Roper Technologies Inc (ROP) 2003 Q2 法說會逐字稿

Good morning and welcome to the Roper Industries second quarter 2003 earnings call.

All participants will be able to listen-only until the question and answer portion of the call.

Today's conference is being recorded.

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

I would now like to turn the meeting over to Mr. Chris Hix, Director of Investor Relations.

Sir, you may begin when ready.

Thank you, Mary, and thank you all for joining us this morning to review our second quarter 2003 results.

Participating in today's call your Brian Jellison, President and Chief Executive Officer, Derrick Key, Chairman of the Board and Martin Headley, Chief Financial Officer.

Last evening we released our second quarter results which showed sequential performance, record second quarter cash flow and excellent progress on the restructuring initiatives announced in February driven by our strengthening leadership team.

If you have not already seen the press release you can obtain it from our web site at www.roperind.com.

The press release includes telephonic replay information.

We have prepared slides to accompany today's remarks, which are available through the web cast and are viewer controlled.

The slides can also be obtained in PDF format from our web site.

Turning to slide number two, I would like to remind everyone of our Safe Harbor statement, which enumerates numerous risks and uncertainties that includes forward-looking statements.

Please refer to our 2002 form 10-K for 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.

Following his remarks, we will open the call for questions from participants.

Brian.

Thank you, Chris and good morning, everyone.

Slide three, second quarter summary are net sales as you see are a $166 million, all these are rounded.

The 10% higher than prior year we are not going to put a lot of bragging rights out on that because we did get $9 million of benefits from foreign exchange on the revenue line.

However, excluding net sales to Gazprom (ph), which were $8 million and net sales from our 2002 acquisitions which rolled up to 16 million in the second quarter, net sales did increase by 5%.

Our diluted EPS from continuing operations is 47 cents a share.

That's versus 54 cents last year.

Our 2003 number at 47 includes eating the cost of $2.4 million in restructuring charges, another million in less other income primarily from royalty payments in our Semiconductor businesses that were much lower and then $8 million, there is a typo here I'm afraid on your slide it says nine but it's $8 million lower sales to Gazprom.

Cash flow from operating activities was a record for the second quarter any time in our history, a little above $23 million.

That is 10% above last year and I'll talk more about that later.

And we have continued to make some networking capital progress that we think can still be accelerated but it's quite good in the quarter.

Our net debt to cap is now down to 42%.

At the end of the quarter it had been 46% at the beginning of the year.

Next slide.

Continuing on just introductory highlights, we did negotiate and sign this new supply agreement with Gazprom and their sort of purchasing entity if you will gas complex impacts; it is a very complicated discussion and we'll bore you with a little more detail later when we're talking about our energy system segment.

What is really different that we learned in the second quarter is that even though this agreement is in place, the TransGas (ph) subsidiaries of Gazprom have become very important then when orders are released.

There used to be a central authority to release the orders and we'll talk about that in depth later.

We have been able to further strengthen our operating leadership team.

One of the things that is crucial for us is we keep the artificial drive of our individual P&L placements but we get some scale and leverage to help them do things well and we will talk about a number of new people that we have seeded into the organizations.

Our segments have captured a lot of the opportunities in cost and customer interfaces that we were hoping they would do in the quarter and have put a framework I think for accelerating opportunity in the fourth quarter and next year in front of us.

We made a good deal of progress on our restructuring industry so we're frankly ahead of schedule and spending a little bit more earlier in the year than we expected the good news is that it means more money sooner in 2004 than we would have otherwise expected.

Our next slide.

On the income statement, I think it's important to sort of be balanced about on the one hand we feel we've done a terrific job compared to the sequential improvement of the first quarter, not quite as well as last year for a variety of reasons.

If we look at net sales, as you can see in the middle column that was $165.527m and that is up 10% from the second quarter a year ago by $150 million.

If you look at what it is compared to the first quarter, the $165 million is sharply up over $138 million.

Our gross profit still up in the 50's as you can see, 52% in the quarter, a little less than last year.

That is really business mix around who bought what/when.

Income from operations is $25.854m.

That of course is depressed by the $2.4 million of restructuring costs and we have a little bit of negative foreign exchange in here in terms of our European operation selling things in the U.S. in dollar denominated prices and Euro created costs.

And diluted EPS, as you can see, we reported 47 cents from continuing operations up from 26 cents in the first quarter.

We continue to believe that the third quarter and the fourth quarter will have this kind of sequential improvement and sort of the worst is very much behind us now.

In the second quarter a year ago, we reported 54 cents.

A million of that is due to higher other income reported than versus now.

And I have been schooled here not to talk about how this income rolls into EPS I guess under Regulation G so I'm trying to constrain myself but with a little bit of effort I think you can see that the 47 cents is pretty close to the 54 cents by doing that math.

Next page.

Considerable leverage with opportunities for expansion, you'll see that throughout our segments.

In the first quarter, we did $138 million.

In the second quarter, we did $165 million, so we were up $27 million or 19% sequentially.

Income from operations grew from $15.9 million to $25.9 million, which was up 63%.

If you add back the restructuring cost of $2.4 million, the quality of earnings would look more like $28.3 million, up 78%.

And then as we like to look at ourselves to see whether we're getting better or worse, we look at the amount of income, the $12.4 million going against the sales increase of $27 million and at the enterprise level or incremental benefit of new sales was running at 46% and that is consistent with my belief that Roper should produce in excess of 40% incremental profit on another dollar of sales.

This restructuring is going to give us some substantial opportunity for the leverage throughout this year and next.

Slide seven, balance sheet and cash flow.

Here we had record cash performance in the quarter, $23,390,000 up from a year ago $21,349,000.

Cash conversion, if you look at the footnote the way we're calculating it -- footnote two, free cash flow would be the cash flow from operating activities minus all CAPEX divided by net earnings and in the quarter, we think we did a terrific job in cash conversion of 147%.

Last year's second quarter was at 110%.

We also reduced networking capital in the quarter by $5.9 million.

Net debt to cap you can see has been reduced to 42.3 from 46.0.

That is the lowest level in about two years.

Next slide.

On slide eight, we feel we made a lot of progress in Cascading leadership.

One of the things we don't want to do is build a large corporate staff.

What we do want to do is to take experienced people from growth cultures and strict, lean manufacturing operations and get them nested into our individual businesses and with the four segment leaders getting increasingly familiar with their P&L Presidents, we made great progress in this quarter.

We brought in a new employee to run market development at the energy systems segment level.

