get into too many details on that but we intend on growing our calibration business in the <unk>.

Irish market.

And really kind of exclusively in the Irish market as far as Europe goes that's where our <unk> is that's where we'll we'll do work and that's where we'll grow organically. Unlike the nex business, that's more scalable throughout Europe, because it's just easier to grow that business and to follow our customers throughout the European footprint calibration will be in Ireland and.

Tom Barbato: Yeah, I mean, we, when we, when we did the acquisition of axiom and we said that we expected Go Forward, you know, once we got kind of into steady state, that the distribution margins would be in the 28 to 30 percent range. So we're kind of already at the low end of that range and we, we still feel comfortable with that range.

It's the early days, there, but we intend on growing it organically for sure.

Tom Barbato: For distribution until, and then on OPEX, I mean, you actually had a little better leverage in there than I expected, just in terms of, you know, with the different acquisitions and everything's happened as of late, you know, how should we think about OPEX with regards to, you know, at least, you know, kind of like a step up from Q, the second quarter, the third quarter, and, you know, I mean, I think we should expect, you know, some continued investments, you know, we've talked about, you know, some of the heavy lifting being behind us, but I think, you know, we're, you know, we should expect some moderate increases, you know, going forward, you know, we continue to invest in sales, we continue to make some investments in IT and cybersecurity, which, you know, you just need to do, but, you know, we believe a lot of heavy lifting is behind us with the, you know, the increases that we saw in last year, the year before.

Okay I hope that's helpful. Ted.

Thanks very much.

There are no more questions in the queue I would like to turn the conference back over to management for closing comments.

Okay, well this is Lee and thank you all for joining us on the call. Today. We appreciate your continued interest in transcon as always we will be participating in the Roth and the Craig Hallum Conference is in New York City on November 15th and November 16th So feel free to check in on US there if not you're you're always welcome to check in on US anytime we look for.

We're talking to everybody and if we don't hear from you we'll talk to everybody. After we.

Have our third quarter results. Thanks again for participating in today's call.

Yes.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

Lee Rudow: Okay, and then one last question, and then I'll get out of line, and on the customer-based lab front, can you talk a little bit about, you know, kind of, you know, pipeline and activity on that front? Yeah, I'll take that one, Ted, this is Lee. Yeah, the, the CBL pipeline is pretty solid, in fact, it's very solid, it's solid has ever been, you know, we expect that to continue, I mean, as long as the labor markets tight, and, you know, you know, we're, I'm not going to suggest we're the only company that, that, that services CBLs, but it's certainly we're, we're, we have an expertise level, and that that is different than our competition, I think we're really well positioned to do well in that space, so I would expect throughout the remainder of this year, and into next that the pipeline we have will support strong growth there.

Yeah.

Yeah.

Ted Jackson: Okay, I'll get out of line, again, congrats on the quarter. Thanks for taking my question. Thank you, thank you, Ted. Thank you, Ted.

Yeah.

Operator: Has the reminder to star one on your telephone keypad if you would like to ask a question?

Martin Yang: Our next question is from Martin Yang with Oppenheimer and Company, please proceed. Morning, thank you for taking my question, me and Tom.

Lee Rudow: Can you maybe talk about next, you know, give us a sense of, you know, how the business has grown by itself, and what are the synergies, especially revenue synergies you have seen between NEXA and your calibration and distribution business thus far, and the finally, maybe I'll look for the NEXA combined with sterile quarrel, you know, how that overall consulting business can grow in the longer term. Thanks. Okay, so we acquired NEXA seems like about two and a half years ago, roughly, so the business has done really well.

Lee Rudow: We acquired at the time business that has since doubled in size, more than doubled in size in that period of time, and we think it's performing, we think it's performing very well. There's a lot of synergies, Martin, that we've been able to leverage, take advantage of between TransCAT and NEXA mostly, whether there's two avenues of synergies that we've performed well in. One is we've given NEXA access to our customer base and some of that growth since they've more than doubled comes from TransCAT traditional customers who are interested in NEXA services, and that's been a very clear and evident synergy for us.

Lee Rudow: The second one has been when TransCAT goes to the table and is trying to win a new opportunity, whether it be a CBL or a traditional onsite or a traditional body of work, we have NEXA sitting at the table with us often, and so not only are we talking about winning an opportunity that we currently don't have that our competition has or an in-house lab is running, and with NEXA sitting by our side, we're able to strengthen our value proposition, our chances of winning increase significantly. We've won deals that we would have otherwise not won on the traditional TransCAT side, because NEXA partnered with us in our proposal.

Lee Rudow: So I think it goes both ways, the synergies have done a really nice job, and I see that continuing, and maybe you're improving as we go forward and get to know how to work with each other better, get to know each other's companies. This is just the early read, the early read's been strong. Sterequal folds up really nicely under the NEXA suite, because NEXA didn't offer commissioning services, and now they can, and they do validation as well, which is something that NEXA did offer, but it advances that value proposition.

