Deborah Pawlowski - Investor Relations - : John Zimmer - Chief Financial Officer

Steven Stern - Stern Investment Advisory

Greetings, and welcome to the Transcat Second Quarter Fiscal Year 2015 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Deborah Pawlowski, Investor Relations for Transcat. Thank you. You may begin.

Thank you, Adam and good morning, everyone. We certainly appreciate your time today and your interest in Transcat. I apologize for the little bit of delay and getting started here we were having on some telephone sound difficulties. On the call I have with me today President and Chief Executive Officer, Lee Rudow, and our Chief Financial Officer, John Zimmer. After our formal remarks, we will open the call for questions. If you don’t have the news release that crossed the wires aftermarket yesterday, it can be found on our website at www.transcat.com. There are slides that accompany today’s discussion as well you can find them at the same place on the web site. So if you would please refer to Slide 2. As you are aware, we may make some forward-looking statements during the formal presentation and Q&A portion of this teleconference. These 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 they are today. These factors are outlined in the news release, as well as documents filed by the company with Securities and Exchange Commission. You can find those on our website, where we regularly post information about the company or on the SEC’s website at sec.gov. Please review our forward-looking statements in conjunction with these precautionary factors. With that, I would like to turn it over to Lee to begin the discussion. Lee?

Okay. Thank you, Deb. Good morning, everyone. Thank you for joining us. Today, we’ll review our second quarter performance as well as discuss our ongoing strategic initiatives and outlook for the current fiscal year. For those following along on the slides, I am starting on Slide 3, which is a review of our long-term objectives. Over the past several years, we’ve been executing our strategy to generate double-digit revenue growth in our Service segment with income growing at a faster rate at our revenue. In addition, we focused on maintaining and building our market-share in our Distribution segment and leveraging the Distribution segment with our Service segment to drive overall growth. At high level, that our strategy and we remain firmly focused on its execution. As we talked about in the recent past, the Service segment offers significant operating leverage. And we’ve achieved the sales level, a critical math if you will, with this segment operating profit is expanding at a faster pace than revenue. So, we are beginning to move beyond what we called inflection point. We also continue to target and maintain a pipeline of acquisition opportunities. The objective is to consolidate the highly fragmented calibration industry. Our acquisition strategy is to increase our capabilities, our expertise and our geographic footprint as well as gain greater economies of scale. Relative to our Distribution segment we intend to maintain and build our market leadership position. This segment is a strong cash generator and it continues to provide a platform that supports our Service segment growth. Before I turn things over to John, I do want to review our second quarter results just a bit and then he will review them in more detail. We reported record second quarter revenue of $31.1 million, our service revenue -- our Service segment have strong growth, organic growth of nearly 10% and we’re pleased to announce that this marks our 22nd consecutive quarter of year-over-year revenue growth with our Service segment. In Q2 the Distribution segment grew a healthy 6.4%. This quarter also highlighted the strong operating leverage in our business. The Service segment operating income increased 2.5 times to $700,000 on a consolidated basis, operating income grew more than 18% on almost 8% revenue growth for the quarter. The business continues to generate a lot of cash, adjusted EBITDA was $2.4 million, up 15% over the second quarter fiscal 2014 and 7.7% of total revenue. Service EBITDA was 10% of the service revenue. Looking to the bottom-line, net income was $900,000, up 11% over the prior year period on a diluted share basis we were up 20% to $0.12 per share. So with that let me turn things over to John and he will walk through our second quarter financial results.

Thank you, Lee and good morning, everyone. Let's begin with Slide 5. As we mentioned, we continued our trend of top-line growth posting record second quarter results on a consolidated basis and record quarterly Service segment revenue. We achieved $12.6 million in service revenue, a 9.8% increase driven by organic growth. While the Distribution segments are $18.5 million in sales or 6.4% growth. Additional volume in the Distribution segment more than offset discounting aimed at building a plan on market-share. Moving onto Slide 6, we realized strong leverage on the Service segment gross profit in operating lines. Gross margin for the segment improved 240 basis points to 26%, while operating income was up 156% reaching $700,000 with the operating margin extending 300 basis points to 5.3%, while the distribution segment saw a 6.4% increase in sales gross profit was down $500,000 to $3.7 million. The gross margin was primarily impacted by lower vendor rebates compared with the prior year period. This amounted to 340 basis points of the 390 basis points decline in the segment gross margin. Vendor rebates tend to be cyclical as expected growth rates are established by some vendors based on prior year performance and we expect some level of rebate impact to continue over the next two quarters, but to a lesser extent than in the second quarter. Selling and admin expenses were lower for this segment which helped mitigate some of the lower gross profit, as a result distribution operating income was down $200,000 for the quarter. On a consolidated basis our operating income in the second quarter was $1.5 million up from $1.3 million in the prior second quarter. As we mentioned previously this represents 18.3% growth on a 7.7% revenue increase. We will now move to Slide 7 and Slide 8 where we…

