Greetings and welcome to the Transcat Second Quarter Fiscal Year 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. An interactive 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, Ms. Deborah Pawlowski. Thank you. You may begin.

Thank you, Matt, and good morning, everyone. We certainly appreciate your time today and your interest in Transcat. I have with me here on the call today, our President and CEO, Lee Rudow; and our Chief Financial Officer, Mike Tschiderer. After our formal remarks, we will open the call for questions. If you don’t have the news release that crossed the wires after markets closed yesterday, it can be found on our website at www.transcat.com. The slides that accompany today’s discussion can also be found there. So if you would, please refer to Slide 2 in the deck. 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 release, as well as with 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 at the SEC’s site, which is 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 have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release. So with that, I will turn the call over to Lee to begin the discussion. Lee?

Okay. Thank you, Deb. Good morning, everyone, and thanks for joining us on the call today. We’re going to follow the same format we have in the past. I will hit upon some highlights for the quarter and then Mike will provide a more in-depth review of our financials I’ll come back and wrap things up with an outlook for fiscal 2018. We generated $35.9 million of consolidated revenue, up 4.2% over the second quarter of fiscal 2017. Results were somewhat muted by Hurricanes Harvey and Maria. As a result, operating income for the quarter was down slightly. Before I get into the Service segment performance, I want to give some context to the impact of hurricanes had on our business in the quarter. Our Houston lab is our largest lab that operates three shifts a day. As we mentioned in our press release, while the lab sustained minimal damage and our employees are safe. There was significant disruption over several weeks with our staff, our customers and supply chain. And while the recovery is well underway, the storms contributed significantly to the low productivity and gross margin in the quarter. It’s difficult to determine the exact impact in the quarter because of the nature of our Houston lab operations. The lab is our standards lab, a feeder lab, if you will, that supports our entire lab network in addition to servicing the local Houston customers. It makes it difficult to exactly quantify the indirect impact of the temporary shutdown that took place. We had customers’ equipment that we couldn’t work on in some cases. We didn’t receive, because the roads were closed, and certainly, we saw the noticeable ripple impact throughout the organization. Our Puerto Rico lab is significantly smaller than Houston and generates less than 2% of our…

Thanks, Lee, and good morning, everyone. I will be starting on Slide 4 of the deck we posted, where we show our revenue performance by segment and on a consolidated basis. And starting with our Service segment, we are pleased with the 7.6% organic revenue growth that we had for this segment. This was in line with our goal of mid to high single-digit organic growth rates. And notably, this was achieved despite the adverse impact from Mother Nature. Hurricane Harvey disrupted our largest lab, Houston, as we mentioned. The Houston facility sustained only minimal damage and thankfully all our employees are safe. But the lab operations were impacted by disruptions to the staff, customers and supply chain. Also, in the last few days of our second quarter that ended on September 23, Hurricane Maria severely impacted the island. Again, we had minimal property damage from the storm and our people are safe. But the recovery in Puerto Rico is expected to impact us for the next several quarters if the recovery and rebuild are as slow as has been talked about. However, our operations in Puerto Rico are small, accounting for less than 2% of our total revenue. So a prolonged return to normal operations is not expected to have a material impact on our results from operations or our financial position. Also, as we mentioned, our second quarter results do not include any amounts for potential recovery from various insurance coverages we have in place in Houston and Puerto Rico. Still on Slide 4, the Service segment continues to deliver solid results over the long-term, double-digit growth over both the trailing 12-month period and on a CAGR basis since fiscal 2014. Our Distribution segment had a fifth consecutive quarter-over-quarter period of revenue growth. And even more impressively, over…

Okay. Thanks, Mike. I’ll conclude by saying that our strategy and focus has not changed. Prospects for both our Service and Distribution segments are bright. The value proposition between our segments continues to be unique and resonates in the market. We continue to expect mid to high single-digit organic growth in our Service segment and the Service pipeline is very strong. We expect Hurricane Harvey, the Hurricane Harvey impact to lessen as third quarter progresses. Although there may be some lingering revenue and margin headwinds, both segments appear to be recovering well. We’re making progress on our labor front and expect to see productivity improvements in the third quarter. Our operational excellence team is also focused on productivity improvements in the short run in parallel to their longer-term multi-year effort across the organization. We still believe and expect significant margin leverage as operational excellence initiatives progress. We continue to work on improving the effectiveness and efficiency and our processes, databases and systems, as we look to eliminate redundancy and improve our analytics. Over time, we expect to be even more competitive to take market share, improve our scalability, predictability, profitability as well. In other words, we plan to drive a better business model. Acquisitions remain an integral part of our growth plan. And looking out over the next two to three years, we still believe we’re on target to achieve our $175 million to $200 million in revenue. So with that, operator, we can open the lines for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question is from Dick Ryan from Dougherty & Company. Please go ahead.

