Greetings. Welcome to the Transcat, Inc. Fourth Quarter and Full Fiscal Year 2023 Financial Results. Please note this conference is being recorded. I will now turn the conference over to your host, Tom Barbato. You may begin.

Thank you, operator, and good morning, everyone. 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, Mark Doheny. We'll begin the call with some prepared remarks, and then we will open up the call 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, transcat.com in the Investor Relations section. If you would please refer to Slide #2. As you are aware, we 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 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. 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 expect 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 non-GAAP to compare GAAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Lee.

Thank you, Tom. Good morning, everyone. We appreciate you joining us on the call today. Our strong performance in the fourth quarter rounded out another great year for Transcat, broad-based strength across our business platforms drove an increase in consolidated revenue of 12% to $230 million for fiscal 2023, a new record for Transcat. The results also included record revenue and gross margin in our Service segment as well as on a consolidated basis. Consolidated gross margin expanded 110 basis points to 29.6%, driven by margin expansion in both our Service and Distribution segments. Adjusted EBITDA, a key metric for us given our acquisition strategy, grew 16% in the prior year to $30.4 million. So another good year in the books, demonstrating the continued durability and resiliency of our business model and the attractive regulated end markets we serve. For the full year, our Service segment generated 19% overall revenue growth, including 10% organic growth; demand in both our core calibration business as well as our NEXA Enterprise Asset Management business remains strong. Our ability in fiscal 2023 to capture a significant number of revenue synergies between NEXA's professional services platform and Transcat's technical services platform continues to drive a sustainable, long-term competitive advantage in highly regulated, high-cost-of-failure industries that we serve. The expansion of NEXA's suite of professional services has been well received throughout the United States and, for the first time, we opportunistically performed work in various parts of Europe, including the Netherlands, Switzerland, and Germany. For the full year, we expanded Service gross margin by 30 basis points to 32.2%. Service margins continue to benefit from our differentiated value proposition, inherent operating leverage, and our continued focus on automation and operational excellence, primarily through process improvement. For fiscal 2023, we successfully acquired and integrated three companies: Alliance Calibration in Cincinnati, e2b Calibration in Cleveland, and Complete Calibration in Ireland. The acquisitions expanded our addressable markets, widen the breadth of our service offerings, and allowed us to leverage our existing infrastructure. We are very proud of the success our various teams are having around integration. The process of successfully joining multiple companies together into a cohesive, well-integrated system is one of the ways we continually differentiate Transcat, capitalizing on both sales synergies, which is our typical and primary objective, along with practical cost synergies is a nuanced process. The alignment of both synergies delivers operational excellence and a superior customer and employee experience. Turning to our fourth quarter Service segment performance. Steady demand drove service segment revenue growth of 15% and organic growth of 10%. This represented our 56th straight quarter of year-over-year service revenue growth. Recurring revenue streams in the highly regulated environments that we serve continue to benefit our Service segment. Service gross margin in the fourth quarter expanded 90 basis points to 34%. Turning to distribution for the full year despite continued challenges with supply chain shortages, revenue grew 3%. Gross margin expanded 180 basis points from the prior year, driven primarily by significant growth in our high-margin rental business. The $30.4 million in EBITDA supported a strong balance sheet. Our leverage ratio of 1.6x positions us to capitalize on growth opportunities, which include M&A activities in the highly fragmented third-party calibration services market and the NEXA-oriented professional services market. Behind the numbers, we continue to focus on leadership development. Strong financial performance over the past several years has supported investments in our people on a continuous basis. Leadership is another differentiator that widens the moat around Transcat, fortifying our ability to execute our strategic plan well into the future. With that, I'll turn things over to Tom for a deeper look into the fiscal 2023 fourth quarter and full year financial performance.

