Greetings and welcome to the Transcat Fourth Quarter Fiscal Year 2020 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host Craig Mychajluk, Investor Relations for Transcat. Thank you. You may begin.

Thank you and good morning, everyone. We certainly appreciate your time today and your interest in Transcat. With me on the call today, we have our President and Chief Executive Officer, Lee Rudow; and our Chief Financial Officer, Mike Tschiderer. After formal remarks, we will open the call for questions. If you do not have our news release that crossed the wire after markets closed yesterday, it can be found on our Web site, at transcat.com. The slides that accompany today's discussion are also on our Web site. If you would, please refer to slide two. 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 with documents filed by the company with the Securities and Exchange Commission. You can find those on our Web site where we regularly post information about the company, as well as on the SEC's Web site 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, 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 have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release. So with that, let me turn the call over to Lee to begin the discussion. Lee?

Okay, thank you, Craig. Good morning, everyone. Thank you for joining us on the call today. I hope you and your families are in good health. I'll start the call today with an overview of the fourth quarter results and how we ended fiscal 2020, I'll provide a quick look into the TTE Laboratories acquisition, which closed on February 21, about a month before the end of our fiscal year, then I'll turn things over to Mike to provide a closer look at the fourth quarter and the full-year financials before I return to speak to our outlook for fiscal 2021 and beyond. Before I get started, want to take a moment to tell you how proud I am of the Transcat organization for both the agile response and the measured actions taken to ensure the health and safety of our employees and our customers as we work through the challenges of the COVID-19 pandemic. At the same time, we believe we're operating in a fashion that enables the business to prosper over the long-term by securing our differentiation and critical resources. I'll talk to both of those opportunities in a few minutes. Early in the fourth fiscal quarter, we formed a 10-member cross-functional response team that met on a daily basis to establish safety protocols throughout our 42 locations, as well as procedures to safely service our customers at their facilities. We followed CDC and WHO guidelines to mitigate risk, and while so doing we delivered continuous essential services to our customers across a broad range of critical industries, including manufacturers of ventilators and test kits, as well as pharmaceutical companies conducting research and development on the COVID-19 vaccine. Within a matter of days we split shifts in our labs, restricted travel, and leveraged our recent technology enhancements so…

Thanks, Lee, and good morning everyone. Today, I'll be starting on slide six, which provides detail for our revenue on a consolidated basis and by segment. As a reminder, we have two reportable business segments, Service and Distribution, and our results include the five weeks TTE, which was acquired in late February, 2020. As Lee mentioned, our fourth quarter performance was solid considering the impact of the COVID-19 pandemic in the latter half of the quarter, especially in March, which historically is the strongest month of our fiscal year. Consolidated revenue for the quarter was up nearly 3%, to $45.8 million, which represents a record level. The increase in Service revenue to $25 million reflects 1.1% organic growth, largely from new business within the life science market, and a quarter-over-quarter increase was 2.9% including the incremental revenue from TTE. Distribution sales were up 2.9% in the fourth quarter versus the prior year fourth quarter with higher rental revenue as we mentioned. Rentals was up 11% over the same quarter last year. Full-year consolidated top line results were solid, reaching a record level of $173 million. Highlights include 10.7% Service revenue growth with 8.4% on an organic revenue basis, and Distribution growing 4.2% including higher rental revenue, 19% year-over-year for the full-year. Our consolidated gross margin performance in the quarter was also a bright spot, and further demonstrated the strength and overall importance the service business has on our margin profile. Quarterly Service segment gross margin improved 120 basis points from our various and ongoing productivity initiatives in spite of the COVID-19 impact on March revenues as described. While distribution gross margin was positively impacted by the higher margin profile of rentals, we did have an unfavorable mix in the quarter which resulted in the 70-point decline. However, as we mentioned…

