Greetings and welcome to Transcat, Inc.'s conference call for the financial results of the second quarter of fiscal year 2025. This conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Barbato, Chief Financial Officer. Thank you, Mr. 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, Mike West. We'll begin the call with some prepared remarks and then we'll open up the call for questions. Our earnings release crossed the wire after market closed yesterday. Both the earnings release and the slides that will be referenced 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, 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 compared GAAP measures in the tables accompanying this earnings release. With that, I'll turn the call over to Lee.

Thank you, Tom. Good morning, everyone. Thank you for joining us on the call today. Transcat delivered strong performance from our core calibration services business again in the second quarter of fiscal 2025. Consolidated revenue was up 8% to $67.8 million, driven by consistent demand for our calibration services, as well as solid performance in our traditional rental business which includes both our Transcat and Axiom rental platforms. Consolidated gross profit grew 5%, driven by growth in both our service and distribution segments. In the second quarter, service recorded its 62nd straight quarter of year-over-year revenue growth as our calibration services continued to perform at a very high level. Overall, service revenue growth was 6% and 4% organic growth. The 6% growth is below historical trends and was significantly impacted by a decline in our NEXA cost control and optimization services business, and was beyond the magnitude of what we anticipated. We've identified the root causes that need to be addressed, which primarily center around the immediate need for NEXA to be fully integrated into Transcat's dynamic and proven sales and marketing processes. In addition, we are renaming the business Transcat Solutions to fully leverage Transcat's industry-leading brand. All of these actions are underway with NEXA. We are making meaningful progress and we're committed to reverting back to growth in the near future. On a positive note, when excluding NEXA, in the second quarter, we generated organic service growth of 9% versus prior year and we have a strong pipeline of new business opportunities entering the back half of the fiscal year. The core service business continues to benefit from recurring revenue streams as well as our industry-leading value proposition which continues to resonate throughout the highly regulated markets we serve, including both life sciences and aerospace and defense. Turning to distribution, in the second quarter, gross profits grew 10% on double-digit revenue growth. However, Becnel revenue and profit was negatively impacted by two hurricanes in the Gulf of Mexico which pressured second quarter distribution margins. Overall, Transcat's core business performed well in the second quarter of fiscal 2025 and our exceptional team is working to overcome the near-term NEXA challenges which we believe are very fixable and include channel marketing and pipeline expansion which is already strengthening. We are confident the business will return to growth in the first quarter of fiscal 2026. Becnel continues to be a well-run company and a strong niche market with significant opportunity for sustainable growth. We fully expect Becnel to deliver sequential improvements in the third and fourth quarters, with distribution margins returning to levels consistent with the second half of fiscal 2024. The balance sheet remains strong, our revolving credit facility was paid off last year, and we are in an excellent capital position to support our strategic growth plan that includes a very active M&A initiative. With that, I'll turn things over to Tom for a more detailed look at the second quarter financial results.

Thanks, Lee. I'll start on Slide 4 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 2025. Second quarter consolidated revenue of $67.8 million was up 8% versus prior year. Looking at it by segment, service revenue grew 6% with 4% of the growth coming organically and the other 2% from acquisition. As Lee mentioned, service revenue grew 9% organically when excluding NEXA. Turning to distribution, revenue of $23.7 million grew 11% and we continue to see good performance from the higher-margin traditional rental businesses. Turning to Slide 5, our consolidated gross profit for the second quarter of $21.2 million was up 5% from the prior year. Service gross profit increased 4% versus the prior year. We continue to leverage higher levels of technician productivity and our differentiated value proposition, but that could not offset the pressure we saw as a result of the lower-than-expected NEXA revenue. Distribution segment gross profit of $6.6 million was up 10% but margins were lower than expected as a result of the two Gulf of Mexico hurricanes impacting Becnel results in the quarter. Turning to Slide 6, Q2 net income of $3.3 million was up from $0.5 million than the prior year. Q2 of last year included a $2.8 million non-cash charge related to the amended NEXA earnout agreement. Diluted earnings per share came in at $0.35, up 29% or $0.29 over the prior year. We report adjusted diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition-related costs. Q2 adjusted diluted earnings per share was $0.52. Flipping to Slide 7, 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 transaction costs, as well as the increased level of non-cash expenses that will hit our income statement from acquisition purchase accounting. With that in mind, second quarter consolidated adjusted EBITDA of $8.9 million was down 5% from the same quarter in the prior year, as lower than expected NEXA revenue negatively impacted services EBITDA and Becnel pressured distribution EBITDA. 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 8, operating cash flow was mostly consistent with last year. Q2 capital expenditures were $2.2 million higher than the prior year, and continued to be centered around service segment capabilities, rental pool assets, technology, and future growth projects. The spend was in line with expectations. Slide 9 highlights our strong balance sheet. At quarter end, we had total net cash of $20.8 million with a leverage ratio of 0.8x. We had $80 million available from our credit facility. Lastly, we expect to file our Form 10-Q on November 6. With that, I'll turn it back to you, Lee.

