Greetings, welcome to Transcat, Inc. First Quarter Fiscal Year 2020 Financial Results Conference Call. [Operator Instructions]. Please note this conference is being recorded. I'll now turn the conference over to Craig Mychajluk, Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone. Certainly, appreciate your time today and your interest in Transcat. With me here on the call today, I've our President and Chief Executive Officer, Lee Rudow; and our Chief Financial Officer, Mike Tschiderer. After formal remarks, we will open up the call for questions. If you do not have the news release that crossed the wire after markets closed yesterday, it can be found on our website at transcat.com. The slides that accompany today's discussion are also on our website. 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. Those 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 the documents filed by the company with the Securities and 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 www.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. I would like to point out as well that 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 comparable GAAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Lee to begin. Lee?

Thank you, Craig. Good morning, everyone. Thanks for joining us on the call today. I'll start by hitting upon some highlights for the quarter as we normally do and turn things over to Mike to provide a more in-depth view of the financials before I return to wrap things up with an outlook for fiscal 2020 and beyond. First quarter results demonstrated the continued successful execution of our growth strategy. We generated record sales of $42 million in the quarter driven by both double-digit organic Service growth and strong Distribution sales. The high rate of Service growth was higher than we had expected and had an adverse impact on our Service margins, which I'll touch upon in a few minutes. Operating income was relatively flat and would have grown absent a onetime $200,000 charge for the sales of building we owned located in Montana. The building was a legacy property from an acquisition many years ago. There were some tax adjustments in the quarter. And net income grew to $1.7 million and EPS grew to $0.23 a share in the quarter. I'll turn to our Service segment for a few moments and talk to growth and margin. Our strength and value proposition continue to resonate, and we continue to take market share from the competition, which is consistent with our plan. Segment revenue was up 16% and our organic growth rate was nearly 12% in the quarter. The 12% organic growth was a result of strong performance across most Service channel including large client-based lab wins in the quarter, growth from our existing customer base and solid growth in the Canadian market, which if you recall was a drag on results most of last year. We believe Canada has turned the corner; we expect to see positive results continue throughout…

Thanks, Lee, and good morning, everyone. I'll start on Slide 4, which provides detail regarding our revenues As Lee mentioned, we started the fiscal year very strong with record first quarter consolidated revenue of $42.4 million. This represents an increase of almost 16% or $5.7 million over the first quarter of fiscal 2019. Service segment revenue increased 16% to $22.4 million, inclusive of revenue from Angel's Instrumentation which we acquired in August 2018. This marks the 41st consecutive quarter of year-over-year revenue growth. As we previously communicated, the immaterial revenue from the acquisition of Gauge Repair Service effective on April 1, 2019, which was the first day of our current fiscal year, is a bolt-on to our Los Angeles facility, will not be called out separately when we talk about organic growth versus total revenue growth. Organic growth for the -- this quarter for the segment was very strong at 11.9%, as we continue to take market share, especially in the highly regulated life science sector and other regulated sectors such as aerospace and defense. To put that growth in perspective, our stated goal is to achieve organic growth rates in the mid- to high single digits. So, anything in the double digits is certainly exceeding our expectations. When combined with acquisition, the Service segment has met our double-digit revenue growth expectations as demonstrated on a trailing 12-month basis and on a compounded rate basis since 2016. Distribution sales did increase more than 15% to $20 million and was driven by broad-based demand. Highlights, as Lee noted, included our rental business, which was up 34% to $1.2 million and higher alternative energy and used equipment sales. These can be lumpy. The Service segment gross margin was still pressured in the first quarter, especially by the investment around two new technicians…

Okay. Thanks, Mike. All signs continue to point to strong Service revenue generation throughout fiscal 2020. Organic service growth remains the priority as we believe we will continue to capitalize on our ability to win in the market. New business and acquisition pipelines remain strong and active. And as we move forward, we look to the balance our acquired and organic growth level. In parallel, we're working to find the sweet spot between growth and improved margins. As we move forward, we continue to believe we have a grounded view of what needs to be done. In addition to operational excellence, which includes a number of important productivity-enhancing initiatives, we believe automation is part of the solution. We expect that acquiring Infinite Integral Solutions and its CalTree software will provide a boost to automation and accelerate improvements heading into the future. We continue to move forward with confidence, and we're doing the right things to secure and leverage our unique position in the market. With that, operator, we can open the lines for questions.

[Operator Instructions]. Our first question is from Dick Ryan from Dougherty & Company.

