Q3 2024 Transcat Inc Earnings Call
Speaker Change: [music].
Greetings and welcome to Transcribe, Inc, third quarter fiscal year 2024 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.
As a reminder, this conference is being recorded it is now my pleasure to introduce Tom Barbados Chief Financial Officer. Thank you you may begin.
Tom Barbados: Thank you operator, and good morning, everyone. We appreciate your time and your interest in Transco.
Tom Barbados: With me here on the call today is our president and CEO, Lee Rudow, and our Chief operating Officer Mark Mahaney.
Tom Barbados: We will begin the call with some prepared remarks, and then we will open the call up for questions. Our earnings release crossed the wire after markets closed yesterday, both the earnings release and the slides that we will reference during our prepared remarks can be found on our website Trans cat dot com in the Investor Relations section.
Tom Barbados: 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.
These factors are outlined in the news release as well as in the documents filed by the company with the SEC.
Tom Barbados: 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.
Tom Barbados: Statements in conjunction with these precautionary factors.
Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We've provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release with that I'll turn the call over to Lee.
Lee Rudow: Thank you Tom and good morning, everyone.
Lee Rudow: Transport continues to make excellent progress on key initiatives across our entire business portfolio. The operating results for the first three quarters of fiscal 2024 had been outstanding.
Turning specifically to the third quarter.
Consolidated revenue grew 14% to $65 $2 million driven by strong demand for our broad suite of services.
Lee Rudow: Consolidated gross margin expanded 350 basis points to 32, 1% and was driven by margin expansion in both our service and distribution segments. Adjusted EBITDA grew 39% from prior year to $9 $1 million.
Speaker Change: Let me spend a few minutes on each of our operating segments, we'll start with service.
Speaker Change: Consistent revenue growth continues to be fostered by recurring revenue streams in highly regulated markets strong customer retention and a differentiated value proposition chassis that has built a very strong reputation for execution and delivering services that consistently meet the needs of our demanding customers we continue to.
Speaker Change: Where the cost of failure is high and our services are critical component of our customers' processes.
Today, approximately 60% of.
Speaker Change: Of our service business comes from the highly regulated life science sector.
Speaker Change: Because of the criticality of our services. This is not an easy place to be but it's where we want it be it's where our tagline calibrated by chance cat resonates the most.
Speaker Change: In the third quarter, we grew overall service revenue by 15%, 9% was organic growth. This represents the 59th straight quarter of year over year service revenue growth.
Speaker Change: We have grown in the high single digits or better for each of the last two years and we anticipate doing the same in fiscal 2024.
Speaker Change: In addition to revenue growth, we continue to focus on margin expansion strategically we focus on operational excellence, which includes increased levels of automation robotics and process improvements in the third quarter service gross margin increased 250 basis points versus prior year to 32, 5%.
Speaker Change: And as always margin gains are supported by strong organic growth and associated operating leverage that's inherent in our service segment.
Speaker Change: Turning to distribution the growth of our rental business further accelerated by the axiom acquisition drove gross margin expansion of 530 basis points from prior year third quarter.
Speaker Change: In fact, the transformation of our distribution segment by growth in rentals has driven approximately 1000 basis points of gross margin expansion since 2016.
And a continued mix change towards rentals provides further opportunities to improve distribution margins as we enter fiscal 2025 and beyond.
Speaker Change: Internally, we say all roads lead to calibration and our distribution and our rental businesses continued to be an important generator of leads for our calibration services business.
Speaker Change: Overall as we mentioned in the earnings release, we are extremely pleased with our performance in the third quarter of fiscal 2024.
Speaker Change: Our adjusted EBITDA increase of 39% highlights trans cats ability to deliver on the high expectations, our shareholders have for consistent revenue and margin growth.
Speaker Change: Furthermore, the strong performance of recent acquisitions demonstrates the effective allocation of capital we have successfully identified.
Speaker Change: <unk> and integrated dynamic companies that align with our strategy and our disciplined approach drives differentiation.
