Transcat, Inc.

Q2 2021 Earnings Conference Call

10/28/2020

spk03: Greetings and welcome to the Transcat Inc. Second Quarter Fiscal Year 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mahalik. Thank you. You may begin.
spk08: Yeah, thank you, and good morning, everyone. We certainly appreciate your time today and your interest in TransCAD. With me here on the call today, we have our President and Chief Executive Officer, Lee Rudow, and our Chief Financial Officer, Mike Chitter. After formal remarks, we will open the call for questions. If you don't have the news release that crossed the wire after markets closed yesterday, it can be found on our website at transcad.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 FCC's website at fcc.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?
spk01: Okay. Thank you, Greg. Good morning, everyone. Thank you for joining us on the call today. Both professionally and personally, the last eight months has been significantly different for everyone, everywhere. There's been no escaping the impact of the COVID-19 pandemic. But amidst the obvious challenges, the pandemic has also fostered an environment to rethink how we do things, and in some cases, to move forward differently. I think the TransCAD team has done exactly that. And as a result, I think we're a better company. Our progress has been intentional and will continue to be intentional. Had it not been for the investments we made in our people, technology, and operational excellence, over the past three years, we would not likely be in as much of an advantageous position as we are today. Our service business has been resilient, and in the second quarter of fiscal 2021, we achieved our 46th consecutive quarter of year-over-year growth. The consistent growth has validated our strategy, including our focus on the life science industry. And the recent acquisition of TTE has proved to be timely, And as expected, it's performing very well in the current pandemic environment. In the second quarter, we also saw encouraging trends in distribution. Distribution revenue was down 6.6% versus the prior year's second quarter, but it was up nearly 7% sequentially from the first quarter of 2021. In the second quarter of fiscal 2021, we delivered outstanding margin. Consolidated gross margin was up 260 basis points, primarily driven by service productivity improvement, and service gross margin was up 660 basis points. Operating income was $3.1 million, which not only exceeded our expectations, it represented a record level of second quarter operating income. Our financial strength was fortified by standout cash generation of $8.5 million in the second quarter. Strong cash flow and effective working capital management made a sizable reduction to our debt during the quarter, and year-to-date period. Slide four represents the drivers for progress towards increasing our service gross margin. There are six primary drivers that impact service gross margin. Technician productivity, strategic pricing, channel mix, product mix, sales revenue, and automation. In the second quarter, we hit on four of the six margin drivers in the generation of 32.2% service gross margins. Technician productivity and strategic pricing have been major contributors to the service margin increase, and we believe both will be sustainable throughout our network of 42 labs on a go-forward basis. The current productivity levels are also supported by the seizing of our lab technicians, additional training, leveraging our strengthened management team, and new processes to control costs and optimize client-based lab operations. Increased pricing is also a factor. Our differentiated level of quality continues to be recognized and valued, particularly by the life science industry where the cost of failure is so high, and we believe our customers have embraced our commitment to quality and the higher costs associated with its delivery. Channel and product mix can be impactful components of service margin performance. Channel mix refers to the way our service is delivered. For example, on-site service versus depot, or pickup and delivery versus mobile or client-based labs. Product mix refers to the type of instruments we are calibrating. Again, for example, temperature, pressure, electrical, or dimensional products. Both channel and product mix tend to be more variable on a quarter-to-quarter basis. And in the second quarter of fiscal 2021, both channel and product mix had a positive impact on service gross margin. One final point I'd like to make on the issue of service gross margin is that in the second quarter, margin expansion was achieved without an increase in organic sales volume and without the benefit of automation. We believe our solid new business pipeline positions us well to return to strong organic growth when the COVID-19 driven delays are behind us and our onsite work resumes at full pace. Automation is currently being tested in a number of labs with the goal of broader implementation throughout our lab network over the next couple of years. We believe both the service growth and automation represent upside to the current service growth margins. And with that, I'll turn things over to Mike, who will walk you through a more detailed review of the second quarter before I come back and talk to the outlook.
