Roper Technologies Inc (ROP) 2004 Q1 法說會逐字稿

Good day everyone and welcome to this Roper Industries first quarter 2004 results conference call.

This call is being recorded.

At this time I'd like to turn the call over to Director of Investor Relations, Mr. Chris Hix, for opening remarks and introductions.

Please go ahead sir.

Good and thank you Audra.

And thank you all for joining us this morning for our first quarter 2004 conference call.

I'm Chris Hix the Director of Investor Relations.

Participating in today's call are Brian Jellison, Chairman, President and Chief Executive Officer and Martin Headley, Chief Financial Officer.

Yesterday afternoon we issued a press release that included our first quarter financial results, including earnings and sales that exceeded our guidance, strong growth in all of our segments and outstanding cash flow performance.

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

Normally the press release is available on our website at Roperind.com, but the site is experiencing some difficulties and we anticipate having that back up and running a little bit later this morning.

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

We've prepared slides which are available through the webcast on our viewer controlled.

The slides will be made available in PDF format from the investor information section of our website once the service is restored.

If you please turn to slide 2, I'd like to mention that today's meeting includes forward-looking statements.

I'd like to remind that we do have a Safe Harbor Statement which is included in both the press release and the slides for today's call, it enumerates numerous risks and uncertainties.

Please refer to our 2003 form 10-K for a listing of key risks and uncertainties.

And with that I'd like to turn to slide 3 as I turn the call over to Brian Jellison.

Brian?

Thank you, Chris, and good morning, everyone.

The slide three I guess if you're turning through with us, first quarter exceeded expectations.

Our diluted earnings-per-share were 52 cents excluding the Neptune inventory revaluation costs, which was with line on what our expectation was on that charge and that exceeded our guidance of 43 to 47 cents and the as reported number is 49 cents versus 40 sent from the prior year.

Our net sales also exceeded our guidance with -- thought the range would be between 200 and 215 million and we actually were able to invoice 221 million.

We've had sort of an interesting cultural shift.

We were curious to see how the quarter would go because those of you who have been following us for a long time know we had a fiscal quarter ending in January a year ago and then we had a January comparison that was difficult and you didn't know how March would do, but March came in as most quarters do, the last month very strong and a lot of our incremental growth occurred in the month of March.

Next slide, if we look at slide 4, we had terrific first quarter growth everywhere.

You see the sales up from 149 to 221 million, a $72 million gain or 48% and our EBITDA went from 28 to $46 million in the quarter which was up 230 basis points to 20.7% as EBITDA performance for the enterprise.

And cash from operations went from 12 to 26 million which was a 120% increase and we expect the cash will continue to expand throughout the year.

We look at the next slide here, slide 5, the first quarter really positions us well for a very strong year now with net orders up 53% in the first quarter and only $7 million was foreign exchange.

Our net debt-to-cap was lowered from 47 at the beginning of the year to 43/7 at the end of the quarter, which is quite considerable improvement for us for the balance sheet.

The Neptune Technology Group holdings businesses are performing well, and the transition is ahead of schedule.

Our restructuring projects we completed.

We'll talk a little bit about that within the segments.

The last shift of machining operations for Amodd [ph] into Mexico and Commerce, Georgia, were completed, so we don't expect to be talking to you any more this year about restructuring costs.

And the acquisition pipeline is full and as we'll see on the next slide we have very broad-based strength here in the businesses.

Turning to slide 6, all segment orders were up sharply over the prior year.

Imaging was up 19%, instrumentation 21%, energy 49%, and industrial, with the inclusion of the main Neptune meter business, was up 115%, that put the enterprise in total then up 53%, $7 million of which was foreign exchange.

We look at the next slide, at the income statement, the income statement shows a number of good things, but as we'll talk in a minute, cash really tells the real story of what's going on here.

Net sales, we had double digit organic growth when we exclude the Neptune acquisition.

Gross profit, we expected that to decline a little bit because of Neptune's gross profit line being lower than ours and some of the expenses that had to occur in the first quarter associated with activities.

As we said, before, strong March activity, and I don't know that we can read that into general order activity throughout the course of the year, but it certainly was good.

Foreign exchange on the sales side was about $8 million of the 221.

Margins here in the nominal income statement include the Neptune inventory reevaluations for both the Neptune business and the DAP business and they also include our last troche of restructuring costs which were a million two in the quarter.

That gives us then, compared to our guidance of 43 to 47 cents excluding those costs, we wound up with 49 and if you add back a reevaluation benefit it's 52 cents and of course if you add back restructuring it's still higher.