Thanks, Lee. I’ll start on Slide 4 of the earnings presentation available on our website, which details our revenue on a consolidated basis and by segment for the fourth quarter and the full year. In the fourth quarter, consolidated revenue reached $62.1 million, representing an increase of 11% compared to the previous year, driven by strong performance in our Service segment and solid results in our Distribution business. In terms of segments, Service revenue growth was robust at 15%, with 10% of that growth being organic and the remaining 5% resulting from acquisitions. For Distribution, revenue amounted to $22.3 million, marking a 5% increase versus the previous year. We continue to see impressive results from our rental business, which is growing at a significant rate. However, we are also affected by prolonged vendor lead times, which contributed to our year-end backlog of $8.1 million, an 8% increase from the end of the last fiscal year. On a full year basis, consolidated revenue totaled $230.6 million, up over 12% year-over-year, reaching a new record high for Transcat. Our Service business remained resilient, with year-over-year growth of 19%. The Distribution business grew by more than 3% compared to the previous year, again fueled by strong performance in the rental sector. Moving to Slide 5, our consolidated gross profit for the fourth quarter was $19.2 million, an increase of 15% from the previous year, and our gross margin improved by 100 basis points to 30.9%. Service gross margins increased by 90 basis points to a record-high quarterly level of 34%. This improvement in the Service margin highlights our capability to leverage fixed costs and enhance technician productivity. The Distribution segment's gross margin was 25.2%, up 70 basis points. For the full year, consolidated gross profit rose by 17% to $68.4 million, with overall gross margin improving by 110 basis points to 29.6%. Our service gross margin was 32.2%, increasing by 30 basis points from the previous year. The Distribution segment's gross margin climbed to 25.3%, a rise of 180 basis points, benefiting from significant growth in the higher-margin rental business and the effects of previously mentioned strategic acquisitions. Transitioning to Slide 6, our Q4 net income reached $3.7 million, up 20% from last year, with diluted earnings per share at $0.48. We also report adjusted diluted earnings per share to account for upfront and ongoing acquisition-related expenses, which for Q4 was $0.60. For the full year, net income dropped by 6% from the previous year, reflecting a decline of $0.10 per share, mainly due to higher interest expenses, which negatively impacted earnings per share by $0.21 year-over-year. Moving to Slide 7, we present our adjusted EBITDA and adjusted EBITDA margin. We utilize adjusted EBITDA, which is a non-GAAP measure to assess our business performance, as we believe it best reflects our operating effectiveness and cash generation capabilities. This metric becomes increasingly significant as we pursue our acquisition strategy, as it accounts for one-time deal-related transaction costs and non-cash expenses arising from acquisition purchase accounting. In Q4, consolidated adjusted EBITDA was $9 million, reflecting an 18% increase from the same quarter last year, with adjusted EBITDA margins growing by 80 basis points. Both segments experienced growth in adjusted EBITDA and margin expansion compared to last year. Full year EBITDA stood at $30.4 million, representing a 16% increase from the previous year, driven by notable profit improvements in both segments. We provide a reconciliation of adjusted EBITDA to operating income and net income in the supplemental section of this presentation. Moving on to Slide 8, our operating free cash flow remained consistent with last year, with cash from operations meeting expectations. Full year capital expenditures were $800,000 less than the previous year, continuing to concentrate on enhancing Service segment capabilities, technology, automation, and growth projects. The slight year-over-year decrease is due to sizable investments in our facility footprint made in the prior fiscal year. For fiscal year 2024, we anticipate capital expenditures to be in the range of $10 million to $11 million, focusing on similar areas as in fiscal 2023. Slide 9 underlines our strong balance sheet. At year-end, total net debt was $47.6 million, with a leverage ratio of 1.6x. We had $37.3 million available from our credit facility at the end of the quarter. Additionally, we recently announced the acquisition of TIC-MS for $9.7 million, financed with 70% stock and 30% cash. As we look ahead to fiscal 2024, it is important to note that we expect our income tax rate to be between 21% and 23%. This estimate includes federal, various state, Canadian, and Irish income taxes, and reflects the discrete tax accounting related to share-based payment awards. While the tax rate aligns with previous years, there will be a timing difference in realizing the tax benefit from share-based payments in fiscal 2024. Typically, these benefits are recognized in the first fiscal quarter. However, in fiscal 2024, we will recognize them in the second quarter due to the timing of awards made in fiscal 2021. In the first quarter of fiscal 2023, this benefit positively influenced the tax rate by approximately 13%, and we expect a similar effect in Q2 of fiscal 2024. Lastly, we aim to file our Form 10-K by June 6. I’ll now hand it back to you, Lee.