spk00: Thanks, Lee, and good morning, everyone. I hope that you are all keeping safe and doing well. Today, I will start on slide five, which provides some detail regarding our revenue on a consolidated basis and by segment. As a reminder, we have two reportable business segments, service and distribution. And included in our results is the previously reported February 2020 acquisition of TTE Laboratories, which we now refer to as pipebets.com. Against the backdrop of a very challenging environment, our second quarter results were strong. and especially demonstrated the resilience of our service business and our continued focus on gross margin improvement. Our revenue remained stable at $41.6 million as modest service growth offset lower distribution sales. ByteBets.com added approximately $2.2 million of incremental revenue on a consolidated basis, with $1.2 million in service and $1 million in distribution. The increase in service revenue to $24.6 million reflects our life science focus as we saw continued demand and secured new business from that sector, which helped offset both demand push-outs and softness from other markets. The distribution segment appears to have started to rebound, although the sales number still reflected the current economic conditions, as we have seen reduced demand from oil and gas-related businesses and other general industries. and industrial manufacturing sectors. A bright spot was rentals, which rebounded 32% sequentially from the first quarter of fiscal 2021 and grew year over year. As Lee described, the highlights of our second quarter were certainly around our service margin performance, which drove our consolidated results. Our consolidated gross margin expanded 260 basis points to 27.6%, with service up an impressive 660 basis points to 32.2%, even with only modest top-line growth. This is the second highest quarterly service gross margin level ever achieved. Back in fiscal 2015, we had one quarter with just a slightly higher gross margin. This high level of performance more than offset distribution, where that segment's gross margin reflected actions taken by our vendors to lower their own costs during these challenging times, as they reduced their cooperative advertising and purchase and sales rebate programs. We anticipate that distribution headwinds will continue into the second half of the fiscal year. Slide six shows our operating performance, which exceeded our previous expectations as we were able to deliver operating income of $3.1 million, which was a record level for a second quarter. Recall that we had guided to second quarter operating income being in the $2 million range. which would have been a $1 million increase over what we delivered in Q1 of fiscal 2021. We were able to achieve these results even with continued investments in technology and operating infrastructure and incremental pipebets.com SG&A expenses, which included $300,000 of non-cash amortization expense of purchased intangible assets. On slide seven, we show our bottom line results. Note that last year's second quarter had a much lower tax rate due to significant discrete income tax benefits related to share-based awards in that prior year quarter. On a pre-tax income basis, we are comparable with last fiscal year's second quarter. Given that our year-to-date profitability has exceeded our previous estimates, we are adjusting our full fiscal year tax rate expectations to to now range between 22% and 23%, which includes federal, various state, and Canadian income taxes. On slide 8, we show adjusted EBITDA and adjusted EBITDA margin. Among other measures, we use adjusted EBITDA, which is a non-gap measure, to gauge the performance of our segments because we believe it is a good measure of operating performance and is used by investors and others to evaluate and compare performance performance of core operations from period to period. I encourage you to look at the provided reconciliation of adjusted EBITDA to the closest gap measures, which for us are operating income and net income. We continue to generate cash from operating activities in this challenging environment. And as depicted on the slide, you can see the strength and overall importance that the service segment has on our business. In the quarter, service EBITDA increased more than 44% to $4.5 million, and service segment EBITDA margin expanded 500 basis points to 18.2%. Slides 9 and 10 provide detail on our balance sheet and cash flow. We ended the quarter with sufficient flexibility and liquidity as we generated $8.5 million of cash from operations in the quarter and which was used in part to fund our CapEx and reduce our debt. At quarter end, we had $22.7 million of total debt, which was down $7.6 million since our March 2020 fiscal year end. With EBITDA in the quarter and this reduction in debt, our leverage ratio also came down and was 1.19. This is calculated as a total debt on the balance sheet at a period end divided by the trailing 12 months adjusted EBITDA, including giving credit for any acquired EBITDA. Other companies may calculate such a metric differently. We had $28.9 million available under our revolving credit facility at the end of the quarter and nearly $25 million of net working capital. Year-to-date net cash provided by operations was $12.5 million, up considerably from $2.8 million in the prior year period. Capital expenditures were $1.9 million for the quarter and $3.1 million for the year-to-date period. As we have delivered solid results to date and have no liquidity concerns, our capital plan for fiscal 2021 has been increased slightly up to a now expected range of $5.5 to $6.5 million. The focus is expected to largely center on technology infrastructure and service growth-oriented opportunities, as well as rental pool assets. This amount is inclusive of maintenance spend, which is expected to be consistent with fiscal 2020 at approximately $1 to $1.5 million. And lastly, we expect to timely file our Form 10-Q on November 5th. With that, I'll turn it back to you, Lee. Thank you.
