Roper Technologies Inc (ROP) 2003 Q4 法說會逐字稿

Welcome to the Roper Industries fourth-quarter and full year-end 2003 results conference call.

This call is being recorded.

At the end of today's presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Chris Hix, for opening remarks and introductions.

Please go ahead, sir.

Thank you, David, and thank you everyone for joining us this morning for our year-end 2003 conference call.

I'm Chris Hix, the Director of Investor Relations, and also participating in the call today are Brian Jellison, Chairman, President, and Chief Executive Officer, and Martin Headley, Chief Financial Officer.

Last night we issued a press release that included our 2003 full-year results.

These results included strong fourth-quarter performance, especially in cash, capping a year of considerable accomplishments.

We also provided our forecast for significant improvements and performance for 2004.

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

The press release includes telephonic replay information for today's meeting.

In a moment, I will turn the meeting over to Brian Jellison for his remarks, following which we will take questions from our telephone participants.

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

The slides can also be obtained in PDF format from the investor information section of our website.

Please turn to slide two.

Today's meeting includes forward-looking statements, and I would like to remind everyone of our Safe Harbor statement, which enumerates numerous risks and uncertainties and includes forward-looking statements.

Please refer also to our 2002 Form 10-K/A for a listing of key risks and uncertainties.

With that, I ask you to turn to slide three as I turn the call over to Brian.

Good morning everyone.

We are going to split this into four pieces.

Initially, we will look at 2003 with kind of a quick overview, move into quarter four, and then talk about the full-year 2004, and then close on a summary and take your questions.

If you turn to the next slide, number four.

At the beginning of 2003, we made four commitments to people on the left-hand side.

We said that we would achieve record calendar year results, even though we felt the market conditions would be difficult.

That turned out to be an even bigger challenge because of the softness with Gazprom in the prior year, but even given that, we were able to have a 7 percent increase in sales.

Cash flow from operations was more than $96 million, and that included us spending $6 million on restructuring.

So it would have been nearly 100 million.

Our diluted earnings per share from continuing operations were $2.01.

We have been saying for a very long time, since last October, we expected to be at $2 or more.

The 11th year of dividend increases, we had a dividend increase last year of 10 percent.

On executing the disciplined acquisition process, you can see we made our largest acquisition, the family of Neptune Technology Group holding businesses.

They are going to be immediately accretive, even a tad of accretion in the first quarter of 2004.

And they're accretive to our growth and sales and margin profiles and will allow us to now refocus on our pipeline where we have a lot of other activity that looks exciting to us.

Number three is capturing the benefits of new structures and synergy.

Our restructuring is essentially completed.

We had to hold off two things until the first quarter of this year, which was the consolidation of our AMOT business globally where we felt it needed to be put together with tighter controls and better leadership.

And then making some changes in the size of our support unit for Gazprom, now that we have a clearer view of what that ongoing business is likely to look like, and that was done in January.

The fourth item was focusing on customers' markets to further strengthen our results, and we have been able to produce, particularly in the second half, real growth, not just foreign exchange driven numbers.

I know a lot of people look at people's current reported revenue, and we think it is important to distinguish between real organic growth and foreign exchange.

With that in mind, let's look at the next slide, slide five.

Here you can see what has happened to us throughout the year.

In the first quarter we reported an 80 basis point improvement in sales, Q1 over Q1 of the prior year.

The reality is that we benefited from the 5.9 percent of foreign exchange so actually organic growth in the first quarter was a -5.1.

In the second quarter we had foreign exchange of about 5.2, we reported sales growth of 7.1, so we went positive there with a 1.9 percent organic growth net of foreign exchange.

In the third quarter we reported 8.8 percent growth and use you see here in the fourth quarter we actually were up 9.4 percent.

So we are moving in the right direction and even if you exclude all foreign exchange in the second half we are up over 5.5 percent.

Next slide would be slide six.

This growth has continued despite a couple of important challenges.

Our sales as we said where at 657 versus 614, up 7.

The 2001 EPS from continuing operations if you add the restructuring back of 12, it would have been 213, divide that by your (technical difficulty) and you are up about 9.2 percent.

A lot of focus on nominal EPS.

We think it is important look at our cash earnings.

If you looked at the net earnings and exclude the debt extinguishment and add back depreciation and amortization, our cash earnings were in excess of $2.43 a share.

All of you who have followed us know that we have 30 million less sales to Gazprom in '03 than we had in '02.

I think it is a credit to the diversity we have everywhere else for making these achievement and then recognizing the restructuring charge as part of our income statement instead of taking a special charge I think we want to remind people of that when you are looking at the nominal measurement.

If you look at the next slide, slide seven, the recapitalization of the company has allowed us a great deal more flexibility.

If you look at the end of last year we had 15 million of cash on the books; at the end of this year we had 70 million cash on the books.

Our undrawn revolver at the end of last year was $91 million, so we total the two together we had $106 million of cash that could have been used for acquisitions.

Today you can see that the undrawn revolver is 205 million at the end of the year, coupled with 70 million of cash so we had 275 million versus 106.

And we do have a very full pipeline of activity that we think is very exciting.

When you look at the next page, slide eight, Neptune, certainly a very compelling opportunity for us.

It meets all of our discipline acquisition criteria.

We feel it has got enough engineer (ph) content and gross margins and world-class EBITDA performance and will throw a lot of cash off and later we will be talking about cash EPS and how much it will be up as a result of this transaction.

We had a sales meeting recently with the Neptune guys and we came away very encouraged meeting their 70 plus people associated with sales here in North America.

They have strong goals in place for the year and they are off to a very nice start here in January.

Next slide nine.

From here we will transition into the fourth-quarter performance.

Fourth quarter has got a few little unique parts we will talk about.

You will see the margin bridges are going to let you see the dias (ph) recorded number looks weaker than what really is going on.

Our margins are substantially better as we will explain these couple of items that happened.

Of course we did have a very modest Gazprom business in Q4 and there was some squeeze from foreign exchange.

If we turn to slide ten, the orders were just extremely good.

You can see for the enterprise as a whole our orders were up 11.3 percent in the quarter.

Our energy business was up 34 percent in both industrial and instrumentation, similarly around 11 to 12.