We brought in a new person to run our Zetec market development effort, a new guy to run our metrics market development programs and new person at the segment level for industrial technology, and a new person in sales and marketing for our AMOT valve business that we think have some better prospects with some new strategies.

In addition to those five people and market development, we brought four seasoned people into operations.

We brought a strong operating guy into our imaging segment.

We brought a Russian speaking person in to our Des Moines, Iowa operations that will play a very heavy control role related to all of these Gazprom negotiations and discussions who is fluent in a variety of languages is helpful for us.

Then, we brought -- we'll tell you about a New Mexican operation we're opening outside of Juarez and we brought a new person in to run the Mexican facility and brought on board an Australian national to run the Shanghai experience who is quite experienced in Chinese joint adventures.

Where these people are coming from I think is really important as we continue to build our growth culture here.

These leaders have come from General Electric, from Bentley, Nevada, from Caterpillar, from C&H, (inaudible) Chemical, Emerson Electric and Chinese JV and we think they bring the right kind of mix of experience and scale and married with our entrepreneurial desires, we think we're going to get a lot out of this in the future.

Slide nine.

Our restructuring initiatives focus more on just the operational excellent side of the equation.

I don't know how you can cost reduce yourself to greatness, but it's a really good idea to cost reduce yourself in addition to this growth platform we're working on, so we'll talk about that.

Zetec and Metrics have a variety of synergies that we're just starting to integrate and that involves our Seattle field service people and our Houston field service people and new ways of going to customers and new ways of doing production.

Our Acton and IDI integration program is essentially completed in this quarter.

Our Qualitek and Uson integration program is about completed.

It did depress margins in Uson in this quarter.

Our Red Light production integration, one thing we'll talk about as we get into imaging that we were not able to say previously is in addition to this entire new concept around how we're going to design these cameras, we built them in a way that they're designed for producibility(ph) and manufacturing ease with an eye to then integrating it into existing facilities allowing us to close entirely the Red Light production operations in San Diego.

We announced that to those employees just recently.

We also opened our Chinese production facility in Melu (ph) and are just concluding our discussions for the acquisition of our space in Mexico and that will be up and running by the end of the third quarter.

Our Struers(ph) facility is almost finished.

We expect occupancy in August and that will give us benefits immediately in the fourth quarter.

All of these analyzed benefits we said before we felt we could get up to $15 million after they were all finished and frankly we thought that those really wouldn't get finished until some time into the calendar year of 2004.

As we're working now at the speed of acceleration that is going on here with our segment leaders, we actually think we're going to finish all of this in 2003.

May see some modest benefit in cost in 2003's fourth quarter and then an accelerating benefit in cost reductions throughout 2004.

Next slide is slide ten.

Our Energy Systems and Controls.

The highlights here just to remind us, this is our compressor control business, our metrics probe, vibratory business and our Zetec acquisition from last year.

If you look at the top box, that's comparing prior year second quarter, $29.7m in sales with $7 million of operating profit to this year's $37.7 million in sales with $7.3 million in operating profit.

Now the reason of course for the increased sales is the Zetec acquisition.

And we have had growth in both our compressor control, oil and gas, non-Gazprom business and our metrics business, but those have been offset by the reduction in Gazprom.

If we look at the performance beneath that in the sequential improvement quarter-to-quarter, you'll see net sales in the first quarter in this segment were $25 million, in the second quarter they were 37.7m, so sales increased 12.7 or 50.8%.

Two-thirds of that is the final sale released to Gazprom at $8 million.

Operating profit, you can see in the first quarter was $1.3 million.

In the second quarter, it was $7.3 million.

That is a $6 million increase in operating profit.

Again, looking at contribution margins here, $6 million of incremental profit on 12.7 in sales gave us 47.2% leverage.

Net orders in the quarter were up 23%, certainly aided by the Zetec acquisition and these other things I mentioned.

We had very strong oil and gas project activity in both metrics and compressor controls outside of Gazprom.

Our Petrotech sale process is well underway.

We've selected a person that we expect to conclude the sale with.

And that should happen before the end of this fiscal year.

Zetec is targeting an unusually large fall approach sale opportunity.

There are regulations that are changed in this industry related to probes, and people have been purging their probe inventories because the new designs that have different kinds of compliance requirements that have to be used in the fall are going to make some of the other things obsolete.

This is sort of good news for us.

We didn't do as well in the second quarter here as we expected because people were fusing up inventory that people didn't even know existed in the utility business, but this is quite bullish for us for the remainder of the year.

Our Metrics and Zetec field service people are beginning to meet actually day as we speak in Seattle.

We see a good deal of cross-selling opportunities and nondestructive testing with these two businesses and by bringing the talent in that we mentioned earlier into both Zetec and Metrics at the segment level, we see a lot of growth opportunity here in the out years.

The Gazprom contract is secured.

It has been just a remarkable experience for us.

What we really didn't understand until this quarter is how involved the TransGas subsidiaries were going to be and for you to understand that, there are 22 Gazprom subsidiaries.

We turn the page and we'll give you an update on Gazprom and why we're seeing where we are now.

This contract is actually negotiated with something called Gas Complect Impacts (ph) and the agreement provides an overview for how you would release everything associated with business.

The TransGas subsidiaries however have to commission and release orders individually.

In the past, it was done at the headquarters level.

This year we're working with 16 out of 22 subsidiaries on individual orders.

Based on where we are today, even though the headquarters operations talk to us about a $36 million order release, we're not seeing the speed of this happening in a way that makes us comfortable to say we can hold on to an idea of $35 million on Gazprom revenue in our fiscal year.

You know, we end on October 31, the calendar year is November and December and the pace may be quite similar to what we have just seen in the second quarter.

So if that is true, maybe we're looking at $7.5 million or $8 million in the next two quarters.

There are a lot of people who believe that that is conservative, that we'll get large orders.

We just can't see that because of the amount of engineering and application things that have to be done.

So we're going to go with a lower number here to say that it is $25 to $30 million for our fiscal year.

This process of working individually with the TransGas affiliates is a brand new thing for us.

This is not what we have done in the past.

All of that administration was handled by central authority at Gazprom.

It's quite good that this is happening because we're learning more about one another and the long-term Gazprom relationship with our large installed base is solidly in place.

Next slide.

Industrial technology.

To refresh our memory, this involves our Able pump and Cornell pump and local branch centers or AMOT valve business or flow technology in fluid metering and (inaudible) refrigeration business.

Here if we look at year-over-year quarterly performance in the upper right-hand side, you can see $40.2 million of revenue last year, $40.6 million this year, operating profits were 9.6m last year, down to 8.7m this year.

