Greetings and welcome to the Transcat Inc. Third Quarter Fiscal Year 2015 Financial Results conference call. A brief question-and-answer session will follow the formal presentation. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Deborah Pawlowski with Investor Relations for Transcat. Thank you, Deborah. You may begin.

Thank you, Adam, and good morning, everyone. I hope you all aren’t buried out in the snow there. We’re doing fine up here in Western New York with a very clear and cloudy day. With weather report I want to thank you for your time and your interest in Transcat. On the call with me are President and Chief Executive Officer, Lee Rudow; and our Chief Financial Officer, John Zimmer. After formal remarks, we will open the call for questions. If you don’t have the news release that crossed the wires after market yesterday, it can be found on our website at www.transcat.com. There are also slides that accompany today’s discussion which you can find at the same location on the website. If you would, please refer to Slide 2. This is the Safe Harbor statements, because as you are aware, we may make forward-looking statements during the formal presentation and the Q&A portion of this teleconference. Those statements apply to future events which are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from where we are today. These factors are outlined in the news release, as well as documents filed by the company with Securities & Exchange Commission. 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. So please review our forward-looking statements in conjunction with these precautionary factors. With that, I'd like to turn the call over to Lee to begin the discussion. Lee?

Okay, thanks, Deb. Good morning, everyone. Thanks for joining the call. Let me start by saying that generally speaking Q3 was a solid quarter, particularly as it relates to our Service business. We continue to grow our top-line, in Service, the top-line trend. We tripled our year-over-year Service operating income which is consistent with the message that we try to convey and that we talk about. And our Distribution segment continues to generate significant cash which many of you know we use to foster the growth of our overall business and our strategic plan. Before John walks through some of the financial data, let me take a couple of minutes and highlight some of the activities within the third quarter, I think you’d be interested in. We are about three months removed from the Ulrich acquisition, up in Montreal, Canada. And the early read has been really positive. As we anticipated, Ulrich is delivering expanded capabilities up in the region and strong leadership. Right out of the gate after the acquisition was completed in Q3, we signed a very significantly large deal with a major manufacturer up in Montreal. And it’s not unusual when we acquire companies we often combine our resources right out of the gate and often times you should have the one-plus-one-equals-three scenario, so that’s kind of what took place in the early days of the integration of Ulrich. We continue - in addition to that we continued to work the acquisition pipeline. We expect to continue to make deals that fit our strategic plan. The drivers are the same. The expansion of our geographic footprint is important. We look to expand capabilities and always expertise within the industry. We’re still the only company that we’re aware of that are making acquisitions in the life science, the…

Thanks, Lee, and good morning, everyone. Slide 4 is an overview of the quarter and the important advances we have made so far this year that will help drive our growth. Our Service segment continues to deliver excellent results while our Distribution segment provides solid cash generation for investments that support our organic and acquisition growth strategies. Looking at Slide 5, we continued our trend of top-line growth, posting record third quarter results on a consolidated basis and record third quarter service segment revenue. We achieved $12.6 million in service revenue, 9.4% increase driven by a combination of organic and acquired growth. This marks our 23rd consecutive quarter of year-over-year service segment revenue growth. The Distribution segment saw $500,000 or a 2.9% decrease in sales. While the market in this segment remains highly competitive we’re executive multiple strategies as Lee alluded to, to maintain and grow our market position. Moving on to Slide 6, as we have seen in previous quarters, our Service segment delivered strong gross profit and operating margins. Gross margin for this segment improved to 110 basis points to 24.5%, while operating income tripled to $600,000 with the operating margin expanding 320 basis points to 4.5%. Distribution gross profit was down $500,000 to $3.9 million with gross margin declining to 21.2% from 23.4%. As we mentioned the gross margin was primarily impacted by lower vendor rebates compared with the prior year period which accounted for 190 basis points of the 220 basis point decline. We expect the negative impact to gross - the Distribution segment gross margin from vendor rebates in the range of 200 basis points to 300 basis points in the fourth quarter. On a consolidated basis, our operating income in the third quarter was $1.4 million, up 2.6% from the prior year’s third quarter.…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Fleming with Heartland Advisors. Please go ahead with your question.

Hey, good morning, Lee and John. Congrats on a solid quarter, especially in the Service side of the business.

Thanks, Andy.

Hey, thanks, Andy.