Imaging while it was down 3 percent, that is primarily due to an unusual lumpy comparison in the transmission electron mycroscopy (ph) business which is in the fourth quarter of the year ago.

We had a big backlog as we went into this year in Gatan.

The next page slide, eleven, is the income statement.

We look at the sales you can see they are up about $10 million from 159 to about 170, that is a 7 percent increase in sales and if you exclude Gazprom it is a 9 percent increase in sales, of which foreign exchange was about 4 percent.

And that was driven mostly by compressor controls business outside of Gazprom and by Cornell's wastewater projects and very strong fourth quarter from our Gatan business.

Gross profits down one basis point there, almost exclusively due to foreign exchange and we have an inventory adjustment in one business in Europe and we will talk about that.

Income from operations as recorded was at 29.3 up from 28.4, however we had a $700,000 investment in restructuring in the quarter, and in a year in inventory adjustment that was over $800,000 that affected these numbers.

Excluding those our margins would have been 18.7 up from last year's 17.9.

We will talk more about that as we get into each company's situation.

Our diluted earnings per share then were 56 cents versus 54; when you add in a debt extinguishment number of course you get the 6 cents versus 53.

When you look at the next slide, slide twelve, that is focusing on the operating margin.

You can see in the fourth quarter last year we reported 17.9 percent.

The restructuring that we took in the fourth quarter would have added 40 basis points to our performance.

And then our AMOT business had a year end inventory adjustment that was negative to us of about $800,000 which we didn't learn until late in January.

This was something that was uncovered by our own internal audit people looking at the way they were doing cycle counting and this was an important thing and a surprise for us and that took 50 basis points off our overall enterprise margins.

Then unfavorable currency on squeeze from five or six businesses that are selling into the U.S. from Europe who are certainly in the black in their sales here but much lower than they would otherwise be.

That is about another 50 basis points.

If you take those three together, the currency squeeze, the AMOT inventory adjustment and restructuring, it is 1.4 percent that you would add back to the 17.3 at the bottom of the page as reported and we would have been at 18.7 versus 17.9 a year ago.

I can assure you that everybody here is all over the operating performance of everyone of their businesses and these are in fact unique situation that ought not to recur.

If we go then to the next page on thirteen, the quarter four balance sheet, the cash is just spectacular.

You can see the cash here excluding the debt extinguishment was nearly $38 million.

That is up 10.1 million from last year's fourth quarter and the sales were only up 10.7 from last year's fourth quarter.

I think that tells you that everybody at Roper remains very focused on cash performance and it is continuing to escalate here.

Our networking capital improved by $4 million in the quarter over last year which added to that cash you can see.

Then our capital structure is in much better shape, the balance sheet now we go from an unrated debt rating to a BB+, our cash balance moves from 15 to 70 and our undrawn revolver capacity from 91 to 205.

We have generated some more cash in January and actually paid down our net debt to net cap at the end of January is about 46 percent.

We are moving in the right direction quickly.

Next slide, fourteen, is the first of our segments we will talk about in the quarter.

Quarter four you can see scientific and industrial imaging, our net sales were up 6 percent, pretty much across the board.

Orders were down 3 because of the lumpy piece from Gatan that we discussed.

Our last year's acquisitions, Duncan (ph) and Q (ph) Imaging are offsetting the softness we see in physical science at Roper Scientific.

Operating margins were 17.4 percent.

We had a negative year in adjustment on medical this year in this business and a positive one last year so that was a little bit of a squeeze.

Next slide is fifteen and here we are looking at energy systems and controls.

Net orders were up 34 percent in this business.

We really do have all of these guys focused on all the opportunities around the world and you can be here, and that is in the face of Gazprom sales in the quarter being down 39 percent or 5.3 million versus the same quarter a year ago.

As you know if we are off $5 million on Gazprom sales on a quarter year-over-year it has an effect.

What we have done in Des Moines already is to put in place a better balanced cost structure to support the Gazprom business versus what we have historically had and that retrenchment is completed, the announcements are made and some structural things have been done there.

And then operating margins were maintained at 20.4 percent despite the lower Gazprom sales.

I think that is a terrific measure going forward that even without Gazprom in any significant degree we still have high margins in this segment.

The next slide is sixteen, that is industrial technology.

Here you can see orders up 11 percent; a lot of that in the wastewater projects, very strong activity at Cornell.

Our industrial markets are showing marginal improvement.

We have got a little bit of systems activity that is improving as we go to a little more solution selling.

Profit margins stayed about the same at 21 percent.

And this is where we got hammered with this January recognition of this year end inventory adjustment that cost us about $800,000.

So that depressed the margins here in industrial technology and in the segment as a whole.

Next slide is seventeen.

That is instrumentation.

Here you can see orders up 12 percent, it is the third consecutive sequential improvement in net sales.

We have had in the business very strong performance in our oil and gas measurement business and very good activity around all of petroleum analyzer and (inaudible).

Operating profit margins increased 190 basis points to 21.1 that is the highest they have been in nearly three years.

And you can see a consistent sales trend continuing at both (indiscernible) and these other business.

Moving from seventeen to the next slide, this is where we would transition to the calendar versus full year.

Here we are looking at the first time our guys have forecast on a calendar quarter basis and we certainly are getting some noise as people think about well the first quarter is really January, February and March, not November, December and January.

I am sure some of you will have some noise in your models as we look at this stuff.

The next page, slide nineteen, looks at where we enter the year with markets and it is the best position we have been in a very long time.

Really none of our markets have peaked and none are in decline.

If you look at what is improving the water waste/water segment which is about 25 percent of our business that is an improving market.

Our oil and gas energy control piece is 25 percent of our enterprise and that is improving.

Life sciences around 6 to 8 percent and that is improving and U.S. industrials improving only a little bit but we continue to have hope that with the 12/31 expiring CAPEX proposal that the government has that there ought to be some pickup in U.S. industrials sales throughout the year.

On the stable side European industrial and power gen are stable, commercial refrigeration is stable to slightly up.

The semiconductor business is starting to focus on rebuilds, we will talk about in a minute.

And physical science would be the part that is struggling the most for us and it represents about 6 to 7 percent of the enterprise but it is not in decline, it just seems to be pretty flat.

We look at the next slide, number twenty, we start to look at the full year next year for our four segments.

We think the initiatives that we have in imaging are going to produce good results.

