Greetings welcome to Transcat Inc's Second Quarter Fiscal 2024 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Tom Barbato, CFO. Thank you, 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 will begin the call with some prepared remarks and then we'll open it up to questions. Our earnings release crossed the wire after the market 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 two. As you are aware, we may 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, 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 non-GAAP to compare GAAP measures in the tables accompanying the earnings release. With that I'll turn the call over to Lee.

Okay. Thank you, Tom. Good morning, everyone, thank you for joining us on the call today. Transcat delivered strong performance across our entire business portfolio again in the second quarter of fiscal 2024. Consolidated revenue was up 11% to $62.8 million as demand for Transcat services continued to be strong. Consolidated gross margin expanded 230 basis points to 32% as margins expanded in both our Service and Distribution segments. Adjusted EBITDA, a key metric for us given our successful acquisition strategy, grew 24% from the prior year to $9.3 million. Operating cash flow in the second quarter was $8.5 million and $16 million year-to-date. Turning to our second quarter Service segment performance. Our differentiated suite of services continued to support performance at a very high level. We recorded our 58th straight quarter of year-over-year service revenue growth. Service revenue grew 17%, including double-digit organic service growth of 10%. Recurring revenue streams and a differentiated defendable value proposition continue to foster durability and resiliency in our service growth model. And we continue to benefit from strong demand throughout multiple regulated service industries that include pharmaceutical, medical device, biomedical and aerospace and defense. Service gross margin was 34% in the second quarter, which represents a 140 basis point increase over the prior year. Margin expansion was primarily driven by leverage on double-digit organic growth, increased productivity from automation, and significant process improvements throughout our network of calibration labs. Turning to Distribution for the second quarter, gross margins expanded 340 basis points from the prior year driven by growth and an increase in the mix of our high-margin rental business. Both core distribution and rentals continue to drive a significant number of leads and opportunities into our Service segment, supporting consistent strong organic growth. The combination of products, rentals, along with calibration and NEXA's cost control and optimization services remains unique. We've executed well expanding our addressable markets, and our value proposition has never been stronger. Overall, strong performance for Transcat in the second quarter of fiscal 2024. The 24% increase in EBITDA is due in part to our ability to achieve our revenue and cost synergy objectives on the companies we acquire. We start by identifying and acquiring companies that are a good strategic fit for Transcat, but those are only the first two steps. Whether we acquire an adjacent company to expand our markets, a geographic footprint addition, or classic bolt-on to our core calibration services, it is through integration that Transcat drives differentiation. And we are very proud of the work our team has done on this front. You could see it in the results of their work as margins and profits increase. And of course, acquisitions will continue to be an important part of our overall growth strategy. In the second quarter, we acquired Axiom Test Equipment rentals, the largest acquisition in Transcat's history, and SteriQual, a life science service company specializing in commissioning, qualification, and validation services. Axiom is a great synergistic fit with Transcat's traditional rental business that was launched organically in 2015. Growth synergies between Axiom and Transcat's traditional rental business include go-to-market selling and marketing strategies with complementary inventories and customer bases. We expect the combined rental business to perform well as we capitalize on what we consider a one plus one equals three opportunity. SteriQual expands our addressable market within the NEXA cost control and optimization space. SteriQual also fortifies NEXA's differentiated single-source solutions model NF3. In addition to the two acquisitions in the second quarter of fiscal 2024, perhaps what stands out most is the completion of a public offering of our common stock, which was used to repay our credit facility. The highly successful offering displayed robust demand for Transcat stock among institutional investors who recognize, understand and value our long-term demonstrated track record of profitable revenue growth, expansion of addressable markets, and sustainable margin improvement. And with that, I'll turn things over to Tom for a more detailed view of our fiscal 2023 second quarter results.

