Transcat Inc (TRNS) 2019 Q3 法說會逐字稿

Greetings, and welcome to the Transcat, Inc's.

Third Quarter Fiscal Year 2019 Financial Results Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce our host, Mr. Craig Mychajluk, Investor Relations.

Thank you.

You may begin.

Yes, thank you, and good morning, everyone.

Certainly appreciate your time today and your interest in Transcat.

With me on the call today are Transcat's President and CEO, Lee Rudow; and our Chief Financial Officer, Mike Tschiderer.

After formal remarks, we'll open up the call for questions.

If you don't have the news release across the wire after markets closed yesterday, it can be found on our website at transcat.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 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 on the SEC's website at sec.gov.

We undertake no obligation to publicly update or correct any of the forward-looking statements contained in this call whether as a result of new information, future events or otherwise, except as required by law.

Please review our forward-looking statements in conjunction with these precautionary factors.

I would like to point out as well that during today's call, we'll 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.

With that, I'll turn the call over to Lee to begin.

Okay.

Thank you, Craig.

Good morning, everyone.

Thank you for joining us on the call today.

We'll follow the same format as we have in the past.

I'll provide an overview for the quarter.

And then Mike will provide a more in-depth review of the financials before I wrap things up with an outlook for Q4 and fiscal 2020, which is right around the corner.

The third quarter was interesting in that from a financial perspective, we started off slow, and I'm referring to October and November, but finished strong in December.

In addition, it appears January indicators are right where we want them to be, and so we're off to a strong start in the fourth quarter.

There were a couple of factors impacting the softer-than-expected October and November that will include productivity; a soft Canadian market, which I'll address in a moment; and it's worth mentioning the timing of the Christmas week.

Let's start with our technical labor force.

Year-to-date in fiscal 2019, we hired a record number of new technicians to support growth in our Service segment.

Many of the new hires were made to support traditional growth.

A fair number were hired to support an unusually high level of large in-house labs that were recently outsourced to Transcat.

That's really good news.

But it does create a short-term timing challenge as a larger number of new technicians have to be hired, onboarded, trained and worked through the system.

In the early part of the prior year fiscal 2018, we experienced a similar new higher productivity lag that quickly reversed itself in the following quarter or 2. We expect the same thing to happen as we progress through the fourth quarter and into next fiscal year.

In fact, even in the latter part of third quarter, we experienced notable improvements in productivity as new technicians became more efficient and work at a couple of the new larger client-based outsourced labs commenced.

In addition and as I mentioned a few moments ago, due to how our fiscal year works, this year, the holidays occurred in the third quarter as opposed to last year when holidays fell in the fourth quarter.

And that effect was 2 less business days in the quarter.

This is something we contend with and move on from, but it's helpful to know when comparing year-over-year performance and productivity.

So move on to Service revenue growth in the third quarter.

Our value proposition continues to resonate well, and we continue to leverage our value-added distribution business to drive service growth.

We generated more than 9% growth in our Service segment, which included incremental business from Angel's Instrumentation, which we acquired in the second quarter of fiscal 2019.

The U.S. generated almost 7% organic service growth, which offset soft results in Canada, which was down 3.6% versus prior year.

The decline in the Canadian revenue was a result of combination of factors, including macros, tariffs and unsettling noise around trade agreements.

The positive news in Canada for the most part in that -- and for the most part, we maintained our strong customer base.

What we experienced was a decline in the volume for the number of our existing customers, and in time, we would expect that to recover.

Consolidated organic growth between Canada and U.S. was 5.2%.

Moving on to Distribution.

The segment continues to deliver on our stated goals of generating strong gross profit performance, differentiation in the market and leverage to drive service revenue growth.

It's important to point out that prior year third quarter was very strong, as we benefited from pent-up demand due to last year's hurricane impact.

Still, even with the tough comps, in our present third quarter, we exceeded prior year gross profit, both in dollars and percent.

Rental sales increased 17% to $1.2 million in the quarter and contributed to a favorable mix that aided the margin expansion.

Another contributor of the margin expansion was our pricing optimization initiative, an early byproduct of our operational excellence program.

In the quarter, gross margins expanded 180 basis points to 24.8%, operating margin expanded 160 basis points to 8.9%.

