Roper Technologies Inc (ROP) 2003 Q1 法說會逐字稿

Good morning, and welcome to the Roper Industries First Quarter 2003 Earnings Release Conference Call.

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

At that time, you will be instructed on how to ask a question.

This conference is being recorded.

Should you have any objections, you may disconnect.

If you need any assistance, please press star zero.

I would now like to introduce your host for today, Mr. Chris Hix, Director of Investor Relations.

Sir, you may begin when ready.

Thank you.

Well, good morning, everyone, and thank you for joining us for our first quarter, 2003, conference call.

I'm Chris Hix, the Director of Investor Relations.

Last night, we released our first quarter earnings of 26 cents per share from continuing operations, and revised our guidance for the remainder of the year, reflecting broadly difficult market conditions.

We also unveiled operational initiatives to better serve customers and capture significant internal and external synergies, which we believe could generate as much as $15m of annualized costs savings.

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

Our call this morning is being webcast, which you can access from the ``Investor Information'' section of our website.

We have prepared slides to accompany today's remarks, which are available through our webcast and are viewer-controlled.

If you experience difficulty accessing the webcast, the slides can also be obtained in PDF format from our website.

Replays of this conference call will be available on our website, and also through March 6th, by calling the replay phone number, 888 568 0886, and dialing the replay code, 1323.

For callers outside North America, the replay phone number is 1-402-998-1564, and the replay code is the same.

Also participating in today's call are Brian Jellison, President and Chief Executive Officer, and Martin Headley, Chief Financial Officer, and joining us telephonically is Derrick Key, Chairman of the Board.

In just a moment, I will turn the call over to Brian for his prepared presentation, after which we will open the call to questions from analysts who publish research on Roper.

As always, we make ourselves available offline for additional follow-up and clarification for investors and analysts.

Our call today will end by nine o'clock.

Turning to slide two of the presentation, I'd like to remind everyone of our safe harbor statement, which enumerates numerous risks and uncertainties and includes forward-looking statements.

Please refer to our 2002 form 10-K for a listing of key risks and uncertainties.

And with that, I ask you to turn to slide three, as I turn the call over to Brian Jellison, President and Chief Executive Officer.

Thank you, Chris, and good morning, everyone.

As you can see-- who's in control of pushing the slides here today?

No, you're in the control of the slides.

OK, well, the summary, then, in the first quarter, is that sales were $138m.

That compares negatively with $147m last year, but in the $147m was $16m in sales to Gazprom [ph].

If you look at that, then, for all the rest of the activity, it's 138 versus 131, up about 5%.

We'll have a lot more to say about this Gazprom fuel order delay as we get into the call this morning.

Secondly, bookings were $149m.

Last year, Gazprom represented $15m, so the common comparison there of 149 to 135 is where we're talking about being up, without Gazprom, by 11%.

Net earnings before continuing operations were 26 cents in the quarter.

There are a couple of other earning numbers you see out there.

You've got the goodwill-adjusted number, that was a loss in the first quarter a year ago, and then you've got the same continuing operations number last year, of 46 cents.

But our reported earnings here are 26 cents.

There's quite a few new issues that have surfaced in the first quarter, driven either by market forces or geopolitical events, that we're all familiar with, and we'll talk about those in detail throughout the call.

Next slide.

The new segment operating structure, which we confirmed at our recent investor conference, has really taken hold very quickly, as we suspected.

They've been working with the people who created the plans at the end of last year, and have begun to execute a large number of synergistic opportunities within the segment.

All four of our segment leaders are firmly in place and have been throughout their various locations around the world, providing their own unique insights into the business.

They've developed a lot of operational initiatives as a result of a series of meetings.

We actually just concluded Sunday afternoon with last series of meetings, and they're beginning to execute initiatives that we'll spell out in some specific detail today.

A strategic decision was made to sell Petrotech while we were going through these meetings, and in the sort of January period.

While we think Petrotech is an interesting business, it's not as niche as most of our other businesses, has a bit less engineered content.

We had thought about combining it with CCC and putting it in Des Moines.

Most of our employees in Petrotech are housed in New Orleans.

It's just not something that makes a lot of sense for us, and we think it's best owned by others.

And lastly, IDI’s Acton integration is well down the road.

We've looked at a few of those product lines for discontinuance or disposition, and you'll hear later this morning, took a modest charge in the first quarter related to that, and we'll be pretty much concluded with that -- we have a new facility that Acton has moved into, and we're well along with that program.

Next slide.

The income statement -- you can see, again, the sales of $138m versus last year's $146.5m.

On the variance in Gazprom sales in the first quarter, it's $14.6m between the two quarters.

We also had some softness that occurred in January in our petroleum analyzer and Antek, which relates to refining.

And then more softness than we expected in what's a small portion of the company, but nonetheless would have been important, as relates to sales and earnings in the telecom market.

And bookings, as we said, without Gazprom were up 11%.

Gross profit still stayed at 51.6; the 200 basis point negative swing is pretty much around negative leverage and compressor controls from the Gazprom cutting their sales so dramatically, and some short-term acquisition and integration costs that we have, that will be behind us in the second quarter.

Income from operations, at $15.869m, was down about-- a little less than $8m, I guess.

No Gazprom contribution, really, versus their contribution, which you can surmise from $14.6m in sales, and what that would have meant for us.

A little bit of lower earnings in the refining business, and certainly telecom, and then the continued investments, sort of final phase, of our merchant camera transformation, with no sales to correspond against that.

Those three things together cost us about $8m, so the rest of the business is in good shape, and all three of these pretty well fits, except for the refining and telecom markets, which probably will be with us throughout the year.

We expect a very strong second quarter dramatic improvement in earnings over the first, and we'll talk about that in moment.

Next slide.

Quarter two guidance is lowered.

We had originally talked about 60 to 65 cents.

That was a number that we developed last October.

We're lowering guidance today to 52 to 57.

Part of the reason for that is that we're going to start doing some of the restructuring, and we expect that restructuring in the quarter might cost us as much as four cents.

