Transcat, Inc. (TRNS) Earnings Call Transcript

If you need assistance at any time, please press star zero and a member of our team will Thank you. Please stand by. Your meeting is about to begin. Greetings and welcome to the TransCat, Inc. First Quarter Fiscal Year 2027 Financial Results Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Howe, Senior Director of Financial Planning and Investment Services at TransCat.

Thank you, John. You may begin. Thank you, operator, and good afternoon, everyone. We appreciate your time and your interest in TransCAD. With me here on the call today is our President and CEO, Jamie Eyrich, and our CFO, Tom Barbato. We will begin with some prepared remarks and then open the call for questions. Our earnings release cross-reference to wire this afternoon after the market close. 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 2. As you are aware, we may make forward-looking statements during the formal presentation and Q&A portion of this teleconference. 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 press release as well as the documents filed by the company with the SEC. You can find those on our website where we regularly post information about the company as well as on the SEC's website at sec.gov. We undertake no obligation to publicly update or correct any of the forward-looking statements contained in this call, whether as a result of new information, future events, or otherwise, except as required by law. Please review our forward-looking statements in conjunction with these precautionary factors. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of comparable gap to non-gap measures in the tables accompanying the earnings release. With that, I'll turn the call over to TransCat President and CEO, Jamie Eyrick.

Thanks, John. Good afternoon, everyone, and thank you for joining us on today's call. Prior to discussing our strong financial performance, I want to share my observations and takeaways after my first full quarter as CEO of Transcat. Over the last 100 days, as you'd expect, I've had the opportunity to engage with and learn from our customers, our strategic partners, and the Transcat team members across the board. technology labs, field operations, and the sales organization. I've also reviewed TransCat's end-to-end operations across North America, Central America, and Ireland. I've met with analysts and investors, many of you on the phone, and I've held in-depth discussions with our board of directors, both individually and collectively. These firsthand experiences have deepened my appreciation for TransCAT's leadership our employees' dedication and enduring customer and strategic partnerships we have built over more than 60 years of industry leadership. Our first quarter results, combined with the insights from my first 100 days, reinforce my confidence that we have clear, measurable opportunities to build on our industry-leading organic and inorganic growth. They also highlight an important opportunity to become as well known for operational excellence as as we have historically been for growth. This will require time, discipline, and consistent execution. by continuously improving our customer-facing business processes, applying proven lean operating principles, optimizing business mix and pricing, and using technology and AI to improve productivity and customer solutions, can create repeatable levers to expand margins and to support sustained growth. As we move forward, we will build an even stronger Transcat by growing the business improving how we operate, and energizing our teammates. With that, I'll briefly turn to our financial results. The fiscal first quarter of 2027 highlighted another sequential quarter of strong financial performance as strength in the calibration business drove double-digit service organic revenue growth and service gross margin expansion. Consolidated revenue was up 22% to $92.9 million in the fiscal first quarter, driven by double double-digit revenue growth in both segments. Demand in our highly regulated end markets, including life sciences, aerospace and defense, and energy, remains strong, and our differentiated value proposition continues to resonate throughout TransCas addressable end markets. Given our strong organic growth, operational excellence, and strategic acquisitions, we firmly believe Transcat continues to gain market share in the calibration services market. Consolidated gross profit grew 19% for the fiscal first quarter, led by 31% service gross profit growth. Adjusted EBITDA grew 19% in the quarter, driven by revenue momentum and productivity gains. And let's take a closer look at our service results. In the fiscal first quarter, service revenue increased 27% and service organic revenue grew 13%. The first quarter marked our 69th straight quarter of year over year growth. Service revenue growth was driven by our differentiated value proposition along with the continued successful integration and performance of our acquired companies. The recent acquisition of SEM is progressing very well, and we are excited about the opportunity that exists in Central America. You can expect us to continue to complement our services organic growth with Strategic M&A. Service growth profit increased 31% in the quarter, with service growth margins expanding 90 basis points versus prior year, driven by the inherent operating leverage in our service model, along with focus on operational excellence and maturing of new customer relationships. The service segment has significant room for growth, both organically and through acquisitions. Our pipeline positions us to pursue strategic, accretive deals that deliver meaningful synergies, and M&A will remain central to our growth strategy. Turning to distribution, distribution revenue grew 11% in the fiscal first quarter on strong demand from rentals and product sales. As expected, distribution gross margins of 31.4% were lower than prior year, given that fiscal 2026 first quarter margins were unusually high. Moving forward in fiscal 2027, we will have a more typical prior year comparisons and expect to benefit from a greater mix of higher margin rentals. Overall, we are pleased with our performance and optimistic about the future, given the momentum building in our service segment.