Okay. Thank you, Tom. So to wrap up, we are pleased with the team's performance in fiscal 2023. We've consistently delivered exceptional results through various economic cycles as can be seen over the past 10-plus years. We believe the combination of our talented team and our differentiated portfolio of businesses is unique and will continue to drive longer-term competitive advantage. Our business model remains durable and demand across our highly regulated end markets remain strong. We expect to perform well in fiscal 2024 despite macroeconomic uncertainty. As we work our way through the first quarter of fiscal 2024, we have good momentum in our new service pipeline, and we expect another year of organic growth in the high single-digit range. In fiscal 2024, we expect continued margin expansion across our service channels, particularly in the back half of the year as we make incremental first-quarter investments to drive scalability for longer-term growth. We are well positioned financially and expect our strong balance sheet and solid cash flow generation to support the conversion of our robust and diverse M&A pipeline. At the very start of fiscal 2023 in April, we acquired TIC Metrology Services. Early indications point to a strong start to the St. Louis bolt-on. We expect acquisitions along with strong organic growth to increase the trajectory of our business over time to continue to drive the sustainable growth journey that we've been on for over the past decade. With that, operator, we can open the line for questions.

Our first question comes from Greg Palm with Craig-Hallum Capital Group.

Let's maybe start with the commentary about some of these kind of near-term investments in NEXA, in CBLs, maybe a little bit more detail on kind of what you're seeing from those two areas, presumably better activity. But why now? Why not 6 months from now or a year from now and just a little bit more details on sort of what investments you're doing here?

I appreciate the question. Yes, we highlighted CBLs and NEXA in the first quarter because they are natural byproducts of our growth. With CBLs, year after year, landing a significant material number can sometimes lead to a short-term drag as technicians get up to speed on margins before they become effective and efficient. That's happening in the first quarter. As for NEXA, they have continued to grow and performed exceptionally well as an acquisition, especially in the U.S. and Ireland. We believe it's the right time to build out infrastructure around sales and operations to continue scaling that operation. We see potential for further growth and want to ensure we make the right investments at the right time. Those are the main factors at play. We certainly expect margin improvement this year.

Yes. That makes sense. On NEXA, specifically, I think it's been, I don't know, what, 1.5 years, 2 years under ownership now. So I guess looking back in hindsight, what surprised you in terms of synergies? Can you just give us some sense on kind of how that's played out? It sounds like you're pretty excited about the future of the business there. So a little bit more commentary on what's working would be great.

Right. Well, we still love the deal, and September will be 2 years. So they got off to a really good start when we reflect back on the first year and three quarters. We like the team; we like the management team. I think it's met our expectations. It's probably exceeded our expectations. We knew we had potential there. I think the synergies that go both ways between Transcat customers offering opportunities to NEXA and vice versa. I think they both come to fruition. NEXA certainly has picked up a fair amount of meaningful business from our portfolio of about 35,000 customers. So it's all going well. And the infrastructure build is the byproduct of that success.

Okay. Great. And then I guess last one, and it sort of dovetails into the NEXA. But more broadly speaking, just expansion into Europe, but you sort of called out a number of additional countries where you're doing business now. So where does geographical expansion into Europe or other areas sort of rank in terms of near-term priorities?

Right. Well, we use the word opportunistic when we talked about the development into some of these other countries. And what that means from our perspective, Greg, is that customers that we're doing business with in the U.S., customers that we're doing business with in Ireland, have locations throughout Europe. And it's not a difficult leap for us to start servicing them in those countries. A little bit different than a strategic approach where we're going to conquer Europe with our NEXA services. So I think today, it's opportunistic. It's part of our natural expansion. We're excited about it. And down the road, when we think it becomes more strategic, we'll talk to that. But right now, we're pleased with the group's ability to service other parts of Europe.

