Roper Technologies Inc (ROP) 2002 Q4 法說會逐字稿

Good morning and welcome to Roper Industries fourth quarter earnings 2002 conference call.

All participants will be able to listen only until the question-and-answer session.

The call is being recorded at the request of Roper Industries.

If you have any objections, you may disconnect at this time.

I would like to introduce your host for today's conference, Chris Hix, Director of Investor Relations.

Mr. Hix, you may begin.

Thank you.

Good morning, everyone.

Thanks for joining us for our fourth quarter 2002 conference call.

I am Chris Hix, Director of Investor Relations.

Last night we released our fourth quarter results which included strong results including record cash flow of $36 million.

If you have not seen the press release, you can obtain it from our website at www.roperind.com.

Our call this morning is being webcast.

You can access it from the investor information section of our website.

We have prepared slides to accompany today's remarks, available through the webcast and our viewer control.

If you experience difficulty accessing the webcast, the slides can be obtained in PDF format from the web site.

Replays are available on our website and also through December 20 by calling the replay phone number 888-566-0470 and dialing the replay code 9756886.

For callers outside of North America, the replay phone number is 1-402-998-0634, and the replay code is the same.

Participating in today's call are Brian Jellison, President, CEO, Director, and Martin Headley, CFO, VP.

In a moment I will turn the call over to Brian for his prepared presentation.

After which we will open the call to your questions.

In the interest of fairness to our callers, we ask you limit your questions to one with a follow-up and then reenter the queue.

Turning to the first slide I would like to remind everyone off our Safe Harbor statement enumerating risks and uncertainties and includes forward-looking statements and is also included in last night's press release for the complete statement, you can refer to the press release for the complete Safe Harbor statement.

And with that I ask you to turn to Slide 2 as I turn the call over to Brian Jellison, President, CEO, Director.

Good morning, everyone.

We closed out the year as Chris said with a strong fourth quarter.

We thought it would be sort of interesting, many of you, as we talk with you in investor discussions, who are familiar with the Roper business model.

We thought we would use that to sort of see how 2002, which was a very challenging year for Roper, reinforces the value of our business model.

If we turn to Slide 3, we have always talked here about having engineered products for diverse niche markets that give us high gross margins.

And I think it is very compelling to look at the fact that in a difficult year, we have actually increased our gross margins from 52.7 to 53.6%.

If we turn to Slide 4, we talk about converting the high gross margins through strong operating management in the superior results and cash flow.

Well, this year, our cash flow from operations will be over $87 million.

And our net working capital, we have been able to reduce by $20 million, twice our original goal at the beginning of the year.

And furthermore, we have reduced head count by 6% throughout this year, which will position us nicely as we go into 2003.

We turn to Slide 5.

Our model has always said we would then put that cash to work, either investing in internal growth or through acquisitions.

Well, this year we feel we have bought five great companies which will be accretive in 2003.

You begin to see the effect of that in the second quarter of 2003.

Zetec, Qualitek, QImaging and Duncan Technologies and now Definitive Imaging.

Also on the growth side, despite having very challenging markets in three areas, the semiconductor piece of our business, which effects acts as an IDI, and then our oil and gas exploration piece which is limited to Petrotech and Roper, a little bit of Anrod and power generation which affects us [indiscernible] have faced very severe falloffs in the market.

Notwithstanding that, our sales are up 6.9% because we have been able to make acquisitions and grow other businesses inside to offset the deep reduction in revenue we got in those other core businesses.

We turn now to slide six.

And we spend a few moments on the fourth quarter, as Chris mentioned, our operating cash flow was $36 million in the quarter, which is an all-time record for any quarter in the history of the company.

We also, in the quarter, reduced net working capital by $15 million, and I will comment other bit more about that later when we start to look at the ratios and the momentum that we are gaining with our operating people.

Our net debt to cap has been reduced by 300 bases points during the year.

We were at 49% and we closed out the year at 46%.

And that is after making all of the acquisitions that we made.

And in addition to that, we had the goodwill impairment effect which would have increased our net debt to cap in any old model.

So it is a stronger performance than it looks like on its surface at 46%.

Our EBITDA-to-interest coverage is above seven times.

So we feel we are in quite good position from our capital structure perspective.

Also, in the fourth quarter, if we turn to slide seven, we achieved our fourth quarter guidance of 60 cents.

Excuse me, which is up 11%.

Our gross margin sequentially went up 40 bases points to close out at 53.9 in the quarter.

Our sales were a record for the quarter at $169 million.

Which were up 3%.

If you annualize the 169, you get 676 million for a year, and we think we will exceed that in 2003.

Our 2002 acquisitions that we mentioned again, Zetec and Q-Imaging and Qualitek and Duncan Technology are off to a solid start.

They had good quarters in each of those businesses.

In the fourth quarter.

And like what we see in the first half of the year.

Among great things that happened in the fourth quarter is our redlight product development is ahead of schedule.

Now, field acceptance of our alpha product and the beta products that we have ready has been quite high.

There is a lot of voice of the customers that went into this design.

That is very good.

We look like a very strong second half of 2003 performance, which will get much more favorable numbers for us moving forward.

And lastly, in the quarter, we have had significant increase actually in what was already a pretty full pipeline of deal opportunities.

We had enough that we actually had a special weekend session differentiating between these.

We see a lot of things now, particularly in the 30 to $75 million arena that look attractive.

We turn now to slide eight.

Slide 8 would detail those things we said at the beginning of the year.

Putting a stake in the ground to say, so what are the other things you are going to achieve as a company?

And we said, well, first we wanted to maintain our high cash flow in the face of difficult markets.

Of course we have done that by generating $87 million.

We also turned that cash flow into 131% of our reported earnings.

We reduced our -- we said the goal for the year, pardon me, was to reduce working capital by $10 million.

We doubled that and reduced working capital by $20.

Thirdly, we said we wanted to improve our enterprise margins.

We expanded our gross margins by 90 bases points to 53.6.

We think we got cost structures in line that will give us quite substantial upside leverage as volumes increase.

But we do have some additional work to do in our instrumentation sector.

We will talk about that later.

Fourthly, sharp and focus on organic growth.