Thanks, Lee. I'll start on slide four of the earnings deck posted on our website, which provides detail regarding our revenue on a consolidated basis and by segment for the second quarter of fiscal 2024. Second quarter consolidated revenue of $62.8 million was up 11% versus prior year on Service segment's strength and slight growth in our Distribution business. Looking at it by segment, Service segment revenue growth remained very strong at 17% with 10% of the growth coming organically and the other 7% from acquisition. As Lee mentioned, we continue to see high levels of demand in our Services business. Turning to Distribution, revenue of $21.4 million grew 1% from the prior year. We continue to see growth in the higher-margin rental business, which also benefited from the Axiom Test Equipment acquisition, which closed in mid-second quarter. Turning to slide five, our consolidated gross profit for the first quarter of $20.1 million was up 20% from the prior year. And our gross margin expanded 230 basis points in the second quarter. Service gross margin expanded 140 basis points. The service margin increase further demonstrates our ability to benefit from the inherent leverage in our operating model as well as higher levels of technician productivity, supported by continuous improvement initiatives like automation and process streamlining within our networks of labs. Distribution segment gross margin of 28.3% was up 340 basis points from the prior year, driven by a larger mix of higher-margin rental revenue. Turning to slide six. Q2 net income of $0.5 million decreased from the prior year due to a non-recurring, non-cash charge of $2.8 million for the previously disclosed amended NEXA earn-out. The NEXA earn-out agreement was amended to recognize the expanded scope of the NEXA portfolio, which includes the acquisition of SteriQual, and this change is based on current expectations of future business performance. Diluted earnings per share came in at $0.06, as the one-time earn-out charge reduced earnings per share by $0.35. We report adjusted diluted earnings per share as well to normalize for the impacts of upfront and ongoing acquisition-related costs. Q2 adjusted diluted earnings per share of $0.60 increased $0.16 or 36% from the prior year. A reconciliation of adjusted diluted earnings per share to diluted earnings per share can be found in the supplemental section of this presentation. Flipping to slide seven 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. As we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for one-time deal-related transactions costs as well as the increased level of non-cash expense that will hit our income statement from acquisition purchase accounting. With that in mind, second quarter consolidated adjusted EBITDA of $9.3 million was up 24% from the same quarter in the prior year. And adjusted EBITDA margin expanded 160 basis points. Both segments had 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. Moving to slide eight, operating free cash flow significantly improved, up $10 million versus the prior year. We've generated $16 million in operating cash flow in the first half of the fiscal year. Q2 capital expenditures were $600,000 higher than the prior year and continued to be centered around Service segment capabilities, technology, including automation, and future growth projects. Slide nine highlights our strong balance sheet. At the end of the quarter, we had a total net debt of $52 million with a leverage ratio of 1.37x, and $32 million available from our credit facility. Subsequent to the end of the quarter, the revolving credit facility was paid off using the funds from the secondary offering, which closed early in the third quarter. Lastly, we expect to file our 10-Q on November 1st. And with that, I'll turn it back to you, Lee.

Thanks, Tom. Transcat has consistently delivered exceptional results throughout the past decade and through various economic cycles. We expect profitable growth and sustainable margin improvement to continue as we increase shareholder value. We expect our successful and unique acquisition strategy to drive synergistic growth opportunities and expand our addressable markets. We expect to leverage continuous process improvement and automation, including robotics, which we're in the very early stages of developing as key enablers to future margin expansion. In other words, we expect to get bigger and we expect to get better. That's the Transcat way. As we work our way through the third quarter of fiscal 2024, we are still expecting high single-digit to low double-digit organic service growth for the full fiscal year. And we expect gross margin expansion as well. Perhaps most importantly, we expect to develop, recruit, and retain superior management and leadership throughout our organization. It's the people of Transcat that continue to move the needle and push the company to new heights. We expect to continue that as we journey into the future. And with that, operator, please open the line for questions.

Thank you. Our first question is from Greg Palm with Craig-Hallum Capital Group. Please proceed.

Yes, thanks. Good morning everyone. I wanted to start with service gross margin on an absolute basis was really strong. And I think the improvement on a year-over-year basis was the highest in some time. So I guess, it's kind of a continuation of what you've been seeing over the years, but in terms of the greatest positive impacts, where are you seeing that? And should we assume that level of year-over-year improvements for the remainder of the year? Was there something kind of one-time in nature that drove some of that strength specifically in the quarter?

Okay. Well, thanks. I'll take that question, Greg. It's a combination of things that we alluded to, no surprise that strong organic growth is going to always help our margins, you know, it's inherent leverage in this business model. We talked about that through the years, and I think volume helps, volume will continue to help. So to the degree that we continue to grow organically at the rates that we have, you'll see margins improve from that. So also automation, you know, we are now probably in our third or fourth year of focusing on automation, we introduced it some years back. And we're picking up some momentum as well. There's no question in our minds as we track the data that that's a contributing factor, and that will also continue to contribute as you know we're certainly not at the end of our opportunities there. And process improvement in general, we've done a lot of work leaning out these labs, working on our processes from, you know, the moment that product comes into our facilities and the moment it leaves, and I just think that when we look at these processes and some of the improvements we've made they're a contributing factor. So when you look forward, and most of those things are going to continue, but you know, I'm always hesitant to guide quarter-by-quarter on margins because there are different factors, you know, you get CBLs that can start up and have a short-term drag. There's other factors as well. So yes, margins will continue to improve. We expect that over time and over the next few years and it will be pretty consistent. I don't want to get into a quarter-by-quarter guidance on that, but much of what you've seen in the past, I think you'll see in the near future.