Okay. Thank you, Mike. No doubt, we're all concerned about the high level of uncertainty that exists both in our personal lives, as well as from a business perspective. At Transcat, we're looking forward, and there are a few points I want to make and make sure I communicate well. Back in 2013, Transcat made a strategic decision to focus our time and our resources towards the expansion and development of the life science sector of our calibration services business. We knew the market was essential, the demographics is attractive, and the revenue stream recurring and driven by regulation. We also understood that the cost of failure within the life science sector is high, and calibration plays an important role in the mitigation of risk. Life science is a difficult market to get into and perform well in, but we are committed to developing the market, and like calibration services in general, it represents our primary growth engine. Today, more than ever, I'm glad we did. It's in difficult times like these that we believe our life science orientation provides both stability and opportunity, and we believe it adds a significant degree of resilience to our operation. We also believe our service segment as a whole by its nature tends to be assessing resistance, but even more so in life sciences. While we expect our Distribution business to feel more downward pressure from an extended economic slowdown or Service businesses expected to continue to be steady and strong and better position us over the longer term, because we believe we're in a good position in our markets and with our customers. We have the opportunity to focus on a couple of important things. First and foremost is taking care of our most critical resource, our people. While we are proactively…

Thank you. At this time, we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Gerry Sweeney with ROTH Capital. Please state your question.

Good morning, Mike and Lee, and thanks for taking my call.

Good morning, Gerry.

Hey, Gerry.

Obviously you gave us a little bit of insight into what you're expecting for fiscal 1Q, but could you give us a little bit more detail maybe -- I mean with April slower, did Service see a little bit of a backup, and then maybe it build a backlog of different services, and have you spoken with any of your customers and what they're saying about need/demand, how are they coming out of COVID with social distancing? Are they going to see different changes to how they're allocating some of the work and that you're going to be doing, and things like that, just to sort of give us a little bit more detail in this new COVID world we're dealing with?

Yes, fair enough, Gerry. This is Lee. So, at a relatively high level, we have been pretty pleased with the Service pipeline and the level of service activity we've seen throughout the organization. Our CLS, our Client-Based Labs, are very steady, just inherently. The amount of workload in the beginning of the quarter tended to be off by a few percentage points, but picked up throughout the quarter, and even most recently. We like the pulse, the level of work that we're being asked to perform in the first quarter, and I'll even make a comment that generally speaking I think we're pleasantly surprised. It's held up really well. In addition to that, the pipeline on a go-forward basis, as I mentioned in the earning release, is really quite strong, and so, some of it's a matter of timing, right, companies wanting to make the change and then switch to using Transcat Services. So, I like the pipeline, I like the work levels, and most of the anticipated declines are on the distribution business, which is absolutely no surprise, and that will work itself in and out as the economy goes, but yes, Service is doing what we wanted Service to do, and that's why in the script I talked a little bit about 2013, making that pivot, and I think it's worked in our favor.

Got it, and does this environment maybe change how some of your customers look at using Transcat? I mean could there be a shift more to CBL, Client-Based Labs over different opportunities, any talk on that, or is it still too early? In other words, is the [indiscernible] changing a little bit?

Right, not yet, and not really. I have not gotten any feedback relative to that. I get the nature of the question. Right now, our CBLs, everything is pretty steady stage for us. We haven't seen a lot of conversions. We have converted many of our on-sites to depot, and that makes a whole lot of sense, right, but that may or may not continue. I'd love it for it to continue, but that may not continue over time, but no fundamental shift based upon COVID that I can pick up yet. So we'll keep you in the loop if we detect something.

Yes, Gerry, I just want to add one thing on to that, and I think it's kind of an advantage, Lee just mentioned at the end, on-sites and having to work done in depots, we proactively reached out to customers, because we are worried about their visitor protocols. One of the advantages that Transcat has is having 21 calibration facilities around the country. We were able to do that, and we have been lucky that they are all operational, and there has been a number of customers that have wanted to move their site into the facilities instead of having us go out there, but it's one of those where I think being decentralized does give us some ground cover. If there was going to be some issue at a particular lab, we have a lot of other levers to move the work into whether it's on-sites to a lab, or from one lab to another lab.