There is a little bit of restructuring here of $100,000.

If you look at performance though in the quarter, the first quarter sequentially below, you can see, we went from $36.5 million net sales to $40.6 million.

That is an improvement of $4.1or 11%, operating profit went from $6.9 million to $8.7 million, which is a million eight and you take it million eight or the $4.1 million, we have a 43.9% contribution margin there.

Net orders are up 5% to $42 million.

We've got a lot of progress here on low-cost operation centers with China coming on line, that will improve our margins -- the AMOT margins in the quarter were not as good as we would like because we've taken some Asian business that we're still producing in the U.S. that will ultimately be produced in China and the margins will be substantially better once that happens.

And our Mexican operations, we've announced to the Denamco business we are closing it.

It was in Texas and that business is being relocated to Mexico along with opening a new Roper operation in Mexico.

Our sourcing programs have continued to accelerate by I must say have been a little bit frustrating in the quarter with SARS with the activity that we had underway.

We've had to slow travel and commitments on both sides.

Market synergies are just starting to appear.

We've been able to take the Auble (ph) Municipal Wastewater business and do some things with that on behalf of our U.S. businesses and we're looking at large project bid opportunities today in a very different way and have a new resource of the industrial technology area that is quite experienced in this working with Jim Mannebach. (ph)

Next page or slide.

Instrumentation, instrumentation as you can see has had a challenging quarter.

Net sales a year ago were $42.6 million.

This quarter they're $43.6million.

Operating profit is down $1.1 million from 8.6 to 7.5.

There are always ups and down in every business but this is basically what we knew was going to happen with LogiTech.

If you look at the sequential improvement down here, net sales flat, up $300,000, operating profit down 100,000.

Orders were only up 2% in the segment.

A lot of this was due to people would say is in the remarked Iraqi war and all the refinery issues that slowed orders at the beginning of this quarter for petroleum analyzer products and for Antek (ph) products.

Our Acton and IDI integration is complete.

As you can see here on operating results that cost us 1.9m of restructuring in the quarter.

Qualitek and Uson will finish up here in the third quarter and that will mean real margin relief for us in the fourth quarter with those business.

Qualitek is actually doing quite well on orders.

The Struers facility I mentioned will come on-line in the fourth quarter.

The Struers had a terrific quarter, they're doing very well in orders and that is really important for us because LogiTech we said would be down and they were.

They were down a modest 60% in the second quarter, but still made money and just sort of, an IDI kind of a story there.

It's terrific what LogiTech has been able to do in a complete collapse of their business and Struers' revenue was so strong it offset the loss of sales at LogiTech.

Petroleum Analyzer and Antek expect a much stronger second half.

We had a conference call with those people yesterday.

They -- the pace at which the euro escalated in the quarter was a bit of a surprise.

We've got our ISL business from France and our Herzog business in Germany that are creating European costs and selling frequently in dollars.

Didn't hurt us a lot in the quarter but it's certainly causing us to pay sharp attention around this and did take a little bit of restructuring in those businesses in the quarter.

Next slide.

On Scientific and Industrial Imaging.

We begin to remind us that is our Gatan business, media (inaudible) software and then the camera business is a few imaging, Red Light and Roper Scientific.

Here net sales a year ago were 38.3.

This quarter they're 43.7.

Operating profit was the same.

If you look at the margin, you can see that the terrific upside we had in imaging, that we'll start to realize in the second half of the year and in the future.

Net sales went from 33.4 to 43.7, up $10 million or 30%.

Operating profit came up from 2.9 to $8.1 million, $5 million more operating profit on tandem (ph) sales that is 50.5% contribution margin.

And this doesn't even yet show the effect of basically eliminating the Red Light overhead structure as a business.

Net orders in imaging were down 11% to $33 million.

There is nothing to be alarmed about there at all.

Actually we had very strong bookings in the first quarter of this year.

Year-to-date, the bookings in the business are slightly ahead of last year.

We think bookings would have been better, we had a number of product launches and a critical software launch in Japan and China that we're not able to do because of the western inability to travel into China and Japan.

We just had our first business session in Japan last week and there's also the situation in Japan that sort of words aren't going with the music there.

They have about an 8% increase in their budget for life science projects in Japan.

Sometimes, that is released in May.

It hasn't really been released.

We're hearing increasingly that it's a fourth quarter phenomenon.

The government is talking positively about it.

If that money gets released, then that will help us in the fourth quarter of our year.

Our motion business with camera business we talked so much about is on target.

It's ahead of plan.

Our new sensor technology and imaging integration software is working without any difficult at all.

And I'm very proud of the people at Redlake (ph) in this technology transfer.

It's, you know, for people to have the courage to do what they have done and know that we're going to wind up doing the operations in low-cost areas to take advantage of existing technology and capability is a real tribute to these people.

They have done a great job bringing these products on-line.

New designs to facilitate our production move, we mentioned in San Diego will be closed within the quarter.

Our Shared production facilities, we talked about that.

It is one of the common opportunities inside imaging as a segment why we put it together the way we did.

You can now start to see the kind of things we're going to be able to do.

They're going to be real synergies for us in the fourth quarter as our manufacturing shifts to Vancouver, Canada and China and Tucson with a little bit left over for Gatan and Roper Scientific in their existing facilities.

Our Duncan technology business we acquired last year is launching half a dozen new products in the fourth quarter.

All the early response to that is very good and this is going to be done in a way to try to salvage the industrial camera business at Redlake that we said at the beginning in the year we were deeply worried about.

The initial reaction to people seeing these products and their producibility and cost structures and pricing is very effective.

Gatan, the backlog will drive our third quarter profit improvement at Gatan.

They have an exceeding backlog and the production problems they were experiencing in the second quarter are behind them.

Next slide.

Our full year guidance, we're saying is $2 - $2.11 from continued operations.

Holding on to the $2.11 from $2.26 before in that pivot point, for us to do $2.11, we would have to get more out of Gazprom than what we're forecasting or have much stronger fourth quarter organic growth than we see at the moment.

To do $2 we feel, you know, quite comfortable with that number based on everything we're doing and the rate of investment we're making.

The Gazprom net sales last year, as you may recall, were $56 million and $25 million that is a $31 million reduction in sales.

You can calculate whatever you think is appropriate.

I guess I can't tell you what I think they are in EPS basis but I'll tell you what, it's a lot of money.

And we made $2.08 last year and we're just not ashamed of the $2 to $2.11 number for this year.

Also, we have increased our investment in structuring because things are going so fast.