In the old days, if one would have said that we see a restructuring charge, we would have announced it now and then bled it out against an accrual, but as I'm sure all of you know, the accounting for any restructuring issues is different today than in the past, and it's sort of a pay-as-you-go program.

Secondly, the geopolitical impact of our earlier product [ph] spending certainly hurt us in January, doesn't look much better here in February, we don't know if this is a long-term situation, but we've gone back and assumed that we won't have the level of growth that we expected in the next several months in this business, and as a result, we're not going to do as well in that business from an EPS perspective.

We also have had a situation in our industrial camera business which would affect both the Roper Scientific brands and the Red Light brands.

We had gone back to a sales forecast by customer and actually had specific conversations with all of our largest customers, and we have been given sort of preliminary customer feedback around purchasing things for the semiconductor electronics assembly/manufacturing type operations, which people are telling us they don't really believe will happen now this year, and we've taken those numbers out of our forecast.

Next, we had in the telecom business that we have, which you may remember, had substantial backlog and a good build schedule at the beginning of last year, which we didn't expect would occur, or reoccur, but we thought there would be some modest level of sales activity in that business this year.

But the glut of used equipment, for most customers as they've responded, pretty much back to the same scenario at LOGITECH, where they just-- they just don't see much new equipment available for sale.

And then we mentioned the IDI product line discontinuance, which we think in the second quarter, along with that physical move, could cost us about three cents.

So, if you looked at the three cents, and product line discontinuance, a bit of softening, you can see why our guidance has been lowered to 52 to 57 versus maintaining the 60 to 65 cents.

Next, we'd like to talk about Gazprom in particular.

The Gazprom partnership, for those of you who aren't as familiar with it, they represent 23% of the world's gas production, just a huge amount of cubic meters of natural gas being moved all the time.

They export gas to 25 different countries.

We've been supplying them control systems since 1993, and we have an installed base with Gazprom of 1,780 control systems throughout their network.

What happens is that our control systems provide them a limited amount of down time on shutdowns, when they're retrofitting.

They operate their turbines in a much more efficient way, and have quite a good payback.

You can see the average payback period for Gazprom is about 1.1 years of equipment.

And what Gazprom constantly struggles with is their retrofit schedule on these large pipeline projects.

If you turn the slides, what happened this year was really a process change in the way Gazprom is going about making its purchase agreements.

They shifted the responsibility to a new organization within Gazprom, which is called the Gazkomplectimpeks [ph].

And that negotiation resulted in all of our people meeting essentially new people, in addition to some that they've had relationships with in the past, revisiting everything about the contract.

We completed negotiations with these guys in the middle of November, and have been trading some questions back and forth about potential delivery and other supply agreement issues.

All of those are behind us now.

We have the commercial terms agreed in principle, and are simply awaiting the signature of the new Gazpomplectimpeks' leadership.

We've been told, and expect, that our 2003 level of activity will be similar to their recent historical past at Gazprom, without our supplemental order.

That supplemental order shipped around $8m in the fourth quarter of 2001, and about $12m in the first quarter last year.

If you strip that away, we've been saying for a long time that we think normalized activity is within the $35m to $40m range.

It was important for us that got U.S. dollar-denominated invoicing and letters of credit, and there's been discussions around that.

All of that's resolved and we have the same terms as we've enjoyed historically, so there's no ruble currency situation, and no open account situations.

A new feature of what we're going to do with Gazprom is that we're going to supervise the installation of our control systems.

One of the things that we learned in this year's discussion is that, in the past, frequently, there may have been material waiting for installation.

They want to make sure that our deliveries are sorted in a timely manner, and consistent with their ability to get them installed, because a lot of other things go into the retrofit market, in addition to our control systems.

We think we have a pretty good understanding about how that'll work, we're delighted to get the additional work, which will add a little bit to this $35m-plus equipment contract.

We're certainly a very critical supplier to Gazprom and the relationship is very much intact, and this morning, with Moscow being a bit ahead of us on time, we received a letter from them, which, as best we can determine -- I'm getting help here -- says something-- I guess this is our English translation of what we have.

It says, ``This letter is to confirm that Gazkomplectimpeks and Compressor Controls Corporation have conducted negotiations aiming to conclude a contract for the supply of equipment and services to Gazprom sites in 2003.

Terms and scope of supply will be specified in compliance with the Gazprom plant and capital investments for 2003 and request from other Gazprom affiliates companies.

Although the contract has not yet been signed, and it still needs to be approved by the new management of Gaskomplectimpeks, its commercial aspects have been determined, schedules of the equipment supply have been specified to meet Gazprom requirements.

Compressor Controls Corporation will start shipping the equipment as soon as the contract is agreed upon and signed, and the letter of credit is open.'' So that's the most recent update, which then allows us to say that we do feel that the supply agreement is in place, and simply awaiting signature.

It does make our second quarter forecasting a little less clear to us, because we've already lost a third of the second quarter in terms of what we could ship, so we're taking them in good faith and continuing to build product, as they've articulated their needs would be, for their aftermarket in the quarter.

Next slide.

If you look at the alignment of our businesses today, we feel we've made some real dramatic improvements here, focused around customers, markets, channels, and costs.

The four segments are energy systems and controls, which picked off several of the industrial control companies that we reported as a group in the past, and industrial technology, which picked up a few of the industrial control companies, and most of fluid handling, and then gave one little piece of fluid handling away to instrumentation.

Instrumentation is pretty well segmented along the lines of non-imaging versus other instrumentation products, and then you see scientific and industrial imaging.

These four are really done purely on a market and synergy basis of how we can be better together than operating separately.

And they did come out at about equal amounts at quarters, but that wasn't really anything planned, because we'll continue to make acquisitions, now, really, in all four of these sectors.

If we look at the next slide, we think we've got a really terrific leadership team in place.

Energy Systems and Controls is run by Tim Winfrey.

Tim began his career with British Petroleum.

He's a Colorado School of Mines Graduate and has an MBA from the Kellogg School at Northwestern.

Has a lot of M&A experience, he's got a lot of joint venture experience, just an outstanding guy.

In industrial technology, this is our most recent new hire, Jim Mannebach.