Lee, I’ve been trying to get a better understanding of the gross profit margin profile in the Distribution side as we move into fiscal 2016. So should we expect the gross profit margin to revert back to 2014 type of margins or that the kind of 21% to 22% that we’ve seen in this fiscal year?

Right.

Is that a good run-rate to think of going forward?

Yes, I think it’s more accurate to say that will be the run-rate to think of going forward. We anticipate, Andy, continued pressure on the margins to what exact degree, it’s hard to completely determine, but we’re going into the year thinking there will be a run-rate will - the run-rate will continue that there will some marginal pressure. That’s why we’re doing some different activities to try to offset that and anticipate that that’s going to happen. Now if that doesn’t happen, that’s fantastic. If there is some stabilization in the margins, that will be great for the business. But we’ll go in with the assumption that margin pressure will continue. Most of it is Internet based, if you will, increased competition. But there - obviously at some point there is a bottom, people have to make money. Have we reached it? We don’t know, but it’s best to prepare for it to decline a bit and the pressure to continue and offset it with some good programs and that’s what we’re doing.

And, yes, and from a rebate perspective, we don’t expect it to decline. There may be some small upside next year. I don’t think we should expect to see it rebounding to a level that it was last year.

Okay. So more of this…

Over to this year.

Okay. That sounds good, and then just trying to dig a little deeper on the Service gross profit margins, so obviously great improvement year-over-year. And I’m just trying to understand from Q-to-Q, from the second quarter to the third quarter. Did this third quarter have a larger percentage of outsourced Service revenue?

Not particularly. I think this every quarter is a little bit different and the mix of work that we do is different from the second quarter to the third quarter and I think that’s why it’s more relevant. The work that we did year in the third quarter other than new business would be similar to what we did last year in the third quarter so it’s really more of a mix. Sometimes the type of work that we do for a particular company, whether it’s a big on-site or another might be at a lower margin in the third quarter than the work that we did for a different customer in the second quarter. So those margins are going to fluctuate from quarter-to-quarter, but that’s why we look at it, year-over-year for the same quarter.

Great, and then with the Ulrich transition now being fully integrated what percentage of revenue for the company as a whole from Canada at this point on an annualized basis?

Just Distribution, or Distribution and Service as well?

Just total, total revenue.

You want to get on it or you want me to get on it?

I think, yes, on the service side of the business, our Canadian revenue is in Canadian dollars somewhere between $9 million and $10 million roughly. And on the Distribution side it fluctuates on an annual basis but it’s in the $4 million to $5 million range.

Okay. And then on the Service side, I assume we’re naturally hedged, and that the cost and revenues…

Yes, that’s correct.

…cancels each other out.

Right.

Okay.

It’s in a 15% range, Andy, relative to Services, percentage of our overall Service revenue.

Okay. Great.

In 20 [ph].

Okay. Great. And then as we move into fiscal 2016 on the service side, we still think that 10% growth with the 50% incrementals, should be the way to think about things going forward?

Yes, and I think our revenue as always will be - we haven’t changed our plan, so it’s going to be blend of organic activity and acquired activity. And we would absolutely look to see revenues grow in the double-digits and so we’re on target with that.

That’s great to see. Well, keep up the good work. If that comes to fruition we should be close to mid-teens ROIC, which is nice to see.

Exactly, yes.

Thank you. Our next question comes from the line of Dave Rhode [ph] with Stifel Nicolaus. Please go ahead with your question.

Hi, good morning, fellows.

Good morning, David.

Yes, congrats on another record quarter, and I also noticed, I think someone had sent me, you guys were listed in the Forbes 100 Best Small Companies last fall. I think that was third quarter as well.

You are correct. And that’s, Dave, that’s something we’re particularly proud off. We didn’t see that coming, or didn’t know that we were being considered by - yes, that’s always good news.

Yes. I - some of my questions have already been answered. I would like to ask one question. I know, you guys used to post the amount of your product sales that were Internet oriented, or you’re not doing that anymore, can you disclose that number or not?

We haven’t been disclosing that number, David, it hasn’t really changed much, and so it wasn’t really particularly interesting. It’s still in a low double-digits and continues to be pretty consistent on a net basis. I think, one of the things that maybe more interesting as we go forward now that we’ve launched our new website is that, there is a settling-in period. When you do, we have a new website, where the spiders have to re-index from an SEO standpoint, so your traffic drops a little bit initially and then it starts to pick-up again. So I think once it settles in at a - at the rate that it’s going to be more consistently from a traffic standpoint, it might be interesting for us to provide an update, maybe in the first or second quarter of next year. But we’re already seeing the traffic rebounding to the same levels it was at and actually beyond, where it was when we launched the new website. So our expectation is the new website will generate more traffic and more importantly, the conversion rate on somebody gets to our website will be increased.