Okay, thanks John. I will take a few minutes to review the strategic growth focused investment initiatives that we’ve undertaken so far in 2015. John just mentioned the couple of them. In late August we completed the acquisition of Ulrich Metrology. Ulrich is a leading Canadian provider of the credit calibration services. They specialize in servicing three major segments, aerospace and defense, industrial manufacturing and healthcare. With the acquisition we acquired leadership, expertise and real strong foothold in Montreal which is a market rich in healthcare opportunities and healthcare companies. In addition the acquisition allows us to consolidate our current operation in Montreal with the Ulrich operation ultimately leading to efficiency gains. As we discussed last quarter during the fiscal 2014 period and into fiscal 2015 Transcat completed significant capital investment in upgrading and redefining Transcat’s client facing software. The C3 asset management and Metrology Software continue to gain customer confidence and we are winning additional customers because of its value, the value that provides for them. We’re also on the brink of launching our new state-of-the-art website, targeted to launch within the next week. The new site will allow for improved transactions, enhanced search capabilities, advanced functionality overall, strategic vendor stores for example, premium content and a real dynamic platform for marketing our services segment. Looking forward, we believe that these investments, all these investments will enable us to continue to execute our strategic plan of driving growth. More specifically looking to the rest of the fiscal year, we expect continued strength in the Service segment and we expect to see a positive impact from our recent Ulrich acquisition. Overall, we expect to achieve strong consolidated operating income growth for the year. So with that we’ll open the call to questions.

Thank you. At this time we will be a conducting a question-and-answer session. (Operator Instructions). Our next question comes from the line of Steven Stern from Stern Investment Advisory. You may proceed with your question.

Thank you and good morning. Congratulations on an excellent second quarter. You have been very forthcoming and helpful in sharing with us investors the acquisition strategy highlighting the synergies and benefits that accrued the Transcat. My question is on divestitures. What were the conditions and disciplines under which you would consider divesting a subsidiary, a branch location or a product service line? And have there been any divestitures over the last five or seven years and if so were they by spin-off, by sale of access to a sale to local management?

Steve, its Jonh Zimmer. I’ll answer that question. As we haven’t had any divestitures over the past five years. In fact as long as I’ve been here over the last eight and a half years, we haven’t had any divestitures. What we have had is we’ve moved locations where it made sense and we’ve actually shutdown some locations where we weren’t meeting our expectations in those markets, those would be our lab locations and so we have reconfigured over the years the nature of our lab network in the geographic locations. But we haven’t had any significant divestitures. We are continuously looking at our return on the investment in each of our markets and each of our product lines from a distribution standpoint to make sure that they are meeting all of our objectives and so while we don’t have anything specific that we would point to from measurement standpoint. We measure our labs particularly on variety or metrics including productivity and the amount of volume in those labs and that typically is going to dictate where we go with a particular location.

So it would be a clear example would be your recent Montreal acquisition where you consolidated the operation we already had in Montreal with the newly acquired company.

See that’s right and we’re in the process of doing that the present time. And we would always look to one of our – one of the motivators one of the things that motivates us to acquire company is the bolt-on opportunity. And so, where we can find a bolt-on and leverage our current infrastructure will do so and that’s what taking place in Montreal.

Very good. Thank you very much.

Thank you. (Operator Instructions) At this time there are no further questions. I would like to turn the conference back over to management for closing remarks.

Okay this is Lee, we want to thank everybody for joining us on the call today. Certainly we appreciate your interest, your support. We look forward to updating you on our progress, so everyone has a nice day.

Ladies and gentlemen this concludes our teleconference for today. You may disconnect your lines at this time.