Lee Rudow: As far as working together, we expect growth to obviously be at a higher rate, since we have more to offer, and we're not going to guide beyond that at this point, other than to say that the outlook with NEXA and Sterequal together is stronger than just NEXA by itself, because the suite of services has expanded, and Sterequal's a really nice small, but key company. I think we can help them with some of the traditional ways we run and grow a business, we benefit to them, and it's also been beneficial to NEXA, so that we expect that trying to continue, for those reasons as well. Did that answer question Martin? Yes, sorry I was on mute. Thanks Lee.

Tom Barbato: One more question for me is on gross margin axiom.

Tom Barbato: Can you talk about the positive benefit on gross margin due to axiom's integration last quarter and then do you expect a meaningful contribution on gross margin up to it from the full integration of axiom in fiscal 3Q? Yeah, the impact, the impact in this past quarter was not significant. We only had seven weeks in the quarter, so it did positively impact distribution margins, but we'll see more of a full quarter impact in this upcoming quarter.

Tom Barbato: Our intent is not to really talk about the specifics of margin in distribution and break it down into the individual pieces on a go-forward basis. We expect as we've said before that going forward, we expect distribution margins in total to be in 28 to 30% range and we're already in the low end of that range, so I think you can kind of take it from there.

Martin Yang: Thank you, Tom.

Ted Jackson: That's all for me.

Ted Jackson: And our final question is a follow-up question from Ted Jackson, Northland Security, please proceed. Great, thanks. Hey, I just wanted to touch base on both automation and kind of what's going on within Ireland, you know, with kind of the acquisition you had in that front. You brought up automation. Automation is one of the drivers for margin. I know it's been an area that you've been focused on and you've kind of, you know, you've been, you know, kind of slow and methodical with it, so maybe kind of an update on, you know, kinds of things that you're automating and kind of, you know, where things stand with regards to that effort and then behind that kind of, you know, the progress report with regards to the penetration of the Irish market. Thanks.

Lee Rudow: Okay, first let's talk about automation and a small subset of that will be robotics. So automation is a very difficult initiative to execute. We knew that going in, but we also knew that once we did it and for each, you know, when we made progress, each element of progress that we made would work. Well, going in arduous, but the results in the last few quarters, you could just see the margins and we can track it back to, you know, the number of technicians that we have, how efficient they are, we have productivity ratings for each technician, how often are they on the bench, how effective are they when they're on the bench, how much automation are they using, how many calibrations are they doing that are, you know, redundant to the time they're spent, you know, doing an automated count.

Lee Rudow: These are the type of KPIs we're tracking, so we know it's working and we'll continue to work. What ending are we in? If I had to characterize it, I used to say we're the first second ending, you know, we're probably in the fifth ending of that game over the, you know, that we've progressed from the first second, thirding to the fifth ending, there's still plenty of work to do. Robotics is a subset of that, you know, the Irish company we bought is a robotics company, and we are now doing mass calibrations, for example, in Philadelphia and our LA labs, we have two robots in each lab.

Lee Rudow: In Ireland, that robotics team, they're now working on digital multimeters, and I think on deck is temperature and pressure after that. So again, not a fast process, but robotics is actually faster than traditional automation, and we, like I said, we've already got robots running, and so these are things that are going to help us get to that high 30s from the mid 30s and beyond, and that's our ultimate goal. So we're pleased with that progress.

Lee Rudow: The Irish market itself, as far as developing it for the calibration business, you know, we bought that very, very small company. We've got some interesting plans and the works to try to grow that organically. It's really early for us to get into too many details on that, but we intend on growing our calibration business in the Irish market, and really kind of exclusively in the Irish market, as far as Europe goes.

Lee Rudow: That's where our Calves is. That's where we'll do work, and that's where we'll grow organically. Unlike the next business that's more scalable throughout Europe, because it's just easier to go to that business and to follow our customers throughout the European footprint, calibration will be in Ireland, and you know, it's the early days there, but we intend on growing it organically for sure, here. I hope that's helpful, Ted. There was, thanks very much. There are no more questions in the queue.

Lee Rudow: I would like to turn the conference back over to management for closing comments. Okay, well, this is Lee and thank you all for joining us on the call today. We appreciate your continued interest in Transcat.

Lee Rudow: As always, we'll be participating in the Roth and the Craig Helm conferences in New York City on November 15th and November 16th. So feel free to check in on us there. If not, you're always welcome to check in on us anytime. We look forward to talking to everybody. And if we don't hear from you, we'll talk to everybody after we have our third quarter results. Thanks again for participating in today's call. Thank you.

Operator: This will conclude today's conference. You may disconnect your lines this time. And thank you for your participation. Thank you.