Q2 2021 Transcat Inc Earnings Call
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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.
Our 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.
Yes, Thank you and good morning, everyone. We certainly appreciate your time today and your interest in Transcat with.
With me on the call today, we have a president and Chief Executive Officer, Lee Rudow, and our Chief Financial Officer, Mike Chair.
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 can be found on our website that's rents get back on the.
The slides that accompany todays discussion are also on our website <unk>.
If you would please refer to slide two.
As you are aware, we may make forward looking statements during the formal presentation and join 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 <unk> website at <unk>.
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 yeah. We.
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 lead to begin the discussion.
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 he missed the obvious challenges. The pandemic is also fostered an environment to rethink how we do things and in some cases to move for differently.
I think to transfer that team has done exactly that.
As a result, I think we're better company our progress has been intentional and will continue to be intentional and then 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 services business has been resilient and in the second quarter of fiscal 2021, we achieved a 46 consecutive quarter of year over year growth.
The consistent growth has validated our strategy, including our focus on the life science industry.
The recent acquisition of GE has proved to be timely and that's expected is performing very well and 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 second quarter, but it was up nearly 7% sequentially from the first quarter 2021.
In the second quarter fiscal 2021, we delivered outstanding margin.
Consolidated gross margin was up 260 basis points, primarily driven by service productivity improvement.
Service gross margin was up 600 basis points operating income was $3.1 million was not only exceeded our expectations.
Represented a record level second quarter operating income.
Our financial strength was four to five by standout cast 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.
I don't mix product mix sales revenue and automation.
And the second quarter, we had won four of the six margin drivers in the generation of 32.2% service gross margin finished.
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 seasoning of our lab technicians additional training leveraging our strengthened management team and new processes to control costs and optimize client base lab operations.
Increased pricing is also a factor.
Our differentiated level quality continues to be recognized and valued particularly by 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 component of service margin performance channel mix are first the way our services delivered for example, onsite service versus depot or pick up and delivery versus mobile or client base 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 volumes 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 on site work resumes at full pace autumn.
Automation is currently being tested in a number of labs with the goal of broader implementation throughout our Latin network over the next couple of years, we believe both the service gross and automation represent upside to the current service gross margins and with that I'll turn things over to Mike to walk you through a more detailed review of the second quarter before I.
Come back and talk to the outlook [noise].
Thanks, Lee and good morning, everyone I hope that you Oh, we're all keeping safe and doing well.
Today, I will start on slide five which provide 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 a previously reported in February 2020 acquisition of T. T E laboratories, which we now refer to as pipe that's dot com.
Against the backdrop of a very challenging environment, our second quarter results were strong in especially demonstrated the resilience of our service business and our continued focus on gross margin improvement.
Our revenue remained stable at $41.6 million is modest service growth offset lower distribution sales.
Right, that's dot com added approximately $2.2 million of incremental revenue on a consolidated basis was 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 secure 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 and industrial manufacturing sectors, a bright spot was rentals, which rebounded to 32% sequentially from the first.
Quarter of fiscal 2021 and grew year over year.
As Lee described the highlights of our second quarter, we're 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.
Back in fiscal 2015, we had one quarter, 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 cost. During these challenging times is they reduce their cooperative advertising and purchase and sales rebate programs.
We anticipate the 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 dollar range, which would have been a 1 million dollar 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 pipe bets dot com SDMA expenses, which included $300000 of noncash amortization expense of purchased intangible assets.
On slide seven we show our bottom line results note that last year's second quarter at a much lower tax rate due to significant discrete income tax benefits related to share based awards in the prior year quarter.
On a pre tax income basis, we were comparable with last fiscal year 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 now range between 22, and 23% which includes federal various state and Canadian income taxes.
On slide eight we show adjusted EBITDA and adjusted EBITDA margin. Among other measures we use adjusted EBITDA, which is a non-GAAP 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 of core operations.
[noise] from period to period.
I encourage you to look at the provided reconciliation of adjusted EBITDA to the closest GAAP measures, which for us our 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 50 basis, excuse me 500 basis points to 18.2%.
Slides nine 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, 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 million to $6.5 million.
The focus is expected to largely centered around 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 million to $1.5 million.
And lastly, we expect to timely file our form 10-Q on November 5th.
With that I will turn it back to Uli, 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 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 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.
At a high degree of uncertainty exists in today's economic environment still weak.
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 the second quarter performance on a year over year basis.
We expect our third quarter consolidated operating income to be similar to prior years third quarter, which was about $2.1 million and I'll close by saying that we believe we are executing the right strategy are taking the right actions to generate strong performance and the push through and pass the challenges.
