TRANSCAT INC (TRNS Q2 FY2025 earnings call

• Consolidated revenue increased 8% to $67.8 million driven by calibration services and rental business.
• Service recorded 62nd straight quarter of revenue growth, but NEXA's decline affected growth; root causes identified and actions underway to integrate NEXA into Transcat's processes, including renaming to Transcat Solutions.
• Distribution gross profit up 10% but impacted by Gulf of Mexico hurricanes on Becnel.
• Strong balance sheet with total net cash of $20.8 million and $80 million available from credit facility.
• M&A strategy continues with robust pipeline to expand business, infrastructure supports more deals.

Consolidated revenue for the second quarter of fiscal 2025 was $67.8 million, up 8%. Service revenue grew 6% (4% organic), with NEXA negatively impacting growth but excluding NEXA, organic service growth was 9%. Distribution revenue was $23.7 million, up 11%. Consolidated gross profit grew 5%; service gross profit increased 4%, and distribution gross profit was up 10% but margins were lower due to hurricanes affecting Becnel. Service had 62nd straight quarter of year-over-year revenue growth, but NEXA's decline impacted overall service growth.

• Full 2025 fiscal year organic service revenue growth expected in mid-single digits when normalized for extra week in 2024.
• Expect service gross margin expansion for the full 2025 fiscal year.
• Strong M&A pipeline with potential to increase business trajectory, supported by strong balance sheet.

• NEXA integration issues due to need for full integration into Transcat's sales and marketing processes.
• Hurricane impact on Becnel's revenue and margins in the second quarter.
• Potential industry cycles affecting certain segments, though isolated and fixable as identified.

Q: Can you give a sense of when you started to recognize NEXA was falling short of expectations?

A: Saw some softness in first quarter but drop in Q2 was unexpected; root causes related to pipeline management identified and being addressed.

Q: On M&A, besides the larger deal, what about pricing and pipeline?

A: Have robust M&A pipeline, working strategic deals, confident in ability to execute on pipeline.

Q: OpEx for second half, any creep?

A: Expect some sequential increase into Q3 and Q4.

Q: Revenue decline specific to NEXA, visibility?

A: Mix of project-based and ongoing business, fixable by integrating Transcat's processes.

Q: Becnel and hurricanes, revenue impact?

A: Hurricanes impacted revenue, expect distribution margins in second half to return to levels seen in second half of 2024.

Q: NEXA sales channels, pipeline management differences?

A: Transcat has more sales touches and stronger brand, will integrate sales and marketing to refill pipeline.

Q: Inventory drop, new norm?

A: Hyper-focused on inventory to improve cash conversion cycle, expect this to be new norm.

Q: Size of NEXA in revenue contribution?

A: NEXA is ~5-10% of revenue, small part but impactful on business.

Q: Organic growth of acquired services businesses?

A: Most service growth is organic, excluding NEXA, organic growth was 9% with other businesses contributing.

Q: Scrutiny on acquired businesses after NEXA?

A: Always review acquired businesses, NEXA was exception, learned from it and will be more diligent in integration.