With that, I will turn the call over to Tom for a more detailed look at our first quarter financial results. Tom. Thanks, Jamie. Slide four of the earnings deck provides detail regarding our revenue on a consolidated basis and by segment for the first quarter. First quarter consolidated revenue of 92.9 million, increased 22% versus the prior year, both segments grew double digits. Looking at it by segment, service revenue in the quarter grew 27 percent, with organic revenue growth of 13 percent, and the balance of the growth attributable to acquisitions. Relative to distribution, first quarter revenue grew 11%, driven by strong performance in our rental channel. strong product sales. On slide five, consolidated gross profit for the first quarter of 30.7 million increased 19 percent, driven by strength in the services segment. If we look at it by segment, service gross profit increased 31 percent in the first quarter and service gross margin expanded 90 basis points versus the prior year. driven by the inherent operating leverage in our service model, along with our focus on operational excellence and the maturing of new customer relationships. As expected, distribution segment gross margin of 31.4% decreased in the quarter by 380 basis points compared to the prior year. Prior year Q1 distribution gross margins were unusually high, driven primarily by increased levels of vendor rebates. On slide six, first quarter diluted earnings per share of 14 cents. Year-over-year change reflects increased intangible asset amortization related to acquisitions, stock-based compensation, interest expense, and executive transition costs. We report adjusted diluted earnings per share to normalize for the impacts of upfront and ongoing acquisition related costs, executive transition costs, as well as costs that are not directly tied to ongoing operations. First quarter adjusted diluted earnings per share was 51 cents. Flipping to slide 7, where we show our adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin. We use adjusted operating income, which is non-GAAP measure, as a measure of performance when evaluating our business segments. The company's management believes adjusted operating income and adjusted EBITDA are important measures of operating performance because it allows management, investors, and others to evaluate and compare the performance of its core operations from period to period by excluding items that we do not believe are indicative of our core operating performance. In addition, these metrics are also indicators of the company's ability to generate cash. First quarter consolidated adjusted EBITDA of $14 million increased 19% from the same quarter in the prior year. by strength and services segment. Service adjusted operating income was $9.6 million, up 35% in the quarter, and margin of 15.4% increased 80 basis points compared to the prior year. Distribution adjusted operating income was $4.3 million, a decline of 12%. reconciliation of adjusted operating income and adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation. Operating free cash flow of $4.8 million in the first quarter grew $5.8 million compared to the prior year period. driven by an increase of cash from operations and slightly lower capital expenditures. Fulfill expenditures of $4 million in the quarter continue to be centered around service segment capabilities, rental pool assets, technology, and future growth projects. Order end, we had total debt of 110.4 million, 39.6 million available for borrowing, under the secure revolving credit facility and a leverage ratio of 2.19x. We believe we are well positioned to grow both organically and through acquisition and have the capital structure in place to support both.

With that, I'll turn it back to you, Jamie. Thanks, Tom. In our fiscal first quarter, the TransCat team delivered strong results, which demonstrated our ability to grow, to operate with excellence, and to energize our teammates. With Q1 performance and momentum as the backdrop, we remain relentlessly focused on bringing differentiated value to our customers. customers every day. When you combine our Transcat customer focus and differentiation with our attractive, highly regulated end markets and recurring revenue business model, we have a winning equation that makes us extremely optimistic about our service segments future momentum and our overall company's potential. for profitable growth. Our strong first quarter performance positions us well to execute high single-digit service organic growth and service gross margin expansion for the full fiscal year. Before we open the line for questions, I'll close with a few thoughts. Sixty-nine consecutive quarters of service revenue growth reflect the disciplined execution of a focused strategy and an exceptional team. Thank you. My first 100 days as the CEO of Transcat directly observing our team in action give me confidence that our best days are ahead of us. Looking ahead, we remain laser focused on executing our four strategic pillars. One, driving strong service organic revenue growth through high customer retention, realization of new business wins, and market share gains. Two, expanding service gross margins through operational excellence, in our recurring revenue business model. Three, continuing to pursue strategic M&A, including our recent acquisition of SCM, metrology, and laboratories as the acquirer of choice in our market. And four, growing our higher margin rental business. Finally, I want to thank our customers for their trust. our employees for their dedication, and our shareholders for their confidence in TransCat and our path forward. The team and I are energized by what we can accomplish together, and I look forward to sharing our continued progress. With that, Leslie, please open the line for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad now. To leave the queue at any time, press star 2. Again, that is star 1 to ask a question. And we will pause for just a moment to allow everyone a chance to join the queue. Our first question comes from Max Michaelis, Lake Street Capital. Please go ahead. Your line is open.