So with that, I'll turn the things over to Mike to discuss the third quarter results in more detail, and then I'll come back and talk to our outlook.

Thanks, Lee, and good morning, everyone.

I'll start on Slide 4 of the deck.

And that's where we provide some detail for our revenues for the third quarter and for the trailing 12-month period that ends on December 29, 2018, a reminder that our full fiscal year 2019 ends on March 30, 2019.

Consolidated revenue for the quarter was up 1% to $40.9 million, which is a record for third quarter revenue.

We acquired Angel's Instrumentation on August 31, which was in our second quarter.

So our reported results include a full quarter of that acquisition.

Angel's contributed approximately $1 million of revenue in the quarter.

The financial results for Angel's were in line with our expectations, and we're happy with their performance and the integration process to date.

As we mentioned, it's hard to definitively calculate the impact, but the Christmas holiday did fall in our third quarter this year, as our quarters end on the last Saturday of a given month.

Last year, Christmas happened to fall in the fourth quarter.

Also, as a reminder, our fourth quarter this year will have 13 weeks, while last year's fourth quarter had 14 weeks.

And that's why full year fiscal '19 has 52 weeks, while last fiscal year had 53 weeks.

Service segment revenue did grow 9.2% to $20.5 million with, as we mentioned, organic growth of 5.2% when excluding Angel's.

This organic growth rate is towards the lower end of our expected range of mid- to high single digits and was due to the softness in Canada, macro-related and especially saw in the aerospace and defense sector there, breaking it down further in the U.S. we had solid revenue growth of 6.9%, while Canada contracted 3.6%.

Early read in the fourth quarter gives us confidence that we can achieve our organic revenue growth goals for the full fiscal year.

In the Distribution segment, our prior year comps were tough, as last year's third quarter was a very strong quarter for Distribution as we benefited from the hurricane recoveries.

Distribution sales for fiscal 2018's third quarter were 6.7% higher than fiscal 2017 third quarter.

This fiscal year's third quarter, Distribution revenue declined 6.2% to $20.4 million.

But the decrease was largely due to lower levels of noncore lower margin sales and we had more gross profit and higher gross margin than the prior year despite the 6.2% top line decrease.

As we had discussed in the past, focus is on improving gross margin by focusing on the higher margin opportunities such as rentals, which did increase 17% in the quarter to $1.2 million.

Consolidated gross margin contracted 60 basis points and was negatively impacted by Canada's soft results by the service mix changes, by short-term productivity issues due to the large number of new tech staff hires and probably to some extent by the timing of the Christmas holiday this year.

Total operating expenses were up very slightly to $7.2 million, reflecting our continued investment in infrastructure for the long term and our operational excellence initiatives.

Moving on to Slide 5. Consolidated operating income declined slightly to $2.4 million, and operating margin contracted 70 basis points to 5.9%.

Service operating income and margin was $0.6 million and 2.8%, respectively, not strong numbers, as the gross profit shortfall in the Canadian business softness previously described fell to the operating income line.

Distribution operating income increased 14% to $1.8 million, and the segment margin expanded 160 basis points to 8.9%, solid Distribution numbers.

Slide 6 shows net income on a trailing 12-month on a quarterly basis.

And while we saw slight dip for the quarter, we believe we're still well on our way to achieving record earnings for fiscal 2019.

The effective tax rate this quarter was higher at 25.3% compared to 21.9% in the third quarter of last fiscal year.

But the prior year was positively impacted by the reduction of certain deferred tax liabilities previously recorded as provided for in the U.S. Tax Act, which was effective in December 2017, right before the end of our prior year third quarter.

Our expected income tax rate for full fiscal year 2019 has been lowered slightly to be in the range of 24% to 25%.

That rate includes U.S. federal, various state and Canadian income taxes.

On Slide 7, 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 our operating performance and is used by investors and others to evaluate and compare performance of core operations from period-to-period.

I encourage you to look at the supplemental slides that provide a reconciliation of adjusted EBITDA to the closest GAAP measures, which for us are operating income and net income.

On a consolidated basis, quarterly adjusted EBITDA was down slightly to $4.4 million, while adjusted EBITDA margin contracted 20 basis points to 10.7%.

This reflects the solid Distribution performance, but which was offset by the Service shortfall.