So, before we were thinking more like five and we moved that number up to $6 million.

We're not seeing any great market activity, some of those net orders that looked good are partially driven by currency.

And we of course haven't put any future acquisitions into these numbers but we are always interested in looking at those opportunities.

Next slide would be our last slide just sort of summarizing what has happened to us and where we are.

I think we once again demonstrated we're really a cash-flow machine here.

We had a record second quarter in cash.

The leadership that we brought in around the segments are not bureaucratic guys, which you can see we are adding real power, and real people that can help and benefit everybody and the segment -accelerating speed in these segments is just really very terrific.

The restructuring benefits are going to be real.

We can see, you know, we were worried when we said up to 15 million that would have been struggle to think you could have gotten all that in 2004.

We're going to come a lot closer to it than we thought originally.

We still have training and the other kind of variances that are created starting new operations but we should have a lot of contribution in 2004 from these efforts.

And then building momentum, we really, you know, have gone through three quarters here where we have had declining LTM EBITDA and we're sick to death about it and done with it.

And I think we have hit bottom and that wasn't a bad number but the numbers are going to see from the future I think are going to be very comfortable with and should be consistent with what many of the analysts are talking about in terms of their forecast for the future.

So with that, I thank you for listening and we'll open it for questions.

Thank you, sir.

If you would like to ask a question, please press * 1 on your telephone keypad.

You will be introduced prior to asking your question and you can withdraw a question by pressing star two.

Once again, please press star 1 if you would like to ask a question at this time.

We'll pause for a moment to assemble the roster.

Our first question is from Wendy Caplan from Wachovia Securities.

Good morning.

Can we focus on the balance sheet for a minute?

Cash was very strong in the quarter.

If you could address that and, also, although you talk about working capital, certainly on the receivables were up versus the end of January, inventories were flat, and the payables were really significantly up.

Can you talk about your strategies related to working capital changes for the balance of the year?

Wendy, Martin here, just a few comments on impacts on -obviously currency had a significant impact on the balance sheet.

If you look as a comparison versus prior year-end, that currency alone had to be impacted increasing inventories by about $2.3 million.

And it had the impact of increasing the accounts receivable by $6.6 million.

But we think that the performance was very good in both of those areas, and the result we saw declining- increase in productivity in the declining percentage of those assets as a percentage of sales going down to the accounts receivable excluding the Gazprom supplemental over the down for 17.9% which compared with 18.5% last year, an inventory of about 14.2%.

We obviously have a strategy of being - we are emphasizing to all of our operations managing all elements of their working capital and have renewed our emphasis on managing our accounts payable and seeing the benefits in the second quarter of the results.

Yeah, I think, Wendy, we finished the quarter at networking capital about 17.4% and I would like to get it down to closer to 15% by the end of the year and we think we're in pretty good shape to do that.

As a percent of sales.

As a percent of sales, yeah, right.

And thank you very much and since you mentioned, Chris, that Derrick was on the call, it's been roughly, I don't know, a year and-a-half if my memory serves me correctly that Derrick, you stepped down from being the CEO.

Two questions, first of all, how do you think it's going; and, secondly, you know, Roper is one of the old Oystrum (ph) companies as you well know and part of the strategy has been that they have been more holding companies than operating companies.

There has been a huge change over the past year and-a-half.

Can you talk about that as well and are we losing something in terms of the entrepreneurial spirit that we had earlier.

Well, Wendy, I think I have to answer the first part of the question, you know, I believe it's going exceptionally well.

I think, you know, the capability that Brian and the management team have shown, you know, kind of managing over the last two or three quarters through some exceedingly difficult kind of market conditions and maintaining the kind of margins and cash flow performance that we've had, you know, is really terrific.

You know, the management team that is being pulled together here now I think is, you know, substantially stronger and more experienced than we've had historically.

And I think, you know, the - you know, the move from three segments to four segments, you know, was exactly the right thing to do to make sure that we've got, you know, the right kind of emphasis on specific operating and marketing problems and opportunities, you know, that we have segment by segment.

So, you know, I feel very comfortable that we're doing all the right things for the right reasons, making great progress.

And you know the real benefits, you know, still have to be seen.

You know, to your second point about, you know, kind of, you know, the old operating philosophy of having a very diversified and divisionalized company, you know, I think still exists.

You know, all of our operating presidents, you know, are all entrepreneurs and have a great deal of attitude to understand and create opportunities within their markets and with their products.

But I think what we're doing is now that we have got a lot of companies, you know, we do need to have some stronger corporate direction to make sure that we do squeeze out all of the fairly easy opportunities to, you know, to restructure and take benefit of, you know, things like purchasing and some of the strategies and synergies that are available for additional market penetration base segments.

The bottom line is, you know, making great progress.

Unfortunately I haven't seen full benefits, but I believe in '04 you will.

Thank you.

And, Brian, one last question.

You talked about acquisitions that are in to the top line.

Can you mention what it added to the operating profit line?

They added?

The acquisition contribution is integrated into all of our other businesses and is really not separable in a meaningful way Wendy sorry I really couldn't give you that.

Okay, thanks.

They're sort of in keeping with what we expected.

Everybody is on this plan.

Tucson is not doing as well as we expected and Qualiteks kind of benefited and you get into cost allocations with this stuff.

But the rest of them are on plan or ahead.

And Certainly creative.

I do want to say I think it is important what Derek was saying and myself that we go around here and we - when I first came I said, what you really want to do is to sort of program or you preserve what is great about the company and you stimulate progress in areas that we need to have that.

We've got a ying-yang table around here and everybody goes what that is.

You ask people what is in the core you want to preserve and we work hard to achieve that.

Then you ask people where you have to stimulate progress, there's a lot of area where you got to that and we work hard at that.

And Chris actually had a slide in here I wouldn't let him put in because I thought it looked a little academic that kind of deals with the core of your question where you look at sort of what do you do around scale and what do you do around customer intimacy and they're very different things.

Customer intimacy is where the entrepreneurial piece comes in and our individual P&L guys are focused on that.

And now we are getting some support that gives them scale to do some things.

And over here in the cost center direction that is a lot less entrepreneurial and that is hard for us to take advantage of Mexican and Chinese cost structures and we're getting to that.

Our next question is from Alex Blanton at Ingalls (ph) and Schneider.

Good morning, gentlemen.

I want to congratulate you on what I thought was a very complete and informative explanation of the quarter.

We should see more of that from other companies.

Just a couple of housekeeping things.

First, the $2.4 million in restructuring, where was that recorded on the income statement?

Which lines?