We have new application opportunities and lowlight security cameras and weather sensitive photography.

Ramen (ph) technology for medical applications, we are launching some new cameras at different price points.

Expanding our software to drive the camera technologies and Redlake's new camera line that we launched last year has exceeded expectations and is starting to develop new applications in industry that we frankly had not foreseen.

So we feel pretty good about where we are moving.

Also we are going to put the DAP and hand-held rugged (ph) computer instrument business from Neptune into imaging because it is quite similar to the manufacturing techniques we use in imaging today and we are going to put the DB Microware software business for route mapping in imaging to provide leadership because of the additional capability we have in software and imaging.

Next slide, number twenty-one, is energy systems and controls.

Here you see a record 2003 performance on the non-gas (indiscernible) side of oil and gas which we believe will continue and you can see that with the 34 percent increase in orders in the fourth quarter.

We have finally mastered getting Metrix in Zetec to be able to share people which is important because Zetec has generally a very soft first quarter and fourth quarter, and then a very strong second and third quarter.

And Metrix has a little less cyclical activity so if we can deploy people around, we can get higher revenue during the peak outage season when Zetec needs all the resources that they can find.

And we have matched the cost structure to Gazprom sales which we think ought to be somewhere between 2 percent on the low side, and 3 percent on the high side of total revenue for Roper.

Next slide would be twenty-two, here we are looking at the industrial technology business.

We see continued growth in water and wastewater markets across the board, although Abel in Germany is struggling a bit because it is 100 percent European cost structure, and selling into the U.S. markets been difficult for them in the last six months.

We need to capture the Neptune opportunities which we know we will do, and then we are uniting our AMOT business which has been segregated one in England and another one in northern California.

And we would think for a variety of reasons we are going to be better as one unit under one leader and stronger market controls and better financial controls.

We are going to do more cross selling across the companies that is already benefiting us with Cornell and Hansen and it is benefiting us with Cornell and Hansen with Abel.

We ought to continue to increase our sourcing wins.

We know that we are going to have some substantial savings in all of these businesses on the valve and casting side.

And then we will be able to leverage our Chinese and Mexican facilities throughout the year as we bring more work down here.

The next slide is twenty-three, that is instrumentation.

Here we are getting some benefit out of leveraging our channel leadership with expanded offerings, bringing in some OEM lines from people and adding some software capability to what is normally a hardware sale.

Continuing to capture the desulphurization move Antek had a very strong second half and we expect that to continue and then selling software capabilities to existing customers, we have done some CRM technology that is beginning to pay dividends for us throughout our installed base.

And then focusing our semiconductor business on retrofit and upgrade markets, some of the data around IDI some of you may remember it is a remarkable, the market leader used to have about 40 percent share of track building in the world and today they have over an 80 percent share, and generally we don't have much business with them, it is the other folks.

What we have done is restructure the business around rebuild activity and as people start to bring things out for production from mothballs, we are getting some rebuild business that could be upside surprise in 2004 for us.

Next slide, twenty-four, if we look at the full year enterprise initiatives for us we want to make sure that we build on the market (indiscernible) segments that we put in place at the beginning of '03.

We want to execute those growth initiatives that we just reviewed with you in detail.

We want to continue to build our capabilities across the company that would be adding talent and continuing to grow and develop our existing people.

We feel we could still drive down networking capital if we came in this year accounts receivable are about flat and inventories improved by 100 basis points, as a function of sales and accounts payable went up substantially.

But there is still room to pick off three or four percent more of networking capital for us in the next year.

And then capturing our Neptune technology holdings opportunities and then lastly, continuing strategic acquisitions of which we have several that we are pretty excited about.

Next slide twenty-five, that is an outlook for continued growth this year.

We see net sales building off our 657 of last year should be somewhere between 875 and 925 million in '04.

And our diluted EPS ought to go up from 201 to somewhere between 245 or 270.

And I just remind everybody we talk about these numbers, cash EPS focus is pretty important for us and our cash EPS next year is going to be somewhere between 349 or 379 or perhaps even more per share and our D&A is worth over a dollar a share.

When you look at our cash projections and our cash results in the last quarter they are going to look a lot stronger than nominal EPS, and that is really what we are about.

Next slide is twenty-six, if you focus back on just EPS instead of cash then what we will see is a similar profile in 2004 to what we did in 2003 in terms of where the earnings are reported.

In the first quarter we are establishing guidance for the first time of around 43 to 47 cents with the second quarter being 57 to 63.

In the first quarter we have got to eat about the last million dollars of restructuring from both AMOT and Gazprom activity.

But then we will be finished and that will be the end of our restructuring cost.

In the second quarter we will have better revenues from already planned sales in oil and gas and wastewater, so that will hike Q2 over Q1.

Then in the first half we are eating pretty substantial costs associated with Sarbanes-Oxley and 404 requirements that really do depress earnings.

Then we go to the next slide twenty-seven, you will see if you look at this years profile in '03 we earned 83 cents in the first half of the year which turned out to be 41 percent of our total year earnings.

In the second half we earned $1.18 which was 59 percent.

In the guidance we established of $1.00 to $1.10 is in fact 41 percent, just as it was last year, and the second half guidance of $1.45 to $1.60 is 59 percent.

There are things that could move forward into the first half; we are very comfortable with full year and think it is prudent to do what we are doing here in terms of guidance in the first half.

We already have covered some of those items in the first half that will be less costly in the second half, so I think that ought to give you a pretty good sense of how we see the guidance going.

We turn to the next slide twenty-eight, we will show you what could happen that could make the 245 go up to 270 or more.

Well, first let's look at what it takes to get from 201 to 245.

What we need there is simply to execute against the known wastewater projects that we have in place; we need to capture the Neptune benefits that we think we are well on our way to doing underway.

We need to continue the inertia that we have from the second half of this year and we need to execute against the strength in the oil and gas markets that we see.

All of our markets are stable or growing so we don't really expect any downward pressure from anyplace.

And then the restructuring benefits need to continue to be captured as they are so the 245 to us is a very straightforward opportunity.

Can it be higher?

Absolutely, we have got a lot of things in the imaging area that we are introducing.

As they are adopted they will add more revenue and more sales to the company.