However, we believe our full year 2019 bottom line profitability level will be solid, albeit muted in year-over-year comparisons by the 53 weeks in the prior year numbers.

Slide 8 provides detail on our balance sheet and cash flow.

In December, we amended our credit facility agreement and replaced our previous $15 million term loan that had a current balance of $12.5 million with the new $15 million term loan that has a 4.15% fixed interest rate through a new maturity date of December 25.

The previous term loan had a variable interest rate.

The excess funds of the new term loan were used to repay amounts outstanding under the revolving credit facility.

The revolving line of credit piece of our credit facility still has a variable interest rate, which has ranged from 3.2% to 3.8% during fiscal year 2019.

We believe our new debt structure prudently manages interest rate change risk.

At the end of the third quarter, we had total debt of $24.6 million outstanding, with $20.4 million available under our revolving credit facility.

That levels are up $1.7 million since the end of fiscal 2018, primarily due to the cash used for the Angel's acquisition.

The leverage ratio at the end of our third quarter was 1.30:1.

We calculate this leverage ratio as the total debt on the balance sheet at period end divided by the trailing 12 months' adjusted EBITDA.

The trailing 12 months of pro forma EBITDA of acquired companies is used in the leverage ratio calculation as provided for in the facility.

Other companies may calculate such a leverage metric differently.

Year-to-date cash from operations increased nearly 25% to $7.2 million, which was used in part for the acquisition of Angel's to fund our growth-focused investments and drive operational excellence initiatives.

Year-to-date capital expenditures were $5.5 million and primarily focused on customer-driven expansion of Service segment capabilities and acquiring assets for our growing rental business.

Our anticipated capital expenditure planned for fiscal 2019 has been refined down to the $7.2 million to $7.4 million range.

Our pipeline of acquisition candidates remain strong, and we have adequate liquidity to act on any opportunities and investments that meet our stated strategic criteria.

On Slide 9, we provide a breakdown of the various focus areas for CapEx spend expected for our full fiscal year 2019.

And lastly, we expect to timely file our Form 10-Q after the market closes today.

With that, I'll turn it back to you, Lee.

Thank you, Mike.

While the third quarter presented some challenges around productivity and a soft Canadian market, it did not change our long view on Transcat.

We remain confident in our direction and how well positioned we are to capitalize on future growth opportunities.

For the fourth quarter of fiscal 2019, we expect favorable quarter-over-quarter comparisons when excluding the extra week from last year's fourth quarter.

For the full fiscal 2019, we expect record consolidated revenue and earnings.

I also want to mention that this past week, we launched the new state-of-the-art website that drives Transcat closer to the cutting edge of digital commerce.

The site is faster, mobile and self-service friendly and is expected to driving increasing conversion rates and overall customer satisfaction.

Best of all, the site further connects the dots between our combined business segments.

I'll conclude with a reiteration of our goal to drive double-digit service growth via a combination of organic growth and acquisitions.

And as I mentioned earlier, we expect to see improved productivity, both in the short term as new technicians progress along the learning curve and the longer-term as we drive process improvement, automation and pricing optimization into our service organization.

Improved service productivity and service margins and double-digit service growth are at the heart of our strategy.

Combined with the continued solid performance and the value-added Distribution segment, we're more excited than ever as we look at the road ahead.

With that, operator, we can open the line for questions.

(Operator Instructions) Our first question comes from the line of Matt Koranda with Roth Capital Partners.

Just wanted to start out with the commentary, I think, that you guys mentioned off the top that you were encouraged by your preliminary look at January.

I just wanted to see if you could give a more detail on where specifically you're seeing signs of strength that were in the commentary?

Is it more on the Service or Distribution side?

And maybe taking a little bit in terms of end-market demand on Service?

So Matt, relative to what we see in January, we're seeing strength in both operating segments.

So that's good news.

We're seeing a pickup in productivity, which is a problem that we had earlier in the third quarter that I alluded to.

We're starting to see some efficiency work its way through some of our new technicians.

But I think probably the most encouraging part of the uptick is just the volume of quotes and orders in both segments.

So I think we would expect seeing the early indicators that this is going to continue.

We're halfway through the quarter almost at this point and no let up.

So we're encouraged by that, and again, it crosses both segments.

Okay, that's great.