We feel we have a planning process in place that's identified a number of synergistic possibilities.

We will talk about that when we get to the 2003 outlook.

Expanded the deal flow networks.

We were able to buy these five companies this year.

This wasn't an auction process.

These are things that we have gone out and identified in a creative way.

And lastly, increase our due diligence.

This was very important, in our opinion, because we felt we needed to look at a lot more deals in order to make sure the ones we made were very good transactions.

We looked at a record number of deal transactions and revenues this year and feel that is why we got such favorable pricing on the ones we chose to close.

If we go now to Slide 9, we would like to look at some of the ratios around our working capital.

If you look at receivables first, and that column excludes the $20 million supplemental financing piece of Gazprom for a moment.

You see we closed the year with accounts receivable of 17.9%, which is down 60 bases points from the 18.5% we had at the end of last year.

Our inventory's been reduced to 13.2% of sales, down another 60 bases points from the end of the prior year.

And our payables accruals are up 15.5% versus only being 14.6% of sales.

So that is a 90 bases point game.

We now got an adjusted net working capital excluding the Gazprom receivable of 15.6% of sales, down from 17.7% last year.

So that is -- that is a really pretty substantial achievement.

Everybody in every one of our businesses is on board or understands the passion that we have around this subject.

And I have always found if I had done this in other places that is the first year is the hardest year of achievement.

Our guys have really accomplished more on a ratio basis in the first quarter than I have seen people do previously.

And one thing we know, in an area like this, success breeds success.

So, we think we are off to a terrific start.

We will as well look forward here in '03, start to talk about not nominal numbers but a shift to ratios.

Because as the year unfolds we expect to get some revenue growth.

We want to make sure that the ratios of -- are the function of accounts receivables and [indiscernible] sales go down leer so we can use cash for better purposes.

We would turn to slide ten.

Slide ten is this year's full-year income statement.

You can see that sales went up 6 .9%, notwithstanding the drag that we had from semicon and the certain industrial markets that we discussed earlier.

We still were up 6.9 because of the acquisitions in growth in other areas.

Gross profit was up 8.8%.

Again, you can I the margins here expanding from last year's full year 52.7 to this year's 53.6, a 90 bases point gain.

I remain always surprised when I am talking to people about folks asking us how we can maintain those prior-year margins when the real opportunity for us because of the engineered content of our product is to work more closely with customers and the value proposition that we provide to continue to get margins up, which is our focus.

On income from operations, you can see we are up 16.7%.

That looks better than it is, because that's largely the benefit of the elimination of goodwill accounting.

But we have lowered head count throughout the year by 6.1%, which will help us next year.

And of course help somewhat in this quarter.

And our acquisitions are contributing nicely, both the ones that we bought in 2001, and those that we have brought in-house in the fourth quarter.

EPS reported, the number we talk about of course is 216 including the 8 cents euro debt currency transaction that we incurred in the third quarter.

So the reported EPS diluted number without that 8 cents is $2.08 and we compare to last year's $1.77.

The $2.08 on the $1.77 is an 18% improvement in EPS there.

If we now turn to slide 11, we look at the segments.

Industrial controls first.

The net sales there were up 3%.

We had very strong performance out of our energy systems and controls businesses.

Hansen did well in the refrigeration market.

Zetec came online as we expected in the fourth quarter, our Petrotech business continued to be down and metrics had to offset the Bentley/Nevada transaction where GE acquired them.

Net we feel we had quite a good year in industrial controls.

Gross profits were up 8.2% partly driven by the Petrotech restructuring improvement from the prior year.

And operating profit was up 28.7%.

We got substantial benefits from PAC and Antec's consolidation resulting in some cost savings in almost all the businesses in this area improved their operating profit against that gross profit opportunity.

If we turn now to Slide 12, fluid handling.

Fluid handling of course had an extremely difficult year primarily because of the IDI business and semiconductors.

It closed out the year down two-thirds on its sales from the prior year.

You know, we are talking about a very substantial dip in total revenue there which makes up the lions' share of the falloff in fluid handling, and as you would know, those of you who have followed the company for a long time, it tends to be a pretty high-margin business.

Also, we have had very slow industrial pump and power generation market activity here in fluid handling.

It affects the Roper pump more than other businesses.

Gross profit, I think it is an achievement, actually, to keep that gross profit up as high as it is.

Pretty solid margins at 46.2 in the face of a nearly 16% falloff in sales and our operating profit still stayed about 20% at 20.4.

We did cut employment here in the section this year by 5%.

Last year, it was down 13.

So we continue to reduce our cost base there.

We think the margins were protected pretty well on the downside.

If you look at that negative leverage off the sales, you would like it to not be anything, but 20% against 16 isn't too bad.

We are certainly positioned the for very strong results, if we get any market improvement there.

We have already done something here in the first quarter.

We have taken the IDI business and combined it with our active business in Massachusetts.

Both these people are people we feel have synergies in the marketplace, calling on the same end users, Acton provides optics in the semiconductor market.

And IDI provides dosage pumps.

We think there's channel access synergies and very definitely cost synergies that we'll gain as a result of that activity.

We turn now to Slide 13. 13 is the analytical instrumentation segment.

You can see, it was up 20.6% in sales.

Most of this was around our tested measurement solutions activities, those applications were strong throughout the year.

Acquisitions certainly benefited us here.

The gross profit improved just fractionally you see from 55.9 to 56.1.

That is really mostly around the mix improvement of having high margins [indiscernible] and Logitech in there versus only being in a quarter of last year and the full year this year.

Our operating profit is up 34.8%.

Of course, again, goodwill accounting a big benefit here with all the acquisitions.

But our fluid properties test business as I mentioned, PAC and Antec, reports in this segment was a big beneficiary here of those margins.

Operating margin improvement will be a big focus in Will's section.

Will, if you are listening.

We are going to have our quarterly review this afternoon and all our friends in instrumentation are sitting there poised to continue to improve these margins.

We are not happy at 18.2% of operating profit with an opportunity to make money on a 56% gross margin line.

It is a really big opportunity for us to get a lot better in 2003 and beyond.

Redlake of course has been a drag on that operating profit for the sector.