$400,000 of that was recorded within cost of goods sold, Alex and the balance of $2 million was recorded within operating expenses.

$2 million in SG&A?

Yes.

You're saying?

Yes.

But all above the operating line?

Yes.

Okay.

The guidance, I believe, in the press release said $1.24 to $1.35 in the second half.

Doesn't that have to be $1.27 to $1.38 to get to your guidance range?

All of it does it better be.

I don't think so. 47 and 26 so far is 73, right?

Right.

Then $1.27 gets to $2 and $1.38 to get to $2.11.

Well, thank you for that.

We now--

I was just wondering if there was something else we should --

I think that is probably an internal error here.

Yeah.

Okay, and also the $9 million mentioned for Gazprom down on the table, should that be $8 million as you said on the slide shipped in the quarter?

There is a table in the press release.

Is there another error there?

The net sales --

On the press release.

The $9 million is what the sales to Gazprom were in the quarter, $8 million represents the variance to the $17 million was recognized as sales in the prior year quarter.

Okay, so it is $8 million less.

It was $9 million in the quarter.

Yes.

But you had said on April 30, it was going to be $7 million.

Yeah, what happened with us, the equipment and sort of other sales process along with the equipment came in at the seven but we picked up a 1,000,007 in start-up out of Russian operations that was far better than we expected.

Okay, so that was --

That was a favorable surprise.

Okay, great.

Let's see, finally, just sort of a general question on next year, you've mentioned that lots of things are looking good for fiscal 2004.

Can you characterize what kind of year it's going to be -- it looks to me like there aren't that many negatives that are developing for 2004.

Is this kind of a year when everything could go right?

We would love it.

You know, I don't know why it couldn't go right.

You know, what's hurt us it's been so difficult in the last two years was the fall-off of the Integrated Design business, which was market-related and nothing that anyone could do anything about except get your costs in line and forget that.

The second thing was this entire Red Light technology transformation, which was a very, very, probably the most difficult challenge in the history of the enterprise.

You know, it's a big thing.

It's a lot of money and it's been an enormous drag on our earnings and that's behind us.

You know, we're making money there.

And then you come in to this Gazprom thing.

If we wind up doing $25 million to $30 million this year, there is no reason to believe you couldn't have that level of activity.

Now, I don't think we're going to have any resurgence back to supplemental order or $50 million Gazprom year, I think that sort of after-market install that we're used to on this more normalized run rate, but all the rest of the businesses are really frankly at the bottom.

Roper pump has gone through a difficult three-year period.

You know, it's sequentially up.

So, yeah, we feel pretty good about that.

It's too early to say what the guidance would be.

But, you know, it's not going to take much revenue for us to do very, very well on top of a substantial increase in earnings per-share just driven by our restructuring.

Right.

And the Gazprom part, if it's $25 million to $30 million this year, could it go back to the $35 million to $40 million next year just on the basis of getting this procurement process moved up?

I don't know that.

We were talking with some of those guys this morning.

We had most of our Russians over here two weeks ago and one of the nice things now we put on order a full-time Russian controller, who has got a lot of business acuity and speaks their language and helps us understand some of the issues here.

You know, I think that Gazprom is trying to tighten up their own use of capital expenditures and our systems are just one piece of what they do and they get into their after-market activity and, you know, our sense would be this lower level of activity that we're seeing now is more likely to be the norm than a higher level activity.

I think it's -- we would love to think it could be $7 million to $9 million a quarter and that would get you, you know, 28 to 35, 36, but we're seeing a very much slower pace of these TransGas affiliates releasing orders than when it was the centralized control and one guy kind of bought it and could put in a warehouse and use it when he needed it.

Now it's absolutely tied to the installation and end-use, and I think it's just like every other sourcing thing; they have gotten better, and we'll probably hopefully have less cyclical deviation.

I don't want you to think it's in the bag to do $35 million.

You said that the program that you started in 1993, 10 years ago is about half complete and it's averaged $34 million a year so if it slows down a little bit, it will take even more than another ten years to finish.

That is absolutely true, and you know, again, the thing that we're going to work on is look at the pay-back analysis on these products and why don't you invest more in them because they pay back faster than most other things.

And if that takes root then we could have resurgence in the level of activity, at the moment that is not the thinking.

Okay, thanks very much.

Thank you.

Michael Schneider, Robert W. Baird.

Good morning, gentlemen.

If we could focus for a minute just on the bookings and then once -- just get a few clarifications on the specific businesses.

First, Martin, do you happen to have what bookings did year-over-year sequentially ex-currency and acquisitions?

If you look at the impact overall of the currency, currency had approximately a 5% impact.

On bookings year-over-year?

Year-over-year bookings, yeah.

Okay and then the acquisitions added how much to bookings?

Well, we disclosed -- didn't disclose that one.

Not really at hand.

I don't really exactly have that in my hand, because it means

Okay.

It means plucking it out as we said before for -- from operations where we have been looking at those operations.

Okay.

And then moving on to the businesses, Brian, you mentioned that Struers (ph) had a decent quarter with orders and then also you mentioned that by ramping the new facility in August and thereafter, you expect a nice additional profit contribution in the fiscal fourth first quarter.

Can your elaborate on both of those, why are orders going better there especially in a tough European industrial economy and then how the new facility adds to operating profit so quickly?

Well, the Struers has had strong demand.

We have improved a lot of software features around Struers products and we're doing even more around that that gives more solutions to the measurable technology that they provide.

But they have had terrific benefit from currency because Struers doesn't sell too much into the U.S.

We have maintained pretty good pricing into the U.S. market for Struers and, so, the benefit we get out of -- that were (inaudible) here is substantial.

Their unit volume is also up but that facility, I guess, Mike, may be has not been there - it is a multistory sort of odd, old European operation.

You know, you can't get anywhere from anywhere.

Manufacturing is not in a manufacturing way out.

It is kind of in a basement.

You can't have any real-time access to people and all the doors are closed, long hallways and all that.

The facility that we have created for them is really set up around lead manufacturing and direct design engineering interface with a factory floor and customer service is associated with engineering and when we move we simply won't move all the people that have been in place and, you know, those people are aware of what is happening and so forth.

So our cost structure will go down in - in our asset loss is going to go up there.

And that is even over and above the additional depreciation expense for the facility?

Yeah, it's just a lease.

We --

Okay.

Okay, and then moving on to Antek and PAC, it sounds like you're a little more encouraged by the order patterns there.

Could you give us some sense why the guys are more optimistic for the second half of the fiscal year?