Jim's got 15 years at Emerson, he's been very familiar with their Fischer Rosemont Micromotion businesses, that are right in places that we serve those markets.

He's got a lot of different business experience at Emerson, quite a bit of M&A experience at Emerson, and has an MBA from Washington University in St. Louis.

In Instrumentation, we have Will Crocker.

Will's been with Roper for 12 years.

Will really built the instrumentation business, and has had that responsibility since '97, and he's led almost all of our acquisition integration in the last several years, and has done an outstanding job.

In Scientific and Industrial Imaging, we have Ben Wood.

Ben grew up in Australia, has had a lot of experience in Asia, has worked a lot with the Japanese trading companies.

Much of the important aspects of imaging have to do with our relationship with certain Japanese companies.

Ben is a graduate of Cornell University, with an MBA, another outstanding addition to the Roper team.

Next slide.

The new structure creates a lot of opportunities.

I think some of you described how quickly we're going to capture them.

We're really focused here on customers and markets, looking at better assets for customers in places where we can put multiple brand centers in front of the customer at the same time, to provide more solutions.

Gives us much better resource allocation, as we look to how we attack markets, particularly foreign markets, where we would have had a few hit and miss drop-ins, as opposed to a centralized strategy on a geographic basis.

Our channels of business abroad our products are starting [ph] to get better representation.

A lot of our products still go through third party sales representatives.

Costs -- we get better economies of scale now, because when people meet and they're talking about opportunities, there are lifetime situations.

And we're going to see some significant benefit later this year -- Industrial Technology from sourcing, which is something that's gone quite well now that we've got a common group of people talking about it.

And then lastly, working together to capture opportunities -- I've been very much impressed with how well our 30-plus P&L Center guys are working with the segment people.

I remember one of them is running about a $10m business, pulling me aside to say, ``you know, coming to a meeting with 30 people that have nothing in common with me, I never realized how much I had in common with the six guys in this room, and how much they're helping me,'' and I think that's just a major plus for the way we're going to lead, manage, and go forward.

And all that business and opportunity create shareholder value.

Next slide.

Capturing opportunities right now -- well, the Imaging segment has a lot of manufacturing processes that are quite similar, that give us a real chance to pick up the competencies from one another and share production opportunities.

The acquisition of Q Imaging has given us a really strong manufacturing leader, and a great outsourcing partnership with people in China.

We think the lead times in all these businesses could be improved with lean manufacturing strategies, and very well down the road, we've got a very fresh and solid outlook about what we can do with our multiplicity of factors in a segment that's not that large.

I think there's nice things happening here.

In the imaging alliance, this is really a brand area strategy and a channel strategy, where we've taken cross-selling opportunities to a new level.

We found that in too many places, people were using competitor products and solutions where we could have used our own, and we've tried to be gentle in how we get that done, but people are picking up on that, and it's really helped us just recently in Japan, where one of our competitors, on a global basis, was doing some things that we thought were less than desirable, and we had MediaCybernetics step in, provide terrific software, and recapture our position in Japan in less than six months, and we're very encouraged by that.

Industrial Technology, in terms of sourcing, we've had all our pump businesses, and frankly, our valve business at Hansen, we've looked at standardizing components where they can do that, at sort of sub-assembly levels.

Looking at common vendors, talking to vendors in a consolidated way, clearing the way for rich foreign sourcing opportunities, where our [inaudible] warrants and trying to lower costs as a result.

Next slide.

We've got a new Shanghai production facility, which is now opening as we speak.

This gives us better access to local markets for, particularly, our EMOPS [ph] controls business, and it's going to do the same for several of our other businesses.

It gives us a foothold for better sourcing in China, and it's a place where we can produce a multiplicity of products at lower cost than we enjoy today.

Our Energy Systems and Control segment production processes have been reviewed.

We've spent a lot of time looking at methods which we think can grow at a faster clip than it has historically, but it's got sort of land-locked, small manufacturing situation there.

We think there's a lot of things that in and around Seattle, which Zetec provides leadership to, and we think that things that Zetec can do with industrial controls and others, so we're very excited about what Zetec is going to bring to our manufacturing and production process efficiencies.

Uson and Qualitek -- you may remember, Qualitek is a business that we acquired last year, primarily European in focus, and that's a great testing business.

The integration with Uson is on schedule, but we're accelerating that now to get most of it done here in the third quarter of this fiscal year for us.

Acton and IDI, we spoke about earlier.

We're really looked at those two businesses, saying both are down in revenue in the last couple of years.

If you get the break-even right, you know, contribute a little money, if you put 'em together, they're going to contribute a lot more money, and we're closing our Texas production facility for IDI.

Struers, we have a new facility, which is currently constructed.

We're just getting ready to move in that in the fiscal third quarter.

That's going to give us better lean manufacturing techniques in side stores than we could have in the old factory, which was very much limited on a multiple floor basis.

Next slide.

All of these things, in our opinion, they come up to the possibility of $15m in annualized savings, that has nothing to do with organic growth, and that's good news for us.

We think many of these investments can occur yet within 2003.

Quite of bit of them will definitely happen here in the second quarter.

We think it will cost us about four cents in the second quarter, and we're continuing to look at how quickly we can get all of them done.

But we know all of them on an individual basis, are things we want to do.

It's just how quickly we can execute.

And of course, we are, as always, subject to about a penny of earnings for $500,000 of operating contribution, so you can see that the $15m is well in excess of 25 cents a share that we think we can add to 2004, or perhaps a little later, as the annualized effects of these things roll in.

Next slide -- Energy Systems and Controls -- if we look at Q1 here, and I hope your chart-- mine's sort of hangs on, but I'm assuming they can see the Gazprom effect in here, so you can see sales in the first quarter last year in Energy Systems and Controls, which includes compressor controls, methods, and Zetec, for us were $26.7m, $16m of which was Gazprom in and of itself, so that's why it has been such a devastating thing.

This year, our sales of $25m, of which $1.4m is Gazprom.

The negotiations we've covered earlier have been completed.

We await the signature.

Zetec has very high second quarter activity.