There has been a pretty rapid growth rate in automated meter reading in the world but that growth rate could escalate, or Neptune's share of that could continue to grow at very high rates and that would add more money and move us closer to the 270 or beyond.

Gazprom we are in here at a very modest number.

If that situation were to change and they had more funding available, they certainly have a backlog in needs and if that improved that would add a lot of strength to the numbers that you are seeing here.

There could be faster market growth than we have seen; remember the second half of the year we had about 5.5 percent organic growth.

It is conceivable that could be maintained throughout the year and that would add to our assumptions.

Then in the U.S. you have this 12/31 year end CAPEX tax deduction that is going to go away and there are a lot of people who believe folks you have not paid a lot of attention to it will in fact pay attention to it as this year rolls on.

In the semiconductor fabrication bringing capacity out of mothballs could drive better performance at IDI and Cyber then we have seen and then lastly the squeeze that we have gotten from several businesses that have to sell into the U.S. from Europe, if the euro went the other way and it has backed up a little bit yesterday and got below the 125 number, that would be good for us.

Because the reality is most of our sales are denominated in dollars and we get a little bit of repatriated benefit in the European side of the sale but it does hurt us as we import it into the U.S. from Europe.

I would also say if you look at the 245 on a cash earnings basis that number is a lot bigger, it is 349.

If you look at the 270, it is 379, so we have an opportunity for just world-class cash earnings in 2004.

Turn to Page twenty-nine.

You see cash flow from operating activities which is a GAAP definitional term, in 2003 that was $96 million and next year we see that between 140 to $160 million.

That produces pretty strong cash EPS as a result.

Then if we move to the next slide thirty, the summary, what we have tried to share with you is the 2003 results were delivered through a strong second half and we think the same thing happens in '04.

The restructuring is now behind us and our sales per employee are already up to 235,000 and we expect they are going to get closer to 250,000 in '04 and that is getting to be pretty healthy numbers.

Our markets are stable improving with water being 25 percent and energy 25 and live sciences 6 to 8, nearly 60 percent of the company with favorable tailwinds and no longer any headwind.

And then cash flow up substantially to 140 to 160 million.

We will get accretion throughout the year even with a modest amount here in Q1.

The new capital structure allowed us to do pretty much anything we want to do on the acquisition front.

And our leadership team has delivered strong organic growth in the second half.

The pipeline as I said is very full.

I think the noise around calendar and fiscal year quarters that we all have in our models will go away as the first half of the year gets behind us and our free cash flow next year is going to be up 50 percent or more in my opinion.

So with that we would like to turn it over to your question and I think we are ready for the first caller.

David, we are ready to take questions from the callers.

(OPERATOR INSTRUCTIONS) Alex Blanton of Ingalls Snyder.

I would like to focus first on the energy systems group.

In the quarter-to-quarter comparison third to fourth quarter, operating earnings were down about 4.95 million quarter-over-quarter and the Gazprom sales in there were only down 2.1 million so even half of that would have only been about a $1 million reduction NOI quarter-over-quarters.

You also mentioned the non Gazprom sales in the quarter were very strong.

(inaudible) orders were strong.

Okay.

The question really is why was that segment so weak in the quarter versus the third quarter?

You can't really blame it on Gazprom.

But there is Zetec in there, so does that have something to do with it?

That is a very seasonal business.

I would say, Alex, actually the compressor control business was down a little over $5 million in the quarter but the orders are very strong.

From the prior quarter?

Yes, Q4 versus Q3 sequentially.

CCC was down 5 million.

It was down 5.8 million.

Of that 2.1 million is Gazprom?

2.2 on my notes but just rounding.

I'm looking at your supplemental sheet.

I'm looking at a bridge sheet I have in front of me.

So the non Gazprom business was actually off even more?

Yes, but that was just the shipments, that is through the roof its going to do very well.

I understand that but I'm just focusing on why the fourth quarter was below expectation.

It actually -- in energy it wasn't below our expectations.

Zetec has a really strong Q2 and Q3 and then it has a weak a comparatively weak Q4 that actually makes money in the fourth quarter, but sequentially Zetec was down a little over 2 million.

Zetec was down 2 million?

Yes, I think something like that.

And CCC was down 5.8?

Yes.

Okay.

But that explains it.

That was the question.

In 2004 you said you have a very modest expectation for Gazprom and you gave a range of 2 to 3 percent of your sales which would be 17 to 28 million.

But what is built into your current forecast for Gazprom?

Which end of that range?

The bottom end.

Below it or just at the bottom.

Yes, even a little below.

We are very conservative on the situation at Gazprom because I think the both companies are really improving their understanding.

We have made a lot of changes now as to who talks to whom and I think we have a very open dialogue about everything but their decision-making process is still slow.

We're not going to have much in the first quarter.

They have given us the same kind of commitment that they gave us in the first part of last year for 2004.

At least we sort of second-guessed that and they came in dramatically lower than what they said they would do.

So we are very hesitant to accept their projections.

We would think the number is below 20 million in revenue.

Okay.

The sales figure you gave for the year, 875 to 925, if I take last year and I add -- let's pick a number 200 million for Neptune, I get 857.

So the sales range you are forecasting is really 2 to 8 percent increase.

Yes.

Isn't that very conservative given what is happening to the economy?

The economy is going to grow in the midrange of that.

We think it is conservative.

Okay.

In other words it could very well be beyond that range.

It would be refreshing for us to have to come in and raise guidance in a year.

Good.

You said, I think in the last conference call you expect a operating margins in every segment to be over 20 percent in '04, is that still your expectation?

Want to be careful -- certainly operating margins without corporate G&A Alex is probably (multiple speakers) yes, the answer is yes.

And finally, can you give us your tax rate assumption for 2004 and also a number of shares that you expect to be at?

Yes, I will.

The number of shares is likely going to be about 37.7 million, and that is what we are using to create these numbers so that is part of it.

For instance if we did the midrange of what we are talking about on free cash flow, we would do about 130 million of free cash flow next year versus about 77 million this year.

Because we have 32 million of shares in the last year that would have created say whatever I would have to divide that.

Take 78 and divide it by 32 and it looks like 231 or something.

Well next year you can have 130, let's say, divided by 37 7 it comes out to be 340 so it is up 47 percent.

But the real cash flow, if you took 128/78 it is up 64 percent.