The current environment, we are encouraged by our technology investments early impact on margin expansion, we expect to continue to keep technology the forefront of everything we do.
Most importantly, we continue to believe the future for Transcat is very bright.
And with that operator, we can open the line for questions.
At this time I'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tonal indicate that your line is in the question queue.
You May press star two if he would like to remove your question from the queue for participate for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key one moment. Please while we poll for questions.
Our first question is from Gerry Sweeney with Roth Capital. Please proceed with your question.
Hey, good morning, Lee and Mike. Thank you for taking my call.
Good morning, Jerry.
I'm excited to talk.
Thereafter question to one on revenue than been shift gears on the margins, but obviously you know.
Starting to see a rebound activity is 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 are going forward and also I believe some of that may have been some channel mix I think some of the intermittent stops at some of the where you do some of the calibration internally with.
A little slow as well just wanted to get a little a little bit more clarity on just how that sort of working out. Excluding you know I know covert is sort of a rearing its head again, but.
Okay.
I think I think I get the question Jerry so.
You are 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 generally general industrial output factors in the business as well and what we see from that customer base and what Mike alluded to it takes off where we're seeing.
What is non essential non critical business, you're seeing a little pent up demand. This is where you are seeing on sites pushed out is where you're seeing.
Even the pipeline in the development of larger new accounts say, well, we're going to we're going to get through this quarter or through this month or want to wait to the first of the year, you're seeing some of that we really like the pipeline is strong it's just slow slower to develop than what we're accustomed to but all the other buying signs are positive and with the with the existing customer base.
Any softness has been offset by life science, but there are definitely.
You know.
Sort of general slow downs related to on sites, they're back they're better than in Q2 than they were in Q1, but not at full capacity. So what we're hearing from our customers specifically is it a little bit less about if and more about when you know, it's just a matter of getting some that pushed through.
Got it and.
And then obviously covered trying to make some headlines.
Recently about accelerating again.
I would suspect this go around maybe different a I think a lot of procedures policies are sort of in place not only transcat, but with your customers.
If things do sort of.
<unk> towards.
I don't want to say shelter in place because I don't think that's going to happen, but I'm just curious as to your thoughts on.
How revenue may or may not be more resilient and if covered picks up or are those policies are sort of adequate to to.
To maintain or managed revenue.
Right I mean, Jerry I would guide back to Q1, even in Q1, when when deciding we really weren't as prepared as hopefully we are now.
You know we did we performed well and I think you know again I'd point back to the life science orientation of our business in certain markets that we serve a half of our business, where even at even when it kobin pick up I think will be more stable than we would be otherwise the corn folks signs and and so in Q1.
Our operating income was still pretty solid and I think we've proven we can do well.
All bets are off of its intended and deeper than we've seen in the past, but I mean, if we if the past is an indication of future I think will be will be just your 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.
On locations plus 20 client base labs, we had 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 risks and Mike we did that in the first quarter right, where there were times, we had to shut alive down for a few days.
We had two or three labs, not operating and yet we moved that we've still got it out so I think you'll see something similar if need be got it that's helpful and your point and then finally just on Dom.
Margins great.
And you know you describe the six sort of drivers and you.
You also mentioned organic growth you are seeing the benefits of some margins without organic growth.
Maybe some absorption of overhead.
When you look at tax it sounds like they're being more efficient I'm not sure. If we necessarily have a stat that says hey, you know they are running at 75% utilization.
But anyway you could.
By qualitative quantitative play around how much capacity you could take on before maybe your techs are sort of getting bumping up against.
The next or the next level of hiring granted there's going to be different.
Product mixes and things in there, but I wanted to see if you could provide any detail around that.
Right I get the question, yes, so I think over time and an extended period time, you're going to see some ebbs and flows in productivity. If you have really strong organic growth that exceeds expectations. Then you could end up in a situation and weve been that way in the past, where your short term margins get depressed a little bit as your training and bringing on new people.
So we've not had to do that in the last year. So we alluded to the seasoning of our Texas 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 were managing our labs differently. 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 normalize a normal amount of organic growth, but where we do really.
Well they'll have short term you could see a short term as in the past, but again, we see that as temporary we see that's all part of growth and we've proven that we can get beyond that in a relatively short period time, and we would again in the future. If that occurs yeah. Just one other thing on that Jerry So yeah, we hit for the six drivers the one that was a.
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 at productivity of the technicians to 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 by rapid growth so.
There's about both the good and a bad or those two drivers that I think will help us with our productivity and capacity planning.