Cash as I say tells the real story.

We'll see that on that on the next slide, if we look at 8.

Now you can see what the net sales, of course, remain the same as they were in the income statement.

The gross profit's a little stronger here and then the income from operations, we think is quite substantial because the operating margins basically held at 16% even though we had to spend $6 million on incremental D&A that shows up in the income statements.

Our EBITDA then went from 27 to 46 million and on a rounded basis we went from 18% to 21% EBITDA margins.

The cash diluted earnings-per-share a year ago was 56 cents and this quarter was 80 cents, so earnings really increased 43 cents on a cash basis.

And we expect that the second quarter will of course be stronger than the first quarter here on cash.

We go to the next slide, slide 9.

This looks at the balance sheet and our cash flow, cash flow from operating activities in the first quarter a year ago was 12 million.

This quarter was 26 million, that's an increase of 120% and our cash conversion was a strong performance here at 156%.

We expect better cash flow in Q2 which will be driven by improved margins and continued improvement on working capital performance.

Our capital structure, we think strengthened again.

You see the debt has come down from 581 to 542.

And the net debt to net cap number has improved from 47% to 43.7.

Next slide, we look at working capital improvements here, and you see the working capital was 170 million at the end of the year, 187 million at the end of March and then the way we measured is ratios in terms of whether we're getting better or not.

You can see that inventory is a function of sales at the end of the year was 13.5% and that excludes the little stub period from Neptune.

Receivables were 18.5% and payables and accruals were 14.5 so if we add the inventory and receivables and subtract the payables and accruals we were 17.5% and already in the first quarter everything's improved the inventory has now dropped to 12.4% of sales, receivables dropped to 17.8, payables and accruals are still constant, but our net number then comes in at 15.7.

So we get as you can see in my margin notes 110 basis points improvement in inventory, 70 in accounts receivable, for a total of 180.

We didn't get the payables up.

Although we have gotten them up in the past so that may be a struggle.

Increasing focus on cash is well understood throughout the company and I think these results demonstrate the guys are really with the program.

Next slide here.

As we look at 11, we talk about our first segment in today's presentation instrumentation.

Instrumentation net orders look terrific, they're up 21%, but you have to temper with that that since a lot of this is European based business and also European sales coming into the U.S., about a third of that improvement in orders was really just from currency with a strong Euro.

We had fourth quarter, the fourth quarter of consecutive organic growth here in instrumentation, very strong oil and gas participation from our measurement technologies that are in that space and while the Euro helped us a lot on sales, it didn't help on margins because of so many dollars being collected in U.S.-based revenue and global Energy customers that tend to receive bills in dollars.

Adjusted EBITDA, you can see, is 22% and that was helped significantly by improvements at are our ACT and IDI businesses, where we closed IDI last year and integrated it into ACT and they've done a bit better on sales and a lot better on costs.

So if we look at the next slide, 12, we'll talk about energy systems and controls.

Here you see net orders up 49% which is pretty spectacular.

Very strong order activity for compressor controls in the oil and gas area and petroleum analyzer has seen that benefit and the instrumentation segment as well.

The power utility business, mostly around Zetec, was up very substantially in the quarter.

Some of the second quarter activity we expected from seasonal strength was pulled into the first quarter and that speaks very well for the restructuring we did at Zetec because in the past they wouldn't have be able to respond as quickly as they were able to in March to a surge in orders.

Our compressor control business has been realigned so that we've got very strong market focused people looking at the different businesses and we've realigned our operations in Des Moines, Iowa, so that we've got the right people in the right places for the growth markets and we've got kind of right sized what we need for the Russian activity.

We've adjusted -- you see EBITDA margins here up sharply to 18% up 190 basis points, pretty much all of that coming from our Zetec restructuring.

And we think this segment's going to do particularly well next quarter.

We look at the next slide here 13, Industrial Technology.

Here the orders are up 115%.

That's because of the inclusion of the Neptune meter business, which includes the Maracta segment [ph], but even without that the segment was up more than 10% organically.

We have strong performance from the refrigeration market business and the industrial businesses grew modestly.

We completed restructuring here, which costs us another million dollars against the income statement in the quarter, as we consolidated Montgomery out of of Richmond, California, into Commerce, Georgia, and the Mexican operation.

We got our capacity right sized for these businesses now and the Mexican operations up and running with some pretty decent efficiency now and unfavorable variance we've had while training people is expected, should be largely behind us by the end the second quarter.