Speaker Change: Gration process enables new acquisitions, such as <unk>, such as the recent deal with axiom to very quickly be accretive to the overall company.
Speaker Change: We ended the third quarter, well positioned financially with strong operating cash flow generation and balance sheet capacity, both of which allow us to actively pursue the M&A opportunities that comprise our current robust acquisition.
Operator: Greetings and welcome to TransCat Inc.'s 3rd Quarter Fiscal Year. Next time, all parches from Ensor, Los Angeles.
Speaker Change: Pipeline and with that I'll turn things over to Tom for more detailed review of our third quarter financials.
Operator: The question and answer session will follow the presentation. If anyone should require Big Star Zero, this is a reminder that this conference is being recorded. Now, my pleasure.
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 third quarter of fiscal 2024.
Tom Barbato, Chief Financial Officer. Thank you, operator. And good morning, everyone.
Tom Barbados: The third quarter consolidated revenue of $65 2 million was up 14% versus prior year on service segment strength and growth in our distribution business.
We appreciate your time and your interest in TransCat. With me on the call today are our President and CEO, Lee Rudow, and our Chief Operating Officer, Mark Doheny. We'll begin the call with some prepared remarks, and then we'll open the call up for questions.
Tom Barbados: Looking at it by segment service revenue growth remained very strong at 15% with 9% of the growth coming organically and the other 6% from acquisition as Lee mentioned demand remains strong in the services segment is our differentiated value proposition continues to resonate well with our customers.
Our earnings release crossed the wire after markets 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. 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 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.
Tom Barbados: Turning to distribution revenue of $23 $7 million grew 10% from the prior year, we continue to see growth in our higher margin rental business, which also benefited from the axiom test equipment acquisition.
Tom Barbados: Turning to slide five our consolidated gross profit for the third quarter of $20 9 million was up 28% from the prior year and our gross margin expanded 350 basis points in the third quarter.
Tom Barbados: Service gross margin expanded 250 basis points. The service margin increase further reflects our ability to leverage organic service growth higher levels of technician productivity and our differentiated value proposition.
Tom Barbados: Distribution segment gross margin of 31, 5% was up 530 basis points, driven by a larger mix of higher margin rental revenue, including impacts from the previously mentioned exit.
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 cautionary factors. Additionally, during today's call, we will discuss certain non-GAAP measures which we believe will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with CAP. We've provided reconciliations of non-GAAP measures to compare GAAP measures in the tables accompanying the earnings report. With that, I'll turn the call over to Lee.
Tom Barbados: Acquisition.
Tom Barbados: Turning to slide six Q3 net income of $3 3 million increased 109% from prior year driven by strong operational performance and also benefited from a material reduction in interest expense.
Tom Barbados: As a reminder, early in the third quarter, we completed what we believe to be a successful secondary offering.
Tom Barbados: Which allowed us to pay down our revolving credit facility in full which.
Tom Barbados: Drove this significant reduction in interest expense.
Tom Barbados: Diluted earnings per share came in at 38 cents up 81% versus the same period in the prior year we.
Lee Rudow: Thank you, Tom. Good morning, everyone. TransCat continues to make excellent progress on key initiatives across our entire business portfolio. The operating results for the first three quarters of fiscal 2024 have been outstanding. Turning specifically to the third quarter, consolidated revenue grew 14% to $65.2 million, driven by strong demand for our broad suite of services. Consolidated gross margin expanded 350 basis points to 32.1%, and was driven by margin expansion in both our service and distribution segments. Adjusted EBITDA grew 39% from the prior year to $9.1 million. Let me spend a few minutes on each of our operating segments. We'll start with service.
Tom Barbados: We report adjusted diluted earnings per share as well to normalized for the impacts of upfront and ongoing acquisition related costs Q3, adjusted diluting earnings per share of <unk> 56 increased 21 cents or 60% from the prior year.
Tom Barbados: Flipping to slide seven where we show our adjusted EBITDA and adjusted EBITDA margin.