And then, I guess, why the bifurcation in the U.S. and Canadian markets this quarter in particular?

I mean, trade issues and tariff saber-rattling has been going on, I guess, for almost, it feels like, I guess, better part of a year now.

Why do think it sort of kicked in and you felt the impact in terms of the organic growth in Canada most acutely this past quarter?

Well, we've experienced some softness in Canada really for the whole year.

If you go back to even Q1 and Q2, it wasn't to the degree that we saw it in the third quarter, but it was still sort of soft or flat.

And to that point, it really even goes back to Q4 of last year.

So Canada has had about -- for the last year or so, it had some softness in revenue.

Now retention rates are very high.

As I mentioned in the earnings call script, it looked -- it tends to be more volume-based than customer-based, which is a good sign for an ultimate recovery.

But I think what we saw in Q3 was just a more drastic trend than we had seen in the previous quarters.

But this has been going on for about a year.

And I expect at some point -- I don't have a clear indication on when that's going to end.

We are encouraged in that -- Canada too has gotten off to a good start in the fourth quarter.

So maybe that's turning in the quarter, but it's too early to tell.

But I just think that the third quarter was a little bit more intense in terms of what we saw in terms of decline than previous.

Yes.

I'll just add just a couple of things, Matt.

I think also in Canada, I think there is a larger shockwave from some of the GM plant-closing activity that was announced this quarter and the layoffs there just impacts Canada on a percentage basis probably more than the U.S. as far as headcount.

And remember, Canada has a larger aerospace and defense concentration than we do in the U.S. We've started to -- and move to some life sciences with that company that we bought a few years ago, Dispersion, in Canada, but more aerospace and defense.

So we were able to fight our way out of it with some of the new wins that we've had in the U.S., primarily life science, especially some of these client-based labs, these larger wins that we alluded to that were won.

So that mix is a little bit different, and I think there's more of that impact in the aerospace in Canada than we're feeling in the U.S. because of that mix.

Okay, that makes sense.

And then just in terms of the service margins.

I wanted to see if we could either quantify things or at least give some directional commentary.

I mean, how much of a drag was the staffing up of on-site technicians versus sort of the normal expansion of tax to support your traditional growth?

I know you called out both of those to sort of buckets that might have caused some of the drag that we saw in the service margin.

I want to see if you could break those out?

Right.

So to the degree that I can, we've probably had in the range year-to-date of about 65 to 70 new technicians.

That's a big number for us, which I alluded to earlier.

Probably that 15%, 20% of that is for some of these larger outsource type opportunities.

What makes that a little bit different is you have to hire these folks in advance of the contract starting.

So you've got to get them onboard, you've got to train them on our systems.

Sometimes we get those staff from our customers when they are outsourcing.

Sometimes we have to go outside of that and recruit.

But either way, we've got a month or 2 of costs in advance of any revenue that's generated.

So that's a certain type of drag related to productivity on those large accounts.

Of the 65 to 70 new technicians, about half of them are roughly -- a little more than half is just traditional technicians.

Some of that is to support growth.

We've had our normal attrition rate, nothing that catches your eye in terms of attrition.

But the combination of just new techs in general and to support that growth, that's a high number.

And so if you look back at what happened in last year, you really do see a productivity pick up, typically a quarter or 2 after they're onboard.

And then it even ramps up from there.

So independent of anything we're working on in terms of automation or process improvement, you're going to just see time in the seat is going to help these folks both on the large jobs and on the traditional end.

The only difference between them from a financial impact perspective is these large jobs incur cost a month or 2 before the job commences.

Did that add some color for you, Matt?

Yes, that definitely helps a lot.

And then just in terms of, I guess, the pathway to getting back toward maybe those normalized segment EBITDA margins in Service and sort of the low double digits, what leverage do we have to pull in the near term and how quickly do we get back there?

I mean, do we have a quarter or 2 where we sort of track toward that?

Or do they snap back pretty quickly toward the more normalized levels in the next quarter?

You're talking about the revenue growth in the mid- to high single digits, Matt?

I'm talking about the service EBITDA margins.

I mean, they were relatively, I guess, depressed this quarter.

But how quickly do we kind of snap back to the more normalized low teens sort of EBITDA margins in Service?