One thing we will say about Zetec is its second and fourth quarter are very strong, and third quarter is usually relatively weak, and the first quarter is quite weak.

Production process synergies throughout this business, we discussed earlier, are very real and we're after them now, and Petrotech, after sitting through our last synergy discussion, we just felt there wasn't a good way for it to take additional costs out, and do things synergistically with our businesses, so we do think that's best done own somebody and have moved it off to discontinued operations for that reason.

Next slide.

Industrial technology -- that includes Abel Pump, AMOT Controls, Cornell Pump, Flow Technology, Fluid Metering, Hansen & Roper Pump.

Our margins, even in a tough industrial market, are up.

You can see operating margins expanded 40 basis points, to 19%.

We've had-- we will have solid sequential performance improvement in the second quarter.

Some of these businesses are seasonal, particularly a couple of these pump business at Cornell -- ag business kicking in strongly, always in the second quarter.

The focus on sourcing is going to yield cost benefits.

We've pretty much agreed to what those are going to be, and how those build schedules will be worked out, and they start kicking in next quarter.

And of course, Shanghai, as we said, opens then.

Next slide.

In instrumentation, those businesses include Acton Research, Antek, Integrated Design, LOGITECH, Petroleum Analyzer, Struers, and Uson, with the Qualitek acquisition.

Net orders in this segment were up 3%.

Their sales were down, due to weakness in semiconductor and telecom, and then just in January, this sort of stopping of the refinery market purchases.

After effects from used telecom equipment that affect LOGITECH are very disappointing to us, because we've known it was there, but our customers were telling us they thought by second quarter, would pick up, and now they're really saying they don't see any change in that for the balance of the calendar year, or fiscal year, for us.

IDI and Acton's research integration is on schedule.

We have a new facility that's been moved into by Acton, and IDI will be in, and we'll have that completed by the end of the second quarter.

The integration we talked about earlier in Acton and-- I'm sorry, you had Qualitek and Uson, and at Struer's opening facility in the third quarter.

Next slide will be scientific and industrial imaging.

That's Gatan, MediaCybernetics, Q Imaging, Redlake, and Roper Scientific.

A word about Gatan -- for those of you who saw the investor conference we had earlier in the year, we've really flip-flopped back and forth with Gatan's leadership about whether they ought to be in instrumentation or they ought to be in imaging, and the fact of the matter is, they're sort of two different businesses in Gatan, both terrific businesses.

One is specimen holders and material analysis-focused, and in that respect, this might fit in instrumentation.

But from a technology viewpoint, from an R&D viewpoint, from sharing career paths, and from manufacturing processes, it really fits better with the electron microscopy business and slide imaging, so we've decided to go with imaging.

Sales-- net orders in this business are up 12%.

We expect to have significant sequential improvement in the second quarter in imaging.

The motion products have begun to ship already.

Camera production process improvements are a-- substantial opportunities, and that means faster deliveries and more revenue sooner.

And the Imaging Alliance, we've talked about before.

Next slide.

This is a slide that I hope we can kind of get ourselves through.

It's a way to try to look at how earnings would unfold and what are the positive and negative influences throughout the year.

If you see Q1, we have reported earnings of 26 cents, and that deviation is caused by the Gazprom delay, number one.

Zetec has always a soft first and third fiscal quarter, so it had terrific sales but only marginal contribution to income in this quarter.

Our motion imaging business continued to drain money on the completing of the investment, but then you can see it turns green immediately in the second quarter, as we start to make some money in motion imaging once again, and sequentially, is certainly stronger in the second quarter than the first, and then continues to grow stronger in the third and fourth.

Electron microscopy -- we've built a substantial backlog in the business.

In the first quarter, orders have been very strong and as we start to ship that backlog here in the second quarter, earnings on a sequential basis will go up.

Our oil refining markets, as we said, have softened.

We've really removed the growth that we had previously anticipated in those markets for the balance of the year, so they're less favorable than in our earlier guidance.

Our industrial camera business, you can see that, saying that we really don't see what we had hoped for in that business for the remainder of the year, and the same thing with our telecom.

Now, if you go to the next slide, the continuation of these quarter by quarter developments, you can see here the Acton IDI integration is red, because it's costing us money.

That'll be behind us in the second quarter of this year, and then we get the benefits, starting in the third quarter, of Acton IDI that'll be quite positive.

Our Shanghai facility has been drawing down some of our reported operating profit in the first and second quarter.

As we get it online -- it'll be completely online here this quarter -- and then that produces more operating profit that-- effective immediately, in quarter three.

Our sourcing initiatives in industrial technology start to kick in this quarter, and it gets better in the third and fourth quarter.

The refining market situation has caused us to re-look at those businesses in terms of staffing levels, and we've cut back some people in those businesses, which will have a negative cost implication in Q2, but then of course, we get immediate paybacks from that in the third and fourth quarter.

The Energy Systems and Control businesses, driven by Zetec's opportunity to provide more services to people-- we may make some investments, we're doing a lot of build materials and routings work in those businesses.

Some systems work, none of this is going to be real substantial, but it's-- it'll turn green, probably in the fourth quarter, and be quite a substantial contributor to 2004.

Our Uson/Qualitek integration will be behind us at the end of this quarter, and that'll be the favorable sequential earnings kick in here, and this [inaudible] facility kicks in money in the fourth quarter, so if you look at those and say, ``well, how can these guys get from 26 cents to 52 or 57, how would these guys say, who made about $1.52 last year, make $1.85 to $2.00 in the last nine months?'' We have a very clear pathway around that, and I think, you know, had we said, ``look, we're going to spend 10 cents on restructuring,'' and done it in the way people used to talk about that in the past, with guidance reduction for the full year, probably would not have been seen as negatively as it is without all this information.

Full-year guidance, yes, we have lowered the guidance.

That guidance is $2.11 to $2.26, but inside it is the assumption that we'll be able to make all of our structuring investment decisions and execute them and that could cost us at least $5m, which is 10 cents a share.

If you added back the 10 cents, then you're looking at $2.21 to $2.36.