Okay, thanks, Tom. Over the past 12 years, we've successfully and consistently delivered organic service revenue growth, sustainable gross margin expansion, and delivered strong free cash flow. We expect these metrics to improve in the back half of fiscal 2025 and return to more normal levels in the first half of fiscal 2026. Given the temporary setback in the NEXA sales channel, for the full 2025 fiscal year, we expect organic service revenue growth in the mid-single digits when normalized for the extra week in fiscal 2024. Our M&A strategy has been very successful and will continue to be an important component of our overall growth plan as we look to continue to strengthen our core business and expand our addressable markets. Through acquisitions, we expect to expand our geographical footprint, capabilities, and expertise. And, of course, we're always interested in bolt-on opportunities where we can leverage our current infrastructure to drive both cost synergies and growth opportunities. We currently have a very robust acquisition pipeline with the potential to increase the trajectory of our business and as I mentioned earlier, we have a strong balance sheet, which will continue to support the conversion of our M&A pipeline. We will continue to leverage continuous process improvement and automation as key enablers to future margin expansion and we expect service gross margin expansion for the full 2025 fiscal year. As we move through the back half of fiscal 2025, our dedicated and talented team will continue to focus on generating sustainable long-term value for our shareholders. With that, Operator, please open the line for questions.

The first question comes from Scott Buck with H.C. Wainwright. Please go ahead.

Hi, good morning, guys. Thanks for taking my questions. Lee, can you give us a sense of when you started to recognize that NEXA was kind of falling short of expectations?

We have multiple sales channels throughout the organization, probably around ten. At any given time in a quarter, not all of them will be operating at full capacity. There are always small areas to monitor. We noticed some of this in the first quarter, but it was unexpected that we would see such a drop in Q2. We immediately investigated the root causes. It's a solid business, but we identified some fixable processes in how they manage their pipeline. We're addressing it and expect to see improvements soon. It was subtle in the first quarter, and the situation caught us off guard in the second quarter. That's how I would describe it.

I appreciate that. And it sounds like there's no additional read through on the rest of the business or any kind of macroeconomic read-through based on the softness you saw in the second quarter there, right?

No, I don't think so. I mean, like I said, the core calibration business organically grew 9%. So we like not only the performance in the second quarter, we like the pipeline going into the back half of the year. So that's steady. And certainly the rental business, which is a big component these days of the distribution segment, that's very strong and we expect Becnel to perform well. So as we look in the back half of the year now, I think the other areas of the company are performing as we would expect. We just have this sort of isolated miss that we're going to fix.

No, that's helpful. And then on M&A, besides the larger deal at the beginning of the year, it's been relatively slow. Can you talk a little bit about pricing and what you're seeing there? Clearly, you guys are open to doing deals. So I'm just curious what the other side of those transactions look like today.

