Q1 2025 Transcat Inc Earnings Call
Speaker Change: Greetings and welcome to Transcat Inc. first quarter fiscal year 2025 financial results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.
Speaker Change: 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 your host, Mr. Tom Barbato, Chief Financial Officer. Thank you, Mr. Barbato. You may begin.
Thomas Barbato: Thank you, Operator, and good morning, everyone.
Speaker Change: We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO , Lee Rudow, and our Chief Operating Officer, Mike West. We will begin the call with some prepared remarks, and then we will open up the call for questions.
Speaker Change: Our earnings release crossed the wire after markets closed yesterday. Both the earnings release in the slides that will be referenced during our prepared remarks can be found on our website transcat.com in the investor relations section.
Speaker Change: If you would, please refer to slide number two. As you are aware, we may make forward-looking statements during the formal presentation and Q&A portion of this teleconference.
Speaker Change: 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.
Speaker Change: These factors are outlined in the news release as well as the documents filed by the company with the SEC.
Speaker Change: 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.
Speaker Change: We undertake no obligation to publicly update or correct any of the forward-looking statements contained in this call.
Speaker Change: 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.
Speaker Change: Additionally, during today's call, we will discuss certain non- GAAP measures , which we believe will be useful in evaluating our performance.
Speaker Change: 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 compare GAAP measures in the tables accompanying their earnings release.
Speaker Change: With that, I'll turn the call over to Lee.
Lee D. Rudow: Thank you, Tom.
Lee D. Rudow: Good morning, everyone. Thank you for joining us on the call today.
Lee D. Rudow: Transcat delivered strong performance across our entire portfolio in the first quarter of fiscal 2025.
Lee D. Rudow: as we continue to demonstrate.
Lee D. Rudow: Our ability to effectively execute our strategy and to drive differentiation.
Lee D. Rudow: throughout our business platform. Consolidated revenue was up 10% to $66.7 million driven by continued demand for our services, as well as strong rental performance.
Lee D. Rudow: Consolidated gross margin expanded 310 significant margin expansion in both our service and distribution segments.
Justin Ibadala: Justin Ibadala in the quarter grew 20% from prior year to 10.2 million dollars. Service continued to perform at a high level and recorded its 61st straight quarter of year-over-year revenue growth. That's more than 15 straight years.
Justin Ibadala: In the first quarter of fiscal 2025, service revenue grew 10% overall and 6.4% organically. We continue to focus on recurring revenue streams with highly regulated industries that include life science and airspace and defense.
Justin Ibadala: And internally, we rally around the theme of get bigger and get better.
Justin Ibadala: To that point, service gross margins in the first quarter grew 150 basis points versus prior year to 34%. Our consistent service gross margin improvement over time reflects our ability to drive continuous process improvement throughout our operation.
Justin Ibadala: Specific drivers of service gross margin improvement include increased productivity through higher levels of automation and technical training, as well as system and software enhancements.
Justin Ibadala: And as we talked about in the past, the constant driver of service margin gain is the inherent leverage in the operating model as service revenue grows.
Justin Ibadala: Turning to distribution and rentals, gross margins expanded 620 basis points from prior year, driven primarily by the higher margin rental business, which now includes both Axiom, which we acquired in August almost one year ago,
Justin Ibadala: and Becknell acquired this past April at the start of our first quarter.
Justin Ibadala: The integration with Axiom has been excellent, and on the Becquenel front, we are off to a strong start, making early, meaningful progress.
Justin Ibadala: In fact, in the first quarter since the acquisition of Becknell, we can already point to several synergistic service opportunities that we've encountered from the Becknell customers. While this was anticipated to occur at some point, the strong early start is great news.
Justin Ibadala: Becknell is a very well-run company that has cultivated a loyal customer base, most of which are heavy users of instrumentation and calibration services.
Justin Ibadala: In addition to its rental platform, Becknell offers a very profitable growing operator-based service model that we anticipate will contribute to service margin expansion over time.
Speaker Change: Overall, we're pleased with our start, our strong start, across the business in fiscal 2025, the 10% growth we generated in consolidated revenue, the 310 basis point expansion and consolidated gross margin, and a 20% growth in adjusted EBITDA.
Speaker Change: It's all a testament to the strength of Transcat, our brand, and the uniqueness of our value proposition. Transcat continues to be recognized and rewarded for the delivery of our risk-mitigating services across high-cost-to-failure manufacturing environments.