Got it, and then switching gears a little bit, you talked a little bit about the operating line, which is speeding up some investments; I believe that if I heard you correctly. I apologize for this, can you maybe talk about what you are doing there and potential outcomes or what the expected outcome would be on -- obviously I think margins would be what you're looking at, but just discuss that a little bit, and how much more you are sort of speeding up?

Yes, I'll be happy to. So, we have in the past couple of years invested in cybersecurity and our infrastructure. We are building integration tools. Some of them are done. Some of them are really close to completion. We have invested in automation. As you know, our C3 software, which is the portal for our customers to sort of act in a self-serviced fashion, and we are really -- we are committed to this journey a couple of years ago, and we are just starting now, and you can see in our margins we are just starting now to see some of the fruits of our labor, and it's exciting, and so, as we pick up momentum, you kind of get awfully excited by it, and so we want to see it continue, and in this environment rather than make a choice to cut back on…

Like before, yes.

-- expenses relative to technology, we want to keep going forward. In fact, we are actually in a hiring mode both programmers and some project managers because we feel like the opportunity is real, it's current, and if we capitalize on it, these things will make a lot of sense to accelerate versus doing the opposite, and that's what I meant to say, and we are going to stick to that plan because we will come out stronger because of it.

Got it, perfect, really helpful. I will jump back in line. Thank you very much.

Okay.

Our next question comes from Dick Ryan with Dougherty & Company. Please state your question.

Thank you. Lee, in your stress test of the business model for Q1, can you give us a sense of what revenue levels you might be looking at for an operational breakeven scenario, or maybe to look at it more specifically, can you give us little more feel of what's your thinking kind of the declines could either be in the Service and Distribution side?

Sure. If you look back at first quarter of last year, Dick, you will notice that we had $1.2 million of operating income in Distribution and about $700,000 in the first quarter for Service. So, we would expect the Service to hold up quite well relative to last year, and wouldn't even be surprised if we outperformed, but where you are going to see the decline is going to be decline is going to be Distribution. So, instead of $1.2 million that's more what we are looking at in terms of breaking even. There may yet rebates involved as well for volume, and some of those go away in a short-term, and so, we would like to see it getting close to breakeven on the Distribution year-over-year, and then, we expect Service to hold up pretty strong. Now, it's possible we could outperform in our estimates, that wouldn't surprise me, but we wanted to take a conservative approach and say, "Hey, if we hit breakeven plus or minus $100,000 that's about where we think we are going to be," there is some upside I think to that, but I want to be a little conservative.

Sure, appreciate it. The kind of offensive stance you are taking on keeping your techs employed, kind of given the speed bump, I think is commendable. What do you see on the M&A side, I mean, do you think coming out of this the opportunities are going to be there, and what could they do to multiples that you were maybe looking pre COVID-19?

Right, so having been through some economic slowdowns in the past, each and every time we saw an increased level of opportunities around acquisition. So, there's no reason to believe that that wouldn't be the case this time as well. Now, exactly the size and the pace at which that's likely to occur, I'm not sure multiples at this point not really sure, we tend to be fairly disciplined between four and six times EBITDA, but for TTE, we extended ourselves a little bit, because the fit was so good. I'm going to reserve answering that question at this point, because I'm just not sure what's going to happen, it's too early to tell on multiples, but history would tell you that there should be an increased level, and that's why we talk to that possibility, and as time goes by, when we report on first quarter we'll give an update on those expectations.

Sure. Just to refresh me, you've got 20 CBLs, what did you have, I mean what did that grow in fiscal '20, and what kind of trajectory could we see from CBLs over the next two, three, four years?