From an M&A pipeline perspective, I have no concerns. Our M&A pipeline is strong and well-characterized. We have a solid pipeline and are pursuing strategic deals that align with the company's goals. While it may seem quiet outside, it's quite the opposite internally, and we will keep working that pipeline. Based on our past achievements, you will see this unfold in the near future. We have the capacity to complete even more deals if they are suitable and align well, as we've built the necessary infrastructure to support this. So, I have no worries; I am pleased with how the pipeline looks.

Great. Appreciate that, Lee. And then last one, Tom, just curious, OpEx for the second half of the year, is the first half a fair run rate or should we see some operating expense creep there as you support some of these growth initiatives?

Yes, I would expect some increase sequentially into Q3 and Q4.

Thank you.

Thank you. Next question comes from the line of Greg Palm with Craig-Hallum Capital Group. Please go ahead.

Thank you, and good morning. I appreciate the opportunity to ask questions. I wanted to follow up on NEXA. Not too long ago, you mentioned that the business was exceeding expectations, and I recall you stating that it had more than doubled since the acquisition towards the end of last year or earlier this year. I’m a bit unclear about what changed so significantly in such a short period. Could you provide some more insight into that?

Yes, I get the question. Thanks, Greg. Yes. Look, this business, the first couple of years since we acquired them, the first couple of years was really flying high. We're talking about high growth rates, really performing well. And I think because of that, we probably gave them more autonomy than we typically would for an acquisition. Greg, we integrate quickly. We do a good job integrating. We get the synergies, we bring these companies together and that's what makes us different. And I think we didn't run that playbook to be honest with NEXA because when you have a company that was doing so well for the first couple of years, we're not talking quarters, we're talking years. So for four quarters, I made the decision, it's kind of on me and the team made the decision to support me. Let's let them keep doing what they're doing. We collaborated; they helped us win calibration business, but we didn't get involved with the day-to-day operations, the processes, the procedures, the pipeline, the marketing; we just kind of let them do their thing. And I think that was probably a mistake. We probably went too long; we got it now. I mean we get it. And we have all of our top people working on expanding their pipeline, coordinating the marketing and making them a Transcat company under the name Transcat Solutions. We're very confident that will solve the problem. So I guess sometimes success hides some flaws and that's probably a fair way to characterize it. But again, high flyer for two-plus years, and that's why it kind of caught us a little bit off guard. But we'll get it fixed up.

Yes, no, I appreciate that. That's helpful color. I mean if you're able to, can you provide the revenue decline specific to NEXA? I don't know if you've got the year-to-date level as well. And just remind us, is it mostly project-based revenue? I'm just kind of curious to know kind of what the visibility is like.

Yes. We're not going to get into the specific numbers but it's a combination. So they've got some project-based business, they've got some sort of ongoing business. It depends on what channel within their company. But it's a mix that leans towards project-based, which is probably some of the core issues around what we got behind on without the recognition. So yes, we know how to combat that and fix it. So hopefully it won't be an issue once we get them kind of turned around.

Yes. But just to be clear, it sounds like you're characterizing this as more company-specific than something market-related, competitively related, something of that nature. It sounds fixable. I guess that's what I'm trying to get at.

I think so. I don't see a problem with the industry. We have other areas of our company that serve the exact same industry almost in the exact same way. If you remember, we acquired a company called SteriQual. We've got a validation business that operates in the same space with some of the same attributes and characteristics as the NEXA business, and they're performing well. So we don't see it. I mean, that's not to say there aren't certain pockets of industry slowdown within life sciences that cycle in and out quarter to quarter, but nothing systemic. So I think that's why it's isolated and fixable.

One thing I want to just mention, Greg, and maybe just correct something is when Lee in his prepared remarks talked about, we're confident the business will return to growth. I think he might have misspoken it. We said, well, that business we believe will return to growth in the first half of fiscal 2026. So when we talk about it being fixable, we talk about the timeframe to fix it. It's kind of a near-term fix in our mind.

Yes. Okay. And then I guess my other last question just on Becnel; you talked about a little bit of issues related to the hurricanes. Was there a revenue issue as well, or was it mostly on the cost side? And are you able to kind of quantify what that impact was? I don't know if you can give a gross margin ex-techno kind of like you gave the organic service ex-NEXA, but any sort of clarification there would be helpful as well.