So some of it -- remember, fourth quarter is our most impactful quarter, right?

So typically, you're going to see a volume increase, which is ultimately going to work its way through.

Some of it's volume-based, right?

So you'll see that in the fourth quarter, no doubt about it.

You'll also see a pickup in productivity in the fourth quarter versus the third and even the second quarter.

So we've got 2 things going for us entering this quarter.

Over the longer term, you get to a point where we should be at our normalized productivity, which is not what you saw in the third quarter, but you should see that in the fourth quarter.

And beyond that, the improvement you're going to see is going to be based upon some impetus, some change that we make in the organization, and that's all the things that we're working on relative to optimizing our process, automation, functionality and our software.

And all these things are, over a longer period of time, what's going to drive it above our normalized level.

So I think I would look for the normalized levels in Q4 based upon all the things we stated.

Yes, and I think a big piece of that is these larger client-based opportunities that we happen to have a large win rate recently.

And what's great about these is once you incur the cost and the projects start, it's a very sticky business.

So it will impact the fourth quarter as well as next year or 2. But we kind of felt the pain with the hiring and the startups into the third quarter.

And I think you got all those other ones, Lee, that I was just going to mention too.

The productivity staff have been here for another 3 months that will impact.

Some of the tools are very close.

Some of them we're actually seeing in beta now.

Some metrics and some productivity metrics that we're able to use and help us run the business on a daily basis.

These are things we've talked about in the past, but actually some of them now are in that beta test that will impact the short term and certainly impact fiscal 2020 too.

All right.

Did the -- I assume then the quarter results don't really show the full impact of those new on-site contracts that you won.

I think, Mike, you're alluding to those ramp over the next couple of quarters.

Any way to think about how those impact sort of core growth in the Service segment?

I mean, should we be bumping up our expectations in terms of the organic growth rate in the next couple of quarters as those come online?

Or those are just sort of part of the normal mid- to high single digits that you guys typically talk about?

I think it's a -- yes, it's a little higher than what normally we would build into that, higher -- the lower or the higher range of that single digits, Matt.

So I think it would be the high, and I have to just caution everybody again, when you're looking at last year, you've got to remember, it's 53 versus 52.

So you're going to have to kind of then modeling somehow normalized one way or the other, because we have to make up for that extra week when you're comparing year-over-year.

So my long answer is, I think some of the growth and some of the wins that we've had would be built into that normal rate that we should be able to get to the higher part of our range.

That would be nice if Canada has a little bit of a recovery too and the productivity needs to recover as we're anticipating it will.

Okay.

Last one, and then I'll leave it to someone else here.

But I think -- I noticed that you guys said you were starting to deploy some of the pricing analytics and optimization that's been helping your Distribution margins to drive better margins in Service.

So is there a way to provide maybe an example or 2 of how that actually works in the Service segment at the ground level?

So at a high level, I would say it is a similar platform that we're going to be employing, and it really helps control margins, particularly on the transactional side of our business.

So we've got 3 buckets, right?

You've got the transactional business, which, let's say, is everything under -- our around the, let's say, $10,000 a year or under.

These are people who eventually will -- it will be more automated through our website in terms of price quoting.

All that will be automated, taking it out of our sales -- our people's hands.

We get the $20,000 to $120,000 on an annual basis.

The pricing optimization will also have help that group.

So it's a set of guidelines, it's a set of features that really understand -- help interpret what's going on in the market and what our ultimate price should be.

And it's all put -- sort of schematic that is ultimately goal is to expand margins.

Once you get above the $120,000 a year, you get some of our larger accounts, it probably has less effect there, because we go through modeling with each of each one of those accounts, different threshold for review.

So I would say anything under $120,000 a year, which represents 70% of our business or in that range, don't hold me to that number, but it's around there, that's the group of customers that are going to be impacted -- potentially impacted in a positive way from some of these new tools we're putting in place.

(Operator Instructions) Our next question comes from the line of Dick Ryan with Dougherty & Company.

So, Lee, can you give us some perspective on Canada?

I think you've got 3 centers up there.

But what percent of Service revenue do those Canadian centers represent?

Yes.

In total, you're in the 8% to 10% range for Canadian sales as a percentage of our overall Service sales.

Okay.

And did you say that's mostly A&D related, aerospace and defense?

