Transcat Inc (TRNS) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Transcat First Quarter Fiscal Year 2018 Financial Results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Craig Mychajluk.

Thank you, sir.

You may begin.

Yes, thank you, and good morning, everyone.

We certainly appreciate your time today and interest in Transcat.

With me on the call today, we have Transcat's President and CEO, Lee Rudow; and our Chief Financial Officer, Mike Tschiderer.

After formal remarks, we will open up the call for questions.

If you don't have the news release that crossed the wire after markets closed yesterday, it can be found on our website at transcat.com.

The slides that accompany today's discussion are also on our website.

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.

Those statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today.

These factors are outlined in the news release as well as with documents filed by the company with the Securities and Exchange Commission.

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.

I'd like to point out, as well, that 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 regular or 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 to begin the discussion.

Lee?

Okay.

Thank you, Craig.

Good morning, everyone.

Thank you for joining us on the call today.

We'll follow same format as we have in the past.

I'll hit upon some highlights for the quarter.

And then, Mike will provide a more in-depth review of the financials before I wrap things up with an outlook for the year.

So good start generally to fiscal 2018, as we generated $36.3 million of consolidated revenue, which represents a 9.4% increase.

The quarter saw solid growth in both our Service and Distribution segments.

With our last acquisition Excalibur being a year old at the start of the fiscal year, all the growth in the first quarter was organic.

Let's start with the Service segment.

In the first quarter, the Service segment delivered strong organic growth of 7.6%.

This is a consolidated service rate -- growth rate, which includes Canada.

Our U.S. Service organic growth rate was about 9%.

We've now achieved 33 consecutive quarters of year-over-year service growth.

That's an accomplishment we're very proud of.

Demand through the quarter was strong and we continue to take market share.

In fact, we're seeing strong revenue growth into second quarter as well.

In addition to growing our targeted life science market during the quarter, we gained quite a bit of traction in defense and high-end electronics as well.

As we mentioned in the news release, we ramped up new labor resources that we expect will position us well for the rest of the year.

Of course, productivity for new technicians is low at first, so we managed the volume -- the volume increase by increasing technician over time.

Not a bad challenge to have, but one we see leveling out and correcting itself.

It's important to note that, we do not have a physical capacity issue.

It's basically on the technician side and that's where we're focusing some of our attention.

The only other thing I'd add in terms of color for the Service segment, in the quarter is that we've invested $1.2 million of capital for new service capabilities, which is a bit higher than what we normally spend in the first quarter, but it was in response to new opportunities and demand.

We expect the utilization of the investments to increase throughout the year as they get fully deployed.

We still expect to be within our $6 million to $6.5 million CapEx forecast for the fiscal year.

Moving on to Distribution.

Segment sales were strong with improved growth and operating margin.

Sales for the quarter were up 11.4%, as we saw U.S. core industrial market strengthen, including some recovery in oil and gas.

Our rental business continues to perform well and grow at an impressive rate.

I'd also add that, from a marketing perspective, we love the work that our technology team is doing.

We generated significant gains in our domain authority and associated web traffic, both of which has led to higher quoting levels, calibration sales on new products and lead generation for our Service segment.

With that, let me turn things over to Mike to discuss results, and I'll come back and talk to our outlook.

Thanks, Lee, and good morning, everyone.

I will be referring to the presentation slides that complement our earnings release.

As mentioned, both are available on EDGAR and on our website.

Starting on Slide 4 of the deck.

We show our top line revenue performance by segment and on a consolidated basis.

Lee provided a little color on the drivers of each segment.

And as a final reminder, this quarter's growth for both segments was all organic, as our last acquisition Excalibur was right at the beginning of our fiscal year 2017.

We expect our Service segment to achieve double digit sales growth over time from a combination of organic and acquisitive growth.

We are very pleased with the 7.6% organic growth performance in the first quarter.

This is in line with our goal of mid- to high single-digit organic growth.

As noted on the slide, Service segment continues to deliver strong results over the long term, with mid-teen growth over both the trailing 12-month period and CAGR since fiscal 2014.

Our Distribution business continued its strong momentum, increasing revenue 11.4% in the quarter.

This growth was a direct reflection of our diversification strategy, as well as an improving U.S. industrial market.

Additionally, the Excalibur acquisition brought us a network of independent sales representatives who are currently focused on selling new and used equipment and equipment rentals.

Early results have been favorable, especially with new equipment sales.

Additionally, order bookings have been strong early into our second quarter.

Moving on to Slide 5. Quarterly consolidated operating income was impacted by the investments made in the quarter, the technician labor capacity Lee discussed and $322,000 of a one-off stock-based compensation expense recorded in the quarter noncash.