Yes. Well, just to clarify, Greg, right, so the issue with the hurricanes caused a revenue issue, right? So it's both a revenue and profit issue. And had we not seen those issues, and I think the way we've guided in the press release is that we expect distribution margins in the second half of this year to be more in line with what we saw in the second half of last year. So certainly north of 30%.

Got it. Okay. All right, I will leave it there. Thanks. Good morning. Thanks for taking my questions.

Hi, Ted.

Good morning, Ted.

I'm going to beat the dead horse of NEXA or Transcat services now. So with the fall-off in business there and the things that you're doing to kind of repair it, you mentioned a couple of things and one of them was sales channels and I know you had various sales channels and some were stronger and some were weaker that you were going to basically go in terms of management of those channels, kind of make some repairs there. And so on that front, I'm kind of curious when you get into maybe some discussion around what are the different kind of channels from which you go to market with that business and where were the issues? And then with regards to pipeline management, what's the difference between how Transcat manages the pipeline and your processes vis-a-vis NEXA? What are the kind of the actual changes that you're making there to refill the pipeline? And then I've got some things outside of NEXA to ask after that. Thanks.

Let me start with your last question first. When considering pipeline development and how NEXA conducts its sales and marketing, they initially relied on a single salesperson, which limited their growth. In contrast, Transcat has 80 salespeople, including inside sales, customer service, business development, and strategic account managers, giving us extensive access to the marketplace, particularly in life sciences where NEXA services, soon to be Transcat Solutions, are active. If we had engaged our sales engine sooner, it would have significantly benefited us. This is the most straightforward solution. Furthermore, from a marketing and branding standpoint, Transcat possesses a robust brand in the instrumentation sector. Whether in distribution or calibration services, our brand strength is unmatched. Leveraging that brand strength with the solutions business, which includes NEXA, will yield substantial advantages. We have relationships with almost every pharmaceutical and medical device company in North America, and had we opened those channels earlier rather than just collaborating, we might not be facing these issues today. That’s our current focus. Regarding your other question about channels, we engage in various channels, including pipette, rental, biomedical, and marine. Generally, most perform well, although there may be occasional softness or timing issues in any given quarter. For instance, deployments in the Middle East can impact our marine business. Such variations are typical. As long as we believe we can meet our overall organic growth targets, which we consistently achieve, we are comfortable with those fluctuations. Those are the types of channels we focus on. I hope I’ve addressed all your questions, but feel free to ask if I missed anything.

No, you did. I will actually ask a little more about NEXA before I move on. My perception of how you were managing NEXA, granted it was very successful, was that you were building a business around them and really letting them operate. You can correct me if I'm wrong. To me, this seems like a significant shift for us on the outside because we aren't privy to everything that happens inside. NEXA is experiencing a shift in terms of integrating Transcat's processes and channels, which is somewhat of a restructuring. At its core, NEXA is a consulting business, which is fundamentally a people business. Should there be concerns about turnover within some of NEXA's talent base? If you are changing your go-to-market strategy and pipeline management to align more with Transcat this year, it feels like a culture change, and that's where I'm going with this. I just wanted to discuss that before I move on.

I don't see that as a concern at all. NEXA has strong capabilities and delivers its services effectively. The consulting services fit well into this, and they've consistently excelled in their service delivery. The majority of their staff is focused on tasks like CMMS work, reliability, and optimization adjustments, and that won't change. What we are introducing is additional sales and marketing leadership and a strong brand to enhance their current processes. Their main challenge has been in sales, which was somewhat predictable. Combining the two companies should lead to significant benefits; they'll continue excelling in their areas while we offer our expertise. This integration is different from past collaborations and, while it might be a bit delayed, it positions us well. My confidence is high because we are adding value to their already strong service delivery, and I don't foresee any significant cultural shifts.

The hurricanes have affected the business, and I might not fully grasp how things flow in this industry. For example, when it comes to construction equipment, following events like these, there are often disruptions, but sometimes these events also create opportunities for additional work due to repairs needed from the damage. Is that the case with Becnel, or will it simply return to its usual state? Do you see what I’m getting at?