Adjusted EBITDA margins are up 90% here.

This segment in total is now running 25.2% EBITDA margins and we see nothing but continuing improvement out of this business throughout the the year.

Up 90 basis points.

Next slide, if you would, 14, just a specific comment on Neptune, how that transition is going.

We really have all the initial integration activities complete.

Most importantly was the governance process and getting all of the management of Neptune in line with both our financial reporting and treasury functions and culturally aligned around what all we're measuring and what we expect and pace of activity.

The first quarter sales for Neptune were up in excess of 10% over their first quarter of a year ago.

AMR sales were up sharply in the quarter, very sharply on units and quite substantially on revenue as well.

The meter market leadership continues.

We think we continue to do well against others in that space.

And we're working on some initiatives that will be going on throughout the year to lower our procurement and production costs.

And we spent more time than we expected and we see we'll have to spend even more time on supporting software application enhancement for Neptune for new products, some of which will launch at a trade show in Orlando in the second quarter.

Neptune though is well-positioned to have a record year for themselves and be an integral part of a strong overall Roper enterprise here.

Next slide, 15, we look at the imaging segment.

Here imaging orders were up 19%.

That's partially benefited from the inclusion of handheld instrument business DAP inside the imaging portfolio.

Net sales matched the orders up 19%.

The good news in imaging is life science activities and our brands in those spaces are performing very well and outpacing the physical science camera business, which continues to lag. 19% adjusted EBITDA, out of these businesses and that excludes inventory adjustment for the DAP business and a very minor amount of restructuring that occurred in the quarter.

We did acquire a small number of employees associated with a technology called QED.

These are people who are going to help us expand our software application technology that applies to our imaging businesses, and we're excited about what that's going to do in terms of growth in the second half of the year.

Very limited ongoing activity from those guys, its inherited, i It's really a leap in terms of technological improvement for us

And then the new applications we've been working are certainly taking hold, in both inspection -- inspection technologies particularly, and we think by the fourth quarter in the surveillance community, but we've gotten very favorable reaction to our product launch around Rammen [ph] Technology and we expect to see sales actually generated by the middle the year from a standing start and that could really drive some additional growth by the fourth quarter.

Next slide, if we look at the that, 16, is our overall enterprise initiatives update.

We said this year that we're sort of six things that were focused on.

First was to continue to build on our market focus segments.

I think you can see that with the orders up, you know, more than double-digit growth demonstrates that the guys have their act together here.

Second was to execute the segment growth initiatives and the sales growth up 48% and up more than 10% organically I think demonstrates that the folks are doing what they said they would do around their initiatives.

Continue to build the capabilities across the company, well we have now completed our restructuring.

We've got new organizational structures in place, particularly places like Photo Metrics and the life science arena and what we've done with the Redlake imaging business with others -- what we've done at Actin and IDI, and those are clearly paying dividends to us and those restructuring activities and better management leadership has also given us some improvement in working capital as we noted earlier dropping it from 17.5% of sales to 15.7% here at the close of the first quarter.

We've already -- we talked about capturing our Neptune opportunities, the transition is going well, it's ahead of schedule, and we're up more than 10% in sales growth in the quarter and continued strategic acquisitions, I can tell you that based on our scheduling difficulties, that the pipeline is full, and we're very excited about a number of opportunities we see there.

Next slide, strong growth here in 2004.

Originally our guidance was that we would go from 657 million in sales for the full year to 875 million to 9.25, raising the sales guidance to 900 on the small side and 9.25 on the top, and our DAP's, which were at 201 last year from continuing operations, and we had said 245 to 270 would raised to the lower end to 250.

Both those numbers we think are pretty good, but, again, cash is important, and we'll talk about that in a second.

If you look at the second quarter, we're leaving the guidance in place we had at 57 to 63 cents last year, we were I believe 41 cents from continuing ops so that's a 40 to 55% improvement over last year's second quarter.

Next slide, 18, on the cash side, which is what I like to stay focused on, you can see last year our cash earnings-per-share were $2.43.

And here we're projecting 3.54 a share to 3.74 a share and cash from operations we still feel will go from 96 million last year to somewhere between 140 or 160 million, perhaps even better, and that cash flow and plenty of capacity, frankly low CapEx requirements this year and the pipeline of acquisition looks very favorable for us.

Next slide, 19, if we look at the general summary of the quarter, we had a great start in terms of orders, sales and cash flow.