Our next question comes from the line of Gerry Sweeney with Roth Capital.

Growth has been really good. And I mean I think you even highlighted differentiated value to your customers. Can you give us a little bit more detail what's driving the growth? How you're really differentiating yourself? Where you differentiate yourself? But also where are you also seeing some competition? Just trying to get a little bit better feel for the market and what's really driving this growth market share or geographic? Obviously, geographic expansion, service expansion, but just trying to dig in a little bit, if you would.

The game plan remains largely unchanged. We believe the range and quality of our services are among the best in the industry. Years ago, we focused on the life sciences sector because we recognized favorable demographics and high entry barriers. Our early efforts from around 2009 to 2011, despite not achieving a positive operating income, were significant investment years, and that strategy has proven effective. Now, we have a competitive advantage in these regulated markets. We made substantial investments in acquisitions to enhance our geographic reach and capabilities, all aimed at differentiating ourselves. We cater to various customer segments, including small and large enterprises, both domestically and in Ireland, which strengthens our value proposition. Our consistent high-quality service has always set us apart in regulated markets. We believe we are positioned as a premium third-party vendor, and when clients seek the highest quality service, they turn to us. This commitment to quality is crucial to our value offer. All of these elements align with our long-term strategy, and we intend to continue reinforcing our value proposition.

Got it. And what about NEXA, how much of an opportunity is there for cross-sell either their services into your 35,000 customers or even open up additional avenues, and sort of where are you on that process?

Yes, I understand the question. We are still in the early stages of this process. A timeframe of two years or even a year and three quarters is relatively short. After acquiring NEXA, we quickly began identifying opportunities within the first quarter and have continued to win more since then. This acquisition is a strong fit for our company. The five or six service tracks they provide align well with our calibration services, targeting the same customers and often the same buyers. This presents a natural growth opportunity for both companies by leveraging each other's customer bases. I am pleased with the acquisition, the compatibility it brings, and the potential synergies that will support our continued growth. We will keep executing our plan.

Adding a point or two to growth with NEXA, do you think that's possible? I know you're likely hesitant to share too much, but...

Yes, we won't get into details. But I think when we point to high single digits, obviously, the better NEXA does and the better we're able to execute those synergies, the more likely we are to hit those targets over time. And like in this past year, we actually exceeded them a couple of quarters. That's always good, too. So this will keep us in our range of high single digits in the uncertain deal with which we're working. I think NEXA gives us a comfort level that in part we'll go to hit those targets.

Could you remind me if NEXA has a margin profile similar to or better or worse than the calibration side?

So Gerry, it's Tom. We've always pointed out that NEXA has a higher average margin than our overall Services margin for Transcat.

Okay. I understand. In the past, you have indicated that a 35% gross margin is a goal. Given your focus on operational excellence and automation, can we expect to reach 35% in the next one to two years? After that, might we consider making further internal improvements?

Yes, we concluded the year with a margin close to 32%, slightly above that. We believe that reaching 35% is the next achievable milestone for our margins. While I don’t want to specify a timeline, whether it’s in one, two, or three years, we anticipate making progress in the near future. We feel that achieving this over the next year or two is realistic, and we'll assess further advancements once we reach that point.

Yes. And just to clarify, that Service's margins...

Correct. This would be Service.

Our next question comes from the line of Scott Buck with H.C. Wainwright.

Can you discuss the difference in margin between the rental business and the equipment sales side?

Sure, Scott, it's Tom. As we have mentioned before, the rental margin is considerably better than the overall distribution margin. We haven't provided specific details, but it is significantly higher.

Okay. And Tom, of the CapEx number that you gave us for 2024, how much of that is for rental replacement and whatnot in that business?

It's a quarter to one-third.

That's great. And then I'm curious, guys, given the rise in interest rates, does that make you rethink or change the way you're thinking about the cap structure and your use of debt?