Tom Barbados: We use adjusted EBITDA, which is a non-GAAP, 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 important to highlight as it does adjust for onetime deal related transaction costs as well as <unk>.
Tom Barbados: <unk> levels of noncash expenses that will hit our income statement from acquisition purchase accounting.
Tom Barbados: With that in mind third quarter consolidated EBITDA of $9 1 million was up 39% from the same quarter in the prior year and adjusted EBITDA margin expanded 250 basis points, both segments had adjusted EBIT growth compared to last year.
Lee Rudow: Consistent revenue growth continues to be fostered by recurring revenue streams in highly regulated markets, strong customer retention, and a differentiated value proposition. TransCat has built a very strong reputation for execution and delivering services that consistently meet the needs of our demanding customers. We continue to operate where the cost of failure is high and our services are a critical component of our customers' processes. Today, approximately 60% of our service business comes from the highly regulated life science sector. Because of the criticality of our services, this is not an easy place to be, but it's where we want to be.
Tom Barbados: As always a reconciliation of adjusted EBITDA operating income and net income can be found in the supplemental section of this presentation.
Tom Barbados: Moving to slide eight operating free cash flow significantly improved from last year as cash from operations was $12 $9 million higher than prior year.
Tom Barbados: Third quarter capital expenditures were $800000 higher than prior year and continued to be centered around service segment capabilities technology, including automation investments in our rental asset pool and further growth projects.
Lee Rudow: It's where our tagline, calibrated by TransCat, resonates the most. In the third quarter, we grew overall service revenue by 15%, of which 9% was organic growth. This represents the 59th straight quarter of year-over-year service revenue growth. We have grown in the high single digits, or better, for each of the last two years, and we anticipate doing the same in fiscal 2024.
Tom Barbados: Slide nine highlights our strong balance sheet at quarter end, we had total net cash of $30 $5 million with a leverage ratio of <unk> and the full $80 million available under our credit facility.
Lastly, we expect to file our Form 10-Q on January 31st with that I'll turn it back to you Lee.
Thanks, Tom.
Lee Rudow: In addition to revenue growth, we continue to focus on margin expansion. Strategically, we focus on operational excellence, which includes increased levels of automation, robotics, and process improvement. In the third quarter, service gross margin increased 250 basis points versus the prior year to 32.5%. And, as always, margin gains are supported by strong organic growth and the associated operating leverage that's inherent in our service segment. Turning to distribution, the growth of our rental business, further accelerated by the Axiom acquisition, drove gross margin expansion of 530 basis points from the prior year third quarter. In fact, the transformation of our distribution segment through growth in rentals has driven approximately 1,000 basis points of gross margin expansion. 2016.
Tom Barbados: The future remains bright for Trans Cat Transcon portfolio of services is both deep and broad and positions Trans cat as a true leader in the highly regulated industries we serve.
Tom Barbados: Our focus on the customer experience is a top priority as we strive to increase our long term competitive advantage as we work our way through the fourth quarter of fiscal 2024.
Tom Barbados: We continue to be positioned to deliver high single digit to low double digit organic service growth for the full fiscal year.
Tom Barbados: Over time, we also expect continued and sustainable gross margin expansion. We believe the service segment has substantial runway ahead for growth both organically and through acquisition are active and diverse acquisition pipeline enables strategic accretive acquisitions that drive synergistic growth opportunities.
Tom Barbados: <unk> and will be a key component of our go forward strategy.
Lee Rudow: And a continued mixed change towards rentals provides further opportunities to improve distribution margins as we enter fiscal 2025 and beyond. Internally, we say all roads lead to calibration, and our distribution and rental businesses continue to be an important generator of leads for our calibration services. Overall, as we mentioned in the earnings release, we are extremely pleased with our performance in the third quarter of fiscal 2024. Our adjusted EBITDA increase of 39% highlights TransCat's ability to deliver on the high expectations our shareholders have for consistent revenue and margin growth. Furthermore, the strong performance of recent acquisitions demonstrates the effective allocation of capital. We have successfully identified and integrated dynamic companies that align with our strategy. And our disciplined approach drives differentiation. Our integration process enables new acquisitions, such as the recent deal with Axiom, to be very quickly accretive to the overall company.