Yeah. Okay, fair enough. And then if I could just switch gears to distribution, and talk a little bit about Axiom. You know, what kind of overlap is there? Maybe you can dive into a little bit of the potential revenue synergies that could play out. And then just in terms of rentals as a mix of total distribution revenue, where does that get you now, and maybe you can just remind us of the margin structure of rental versus equipment sale.

I'll begin by letting Tom discuss Axiom as a share of total distribution revenue. However, I want to mention the synergies, Greg. There are some excellent synergies with this deal, which is why we are excited from the beginning. We have potential rental equipment inventories on their side of the business that will significantly assist us with our core customer base, and it works both ways. Our inventory and theirs do have some overlap, but not much. We anticipate selling our respective inventories to each other's customer bases, which is significant. In terms of market approach, Transcat relies more on marketing, supported by strong marketing plans, our web domain authority, and digital recognition. They, on the other hand, focus on traditional selling. This creates a synergy where we will leverage our marketing skills to support their business growth, while they will use their field sales team to assist us, resulting in two strong synergies. The customer bases themselves are different, and we appreciate this deal for all these reasons. Tom, would you like to address this?

Yeah, so I think Greg, I mean, if you think of the combined distribution business now, you know the rentals is 20%, to 25% of the combined distribution now when we take what we had and add the Axiom business to it.

And just remind us on the margin structure of rentals versus equipment sale.

When we acquired Axiom, we disclosed that the margins were 55% or better in the combined rental business.

Okay, great. All right, I will leave it there. Thanks. Best of luck.

Thanks, Greg.

Our next question is from Ted Jackson with Northland Securities. Please proceed.

Thank you very much and congrats on a very, very solid quarter.

Okay. Thanks, Ted.

Thanks, Ted.

I'm going to get into some specifics, but I always do. With the transaction closing and the funds you raised, it clearly wasn't in the current quarter, as you are paying off the credit facility. So how much money actually came in from the deal? I believe it was supposed to be around $65 million. Last quarter, the credit facility was at $42 million or $43 million. When I look at your balance sheet, considering this, how much cash is on your balance sheet? Am I correct in thinking that you take the $65 million and subtract the $43 million? With this, your debt is down by $43 million, and the difference is cash on your balance sheet.

The net proceeds were approximately $75 million, as we initially dealt with $78 million. An additional $10.5 million was included under the greenshoe, resulting in net proceeds of about $75 million. Of that amount, $50 million was used to pay off our credit facility, leaving us with around $25 million in net cash after settling the revolver. We still have about $4.5 million to $5 million in term debt remaining, with an interest rate of roughly 4%. This will be the only interest expense we incur until we utilize the cash balance.

Okay. That was very helpful. Any chance you can give me just kind of the breakdown in services between service third party and freight, at least on a percentage basis, just to let me clean up my model?

Yeah, it's in the 10-Q, which we'll be filing tomorrow. I don't have that off top of my head, Ted, I apologize.

That's okay. Regarding the margins, gross margins were excellent. When I think about the distribution side of margins and the strength you had there, is it fair to say that with the new mix in the rental business, that this will be the new baseline for distribution margin moving forward?

Yes, I mean, when we did the acquisition of Axiom and we said that we expected go-forward once we got into steady state that the distribution margins would be in the 20% to 30% range. So we're kind of already at the low end of that range, and we still feel comfortable with that range for distribution in total.

Regarding operating expenses, you actually experienced slightly better leverage than I anticipated, particularly considering the various acquisitions and recent developments. How should we view operating expenses in terms of a step up from the second quarter to the third quarter, and how should we consider the scalability of that as we move forward?

I believe we can anticipate some ongoing investments. While we've mentioned that much of the significant work is behind us, we should expect moderate increases in the future. We continue to invest in sales and also allocate resources towards IT and cybersecurity, which are necessary areas. Overall, we feel that the major efforts are mostly completed, especially considering the increases we experienced last year and the year before.

Okay. And then one last question and then I'll get out of line. On the customer base lab front, can you talk a little bit about kind of pipeline and activity on that front?

Yeah, I'll take that one, Ted, this is Lee. Yeah, the CBL pipeline is pretty solid. In fact, I would say it's very solid, as solid as it's ever been. We expect that to continue. I mean as long as the labor market is tight, and you know, I'm not going to suggest we're the only company that services CBLs, but it's certainly where we have an expertise level in that, that is different than our competition. I think we're really well-positioned to do well in that space. So I would expect throughout the remainder of this year and into next, that the pipeline we have will support strong growth there.

Okay. I'll get out of line. Again, congrats on the quarter. Thanks for taking my questions.

Thank you, Ted.

Thank you, Ted.