The Neptune transition is going as well as could be expected.

Restructuring's completed.

You see it in both the margin improvement and major working capital elements being better.

The market conditions continue to be favorable for us.

Acquisition pipeline's full and we just see very strong sales and DAP's and cash flow throughout the year and everything's certainly in place for us to have record performance and not record performance in terms of getting a penny up, but we think very strong economic performance and with that we'll open it to questions.

Audra [ph] we're now ready to take questions from our callers.

Thank you [Operator Instructions]

We will go first to Michael Schneider at Robert Baird.

Good morning guys.

Wondering if -- first congratulations on a nice start to the year.

The instrumentation segment, wondering what the drags are on that segment today, because it looks like it's got nice momentum, but isn't Logitech still, is maybe a drag or a pull on the segment?

Well, it's certainly on a comparative basis.

Logitech was off dramatically last year versus the year before.

Logitech is down to a very, you know, almost immaterial level of sales activity.

They'll do a little bit better, we believe, this year than last year, but they certainly are not, you know, not strong.

The margin thing around the drag is really FX related.

So much of the sales growth in instrumentation is coming from Stirrers [ph] selling into the U.S. and from Pack and Antek [ph] selling to global energy companies and reminding companies in dollars and producing stuff in Germany and France, and Stirrer's producing it in Denmark.

You wind up with stuff that looks pretty good, but instead of making say 30% incremental, you might be making 10% inclemently so that's a drag in instrumentation.

Okay, I appreciate the color then.

Just a second question on Neptune.

Any contract wins or municipal wins you can report during the quarter or maybe since December, November?

What I would say there, I don't have data in front of me about this town or that town.

But the activity level in AMR is very strong in terms of shipments.

Depending on the kind of reader that people are buying, if it's a pit based reader they go for substantially higher sal -- costs than if it's a basement derivative product where it's above the frost line, so mix can change from time to time.

But their unit growth was really spectacular.

Their sales growth was -- is somewhere between 10 and 15%, so there was only really one large job let last year for a major center and that was Cincinnati and Neptune won that job.

Right.

This year there hasn't been, you know, a major job let.

I guess it's no secret that, you know, the big job that's going to take time is Chicago, and I think we're all over that.

Right, right.

And one number I haven't got any color on is at Neptune, what is the largest contract that's percent of sales, rough numbers if you know it?

You know, we've never asked the question that way.

We sort of know, you know, POP a hundred customers and stuff like that.

Here's the danger of something like that.

Say Cincinnati, which they won last year, was the only really large contractor in the country, but it has, say a four or five year build out, and so if you looked at it as a function of what might have been booked it would be pretty substantial, but there is no customer at Neptune nor no job at Neptune that's greater than 10% of its total sales.

So it's a pretty, you know, pretty much ongoing business, as you recall, two-thirds the business we feel is replacement meters and only one-third is kind of related to new construction where you would see real activity or a jump in a municipal change.

Geez, --

That helps.

You know I don't know that I could tell you what the biggest one in their history was --

Mike, this is he Martin Headley just o provide a little color on our practice on our disclosure on net bookings that we disclosed on those large contracts only have the next year's with the bookings in them so there will be bookings that come in from a large job such as Cincinnati that we'll continue to refresh those as we move forward through the evolution of that contract.

Okay.

Thanks again.

Uh-huh.

We'll move next to Alex Blanton with Ingalls and Snyder.

Good morning, good show on this quarter.

Several questions.

Maybe the first time since you went public in 1992 that Gazprom hasn't been mentioned.

You mentioned it even in 1992, before you got the big business there.

What -- what was -- the sales you disclosed as being flat at 1.4 million versus last year, but what is the outlook for that?

Is there anything in your guidance for Gazprom either in the second quarter or the full year.

Yes, Gazprom we said would be 20 million or less of revenue.

We talked about it being 2 to 3% of sales, probably at the lower end of that, so if you took the 900 million ower end of the sales guidance, 2% would be 18.

There's a lot of activity there.

You're absolutely right, actually.

We look back here, when was the last time that Roper issued a press release and didn't have Gazprom in it, and it was the first quarter of the year 2000.

So the performance, when you know the history of the company, here in the quarter is really spectacular given it was completely devoid of much Gazprom influence.

We -- we're working directly with the OEM's in Russia.

We have fundamentally stronger sales approach we believe to create demand and not be totally reliant on the gas complex [inaudible] sourcing organization.