spk01: Okay, thank you, Mike. To date, our employees have been vigilant, keeping themselves and those close to them safe. Their safety has kept our business running, enabling us to provide outstanding support for our customers, which has increasingly become a competitive differentiator. As I previously mentioned, we believe our new business pipeline is positioned to generate strong organic growth, and we expect the retention and growth of our highly regulated life science customer base. to provide stability and foster continued financial strength. Our acquisition pipeline is, as expected, active, and our investments in people and technology have positioned us to capitalize on what we anticipate will be a higher level of acquisition opportunities. As we make our way through the third quarter, we have to recognize that a high degree of uncertainty exists in today's economic environment. Still, we expect service revenue to grow modestly versus last year's third quarter, with solid improvement in year-over-year gross margins. Distribution will likely be negatively impacted by the current economic environment, but we anticipate it will perform in a similar fashion to the second quarter performance on a year-over-year basis. We expect our third quarter consolidated operating income to be similar to prior year's third quarter, which was about $2.1 million. And I'll close by saying that we believe we are executing the right strategy and are taking the right actions to generate strong performance and to push through and past the challenges of the current environment. We are encouraged by our technology investments' early impact on margin expansion, and we expect to continue to keep technology at the forefront of everything we do. Most importantly, we continue to believe the future for TransCAD is very bright. And with that, operator, we can open the line for questions.
spk03: At this time, I will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Jerry Sweeney with Ross Capital. Please proceed with your question. Hey, good morning, Lee and Mike.
spk02: Thank you for taking my call.
spk00: Good morning, Jerry.
spk02: Thanks, Jerry. Do you want to talk or ask a question, too, on revenue and shift your standard margins? But obviously, you know, starting to see rebound activities pretty good. You talked about a little bit of weakness outside of life sciences. Can you maybe... Have you spoken to those customers? Have you any insight as to what their expectations are going forward? And, you know, also I believe some of that may have been some channel mix. I think some of the sort of intermittent stops at some of the – where you do some of the calibration internally was a little slow as well. Just wanted to get a little bit more clarity on just how that is sort of working out, excluding – And I know COVID is sort of rearing its head again, but I wanted to see if you had any thoughts on that.
spk01: I think I get the question, Jerry. So you're referring to some of the business outside of life science. Obviously, life science in this particular environment is going to hold up pretty well, and it has. We have general industrial customers and general industrial output factors in the business as well. And what we see from that customer base And what Mike alluded to is where we're seeing where it's non-essential, non-critical business, you're seeing a little pent-up demand. This is where you're seeing onsites pushed out. This is where you're seeing, you know, even the pipeline and the development of larger new accounts say, well, you know, we're going to get through this quarter or through this month, or we want to wait until the first of the year, and you're seeing some of that. We really like the pipeline. It's strong. It's just slower to develop than what we're accustomed to, but all the buying signs are positive. And with the existing customer base, any softness has been offset by life science, but there are definitely sort of general slowdowns related to onsites. They're back. They're better in Q2 than they were in Q1, but not at full capacity. So what we're hearing from our customers specifically is, you know, a little bit less about if and more about when, you know, and it's just a matter of getting some of that push through.