And beginning in Q2, Redlake will turn from a negative contributor at a loss level to a positive contributor in an income-producing level.

That will help our ratios from the the second on.

If we go to Slide 14 now, we have talked about our guidance here.

If we look at Q1, we started to mention several weeks ago about the challenging nature of Q1 for us.

We had the supplemental Gazprom order in the first quarter that shipped this year which was about $12 million.

You can do your own modeling around what you think that might have meant in terms of operating profit, but, you know, we have always said going forward, we would like to think that we will get around 40% contribution margin on our next dollar of revenue.

And there is no reason to think the door doesn't swing in both directions.

And that is a pretty substantial drag on the first quarter from a comparison perspective.

Also last year in our first quarter, we had a 3 cents of nonoperating income that came from royalty payments, which we're closing out most of the royalties we were getting from a semiconductor business situation we have, and then some currency gains that wouldn't be repeated in this quarter.

So when you look at the income loss relative to the revenue on the supplemental Gazprom order in Q1 and the 3 cents there, last year, we reported 46, so you take the other income of 3 and you are down to 43.

So when we establish guidance at 40 to 43, we actually see that as relatively strong performance from all the rest of our businesses.

Because when you look at it, if you took something in the order of 9 cents on a Gazprom off of the 43 you are at 34.

Here we are providing guidance at 40 to 43, which is up 18 to 20% or more.

So you know, we are really seeing the underlying nature of our stuff.

We feel good about our momentum.

We just have this Q1 comparison that is a struggle for us to get through.

It doesn't mean anything is a risk or there is a problem here in any way.

In the second quarter, we established guidance in the 60 to 65-cent range.

We noticed that sort of the first call number was 62.

We were comfortable with that.

We really think there is some upside there, and not much downside.

So what -- why are you going to do 65 to -- 60 to 65 if you are only going to do 40 to 43 in Q1?

For us it is a simple explanation, Redlake continues to be a drag in the first quarter because we don't have either revenue or the income and we have the continued investment.

In the second quarter our investments are behind us and we have substantial revenue and some income.

We have a seasonally strong second quarter anyway in our businesses, and so that second quarter you might remember is not the second calendar quarter of next year but February, March and April.

That has always been a good quarter, it is forecast to be a great quarter.

The rollups we see look pretty favorable.

So we're comfortable with that.

Then we get a substantial benefit from Zetec in the Q2.

Zetec has quite good performance throughout the course of the year.

It tends to be much more driven in the second and the fourth quarters of our fiscal year, tends to be light in the first and third quarters of our fiscal year.

That will add some considerable strength in Q2 that we don't enjoy in Q1.

That is why we are comfortable with 60 to 65.

For the full-year guidance, we said at the Baird conference we felt 235 to 265 was a doable kind of a number.

And if we turn now to Slide 15, we give you a little more reason for our feeling about that.

We have -- our 2002 acquisitions should be accretive.

That number, you know, most people conservatively think it is at least 15 cents.

If you look at our head count and cost reductions that we have realized in 2002, that is going to largely offset any cost [indiscernible] inflation we'll have for medical which continues to be a problem for our company and others as well.

Then we look at the motion camera investment generating favorable [indiscernible] variances, it will certainly improve our earnings by more than a nickel next year.

So you pick up 20 cents already.

And then working capital improvements, while we the not putting a dollar, nominal dollar figure there because we would like to shift the ratios, we don't see any reason why our working capital, networking capital won't be less than 15% of sales.

We think the hardest part was getting everybody's focus and attention, now it is just executing against some known ideas.

That looks good to us.

The cost structures we feel we have in place in virtually all the businesses tell us that we ought to get 40% contribution margins on the revenue and with revenue growth you get some upside.

What we have to do of course is offset the loss of that supplemental order from Gazprom, and any other softness with sales growth in other areas.

If we turn now to Slide 16, we expect record earnings as we said in 2003, cash flow we believe should exceed $100 million next year.

We get the benefit of the $20 million financing return to us from Gazprom.

That will start in December of this month.

And comes in quarterly throughout the year.

Our deal flow process is generating a lot of very interesting things we are looking at.

We think we have a great place to put our cash to work.

We are seeing a lot of stuff in the 25, 35, $70 million sales range that seems to be right in our wheelhouse.

Our 2002 lower effective tax rate of 31% will continue into 2003.

That means strong earnings performance as we generate pre-tax income.

And we have also moved our incentive compensation focus from entirely on cash flow to supplementing it with some profitable growth measurements so that you not only do you need to perform in the cash flow, but you must generate a favorable year-over-year improvement in operating profit, strong focus around inventory and receivables and then certain selected targets by business, whether that is sales growth or lowering cost structures or participating in new channels.

So we think the compensation kind of aligns us with where we need to go.

If you then look at Slide 17, in sort of the summary way, what we feel is 2002 really created a lot of processes that the people have embraced strongly, that have delivered better results from operations than you might have expected given the challenges we had in both semiconductor and power generation and then the technology shift in Redlake.

We have really consolidated and reinforced our strength.

If you look at what we are doing this year that is different is building great processes just as we did around operations last year, around all the vehicles to deliver growth.

We have really begun building an even greater company with a compelling future.

If you look at Slide 18, you see the detail around that.

So what did you really do in 2002?

We had record cash generation.

We puts in place much better cost controls.

We have improved our asset loss till.

We have revenue growth, even in down markets in most of our areas.

We have great acquisitions and very good pricing.

We have got a terrific deal pipeline going.

What have you done for me lately in 2003 it has got to be around improving our growth.

We have got focused expectations from our operating people now, not only on cash flow, but around growth and the rewards are aligned with us, the behavioral requirements.

People are looking at expanding distribution channels, much more sensitive approach to voice of the customer in our technological product development programs and an opportunity to expand in our supply change arena.

We can do a much better job with better processes around global reach to expand internationally. 52% of our revenues are outside the country, and we can build on that more aggressively and we are already seeing some improvement in China and Korea as a result of those initiatives.

And then lastly, we have now gone through a program that allows people to get very focused around where is our future.

And that really is around four specific platforms.