Tom Barbados: As I closed last quarter's earnings call by saying a trans cat.
Tom Barbados: We expect to get bigger and we expect to get better that's the trans cat way and with that we can open the call for questions operator.
Speaker Change: Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session.
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Speaker Change: Our first question comes from the line of Greg Palm with Craig Hallum. Please proceed with your question.
Very hard.
Good morning, everyone. Thanks for taking the questions and congrats on the results here.
Gregory William Palm: Thank you Hey, thanks, guys Greg.
Gregory William Palm: I wanted to start with gross margins.
Gregory William Palm: Particularly in distribution can you quantify maybe the the mix tailwind from from rentals and also trying to get a sense for what the positive impact was from weather.
We ended the third quarter well-positioned financially with strong operating cash flow generation and balance sheet capacity, both of which allow us to actively pursue the M&A opportunities that comprise our current robust Acquisition Pipeline. With that, I'll turn things over to Tom for a more detailed review of our third quarter financial results. Thanks, Lee.
Gregory William Palm: Whether it's exiting or deemphasizing some of the lower margin reseller sales as well. So I don't know if you can quantify either of those or talk about that a little bit more detail.
Speaker Change: Yes, Greg I mean, we're not.
We're not prepared to go into that level of detail. What we will say, though is that you know the.
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 third quarter of fiscal 2024. The third quarter consolidated revenue of $65.5 million was up fourteen percent versus the prior year on service segment strength and growth and distribution. Looking at it by segment, service revenue growth remained very strong at 15%, with 9% of the growth coming organically and the other 6% from acquisition. As Lee mentioned, demand remains strong in the services segment, as our differentiated value proposition continues to resonate well with our customers.
Speaker Change: The.
Speaker Change: The focus on rentals continues to to pay returns for us.
Speaker Change: You know the the acquisition of axiom that we did back in August.
He has really gone well the integration has gone well and I think we're kind of I guess ahead of the integration curve on that one a bit.
Speaker Change: But.
As mix continues to change going forward and mix continues to shift more towards rentals, we'll expect to see.
Speaker Change: Margins.
Speaker Change: Continue to move up into the right in the in the distribution segment.
Turning to distribution, revenue of $23.7 million grew 10% from the prior year. We continue to see growth in the higher-margin rental business, which also benefited from the Axiom test equipment acquisition. Turning to slide 5, our consolidated gross profit for the third quarter of $20.9 million was up 28% from the prior year, and our gross margin expanded 350 basis points in the third quarter. Service Gross Margin Expanded 250 Basis Points The service margin increase further reflects our ability to leverage organic service growth and higher levels of technician productivity in our differentiated value proposition. Distribution segment gross margin of 31.5% was up 530 basis points, driven by a larger mix of higher-margin rental revenue, including impacts from the previously mentioned acquisition. Turning to slide six.
Speaker Change: Okay, I mean, any reason not to extrapolate what you saw with previous quarter.
Speaker Change: But.
Speaker Change: Going forward I mean that.
Speaker Change: That distribution margin was obviously well ahead of kind of what you.
Speaker Change: Expecting but I'm not sure if there was anything onetime in there or if it's just sort of the benefit of everything that you've been maybe sort of working for over the past couple of quarters.
Speaker Change: Yeah, Greg I don't I wouldn't characterize as any one time event that drove it.
Speaker Change: When you think about rentals, you think about mix and in any given quarter. In your 90 day increment of time youre going to have a positive or sometimes a bit a bit of a drag based upon that makes sense. So we had a positive mix. This past quarter. We may have a positive mix in next quarter, but I think I think Tom's point is over time.
As the rental mix becomes a higher percentage of our overall distribution, we expect margins to continue to expand and that's what we expect quarter to quarter you may see another quarter like this one.