Congratulations on a good quarter, guys. So Lee, you talked about -- obviously, the organic growth and Service was pretty impressive. And you mentioned that was across more Service channels. Was there any markets that didn't really perform in the quarter?

Dick, none that I would highlight. So, when we look at the way we go to market, we have a life science strategy that includes things like validation and laboratory equipment, we've got energy, we've general manufacturing and process. So, we really were strong across the board. The way I worded it was based upon just -- certain markets just did really, really well, like life science as it historically at least in the recent past has done. So, I wouldn't read into that as any weakness. It's pretty much strong across the board, so we're pleased.

Okay. And then you mentioned lab wins and some start-up costs. I think you have to go back to Q3 when you talked about some significant lab wins then, can you bring us up to speed how many labs you are currently operating in and what does that pipeline look like?

Right. So, in Q3, we talked about the large number of client-based labs that we had landed in the year. Normally just as a refresher, we typically win 1 or 2 big deals a year. Perhaps, there's been a year where we've won three. And last year, I think it was maybe 6 or 7. It was in the high to -- mid- to high single digits, which is a really high rate. And that continues. So, for the start of fiscal 2020 again, we've seen 2 or 3 more client-based labs. So, it continues to be an opportunity. It continues to be a strength for us. And I think one of the drivers for it is just the labor market, and I think a lot of the in-house labs for big manufacturers it's difficult for them to find technicians. I mean I have 350 technicians. They've five. And if they lose one, one retires or some board another company, they've serious risk around compliance. So, the [indiscernible] company like Transcat, they -- this is just not a problem they want to deal with anymore. And I think that's what's driving it. We are lucky because we may be the only company or we're certainly part of a small number of companies who can handle that sort of business, albeit pressure on the margins in the short run, but we can pick it up, and we can be successful and that's what we've been doing.

Okay. Are you having any retention issues with technicians?

No. Our retention -- our turnover rate has actually gotten better in the first quarter this year versus first quarter of last year. There is always some turnover that we have to deal with, but I wouldn't point that as any contributing factor to the number of new techs. Number of new techs for the most part are because we've new business.

Okay. And Mike, you mentioned the couple hundred thousand dollar loss push up extra about 19%. Should we still kind of look at that in the maybe low 18% range going forward?

Yes, yes. I think that's still where we think we will be Dick.

[Operator Instructions]. Our next question is from Chris Sakai with Singular Research.

I have one. Just a question on the acquisition of IIS. Do you have a target as far as how it will improve margins going forward and add to revenue?

This is Lee, Chris. We don't have targets around how it's going to add to revenue. The idea behind IIS, as I mentioned in the script, is it's really to drive automation. And if you want a picture how automation impacts the company, I would look at it this way. You have a technician that typically would run through a calibration, but they take 30 minutes. Now they can hit a button or two. Once you get it up and running and program the software, they will be able to hit a button and it would self-calibrate. And while they're doing that, they can turn around and do another calibration or call it an incremental calibration. So that's how automation works. The benefit of automation over time is that we get more productive. And it even helps new technicians, and since we have a lot of new technicians, if you could teach them how to push a button and automate versus actually doing the manual CAL that's an advantage for us. There's about 20%, 30% -- 25% to 35% on the outside percentage of the work that we do today that lends itself this kind of automation. Now getting up and running with this is going to take time. Each variable is a pressure, needs to be -- we need to program for that, and then we got to go on to temperature and then we got to go on the flow to sequential sort of progressive in nature. It won't all happen at once, it will happen over time, but we feel pretty good about our ability to get this done as we move forward.

Okay. Great. And then one last thing. This property in Montana, why was this sold? And why did you guys take the $200,000 loss on it?

Yes. So, this was a building that came to us actually with an acquisition we made in 2011, and it was just a building that was vacant now. And we don't have any operations in Montana. We've had it under market for a while and it just didn't make any sense to keep paying maintenance and just a risk avoidance of having a property that was baking by itself like that, that kind of a noncash loss was really the write-off of any of the remaining book value versus the sales price risk. So, we kind of bid it -- bid once, get rid of it, and we don't have any other property similar to that.

We have reached the end of our question-and-answer session. I'd like to turn the conference back over to management for closing remarks.

Okay. This is Lee. Thank you all for joining us on the call today. We appreciate the continued interest in Transcat for sure. We'll be participating in two investor conferences in September, the Dougherty Conference in Minneapolis on September 5, the Sidoti Conference in New York City on September 25. So, feel free to check in with us at those events or reach out to us anytime. Otherwise, we will talk to everybody after our second quarter results. We appreciate you participating on the call.

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