But we see those investments as so clear and such incredible contributors, we're making 'em.

The Gazprom net sales, based on what they've told us about deliveries, we see those sales in the $35m to $40m arena, maybe a little more than that, but we're going to stick with what they've talked about so far, which is $35m to $40m.

Our end markets, we assume, remain soft but stable.

Our Petrotech contributions are excluded.

We did believe Petrotech would have earned around three to four cents a share this year, but it won't do that, and it's an asset held for sale.

We won't be able to claim any positive or negative effects around Petrotech in those core numbers.

And lastly, of course, it doesn't include any future acquisitions which could be in the offing.

Next slide.

Our priorities, then, for this year, is to find a way to achieve record results despite these market conditions.

Our guys are moving at a fast pace to try to do that.

We expect to continue to execute our disciplined acquisition process.

We expect to capture the benefits of the new structure and synergies that we've articulated here this morning, and to continue our focus on customers and markets, to strengthen results in '04 and beyond, as you get some macroeconomic gains.

And with that, that concludes my slides and prepared remarks, and we'd like to take questions.

Operator, we're prepared to take questions from callers at this point.

Very good.

Our first question comes from Alex Blanton, Ingalls & Snyder.

Good morning, gentlemen.

Good morning, Alex.

First question is on the Gazprom contribution that was lost -- you didn't ship $14.6m.

If you use a contribution margin of 50% on that, it comes to about $5.1m, after tax, or about 16 cents a share.

Is that something we should use, or is it more or less than that?

Well, let's see -- it is more or less than that.

I mean, it's very hard to talk about a particular customer's margins around a business, but I think historically, many people would have assumed it's in the 40% to 50% range.

I don't know, to my knowledge, Martin or Chris, if we've ever commented specifically on Gazprom margins, but it's absolutely true there's a lot of software here, there's-- there's some electronic activity and some panel building, but one would expect those wouldn't be unrealistic margins, in a way, because the gross margins in that segment are quite high.

And if you look at the gross margins, you know, most of the incremental sales benefit drop down to the bottom line, and all of those sales variances in Gazprom, of course, are incremental.

Right.

So if you use 50%, that's 16 cents or 40 would be less, but, you know, going back to 1993, there's an awful lot of historical data available on the margins on the Gazprom business and a lot of work has been done on that by analysts, probably before you joined the company, Brian, so people do have a sense of what that is.

So how would that-- let's say it's in the 12 to 16 cent range.

How would that be distributed, then, over the second to the fourth quarter?

In other words, it's absent from the first quarter.

Well, I tell you, you know, here we are this morning, just getting this letter from the export sales guy.

Their operating people have provided us with what they'd like to see happen, and we're building in good faith along those lines, but until we get a definitive agreement that's formally signed, and they release the purchase orders, we're not going to ship anything.

You have stuff ready to ship, so that you can ship it immediately?

Well, some of it is, but not as much as it used to be.

You know, I think probably the biggest single change in this relationship is the recognition of a more Westernized sourcing strategy, that we don't really want to have inventory material here.

You know, what we really want is, we've got line and station number 1571 and 1642 coming up, and we want your stuff--

--so it may be skewed to the second half, then?

It might be.

We're assuming pretty substantial-- in the way we were thinking, right through this morning is, ``well, if you did do $35m to $40m, it's nine or ten million a quarter, so in the first half, if had been non-seasonal, you would have done half, is $20m.'' If you got 80% of that, given where we are, that would be $16m, and that would leave you 24 in the second half.

But I can't tell you how much we'll ship in the second quarter, but we're very confident, it's the reason for our guidance, saying it's certainly possible to make $1.85 to $2.00 on the second half.

Yeah, in looking at the second half, you mean the last nine months?

Yeah, last nine months, I'm sorry.

The second half would be about $1.38 versus $1.16, last year, which is about a 19% increase.

Yeah, but it can be busted at-- well, first of all, we've got our acquisitions that kick in, and then it probably is better second half performance than--

OK, one more on this, and then I'll get off, but if- I'm looking at slide 15, which shows Energy System Controls, earnings off $3.9m, year-over-year.

But there's an absence of-- if we use that 50% contribution margin, that would be an absence of $7.3m, just from Gazprom shipments.

But the total is only down $3.9m, so something has added $3.4m to the earnings, to offset part of the Gazprom decline year-over-year.

What is that?

Well, I think we've said all along, we expect Metrix to perform better.

Remember, GE bought Bentley, Nevada, and Zetec, of course, is a new acquisition that comes in, and there's all of the compressor control business, which is not the Gazprom.

I think we remarked last year that we've gotten our first Kuwaiti oil company job, and we've got a very strong, Dutch-based organization creating demand around the globe, really, and we've got, frankly, richer relationships with non-Russian players than we've ever had before, so they actually had quite a decent non-Gazprom first quarter.

Yeah, so in effect, that really offset some of the weakness we saw in some of the other divisions, year-over-year?

Yeah, it helped.

OK.

But still-- you know, your numbers are hard to argue with.

Oh, OK.

Thanks a lot, Brian.

All right, thank you, Alex.

Thank you, and our next question comes from Mike Schneider of Robert W. Baird.

Good morning, gentlemen.

Good morning.

Maybe you could first start just with bookings.

You mentioned bookings are up 11%, X Gazprom, but if we strip out the acquisitions, can you give us a sense of what they were up, year-over-year?

You know, it's a very modest improvement in terms of each of the businesses.

We had a strong benefit in Struers.

Struers was up very dramatically.

They got kroner-based invoicing and Euro-based invoicing, so that was good.

Everything we had in Europe that repatriated in dollars is pretty good.

Unfortunately, it wasn't as profitable as we'd like it to be, because we've got European-based manufacturing that's exporting into the U.S., so that puts a corresponding pressure.

I don't know, Chris, if we provided an absolute number, but there's some organic growth, but most of the bookings, for instance, reporting out on the way we have to report now, and not talking about pro forma and we're not getting into pro forma, so it was, you know, I think pretty flat, Mike.

It's not-- not a lot of-- if you strip away currency and acquisitions, pretty flat.