Speaker Change: Customer attention has been, and continues to be, a hallmark of Transcat and a major contributor of our consistent top-line performance over time.
Speaker Change: Lastly, the first quarter of fiscal 2025 was also benefited from the expansion of addressable markets, which contributed significantly to both revenue and margin growth.
Speaker Change: We ended the quarter with a strong balance sheet and we're well positioned to execute our growth initiatives including the acquisition of companies that enhance our geographic footprint.
Speaker Change: expand our current capabilities, expertise, and markets.
Speaker Change: With that, I'll turn things over to Tom to provide additional detail on the first quarter financials.
Thomas Barbato: Thanks, Lee. I'll start on slide 4 of the earnings deck posted on our website, which provides detail regarding our revenue on a consolidated basis and by segment for the first quarter of fiscal 2025.
Thomas Barbato: The first quarter consolidated revenue of $66.7 million was up 10% versus prior year as both segments experienced consistent demand.
Thomas Barbato: Looking at it by segment, service revenue growth remains solid at 10%, 6.4% of the growth coming organically in the remainder from acquisition.
Thomas Barbato: Turning the distribution revenue of $22.9 million grew 11% as we continue to see strong performance in the higher margin rental business.
Thomas Barbato: Turning to slide 5, our consolidated gross profit for the first quarter of $22.7 million was up 21% from the prior year, and our gross margin expanded 310 basis points to 34%.
Speaker Change: As Lee mentioned, we are very pleased with our year-over-year service gross margin expansion of 150 basis points. The service margin increase further demonstrates the inherent leverage in our service model and our ability to drive higher levels of automation and technician productivity.
Speaker Change: Distribution segment gross margin of 33.9% was up 620 basis points driven by strong rental performance.
Speaker Change: Turning to slide 6, Q1 net income of $4.4 million increased 49% from prior years, and our diluted earnings per share came in at $0.48, up $0.10 per share.
Speaker Change: Net income growth was driven by strong Q1 performance, and the reduction of interest expense as the majority of our debt was paid down in Q3 of last year, leveraging the proceeds from our secondary offering.
Speaker Change: We report adjusted diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition related costs.
Speaker Change: Q1 adjusted diluted earnings per share was $0.68, up from $0.52 per share in the prior year. A reconciliation of diluted earnings per share to adjusted diluted earnings per share can be found in the supplemental section of this presentation.
Speaker Change: Flipping to slide 7, 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.
Speaker Change: As we continue to execute 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 expense that will hit our income statement from acquisition purchase accounting.
Speaker Change: With that in mind, first quarter consolidated adjusted EBITDA of 10.2 million was up 20% from the same quarter in the prior year, and adjusted EBITDA margin expanded 130 basis points.
Speaker Change: Both segments had double-digit 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.
Speaker Change: Moving to slide 8, operating cash flow improved from last year to $8.9 million for the quarter.
Speaker Change: Q1 capital expenditures were $900,000 higher than prior year and continued to be centered around service segment capabilities, rental pool assets, technology, and future growth projects.
Speaker Change: The spend was in line with expectations.
Speaker Change: Slide 9 highlights our strong balance sheet. At quarter end, we had total net cash of $19.1 million.
Speaker Change: with a leverage ratio of 0.1x.
Speaker Change: We had $80 million available from our credit facility, and as previously announced, we acquired Becknell Rental Tools for $50 million just after the end of the first fiscal year, paid in a combination of $32.5 million in company stock and $17.5 million in cash.
Speaker Change: Lastly, we expect to file our Form 10-Q on August 7th.
Speaker Change: With that, I'll turn it back to you, Lee. Thank you, Tom.
Lee D. Rudow: Transcat has successfully delivered on the expectations we have set and communicated over a very long period of time. Expectations include consistent organic
Speaker Change: Service Revenue Growth, Gross Margin Expansion, and in recent years, Solid Free Cash Flow. We've also expanded our addressable markets and strengthened our industry-leading value proposition through a significant number of accretive acquisitions in our core and adjacent markets.
Speaker Change: And as always, effective and timely integration represents the key differentiator in a set Transcat apart. Throughout the remainder of 2025 and beyond, we are confident this will continue.
Speaker Change: Fiscal 2025, we expect organic service growth in the high single-digit to low double-digit range when normalized for the extra week in fiscal 2024, and we expect gross margin expansion throughout our portfolio of businesses and business channels.
