Transcat, Inc.

Greetings and welcome to the TransCat, Inc. First Quarter Fiscal Year 2027 Financial Results Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Howe, Senior Director of Financial Planning and Analysis. Thank you, John. You may begin.

Thank you, Operator, and good afternoon, everyone. We appreciate your time and your interest in TransCat. With me here on the call today is our President and CEO, Jaime Irick, and our CFO, Tom Barbato. We will begin with some prepared remarks and then open the call for questions. Our earnings release crossed the wire this afternoon after the market closed. 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 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 press release as well as 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, 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 comparable GAAP to non-GAAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Transgap President and CEO, Jaime Irick.

Thanks, John. Good afternoon, everyone, and thank you for joining us on today's call. Prior to discussing our strong financial performance, I want to share my observations and takeaways after my first full quarter. As CEO of Transcat, over the last 100 days, as you'd expect, I've had the opportunity to engage with and learn from our customers, our strategic partners, and the Transcat team members across technology labs, field operations, and the sales organization. I've also reviewed Transcat's end-to-end operations across North America, Central America, and Ireland. I've met with analysts and investors, many of you on the phone, and I've held in-depth discussions with our board of directors, both individually and collectively. These firsthand experiences have deepened my appreciation for Transtep's leadership, our employees' dedication, and the enduring customer and strategic partnerships we have built over more than 60 years. Our first quarter results, combined with the insights from my first 100 days, reinforce my confidence that we have clear, measurable opportunities to build on our industry-leading organic and inorganic growth. They also highlight an important opportunity to become as well-known for operational excellence as we have historically been for growth. This will require time, discipline, and consistent execution by continuously improving our customer-facing business processes, applying proven lean operating principles, optimizing business mix and pricing, and using technology and AI to improve productivity and customer solutions. We can create repeatable levers to expand margins, and to support sustained growth. As we move forward, we will build an even stronger Transcat by growing the business, improving how we operate, and energizing our teammates. With that, I'll briefly turn to our financial results. The fiscal first quarter of 2027 highlighted another sequential quarter of strong financial performance as strength in the calibration business drove double-digit service organic revenue growth and service gross margin expansion. Consolidated revenue was up 22% to $92.9 million in the fiscal first quarter, driven by double-digit revenue growth in both segments. Demand in our highly regulated end markets, including life sciences, aerospace and defense, and energy, remain strong and our differentiated value proposition continues to resonate throughout Transcat's addressable end markets. Given our strong organic growth, operational excellence, and strategic acquisitions, we firmly believe Transcat continues to gain market share in the calibration services market. Consolidated growth profit grew 19%. for the fiscal first quarter, led by 31% service gross profit growth. Adjusted EBITDA grew 19% in the quarter, driven by revenue momentum and productivity gains. And let's take a closer look at our service results. In the fiscal first quarter, service revenue increased 27%, and service organic revenue grew 13%. The first quarter marked our 69th straight quarter of year-over-year growth. Service revenue growth was driven by our differentiated value proposition along with the continued successful integration and performance of our acquired companies. The recent acquisition of SEM is progressing very well, and we are excited about the opportunity that exists in Central America. You can expect us to continue to complement our service's organic growth with strategic M&A. Service growth profit increased 31% in the quarter, with service growth margins expanding 90 basis points versus prior year, driven by the inherent operating leverage in our service model, along with focus on operational excellence and maturing of new customer relationships. The service segment has significant room for growth, both organically and through acquisitions. Our pipeline positions us to pursue strategic, accretive deals that deliver meaningful synergies, and M&A will remain central to our growth strategy. Turning to distribution, distribution revenue grew 11% in the fiscal first quarter on strong demand from rentals and product sales. As expected, Distribution gross margins of 31.4% were lower than prior year, given that fiscal 2026 first quarter margins were unusually high. Moving forward in fiscal 2027, we will have a more typical prior year comparisons and expect to benefit from a greater mix of higher margin rentals. Overall, we are pleased with our performance and optimistic about the future, given the momentum building in our service segment. With that, I will turn the call over to Tom for a more detailed look at our first quarter financial results.