So we're trying to approach it in a wide variety of ways.

We still are waiting whatever the contract purchase agreement will be for the year.

Best indications is we'll know that at the end of May.

We haven't learned anything.

We've had numerous meetings that would say that it's anything other than what we've been talking about all along.

There are guys in Gazprom who have intimated that that they would see some upside.

We just remain sceptical because of what we've had to deal with in the last, say in the last 18 months, in that arena.

But, not talking about it isn't because we think it goes away or doesn't have any effect on the company.

To the degree that it got better, it would get us closer to the higher range of our range and if it got a lot better it would allow us to rethink our guidance.

So in the orders for energy in the quarter -- up 49% there isn't anything for Gazprom.

Very tiny bit.

There's a little bit of ongoing installation activity we have there.

And your guidance for the quarter, the second quarter is there much then for Gazprom, you are not going to find out much until the end of May so you probably don't have anything in there?

No, no.

We do.

It's a couple million bucks, $5 million.

What?

Less than $5 million I'd say.

So a minor amount.

Yeah.

So you could have upside in the second quarter if they come through.

Well, no, I don't think that's true.

I think it would be more towards the third quarter because it's so late, I don't think we could get anything built and maybe a little, but not much.

On the currency, was there an effect on margins?

You said there wasn't a positive effect, was there an overall negative effect?.

You mentioned Stroers [ph] in their segment, but what about overall?

It was just about a wash.

I think we think it's, oh, about a 10 basis points or so.

I mean, it's a little bit, but not material.

Okay.

The Zetec business you said you pulled some -- normally would be in the second quarter into the first, is that you said.

A little bit we had.

We had activity right towards the end of March that we would have normally expected for second quarter and they asked if we could move it up and we were able to do that and we were able to get the service people because we've now got service people and the segments can move around and get it to the customer, so that was favorable.

How much was that?

I mean--

Well, it was in excess of $1 million of revenue.

A million, okay.

All right.

Your strong quarters for Zetec again.

Could you remind us of second quarter and what?

It really should be the second and third quarter.

Second and third.

But we have a pretty strong quarter, I mean, they're a big part of our story in the first quarter, and we've beefed up the talent there quite a bit, and I think we're really working in the right space and Zetec has not seen to continue to surprise us on the upside throughout the year.

We're off to a good start in April and --

Okay, finally Neptune, Neptune apparently is in two segments, industrial technology and imagery?

Yes, the hands held instrument business we put into imaging because of similar manufacturing capability and sourcing requirements.

And we also would like to sell those products outside of utility applications and our imaging people have the best channels to do that.

You ought to put that on your slide.

You didn't mention that on the top where you listed the components.

We show it as DAP.

That's DAP.

Okay.

Yeah, that's DAP.

Are we going to get pro forma numbers, in other words, showing -- you haven't indicated exactly how much sales were added by Neptune in these two segments or overall.

I'll turn to Mr. Headley on that.

I mean the difficulty is for competitive reasons we're just not prepared to be totally granular on Neptune, so go ahead.

Brian's exactly right.

We don't intend giving precise amounts because of the competitive transitivity of the data when that's the only acquisition of any meaningful comparison.

Okay.

One final thing then.

You said double digit organic growth without Neptune.

Could you be a little more specific on what that is, double digit's a pretty wide range.

I think it's kind the low end of double digit, but if we're too precise you'd just back into the --

Exactly but, yeah, I'm asking for a range of something.

Let's say 10 to 12.

Okay.

That's pretty good.

All right.

Thank you.

Okay.

Next we'll move to Wendy Caplan with Wachovia Securities.

Good morning.

You've talked about very strong results in March along with a number of your diversified industrial peers.

Do you have a sense of how much of your strength was related to macro improvement and how much of the strength in March came from the sort of quarterly pattern that the third month in the quarter was real strong?

You know, I don't know.

We had about, we had a decent January and a softer February and a strong March.

All of the quarters had pretty decent -- sorry, all the months had decent numbers, but two-thirds of the total quarter growth occurred in the month of March.

And because of the shift from fiscal to calendar, it's not clear to us that that's a normal cultural behavioral change, where a lot happens in the last month of a quarter, or whether it's the continuing improvement in escalating organic growth we had.

So, you know, I don't know.

On sales, sales lagged orders, so the orders up 53% and the sales were up 48, so that's a pretty good indicator.

We kind of of like where we are going into the second quarter, things look pretty good.