spk02: Got it. And then, obviously, COVID is starting to make some headlines just recently about accelerating again. I would suspect this go-around may be different. I think a lot of procedures, policies are sort of in place, not only, you know, at TransCAP but with your customers. If things do sort of move towards – I don't want to say shelter in place because I don't think that's going to happen, but just curious as to your thoughts on, you know, how revenue may or may not be more resilient if COVID picks up or those policies are sort of adequate to maintain or manage revenue.
spk01: Right. I mean, Jerry, I would guide back to Q1. You know, even in Q1 when deciding we really weren't as prepared as hopefully we are now. You know, we performed well. And I think, you know, again, I point back to the life science orientation of our business. Certain markets that we serve, about half of our business, where even with a COVID pickup, I think we'll be more stable than we would be otherwise if we weren't focused on life science. And so in Q1, you know, our operating income was still pretty solid. and I think we've proven we can do well. You know, all bets are off if it's extended and deeper than we've seen in the past, but, I mean, if the past is an indication of the future, I think we'll be just fine.
spk00: Thank you. I'd just add one other thing, too, that I think we have the benefit of being very decentralized. I mean, we don't have just one calibration facility that, heaven forbid, you know, it was in a state that was shut down with 21 locations plus 20 client-based labs that we have that opportunity and ability to spread work out if this thing is worse in regions than in some other regions. So we think that will help us minimize some risk.
spk01: And, Mike, we did that in the first quarter. Right. There were times we had to shut a lab down for a few days. We had two or three labs not operating, and yet we moved that work. Still got it out. So I think you'll see something similar if need be. Got it.
spk02: That's helpful and a good point. And then finally, just on margins grades, And, you know, you described the six sort of drivers. And, you know, you also mentioned organic growth. You know, you're seeing the benefits of some margins without organic growth, i.e., maybe some absorption of overhead. When you look at techs, it sounds like they're being more efficient. I'm not sure if you necessarily have a stat that says, hey, you know, they're running at 75% utilization. But anyway, you could provide, you know, qualitative, quantitatively around you know, how much capacity you could take on before maybe your techs are sort of getting, bumping up against, you know, the next, you know, next level of, you know, hiring. And granted, there's going to be different, you know, product mixes and things in there, but I wanted to see if you could provide any detail around that.
spk01: Right. I get the question. Yeah. So I think over time and an extended period of time, you're going to see some ebbs and flows and productivity. If you have really strong organic growth that exceeds expectations, then you could end up in a situation, and we've been that way in the past, where your short-term margins get depressed a little bit as you're training and bringing on new people. We've not had to do that in the last year, so we alluded to the seasoning of our techs being one of the things that have benefited us. But in addition to that, I think it's important to recognize we also are running different productivity measures. We're doing things – you know, in a more efficient and effective way than in the past. We're managing our labs differently, and this is all part of our initiatives around margin expansion. So some of that's going to hold up even independent of the factor of technicians. We have enough technicians. We have capacity to handle a normalized, a normal amount of organic growth. But if we do really well, we'll have short-term, you know, you could see a short-term as in the past. But, again, we see that as temporary. We see that as all part of growth. and we've proven that we can get beyond that in a relatively short period of time, and we would again in the future if that occurs.
spk00: Yeah, and just one other thing on that, Jerry. So, yeah, we hit four of the six drivers. The one that was not there was the growth, like you mentioned. But I think the other one that we still are going to get benefit from that we haven't yet, kind of keeping in our back pocket, if you will, is automation, which will change that productivity of the technicians too. So, you know, that might offset. We're not saying it's dollar for dollar or anything like that, but automation will increase productivity that could be hindered by rapid growth. So there's both a good and a bad of those two drivers that I think will help us with our productivity and capacity planning.
spk02: Got it. I appreciate it. I'll jump back in line. Thank you.
spk00: Thanks, Jerry.
spk03: Our next question is with Dick Ryan from Dougherty. Please proceed with your questions.
spk05: Thank you. So, Lee, you've mentioned the new business pipeline a couple times. And I guess I'm wondering, is that new business opportunities with existing customers or new customers in general? How does that – can you give us a little qualitative feel there? And maybe additionally, you know, TTE is obviously a very good acquisition company. Has that opened up any new doors to aid the business pipeline?