Our tests and measurement solutions, our energy systems and controls, our scientific and industrial imaging and our industrial technology flow control space.

And those things we think allow people to stay focused as they make the incremental improvements and then take the strategic thing to the next level.

Thank you very much for listening and I am ready to open up to questions, Chris.

Michelle, before we go to questions I want to mention that I missed mentioning that Derrick Key, Chairman, is also present on today's call.

With that we are ready to take questions.

Thank you.

At this time we are ready to begin the formal question-and-answer session.

If you would like to ask a question, please press star 1 on your touch-tone phone.

You will be announced prior to asking your question.

If you would like to withdrawal, please press star 2.

Once again to ask a question, please press star 1.

One moment, please.

Our first question comes from Mr. Alex Ballentin of Engles and Snider.

Good morning.

I wanted to make a comment at the beginning, the first call consensus for the quarter was 48 cents, and that might be responsible for some of the weakness in the stock this morning.

But I believe that you gave a strong indication on your last conference call that the earnings for the first quarter would be down, did you not?

I don't think you said that specifically, but all of the factors that you just mentioned.

I think you talked about.

We certainly did at both the Baird conference and the JP Morgan small cap conference.

They were webcast.

We have been saying this consistently for some time.

But the company never said exactly what a number would be.

We didn't establish a specific guidance number.

You know, perhaps we should have come out with some.

We felt we had to get through our year-end close, and finish our planning process and see where people were.

The 40 cents to 43-cent guidance is in line with what you had previously thought, is that correct?

Well, you know, we would love to have had a better performance.

With what we see from what people are telling us through this week, the 40 to 43 is a number that we think makes sense.

This is the one that you -- this is in line with your previous thinking, though, is --

Well, I don't know that we could refine.

We said it would be a challenging quarter.

We wouldn't be able to -- if we could have put a number on it earlier, we would have.

But until we heard everything from everybody, it is hard to say what it would be.

It -- we have known we had these challenges.

But what you can't predict is what is it the level of growth coming.

Okay, second question.

And then I will get off.

Is you mentioned that you are seeing a pickup in acquisition opportunities.

I was wondering if you could give us an idea of why that has taken place and secondly, does that suggest that you might reconstitute the equity offering that you planned to do last summer but which you canceled because of the low prices in the marketplace?

Could we be seeing that again coming back to recharge the balance sheet because of the additional acquisition opportunities?

Probably not, Alex.

Because, several things.

First of all, the company, when it was looking at the equity offering had two relatively large transactions that were deemed to be attractive prior to finishing the due diligence that would have been quite substantial usage of funds.

We had confidentiality agreements signed and couldn't really disclose what they were or anything.

But we broke down both of those in the due diligence process and decided not to go forward.

So they are away from us now and have been for a long time.

We don't have an urge to do that.

Secondly, we were able to acquire this year at pretty high EBITDA ratios businesses, you know, for really quite a lot less money, $100 million less than the previous year.

So that really allows us quite a bit of space in our capital structure and balance sheet.

Thirdly, we think we have really got the ARFIFO index driven home to the operating people.

We got $20 million more and there is still more available.

Our cash flows are better, our cost structures are better.

I think next year will be better.

The things that have been soft this year are already as bad as they can get.

They won't get worse.

Things will get better.

So we feel pretty good that.

We have really got in excess of $150 million that we have available for deal structures.

And the deals that we are looking at are frankly much more in the 35 to $70 million revenue arena, and now that we have the capacity to look at a lot of them simultaneously, we don't have a gun to our head around doing a couple.

And I think we are going to be able to do -- continue to do things at least in this environment at favorable pricing.

Okay, thank you very much.

Our next question comes from Michael Schneider of Robert W. Baird.

Good morning.

Maybe we could first spend a money on Redlake.

I am wondering the guidance in the second quarter obviously takes into account the seasonality and recovery in Redlake.

How much of that is built, as far as Redlake, goes on orders you have already got in hand versus just your forecast of market acceptance for the new product line?

You know, we are actually working on those things this afternoon and tomorrow.

But I can just -- I would know off the top of my head that it is mostly, it will be favorable, because the -- we are ahead of schedule on the completion, and building will -- we will be shipping our cameras a month ahead anyway.

It is a reduction in the investment that guarantees a favorable turnaround.

Now, we have got strong orders in process already today, right now I can't tell you what the shipment pattern for that will be in terms of March, April, and May.

It will be a stronger effect on our third quarter than it will be the second.

It will contribute to EPS in a favorable way in the second quarter.

The recovery in the second quarter is more built around a reduction in spending versus an acceleration in national sales at Redlake?

Well, both things are in there in Redlake.

The spending level has been very high, as you know.

So stopping that is a big improvement.

Okay.

And then on the research-based businesses, Gatan and Roper Scientific, could you give us a sense of what the order patterns are there?

We had markets and lumpy orders at both Roper and other companies in the space.

Could you give us a sense of what the tone of that market is right now?

Absolutely.

The order flow at Gatan has actually been up.

For building backlog at Gatan.

Roper Scientific finished with a very strong fourth quarter.

I haven't actually looked at the November.

Both of those companies are showing higher bookings in the early half of this quarter, so, you know, yes, it is been choppy and you don't want to draw too much of a trend.

The signs are favorable at this early stage.

Okay.

And we talk the about this actually I think at the conference, but what's your latest read on the effect that the NIH budget delays might have on these businesses?

It was delayed last year and I think you guys felt at least a modest impact from that and it looks like it will even be delayed into February of this year?

Do you have a sense from the field as to what the impact could be?

We haven't seen anything soft in that area.

I mean, the -- generally speaking, those kind of orders have a little longer lead time.

We have got a strong backlog in both businesses, and nobody is on board to say that NIH funding is slowing anything down.

I think our fear in that arena would be more around state governments not spending money because of tax pressures that we see, and that is always a -- climb a wall around that.

If there is a slowdown in NIH funding releases we think that would be offset by a dramatic increase.

You will get some pump priming here from bush in a lot of areas.

That ought to be good news for most of our businesses.

And the final question, just the margin at AI was especially impressive.

In effect you had a hundred percent incremental gross margin this quarter.