Well, they had a better -- you know, the end of the month was better than the first two months and it wasn't better than last year.

We point out to them but they feel pretty good about that.

They -- their quotation activity is good.

They historically do fairly well in the fourth quarter any way and basically the margins in the refinery businesses of course are getting better for most people so they don't see roadblocks as to why they wouldn't do better.

They had a decent year last year but in terms of year-over-year improvement, we're putting a lot of pressure on them for results and they know that so I think they're pretty motivated.

Have they received any additional orders or release of orders as a result of the Iraq war ending and troops stabilizing?

I don't think you could see that there was some pent-up demand actually what caught us with Iraq is some of our pump businesses, sales were slowed going into Kuwait and that was a frustration, but we didn't think it was too material.

Okay.

There may be opportunities in the future for Iraq.

Actually, there are interesting opportunities for compressor control, depending on what happens with Iraq going forward.

Okay, and then --

And we're working on that, believe me.

The final question is just the revenue implied or imposted (ph) in the guidance.

Maybe you could give us some sense of what you're assuming for revenue either maybe by a third and fourth quarter or just the second half of the year, however you want to work at it from the low end to the high-end of the range?

Let's see, we're looking at around, you know, in the 170, the bottom $5 million more than where we were maybe, something like that for the third quarter and then, you know, more than that, another $10 million, $15 million more in the fourth quarter.

Not a lot really, okay.

Not a lot really.

I mean, most of the improvement is mix adjustments and I'm kind of looking at my charts here but -- and not dramatic revenue growth.

Okay.

Thank you --

Feasibly in our -- usually in our fourth quarter -- you know this as well as anybody.

Our fourth quarter tends to be up like 6%, 8%, 10% in revenue over the years and that has been kind of true even in difficult years.

So we're not necessarily thinking it will be up that much in the fourth quarter, but if it did, that gets us to the -- to the two-dollar number quite easily.

Okay, thank you.

Yep.

David Smith at SSB, you may ask your question.

Good morning, guys.

Good morning, David.

On working capital, just a follow up on what Wendy was asking you, can you kind of get a drill a little more into the DSO number?

I know that that is coming down with Gazprom on a quarterly basis, but by my numbers it looks like it was 71 to 72 days this quarter.

Can you give us a sense of where you see that falling out by year-end in your 15% working capital efficiency expectation?

Well, the accounts receivable excluding Gazprom are 17.9% of revenue in the quarter, which I think Martin said before, and inventory is 14.2% and then you have got payables and accruals to go against those numbers.

It is somewhere it was at the end of last year's second quarter so we'll -- and we've had, you know, a build of stuff going on.

I don't know about the 72 days.

I don't have a --

I make it by off 69 by my calculation, David.

Okay.

But, I mean, we would anticipate seeing that decline obviously because you've got the 10 million of Gazprom that will come out of that with no sales attributed to them during the course of the balance of the year.

Right.

So as you start to look at that kind of number, that takes a percent and-a-half of accounts on it so we -- we would expect to see in that case, you know, obviously we're seeing something in the order of 15 to 17 -- to mid 16% of the percent of sales, is how we view the world.

You might be thinking closer to 65 days?

Okay.

Then again on inventory I guess looking at that, you know, my number I've got around 104ish, 105 days but that looks like an improvement year-over-year as we see that go down as well?

Absolutely.

Yes.

I think that is how -- we believe that is probably the area of greatest focus and opportunities.

We've said before, inventory is the area that has the longest area of gestation of securing improvement and this will be yet another of the operational improvements that will follow through from the people that we're putting into these businesses as Brian explained earlier in the call.

What are your thoughts by year-end kind of on that -- that the capital number, would it down to about 41.2% this quarter. (Inaudible) excluding there is any acquisitions you guys do?

I'm not sure that is on the table.

Yeah, obviously it does.

If you kind of look at -- well, we're talking about here we're clearly looking at free cash flow for the full year of at least 80 to $90 million for the full year.

And that -- that strong performance in the second half with stronger cash performance than we have had in the first half even after the second quarter was a record ever for a second quarter, is going to strongly drill down on that debt cap numbers, as we go through the balance of the year.

Okay that is great.

One thing on Gazprom, I'm just not completely clear. clear.

Is there any -- you I hate to use the word guaranteed, but is there any sort of set level of where you -- have they signed a contract for a certain number or should we just expect sales to roll in during the year?

The contract doesn't have a have a definitive top line number to it.

So, it will be dependent as Brian explained on the TransGas entities going through the approval of supplying the commission requests through to gas complex impact during the course of the year.

I've got to tell you, David, you guys in Des Moines are listening or Moscow or Saint Petersburg, you know, we're completely behind you and if you want to bring us $35 million, we'll get it to you.

So let's -- let's, you know, there are a lot of constituencies on these calls and we had no capacity constraint to move up and down with Gazprom.

We've got all of it as basically outsourced assembly opportunity for us.

It's just a sourcing world for us and design engineering and sales and marketing application and we're -- we can vary our cost structures pretty nicely around that and get good recognition.

Now, I think that these TransGas affiliates have the same learning curve as everybody else did in here because the big change is moving from a centralized control authority to the people that do the work.

And we're just not willing to say, well, I think it's a safe $7.5 million every quarter because it's going to be lumpy.

You know, we're -- we know what we have done year-to-date and we kind of assume it ought to be something like what we did in the second quarter.

Yeah

You know, it could come in the last month.

It's just tough.

Okay.

One thing on non-gas oil and gas business that seems to be coming in the headlights a little more quarter-to-quarter.

Can you briefly touch on that and what you see as a growth opportunity there?

That is doing quite well.

That is why some of those numbers were what they -- what they were.

That affects both our compressor control systems business, which I'm sure it will have a record year this year.

And metrics, which will have a record year and somebody noted earlier saying that our Petroleum Analyzer guys just came back saying that they decided the Iraq war really has freed up the orders and a lot of good news there.

So oil and gas that Chris and I were talking about was downstream, is it upstream for systems, it is really all the way through the system and that is going well.

Okay.

The last thing I've got just so I'm not sure I heard this right but on the top line did you say there was $9 million benefit from foreign currency?

Yeah, we did.

Okay, I just wanted to clarify that.

Thanks.

Okay.

Jim Lucas, Janney Montgomery.

Thanks a lot.

Good morning, guys.

Good morning Jim.

The first question kind of a thing that was touched on earlier.

This really hasn't been a year of Murphy's law with it seems every time you turn around there is something new that is coming up on the horizon.

Can you speak a little bit about the contingency planning process you have in place?