spk01: So it's a combination, Dick, as it always is, but I would say that it absolutely weighted towards new opportunities from new customers. Some of the pipeline has new opportunities from existing customers, but I would say the lion's share are net new opportunities to us. Relative to TTE, I would say that I characterize it as there are a couple of opportunities. I don't think they're material relative to the entire pipeline. I expect they will be over time. But, yeah, we've had a couple opportunities that are interesting. I think we've actually won one or two opportunities as a result of the sales synergies that we talk about. on the life science front between the acquired company, but generally the bulk of it is net new business because I think our sales engine is doing well. I think it's improved. It will continue to improve, and it's doing a pretty good job. So that's how I would characterize it.
spk05: Okay. On the CBL side, it looks like you're still at 20 customer-based labs. What's kind of going on there or below the surface with, some new opportunities given COVID?
spk01: Yeah, so we have CBLs in our pipeline, potential new CBLs in our pipeline, but without question, we have not closed and started a new CBL since COVID started. And I don't anticipate, you know, we will until there's some, you know, you know, clearer vision and less uncertainty going forward. So to come into a person's lab with a crew of people and to establish and set up a facility is just not something our customers are interested in. So in those cases, we may be doing their third-party work, get some of their overflow, but there's going to be delays around that portion of our growth. Now, we said that. I will add to the narrative that the bulk, almost entirely, or a large percentage of our new business pipeline is not centered around CBLs. And so there's one or two in there, but we would expect the pipeline, things to flow through the pipeline at a nice pace, independent CBLs.
spk00: Yeah, and I think that's just kind of the nature of the business and COVID-related too, whether it's new wins or pipeline percentages, it's still going to be skewed to non-CBLs in this uncertain time. Correct.
spk05: Okay. And then you said expect increased levels of acquisitions. You know, what's going on in the M&A pipeline? Are there smaller guys just raising the white flag given regional difficulties that could come up? Or what are you seeing on the M&A side?
spk01: I would say about half of our M&A pipeline would be characterized as normal pipeline activity. You know, we brought on a new vice president of business development, recently, and they hit the ground running to develop our pipeline and push things through. I think we're seeing some of that occurring at a pretty healthy clip. And then I would say that a portion of our pipeline, a small portion but an ever-growing portion, is related to some of the challenges around COVID. You know, I've mentioned before on our earnings call and with investors that if you go back to the major recessions we've had in the past, and you look at the early 2000s, 2008, byproducts of tough times are always people who sort of raise the white flag, as you describe it, at some point say, hey, I'm a little tired, and I'd be interested in a partnership, or I'd consider an acquisition, our company being acquired. So we're seeing some of that, no question about it. We're seeing a development of our traditional pipeline more efficiently, effectively, as we sort of messaged earlier, and the combination of the two leads us to use the word active.
spk05: Great. Thank you.
spk01: You got it.
spk00: Thank you.
spk03: Our next question is with Greg Palm from Craig Hallam Capital Group. Please proceed with your question.
spk06: Thanks, John. Good morning. Congrats on the results. Really fantastic survey. Good. Are you willing to give the growth rate for life sciences? I'm just curious what level of outperformance you're seeing, at least broadly speaking, versus some of your non-lifestack customers.
spk01: Yeah, at this point, I don't have a breakout in the exact growth rate. I just don't have that in front of me. I will tell you that we've gone from about 45% to like 47%. I think we're very close to 50%. So it's in that general range as a percentage of our overall business in the service segment. Okay.
spk06: Got it. Okay. Presumably that mix has gone up because that sort of segment's been growing versus the non-life science. So that's the right way to think about it? Yep. I think that's the right way. Yep. Okay. And any way to bucket out the margin tailwind in service specifically from the four different sources you alluded to? I mean, specifically, how big of a tailwind was the mix part versus the pricing and productivity? Do you have that handy?