Hey, guys. Great job on the quarter. Jamie, it's good to talk to you. First question for me, I mean, granted growth in the service segment, 13%, obviously that was higher than what we expected. You're looking for high single-digit growth throughout the rest of the year. I mean, can you kind of point to some end markets that really outperformed your guys' expectations and maybe some other end markets that you expect to kind of.

push growth throughout the year? Yes, Max, I think we saw good performance across all end markets. You know, I think, you know, we talk about our, you know, splits. I would expect that they're going to kind of remain consistent, or they did remain consistent in Q1, and I would expect that to continue balance of the year. I think we're performing well. I think the opportunities are coming kind of across the spectrum of end markets, and, you know,.

And that's what the expectation should be. Yes, Max, I agree with what Tom said. And look, the nice thing is we've got a double threat in our favor. One, the end markets are growing and up from what we saw last year and two, we're taking share. So those give us the ability and the confidence to call what we're calling because of those two forces that, you know, the team, as you can tell, has just done a great job of optimizing.

Perfect. A couple more from me and then I'll hang it up. Rental business, So distribution grew 11%. I mean, can you give us sort of an indication on how rental business performed on let's say Q4, last year was it low double digits or is it should we expect it to kind of slow down from what it how it performed in this year 26 yes I mean we've kind of we've kind of guided that we expect.

you know, the rental business to perform organically, high single digits, low double digits, and it was in that range. And, you know, we're really happy with the way that that business performed in the quarter.

Okay. Last one for me. You guys mentioned AI optimizing sort of productivity in the company business lines right now. I mean, when should we expect to see that sort of show up in the numbers? I mean, what sort of outcome do you expect from sort of this operational excellence initiative?.

Yes, Max, the way we think about that, I mean, just take all the levers that I shared in my prepared remarks. You know, operational excellence to us means means starting with our customer-facing business processes so that we make those faster, better, fewer defects for our customers. Quite frankly, drives growth and margin expansion. AI, mix optimization, pricing analytics, and improving our processes there, and all the things we do, we feel we're getting an uplift now, quite frankly. And our team has really rallied around the renewed focus. And each of those is contributing, you know, some a little more than others, but we're seeing that lift start to take effect. And that's going to continue to help prop up the business and help us on the growth side and the margin side, which is why, you know, we talk about being as strong on our operational excellence muscles as we are. our growth muscles, we feel confident that we can do that and continue going forward. And we'll share more. You can expect in the future, you know, we'll start to break out some things as we talk more, but just know they're all giving us great tailwinds.

Awesome. Thanks, guys. Thanks, Max. Thanks, Max.

Thank you for your question. Our next question is from Greg Palm with Craig Hallam. Your line is open.

Yes, thanks. I wanted to go back to the organic service growth number. It was very impressive. And so, I mean, as you look back on the quarter relative to what we were all talking about a couple months ago, what outperformed relative to your expectations? the one word that maybe changed as it relates to the full year is you now confidently expect high single-digit organic growth and just want to sort of get your feedback on whether that's a little bit of a under-the-radar tone shift as well.

Well, Greg, I think, you know, again, similar to Max's question on end markets, right, I would say it was just strength across the board. There isn't one, you know, particular, you know, lab or one particular, you know, part of the business that stands out. I think we're pleased with what we saw. I do want to take a minute to remind everyone though, that when you look at the first half of last year and the second half of last year, they were very different. We were relatively flat. The first half of last year, we grew 7% in the second half of last year, right? So the comparison is a little easier, first half versus second half. But I think with Jamie's comments, with the use of the word confidence, I think that is in fact an indication of where we think we expect to be within that range.

Yep, okay. And you know Jamie as you think about some of these margin enhancement opportunities, you called out a few of those. I mean how does that shape your view of the earnings power, you know, of the company and just trying to get a sense of like how much of this is near-term where we're actually going to see like near-term improvements in margins in the P&L versus stuff that's going to sort of work its well through overtime yes the look.

So the way I think about it, Greg, first, our team is rallying around the vision that we should be and can be and will be as strong on operational excellence as we have been on growth. So that's a starting point. And you heard me right off the levers. I won't repeat them. And frankly, we felt the lift as we shared in Q1. And Q1, based on what we were planning earlier, we did a little better than we thought, a little faster. Too early to call anything different than we've said for the full year, but I would say we're at the beginning of our journey, Greg. on operational excellence and what we could be versus the middle, certainly then. So there's room to continue to run, and we feel very confident with our team rallied around the levers that I laid out that we can continue that performance.

Okay, congrats again, best of luck. Thanks Greg.

Thank you for your question. Our next question is from Martin Yang with Oppenheimer. Your line is open.