Speaker Change: We have a robust and diverse acquisition pipeline that will enable opportunities to both expand our core services and addressable markets and ultimately increase the trajectory of the business.
Speaker Change: Of course, the ultimate focus...
Speaker Change: will continue to be on generating sustainable long-term value for our shareholders.
Speaker Change: As we look ahead, we remain excited about the direction Transcat is headed and our ability to execute what we believe is a differentiated and defendable strategic plan. And with that, Operator, we can open the line for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: The first question comes from the line of Craig Palm with Craig Holman Capital Group, please go ahead.
Craig Palm: Hey, all. Good morning. Thanks for taking the questions here. I wanted to maybe dig into the segment-related results a little bit to start things off. So, on services, the
Speaker Change: Organic growth number was a little bit light of kind of your full year guide, certainly what we're accustomed to, you know, over the past couple of years. So just can you dig into that a little bit?
Speaker Change: Was it timey? It suggests that if you're going to get to high single digits, low double digits, it obviously accelerates from this level for the remainder of the year. So just a little bit more color there would be helpful to start.
Speaker Change: Sure, Greg. This is Lee. I'll take that. No, I wouldn't read into the 6.4% organic growth too deeply. Service remains strong in terms of demand. Demand remains strong. There's going to be fluctuations in this business.
Speaker Change: We've always talked about that, fluctuations that aren't necessarily reflective of our expectations, particularly long term. So we didn't change our guidance because we still think that the pipeline and the demand is there and we would expect to be in that range.
Speaker Change: for the fiscal year. So no, we're not. It's not something we think about too much as we look at 90-day increments of time. We've never really looked at the business that way and so no, I'm not concerned.
Speaker Change: Yep. Any end markets, you know, within that segment that jumped out either from a positive standpoint or maybe a little bit weaker than expected, at least for the quarter?
Speaker Change: I think everything is pretty consistent with our expectations, when you look at the business that was generated, the growth and the pipeline.
Speaker Change: pretty much in line with the highly regulated industries that we serve. So you've got aerospace and defense in a big way, producing and same with life sciences. So I think that's consistent with the past and that's what we expect.
Speaker Change: Okay, good. And then shifting gears to distribution, you know, by our math, I think organic growth was negative, you know, and certainly the reported growth was driven by, you know, acquisition related contribution.
Speaker Change: Can you just give us a little bit more sense on what's happening in distribution and, you know, for rental specifically, how much is that at this point in terms of overall mix? Are you willing to give us kind of a ballpark number?
Speaker Change: So, so generally speaking, you know, we
Speaker Change: We have guided towards this, and we look at distribution a little bit differently, obviously, than we did years ago.
Speaker Change: We have invested in our strategy to grow the rental business. We've done that organically and through acquisition. You do see...
Speaker Change: Barbato, Lee Rudow
Speaker Change: And the mix may change and a percentage of the business is going to increase.
Speaker Change: We like that. That's strategic for us and we'll keep that going. We have low margin and what we used to call reseller business in the core distribution channel. And it's just not something that we spend a lot of time thinking about or investing in and we expect that number to...
Speaker Change: Tweak its way down over time, but to be supplemented and substituted for the higher margin, higher growth rental business. We're going to continue down that path. We like it.
Speaker Change: Is it fair to say that you're maybe...
Speaker Change: walking away from some of that business on purpose, that low margin business? Or is it just more of a, hey, we're not really putting any resources focus on it. So it may just
Speaker Change: Sort of doing it all over time. Yeah, I think the latter, you know, we're not going to walk away from business We never walk away from our customers when they have needs, but we're certainly not
Speaker Change: allocating additional incremental resources to low-margin, let's say for example like I just pointed out, resale business.
Speaker Change: or channels that aren't as profitable, we're allocating resources towards a high-margin rental business.
Speaker Change: And we don't lose much in terms of that ever-important connection, in fact, we don't lose anything, in my opinion, in the connection between services, you know, in the rental business.
Speaker Change: same customers, and we always want to get that crack in that door so that we can walk through and try to gain service business. So nothing has changed in that respect, Greg. Understood. Okay. I will leave it there.
Speaker Change: Thank you. Next question comes from the line of Ted Jackson with Northland Securities. Please go ahead.
Edward Randolph Jackson: Thanks very much. Good morning.
Speaker Change: Wait, are...