spk01: I would characterize it as saying at least half to three-quarters of it was around productivity, pricing, and some of the things I mentioned. Just in that rough range, it's probably half or more than half. It's not 100%. And so that's the part that we believe should, by definition, be sustainable. So it's a significant portion of it.
spk06: Yep, okay. And the strategic pricing specifically, you know, I know that's been mentioned before from time to time, but you certainly seem to highlight that a lot more this quarter. Did something happen? Did you take pricing up across the board for certain customers or verticals? I'm just sort of curious why you're so confident that that's something that will be sustained here going forward.
spk01: You know, Greg, as we see our concentration of life science business increase as a percentage of our customer base, it's natural that you're going to see some elevation in pricing and margins as a byproduct of that. That's where, as I mentioned, the cost of failure is so high. That's where our value prop resonates the most. And as we get more and more into life sciences, whether it be in the pharma world or med device or bio, you know, you're going to see margins – you know, do better and potentially improve it. And that's what I think you're saying.
spk06: Yeah. Okay. Last one is it relates to distribution and the guidance for that segment. Are you taking into any account a potential for, you know, a budget plush environment? I think usually, you know, in the month of December, you usually see a pretty big, big bump. I'm just not sure what guidance assumes if it assumes a, kind of a continuation and recovery from here or if it seems that things sort of level out at current?
spk01: Yeah, we were referring to, you know, year over year Q3. We typically have a bump in Q3 in the distribution business. And so all things being equal, you know, we're comfortable saying that, you know, barring any major, major change, that we would expect Q3 to be similar to Q2 and less similar than Q1. You know, we had a lot of sequential improvement in Q2, and we expect to stay at about that range going through Q3 on a year-over-year basis.
spk06: Okay, so you're not talking, you know, an absolute. You're talking about a growth rate year-over-year. That's what you're referring to?
spk00: I think the way we tried to describe it was that we would expect Q3, like you said, is normally our largest quarter because it's the end of the year. But we would expect this one to be more in line with what Q2 is with a slight pickup in what we normally would see in Q3. So I wouldn't expect it to go back to last year's Q3 levels. We've seen rebounding and some improvement in the sector as a whole, but it would be a big step to get back up to what last year's third quarter was.
spk06: Yeah, yeah, absolutely. Okay, makes sense. Thanks, Paul. I'll hop back into the queue. Thanks, Greg. Thank you.
spk03: Our next question is from Kara Anderson with B Reilly & Co. Please proceed with your question.
spk04: Hi, guys. Thanks for having me on the call. Just one question for me. I'm just hoping you can talk a little bit about the rental business. It rebounded in the quarter. I guess, what are you hearing driving those decisions for your customers, and is it bringing a new business, or are you offsetting what would have been an equipment purchase? Just some color there would be great.
spk00: It's a little bit of everything, Kara. I think it kind of shows what we've always thought would happen with rental in uncertain times, that it's another lever for us to have. It's another option for customers who need equipment and but aren't committed to buying CapEx. You know, there could be some short-term cannibalization because of the nature of that. But I think it's doing what we said it was going to do, and it just gives those potential customers another option for us. We always said that uncertain times, good or bad, we think rentals can grow, and it kind of showed it this quarter.
spk01: Yeah, I would add a little bit to that and say that in starting the business about four or five years ago, we had a run. about 16 straight quarters, if my memory serves me correct, of growth in rentals. And the only quarter that didn't grow was Q1 of this year. So Q1 of this year, I just think all bets were off. And we're talking April, May, and June. And people just weren't doing business of any kind. We were really pleased to see it improve and get back to normal rates in the second quarter. And barring anything unusual that we're not anticipating, you know, I would expect that in Q3 you'd see something, you know, similar as well. So it feels like one bad quarter and we got past it. So we're pleased with that.
spk04: Got it. And actually one more from me. Just wondering if you're seeing any pickup and sales related to this kind of pandemic supplies or the body temperature devices. You know, you have them highlighted on your website. So just curious what you're seeing there.