You talked about the $2 you feel is a reasonable number based on what you know today, but can you speak a little bit about that contingency process?

You mean if things got worse?

If they got worse, I think we know as things get better, you know, clearly you're well-positioned but, again -- first, Gazprom delay then you had the Redlake, you talked about IDI.

If the Hong Kong, beyond unknowns were to show up that problem you didn't know about today were to come up a month from now that could cause cost you 10 or 15 million in sales, how quickly would you be able to react and what is in your plans?

Well, I think you can see how quickly you react.

You take a look at LogiTech, which is a company that when it came on board had a big backlog, and we knew what is going to have a lot of business.

Here is a company that is down 60% year-over-year in the quarter and still made money.

You can look at instrumentation, which struggled through the quarter with Packet Antek and Uson and didn't have any real increase in sales and had had basically the same kind of earnings.

I think, you know, our guys are looking monthly.

I think when people think about the entrepreneurial nature of these P&L guys, quite frankly our guys are more entrepreneurial around their cost structure.

We're trying to teach him how to become a growth company.

So, we want to do that in a way that it doesn't add any fixed cost and we have had a huge focus this year on break-even analysis and we have given all the local guys not to tell us what their break-even is and we have professionally come in and explain what it was and it's probably been the biggest learning opportunity for these people in their lifetime.

And each one of our businesses knows exactly what he thinks as fixed cost structure is and he goes what we think it is and he goes what is variable contribution margin is so we see a lot of upside and we think they have at their disposal an opportunity to shrink whenever they want and since we have outsourced a lot of manufacturing pretty much an assembly kind of company in these days, Jim, I don't see a big downturn.

Okay.

And if we switched gears with bringing on a lot of management talent that you are clearly changing, improving the (inaudible) at Roper, has there been any turnover in the middle management ranks that are notable or is it still pretty much the same cat that you're just building on a strong foundation still.

We have had almost no turnover.

We did what -- a long time ago we let the Red Light guy go and IDI guy go but everybody else is still here basically.

In the P&L area, the middle management area, the guys that work for them, we don't have a lot of turnover in those businesses historically.

They're people who, you know, they really know their markets and they're quite effective in the business themselves.

A lot of these companies are $40 million kind of companies so the relationships with the team are, you know, critically important.

They may not be sort of career building jobs where they're moving up in some big company.

There may be people out there we've lost but, I mean -- in our team when we think about who is left, we lost one person that we would really like to have held on to, but this was kind of a science as to who went into a research project that made sense with him.

But we haven't really lost anybody.

Okay.

And with regards to Gazprom, you talked about being a learning experience for all the entities involved and as we go forward, could you based on what you know today speak about '04, '05 beyond what you think the negotiating process that -- how do you see that business going forward?

Well, the negotiating process I think is really clear and okay.

We really have a good contract.

It took longer to get done than we expected, and when we were originally waiting on the signature, that was sort of central authority Gazprom signature.

What wasn't explained to us that became very clear in the second quarter as we're going through this, now that that is done, the central authority brought all their subsidiaries in and they made the subsidiary authorities basically go through their whole CAPEX structure about what their after-market activity would be and then those guys signed on to everything then the negotiation - there is no negotiation around this sort of individual contract any more.

That is in place.

Now it's just the sort of servicing these Gazprom entities and without a central authority telling them that they have got to buy at a particular point in time, it's a more - I don't want to say it is undisciplined but, you know, it's like any sort of CAPEX strain.

If a guy wants to refer he could refer it for three months and that is - there is not much we can do about that except know that they want to get these things done and they're not going to want to lose their budget that they have gotten approved by Gazprom to do this during the course of the year.

But some guys will do that efficiently and some guys will probably wait to the end and most of our relationships were frankly with the Gazprom senior leaders and some of the Gazprom affiliates.

Now we're having to develop the same kind of intimacy with the Gazprom affiliates that we did at the senior level.

And I always - you know, we've got a lot of installed systems, we've got a lot of systems over there that we're going to be installing and it's just hard to see the pace of change for them picking up in '04 above what we're looking at in '03.

But we don't have the sort of gun to our head about how are you going to negotiate the contract?

Maybe an annual renewal but I think that now is going to be a standardized kind of thing.

I don't see a problem with that.

There are a lot of things that they had to do this year to verify they thought they were getting a reasonable price and it was not dissimilar to what we would sale to other people around the world and what have you.

And I call those difficulties are behind us.

All right, thanks for the clarity on that.

And final question, on the central comp plan at the beginning of this year you had put a new component in if I remember correctly to focus on the working capital to help incentivise (ph) and align everyone's interest on that front.

I know we're only halfway through the year but do you see any material changes to the incentive comp plan to help change the thought process at the next level of the organization going forward or would you envision things pretty much staying in the same for at least another year?

You know, we have a quarterly review in June that we'll bring in all the P&L guys and we're going to talk to them about that for '04.

This year it's around operating profit and working capital and some choices announced for the specific performance for the business and I think that sort of serves us fairly well.

But the layer beneath the 20 some P&L Presidents we have has been pretty much completely controlled by those guys.

They get a bonus pool and they can - it's driven off of the P&L person's results and then that P&L President can fill that out as he sees fit to their people as a function of whatever he wants to do.

We've not really been very, you know, they get a direct function to his pay.

I mean, we're not - we're not saying, you should design a compensation program for the manager manufacturing, you should design the sales compensation separately.

But for the 20 P&L presidents, that you'll begin to discuss that in June?

I think we are willing to listen to what they have to say about it.

I think, you know, the business has got to generate enough profits to fund the bonus plan and then we want to look at how they use the money.

Okay.

But I don't think, you know, we're not in need of any kind of re-mediation around here on those subjects.

That you know, we're getting the behavior that the enterprise needs and P&L centers are getting the behavior they need from the existing bonus structure.

Okay, fair enough.

Thank you very much.

Okay.

Steven Colbert, Jolson Merchant Partners

Yes, thank you.

Good morning .In the company's second half guidance, can you tell us what you built in terms of additional restructuring costs as well as any benefits from the restructuring efforts and also in addition to that, can you help us a little bit more specifically in the timing of the benefits that you expect that the company expects to realize in 2004?

Yeah, the second half of the year, Steve, is probably a little over $3 million.

Restructuring costs?

Restructuring, yeah, yeah.

You know, it could be up or down a little bit from that, depending on how quickly everything happens at Redlake.

Benefits, we'll see actual cost reductions in the fourth quarter.