Edward Randolph Jackson: So I'm going to just jump over into let's talk about services gross margins because I mean it's a clear bright spot for Transcat and you know something you should be proud of and I know you are. Can you
Edward Randolph Jackson: You know, maybe flesh out what's driving a lot of the margin improvement. I mean, in the press release, you talked about, you know, productivity improvements and you talked about automation and maybe put some meat on the bones with regards to, you know, some of the projects and programs that you are using to drive that.
Speaker Change: Margin Improvement, and things in terms of projects and programs in the future that will continue to drive it going forward. And then I think I have a follow-up after that. Thanks.
Speaker Change: This is Lee. I'll take a stab at this and Tom can make sure I don't miss anything because there are a lot of things in play here and I'll try to capture and highlight some of the big ones.
Thomas Barbato: Automation is important, you know, we launched...
Speaker Change: This initiative, I want to say maybe three, four years ago, at least that feels about right.
Thomas Barbato: You know, for the first couple years, people would ask, you know, how far along are you? I'd say, well, we're in the first inning, second inning. I think today I would characterize that as, you know, we're in the fourth inning.
Speaker Change: We used to have automation in terms of percentage or calibration, we don't get into a lot of detail right now, but mid-low single digits, and now it's in the 20% plus range.
Speaker Change: And so there's a lot of automation that's taking place, and it's arduous, and it's difficult, and there's a lot of programming. But once you get it done, you can capitalize on it over a long period of time, and that's kind of what we're doing. So there's still a runway there that's significant, and we're...
Speaker Change: Steady progress. We're pleased with it, and you always want it to be faster than it is, but it's making a dent in the initiative, and we're increasing margin.
Speaker Change: It's an inflection point in this business, that operating leverage, and as you get organic revenue growth over time, aside from a step function investment here or there, that's going to improve your margins, so that's definitely playing a role.
Speaker Change: And, you know, we've done a lot of work, you know, we have a new Chief Operating Officer and we've really dug into the labs and trying to make them more efficient, improve processes, and we've really made some gains in terms of how we get products through our lab, onto the bench, off the bench, build quicker, better turnaround times. These are all things that eventually lead their way to margin and also lead their way to stronger organic growth because you have a higher level of customer satisfaction with better turnaround times. These are all the things we're working on. And I think they all contribute. Tom, maybe... The other thing I would just add, right, is that...
Thomas Barbato: When we talk about productivity and automation and the benefit that we see in margins, there's also another benefit that we get as it puts less dependency on additional resources to get the incremental work done.
Thomas Barbato: you know, I don't want to lose sight of, right, because, you know, technicians are, are, you know, our most important asset. And, you know, being able to do more work with the same number of people is, is extremely valuable. So I just want to make that point as well.
Thomas Barbato: Well, that's good, because, you know, Tom, that's a great segue into my next question.
Speaker Change: And that has to go with labor and your labor needs. I think you might have gotten into it a bit, but as Transcat continues to get big, it clearly means that you need more technicians. I mean, it's always been an issue in terms of your ability to get in that kind of labor, and that's why you started your training program so you could develop your own talent, grow your own wood, if you would.
Speaker Change: You know, like, you know, where is that in terms of an issue for Transcat, you know, maybe an update with regards to, you know, some of your training programs and the technicians that you put through it?
Speaker Change: and you know maybe I don't mean maybe kind of answered it already but what where do you see that in terms of your needs and choke points going forward?
Speaker Change: So, Ted, you know, I've been in this business for coming up on 40 years. Labor, technical labor has always been an issue and it always will be an issue. And you're right, that's why we started Transcat University. That's why we decided we have to train our own technicians. And if and when we do, and we are doing it, it'll be a differentiator because we'll have labor.
Speaker Change: when and where we need it. Now that's not always the case, it's not as easy as I make it sound, but we're, you know, we try to position ourselves better than the competition so that we can compete better and we can win more, we can win the jobs that we want.
Speaker Change: So, always a challenge, no question, but in there also lies the opportunity, right? So, if you can overcome it, and you can get this kind of training program going, and I expect that program to get better and better over time, more efficient, more effective over time.
Speaker Change: still relatively new.
Speaker Change: But I like the returns.
Speaker Change: We like the returns, and I see that as continuing. Now, there are other ways, too. We talk about, as Tom mentioned, the more automation you do, the more you go kind of from tech to operator. I mean, one day, it'll be more robotics, which takes you from operator to robots. I mean, there's all kind of things that you can do longer term. We're focused on those things, but when you allocate resources, the best place to make sure you have the labor where and when you need it, and that's what we're doing with Transcat University. There's all kinds of things that you can do.