As a result, operating income was consistent quarter-over-quarter, and operating margin declined 40 basis points to 3.9%.

The stock-based comp expense was split almost 50-50 between our 2 segments.

This negatively impacted operating margin by 90 basis points, in both the Service and Distribution segments.

Our total operating expenses were 20.1% of consolidated revenue in the first quarter of fiscal '18 compared with 20.5% of consolidated revenue in the first quarter of fiscal 2017.

We expect to see our Service segment margins improve as sales begin to flow through our new and existing calibration capabilities and as the productivity of newly hired technicians improves.

On the Distribution side, our gross margin increased from higher-margin equipment rentals and used equipment sales, along with increased volume-based vendor rebates, which when combined with cost controls, resulted in segment operating margins expanding 50 basis points.

On Slide 6, we show adjusted EBITDA and adjusted EBITDA margins.

Among other measures, we use adjusted EBITDA, which is a non-GAAP measure, to gauge performance of our Service and Distribution segments because we believe it is a good measure of operating performance and is used by investors and others to evaluate and compare performance of core operations from period to period.

I do encourage you to look at the reconciliation of adjusted EBITDA to the closest GAAP measures, for us operating income and net income, that we have provided.

Quarterly adjusted EBITDA increased more than 8% to $3.4 million and was driven by strong growth in the Distribution segment, which increased more than 50% to $1.1 million.

As a percent of revenue, consolidated adjusted EBITDA margin was down nominally 10 basis points to 9.3%.

On Slide 7, first quarter net income was $860,000, down just slightly over the first quarter of fiscal 2017, as a lower effective income tax rate nearly offset slightly increased interest costs.

The effective tax rate for the first quarter was lower than typical at 24.8%, largely due to the discrete tax benefit recorded from accounting for certain stock-based compensation awards.

We still expect our effective tax rate to range between 34% and 36% for full year fiscal 2018.

Slide 8 provides detail regarding our balance sheet and our cash flow, which support our growth strategy.

During the quarter, which typically is not a strong generating quarter for cash, we used $2.9 million of net cash in operations.

This higher-than-typical usage stems from the timing of working capital changes, especially the timing of certain vendor payments and the payout of prior year bonus and profit-sharing awards during the quarter.

We fully expect to generate cash from operations for the remainder of the year.

Our total capital expenditures were $2.1 million for the quarter and were primarily for customer-driven opportunities to support our service capabilities and for assets to support our growing rental business.

Of note, we've made investments into our mobile calibration fleet.

For those of you that may not know, we have built a fleet of mobile calibration trailers that can provide service to customer sites, which may not have the space or the utility capabilities we require to service their equipment.

This mobile capacity is especially valued in the alternative energy sector.

During the quarter, we also added reference level radio frequency and microwave calibration capabilities in our Houston, Texas, calibration service center.

Total CapEx is still planned to be approximately $6 million to $6.5 million in full year fiscal '18, with the remaining expenditures focused on other service-related capabilities, as well as on IT infrastructure investments to drive our operational excellence initiatives.

Of the CapEx plan for fiscal 2018, approximately $1 million to $1.5 million of the $6 million to $6.5 million is for maintenance or existing asset replacements.

At quarter end, we had total debt of $32 million, with $6.4 million available under our revolving credit facility.

Debt was temporarily elevated during the quarter, up $4.6 million since fiscal year 2017 year-end, given the timing of capital investments and the usage of cash in operations.

Despite that, our leverage ratio was still relatively low at 2.2x, a ratio we are comfortable with, especially considering the timing of working capital changes that will level out over the remainder of the year.

We calculate our leverage ratio as total debt on the balance sheet at quarter end divided by the trailing 12 months adjusted EBITDA.

Other companies may calculate such a metric differently.

We believe we continue to have sufficient liquidity and ample dry powder for any investment opportunities or acquisitions that meet our strategic criteria.

Lastly, we expect to timely file our Form 10-Q on or around August 4.

With that, I'll turn it back to Lee.

Okay.

Thank you, Mike.

So the first quarter of fiscal '18 is in the books, our strategy and focus have not changed, and we're pleased with the prospects of both operating segments.

Recently, we spent a lot of time talking about operational excellence and the initiative is well underway.

Over time, we expect operational excellence to support strong, sustainable organic growth and margin enhancements.

Goals include process improvements across the business from acquisition, integration to order processing.

The ultimate goal is to leverage technology and processes as a competitive advantage for Transcat.

It won't happen overnight but the process has started.

It's an important one and it's getting a lot of attention and focus.

As we progress to fiscal '18, we expect the Service segment to continue to deliver mid- to high single-digit organic growth.