So going forward, you don't intend to report organic growth by segment or for the total company?

No, we've had two meetings in the last two weeks, talking about how we're going to report and so forth.

We've got another meeting soon, and I-- I don't think you'll get a-- we're certainly not going to use pro forma reporting.

It's just too difficult in the new environment.

And we will tend to talk about how acquisitions are doing.

I don't think it'll be too difficult to figure out.

And we will certainly be forthcoming, as we're trying to be now, about what's going on.

Well, my two cents is, I think it's a mistake not to give us organic growth numbers.

This is a company that has a significant amount of acquisitions each quarter, and people, and analysts, need to know what's going on with the base business, so the lawyers, of course, and I am a lawyer, so I understand that it's hard to know--

--well, we're--

[crosstalk]

We want to be investor-friendly.

We're all about creating shareholder value, and we understand all that, and we're working through this stuff, and Reg G is about upon us, and I think everybody will have their positions clear in the next, probably, eight weeks or so.

OK.

And moving on, just on the instrumentation segment, can you give us the bright spots in that segment?

Is Struers still performing well on a relative basis?

Oh, Struers is extremely well, although I'd have to say, a little bit buffeted by currency, but it did very well.

Instrumentation, let me say, I'm sorry, I've just got to get to that stat.

Well, Acton-- Acton and IDI did well, but we-- we trimmed the product line, starting there in the first quarter, so the earnings didn't reflect the underlying nature of business, but it's doing OK.

Antek was doing well, but in January, slowed up, as we discussed before, with the refinery geopolitical hold.

LOGITECH, we didn't expect a lot out of this year, but we've expected something, and it quite marginal contribution.

It's part of the reason we've lowered guidance for the full year.

Petroleum Analyzer was OK.

Struers was OK.

Uson was OK.

We would have liked to have it done better.

And it just surprises me that Struers is still doing well, given the economic data coming out of Europe.

It seems like that geography is still deteriorating.

Yeah, but we're a very significant player in materials analysis with them and there's a lot of export business.

We are increasing business in the Far East.

We've helped them a lot with their distribution channels, so we think the U.S. business, you know, has improved substantially, and it has improved substantially.

Struers is a great company.

They're really an anchor in our family of businesses.

OK, and then, I guess, just taking a step back and looking at the entire business, you've had five quarters now, I guess, to dig in, and obviously have dug in deep.

What-- can you give us your updated growth expectations for this business now that you've gone business by business and you roll it all up, whether you express it as a percent of GDP or just--

I don't know these businesses can't strive to double GDP growth, and I don't know why we can't at least match GDP growth.

I think we're still going through the teaching, the learning, the exchange of ideas about how you get growth in flat markets, and people learn at different paces.

But I don't think-- you know, Petrotech would probably be the example where you'd say, ``we just don't see we're getting growth in that business.'' You can't replace what happened at Enron and Dynergy.

It's really U.S. pipeline business.

We don't want something like that in family.

The other businesses that would tend to make our growth look less robust than it actually is have recently been Vertical Pump and IDI and the ship over of Motion at Redlake, and we're, frankly, we fixed all of that, and it's started to reflect an improvement.

But we tried to do it at our last investor conference, and say, you know, if you don't pull out the fact that Redlake and IDI went from $79m in revenue two years ago to a much smaller number today, then you're not realizing, we've got a lot of businesses that are growing and have continued to grow.

So it's a mixed bag.

And I mean, our challenge is to get all of them to grow, and that's what we're going to try to do.

OK, thank you.

And our next question comes from David Smith of SSB.

Good morning, guys.

Good morning, Dave.

First on, for cash flow, can you give us a sense what's your revised estimate, where you think free cash flow will come in for the year?

Well, if you take -- Dave, this is Martin Headley.

If you take the earnings range of $2.11 to $2.26, that would imply cash output from operations of something of the order $140m to $150m, at current D&A rates, and then of course we would anticipate that our capital expenditures will be consistent with the trend of 1.4% to 1.5% of sales, so that would that would take you to a range of $10m, plus or minus, and those are kind of the bits and the components of free cash flow as we see them.

OK, so working capital impacted at all?

Very difficult to estimate, particularly, as you will see, a lot of these restructuring actions start to really kick in the fourth quarter, and thus, for the full year, we may only get modest gains from working capital, even though the ratios may be favorable.

We will, however, recover the 20-- we will receive the payment of $20m from Gazprom on the extended term supplemental shipment.

We already received the first $5m in December, and everything is working like clockwork there.

OK.

I would just add, David, the operating guides have very, very strong measurements and a lot of goals built around working capital.

It's a hallmark of what they're going to continue to do there, so you know, I think Martin is rightfully being conservative about the challenges that-- you know, we generally start every meeting with what-- tell me about your working capital asset loss, and why it's not better, and so it's pretty culturally engrained here.

I'd be very disappointed if we don't have continuing ratio improvement as the year unfolds.

OK.

On Gazprom, any renegotiation of that contract in terms of pricing, with the new regime?

The only thing we can really say around that is that whatever fears that we had prior to completing our supply agreement, they've all been negated.

You know, we were concerned about a lot of things -- we would like to get higher prices, we-- the way this thing is running out, they'll have kind of a list price and discount structure, and that's good for both parties.

We know what we charge around the world, we know what we're going to be able to charge Gazprom, and we think the margins will be at least as favorable as they have been in the past, for 2003.

OK.

Last thing you talked on the last conference call about Redlake's backlog.

Can you give us a sense of how that's looking right now, going into product delivery?

Well, we've done a couple of things.

We have a very strong Q Imaging manufacturing operation in Vancouver, and we have a bunch of their people down working with the motion business now to launch the new product, and we're doing well.

We don't really have any problems in terms of doing things.

We have an obligation to bring back a bunch of older model cameras over time and retrofit them with some of the new technology, so for the first, probably, four months, we're thinking in the neighborhood of a third to 40% of our cameras are going to be the retrofit type, and the rest will be the, you know, new, fresh, out-of-the-box production.