Right, well, to refresh your memory, if you go back beyond last year, we typically would win one of these opportunities once or twice a year for several years, that was pretty average, and I think at one time, we had about five or seven of them. If you go back the last 12 to 24 months, therein lies the difference, and there's the 10 or 12 opportunities. So, we saw a pick-up from one or two a year to five or six the year over the last couple of years. To the second half of your question, do we see that continuing? I don't see why not. I mean, if you COVID aside, the speed bump aside, we had a nice pipeline. We were marketing well and selling well and performing well in that particular space, and I don't know, I can't really speak to a reason why that wouldn't continue. There's no guarantee. Some of our pipelines have been delayed a little bit at people are trying to make sense out of whether they want to change now versus next quarter or next month or a couple months from now, but the general feeling from our sales folks are that the value prop is strong around CBLs, and we would expect that to continue. At the same level as last year's, perhaps, maybe a little lighter, maybe heavier. We don't know at this point. I would expect about the same, if I had to guess.

Okay, great. Thank you and congratulations on the strong execution.

Thanks, Dave.

Thanks, Dave.

Our next question comes from Mitra Ramgopal with Sidoti. Please state your question.

Yes, hi, good morning. Thanks for taking the questions. First, I just have a question on the Service segment that Lee I believe you mentioned some customers are delaying their project decisions, and I was just curious, I'm assuming it's in non-life sciences areas, maybe aerospace, defense, et cetera, just wondering if you could maybe give us a little more color on that?

It's actually a mix of both, and so, we had some nice opportunities. We've been sort of given a thumbs up of verbal, "Hey, you guys, we're going to go with you," but we just we're not going to make a change in the first quarter. You're right, A couple of those tend to be in A&D as opposed to life sciences, but there's some in life sciences as well. So, I don't see it as a major setback. I see it as maybe a quarter, or quarter-and-a-half. I mean, if things do pick up as we expect, and the first quarter is sort of the bottom period for us, I would expect that sentiment to change at a fairly rapid pace, but right now, that's just I'm giving you feedback on what we've heard, and again, it hasn't stopped us from growing to this point. I think it's just muting what we could be doing. I expect it to reverse itself at some point.

Okay, that's great. And then, related to the organic growth, you're obviously very good about long-term prospects, and I know you just added some technicians over the last year, and obviously you've held the line in terms of many potential reduction of headcount. I am just curious on the flipside, given the weaker labor market, if that's providing you maybe with some opportunities to continue to maybe add some technicians that might not have been available a few months ago?

Right. So it's actually an interesting point. I mean we're not really focused on adding technicians at this point, because we think we're more overcapacity than undercapacity for the short-term. That doesn't mean if a sensational opportunity presented itself with someone with a specialized needed skill set that we wouldn't jump on that and we probably in fact, of course we would, but our general playbook says, "Let's stick with the technicians we have." We're less concerned with the profitability over the next 30 to 90 days based upon having an overcapacity of technicians, and more excited about having the opportunity to grow our business at some later point in the year. So, we're going to stick to that game plan, and be open-minded to talent if it's out there, and it makes us better. I wouldn't probably hesitate, but the plan is not to go looking proactively for more technical resources when we think we already have more than enough in the first quarter.

Yes, and I think that that makes sense, Lee, and certainly I think a higher unemployment rate, just to converse, when low unemployment rate where it hurts little bit technical labor, you would think that in theory there would be more resources available when the time is right, and we'll always look for the best athlete available. I think we'd be in a position to take advantage of that, when things settle down a little bit, Mitra.

Okay, noted, that's fair. And on the acquisition front, obviously TTE still early days yet, and with the environment really difficult maybe to assess how prominent in normal conditions, but I was just curious if you had any additional color as it relates to the integration and what you've been able to see so far from that acquisition if it's sort of meeting or even exceeding your expectations?

Yes, so from a personal perspective, I love TTE. It's probably of the 11 or so acquisitions it's probably my favorite. I like the way it fits from a strategic perspective. I like the way it's run, and I like the upside to market their services throughout all of our labs and vice versa. So I'm pretty bullish on where I think that can go, and there're no signs to point to anything different than that. In this environment that particular space and that particular suite of services that they offer should do well, and I like their management team, which is one of the reasons why we acquired them. So I'm going to stick to my, into my bullish outlook on them, and like I said, I do it again, quietly coming again, in a second, I think it's going to be really good for us.