How do you bring $5 million additional to the gross profit line and $5 million in additional sales, or anything unusual going on or is that just additional cost trimming in the organization?

Well, part -- you know, if we pick a really bad quarter, like the one you just did in the third quarter, where we were embarrassed with our performance it is easier to look better again.

I think we have gotten on top of a wide variety of things in instrumentation to say, look here is the level of expenditures beyond which you are not going to go.

I can tell you our segment executive, Will Konkers [ph], put very strong cost controls throughout that business to be able to do anything, and, you know, we are -- we also said, in the Q3, and delivered in the fourth quarter, lower investment expenditure in Redlake.

So it cost us less, because we were getting done sooner.

And that was quite favorable in there.

It is not really conditioned around capturing the gross profit.

It is really a reduction in absolute operating expenses.

Okay, thank you.

Our next question comes from Wendy Caplan of Wachovia Securities.

Good morning.

Could you, as we look at your EPS expectations for '03, it sounds as if just the acquisition contributions and Redlake get you to the bottom end of that range, what has to happen in your minds to get to the mid-or high points of that range, you know, the 2.50 to 2.65 area?

Well, we think some of that comes from efficiency and better cost containment from the guys we will be working with this afternoon and tomorrow.

I know they think they are doing a great job and we think they are too and we will encourage them to do an even better job.

Secondly, just a little bit of revenue, Wendy, if we get a point of revenue on a 6.27 base at $6 million and you turn it at 40%, it is $2.4 million, and half a million bucks is a penny a share.

So, you know, 1% revenue gets you a nickel a share.

So if you kind of got to the bottom at 2.35 and you could get 3% growth, you hit 2.50 in a big hurry.

And we are feeling and seeing some growth in a variety of areas.

We have just got the supplemental Gazprom thing in front of us all year on a comparison basis to get through.

We need more growth than just a sort of a modest return to GDP, and that's what we are pushing to get and we think we will get it.

Where specifically, Brian, are you seeing growth opportunities that you are baking into the model?

We are still seeing opportunities in oil -- Chris is dying to say this.

One of the factors that obviously we have talked about is the continued benefits that we get in the oil and gas arena from desulfurization, primarily in the test and measurement side but also in the control systems side.

That is an area that has been favorable for us, and we see that continuing on.

In addition to that, you know, in a sort of broader context we still see a lot of good control system opportunities in the energy arena, not just in L & G, but in global refining and other places.

And finally, a quick one.

The relatively high corporate expense in the fourth quarter, can you comment on that and what we should be -- should we think of that as kind of a run rate for '03?

Wendy, this is Martin.

That was unusually high, because we have a lot of activity occurring in the quarter.

We had our strategic planning process which has quite a bit of travel costs associated with it, getting us all around to the various spots.

Costs associated with lots of acquisition activities, be they successful or unsuccessful.

And greater board governance as we responded to a lot of professional fees and meeting costs.

So it was abnormally high at $4.4 million.

I would imagine going forward that you probably ought to be looking at somewhere midway between the run rate before and that fourth quarter number, and you have something what we should expect going forward.

Thank you very much.

Thank you.

Our next question comes from Eric Daniels of JP Morgan.

I would like to talk about the goal of capturing more synergy for the purpose of improving organic growth.

You have re-aligned along the four strategic platforms, is this realignment just a matter of changing the way people think about the organization, or is it more making a structure changes such as the merging of Actech and IDI?

It is both at the moment.

What we did in the planning process, instead of bringing people together by the segments, we brought them together by either focused-in markets or by places where cost synergies would be available by combining sources and looking at using each others' assets.

And that process leads to a better understanding about how we can be better together than operating as 27 or 30 black boxes.

I think a real benefit for us of going through year-over-year down revenue performance in semicon and power gen and some investoral markets is you have to be creative.

You can't just be dependent on macro economic growth to fuel your results.

And we are not going to buy our way out of macro economic weakness.

You are expected to deliver both cash flow and growth.

It is a cultural change for one.

Secondly, it is looking at the adjacencies of things we can do.

We have, maybe leaving the names out, one of our scientific imaging businesses was dependent on a competitor to provide software that we felt media cybernetics could provide on a world-class basis by creating an internal imaging alliance we are able to get our own software company to provide something that a different vendor was providing previously which obviously carries with it better cost structures, and more creativity around end market applications than we would get from a vendor that could supply his same material to some other competitor.

There is a lot of things a year from now that we will be talking about that are already under way that will make us look good.

Now, I think the other thing is that by asking ourselves what are we doing in test measurements solutions?

We get a tighter boundary around where we should be investing and what things we are going to pursue from a product development perspective, what kind of businesses we want to own, what kind of bolt-ons we will do and that sort of stuff.

Lastly, by thinking out of the box and where we can combine sales channels and further reach internationally, we can't afford to have 20 guys making plane trips to Korea instead of having two people dedicated to us creating demand in a place like Korea or China.

So those things interest all working favorably for us and in 2004 will bear big fruit and hopefully you will see that in the second half of this year.

The organic growth is a component of the enhanced program, when did this program actually go into place?

It went into place a November 1.

It was the first day of our full fiscal year.

The benefit of -- it has to be profitable growth, Eric.

You probably know us well enough to know we weren't going to pay for revenue increases.

We will pay for operating profit that comes from revenue increases.

Okay, great, thank you very much.

Okay.

Our next question comes from Keith Hughes of Robertson Humphrey.

Thank you.

Just shifting back to the second quarter guidance, can you quantify a little more how much Redlake is going to contribute to the range that you put out?

Well, let me see.

Would we or would we -- year-over-year?

You know, I said earlier it would certainly be more than a nickle for the course of the year.

And we kind of know what the costs were, so there is a couple of pennies of favorable improvement in the second quarter there.

And the Gazprom in the prior year first quarter, what was the number you are speaking of there?

12 million of revenue.

How much will it be in the Q2?

None.

It was just a first quarter phenomenon.

It was a 2001 order for $20 million.

And it shipped about $8 million in the fourth quarter of '01 and $12 million in the first quarter of '02 .

Thank you.

The next question is from David Smith of Salomon Smith Barney.