Tom? Thanks, Jamie. Slide 4 of the earnings deck provides detail regarding our revenue on a consolidated basis and by segment for the first quarter. First quarter consolidated revenue of $92.9 million increased 22% versus the prior year as both segments grew double digits. Looking at it by segment, service revenue in the quarter grew 27%. with organic revenue growth of 13% and the balance of the growth attributable to acquisitions. Related to distribution, first quarter revenue grew 11%, driven by strong performance in our rental channel and strong product sales. On slide five, consolidated gross profit for the first quarter of $30.7 million increased 19%, driven by strength in the services segment. If we look at it by segment, service gross profit increased 31% in the first quarter and service gross margin expanded 90 basis points versus the prior year. Driven by the inherent operating leverage in our service model, along with our focus on operational excellence and the maturing of new customer relationships. As expected, distribution segment gross margin of 31.4% decreased in the quarter by 380 basis points compared to the prior year. Prior to Q1, distribution gross margins were unusually high, driven primarily by increased levels of vendor rebates. On slide six, first quarter diluted earnings per share of 14 cents. The year-over-year change reflects increased intangible asset amortization related to acquisitions, stock-based compensation, interest expense, and executive transition costs. We report adjusted diluted earnings per share to normalize further impacts of upfront and ongoing acquisition-related costs, executive transition costs, as well as costs that are not directly tied to ongoing operations. First quarter adjusted diluted earnings per share was 51 cents. Flipping to slide seven, where we show our adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin. We use adjusted operating income, which is non-GAAP measure, is a measure of performance when evaluating our business segments. The company's management believes adjusted operating income and adjusted EBITDA are important measures of operating performance because it allows management, investors, and others to evaluate and compare the performance of its core operations from period to period by excluding items that we do not believe are indicative of our core operating performance. In addition, these metrics are also indicators that companies' ability to generate cash. First quarter consolidated adjusted EBITDA of $14 million, increased 19% from the same quarter in the prior year, driven by strength in services segment. Service adjusted operating income was $9.6 million, up 35% in the quarter, and margin of 15.4% increased 80 basis points compared to the prior year. Distribution adjusted operating income was $4.3 million, a decline of 12%. A reconciliation of adjusted operating income and adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation. Operating free cash flow of $4.8 million in the first quarter grew $5.8 million compared to the prior year period, driven by an increase of cash from operations and slightly lower capital expenditures. Capital expenditures of $4 million in the quarter continue to be centered around service segment capabilities, Lend for Full Assets, Technology, and Future Growth Projects. We had total debt of $110.4 million, $39.6 million available for borrowing under the Securities Involving Credit Facility, and a leverage ratio of 2.19x. We believe we are well positioned to grow both organically and through acquisition and have the capital structure in place to support both. With that, I'll turn it back to you, Jamie.

Thanks, Tom. In our fiscal first quarter, the Transcat team delivered strong results, which demonstrated our ability to grow, to operate with excellence, and to energize our teammates. With Q1 performance and momentum as the backdrop, we remain relentlessly focused on bringing differentiated value to our customers every day. When you combine our Transcat customer focus and differentiation with our attractive and highly regulated end markets, and recurring revenue business model, we have a winning equation that makes us extremely optimistic about our service segment's future momentum and our overall company's potential for profitable growth. Our strong first quarter performance positions us well to execute high single-digit service organic growth and service gross margin expansion for the full fiscal year. Before we open the line for questions, I'll close with a few thoughts. Sixty-nine consecutive quarters of service revenue growth reflect the disciplined execution of a focused strategy and an exceptional team. My first 100 days as the CEO of Transcat directly observing our team in action give me confidence that our best days are ahead of us. Looking ahead, we remain laser focused on executing our four strategic pillars. One, driving strong service organic revenue growth through high customer retention, realization of new business wins, and market share gains. Two, expanding service gross margins through operational excellence in our recurring revenue business model. continuing to pursue strategic M&A, including our recent acquisition of SCM Metrology and Laboratories, as the acquirer of choice in our market and for growing our higher margin rental business. Finally, I want to thank our customers for their trust, our employees for their dedication, and our shareholders for their confidence in Transcat and our path forward. The team and I are energized by what we can accomplish together, and I look forward to sharing our continued progress. With that, Leslie, please open the line for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad now. To leave the queue at any time, press star 2. Again, that is star 1 to ask a question. And we will pause for just a moment to allow everyone a chance to join the queue. Our first question comes from Max Michaelis, Lake Street Capital. Please go ahead. Your line is open.