And Mitra, I think with the technology that we've deployed, not being able to kind of have as much face to face as we normally would, hasn't really slowed down any integration efforts. We're kind of used to doing that anyways. So I think we're not going to use that as a reason to slow down any of the integration or get the cost or the sales synergies out of it.

Okay, that's great. Thanks again for taking the questions.

Thanks, Mitra.

Thank you.

Our next question comes from Chris Sakai with Singular Research. Please state your question.

Hi, good morning. I had a question on the distribution sales mix. Wanted to get to see, what you guys are looking forward to, I guess in the current quarter, we've seen the improvements there?

Well, this distribution, Chris will typically follow the general economy and GDP and so on. So if the economy backslides in Q1 as I think we all recognize that potential to occur, then you would expect distribution at the front of the line for us to feel that. So, yes, the reason why we're projecting out for the first 90 days of our fiscal quarter, a breakeven sort of operating environment is almost exclusively related to some of that, you know, that the impacts that we think we're going to see on distribution. That could change. We could have a strong June, we could have a strong May still, and so, we can't predict the future fully, but we do expect distribution to feel the impact of a slow economy, and we'll see how it plays out over the 90 days of our first quarter.

Okay, great. And then one other thing, looks like the operating income for the Service segment was down year-over-year, can you help me understand a little more about why?

Yes, Chris, this is Mike. As we tried to kind of describe kind of a couple different things, one, there's a lot of investment that's happening in technology that goes into those SG&A, the operating expense lines and service, there's a lot of that because it's related to that segment, and then the TTE costs kind of the one-timers, excuse me, the legal and the transaction costs muted operating income on a segment level and on a consolidated level.

And I would add to that too. Remember Chris that March is an extraordinary month for us from a service perspective, every year, it's our largest month, and within the month, the last week or two tend to be our -- when we build, and most of us -- a lot of our service business at concentrated level, and so, in this particular March and even in February, we talked about that muted revenue and the way our business works we have a sort of a fixed cost orientation. If you missed, let's just say the last two or three weeks, $1 million worth of billing that you typically would have every year, and you can look at our past fourth quarters to see this, that million dollars, that incremental million dollars that you missed in a COVID environment, really drops to the bottom line at a very high percentage, and so, if you just took a $1 million, about half-a-million would have dropped or three quarters of $1 million would have dropped, you would have seen that operating income wouldn't have performed as you stated. So, I think -- I don't want to make an excuse for COVID, but no question that had an impact, as we -- instead of speaking on a finish strong, we were unable to finish as strong as we normally do in a critical time for us.

Okay, that helps, but then I guess will those -- would that be pushed into the first quarter, when you're saying that --

Yes, right. Well, that's a good question. So, will it be pushed into the year, where the first quarter, hard to tell; it's hard to tell what's going to be pushed into the first quarter, we will have to wait and see. At some point, our calibrations on service side need to be performed, and for that reason you'd believe there'd be pent-up demand and it we'd see that. If a location shuts down or company goes out of business, which can happen, then no, that's not going to come back, but if a business starts to run as normal as usual at some point during the year you would believe there'd be pent-up demand and we would expect, and that's why we haven't laid off technicians, that's why we're staying steady state, so that we're ready to capitalize on that, because we think that's going to occur to some degree. The exact amount, the exact impact I'm not a hundred percent sure, but we see something coming back.

Okay, great. Thanks.

Thanks, Chris. [Operator Instructions] Ladies and gentlemen, there appears to be no additional requests for questions. I'll turn it back to management for closing remarks. Thank you.

Well, thank you all for joining us on the call today. We appreciate your continued interest in Transcat. Feel free to checking with us at any time. Otherwise, we'll talk to everybody at the end of our first quarter 2021. Again, we appreciate everybody participating in the call. Take care.

This concludes today's conference. All participants disconnect. Have a good day.