In terms of the overall adjusted EBITDA percentage, we — historically, we do see a little bit of compression there versus 63 or 64 day quarters just given our fixed versus variable operating cost structure. So we see a little bit of compression there typically in the fourth quarter. Nothing dramatic, but I think if you look back, we do see a little bit there. So we’re anticipating with the current revenue trends that we’ll probably see a similar — a little bit of compression in the fourth quarter versus what we saw in Q3.
Tommy Moll: Thank you both. I appreciate the insight and I’ll turn it back.
Bryan King: Thanks Tommy.
Operator: [Operator Instructions] Our next question is coming from Brad Hathaway with Far View. Your line is live.
Brad Hathaway: Hi, guys. Thanks for the time and thanks for all the insight in the quarter. One question for you. It seems like the bulk of the weakness is still on the test and measurement equipment. And in the 10-Q, I think you mentioned that you saw — you were optimistic about a recovery in the first half of 2024 in that segment. I’m curious what gives you that optimism? And how do you get visibility into that?
Bryan King: Great question. The — I think there’s two things, I’m going to say there’s three things. One is, at this point, we’ve seen a slight turn, but it’s definitely a turn from the trough in July to starting to see our test and measurement activity levels coming back up. It’s still down, but it’s certainly — we’ve got visibility around order interest and starting to see better performance there than where it was at its trough. And then we’re also — we’ve been — some of the revenue that we decided not to do or to take based on what felt like some less rational destocking that was going on with maybe some of the players in the market that we’ve got a dominant position there. We’ve got the largest inventory position. We have been for our key vendors, the biggest part of their North American sales through distribution.
And we didn’t want to be price disruptors. But when you try and hold that discipline, you see — if you end up losing some revenue that you would consider normally going to you by being more disciplined around price discounting. It used to be that there was more firm discounting boundaries that were enforced by the vendors. There became some sloppiness on that over the last quarter or so as I think some distributors were trying to move some inventory. And we feel like that, that’s behind us at this point. And so that’s another reason why we think we have more optimism there. And then lastly, we’re going to eclipse this relationship that we made a strategic decision coming off of 2022 and feeling really good about the progress we’ve made at TestEquity but being very disciplined around or focused on wanting to drive more margin discipline, ultimately EBITDA margin as well.
We were not willing to continue to sell into the channel to a reseller that set at a really low margin for us, but it was real volume. And that volume became a bigger headwind when you match it. The volume that we walked away from became a bigger headwind when you max that up with a weaker backdrop in the industry. So that was kind of — it probably amplified the negative revenue out of test and measurement year-over-year in the quarter. It did amplify it.
Brad Hathaway: Okay. So it’s kind of cycling some things that are internal that you kind of are already in control of as opposed to making kind of a macro prognostication on when T&M will recover?
Bryan King: Yes. It’s probably a combination of both. But yes, it’s definitely there are some things that were internal that we were cycling, but then there’s also — we think that there’s customers that have just been slow to release dollars and to try and replace or upgrade their test and measurement equipment that are ultimately in our queue that need to replace it or add to. But I don’t think we’re making a call on the economy as much as we are making a call on our customer RFQs and the conversations there and how we see this and see the longer cycle demand for — more secularly for the — from our customers of equipment.
Brad Hathaway: Got it.
Bryan King: But I would be concerned about trying to make a call on it. But I’m less concerned that we’re making the call versus the fact that we think that we’ve got better visibility right now than we did 60 days ago.
Brad Hathaway: Understood. Okay. Great. And — okay. And speaking of I mean you also reiterated on this call staying with TestEquity that you expect to exit 24%, I believe to 10% EBITDA margins. And that’s obviously a long way from where we are today at 7% ish. I guess how much of that is part of this demand recovery, or not demand recovery, but part of this kind of recovery you see in the business and into 2024 versus Hisco integration? I mean is there a way to kind of break out how you see that significant improvement?
Bryan King: Yeah. Very fair question. So the cost side opportunity that we’ve alluded to is — actions have taken place or in process right now is over 100 basis points. So it’s 100 to 150 basis points that have already — had actions taken that haven’t flowed through. And there’s more opportunity to try and optimize the total industrial technologies vertical that we still are working kind of collaboratively across the Hisco TestEquity businesses to kind of unlock, but it’s been identified, it hadn’t been actioned. There’s — so I would kind of — and then there’s gross margin actions that are underway, and then there’s some gross margin dynamics that we saw, like I just alluded to on test and measurement that we think that we’re going to be sunsetting or getting the benefit of.