Hey, guys. Great job on that quarter. Jamie, it's good to talk to you. First question for me, I mean, granted growth in the service segment, 13%, obviously that was higher than what we expected. You're looking for high single-digit growth throughout the rest of the year. I mean, can you kind of – Point to some end markets that really outperformed your guys' expectations and maybe some other end markets that you expect to kind of push growth throughout the year.

Yeah, Max, I think, you know, we saw good performance across all end markets. You know, I think, you know, we talk about our, you know, splits. I would expect that, you know, they're going to kind of remain consistent or they did remain consistent in Q1, and I would expect that to continue. You know, balance of the year. I think we're performing well. I think the opportunities are coming, you know, kind of across the spectrum of end markets. And, you know, that's what the expectations should be.

Yeah, Max, I agree with what Tom said. And, look, the nice thing is we've got a double threat in our favor. One, the end markets are growing and up from what we saw last year. And, two, we're taking share. So those give us the ability and the confidence to call what we're calling because of those two forces that, you know, the team, as you can tell, has just done a great job of optimizing.

Perfect. A couple more from me and then I'll hang it up. Rental business, so distribution grew 11%. I mean, can you give us sort of an indication on how rental business performs on, let's say, Q4 last year? Was it low double digits or... should be expected to kind of slow down from how it performed in this year, 26.

Yeah, I mean, we've kind of guided that we expect, you know, the rental business to perform organically, high single digits, low double digits, and it was in that range. And, you know, we're really happy with the way that business performed in the quarter.

Okay. Last one for me, you guys mentioned AI. optimizing productivity of the company business lines right now. When should we expect to see that show up in the numbers? What sort of outcome do you expect from this operational excellence initiative?

Yeah, Max, the way we think about that, just take all the levers that I shared in my prepared remarks. Operational excellence to us means starting with our customer-facing business processes so that we make those faster, better, fewer defects for our customers, which quite frankly drives growth and margin expansion. AI, mixed optimization, pricing analytics and improving our processes there, and all the things we do, we feel we're getting an uplift now, quite frankly. And our team has really rallied around the renewed focus and each of those is contributing, you know, some a little more than others but we're seeing that lift start to take effect and that's going to continue to help prop up the business and help us on the growth side and the margin side which is why, you know, when we talk about being as strong on our operational excellence muscles as our growth muscles, we feel confident that we can do that and continue going forward. And we'll share more. You can expect in the future, you know, we'll start to break out some things as we talk more. But just know they're all giving us great challenge.

Awesome. Thanks, guys.

Thanks, Max.

Thanks, Max.

Thank you for your question. Our next question is from Greg Palm with Craig Hallam. Your line is open.

Thanks. I wanted to go back to the organic service growth number. It was very impressive. As you look back on the quarter relative to what we were all talking about a couple months ago, what outperformed relative to your expectations? I guess the one word that maybe changed as it relates to the full year is you now confidently expect high single digits. Organic Growth, and just want to sort of get your feedback on whether that's a little bit of a under-the-radar tone shift as well.

Well, Greg, I think, you know, again, similar to Max's question and Marcus', right, I would say it was just strength across the board. There isn't one, you know, particular, you know, lab or one particular, you know, part of the business that stands out. I think, you know, we're pleased with what we saw. I do want to take a minute to remind everyone, though, right, that when you look at the first half of last year and the second half of last year, they were very different, right? We were relatively flat. The first half of last year, you know, we grew 7% in the second half of last year, right? So the comparison is a little easier, first half versus second half. But, you know, I think, you know, with Jaime's comments, you know, with the use of the word confidence, I think that that is, in fact, an indication of where we think we expect to be within that range. Yep, okay.

And, you know, Jaime, as you think about some of these margin enhancement opportunities, you called out a few of those. I mean, how does that shape your view of the earnings power of the company and just trying to get a sense of, like, how much of this is near-term where we're actually going to see, like, near-term improvements in margins in the P&L versus stuff that's going to sort of work us all through overtime?