Q3 net income of $3.3 million increased 109% from the prior year, driven by strong operational performance and also benefited from a material reduction in interest expense. As a reminder, early in the third quarter, we completed what we believed to be a successful secondary offering, which allowed us to pay down our revolving credit facility in full, which drove the significant reduction in interest expense. Diluted earnings per share came in at 38 cents, up 81% versus the same period in the prior year. We report adjusted diluted earnings per share as well to normalize for the impacts of upfront and ongoing acquisition-related costs. Q3 adjusted diluting earnings per share of $0.56 increased $0.21, or 60% from the prior year. Flipping into slide 7, where we show our adjusted EBITDA and adjusted EBITDA margin. We use adjusted EBITDA, which is a non-GAAP measure, 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.
Speaker Change: May be closer to 30%, but I think the bigger most import more import pictures overtime rentals will continue to drive margins up as that becomes a greater part of our distribution mix and just for a lot of new shareholders. We have the strength of our brand is really an anchor for all of this and when we started the rental business back in 2016 I mentioned.
Speaker Change: 1000 point gain on margin, but we had we had the perfect infrastructure, we had the perfect position in the marketplace and it was sort of the co location of all these factors that help us helped us launch and drive this business now, it's a more mature business and we understand it and Theres acquisition opportunities. So you've got the combination of organic and inorganic.
Speaker Change: So I think we're positive for our outlook, but the quarter to quarter timing.
Speaker Change: We don't want to get too specific we just don't have that kind of insight.
Speaker Change: Understood makes sense.
Speaker Change: And as it relates to M&A can you talk about how the pipeline has evolved over the last few years.
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 transaction costs as well as increased levels of non-cash expenses that will hit our income statement from the acquisition purchase account. With that in mind, third quarter consolidated EBITDA of $9.1 million was up 39% from the same quarter in the prior year, and adjusted EBITDA margin expanded 250 basis points. 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 8.
Speaker Change: Really curious if your appetite around the type the kind of acquisitions. The size has that changed meaningfully recently, maybe last couple of quarters.
Speaker Change: Yeah, I mean, I think I think that's an accurate way to look at it we guided the market a few years ago softly, we we hired a vice president of business development to be more aggressive looking for these types of opportunities that would be strategically a good fit for the business. We have integration teams in place due diligence teams in place and so we're geared up.
Speaker Change: In ready to kind of pick up the pace and even the size of deals we showed that a little bit with axiom I think the pipeline that exists. Today also reflects that's sort of an outlook. So I would expect the potential there as we go into the future to see bigger deals.
Operating free cash flow significantly improved from last year. If cash from operations was $12.9 million higher than the prior year. Third quarter capital expenditures were $800,000 higher than the prior year and continue to be centered around service segment capabilities, technology, including automation, investments in our rental asset pool, and further growth projects. Slide nine highlights our strong balance sheet. At quarter end, we had total net cash of $30.5 million, with a leverage ratio of 0.12x, and the full $80 million available under our credit facility.
Speaker Change: Got.
Speaker Change: This is not something that should be a surprise. This is something we've been talking about I think for years.
Speaker Change: Building up to the point, where we are today.
Speaker Change: I think that was helpful.
Speaker Change: I was just going to emphasize what Lee said it that we've got a we've got a really good process right and we make good decisions.
Speaker Change: And we've demonstrated that consistently over time.
Speaker Change: Our intent is to continue to stick to our process and the deals will happen when the deals happen.
Lee Rudow: Lastly, we expect to file our Form 10-Q on January 31st. With that, I'll turn it back to you, Lee. All right.
Speaker Change: Yes, Okay I will leave it there best of luck going forward. Thanks.
Lee Rudow: Thanks, Tom. The future remains bright for TransCat. TransCat's portfolio of services is both deep and broad and positions TransCat as a true leader in the highly regulated industries we serve. Our focus on the customer experience is a top priority as we strive to increase our long-term competitive advantage. As we work our way through the fourth quarter of fiscal 2024, we continue to be positioned to deliver high single-digit to low double-digit organic service growth for the full fiscal year. Additionally, over time, we also expect continued and sustainable gross margin expansion. We believe the service segment has a substantial runway ahead for growth, both organically and through acquisition.