Got it I appreciate it I'll jump back in line. Thank you.
Thanks Jerry.
[noise] <unk>.
Our next question is what Dick Ryan from Dougherty. Please proceed with your question.
Thank you Kelly you mentioned, the new product or the new business pipeline a couple of times I.
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 maybe additionally, TTM.
Obviously, a very good acquisition is that opened up any new doors.
Hey, the the business pipeline.
So its a combination dick as it always is but I, but I, but I would say that it absolutely weighted towards new opportunities from new customers. You know some of the pipeline has new opportunities from existing customers, but I would say you know the lion share our net new opportunities to us relative to.
T.D. I would say that I'd characterize it as there are a couple of opportunities I don't think they are material relative to the entire pipeline I expect they will be over time, but yes. We've had a couple of opportunities that are interesting I think we we 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 our sales engine is doing well I think it's improved and will continue to improve in it's it's it's you.
Did a pretty good job. So that's how would you characterize it.
Okay.
On the CBL side, it looks like you're still at 20 customer base labs, whats kind of going on there or below the surface with some new opportunities given cologuard.
Yes, so we have.
CB old in our pipeline of potential new sales our pipeline, but without question. We have not closed and started a new CBL since scope. It started and I don't anticipate we will until there is some you know.
You know clear vision and less uncertainty going forward so to come into a person's life with a crew of people and to establish and set up a facility just not something our customers are interested in so in those cases, we may be doing their third party work you some of the ROE flow, but there's got to be delays around that portion of our growth now we said that I will.
To to the narrative that the bulk almost entirely or a large percentage of our new business pipeline is not centered around cbls and theres, one or two in there but we.
We would expect the.
The pipeline things flow through the pipeline at a nice pace independent Cbls, Yeah, and I think that just kind of the nature of the business and corporate related to whether its new wins or pipeline percentages, it's still going to be skewed to non cbls in this uncertain time correct.
Okay.
And then you said expect increased levels of acquisition.
What's going on in the M&A pipeline other smaller guys do.
Raising the white flag given.
Regional dip for the difficulties that could come up or what are you seeing on the M&A side.
I would say about half of our M&A pipeline.
Wouldnt be characterized as normal pipeline activity. We we brought on a new vice President of this 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 pretty healthy clip and then I would say that a portion of our pipeline of small portion, but an ever growing portion is related to some of the.
Challenges around coated I have 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 know you look at the early 2000 2000, a byproduct of the tough times are always people, who sort of raised the white flag as you describe it at some point say, Hey, you know I'm a little tired.
And I'd be interested in a partnership or you know.
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 as we sort of message earlier and the combination of the two.
Leads us to use the word active.
Great. Thank you.
Got it thank you.
Our next question is with Greg Palm.
Craig Hallum Capital Group. Please proceed with your question.
Thanks, John Good morning, Congrats on the results aren't really fantastic through good margins there.
Any 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 bird somebody or non lifestyle customers.
Yeah at this point I don't have a breakout of the exact growth rate I just don't have that in front of me I will tell you that we've gone from about 40% to 45% or 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.
Got it okay approach.
Presumably that that mix has gone up because that sort of segments been growing versus the non life science. So that's the right way to think about it.
Yes, I think thats the right way.
Yes, okay.
Any way to bucket out the margin Tailwinds in service specifically from the four different sources, you alluded to I mean, specifically how big of a tailwind was was the mix part versus the pricing and productivity you have that handy.
I would I would I would characterize as saying at least half to three quarters of it was around productivity pricing and some of the things I mentioned.
In that rough range, its probably half or more than half of its not a 100% and so that's the part that we believe options pieces should by definition be sustainable.
It's it's a significant portion of it.
Yes, okay and in the strategic pricing, specifically 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 are.
I'm just sort of curious why you're so confident that that's something that will be sustained here going forward.
No Greg as we see the our concentration of life science business increase as a percentage of our customer base, it's natural that you're going to see some l. 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 into life sciences, whether it be in the pharma water med device or bio you're going to see margins.
Do better and potentially improving and that's what I think you're seeing.
Yep, Okay last one as it relates to distribution and be guidance for that segment.
Are you taking into any account a potential for a budget flush environment I think usually in the month of December you, usually see a pretty big Big Bob I'm, just not sure what guidance assumes EBITDA assumes a kind of a continuation and recovery from here. If the terms that same sort of level out at current.
Yeah, we were referring to year over year Q3, we typically have a bump in Q3 in the distribution business and so all things being equal we're comfortable saying that barring any major major change that we would expect Q3 be similar to Q2 and.