Yes, it certainly does. You just need to look at our interest expense over the past year and consider how it will impact our future projections. We are definitely examining this issue, discussing it, and evaluating all of our options.

I appreciate that. And then last one for me, just on M&A. Curious what the appetite is for a larger, more transformational type deal and even if there are opportunities like that on the calibration side currently?

Yes, Scott, this is Lee. We are always interested and more than capable of acquiring larger companies. We've got a strategy where we've got our three drivers that sort of dictate our day-to-day focus: geography and capabilities, expertise, bolt-ons, and the like. But something more transformative is always on our radar. And I think when we use the word diverse pipeline, we're sort of guiding towards the fact that we're open to more transformative opportunities. There aren't that many out there, but they're out there, and it's always something we're interested in. I think the company is ready if one presents itself, we certainly have the infrastructure to be able to acquire and integrate. So it's on our radar, and we'll see.

Our next question comes from the line of Ted Jackson with Northland Securities.

I also would like to throw my congratulations in for a great quarter and also a great fiscal year. So my first question is kind of boring, but I just kind of going to talk about the balance sheet really quick, and there was a pretty good jump in working capital, mainly from receivables. I mean inventory also relative to my expectations is a little higher. So I mean, those things I look at free cash flow a lot and kind of wanted to have a little bit of color provided maybe on what we could expect to see with regards to those line items as we roll through '23.

We have previously discussed strategic purchases and our efforts to capitalize on them when possible, which is mainly responsible for the increase in inventory. We've addressed this on a quarterly basis. In terms of accounts receivable, it reflects the growth we've experienced and the timing of billings within a quarter. There's no cause for concern; it's just part of the cycles we encounter with working capital, and everything is consistent with what we've mentioned before.

I don't have any concerns with it. I just kind of want to think about it roll through. I mean would we expect to see your receivables maybe kind of trend down as we roll through '24, hold steady? I mean, if we think about it from like a turns or days basis, I mean, kind of what are your thoughts with regards to that in particular?

I believe we should anticipate that accounts receivable will grow alongside the overall business increase. I expect inventory to likely remain stable. We are still seeing price increases, which will affect our results. However, I think some of the strategic purchases we've discussed previously may diminish this year, leading us to reduce inventory accordingly.

Could you provide more details on how you view first quarter revenue and its integration into the revenue mix for this current fiscal year in relation to the acquisition in St. Louis?

Yes. I think we'll be able to achieve the growth targets that we've alluded to in the earnings release. The St. Louis acquisition is a pure bolt-on. They're within striking distance of our current labs. So there'll be some integration activities where we're going to put these two labs together; that makes a lot of sense. But I don't think that's going to really impact revenue to any large extent in the first quarter. So I think we'll look at high single digits in that range. I think we'll be able to achieve that from a Service perspective.

We should consider that you wouldn't be able to provide any specific information about how much it will add to the first quarter by a certain amount or anything like that. Is there any additional information or commentary you could share on that?

No, we won't be adding any color like that, at least at this point.

Okay. Sorry for still being on the line. I woke up this morning feeling a bit off. Moving on, do you expect to see growth in your distribution business in '24?

Well, the way we look at distribution is the way we've looked at it for the last several years, and that is we've always won a core distribution just to be a stable segment for us. Just to remind you, Ted and others. We primarily use distribution as an opportunity to sort of crack open the door for service opportunities. It's an important differentiator for us. So every time we have a distribution order that oftentimes leads to a service opportunity. We expect that to continue. But it's never been our goal to grow distribution, take it from roughly $70 million, $80 million to $100 million or $150 million. That's not our goal. It is our goal to grow our rental business. Rentals fall under distribution, and that's had significant growth both in margin from a gross profit perspective and revenue perspective; it moves the needle more on margin than revenue, but that is more strategic. So I'm going to say steady as she goes with core distribution, and you would expect growth in rentals over time.

Okay. My last question is about the Irish acquisition. I found the efforts they are making in robotics and automation quite exciting. I understand that it's a slower, long-term opportunity for the company, but could you share some insights on what is happening in that area, including any efforts and successes?