Yes, it'll be more normal state, Ted. The amount of incremental that could be generated is not meaningful.

Okay. For the next question, your inventory decreased by nearly $3 million from the previous period. What factors contributed to this decline? How should we view this as we move into the third and fourth quarters and beyond?

No, it's something that Mike West and I have been very focused on over the past few quarters. As you know, concentrating on inventory takes some time to gain momentum. Our goal is to enhance the cash conversion cycle. We've been very focused on that, and it does not indicate any changes in our distribution business.

No. Would that become the new norm then? You know how much I care about cash?

No, no, no, absolutely. I'm sorry, I missed making that point, right? Is that yes, we would expect that to be the new norm. And on occasion, as you know, we get opportunities to make strategic buys at additional discounts, and we'll continue to do that where it makes good financial sense, but hopefully when we do that, it'll kind of work its way through in the current quarter or maybe the subsequent quarter. But think of it as more of the norm.

And then on the gross margin side, particularly as it relates to the distribution business, your number there was at a level not seen since, I guess, the first quarter of last year. Is that all Becnel or is there anything else that went on in there that caused that to go down or is this just really just this one time?

No, it's primarily Becnel. And that's why we're comfortable saying that for the second half of the year, we should be back more to the levels we had in the second half of last year, which are north of 30%.

Okay. And that's it for me. I mean, is your 10-Q will be out later today?

No, on Wednesday, the November 6th.

Okay.

So a week from tomorrow.

All right, thank you.

Thank you.

Thanks. Bye-Bye.

Thank you. Next question comes from the line of Martin Yang with Oppenheimer & Co. Please go ahead.

Hi, good morning. Thanks for taking the question. Can you help us get a sense of how big is NEXA in your revenue contribution on an annual basis?

Yes, when we look at services, I would say it's somewhere between 5% and 10%, probably right in the middle.

Closer to 10%.

Closer to 10%. And that's what's so interesting. It's just a small part of the business, but where you didn't get labor out and you didn't kind of anticipate some of the changes in revenue, Martin, it's just that you can see the effect it has on the business. But again, we got our arms around it now. But yes, I think that range is accurate. Yes.

Thanks for the question. Can you provide insight into the organic growth of services in recent quarters, including the quarter just reported? Are all the acquired businesses experiencing organic growth?

We typically don't discuss performance at the individual unit level. However, it's important to note that our growth is primarily driven by organic growth, especially since we haven't acquired a services business since April of last year. To emphasize, when excluding NEXA, our organic growth rate was 9%, with all businesses contributing to that growth.

Got it. One last question for me. So given what you have seen in NEXA, would you apply perhaps a bit more scrutiny to other acquired business in terms of sales, marketing, or other business processes?

I understand the question. My immediate response is that we always aim to integrate our acquisitions effectively. When we follow our Transcat acquisition strategy, it's our goal to integrate quickly and thoroughly, and we believe we excel at this, as our track record shows. NEXA was an exception; it was a distinct business within our calibration services ecosystem that was performing exceptionally well for a long period. We decided not to follow our typical strategy with it. While some of our other businesses have varied quarterly performance, we consistently review them at both the Board level and internally. Overall, these businesses perform very well throughout the year. NEXA stands out as an anomaly, and we have learned from that experience. I don't anticipate a repeat of that situation, and I believe we will improve in this area moving forward.

Got it. Thanks, Lee.

Okay, no problem.

As there are no further questions at this time, we have reached the end of the question and answer session. I would now like to turn the floor over to Lee Rudow for closing comments.

Well, thank you all for joining us on today's call. We appreciate your continued interest in Transcat. We'll be attending the Craig-Hallum 15th Annual Alpha Select Conference which is in New York City on November 19. Tom and I will be there. Feel free to check in with us at the conference or really any other time. Otherwise, we'll talk to everybody after the third quarter results. So again, thanks for participating. Take care.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.