Transcat(US:TRNS)2023-01-31 17:46Financial Data and Key Metrics Changes - Consolidated revenue increased by 13% to $57.4 million, with service revenue growth of 19% and organic growth of 12% [5][11] - Consolidated gross margin expanded by 180 basis points to 28.6%, driven by margin improvements in both distribution and service segments [6][12] - Adjusted EBITDA grew by 20% year-over-year to $6.6 million [6][13] - Net income remained flat at $1.6 million, with diluted earnings per share of $0.21 and adjusted diluted earnings per share of $0.35 [12] Business Line Data and Key Metrics Changes - Service segment revenue grew by 19%, marking the 55th consecutive quarter of year-over-year revenue growth, with service gross margins at 30% [6][7] - Distribution segment revenue increased by 4% to $21.4 million, with distribution gross margin expanding by 370 basis points to 26.2% [8][11] Market Data and Key Metrics Changes - Open order backlog in the distribution segment rose by 7% to $9.5 million [11] - The company reported strong performance in regulated markets, particularly in life sciences and aerospace and defense sectors [6][15] Company Strategy and Development Direction - The company aims to expand its addressable markets and leverage acquisitions to drive growth, with a focus on differentiation and strong execution [15][16] - Strategic acquisitions are a key part of the growth strategy, with recent acquisitions enhancing capabilities in calibration services and expanding geographic presence [9][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's resilience amid economic uncertainty, highlighting the durability of its business model [15][39] - The company anticipates continued organic growth in the high single-digit range and expects to maintain strong demand for its services [15][39] Other Important Information - The company generated $6.8 million of free cash flow year-to-date [10] - The leverage ratio stands at 1.66 times, indicating a strong balance sheet supportive of acquisition strategies [10][14] Q&A Session Summary Question: Service growth acceleration and contributing factors - Management noted that the acceleration in service growth was due to a combination of factors, including strong retention and growth across various businesses, particularly NEXA [17] Question: Update on CBLs and their impact - Management indicated that while CBLs contributed to growth, they do not represent a high percentage of overall growth, and any drag from recent CBLs is expected to normalize in upcoming quarters [18][19] Question: Distribution margin strength and rental business contribution - Management stated that both rental business and strategic acquisitions contributed equally to the strong distribution margin performance [20] Question: CapEx expectations for the rental business - Management expects CapEx for the rental business to remain in the $2 million to $3 million range [23] Question: Efficiency gains on the service side - Management indicated that they are still in the early stages of their margin enhancement journey, aiming for mid-30s gross margins in the future [24][25] Question: Opportunities for cross-selling with NEXA - Management expressed optimism about substantial cross-selling opportunities with NEXA, noting early successes since the acquisition [26][27] Question: Expansion plans in Europe - Management confirmed that the acquisition in Ireland is a foothold for further expansion, with potential for growth in calibration services and professional services [28][29] Question: Comfort level with leveraging the balance sheet for acquisitions - Management indicated comfort with leveraging up to 3 times, currently at 1.66 times, and remains active in pursuing acquisitions [32][34] Question: Performance in the Canadian market - Management reported strong performance in Canada, exceeding expectations, and noted ongoing investments in the Toronto lab to enhance capabilities [36][37] Question: Potential headwinds for fiscal 2024 - Management acknowledged economic factors such as rising interest rates and inflation as potential headwinds but expressed confidence in the company's recession-resistant business model [39]