Has there been any more thinking along the lines of analytics as far as marketing via the Internet yet?

Dave, we think about that all the time. We have a new VP of Marketing here that took the position in the - in Q3. In fact, we have been really impressed with his attitude, his ability, his energy level, all-in-all his smarts. And I think that, when we have marketing meetings now and my quest steps to the front and sort of lays out his thoughts and a strategy, it’s a different atmosphere. And we’re encouraged, I’m looking forward to what you’re thinking, well, I think you can implement. So data becomes - the analytics become more and more important. We can now with our new platform we know who is looking and what, when they visit our website, we know how long they spend in each area of our website, what their interests are, and we have the ability to chat with them online. We have the ability to follow-up really quickly in a more effective way than we have in the past. From a data perspective specifically addressing your question, we’re getting better analytics, and so to agree that, we can capitalize on that, our success will be accelerated. One thing I wanted to add to what John had said, we did some industry research and when you launch a new website, you have to go to that re-indexing process, it takes ex-amount of time to do that in. And we planned and knew that, perhaps, we take one step back, so that we can take two steps forward in terms of traffic. But we’ve actually experienced a little bit of a different trend, and we’re recovering quicker than industry norms. We’ve even checked with Fluke and some of our manufacturers who went to a similar process, it took six months to eight months to recover, and we look at where we’re recovering within almost a quarter, so that’s good news too as well.

That’s great. I guess, this would be for John. So it looks like you’ve got about $800,000 left in CapEx for the fourth quarter here, is that about it?

Yes.

Okay. And you quantify at all, I know we’ve talked about the rebates and the effect that they’ve had on things. Can you quantify at all any EPS, or lack of that that occurred because of that in the third quarter?

I don’t have that number in front of me, Dave, but it was 190 basis points of margin. So we would have to calculate the dollars associated with that and tax effective, because it really drops to the bottom line.

And just FYI gosh, I mean, I look back ten years with you guys and you’ve really done an outstanding job. I ran some numbers, your shareholders equity in the last ten years quarter-over-quarter is 773% increase.

Wow.

Your Service revenues last 10 years have increased 201% quarter-over-quarter. And the Service revenues 10 years ago were 30%. They are now 41% of the overall picture. My question for Lee is going forward, we don’t have to go out 10 years into the future, but as we look forward, how do you want to see that mix with service and product sales on a long-term basis?

Longer term, Dave, and there is no question that our strategy is driving us towards growing Service, obviously the faster rate than Distribution. We want to see Distribution grow. We want to add thousands of SKUs. We want to expand our product line on the Distribution side. But the - we’re going to look to grow the Service, it’s got the higher margins, it’s got the recurring revenue streams. The bottom line is the most important thing and [Audio Gap]

…going forward, during, say, the next 12 months?

So we plan to continue to meet with investors on a quarterly basis, we’ll continue to do these conference calls, this is all part of investor outreach. We do have a plan to go to the West Coast in a couple of weeks. We’re going to be there from 9 through the 11. And if anybody is on the call, or listening to the call who is interested in meeting with us, then they should contact Deborah Pawlowski and we can set up a one-on-one meeting will be in San Francisco, LA, and San Diego during that time, and we plan to do that kind of thing quarterly. We will - we’ll look at some conferences as appropriate and we've done some of that. So, yes, you’ll probably see more of the same as what we've been doing over the last 12 months.

Thank you.

Thanks, Dave.

Thank you, Dave.

Thank you. [Operator Instructions] Our next question comes from the line of Donald Porter with DGHM. Please go ahead with your question.

Hey, good morning, guys.

Good morning, Don.

Hi, Don.

Hey. So what was the organic growth rate in the quarter?

We don’t - we haven’t been splitting out the organic growth. We integrate very quickly and we haven’t, and we don’t typically break that out. We don’t plan to, because once we acquired these businesses, they become part of our network and some of the opportunities that we was talking about earlier are generated through that sort of one-plus-one-equals-three scenario where we’re - we have a trouble with putting it in our pocket, whether it’s organic or acquired, so…

Okay.

It’s not really meaningful to break it out.