In Montréal, the bulk of our business, based on the acquisition we made years ago, is aerospace -- primarily aerospace and defense.

As you go into Toronto, you're going to see more general purpose, general manufacturing, but you're also going to see some aerospace and defense.

And to the point that Mike made earlier, if you just take the last 12 months, there's no question that 80% or some high percentage of our growth has been within the life sciences segment, because that's where we're concentrating.

So our overall plan in Canada in the last couple of years has been to sort of shift to our specialty, which is life science.

It doesn't mean we ignore aerospace, and we're certainly capable of servicing that market, but we want to do some sort of a pivot in Canada to life science, so it reflects and mirrors what we do in the U.S., because we've had -- success we've had here.

Yes.

I mean, the life science company, Dispersion, was Montréal-based.

So there's -- geographically, there would be more of the impact in Montréal versus Toronto, which is more general purpose.

Correct.

Okay, great.

So on the large customer labs, are you seeing wins expanding applications within existing labs that you already control?

Or are these new wins altogether?

On the large side of -- the outsourcing opportunities that we've won, these are all new and they're predominantly in life science, but not exclusively, I would say.

The bulk of them have been life science.

And we've definitely seen and we have asked ourselves the question, our sales staff is certainly attuned to selling to this particular -- these in-house labs.

But the success we've had in this past year, and you'll see some of it play out in future quarters, could be a byproduct of the economy, hard-to-find technicians and some of the struggles and challenges that these in-house labs have and it's not their specialty, it's not their core competency.

So yes, these are new opportunities, it's really good for our company.

And I've mentioned in the past how well positioned we are as a company to capitalize on these sorts of shift in the market, and I think that's to be noted, because we were really well positioned once these opportunities presented themselves.

So that's a good thing for Transcat.

Can you give us a rough count of how many in-house labs you're now running?

I would say probably in the 15 to 20 range.

Yes, that's the exact number.

Yes, normally we pick up any one a year, we never lose them, because we're very sticky, because once they transfer and move to us, it's very hard for them to go back.

They use our software.

We have the technicians now that are on our payroll.

But if there has been a move, maybe it's labor market-related, maybe it is just other circumstances.

But we picked up more than one in this past 90-day period for sure.

And how is the margin on that business?

It depends.

So their -- overall, the margins on an incremental basis tend to be -- because the volume is a little bit lower, but these can run anywhere from 25% to 35%, depending on the account.

And like Mike said, you're locked in for the future, you can get very embedded very quickly, versus more of an incremental type margin on a product that reaches one of her depo labs could be 50% or higher.

So it all gets blended together.

But it's on the lower end, but I would add also that in this past year, there have been several of these that have been won.

There have been a little bit higher margins that we typically see in these types of large accounts, and that's been strategic for us.

We have tried to drive that through a variety of tactics when we're dealing with these larger customers.

Okay.

So you mentioned the tight labor market and that you haven't really seen attrition.

But have you had to pay more to keep or to have or attract new or how is that dynamic?

Yes, so we have seen attrition, but the attrition is within the sort of normal percentage of what we typically see on any given year.

I didn't want you to come away with -- that we don't have any attrition, but we have some.

We are seeing in the past quarter or 2, and it's a contributing factor, not material enough to necessarily bring up, but since you asked the question, yes, we're seeing some escalation in price, in the cost of our labor to maintain our quality workforce.

And if all things work out, the way we intend, you get that into your pricing over time.

Some of these deals are under contract for a period of 1 year or 2 years, and you've got to wait sometimes to get the escalation in price.

But we do have annual price increases that in the end should cover -- at least theoretically should cover the majority of the increases we have in our labor force.

But yes, short answer, we're seeing an escalation in wages.

We have reached the end of our question-and-answer session.

I would like to turn the call back over to management for any closing remarks.

Okay.

Well, thank you all for joining us on the call today.

We appreciate your interest, your continued interest in Transcat.

I did want to announce that for those of you on the West Coast we'll be participating at the Roth conference in Dana Point, California on March 18 and 19.

So if you're attending the conference, feel free to check in with us.

Otherwise, feel free to call us anytime, Mike or I -- or me.

We look forward to talking to you all again after the closing of our fourth quarter.

So take care.

Thanks for joining.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.