Yeah. Look, the way I think about it, Greg, first, you know, our team is rallying around the vision that we should be and can be and will be as strong on operational excellence as we have been on growth. So that's a starting point. And you heard me right off the levers. I won't repeat them. And frankly, We felt the lift as we shared in Q1. And Q1, you know, based on what we were planning earlier, you know, we did a little better than we thought, a little faster. Too early to call anything different than we've said for the full year. But I would say we're at the beginning of our journey, Greg, on operational excellence and what we could be. versus the middle will certainly end. So there's room to continue to run, and we feel very confident with our team rallied around the levers that I laid out that we can continue that performance.

Okay. Congrats again. Best of luck.

Thanks, Greg. Thank you for your question. Our next question is from Martin Yang with Oppenheimer. Your line is open.

Hi, good evening. Thank you for taking my question. Hi, Martin. Hi, Jaime. I want to better understand your current outlook for OPEX investments. Are you still in an investment phase? If so, what particularly are you investing in?

Yeah, so maybe I could start on that, Martin, and then Jaime can comment as well, right? So I think, you know, Five or six weeks ago, you saw the announcement of Roy Simmons joining the team. That's obviously an investment in our future, right? Not only from helping us set the strategy and enhance the strategy of the company, but also an investment in ensuring that we've got a sound M&A strategy in place, ensuring the pipeline's robust, working closely with me to make sure that we've got the capital structure in place to execute the strategy and also being hyper-focused on integration to make sure that we maximize the value of the acquisitions that we do execute on. I think there are some additional investments we'll make in the executive team as well that, again, will position us for long-term growth. We've said it in the past, right, that that the team that you need to get to, I'll just say $300 million is different than the team you need to get to $500 or $600 million, right? And we're going to continue to invest in that growth, right, and ensure that we're positioned not only at the executive team but two and three levels down in the organization to build for success.

I agree with what Tom shared and what I'd add to that, Martin, is Given the recurring revenue nature, highly regulated end markets we serve, and just the total lifetime value of our customers, we think there's an opportunity to kind of ride the tailwinds that exist now. So we want to be smart and surgical about investing into that. And we also think there's a continued opportunity to take share, given things we're seeing and some softness with other folks in the industry that we can take share from today. So I think you'll continue to see us invest into that broadly, but certainly, you know, we can pick up great talent like we did with Roy Simmons. You saw the announcement to lead M&A and strategy, two areas that are so critical for our current performance and future. We'll look to be opportunistic there, and you can expect that to continue.

Thank you. That's a really comprehensive answer. Next follow-up is on the share gain comments. Let me maybe double-click on where are you taking share? Is it from being more OEMs, switching to third-party? Are you taking share from regionals or smaller?

Yeah, Martin is broad-based. I've been very impressed. You know, having worked in various end markets and industries, I knew the strength of Transcat and the brand and the growth. Thank you. That's important. Thanks, Mark.

Thank you for your question. Our next question is from Ted Jackson with Northland Securities. Please go ahead. Your line is now open.

Thanks very much. Good evening, guys. Hey, Ted. My first question, we've been talking a lot about organic service revenue growth, and it obviously is impressive, but the other part of it that was impressive in terms of services was the margin. And how about a little discussion in You know, was there, you know, the strength in the margins you saw, is there any kind of particular, you know, mix or, you know, discipline or something that pushed that margin to those levels and how sustainable is something like that?

Yeah, Ted, I think first and foremost, I think it shows the, you know, our ability, you know, when you get I'll just say, you know, above high single digits into low double digits, the leverage that we get in our operating model, right, that's first and foremost. I think, you know, the other thing is that, and Jamie alluded to this, there are some early signs and some early results from some of the actions that we've been focused on from an operational excellence standpoint, which is, you know, kind of nice to see. as well. And, you know, there was some benefit we got from Mix, but, you know, we see that, you know, some pluses and minuses, you know, from that, you know, quarter to quarter. But, you know, the biggest contributor is really the operational leverage that we got. You know, Jaime also did mention that, you know, the past couple quarters we've talked about some of the upfront costs associated with some of the new You know, customers that we've been onboarding and we've seen, you know, some of those relationships mature to the point where, you know, we've got kind of, we've reached some normalized, more normalized margins with some of those larger customers that are coming on board.