spk01: Right, yeah. We are seeing... business around pandemic-oriented devices. I know we calibrate hundreds and perhaps even thousands of the lower-cost thermometers, the people you're seeing around the environment. Well, they tend to be, to be honest, they tend to be very inaccurate and within one or two degrees. And so we're getting a significant number of those into our labs to apply the appropriate correction factors. So that people know when it reads 99, it could be reading 101 or vice versa. So, yes, we are seeing an uptick in that, and it's a little too early to provide more detailed data on some of the permanent installations that we're doing with temperature. But, yeah, it is up on our website. It is a new offering, and as we get through the next quarter or two, we'll add some color around that.
spk04: Got it. Thanks so much.
spk01: Bye-bye.
spk03: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Chris Sakai with Singular Research. Please proceed with your question.
spk07: Hi, everyone. Good morning. I have a question on you guys mentioned automation. Do you have an estimate of, you know, in the future, How will this improve margins?
spk01: So generally speaking, Chris, and I appreciate the question, generally speaking, I think you can have a material impact on margins over time. So when we talk about automation, you know, we're talking about a technician that normally would take 20 minutes to do a calibration or half an hour to do a calibration can push a button, and that calibration runs on its own. And that allows the technician to turn around and, let's say, perhaps do a second cal simultaneously. And so the real question is, what percentage of our work that we do today lends itself to that opportunity? And we're getting our arms around those numbers. We've thrown out 20% or 30% of our cows potentially being impacted by it. We feel like that's still in the range that is correct. So over time, as we get more into automation, we'll provide more color on it. But theoretically, the answer is yes. The more automation we use and the more labs that we use it and on more disciplines as we move from pressure to temperature and other variables, the better our margins should be. And we're fairly confident that all that will take place over time. What we're less confident in is a timetable for it. It's been slower than we would have liked, but it is absolutely back on track, and we expect to be talking more about that as the future unfolds.
spk00: Yeah, Chris, I think it's kind of two things. One is the actual technology and the software that Lee mentioned has been a little bit slower, but we're still very confident in what it can do. The other piece to get the full benefit of automation, why we can't just throw a number out there now, is it kind of just has to change some of the logistics and the setup. You get the benefit in Lee's example when you push the button and have another calibration to work on. So there's some batching, logistics, asset movements that you really need to take full advantage of that two-for-one automation. So it's hard to just put a number on it right now.
spk07: Okay, great. And then you guys mentioned about M&A activity is strong. Do you have any sort of timing on that?
spk01: So the word we used was active, but I would say that synonymous with strong. And the best guidance I can give you is just to tell you that we are working on some things that I think would be helpful to the company and make us better and satisfy the drivers behind acquisition. If you recall, we look to fill our geographic footprint. We look to add capabilities that we don't currently have. We're always interested in a bolt-on where we can leverage some of our current management capabilities. And so we've got elements in our pipeline that satisfy several, if not all of those in some cases, and we're going to push it through as fast as we can. I'm not going to add any specific guidance at this time.
spk07: Okay, great. And then one last one. As far as margins go for next quarter, I mean, would you say that it's fair to say that they'd be about the same with the same product mix?
spk00: Talking distribution, sorry. Distribution or service, Chris? Service. Yes, service. We were pretty conscious in the release to say that we'd expect margin improvement, but you should look for the margin improvement over what we delivered last year's third quarter, not on this second quarter, just because that third quarter of our year has always had a lower margin profile with holidays and everything else. So we expect improvement, but you should do it off of last year's versus the second quarter of this year.
spk07: Okay.
spk00: Okay, great.
spk07: Thanks.
spk03: It appears that there are no further questions at this time. I would like to turn the floor back over to management for concluding comments.
spk01: Well, this is Lee, and we thank you for all joining us on the call today. We appreciate your interest in TRANSCAT. Feel free to check in with us at any time. Otherwise, I guess we'll look forward to speaking with everyone after our third quarter results are completed. And, again, thanks for participating.
spk03: This concludes today's conference. Thank you for your participation. You may disconnect your lines.
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