Thanks, Greg.
Our next question comes from the line of Scott Parker with H C. Wainwright. Please proceed with your question.
Hey, good morning, guys I appreciate the time Lee a little bit more on M&A I'm curious, what you're seeing in terms of pricing. When you guys talk to folks and maybe what you're seeing from competitors in the market or are they getting more aggressive on.
Scott Parker: The acquisition front as well.
Great.
Lee Rudow: Scott we have seen in the last couple of years more activity on the PE side.
In terms of outreach to potential acquisitions, but literally I think I'm comfortable saying this to date it's.
Scott Parker: It's very hard for us to point towards an acquisition that we wanted to make that we weren't able to make whether it be price or some other factor p/e is in this space, but we understand it. This is all we do right. So we're intimate with these companies. We know the owners we know the process I think it's very differentiated which is what I.
Lee Rudow: Our active and diverse acquisition pipeline enables strategic, creative acquisitions that drive synergistic growth opportunities and will be a key component of our go-forward strategy. As I closed last quarter's earnings call by saying at TransCat, we expect to get bigger, and we expect to get better. That's the TransCat way.
Scott Parker: Tried to allude to in my earnings call. So so far it hasn't had an impact on any company that we can point to that we've wanted to acquire.
Scott Parker: I don't see that changing anytime soon there are some companies that had been acquired in the space, but they're ones that we've left behind because they didnt meet the criteria of our disciplined process.
Operator: And with that, we can open the call for questions, operator, test, first. CREDITS, congratulations on the results. Thank you.
Speaker Change: Great. That's helpful and then my second one.
Could you talk a little bit about what drives customers to the rental business versus acquiring equipment.
Speaker Change: And whether or not you know how sustainable that that really is or whether we're just kind of in a peak.
The macro environment that drives people to make that decision rather than another.
Speaker Change: Right well some of the factors include.
And I'd say first and foremost an urgent unexpected need when you think about rentals youre thinking about someone needs equipment right now and didn't necessarily see it coming so they turned to the rental market that would that would be a primary mover.
I wanted to start with gross margins, particularly in distribution, can you quantify that? Maybe the rental revenue and also trying to get a sense for what the positive impact was from, you know, whether it's exiting or de-emphasizing some of the lower margins, seller sales as well. So I don't know if you can quantify either of those or talk about that in a little bit more detail. Yeah, Greg, I mean, we're not. We're not prepared to go into that level of detail.
Speaker Change: You also have the difference between Capex and Opex and as you go through different economics economic cycles the macros.
Speaker Change: We also have this thing will cycle in and out as well a little bit but those two sometimes balance each other off I think the third factor is.
Speaker Change: The way we market rentals I mean, we are we have become over the last I'm going to say half a decade last three to five years.
Lee Rudow: What we will say, though, is that, you know, the focus on rental continues to pay returns for us, and the acquisition of Axiom that we did back in August has really gone well. The integration has gone well. And I think we're kind of, I guess, ahead of the integration curve on that one a bit. But, you know, as mix continues to change going forward and mix, you know, continues to shift more towards rentals, we'll expect to see, you know, margins, you know, continue to move up in the right in the distribution segment. Okay, I mean, any reason not to extrapolate from what you saw.
Speaker Change: Really adept at marketing you know getting into the digital world with our brand with our offerings with our diverse value proposition and rentals as part of it. So I think rentals connects to service service connects to rent those distributions in between both does that accommodate that unique combination that we bring to market I think if you factor all three of those.
Speaker Change: In the macros, the urgent unexpected need and the way we go about trying to grow our rental business. There's the three factors and I see that I don't see any major changes on the horizon that would change our way of thinking in terms of you know the consistency of that business.
Speaker Change: Great I appreciate that that's it for me guys. Congrats again on the quarter.
Okay. Thanks, Scott Scott.