I understand.

On tax, let me just say on tax, the situation here is interesting.

It looks like what will happen for all companies in '04 is that you are likely to have quarter to quarter variances on your tax instead of a smooth rate.

This seems to be an outgrowth of governance today.

I will let Martin comment on the tax rate but it is going to be lumpy throughout the year.

Whilst overall we are kind of finalizing everything, we would anticipate as we get close to the end of the quarter or so, we would see an effective rate probably in the 30 to 31 percent range.

The way that the accounting and auditing profession is looking at taxes now following guidance from the public company accounting oversight board is that you are likely to see that variance because they are going to be reviewing the movements in taxes quarter-to-quarter looking at an effective rate year-to-year.

I think Brian was giving a very wise kind of heads up on something we may see during the course of the year.

So we're going to see the tax rate jumping around quarter-over-quarter --.

No, we are getting those pressures from all of those kinds of sources.

We will see what happens, its going to be driven by X analogies (ph) not so much by us.

Right.

Okay, thank you.

Matt Summerville McDonald Investments.

Either Brian or Martin, could you quantify what your anticipated spending is related to Sarbanes-Oxley and how that is going to look in the first quarter versus second quarter?

How should we be thinking about that?

It is good that you have asked either one of us.

We have an internal debate over that.

Mr. Headley's going to spend a lot of money because he needs to get it all right and we want to be reasonable.

We just had our board meeting yesterday and the audit committee they are stunned at what it costs, it is going to be very substantial, could easily be a nickel a share in the first half of the year for us.

Martin, you can comment on the timing.

It's going to be weighted towards the front end.

The amount to which we occur in the second half is still uncertain and will be a function of how high or where the bar is actually set by the public company accounting oversight board which still has not given key guidance on key areas.

We're not quite sure where the hurdle is referral is that we got to jump or in the target but we have got to progress making some assumptions at this juncture.

If that changes we may have to hire additional resources to help us get to the finishing line by the end of the year.

Martin, depreciation, amortization, CAPEX and interest in '04?

G&A in total in '04 is going to be about 40, 42 million in that kind of range.

CAPEX in the high teens, it will be slightly higher than the kind of 1.5 percent of sales that we have had previously because of the impact of Neptune having just a slightly higher requirement.

And then interest expense?

We're not providing specific guidance on the absolute amounts.

I mean I could walk you through the structure obviously.

We have 230 million of CATS (ph) with a premium of 3.75.

We have a $400 million term loan with 300 of that floating at LIBOR plus 2 and 100 million of that now fixed at 4.1075.

Incremental borrowings that we may make associated when we utilize the revolver are also at LIBOR plus two.

It depends on what assumptions you make about cash flows to where the interest expense comes out but those are the components.

That is perfect, that is what I needed, thank you.

And then just one follow-up question, Brian, with respect to in the guidance in the EPS 245 to 270, what kind of brackets are you putting around the core growth for Roper excluding foreign currency?

And then what is your foreign currency assumption from a top line perspective?

And then I guess it makes sense to tie into it in the first couple of quarters this issue with respect to your manufacturing footprint is not to be ignored, obviously the strong euro is hurting you, but can you quantify the magnitude that you expect that to hurt the company early on at least?

In this quarter I think we already said it was 50 basis points of margin on the whole enterprise.

It is about 800 grand.

It is so mix related, it is hard to really say -- probably the richer part of the question was what do we think about organic growth throughout the year.

At the 245 we have a very, very modest assumption.

At the 270 it would have to be better by 5 percent or something like that.

We are not counting on some hockey stick improvement.

We are just looking at what happened last year continuing to apply and then if the markets were better we will outperform.

Okay, thanks a lot.

David Smith at Smith Barney.

Quickly on orders up 11 percent year-over-year, how much of that is currency related?

I think it is --.

It is about 4 percent year-over-year and for the full year and about 5 percent for the fourth quarter.

So without currency we're looking at six or seven percent roughly?

That is right.

Okay.

On Sarbanes-Oxley you seem to be indicating if it is say a nickel in the first half, would we assume half of that for the second half from what you are seeing?

It better be less than that.

It is an ongoing debate and there remains a lot of uncertainties.

As I said depending on where the bar is set and the exact scope of our activities that we have to go through.

We have made the assumption that there is a modest level of cost, but substantially less than the nickel in the second half.

Okay.

On working capital in '04 it looks like just from the numbers I can run right now that about 115 day supply of inventory.

Where do you see that going in '04?

It seems like it has been trending down but now it is sort of in that 110 day range -- does it go down to?

One of the problems it is trending down, one of the things as Brian said in his remarks earlier, if you exclude the Neptune business for a moment and just look at the same businesses between the end of calendar '02 and the end of '03, the velocity and we measured that as a percent of the annualized preceding quarter sales went down from 14.4 to 13.4.

And that level of improvement is something that we should be continuing to strive to at least achieve in the continuing year.

We also look at it as a net number and if you look at what Mark's description was inventory less labels at the end of last year was 10 percent.

Today inventory less payables is 7.6 percent.

Actually a substantial improvement.

Okay.

Just on the Neptune subject, can you just talk about accretion in '04 and '05, where you are standing today after having a better look at the business?

We said throughout our discussions it would be 10 to 15 cents accretive excluding the inventory step-up cost for the full year.

So we would stand by that, it could easily be better than that because the inventory step up is going to be a little less.

They shipped the lights out of their December numbers and so we're going to inherit a little less inventory, it is still going to be a couple of million dollars in step up charge but has the verbose (ph) effect of giving us a little more EPS but at the moment we are still saying 10 to 15 cents.

Okay.

On Gazprom any indications of what those margins are?

You can read a lot of people's reports.

Some of them who I admire think it must be in the neighborhood of 50 percent, and it must be about a penny for every dollar the Company does, never really confirmed it one way or the other.

It is very profitable work.

Last thing, you mentioned just more conceptually at least what you see in the water markets these days it sounds like you are seeing some strength there.

Where are you seeing that strength geographically and what kind of companies are buying the equipment?

We have really had, we had business called Parnell (ph) out of Portland, Oregon which makes centrifugal pumps and has been focused up until the last two years on kind of a very small niche market around irrigation applications and some food processing and some parts in rebuild.