On Gazprom, can you give us a total sales for the year in 2002 and what they look like they are going to be in 2003 and maybe discuss any additional growth opportunities that you may see coming down the pipe with Gazprom be it this year or next year?

Yeah, we are about one meeting removed from the session that happened Monday, so we are not totally up-to-date on this year, but we had a great year with Gazprom last year, even in addition to the supplemental order, it was very high rate.

It was about $55 million of total revenue to Gazprom last year.

If you look at $12 million being supplemental, that is $43.

We tend to think of the Gazprom business in the 35 to $40 million arena.

But Gazprom touches a lot of other things.

There are other CIS businesses we see.

We have interesting things going on now in other areas in the CIS arena that could be substantial.

And then while it is a non-Gazprom thing, we book our first largest order with a Kuwaiti oil company last year [ph], it was $8.5 million that will be benefiting us throughout the year.

Although it is not as high a margin as some of our traditional business, it is still very attractive business.

We think there are a lot of opportunities from our compressor control business to grow beyond our Gazprom franchise that we have there.

Having said that, as Gazprom gets stronger and stronger which they are doing, and they increase their buildout schedule because our activities really are after mark-related we have good upside potential there.

We don't have firm orders for the full year, so I can't tell you what that will be.

We would hope it would be in the 35 to $40 million area, or higher.

10 to 15% growth.

Well, it is really hard to say.

It's lumpy.

I wish we could tell you, you could model it.

You know, we tend to think of it more like I said at 35 to 40, if you get growth, that's great.

But we can't plan on it.

Assume it is flat, then, I suppose?

Normally flat.

But last year, even without the supplemental order, we were at a pretty high level, you are talking $43 million.

So that is a couple million higher than we would have expected.

Okay, great.

Just a follow-up.

The second one on Redlake.

Can you give us a sense of what -- what quarter of sales in Redlake were last year, and then also first quarter of 2002 sales?

David, I think we would be uncomfortable sharing the specifics, you know, just from a competitive standpoint.

I think we gave some sense of the impact from semiconductor from Redlake, really the primary challenges that we face in years being, you know, as being reasonably substantial for the -- you know, for the year.

It is hard for us to talk I guess about specifics.

I would like to remind you that Redlake, we are talking about the motion imaging business which is a subset of the total company.

Obviously they have a very strong and robust industrial camera business with a lot of other applications.

Roughly half the business?

Well, again, I think we would be uncomfortable going into a lot of details there.

The only other thing on Redlake, can you give us some idea of the bookings you have already taken in there?

Yeah, through the -- I think as of a few weeks ago we had mentioned that we had received already over $6 million of orders for the new product that is going to be coming online, you know, being launched in the second quarter, and that is on very good feedback from customers on preliminary testing.

We are pleased with the development being ahead of schedule, being very well received by customers and order receiving fairly substantial orders.

Great.

Thanks a lot, guys.

Our next question comes from Jerry Boffman of Credit Suisse First Boston.

Good morning.

I want to try and get a breakout of '03, if you are going after growth, as your major initiative here, what is your target as far as organic versus liquidive?

I need to put on every one of our slides, we will keep doing what we do well.

And we want to stimulate progress in the other areas.

I would like to make sure everybody knows we are fully functioning and working on our cash flow and continuing to make internal improvements.

In addition to that, we are putting growth processes in place that will deliver something prospectively.

In terms of acquisitions, you know, we would think that we would want to continue to be opportunistic about things that we see.

Generally speaking, if you thought you would buy at least 10% of trailing revenue, that wouldn't be a huge number for us.

And maybe we would do a lot more.

We have got certainly the capability to spend well over $100 million, so it really comes down to what is it that we see what do we like?

What's the price, does it fit our strategy?

Is it going to give us a platform for amplify or build around or what have you?

That will always be a little lumpy.

On organic, we said shame on us if we can't grow twice GDP.

The trouble is when GDP is 1, you get 2%.

That is pretty boring.

We think our energy systems and control markets and test measurement solutions are pretty high-growth markets.

They ought to be, you know, well above 5%.

And we think our scientific imaging and industrial imaging businesses have got a lot of soul searching to do about just how to best take advantage of the markets that we see and where we are and those tend to be high growth.

Of course unfortunately you see this 15% falloff in sales in fluid handling largely driven by semicon and power gen.

We don't see that recovering much this year.

We haven't built any growth into fluid handling in this modelling above 3 or 4%.

We do see growth in the other areas.

Okay, if you could describe a little bit the incentive compensation target you have placed on organic growth, how will that work?

Well, we are going to review that with the guys in the next couple days, so I hate to kind of make it public.

Fair enough.

Until we have a complete understanding.

Fundamentally it is about 60% of our target's related operating profit and another 25% is related to inventory and accounts receivable and another 25% is related to a leverage off of growth.

Okay, and would the focus be on organic for the operating guys?

Yes.

Chris, let me ask you a question as far as the planning process has gone, how has the culture responded to Brian's involvement now in this process?

I think the evidence is in the -- you know, could partly be taken from the working capital progress.

Obviously the guys have taken advantage of the tools and coaching that is available, and the direction that's being offered.

You don't get that kind of working capital, you know, easily.

So clearly there is a lot of people that are, you know, that are taking advantage of the skills and tools being offered there.

There is a lot of enthusiasm from the planning process going forward.

Brian, your assessment?

We are doing better than I expected at this stage of it.

I think the quality of the plans the guys put together was pretty good.

We accepted about 60% of them, and redid about 40%, but that is not a surprise for me in terms of a first pass.

On a scale of 0 to 10, I expected to come in at -- fairly low, I am a tough grader, we certainly outperformed my expectations.

We have to execute and pick up the pace but we are off to a great start.

Derrick has observed this year and can provide a better answer than I can.

I would like to comment on that to everybody.

Obviously, I think the results speak for themselves.

Brian has brought a tremendous capability to this organization that we recognize that we needed.

You know, he is bringing about disciplines to manage, you know, growth in a very effective manner, and, you know, the organization has stepped up to the challenge I think very admirably.

So, you know, as Brian has been saying, step one was clearly to get controls and disciplines in place.

That has clearly been achieved.