Gregory Palm, Gerard Sweeney, Deborah Pawlowski, going forward, I mean, that distribution Marg was obviously well ahead of kind of what you've been expecting, but I'm not sure if there's anything one-time in there, if it's just sort of the benefit of everything that you've maybe sort of working for over the past couple quarters. Yeah, Greg, I wouldn't characterize it as any one-time I mean, when you think about rental properties, you think about mix. And in any given quarter, in your 90-day increment of time, you're going to have a positive or sometimes a bit of drag based upon that mix. So we had a positive mix this past quarter. And we may have a positive mix next quarter, too.
Speaker Change: Our next question comes from the line of Martin Yang with Oppenheimer. Please proceed with your question.
Martin Yang: Hi, Good morning. Thank you for taking my question I have two first on Capex, you referenced the need to increase for rental.
Martin Yang: Assets.
Martin Yang: So the capex.
Q as it picked up quarter over quarter is that associated with our expansion on the rental business.
Martin Yang: And then do we see should we see that as the goal for run rate are another step up.
Martin Yang: More normalized capex after the acquisition.
Speaker Change: Yeah, I think I think Martin you know some some.
Lee Rudow: But I think Tom's point is over time, as the rental mix becomes a higher percentage of our overall distribution, we expect margins to continue to expand. That's what we expect quarter to quarter. You know, you may see another quarter like this one.
Speaker Change: With that I I.
Speaker Change: I was specifically referencing the year over year increase that we saw in Q3, and certainly rentals played a role in that.
Speaker Change: As we continue to to grow the rental business.
Speaker Change: You know, we'll continue to see.
Lee Rudow: You know, we may be closer to 30 percent. But I think the bigger, more important, more important picture is that over time, rental rates will continue to drive margins higher. You know, that will become a greater part of our distribution mix, and just for the many new shareholders we have. I mean, the strength of our brand is really an anchor for all of this. And when we started the rental business back in 2016, you know, I mentioned the thousand point gain on margin. But we had the perfect infrastructure.
Speaker Change: Additional investment required in that space. It's just the nature of that that business right you've got to have the assets in order to grow the business.
Speaker Change: But it'll be done in a very well thought out kind of methodical way and with a focus on assets that are going to drive the highest returns.
Speaker Change: Got it thank you Tom.
Speaker Change: My next question is.
Speaker Change: The lead generation potential between rental and distribution is one more effective than the other for example is rental business a better lead Gen tool.
Lee Rudow: We had the perfect position in the marketplace. And it was sort of the co-location of all these factors that helped us launch and drive this business. Now it's a more mature business, and we understand it. And there are, you know, acquisition opportunities. So you've got the combination of organic and inorganic growth.
And then distribution.
I wouldn't characterize it that way Martin and I'm not sure we're prepared to rank the two I would clearly with distribution people, who are buying test equipment at some point, we'll have a need to have that test equipment service. So there's just such a natural connection there and some of them need the calibration done right upfront in order to put into service. So.
Lee Rudow: So I think we're positive about our outlook. But the quarter to quarter timing, you know, we don't want to get too specific. We just don't have that kind of insight. Okay. Next.
Lee Rudow: And as it relates to M&A, can you talk about how the pipeline has evolved over the last, Title Microsoft Office Word Document MSWordDoc Word. Document.8 I'm really curious if your appetite around the type, the kind of acquisitions, the size, has that changed meaningfully recently, maybe the last couple of quarters? Yeah, man, I think that's an accurate way to look at it.
Speaker Change: That's it's hard to get better than that but with our with our rental customers to the degree that we're picking up test equipment users that we wouldn't otherwise have as a customer if we didn't have a rental program, yes that will be incremental to the degree that our rental customers are a byproduct of our distribution customers are installed base than that then it would be.
Lee Rudow: We guided the market a few years ago, softly. We hired a vice president of business development to be more aggressive in looking for these types of opportunities that would be strategically a good fit for the business. We have integration teams in place, due diligence teams in place, and so we're geared up and ready to kind of pick up the pace and even the size of deals. We showed that a little bit with Axiom.