The increasing demand that started in fourth quarter of last year continued in the first quarter and second quarter as well.

Our new business pipeline is strong and continues to provide nice momentum.

From a labor perspective, we're making progress on increasing our capacity.

Like I said before, it's a nice challenge to have, and we're working through it.

We've made a significant number of early year investments to strategically increase our service capabilities, and we expect increased utilization of the investments throughout the year and into next year.

Distribution has performed well and will continue to be -- we continue to be pleased with the impact of the rental and used equipment businesses; the impact it has had on the segment, both directly through higher-margin profiles and indirectly, through the enhancement of our value proposition across our Service segment and the entire organization.

And we've said and demonstrated in the past, acquisitions will remain an integral part of our growth strategy.

And from a pipeline perspective, we're in a good position.

That said, most recently, we've been focused on organic growth investments in what has been a productive and responsive market.

So overall, we expect strong fiscal 2018.

Looking further out, we're tracking well to reach our sales target of $175 million to $200 million over the next 2 to 3 years.

So with that, I'll turn things over to the operator for any questions.

(Operator Instructions) Our first question comes from Bill Sutherland of the Benchmark Company.

I was really impressed with the distribution growth and just curious, as you look at the quarter and then obviously going forward, how much do you feel of the pickup is the backdrop, the tailwinds versus some of the things you're doing, just to grab share?

Right.

So Bill, this is Lee.

I think it's really a combination.

We've done -- and I mentioned it in the script in walking through some of the notes.

We've done a really nice job with some of our web presence, our domain authority.

We're getting a ton of leads relative to what we've produced in the past or last couple of years.

It's really been building over time some of the momentum and some of the work that we put into to lead generation.

So I think that's part of it.

And I would certainly credit the group here for producing that benefit.

I think there is a bit of a tailwind as well.

So like I said, it's a combination.

We're certainly -- relative to oil and gas, we've seen some recovery.

When I say some recovery, I think it bottomed out, if you will.

There is some pent-up demand.

Some of our vendors with instruments that particularly relate to oil and gas and the transmission of signals along that process, have seen an uptick in business, and we've seen it as well.

So it's a blend.

I wouldn't put a percentage on it.

I like the work we're doing.

I think it's had a big impact.

It's nice to operate in an environment that doesn't have headwinds.

So I think you're seeing some of what this company can produce in at least a neutral environment, with maybe a little help from the macros.

And then in Services, the labor constraints, that only impacted gross margin, not growth.

Is that the situation?

So a little bit of both.

And...

I'll start off with at least, it didn't impact the revenue growth even though we continue to have a good, we call it, work in progress and backlog of work on the shelf set would be done in July.

What we saw was the costs of getting the workout was higher because of the mix of overtime versus having fully trained up staff, which gets to the hiring and recruiting and the training programs that are going on.

Right.

So -- but with a consistent buildup of back orders, had we had the staff here early enough, trained up quick enough, I think you would have seen some revenue increase as well.

So I agree with Mike.

It's really a combination.

There would have been some higher levels of growth, in combination with some margin.

Without any question, that the margins would have been improved.

So did the order flow kind of tick up in a way that you were somewhat surprised, in terms of the available -- of the number of techs that you had?

Right.

That's a great question.

I would say that we were probably a little bit late in recognizing into the Q4 of last year.

So in Q4 of last year, we saw this starting.

We probably could have got that ahead a little bit.

But as soon as we've recognized it, we started ramping up.

In this business, it's not always easy to turn on a dime.

We hired a significant number of technicians through a really nice internal recruiting program that we started in Q4.

It's produced a lot of labor.

In Q1, we've just got to get the productivity up.

So we didn't -- we didn't see necessarily this volume pickup.

We knew that we were improving each quarter on organic growth.

But it's really picked up momentum.

We're really happy to see it.

In these positions, Lee, you can't use contract-type employees, can you?

No, not really, not really.

So these employees, even if they're experienced in industry, it takes a good month or 2 to get experience on our system so that's part of it.

And I don't see this as a long-term issue.

But when you look quarter-to-quarter and you get an uptick in the business, you're going to see quarters like this and we'll get flatten out and level out over the year.

That was my last question, actually, is the ramp of the new tech.

It's not several months, it sounds like it's...?

No.

I'd give it a quarter or so until we'll be well positioned.

We've had organic growth, at least in the U.S., of almost 9%.

And if that goes to something significantly higher, we can end up in the same position later in the year.

That would be a nice problem to have, too.

But I think we're in a good position for the current volume.

I guess there was some -- not on the M&A pipeline, you're saying, it's fairly active.

But it's not -- it's may be not the priority it's been in past years at this point?