I can see all the efforts that are going in now to -- you know, to focus on growth.

So I think it would be just as effective in that area as we have seen in '02 on, you know, on getting the cost structures.

So and working capital right.

So I think we a off to an outstanding start.

Great.

One last question, then.

What's your Cap-X forecast for '03?

Well, the forecast is it will be one or 1.5% less than sales.

Well closed out Cap-Ex at less than $8 million for the year.

And I don't see any reason it is going up.

I -- most of our businesses are test measurement businesses.

And we only have a few, you know, kind of factory situations.

I think the budgets roll up to $10 million or something like that.

We will -- Cap Ex won't be substantial.

Okay, great.

Thanks a lot, guys.

Okay.

Our next question comes from Aaron Ravenscroft of Janning, Montgomery, Scott.

Good morning.

In recent weeks in the newspaper there has been discussion of some pretty sizable pipelines possibly that Gazprom would put in.

Could you just touch on the type of opportunities that may create for Roper long-term if they were to take on some of these projects?

We are fighting to answer your question.

Go ahead.

I think it is pretty well understood that obviously, compressor controls has a good relationship with Gazprom and works closely with them on new pipelines and has worked with them to retrofit their pipeline and has worked on new pipelines as well.

We need to see where some come out.

I have seen the plans or heard of the same plans for new pipelines that you have apparently read about as well.

We need to make sure they are definite plans and will go forward.

We will work with our partners to work with them as best we can.

But clearly [indiscernible] has a pre-eminent position in pipeline technology.

Thank you very much.

Our next question comes from Scott Levis of Newcastle Partners.

Hey, guys.

Just a couple questions.

How much in total sales did we do in acquisitions this year?

How many acquisitions, you know, how much sales from acquisitions in the fiscal year?

If I understand the question, Scott, we acquired about $70 million of revenue in the acquisitions from this year, part of the benefit of that would have been this year, a quarter's worth.

We will get the full-year benefit into next year.

And how much from last year held this year?

That would be the Struers [ph].

The acquisitions in 2001, what was their effect in this year?

Right.

Martin, you want to --

I mean basically, the prior-year acquisitions had about $70 million impact on the firm.

70?

Yes.

And then the ones this year had about half, you say half of that, half of the $70 million?

No, going forward it will have --

That was a quarter of that this year?

Yes.

So a total, we had about 85 to $90 million revenues this year?

Some stub period of those deals.

What's that.

There's a stub period in there.

About 75 million.

Okay.

This is going back to everybody's question on organic revenue growth.

It looks like revenues --

We didn't have much organic growth in 2002, Scott.

There's no question about that.

The reality is you have to be careful.

The problem is you had our semicon business and our power generation business, so you get very weak activity at IDI, and you have weak activity at Roper pump and weak activity in Airmont [ph].

Those things in the U.S., those very much pulled down the business.

And then we had an interruption which we created on our own that was, you know, well above $10 million of revenue on Redlake.

So you put those together.

You are talking about quite a substantial piece of revenue that went away, and still even given that we were up $40 million in revenue.

So -- This had modest growth if you adjust for softness at Roper pump and Redlake and IDI and a little bit of Acton and Gatan.

The rest were up modestly a couple points

But some of the organic was down 8%, what are you thinking for '03 we can have organic growth?

Oh, you know, we are building our plan around neutralizing any additional weakness, and around improving costs, and when you look at our 2.35 to 2.65, everything above 2.35 needs to come from either better cost control, you know, more deals than well expect for organic growth.

If you looked at 3% growth, we think that is worth in the neighborhood of 15 cents a share.

But I can't tell you how much further right now.

I mean, we have -- again -- November and December are not going to be sterling months for us from what we can tell, they appear to be similar to last year or backlogs similar to the end of last year.

We don't feel bad about anything.

Growth, I wouldn't -- - I wouldn't put massive growth into Roper until the second half of the year you see an upturn and 2004 you see stronger results.

How much did the acquisitions help this year?

Or is that -- the EPS, did they help at all, the EPS in the '01?

Absolutely.

Acquisitions provided accretion both last year's acquisitions where we got the benefit of a full year versus a stub period last year as well as some accretion in the fourth quarter after this year's acquisitions so, you know, we continue --

Roughly a dime?

No, no,.

It depends which acquisitions are you asking about.

I am saying the 80 to $90 million in sales that you got this year, how much of that roughly held to the bottom line?

I didn't hear his question.

Roughly the 80 to $90 million sales from acquisitions that you had in the past -- this past year, how much did that attribute to the bottom line?

Yeah, we did.

In cents per share?

No, no, more than that in the year.

We said we expected it to be the 19 to 29 cent arena and it was.

From acquisitions from cost reduction activities and other activities in '02 which we secured in '02.

Okay.

And then as far as goodwill, that was what, $13 million last year?

The goodwill amortization was a 39-cent benefit.

39 cents.

Okay.

So I guess, I don't know --

Scott, we -- I am sorry in the interest of time, we are running short here.

I would like to suggest that we move on to another caller and I can follow up with you off-line.

I just have two more questions.

Well, that's -- Scott, we wanted to have one or two questions, we're up to six now.

I have only asked two, but everybody else is asking five.

I mean, I just --

What's your last question, Scott?

The last question is I am just trying to understand when we can start seeing more growth on the organics because it looks like the 1.92 you had from last year, you had 12 cents on tax rate, 20 cents from tax and 40 cents on goodwill.

We see organic growth renewed as soon as the economy comes back in any way.

Our businesses are doing a little bit better than the economy today in the markets they serve.

We are not cyclically related to a lot of markets.

We don't do anything in commercial construction.

We don't do anything in the automotive arena related to production.

We don't buy big inventory and those kind of things.

We are comfortable with the businesses are going to recover in the second half of the year.

Those that were down in 2002 are not really coming back in any meaningful way in 2003.

So we see modest growth in the second half of the year, organically.

Thanks, Scott.

Our next question comes from Mike Marionaty of Mathis Capital Management.

Yeah, I hate to rely on the analysts' models I have since they butchered the first quarter so badly.

Can you give us an idea of what revenue number you are looking for for the year?

All you said is north of 676.