Speaker Change: Not incremental and I'm not sure if any better that our core distribution. So I think they are both important but you just got to love the connection between distribution and is it really close connection from distribution to rentals.
Speaker Change: Thank you Lee.
Quick follow up so the.
Speaker Change: Both rental and distribution or the equipment.
Lee Rudow: I think the pipeline that exists today also reflects that sort of an outlook. So I would expect the potential there as we go into the future to see bigger deals, but this is not something that should be a surprise. This is something we've been talking about for years, building up to the point where we are today. I think the staff kind of listened to it.
In both services Recalibrating before you deliver to your customers.
Lee Rudow: You know what one of the things that makes us unique in our rental program is when we get equipment and from a rental customers recalibrate everything of course, and that's easy for us to do and I think it's easier than other some of our competitors, but yes, all equipments checked calibrated before it goes out to the next customer and in some cases, our customers who are renting equipment.
Lee Rudow: I was just going to emphasize what Lee said, that we've got a really good process, and we make good decisions. And we've demonstrated that, you know, consistently over time. And, you know, our intent is to continue to stick to our process. And, you know, the deals will happen when the deals happen. Okay, I will leave it there. Best of luck going forward. That's great. Our next question comes from the line of Scott Buck. Hey, good morning, guys. I appreciate the time.
Lee Rudow: Need need.
Lee Rudow: Equipment that that is a credit so we go through the uncertainty calculations as well so that would all be part of our service.
Speaker Change: Got it that's helpful.
Speaker Change: Okay I appreciate it Martin.
Speaker Change: There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Speaker Change: So this is Lee and thank you all for joining us on the call. Today. We appreciate your continued interest in chance cat feel free to check in with US really at any time, otherwise, we'll talk to everyone. After we see.
Scott Buck: Lee, a little bit more on M&A. I'm curious what you're seeing in terms of pricing when you guys talk to people, and maybe what you're seeing from competitors in the market. Are they getting more aggressive on the acquisition front as well? Right, we have seen more activity on the PE side in terms of, you know, outreach to potential acquisitions. But literally, I think, and I'm comfortable saying this to date, it's very hard for us to point to an acquisition that we wanted to make that we weren't able to make, you know, whether it be price or some other factor. You know, PE is in the space, but we understand it. This is all we do, right?
Speaker Change: So not the fourth quarter results, thanks again for participating.
Speaker Change: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
May disconnect your lines at this time and have a wonderful day.
Lee Rudow: So we're intimate with these companies. We know the owners. We know the process.
Lee Rudow: I think it's very differentiated, which is what I tried to allude to in my earnings call. So, so far, it hasn't had an impact on any company that we can point to that we've wanted to acquire. So, you know, I don't see that changing anytime soon. There are some companies that have been acquired in the space, but they're ones that we've left behind because they didn't, you know, meet the criteria of our discipline process. Great, that's helpful. And then my second one.
Scott Buck: Could you talk a little bit about what drives customers to the rental business versus acquiring equipment? Thank you, and whether or not, you know, how sustainable that really is or whether we're just kind of in a peak, you know, macro environment that drives people to make that decision rather than another.
Lee Rudow: Well, some of the factors include, and I'd say first and foremost, an urgent, unexpected need. You know, when you think about rentals, you're thinking about someone who needs equipment right now and didn't necessarily see it coming, so they turned to the rental market. That would be a primary mover.
Lee Rudow: You also have the difference between CapEx and OpEx, and as you go through different economic cycles, the macros, you know, we also, this thing will cycle in and out as well a little bit, but those two sometimes balance each other off. I think the third factor is the way we market rental properties. I mean, we have become, over the last, I'm going to say, half a decade, the last three to five years, really adept at marketing, you know, getting into the digital world with our brand, with our offerings, with our diverse value proposition, and rentals is part of it. So I think rental connects to service, service connects to rental, distributions in between both, because that combination is a unique combination that we bring to market. I think if you factor all three of those in, the macros, the urgent, unexpected needs, and the way we go about trying to grow our rental business.