I'm not sure exactly how much that will be, but we'll have lower costs in imaging and we'll have lower costs in Qualitek and lower costs in Zetec and benefits from Struers.

So, you know, it will be a lot this year.

It will be, you know, much better in '04.

And does the $15 million in benefits that you talked about for mostly in the first half of the year, what you think?

Well, I mean, that is an analyzed run rate so if you got all of it, there will be a curve up as the year goes on.

First of all, you know, there is some seasonality in Roper's businesses so the first quarter traditionally is not as strong as the second quarter and the third quarter is not as strong as the fourth quarter.

And there is some volume variances that will drive those restructuring benefits favorably as well.

You know, having said that, there are some people become more productive as they engage in new systems and so you'll get some productivity softness at the beginning that will iron itself out.

I just think you build sequentially on those costs improvements throughout the throughout the fiscal year of 2004.

So building up basically over time in this sort of towards the end of the year will reach a $50 million run rate at that point in time?

(inaudible) this guarantee - we said up to $15 million on the annualized basis.

That earlier was done and people were up and running we could see the opportunities for that and it's going to be substantial.

Our goal is to get up to $15 million.

Okay.

Brian, you've also mentioned here and there about capital plants in Mexico, more operations potentially in China as well.

Is there a corporate policy that you are trying to move more and more production to such lower cost manufacturing locations and, if so, can you help us define a little bit more where and the percent of your manufacturing that might be in such low-cost manufacturing in 2004 and 2005?

I think it won't be overly material, Steve.

The move to China was really to get us closer to the ship-building markets and power generation markets we think are growing there with our particular business as a result of it being there we will be able to do more sourcing because we have an infrastructure and over time we may move a few more things in there.

It is just sort of part of a continue versus improvement philosophy we have had for year.

Mexico is a very distinct situation.

We have got a business that was not going to work on its cost structure and we had a couple of things to do and the right thing was to move it into the low cost structure.

Today it had a lot of direct labor.

Our businesses as you know -we don't have a lot of direct labor and we're much more tested in assembly kind of an operation so moving those to low-cost centers isn't going to drive a lot.

It's more in the industrial technology arena that low-cost centers are really critical for us.

Then you start to move things in to them as their capabilities improve.

I think it is a multi-year process.

We don't have a strategy that says, we don't want to have to have a plant in Germany or Denmark and we want to have 80% of our production in China by 2004.

Absolutely, couldn't be further from the case.

Okay.

We want each of our businesses to maximize their proximity to customers and their contribution to the enterprise.

Okay.

There are many ways to do that.

And then the last question, can you just tell me totally you can provide us in terms of the acquisition pipeline right now, what that looks like, the size of deals that you're looking at and can you tell us where that stands?

We have a lot of things we're looking at.

There is really actually more final ways - most of what we're looking at is below $50 million.

A couple of things we're looking at would above that.

There remain a lot of opportunities.

Multiple kind of expanded a little bit so we're very selective.

But there are a lot of opportunities.

To the extent that other enterprises such as yours are focusing on cash flow debt reduction building up cash, is the competition for these fields intensified in the last six to nine months versus what you saw a year and a half ago perhaps or so.

I think the private equity people are prepared to take lower internal rate of returns on their equity investment piece so the bottom has come up some and in the larger businesses have come up on an enterprise value basis on trailing EBITDA under the theory that their performance will be better and people are buying adjusted EBITDA numbers.

All of that, it's not really too relevant to us, you know, the deals we're looking at are all, you know, specific things that we know and understand and I don't think the marketplace pricing will be a problem for us.

Okay.

We really buy stuff on the basis of first year performance and, you know, less about what their trailing number was.

Good.

Thank you, Brian.

Okay.

Keith Hughes, SunTrust Robinson Humphrey.

All of our questions have been answered.

Matt Somerville, McDonald Investments.

I sort of have a couple of questions.

Martin, you mentioned $80 million to $90 million in free cash flow, I want to clarify this, that does not include any benefits from working capital number one and part of that obviously would be the Gazprom collection; is that correct?

No, that is - that- that includes some part of the -it includes the Gazprom collection but no other working capital benefits.

Okay.

So based upon, you know, what you're look at in terms of what you're doing with working capital this year if you would factor that in, you know, could we be looking at a free cash flow number in or about the $100 million range?

Yes, if we - that is entirely possible.

Okay.

And secondly, Brian, you talked about some rough revenue numbers for Q3 and Q4.

I was wondering if you could distill that a little bit in terms of what you expect in terms of organic growth in those quarters excluding foreign currency?

We are counting on organic growth other than, you know, on a year-over-year basis or sequential basis by very much.

You know, we - you know, a couple of points would be nice.

And lastly, you know, I hate to beat this Gazprom thing to death but I just want to make sure I'm clear on this.

How much revenue do you have to Gazprom year-to-date in request's 1 and 2?

We're at $10 million basically that we have already.

So to hit the two bucks you need an incremental - another $15 million; is that accurate?

That is accurate.

Okay.

And It sounds to me - and please tell me if I'm wrong here - that your level of confidence in getting that incremental 15 has increased substantially from, you know, 90 days ago?

Yeah.

I mean, I think our level of confidence about the whole situation has increased substantially from 90 days ago.

Okay.

You know, we still have people telling us they're going to do more.

We're just - we're skeptical about that but we have a high degree of confidence in getting $15 million more in the second half of the year.

Okay.

If you look at the $15 million annualized savings potential from the cost reduction program, can you break that out a little bit in terms of which segments are going to benefit the most, kind of rank them, if you will?

I don't know.

That is - you know, certainly everybody benefits.

Imaging will certainly have a substantial benefit because of what's going to happen with Redlake.

Instrumentation, maybe - everybody benefits.

Sort of not in - in terms of the size of the business on a relative scale, imaging is the one that will have the biggest turn around.

Okay.

And then Lastly, can you talk about-You've mentioned you've seen some gaps in funding or lack of releases in funding out of Japan on the research side if I understood that correctly.

Can you talk about what you're seeing here in the U.S., and if you have any preliminary thoughts on how the funding pipeline will shape up for fiscal '04?

Yeah, we're not seeing any shortfall in spending in the U.S.

Research businesses have been okay here.

It's just the Japanese business that's been - been soft.

I don't know about next year's budget from the government on research.

A little early on our strategic process to really have any clear visibility on next year.

Okay that is all I have.

Thanks, guys.

Thank you.

Mr. Hix, at this time I'll turn the call back to you.

Good.

Well, thank you very much for participating in our conference call this morning.

We appreciate your time.

Thank you for joining us today.

You may disconnect at this time.