Our next question is from Martin Yang with Oppenheimer & Company. Please proceed.

Good morning. Thank you for taking the question, Lee and Tom. Can you maybe talk about NEXA, give a sense of how the business has grown by itself and what are the synergies, especially revenue synergies you have seen between NEXA and your calibration and distribution business thus far? And finally maybe an outlook for the NEXA combined with SteriQual, how that overall consulting business can grow in the longer term? Thanks.

We acquired NEXA about 2.5 years ago, and the business has performed exceptionally well since then, more than doubling in size during this period. We believe it is doing very well, benefiting from significant synergies between Transcat and NEXA. One key avenue of synergy is granting NEXA access to our customer base, with some of its growth coming from Transcat’s traditional customers interested in NEXA services. Another area of synergy occurs when Transcat pursues new opportunities, whether it's for a CBL or regular onsite work, as NEXA often joins us at the table. This collaboration allows us to enhance our value proposition, significantly increasing our chances of winning new business. We've secured deals on the Transcat side that we might not have won without NEXA's partnership in our proposals. The synergies are mutually beneficial, and I see this trend continuing and possibly improving as we deepen our understanding of each other's operations. Currently, SteriQual fits well within the NEXA suite, allowing NEXA to offer commissioning services that it previously did not provide, alongside its validation services, thus enhancing their value proposition. We anticipate that our growth will accelerate since we have more to offer now, and while I won't provide specific guidance, the combined outlook for NEXA and SteriQual is stronger than NEXA on its own due to the expanded suite of services. SteriQual is a nice boutique company, and we believe our traditional business strategies will be advantageous for them and beneficial for NEXA as well. We expect this positive trend to persist.

Yes, sorry, I was on mute. Thanks, Lee. So, one more question from me is on gross margin, Axiom. Can you talk about the positive benefit on gross margin due to Axiom's integration last quarter? And then do you expect a meaningful contribution or gross margin uplift from the full integration of Axiom in fiscal 3Q?

The impact in this past quarter was not significant because we only had seven weeks. It positively affected distribution margins, but we will see a more complete impact in the upcoming quarter. However, we don't intend to discuss the specifics of margins in distribution in detail moving forward. As previously mentioned, we expect total distribution margins to be in the 28% to 30% range, and we are already at the lower end of that range. You can take it from there.

Thank you, Tom. That's all from me.

And our final question is a follow-up question from Ted Jackson with Northland Securities. Please proceed.

Thank you. I wanted to check in on automation and the situation in Ireland regarding your recent acquisitions. You mentioned automation as a key factor for margin improvement, and I know it's been an area of focus for you, Lee, though you've approached it gradually. Could you provide an update on what areas you are automating and how that effort is progressing? Additionally, I'd like to hear about the progress in penetrating the Irish market. Thank you.

Sure. First, I'll discuss automation, including a specific focus on robotics. We recognized that automation would be a challenging initiative to implement, and it has proven to be a rigorous process. However, the improvements we've observed in recent quarters have led us to see positive changes in our margins, which we can trace back to the number of technicians we employ and their efficiency. We monitor productivity metrics for each technician, including their time spent on the bench, their efficiency during that time, and their use of automation. We also track the frequency of redundant calibrations as compared to automated ones. These key performance indicators indicate that our approach is effective and will continue to yield results. If I had to describe our progress, I would say we have moved from the earlier phases and are now in the fifth inning of this journey. While there is still much work ahead, robotics—a component of our overall automation efforts—has advanced. Our recent acquisition of a robotics company in Ireland has enabled us to implement mass calibrations in our labs in Philadelphia and Los Angeles, where we each have two robots. The robotics team in Ireland is focusing on digital multi-meters, with plans to tackle temperature and pressure next. While this process is gradual, robotics is proving to be quicker than traditional automation, and we already have operational robots, which will help us enhance our margins further. Regarding our calibration business in Ireland, we have plans to develop that segment organically. It is still early for us to share specific details, but our aim is to grow this part of our business exclusively in Ireland. In contrast, our NEXA business can scale more easily across Europe due to its customer base. However, our calibration efforts will remain focused in Ireland. We are committed to nurturing this market organically as we move forward. I hope this update is helpful.

It was. Thanks very much.

There are no more questions in the queue. I would like to turn the conference back over to management for closing comments.

Okay. Well, this is Lee, and thank you all for joining us on the call today. We appreciate your continued interest in Transcat. As always, we'll be participating in the ROTH and the Craig-Hallum conferences in New York City on November 15th and November 16th. So feel free to check in on us there. If not, you're always welcome to check in on us anytime. We look forward to talking to everybody. And if we don't hear from you, we'll talk to everybody after we have our third quarter results. Thanks again for participating in today's call.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.