Thank you. So, Lee, you gave us Puerto Rico, it was less than 2% of revenue. Can you give us some sort of perspective what Houston represents for the Service?

So we don’t – we haven’t broken that on the path. I will say that, as I’d mentioned, Houston does run the multiple shifts and does – is a feeder lab. It is probably twice the size of most of our labs. And it’s certainly, dominant in terms of the revenue it produces directly and indirectly. We’ll – we’re not going to breakout each lab revenue on this call, but significant. This is how I would put it. Mike, would you add any color to that or…

No I…

For this basis or…

No, because it is a feeder lab and a reference lab, sometimes the work that is actually sent there may get credited to the lab…

Right.

…where it comes from. So it probably is hard to just look at the Houston and the impact of Houston because of the nature of the lab.

How do you see that recovering the Services directly around Houston versus the feeder capability throughout the other labs, is the feeder side coming back or would that come back sooner than the direct Houston impact?

Yes. So it’s a great question. The feeder volume will come back immediately and it has. And the Houston area itself is going to be a little bit harder to predict. I will say that we definitely saw significant recovery in October. There was an uptick both locally, and of course, we expected the uptick to be through the feeder network. So I – we’re feeling pretty good. I mean, it – without question there will be some lingering impact. Longer-term, it may have a positive effect perhaps. But in the short-term, it’s going to be hard to predict other than to say, if October is an indicator that we can rely on, we’re feeling much better about it.

Okay. Now the productivity issues, is that tied mainly to the new hires or was there some other productivity issues that crept into the equation?

Right. I would say that, while we always look to improve our core productivity and if there is opportunity for improvement, that’s why we’re launching operational excellence, that the majority of the issues that we feel like we had and where we could have done better, Dick, is on the new hires. And not just the new hires themselves, but when you hire 33 new technicians, what happens is, you have to pull your – some of your senior techs to do the training. And so the direct impact is that, they’re not as productive, because they’re new. The indirect impact or you can call it direct as well is that you slowdown some of your senior techs. So it’s hard to differentiate between that impact and that affect versus could production have been better in any given quarter. So I’m pretty confident to say the bulk of it, the lion’s share is going to be related to the new hires directly and indirectly. But I – but there’s opportunity to improve our productivity, and that’s why we’re investing like we are in operational excellence in our processes, in our procedures, because we think productivity can improve. I think you’re going to see that productivity proven in the third quarter, okay. So, as these – and that will lend itself more to the new technicians being independent and productive and senior technicians allowed to do more work having afforded the time, and now you should see that in third quarter because of that. Longer-term, productivity improvements will be based on some of the operational excellence initiatives we have in place.

Okay. And the mid to high single-digit, is that what we should look at for fiscal 2018 over fiscal 2017?

You’re referring to organic growth?

Yes.

Yes, absolutely.

Service.

Yes, Service.

Yes.

On the Service segment, we’re confident that we can – we expect certainly to reach those levels.

And just one last one sticking with Service. You mentioned taking share, can you give us some perspective as to where and what industry segment that’s occurring?

Well, primarily, we target life science. And the bulk of our growth has been both, I would say, life science, as I alluded to in the script, most of the life science, we’ve done well in defense and aerospace as well, there has been an uptick. But I think that our value proposition around life science continues to get better. It was already good relative to our competitors. I think it’s getting better. And I think that’s the reason why we’re confident and we’re achieving some of these growth levels. And we achieved 7.6% growth, but again that was muted by just some obvious impacts from the storm. So if you’re to plate it out, Dick, you would have been even higher than that, maybe even close to – maybe to 10%. And so we’re pretty comfortable that the proposition on the Service side and our ability to communicate it and sell to it is effective enough to hit those targets.

Yes, and I’ll just add one thing to that. You can apply based on the range of the estimates that we are giving for the gross margin that the organic Service revenue growth would have been probably in the mid-8% to the mid-9% with those same ranges of estimated direct and indirect losses because of the storms, Dick.

Okay, great. Thank you.

Okay. You’re welcome.

[Operator Instructions] And if there are no further questions, I’d like to turn the floor back over to management for any closing comments.

Okay. Well, thank you all for joining us on the call. We certainly appreciate your interest and your time in Transcat, and we are certainly available for further questions or follow-up if there’s any interest. Take care. Have a nice day.

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.