We said previously in answering a question about that, we said at conference that we expected somewhere between 680 and 725 in revenue.

Okay.

So -- And that is up from 627.

It includes the benefit of the just recent acquisitions.

Let's forget for a minute the 627, okay?

The proforma revenue for 2001 according to the 10-K was 663.

You have made $70 million in acquisitions since.

So that is -- I think I can do the math. 733.

You are talking about organic or proforma revenue growth next year somewhere between down 1 and down 6.

Let me ask you, why did organic growth will benefit 5 cents for every 1% of increase, why doesn't it work the opposite direction?

Since the proforma revenue growth next year will be down 1 to 6% based on what you have said, why is that not a --

Mike, actually, what we have -- what we have represented to folks is that the range that we have given expects proforma or basically proforma 0 to 5% growth, and that equates to the earnings range that we have of 2.35 to 2.65.

So we have not represented to folks that our -- that our expectations or our models or projections include proforma declines in the business.

They don't?

Your analysis is not taking into account the declines that we have had in certain businesses during the course of this year in semiconductor, power gen and oil and gas in the areas that Brian described in the call which we've said we don't anticipate any --

That's the beauty of proforma revenue growth, it doesn't matter which businesses are up, down or sideways.

It is just an aggregate number.

That is very relevant to -- we are talking about the organic growth.

You are starting from a point that is already too high given what has happened in the course of this year.

Too high.

So when you filed the 10-K for October '02 year, the proforma revenue growth will be less than 733?

Correct.

For 2001?

2002.

For 2002.

Okay.

So you are not even getting back to 2001 levels in 2003?

No, it is about flat with that.

Okay.

Congratulations, thanks.

Our next question comes from Cliff Josephee of HT Blouse.

I was just wondering, you talked about the $15 million reduction in working capital in the fourth quarter and also the $20 million reduction in working capital for the year, and I was just wondering how you got those numbers.

I wasn't able to get to those numbers.

Can you run through the actual calculation with me?

If you take what is actually -- you can't do it from the -- just comparing the year-end balance sheet side by side because you have obviously had acquisitions during the course of the year.

What you start with is if you start with the $5.2 million of change in accounts that is shown in the cash flow statement, you add that to that $11.1 million of deferred taxes that arises out of the goodwill writeoff that was taken on the transition to FAS 142 at the beginning of the year.

There's about $3.7 million increase in other assets from various things associated with non qualified benefit plans, insurance claims, software and things of that ilk.

That gets you to a $20 million movement in assets and liabilities as a result of operations.

Our working capital.

That is for the full year.

And that's for the full year.

The $15 million arises just in the quarter.

And again, you can't work those from the changing balance sheets because of the acquired assets that we have from acquisitions.

Thank you very much.

You are welcome.

Our next question comes from Steven Colbert of JNP Securities.

In some of the businesses which you mention you don't expect to come back in 2003, such as the oil and gas market and some of the pump operations, to what extent can we expect to see a more major restructuring in those businesses or major efforts at asset reductions, are other changes more meaningful than just perhaps some modest cost adjustments?

You know, Steve, I wouldn't call it major.

We have already done some things.

We have taken a [inaudible] which is a modest small company in Texas, we are forcing it together with Roper Pump.

So we get better absorption, better cost structures moving forward.

So that will help.

We are doing some things with our Amot U.S. operation.

In terms of thinking about how can we take advantage of different cost structures that we have around the country and the world.

We're opening a facility in Shanghai that Amot will be driving from our UK operation of Amot Controls.

That will come online here in '03.

We are talking about a small thing.

And what we are talking about the falloff in those businesses, it has already occurred, you know, it is not going to get worse than that and the power gen, this is more around parts and components that we were supplying to people like Caterpillar who had portable power generation activity that is pretty well wiped out the last time I looked, people weren't building up those California portable generators any longer and things like that.

And then the oil and gas exploration is a very small part of our overall company.

I wouldn't overreact to that.

Most of our oil and gas activity is in energy systems and controls and that remains pretty strong.

I don't -- we don't have an immediate plan to do any additional restructuring that would cause us to take a charge.

That is the kind of thing we always would look at.

We are kind of moving as we go here in absorbing these costs.

So far, inside our income statement.

With the cost reduction that have you got for example in some of the fluid handling pieces, can that segment have flat margins if revenues stay flat?

Oh, absolutely.

They will improve their margins.

Thank you.

Our next question comes from Michael Schneider of Robert W. Baird.

Just as a follow-up, you have talked about a number of businesses that are being consolidated, and then look to cross different segment lines.

Have you guys contemplated recasting the segments as you report them to us?

We might.

We have got to work on that.

We have to look on it.

There is work to do there, Mike.

I think we are still looking at how to best capture all these synergies, and then if we reconstituted the segments, it would be because of end-market opportunities and synergies that we saw.

You seem to have done it internally in the planning procession, as you say, Brian, you have called in individual business units by platform not by segment?

That's true.

That's absolutely true.

Okay.

All right, thank you.

Our next quell comes from Wendy Caplan of Wachovia Securities.

I'm all set thanks.

I will give a call in.

Thanks.

Happy holiday.

Our final question comes from Scott Levis of Newcastle Partners.

Your line is open.

I appreciate it.

Just one last question.

Just on seasonality you guys mentioned Q2 should be better than Q1.

Can you talk about seasonality in the rest of the year and I was just looking back, you know, it seems like Q1 and Q3 are similar and Q2 and Q4 are similar, has the seasonality changed much?

I think traditionally the second and fourth quarters are the strongest quarters at Roper and the first quarter is the weakest and the third is -- it is hard to model historical basis because some of our acquisitions have been in Europe.

As you know, July and August are not robust performance months in Europe, so there is always an issue of what will happen in Q3, but 2 and 4 are where we do well.

This past year we did about the same in the second and third quarter and then did more in the fourth quarter.

Okay, thanks.

At this time, we have no further questions.

Okay.

We would like to thank everybody for calling in and listening today.

We think we have done a nice job of closing out the year and we think we are positioned for a very strong cash flow year in 2003, and thanks for your attendance and happy holidays to everybody.

Bye.

Today's conference has concluded.

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