And, you know, well said, Tom. And all I'd add, Ted, you know, look, this is a process that's going to take time, but you can expect to continue just relentless focus on both growth and operational excellence. And I've been really impressed with the team. You know, our COO, Mike West, is really leading the charge with a lot of support here on areas like mix optimization. And, you know, we don't have time on this call to dial it in, but as we've shared, you know, we have the ability to now do a much better job of segmenting and targeting customers where we feel there's better mix opportunity and margin opportunity. do the same thing with our different business segments. So really like what, you know, Mike and the team are driving there. And, you know, every time we see him, he's got, you know, several more ideas and opportunities that he and the team are managing. So couldn't be more – it's early. It's going to take time, but we're very excited about what we can accomplish together.

The next question, and this is maybe of the oversight on my part, but the tax rate was – What is the tax rate we should think about for the fiscal year? And is there a shift in terms of how you think about your tax rate with regards to your performance and performance?

Yeah. So the tax rate in Q1 was higher than you would expect or more than what you would have seen historically. We expect that to normalize, right? So we provided a range of 31 to 32% for the full year, and we still expect to be, you know, at that rate. There were some, you know, stock-based compensation impacts in Q1 that drove the rate a little bit higher, but that'll normalize. 31 to 32 is where, you know, you should expect this to be, you know, kind of on a go-forward basis, you know, on an annualized go-forward basis.

And then just one more model question, then I've got something a little more fun. But G&A also is a little bit more than I might have expected. You know what I mean? It's kind of hard to say what maybe I was just low relative to, you know, my peers or such. But, you know, were there any expenses in G&A that were, you know, unforeseen? How would we think about that in the remainder of the year?

Yeah. So there continue to be some what I would say are kind of one-time expenses. um, expenses, right, related to the, the CEO transition, right? And I think, you know, maybe when we talk offline, Ted, we should just kind of take a look at those and just make sure that, you know, you have them reflected properly, um, and, and are comprehending those properly. But, you know, aside from that, things kind of came in pretty much, you know, in line with where we would have expected and, um, you know, we could, we could, uh, talk about the, kind of the right go forward run rate as well, so.

Okay, and then one just kind of marketing question, market question is, you know, in the past, I had a client ask me a bunch of questions about training staff, especially last week, and it made me kind of dig into some old presentations, you know, from years gone by. And I haven't seen any data for a while, but I guess where I wanted to get at is, you know, where do you think you sit? And it's sort of two or three questions. in terms of market share in North America for calibration services. And where do you think you sit in terms of market share for kind of, you know, your key verticals, which would be, you know, I mean, to me it would be life sciences and aerospace defense.

Yeah. So, Ted, if you think of the North American market in like the $3 to $3.5 billion range in terms of calibration, right, You could take that market and split it roughly a third, a third, a third between outsourced service providers like Transcat, the OEMs, and then companies that run, you know, in-house laboratories, right? So you could kind of look at our services revenue as a percentage of that third, right? And that'll kind of show you where we're at, you know, relative to, you know, you know, that percentage, right? But it's still a fairly small percentage of the North American opportunity and obviously growing, right? Because we're confident that we're taking share. In terms of end markets, right? I mean, you know, we're roughly 60% life sciences. We've been at 60% for a while and it's, you know, not because life sciences isn't growing. It's just that we're being successful at growing across all of the end markets that we serve, right? So that You know, they're staying as a percentage of the total. They're remaining relatively the same.

Yeah, Ted, I mean, look, Tom's right. There's a lot of room to run organically. There's a lot of room to run inorganically. That's how I just think about it. We think we've got runway on both as we've demonstrated and we expect to continue.

Well, I mean, in the markets for that, I mean, there's clearly a lot of reshoring going on with life sciences and Yeah. I mean, you know, in some ways, you know, with aerospace and defense wars, so. Yeah, that's right.

Yeah. That's right. That's right.

Okay. Well, that's it for me, and congrats on the quarter. It was very impressive.

Thank you, Ted.

Thank you. Thanks, Ted.

Thank you for your question. At this time, there are no further questions in the queue, and I will now turn our meeting back to John Howe.

Thank you all for joining us for today's call. We look forward to sharing more on our story at upcoming investor events, including facility tours, institutional investor conferences, and non-deal road shows across key cities throughout the United States in the fall and winter of 2026. We will also be attending the Jeffries Industrials Conference, Lake Street Big Ten Conference, and D.A. Davidson Diversified Industrials and Services Conference in September. We look forward to discussing our recent results with investors at each conference. If we were unable to answer any of your questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist. Thanks again for your interest.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.