So I'm not sure I'd characterize it that way.

What I would say is that, couple of years ago, 12, 24 months back when the macros were more challenging, what that sometimes provides, Bill, is an environment that's really nice for making good acquisition deals.

So what we try to do here, when we allocate resources, is try to do so and then being well aware of the opportunities that we have.

So sometimes, you have more opportunities and it's a better opportunity to make an acquisition and sometimes organic growth is really strong.

We think organic growth has been pretty consistent for the last year or so and really responsive.

So I would say that what you're going to see moving forward is a blend of both.

We have a nice pipeline.

We've made a lot of acquisitions.

We've done well integrating them and finding them and paying the right price.

We're very disciplined.

We're going to remain disciplined.

I just wanted to make a note that in the last year, we just have invested more time, energy, money into organic growth because the market was so responsive.

I wouldn't read it to that we won't -- we can't do both at the same time because we always have, and I would expect that to continue into the future.

Okay.

And last one from me is on Distribution, and you call this out in your filings about the increased competition from platforms like Amazon and those kinds of more consumer-level distribution.

So what are you doing?

I mean, you're obviously not feeling them -- it doesn't seem like it's a source of pressure on your Distribution numbers?

And how do you position yourself going forward against that kind of competition?

I think the key is the overall comprehensive strength of our value proposition.

So it's not, when you look at Transcat, today, I don't look at it as distribution.

I look at it as the combination of distribution, with the elements of rentals and used and stock house and our Service business.

So somebody wants to order not just 1 unit or 2 units, but 50 units and a variety of vendors, we still are a very, very viable option.

If these units need to be calibrated up front with uncertainty data and performance data, we have a very strong value proposition.

And with our Service customers, Bill, across the country, they regularly buy instruments from us because of the combined relationship we have on both our Service and Distribution segments.

So I think that I look at Transcat's strength in some of the momentum we've had in Distribution, some of it's rental, some of it's used, some of it's combined value proposition of the whole company, and I think that's where we are uniquely positioned.

We don't know of another company in the country that, if you look at the key elements of our value proposition which include Distribution, Service and the elements of each, that present the market a type of proposition that we do.

So I think it's that combined strength and as well as we're not having significant headwinds, you're going to see some better performance.

That's what we're seeing now.

Our next question comes from [Dean Trottier], a Private Investor.

Most of my questions were answered.

So I just have one.

Is there a certain amount of leverage where you start to become sort of uncomfortable with?

You mentioned that there's still stuff in the acquisition pipeline -- or the M&A pipeline potentially.

You're sitting pretty low at 2.2x, but maybe you could just give me some context on that?

Sure.

Thanks, Dean.

Yes, we're very comfortable especially with the timing of 2.2x, which we think will -- is high right now as EBITDA grows and some of the working capital things kind of adjust out.

But we're still comfortable with something higher into the 2s.

We're not comfortable with anything nor would our bank be comfortable at something into the 3x trailing 12 months.

But we believe that we have enough there, and it's still a good time to be borrowing.

And we're comfortable at 2.2x even though we think that will go down, ex any acquisitions or any other unusual activity.

Our next question comes from Steven Stern of Stern Investment Advisory.

My question concerns to Distribution segment sales.

What is the breakdown of that number between rentals and outright sales, just on a percentage basis?

Yes.

We don't disclose rentals as a number or as a separate segment.

If it continues to grow, we probably will -- but it's a rough range.

I mean, our distribution of over $70 million, our rental is still -- it's $2 million to $3 million of revenue.

So it's still very small, Steven, compared to the total Distribution segment revenue.

It's more compelling and it brings more to the bottom line just because the profitability margin is different than a core distribution product.

Eventually, if it continues to grow like we hope it will, we could see it as a separate reportable segment, but it's in that range.

Okay.

What rentals or leases or what type of time period?

Yes, it ranges anywhere from weeks to we've had some that are 2 years.

I will say probably the sweet spot is in that 4- to 12-week period.

The business that we got from Excalibur, their rental business, which is typically higher cost, higher-end electronic gear is typically a little bit longer period average rental than a Transcat, which is more of a meter-based smaller dollar piece of equipment.

But we're talking 6 to 18 weeks for an Excalibur, sometimes up to 6 months.

As there are no further questions, I would like to turn the call back to management for closing remarks.

Okay.

Well, thank you for joining us on the call today.

We appreciate your continued interest in Transcat.

Feel free to reach out to us at any time.

We look forward to talking to you all again after our second quarter results released.

For those we are going to be in the Chicago area, we will be presenting in the investor meetings at the IDS Conference at the end of August.

So again, thank you for participating, and have a nice day.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.