Yes, similar than Q1, 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.
Okay, So you're not talking.
Absolutely you are talking about a growth rate year over year, that's what you're referring to.
Well I 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 pick up 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.
Yes, yes, absolutely Okay makes sense, thanks, I'll hop back in queue.
Thanks, Greg Thank you.
Our next question is from car Anderson with B. Riley.
Please proceed with your question.
Hi, guys. Thanks for having you on the call I'm just just one question for me I'm, just hoping you can talk little bit about the rental business I. It rebounded in the quarter I guess, what are you hearing driving those decisions for customers and is it bringing in new business are you offsetting what would have been in equipment or just some color there would be great.
It's a little bit of everything Kara I I think it kind of shows what we've always thought would happen with rental in uncertain times that it's it's another lever for us to have it's another option for customers, who need equipment, 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 I'm, good or bad we think rentals can grow into kind of showed it this quarter.
Yeah, I don't care I would add a little bit to that and say that it's starting the business about four or five years ago. We had a run of about 16 straight quarters. If my memory serves me correct of growth in rental 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 werent.
You know doing business of any kind of it was really well.
We were really pleased to see it improving get back to normal rates in in the second quarter and barring anything unusual that we're not anticipating I would expect I would expect that in Q3, you see something similar as well so it feels like one bad quarter and we got past. It. So we're pleased with that.
Got it and actually one more from me and.
Just wondering if you're seeing any pickup in sales related to kind of that mix inside the body temperature devices you have them highlighted on your website and just curious what you're seeing there.
Right, Yes, we aren't we are seeing business around our pandemic oriented device I know, we we calibrate hundreds and perhaps even thousands of the lower cost.
[noise] thermometers, you know the people you're seeing around environment, well they tend to be honest it tend to be very inaccurate and within one or two degrees and so we're getting a significant number those into our lives to apply there the appropriate correction factor. So that people know and every 99 it could be reading what are one or vice versa. So yes, we are seeing it.
Uptick in that and it's a little too early too.
To provide more detailed data on some of the permanent.
Installations that were doing with temperature, but yes. It is up on our web site. It is a new offering and as we get through the next quarter or two worldwide some color around that.
Got it thanks, so much.
Okay Bye bye.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question.
It's from Chris.
Hi, with singular research. Please proceed with your question.
Hi, everyone. Good morning.
Okay question on.
You guys mentioned automation do you have an estimate of.
Have you know in the future how will this improved margins.
So generally speaking Chris 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 were talking about technician. It 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 a turnaround and lets say, perhaps do a second cow 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.
Yeah, 20, or 30% of our accounts potentially being impacted by it we feel like that's still in the range John that's correct so overtime.
As we get more into automation will 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 them on more disciplines as we move from pressure to temperature and other variables the better our margins should be and now were fair.
Really confident that that will that all that will take place over time, what we are less confident in the timetable for it.
It's been slower than we would have liked but it is absolutely back on track and we expect them to be talking more about that as the future unfolds, yes, Chris Chris I think its 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 bought from me on.
Nation will 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 set up you get the benefit and leaves 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 another.
Nation. So it's hard to just put a number on it right now.
Okay great.
Great and then you.
You guys mentioned about a pipeline of M&A activity and is strong.
Do you have any sort of time timing on that.
So the word we use with active but I would I would say that's synonymous with strong and you know we we are 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 we look to fill our geographic footprint. We looked at capabilities that we don't currently have we're always interested in a in a bolt on where we can leverage some of our current management and so we've.
We've got elements in our pipeline to satisfy several if not all of those in some cases and we're going to push it through as fast we can I'm not going to add any specific guidance on that timing at this time.
Okay, Great and then one last one last one on as far as margins go for a next quarter I mean, it would you say that it's fair to say that they'd be about the same with the same product mix.
Tuck in distribution, sorry distribution or service Chris.
Third.
Yes service, we were we were pretty conscious in the release to say that we would expect margin improvement.
But you should look for the margin improvement over what we delivered last year's third quarter or not and the second quarter, just because the third quarter of every year has always had a lower margin profile of holidays and everything else. So we expect improvement, but you should do it off of last year's birth.
The second quarter of this year.
Okay, Okay, great. Thanks.
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.
Well this is Lee and we thank you for all joining us on the call today. We appreciate your interest in Transcat I feel free checking with us at anytime otherwise I guess, we'll look forward to speaking with everyone. After third quarter results.
Our completed and again thanks for participating.
This concludes today's conference. Thank you for your participation you may disconnect your lines at this time.