Once we're in our line mode on this, we'll have a dramatic improvement in productivity, quite a dramatic improvement in productivity.

But we're, you know, talking in the 150-plus camera, initial, getting it out the door scenario.

So that issue with the cameras doesn't really delay the shipments of all the new products?

No, it doesn't delay anything.

The-- I mean, a lot of these people have been waiting a year for this new technology, so it's not-- you know, it's a market that knows that it's going to do and it doesn't change its mind much.

Is there a backlog figure you can give us for that right now?

I'm looking around for help on that.

I think you might-- I think, Chris, we do have a backlog.

You know, Martin is flashing me a percentage, I but I don't know what it's of.

The backlog is up about 12% from the prior year, reflecting the benefits from the motion business.

That includes a little bit of a netting against some of the industrial business that Brian referred to before, so the motion business is up substantially more than that.

And sequentially, has that risen as well?

Yes, it has.

Thank you.

And our next question comes from Jim Lucas of Janney Montgomery.

Thanks a lot.

Good morning.

Hello, Jim.

First question-- on-- within the press release, three of the four segments you gave bookings numbers in one form or another, but on the imaging side, following up on that last question, can you give us, for the total segment, whether in dollars or a percentage, where bookings are?

Yeah, Jim, in the press release, the attached selected segment financial data, the scientific and industrial imaging, I think, is your question, the bookings we reported were $44m--

There it is.

Got it.

Thank you.

--there you go.

And that represents a 12% increase, Jim.

I cut caffeine out.

I apologize.

OK.

Don’t worry!

On the balance sheet, we've been talking a lot about Gazprom and the earnings impact.

Could you give us a feel for the inventory impact of what your inventory would look like, were the Gazprom shipments had to have taken place?

I think, Jim, if you kind of look at our balance sheet, as compared to last year, inventories were 15.2% of annualized sales.

This year, they're 17.2%.

Approximately half of that movement in the ratio is attributable to the Gazprom inventory build.

As Brian referred, we are continuing to build inventory in anticipation of finalization here.

Another important element would be we referred to building a backlog.

We've also got a little bit of inventory around one of our imaging products, as well as pre-launch at Redlake, et cetera.

OK.

And if we look at-- from December to today, how the guidance has changed, just trying to get a feel for recognizing the world has changed, the low end of your guidance has come down 20 cents, the top end, 40 cents.

Throwing in 10 cents of restructuring-related activity, what are the three or four biggest factors that have changed as you look at the outlook today versus just a few months ago?

Well, when we did this in November, I would have said, and several people, I think, correctly have picked up -- if you looked at the accretive nature of the acquisitions that we've done, that should have been worth some number.

Most people were around 15 cents.

Some people at 10, some people a little higher.

And people knew that we had the imaging turnaround that would be here, and generally speaking, that might have been viewed as around a nickel.

So if you add the deal at 15 and the imaging turnaround at a nickel, you add 20 cents, and then depending, of course, now we like to look at the fact that our EPS was $2.08 last year, but we also, frankly, said it would be below $2.16 because we had this unique Euro currency debt conversion situation in the third quarter.

So let's say-- that's why you'd say why can't you do $2.35, and when I challenged all of us, I said, ``well, I don't know why it can't be $2.35.

That assumes no growth.'' And we know we're going to get something in the neighborhood of a nickel, for 1% of organic growth, so we looked at the $2.35 as sort of a bottom end of the number, and then you could go up as high as you want, and you know, one of the people at our conference was challenging us, as to why we couldn't do $2.65, and I don't think that's an unrealistic challenge if we would have had, say, 5% or 6% growth, along with things we kind of knew internally we could do.

So here's the problem -- what's really occurred is in basically three areas that are kind of market-related, and then the fact that we've now moved Petrotech off, as an asset held for sale, but Petrotech, in that guidance number, was about four cents.

And then we have this geopolitical situation around, declining, frankly, was not on our radar screen.

And that's worth about six cents in our guidance.

And then the telecom situation, this is not sort of unlike IDI, it's a very small business, great people, doing everything they can, marginally profitable, we'll keep 'em at break-even this year, but we expected a little bit of uptick, and we're not going to get it with what their customers have revised now in the first quarter.

And again, it's just this glut of equipment, and that's a nickel, negatively, to us.

And then the industrial camera business, on a customer by customer forecast basis, this is mostly people that are chip builders, who had given us sales forecasts for machine vision type products, and that has pretty much collapsed, and they're, as we've gone back to everybody now, on a customer by customer basis, we're in the big reduction in the industrial camera category for them, and that's worth a nickel.

So we look at industrial cameras and telecom and geopolitical uncertainty, it's about 16 cents.

In Petrotech, it's four, and you take 20 off of he guidance number, and you can see kind of where we're at and why.

We just think it's time to say $2.11 to $2.26 is a doable thing for us, it allows us to fund as much of this restructuring as we can possibly get done during the quarter.

If we didn't do the restructuring, we could have had a higher earnings guidance number, but it's too important to do this restructuring to put it off to try to get our last October guidance number.

OK, thank you very much.

You're welcome, Jim.

Thank you, and our next question comes from Wendy Caplan from Wachovia Securities.

Thank you.

Good morning.

You spoke a lot about integration and facility closure and opening a couple facilities.

Could you talk about the net effect in terms of capacity and where would you say the company has been in terms of capacity utilization and what's your expectation, with these changes?

Well, Wendy, most of our business is-- we have really four industrial technology businesses in the three pump companies and Hansen, which is valve, that are traditional factories, but Roper's other businesses are pretty much assembly and test operations.

They have a substantial ability to increase capacity and flex in what they do because you're just doing final assembly.

Our imaging businesses have very sophisticated final assembly that involves bonding and clean rooms, and they tend to need to remain close to where our scientific people are and our technicians.

We could have a very dramatic increase in revenue generated from Roper and not need any expansion.

One of the reason our capex is so low is that we don't really to build out things to support our sales requirement.

When we're talking about-- careful about-- we closed an IDI facility in Texas.

This was a small facility with not a huge number of people, that was, in fact, assembly and test.