Well, it is a slow burn, and I would characterize it as being in the first inning, that's a good place to start. But just because you asked the question, we actually did install a couple of robots in our Philadelphia lab that are related to mass calibrations, which is weight. And so they are up and running and we're working through the kinks. But yes, we started the process. And so the key is looking at the disciplines that we perform work on and putting them in some logical order that makes sense from a robotics perspective and to continue to develop that technology over time. But I think characterizing it as the first inning is important. There's a lot of work to be done. It's more of a longer-term play. And so when we get to the mid-single digits in our service margins, the next year or so, a couple of years, then we'll start talking about robotics somewhere down the road, I'm sure.

And our next question comes from the line of Mitra Ramgopal with Sidoti.

First, just on the Service segment. I know it's being driven by the life science industry in particular. Just curious if you're seeing growth from any of the other areas that might get you excited, whether it's aerospace, energy, chemicals, industrial, anything that might accelerate the growth in this segment.

Yes. Most of our growth in the low 60 percentile range is seen in life sciences, but we've also experienced growth in Aerospace and Defense. Our pipeline includes some promising opportunities in this area. There has also been moderate growth in general manufacturing. Overall, the growth is quite broad-based beyond our primary focus on life sciences, which includes pharma, biomedical, and medical devices. The next areas in terms of growth would likely be aerospace and defense, followed by general manufacturing, then chemicals, along with some interest in alternative energy.

Yes, this is Mark. Our wind energy business has actually seen some improvement in recent quarters, showing some areas of activity. We haven't discussed our life science business much, but it is also a sector that is continuing to grow well and contributes to our recent strong organic growth.

Okay. No, that's great. And then just digging a little deeper in terms of the biotech space and biotech companies having difficulty given the capital markets currently, et cetera. Just wondering if you're seeing any slowdown in that area.

When we consider biomedical, we are involved in a hospital business that has been part of our expanded addressable market since the Spectrum acquisition. This business has performed well over the past year and continues to grow, which is where we concentrate our efforts. Regarding biotechs and the development of that smaller market for us, we haven't been significantly affected.

Okay. And then, Lee, I know one of the things you're excited about in terms of the investments you're making Transcat University, so to speak. Just wanted to get an update on that in terms of how far along are you on that front? And as it relates to the investment at set when do you expect to really see that paying off for you?

The program continues to make progress. This time last year, we had about 50 students who had gone through the program, and now we’re up to around 100, which is excellent news for us. The initial 50 are also more productive than they were during the early quarters after their training. We are scaling this initiative, and it gives us a competitive edge. It took a while to launch the program, but we are satisfied with our current position. A significant number of those who have completed the program are still with us, leading to good retention rates. Maintaining their career progression with Transcat is just as crucial as training them. Overall, this is positive news.

Okay. And then finally, just on M&A. Obviously, you have an active pipeline and a lot of opportunities out there. But I'm just wondering in light of NEXA, et cetera, if you're more willing to maybe consider M&A activity outside of the U.S. than maybe you might have been willing to do in the past.

I believe that they will come eventually. However, our primary focus has been on the U.S. We made a small acquisition in the calibration sector in Ireland after NEXA, and we could consider similar opportunities in the near future. Looking at the pipeline, about 95% of it is concentrated in the U.S. This reflects our current intentions, and I don’t anticipate that changing anytime soon. If there are any changes, we'll provide additional details. For now, our acquisition strategy remains mainly U.S.-oriented.

We have reached the end of the question-and-answer session. I'll now turn the call back over to Lee Rudow for closing remarks.

Thank you all for joining us on today's call. We appreciate the questions. We appreciate the continued interest in Transcat. We'll be presenting at the Craig-Hallum Investor Conference in Minneapolis on May 31, so feel free to check in with us there. Otherwise, you can check in with us at any time. We look forward to talking to everybody again after our first quarter results. I hope everybody has a nice Memorial Day. And again, thanks for participating. Take care.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.