We have let them go in an expanded direction and they are bidding on a lot more municipal work and improving other people's, adding other people's products to their systems.

That business is strong pretty much throughout the U.S. but it is also strong in the Middle East and we are approved on quite a few projects in Kuwait that could become substantial.

But as yet we haven't included them in our forecasts.

Okay, great.

Thanks.

Jim Lucas at Janny Montgomery Scott.

If we take a look at the acquisition pipeline being full which you have referenced a few times throughout the call, Brian, can you speak a little bit to what types of activity you are looking at whether it is building out the existing platform, new businesses a Neptune size or smaller, just give us a little bit more color on how you are looking at acquisitions these days.

I think we have a broad view of acquisitions, Jim.

We looked at $5 billion last year and bought just Neptune and the year before we looked at 4.5 billion we only spent 74 million.

So we have to look at a lot of stuff.

Right at the moment the things that we are deeply involved in are unusually exciting.

They are less than 100 million in revenue but they are very cash accretive and they have growth characteristics that are better than our enterprise.

So it would be very unusual today for us to buy something that is not accretive to our organic growth profile.

We wouldn't buy anything that we didn't think we could add value to.

Having said that the instrumentation business, we had a hard time building that out any further because so many of those businesses touch either the semiconductor market or the telecom market or autos that aren't particularly great places.

We struggle with that;

I wouldn't be surprised if you saw us add more software technology to imaging or to instrumentation.

We are not looking at much in the industrial technology arena.

It is really more imaging instrumentation or something that is complementary to those business that is slightly out of our current wheelhouse.

Okay.

When you look at the new profile of Roper with half of the business roughly oil and gas and water on the top line, how does that shakeout from a profitability standpoint whether you want to look at it straight operating or cash earnings?

Let me just add one more thing.

I think we are looking more aggressively at life sciences than physical science.

When you frame that you have 25 percent water, 25 percent energy; we also have 13 percent research we call it.

And it is split pretty evenly with a little bit of plurality going to life sciences versus physical.

We are struggling and have struggled for three years in the physical science arena.

So we're taking a much harder look at life science applications and I think you'll find us doing some things there.

Then that leaves us with the rest of the businesses being mainstream industrial kind of things.

We wouldn't mind finding something that gave us maybe healthier non-macroeconomic driven nature of sales.

So I think we are still looking for some more balance there.

As far as profitability between energy and water, they are both very strong.

As Martin or whatever said, all of the businesses have 20 percent plus operating margin, so it is not too different which way you go.

We wouldn't buy anything that we didn't think couldn't get to be high teens or up to mid-20s quickly.

Okay.

When looking at the organizational structure today, you have brought in a lot of talent; you're looking at the businesses differently.

Are you comfortable with the management team today?

Are there any holes still left to fill, or are we ready to -- is this the infrastructure you need to grow to the next level, whatever that may be, how you define it?

At the leadership level, we are in great shape.

We have got some holes in marketing or product development in some of the businesses out in the field, and we have continued to try to cascade resources out there.

But we don't want to build more into the corporate enterprise organization than we have, and I think the people we have at the top of the organization are terrific, and I think the results speak to that.

Okay, thanks.

Ned Armstrong at FBR.

Two questions I had quickly was, with the change in the Gazprom cost structure during the first quarter of '04, how much cost did you recognize that was specifically related to those efforts?

I think we never get to one particular place.

We're just saying that all total in Q1, it is going to be about $1 million.

That is total across the company?

Yes, total across the company.

There's only two things we did.

We had hoped to get done last year.

We said we would spend 6 to 6.5 million, and we spent 5.9, I think.

And we had to roll over something because AMOT has a business in Northern California, and with the Warren Act, we felt the timing was just awkward, because you have to give people notice.

So we did that and that's rolled into the first quarter.

And then we've had enough conversations with Gazprom.

We feel more confident about what '04 could look like once you get that sorted out, and we are having direct conversations with them, where in the past we went through distribution.

We were able to take a much better swat at what we ought to have in Des Moines to service this business.

My second question regards your outlook for the scientific and industrial imaging in 2004.

You mentioned that you want to try to reach customers through complicated distribution channels.

Can you just elaborate on the nature of that complication?

Yes, we would like to reach them through e-mail (ph).

The problem is that we have to sell through people like Olympus, and so sometimes the customer is somebody who we compete with directly.

But we have unique technologies that he needs to buy from us, and there is always friction in the relationship because they would like to sub us out, but we go to an end-user and we get spec'ed in.

So that pulls us through the product, and that is what is complicated about it.

You don't want to have an acceptable relationship with the value-added resellers that provide solutions in the market.

We don't want to be a value-added reseller.

We want to stay focused on products and software that can be sold by others and bundled with what they do, and that is what is complicated about it.

My final question regards your cash flow from operating activity.

Does the 140 to 160 that you're looking for '04, is that inclusive of working capital benefits/cost, or is that prior to including it?

That includes the benefits of improving working capital, Ned.

It includes the benefits of better working capital management.

Yes, it does.

So working capital would be a source of funds.

It will indeed.

Okay, great.

Thank you very much.

Keith Hughes at SunTrust Robinson Humphrey.

My question is on the first-quarter guidance.

We're going to be up a few pennies year-over-year at the midpoint of your range.

Given it looks like we're going to have some pretty strong organic growth continuing into early '04, is there something going on here in the margin similar to some of the things that hit you in the fourth quarter are going to be happening in the first quarter?

Just expected the margins to get to that number to be better.

We're talking about Q1 versus a year ago?

It was a year ago.

You're going to be up, but you're also going to have some strong organic growth.

I just thought the margins would have come in stronger given the cost (indiscernible).

I guess my question is, is there something there I'm not seeing that is again one time or special coming in the first quarter?

No.

I mean you have the substantial sales from Neptune.

Because of the inventory step-up and what have you, they won't produce a lot in terms of EPS.

It is going to take Q2, 3 and 4 before we get into there.

We also have the highest level of interest cost.

Given the strong level of cash flow, the interest costs associated with the Neptune acquisition is the highest in the first quarter, which crunches the net earnings margins for that quarter.

That's part of the answer, okay.

The inventory charge, do you get that more in the first quarter?

Yes, it will be orientated.

Most of it will be in the first quarter and then a little bit in the second quarter.