Speaker Change: Longer terms, we're focused on those things, but we allocate resources in the best place to make sure you have the labor and the security and that's what we're doing here.
Speaker Change: You know, kind of labs.
Speaker Change: You know, can you give us an update on kind of like how many, you know, CDLs you have at this point, what the pipeline looks like, you know, what's kind of going on with that in terms of a growth drive or service revenue for people, you know, coming kind of like in a matter of days.
Speaker Change: I would characterize our client-based labs as steady. So we still have, in the mid-to-upper 20s, as a round number for the number of locations we're actually in with embedded technicians, with an embedded lab. At different times, that business ebbs and flows, and it's usually a byproduct of labor shortages and our customers' inability or their challenge that they have with finding the labor they need when they need it. So right now, we have a pipeline with a significant number of CBLs in them, but you know, when you look across our pipeline portfolio, we've got everything from transactional to core small.
Speaker Change: [inaudible]
Douglas Goldstein: And of course, I'm sorry to interrupt, but I think that was a steady and stable is how I would describe that. It's not on the up take, but it's not... Thank you. Next question comes from the line of Martin Yang.
Speaker Change: with OpenEyemer and Google. Please go ahead. All right. Hey, thanks very much for taking my question. Lee, I want to ask you about your updated view on your address for market. Thank you. The next question comes from the line of Marty Yang with OpenEyemer and Google. Please go ahead. Thank you for taking my question. Lee, I want to ask you about your updated view on your address for market. In the past, we had a couple of different numbers for address for market in the U.S.
Lee D. Rudow: Well, in terms of addressable markets...
Speaker Change: In general, first, let's make clear that when we expand our addressable markets, we're always going adjacent to what we do. We want to stay in pretty close proximity to our core business.
Speaker Change: which is calibration services. So today, you know, we're always looking to, you know, expand where it makes sense for the business, where we get recurring revenue stream, where there's the demand, where there's regulation. You saw that with MacNell.
Martin: You know, if there's a margin play, you know, you saw that with Axiom, and so with Nexa, you saw kind of a combination of, you know, value-profit enhancers around calibration. I think, Martin, you know, there are opportunities to expand our addressable markets to the house next door, and sometimes maybe the house right next door to that. We're going to stay disciplined. You know, we've always been disciplined around our acquisition strategy, and that's not going to change. It's something that we talk to the board about, it's required from us, and our shareholders expect that. So, there are more addressable markets, we expect to tap into them, they are likely to be the house next door, because that's the way we approach it, and certainly we look for all the attributes that are...
Martin: [inaudible]
Speaker Change: They are, you know, as a parody now, and how do you think about, you know, the difference in margins, or the convergence of gross margins between two segments in the medium to longer term? You know, almost a parody now.
Speaker Change: So, you know, Tom helped me out with this one, but, you know, we've guided towards...
Speaker Change: [inaudible]
Speaker Change: [inaudible]
Speaker Change: Thank you, next question comes from the line of Ted Jackson with Northland Securities, please go ahead.
Speaker Change: Got it.
Edward Randolph Jackson: Oh, I just have a follow-up question driven by the last line of questioning. Thank you. When you look at the historic, you know, trends of the distance, you know, seasonality of it,
Speaker Change: Oh, I just have a follow-up question on the order of the last line, particularly as it relates to services revenue that is stronger than the first order, but do we expect that to be the same issue?
Speaker Change: typically Transcat sees the second... yeah we're not we're not expecting Ted anything you know really significantly different in in our
Speaker Change: from a seasonality standpoint. So I think it would be safe to assume that. We're not expecting to have anything really significantly different. Okay, that was my one question. Thank you very much.
Speaker Change: Thank you. A reminder to all the participants that you may press star 1 to ask a question. Okay. Okay. That was my one question. Thank you very much.
Speaker Change: Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor over to Lee Rudow for closing comments.
Lee D. Rudow: Okay, well, thank you all for joining us on the call today. We certainly appreciate your interest, your continued interest in Transcat. We will be attending the Oppenheimer 27th Technology Internet Communications Conference.
Speaker Change: It's going to be on August 12th, so feel free to sign up to talk to us then and reach out. Otherwise, you can really check in with Tom or me at any time, so we'll hear from you. We look forward to talking to everybody again after our second quarter results, and thank you again for participating. Take care.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.