We haven't closed any of the factories that are really vertically integrated kind of factories, and all-- pretty much all the things we're talking about production processes are in and around energy systems and controls and imaging.

The move to Struers is something we knew we would do at the time we bought Struers, so we've had a lot of capacity.

We continue to have a lot of capacity.

There aren't things we would close, due to capacity.

If we close something, it would be because the cost structure was inappropriate versus what other outsourcing opportunity you could have, or some different vendor relationship.

And the current capacity utilization of the manufacturing plants?

We don't really keep those kind of numbers, but it's low.

I mean, our custom assembly operations, I would say it's-- on a real basis, it couldn't even be 50%, because you're not working three shifts and you're not doing staggered hours and things like that.

It's not the nature of the work.

If you look at an eight-hour shift capacity, they certainly wouldn't be above 60% capacity utilization.

OK.

And a couple more balance sheet questions, Martin, if I could.

The receivables, can you just address what drove receivables down, payables down, and the accrued liability change?

Well, we-- the intent of the receivables, we obviously collected, as I previously mentioned, $5m of the $20m outstanding from Gazprom on the supplemental order.

It-- the reduction from $138m to $122m is a reflection of the reduced activity levels, apart from that.

Otherwise, nothing unusual.

At is relates to accounts payable, that reduction is also reflective of reduced activity, so you kind of take a percentage of activity, as we do, we've stuck at 5.3%.

And the accrued liability reduction of $50m in the quarter is also a very typical, seasonal one.

We have a lot of incentive compensation programs tied to performance that don't pay out until after the fiscal year, so those are the principle reasons for the movements in those accounts.

Thank you.

Operator, we have time for one more call, so why don't you go ahead and introduce that caller, please?

Very good.

Thank you.

Our next question comes from Matt Summerville, McDonald Investments.

Hey, thanks.

Good morning.

Good morning, Matt.

Good morning, Matt.

Brian, a couple of questions.

As far as the 10 cents worth of restructuring impact, you're looking for four cents of that to hit in the second quarter, can you talk about how you expect the other six cents to play out throughout the year?

We're really finalizing that, Matt.

I-- we would love it to play out in the third quarter, because the quicker it plays out, the quicker we get, you know, cash contributions from it, and the guys who decided they want to do this are back, kind of finalizing their stuff.

For me, the way we're looking at this, is it's very easy to understand what the costs are, and it's very easy to understand what the benefits are.

What people get wrong all the time is the variance in the change, and so we challenged everybody to come back and talk to us -- we understand this, we see how it works, we'll embrace that, we'll invest it, but you've got to tell us what's the timetable and whether you have all the documentation necessary and what the operating variances could be.

As soon as we're finished with that process, then I could tell you.

But frankly, we had hoped that it would-- the balance of the investment would occur in the third quarter and a little bit, maybe, at the beginning of the fourth, and we'd love it if some of this could be partially self-funded this year, and I think, you know, if we're great, it might be.

As far as-- you mentioned, I believe, in your prepared remarks, a three-cent negative impact from IDI in the second quarter.

Is that part of that net of four cents, if you will?

Yeah, yeah, the situation at IDI is mostly that, and it's about 2/3 around product line, discontinued products, with inventory write-offs, it's really a non-cash expense for us.

And then a little bit around the physical movements.

OK.

And then as far as one final question, you really didn't talk much about the physical and life sciences research business.

I was hoping, perhaps, you could provide an update there, talk about how the backlog is looking in those businesses, what the key drivers are, your level of visibility there, et cetera?

It's actually quite strong.

The Gatan business is doing very well, we had a substantial backlog at Gatan.

Roper Scientific is-- had a solid quarter.

The-- where we're suffering in images is this new industrial camera, lack of growth that those had talked about doing.

So we haven't seen the image shortfall related yet to any fears around NIH funding or any changes in science and technology.

We'll certainly-- we would say that if it had happened, but it's not happening, so we feel good about those businesses.

And how far out would you say your visibility in that respect right now?

I'd say four to six months of pretty good visibility.

Some of the stuff books and ships in the same quarter, but you know, pretty good.

It's pretty sophisticated product.

It's not an impulse purchase item, and it's relatively close to people, but the fears in some of the businesses are just if somebody did what they did basically in the [inaudible] business, and puts a freeze on, due to the geopolitical situation, then, you know, a freeze is a freeze.

Right.

And I'm sorry, one-- this will be my last question - can you just update what you're seeing on the M&A side of things?

How's the acquisition environment pricing, et cetera?

Oh, that would be a-- we can give you a long answer there.

We-- we're still looking at a lot of stuff.

We see a lot of opportunity.

Some situations, the pricing is just not attractive.

But we've had a lot of stuff that we're actively looking at, and several things we feel pretty good about, that we're fairly far along with.

There's a number, I almost hesitate to use it, because it's just-- you can't believe when you look at it, but we actually looked over $4b in revenue transactions last year to do the $75m we did.

It's not as bad this year, but we're looking at a lot of stuff that you-- if you just said, ``I'd like to start in the acquisition business,'' it wouldn't be a good time to start.

If you've got a really active pipeline, which we do, and a lot of connectivity with private equity and larger companies that are still looking to exchange assets, we're not seeing any slowdown at all.

We really aren't.

We see a lot of stuff in front of us.

Based on the balance sheet lines of credit, et cetera, how much dry powder do you have right now for incremental deals?

It really depends on what the deal is, because the way our program works, you get pro forma EBITDA and it comes along with a like 3.5 times the trailing thing, so it's-- each deal is kind of different.

But we'll generate a lot of free cash over the course of the year, so we've got a substantial amount of money that we can put to work during the next 12 months.

And we've got a lot of opportunity to improve EBITDA in our base businesses, which people hope we would understand after the call.

But we see a lot of things that are going to get better for us that makes it easier to have more powder in the future.

Great.

Thanks a lot, guys.

Thank you.

Thank you, all, for your interest in Roper Industries, and for joining us in our conference call here this morning.

Thank you, everybody.

We appreciate it.

Thank you.

That concludes our conference call for today.

You may disconnect at this time.