That answers my question, thank you.

I do just want to say there, Keith, those items that we had in the fourth quarter, the restructuring and that inventory adjustment, those go away forever.

So the 17.3 that was reported really would be 18.7 in a normalized situation, and that is not going to get worse; it is going to get better.

David Talus (ph), (indiscernible).

I hate to rehash the guidance question, but I want to try it one more time.

Prior to the Neptune acquisition, I believe the consensus for '04 was in the mid 2.50, 2.55, 2.60 range.

And you have got 10 to 15 cents accretion, which gets you to 2.65 to 2.70 because of Neptune, and then you've got this Sarbanes-Oxley thing and that gets you to 2.6 to 2.65.

Your guidance is 2.45 to 2.70, and you're saying at the low end of the range, it is zero or very modest internal growth, organic growth.

At the high end, it's 5 percent, but the range is still 2.45 to 2.70.

I just don't understand how you're getting there, one.

And then secondly, why did you let those numbers out there when you did your offering, because people were assuming those numbers north of 2.60, 2.70, were the number two guys were endorsing, because you did an offering in front of them?

So I'm just trying to make sense of those numbers.

Yes, I think it is hard for us to speak to the consensus numbers as kind of a moving target throughout the fourth quarter and as we enter January.

I think if you look at people's numbers falling within our range, mostly assuming the Neptune acquisition, I guess I would have to try to recalibrate around all your comments there, David.

Okay.

At the bottom-end of your range at 2.45 for '04, that is actually below the preconsensus of the Neptune acquisition.

Sure, and the 2.70 is above the consensus today and above the pre-Neptune consensus.

Okay.

Back to the organic growth number, why do you think or why are you assuming organic growth, besides being conservative, is going to be in that zero to 5 percent range when you had such a good fourth quarter?

And just looking at ex-currency, why so conservative on that?

The economy looks like it's going pretty well.

Energy looks like it is going pretty well.

So what are you thinking about there, a slowdown or just conservatism?

No, I wouldn't say it's just pure conservatism.

Part of what we don't know is we changed the company from a fiscal to a calendar year reporting basis.

For us the behavior we are seeing you are not exactly certain what is going on.

December was exceptionally strong and then so does that mean they pulled stuff in for January, and what is January look like?

And so it is just a little hard for us to see -- we are just not wanting to take much of an aggressive position about that.

Everybody out in the field is used to saying 10/31 was the end of my year, so I always drove whatever I get for 10/31 and gee, November and December were not important but January was crucial and they would drive a lot of activity around that.

Today December gave them a kind of a second opportunity to have a year-end month in addition to October.

So it is hard for us to know what to read into this first quarter until we get a couple of months behind us.

Now also that strength in the fourth quarter if some of that was driven by year end focus we do want to mislead people into thinking it is going to be continued into the first quarter.

The first quarter of last year and now we have had a chance to go back and kind of look at all of our data on a calendarized basis.

First quarters on a calendar basis for Roper have always been very soft relative to the last three quarters on a calendar basis.

That is the reason for the conservatism.

Andrea Wirth at Robert W. Baird.

Just like to focus a little bit on the energy segment; could you give us an idea what the energy orders were excluding Gazprom?

I know they are up 34 percent over all but what is the Gazprom contributing there?

The orders were up 37 percent if you exclude Gazprom, so 34 percent for the total segment, 37 percent without Gazprom.

Okay, so you have now had two really good quarters of orders ex-Gazprom.

Can you give us an idea actually what the backlog looks like, I mean what are the lag times that you are really seeing here cause now you have got two quarters when are you actually going to start seeing this really pull through to the operating line?

We look internally at backlog, but it is not a terrific number because projects can always be moved around.

And if you look at the backlog generally speaking things are going to ship within three to six months, and guys are always making changes around what they are doing and we are just one component of it.

It is tough, our visibility is pretty much just looking at Q1 and Q2 we have a pretty good idea.

That is about as far as I think we would want to go on backlog.

Okay. (indiscernible) Neptune wondering if you guys can give us an idea of how this business has done in the first month?

You said things shipped pretty well at the end of the fourth quarter, has that continued into the first quarter?

Also, just looking at Neptune's backlog, I know the AMR projects are usually longer leadtime projects.

I am just wondering what the potential is there you see for '04 for Neptune?

We went in with an idea that Neptune would be around 48 percent growth and it is well into the middle point of that range in January.

That is why we said it is off to a strong start.

And about the backlog?

Backlog is very difficult to dissect there because they have some very long leadtime AMR projects associated with redoing some of these large municipalities.

So just giving a number there will be very deceptive and the rest of that business is on such short leadtime they have very little backlog.

The general sense is that it is building consistent with our plans.

Fair enough.

They are really a build to order place and Hank can get anything out in short order so they can adapt to customers very quickly.

Customers know that, so they get pretty short leadtimes from customers and then they deliver.

Fair enough.

On the cash flow from operations that you're expecting for '04, how much of that are you expecting Neptune to contribute?

And what portion I know you said working capital is going to be a source of funds, how much are you actually expecting from working capital?

I don't think we have separately disclosed the elements of Neptune cash flow and we wouldn't be dissecting the business in that manner.

I think what is coming out of working capital is kind of evident from what we have said about the net income there.

As we said if you look at the free cash flow which we have said will be between about 130 to about 150 --

I think if you go back to, I think our range for Neptune was we said it ought to do somewhere between 50 and 70 cents of cash for 2004 and that is what we are talking to people about.

So those numbers have stayed pretty solid and that is --?

Six weeks into the year so.

Okay, thank you.

Julie LaPunzina of Wachovia Securities.

Can you give us a sense of the impact of any raw material price increases in the quarter by segment please?

Yes, we don't really have it by segment but it is not an appreciable problem for us, because we don't use a lot of things that you would associate with that.

Our industrial technology segment is the one that has the highest risk of sourcing issues.

The rest of our segments are pretty much test and assembly operations, and those things aren't varying, they tend to come down in price. (indiscernible) law is still active there.

We have got a long-term negotiated contract for Neptune so they have fixed vendor pricing throughout this year so we don't have an exposure to any of the cost increases that would be there.

And in industrial technology Jim (indiscernible) has got the flexibility of buying from Mexico or buying from China to offset any domestic supply pressures.