, :

Yes, I mean, I’ll just give you, this is Lee, Donald, that’s in the - it’s a six-figure contract, let’s call it, mid-to-low six-figure contract range.

Okay, guys. And the other two, you said you expanded Service and you won two deals, not actually there?

Yes. So those deals on the analytical space, one is a mid six-figures and one is around low six-figures, so they’re both significant.

Okay, I agree. And just, not to beat dead horse in the rebates thing, but is this just an half year, where it reverts kind of every other year, or is it more competitive just kind of generally. And so it’s more difficult to kind of get margin there.

Sure. So last year, Donald, we had a really good year with Fluke in particular and it droves a very high gross rebate for us.

Gotcha.

And the bar gets raised, it’s based on growth. And so when you’re coming off of a very, very good year, it’s difficult to hit that threshold makes you impossible, but somehow it’s difficult. And so we've just had a challenge this year. Coming off of this year going to next that’s absolutely not going to be the case, so it’s not completely cyclical and there are half years and there are little bit, there are anomalies in there. But generally you are coming off of a high year and that’s a result.

I think going forward though, the market is very competitive, and I don’t think that the expectation is to see the level that we saw last year, I think, no further declines. But we won't see - we are not expecting to see the rebound.

Gotcha.

So the margin going forward maybe similar to what we are seeing this fiscal year. And we are also getting an increased contribution of our revenue from a more variety of manufacturers. And that’s spreads the revenue out, and I think that diversification is positive for the business in the long run.

Gotcha, great. And just on the M&A pipeline, how is that looking?

So we have a - we have a decent pipeline, it’s something that we work, pretty hard at, and we like the pipeline as it is today. We expect that to result in future deals, that’s our strategic plan.

Gotcha. Okay, great. Thanks, guys. I appreciate it.

Thanks, Don.

Thank you. Our next question comes from the line of Steven Stern with Stern Investment Advisory. Please go ahead with your question.

Good morning.

Good morning.

Good morning, Steve.

Boy, directly [ph] got here in Washington, we have one-inch of snow in the ground and we can’t handle that nearly as well as you guys can handle it in Rochester.

That’s for sure.

Three quick kind of what on related questions. In your release, you referred the cost discipline in Distribution and reduced expenses related to performing space compensation. I’m just curious, is that a commission - sales commissions for the sales staff, or is that operating rewards for the distribution management?

It’s more of the latter. We are very performance-based. Our compensation throughout the company is very performance-based and heavily levered that way. So as we see something like a reduction in the gross profit or year-over-year that has an impact on everyone’s compensation.

Very good. What are some of the parameters into sales growth, margin change? What are the parameters of –what are the benchmarks by which the - they are measured?

The most important is our - is EPS. When we talk about our management performance-based compensation plan, EPS is the highest rated. And there are other factors and all of that, it’s relatively complicated, but all of that is outlined in our proxy statement. So if you go to the proxy you can see. But for management, it’s based on the overall company performance in the most heavily weighted factor as EPS. And then we also have a plan that that all employees share on, which is based on our success relative to our plan every year. And those are - yes, go ahead.

And do you have an ESOP plan?

No, we don’t.

Very good. And then the third question completely change of pace, with the decline - the drastic decline in oil prices, petroleum prices, what is our exposure to the refining industry drilling retailing any?

So, Steve, this is Lee. There - such a drastic decline is likely to impact the lot of areas and a lot of companies. I don’t think anything really significant on our end. We do have a certain portion of our Distribution business itself into the pipeline industry. We just - we’re pulling our own data within the last month or so to try to gauge the potential impact. It’s not really all that material, I mean, where we have some decline in that market, of course, but it’s not something that, we’re not concentrated on the Distribution side relative to refinement of oil and so on and so forth. On the Service side, it’s even going to be less an impact. We've always talked about targeting the life science industry and that’s where the bulk of our customers lie, not in the oil refining and so reduce some work at the utility level, but again, the oil should have a minimal impact.

Very good. Okay, that’s it. Now, keep up the good work.

Thanks.

Okay, Steve, thanks.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to management for closing remarks.

Okay. So I thank, everyone, for joining us on the call and certainly appreciate your interest and support. As John mentioned, we’re going to be in California, February 9 through 11, I think we are stopping off in San Francisco, LA, San Diego, so if you are in that area, you ought to contact Deb, and we’ll do everything we can to accommodate a meeting if that’s possible, otherwise, I will keep you updated on our progress. We appreciate you all being on the call.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.