We don't have basic commodities that other businesses might be stuck with that they can't do anything about other than maybe hedge.

So we don't have much if any cost push inflation from material costs.

Okay, thank you.

Darryl Party (ph) with Merrill Lynch.

Do you have the local currency revenue growth by segment?

No.

Might have to start working on that for next quarter but, no.

The biggest variable on that would be (indiscernible) and Danish krona and their local growth wouldn't look as high as the dollar-denominated repatriated growth looks.

Okay.

What do you think about the geographic distribution of sales for the other segments though, it is probably the currency effects for each of the segments was probably close to the corporate?

No, no the instrumentation is a big deal because instrumentation has ISL (ph) Herzog, Herzog is in Germany and ISL is in France, and they tend to sell in dollars because they are selling to oil and gas people and their cost structure is in euros.

So that puts a pressure in that instrumentation and then you have stirrers (ph) which is a big portion of instrumentation, about 25 percent of its sales go into the U.S. and they're all coming from a European cost basis so that puts a squeeze on us.

And then petroleum analyzer exports from the U.S. and there is some currency issues associated there.

Industrial technology Abel is a pump company in Germany, and it is struggling a little bit right now because it does sell into the U.S.

That is depressing its sales and when it is delivering it is squeezing the margins a little bit.

Neither energy systems nor imaging has much if any FX effect.

Thank you for walking me through that on the operating profit line.

I was referring to the effect on the revenues.

So was I. The revenue effect, we're getting overstated revenue mostly in instrumentation.

In terms of currency gains.

On the semiconductor market orders for the semiconductor equipment capital equipment suppliers certainly have been very strong and some of those starting to ship, I was surprised that you weren't a little more positive on what you are seeing from Logitech, and Acton, IDI and Cybor?

It is a very narrow thing that we do there.

You are talking about less than $10 million in sales with IDI and Cybor.

They put photo resist on a semiconductor wafer and if people were building out the larger millimeter wafers you might have some opportunity, but you have -- everybody has the install product base, so it is only if somebody takes something out of mothballs you have an opportunity to sell something other than rebuilds.

Our rebuild business is in fact coming back but it is nothing like the business used to be from 2000 back to 1998, when people were adding to capacity and you were selling pumps for new applications.

That is why it is not a great thing.

And then Tokyo Electron is the leader in this business.

And just a couple of years ago it had 40 percent share; today they have somewhere between 80 to 87 percent share and we have an arrangement where they pay us on the other income line a licensing fee for some things that was negotiated.

Even their business is not super strong and it has hurt our other income line.

We just don't see it as something that we are participating in because it is not what everybody else is looking at that is in the socks (ph)index for driving growth.

Okay.

Are you guys designed into the 300 millimeter fab?

The problem there is we are designed into it, but Tokyo Electron is pretty much sole source on micros (ph) so we will sell it to the 15 percent of the world Tokyo Electron doesn't dominate but it is a small piece of the market.

I thought that the semiconductor was a significant end market for Logitech as well.

That is for telecom, what Logitech does is measures fiber-optic sufficiency and they have some machine that is very unique for cutting and measuring things.

That business absolutely hit its Nader last year and it is up a little bit in the fourth quarter but it is not a significant business going forward.

Reason we talked about it is it was a very significant year-over-year reduction.

We acquired Logitech because it came with stirrers and it have a very large backlog that people knew would dissipate.

In fact Logitech’s sales resulted last year in about a six cent earning variance versus the year before.

There was that much backlog we benefited for in 2002 that we didn't get in 2003.

So we just don't see much to do for Logitech.

There is all kinds of new equipment out there that has never been used that you can buy on the Internet for less than a new piece of Logitech equipment.

Until that supply is depleted we won't have much of an uptick.

The dark side of Ebay.

There is a lot of moving parts when we look at '03.

I guess getting back to how your earnings are going to break out for '04, when you look at the trends in 2003 I mean you guys reported are now reporting on a different basis for calendar year.

But we also had last year we had accelerating organic growth, had slightly more restructuring expenses in the first half and the second half, it was not kind of a normal year.

Can you just from a business perspective give us a sense for what the seasonality is in your businesses that would lead to the type of progression that you're talking about in EPS over the course of '04?

In other words, which businesses are more seasonal than others that we should looking at?

Each segment is a little different.

If you looked at energy systems it is going to be strongest in the second and third quarter of the year for two reasons.

Zetec produces really good earnings in those two quarters and I also think that the Gazprom situation what we learned is they are going to really drive Q2 and Q3 while they figure out in Q1 what they are going to do and then in Q4 they are going to stop.

And I think that is likely to stay there, so I think we will see outsized earnings in quarter two and quarter three for energy and softer in Q1 and Q4 numbers.

In industrial technology it is not that cyclical.

What happens is that you get a lumpy situation because of a project shipping.

It is hard to know.

In the fourth quarter we had a disappointment at Cornell relative to what we expected that you think would roll to the first quarter now it is going to roll to the second quarter so that will help us a lot in the second quarter and there is not much you can do to control that.

Sp there is lumpiness but not huge variants.

And industrial technology ought to grow okay; the break on that is just the European based (indiscernible) business which is struggling a little right now because of its cost structure and currency (inaudible) in dollars.

In imaging you tend to have a better second quarter in imaging because of the Japanese deployment of spending.

A lot of our businesses in Asia with imaging.

We have some new products launched in imaging and you get the early adopters in the first part of year but you sell through more in the first quarter.

But imaging should not be hugely variant, it should be fairly normalized with the first quarter being the softest.

That leaves us with instrumentation, instrumentation should be heavier in the second half of the year than the first half.

Last year it was artificially low in the first quarter because of the war and activities associated with it.

It confused refinery purchase patterns and then it was stronger throughout the year, and it is currently doing pretty well on bids.

That is about as close as I can come to helping you understand the four segments on a seasonality basis.

Okay, thank you very much.

This concludes today's question-and-answer session.

At this time I would lie to turn the call over to Mr. Jellison for any additional or closing remarks.

I thought those were great questions.

I hope people have a better understanding of what we have got.

I think we are happy with the order flow and we trust the cash and look forward to a terrific year.

Thank you everyone.

Thank you everyone for your participation in today's conference call, and you may disconnect at this time.