We're just getting ready to start our quarterly reviews and, you know, the flavor or the tenor of -- from all, but maybe two or three of of our businesses, is -- feels better and people's activity levels are high and quotations are high.

We just, I guess, remain conservative about show us the numbers, and I think once we get the Gazprom contract in house and we have a real firm sense of it, then we can be a little more fourth coming about how we believe the year goes.

Thanks.

In the orders, can you say anything about whether there was anything in the order books this quarter that was particularly lumpy, any kind of significant project business that would make for a tough comparisons next year or made for easier comparisons this year?

And just to clarify, all of the orders, all of the orders that you reported would be shift in 04?

Yeah.

I would say that -- We expect the vast majority of the orders were shipped in 04.

Nothing in 04 will be shipped within 12 months, so by the end of the first quarter of 05, Wendy.

But, actually the order -- the nature of the order patterns are things that are moving along routinely.

We didn't book anything that's sizable for shipment beyond this year.

I think this is normalized quarter, Wendy, and you'd expect at least to do better than that in the corresponding quarter next year.

And finally, two things.

One a follow-up on Zetec.

Is there any concern that the pull-in from Q2 order shipments would affect -- negatively affect Q2 shipments?

It could hurt it a little bit, but we also have high regard for what we're doing out there, and, so we're not giving our friends any safe harbor because they did strictly well in the quarter.

We should have a good second quarter at Zetec.

It may be tough -- I mean it clearly is pulling some business.

We'd like to see them increase their business levels in total anyway, so we'll pull something in in June.

And finally, it seemed curious to me that when you issued guidance in the press release that you upped the bottom end, but didn't up the top end.

Should we read anything from that like you're being conservative?

No, I don't think -- I think that until we have clarity around what 04 looks like for Gazprom, it would be imprudent for us to raise the high end of the guidance because when we went in, in fact, in the last quarterly call we kind of said here's the stuff that leads to 245 and here are the things that need to go into place to get to 270 or higher, and if you look net-net all of the things on the the left side of that slide have occurred and three of the 7 things on the righthand have occurred, so we -- in order for us to raise guidance at the high end we would want to see faster AMR growth, we would want to see a less robust Euro that was allowing us to capture more income and a little better margins in some of our businesses, and we'd want to have the high end of the range of sales to Gazprom and none of those three things could be confirmed at the moment.

But it could any of or all of them occur, the answer is yes,.

Thanks, Brian.

Okay.

Next we'll move to Jim Lucas with Janney Montgomery Scott.

Thanks, good morning.

First question on corporate expense.

You had indicated back when you reported the fourth quarter that you are expecting higher levels as you adopt Sarbanes-Oxley and 404 controls.

How did that play-out and what is the outlook on corporate expense line the rest the year?

The "SarBox" stuff was, we're well along in work.

We're doing more of it at the moment internally than we expect that we would be doing right at the time so the expense run rate in the first quarter wasn't as high as we feared it might be.

That's not really good news because it's still going to be of some cost that we're going to invest in throughout the year.

I think we said we could expect to see as much as a nickel a share dealing with "SarBox" and we have had a minor part of that Q1, we'll have more in Q2, and it may well shift much more into the third quarter than we originally expected and that's just because the slowness of things.

People are promulgating and the testing process we have to put in place and the auditors add a station that doesn't come until late in the year.

Okay.

And with regards to the improving organic picture, clearly we're seeing a lot of the end markets pickup.

Two questions with regards to that.

One, what industries are you seeing [inaudible] better still [inaudible].

You said there are still two or three that aren't performing and second now with restructuring complete and the core business coming back, how were your contribution margins in the first quarter and where did you see that for the rest of the year.

The laggard piece has been in the imaging physical science activity.

Microscopy of our activity is excellent, but the big lags would be just general European industrial activity and the camera portion related to physical science without naming names.

You can figure out who that is.

an Uh-huh.

They're in here this afternoon to receive the kind of friendly help that we try to give all of our businesses.

And the contribution margins?

Contribution margins should continue to improve.

We'll see better operating margins in second quarter and better EBITDA margins.

The only thing that's a drag on the margins now, Jim, is the Euro sales, where we've got several businesses that are up sharply in revenue, but have -- let's say they're up 30% revenue, 10% income and that's terrible, it should be up 30% revenue and 40% income, and because they're based in Leon, France and Germany and Denmark and in the U.K., you get a lot of technology, most of the costs are people, you know, it's hard to do much about that in the shortrun.

Okay.

And final question, now that Neptune's been in the fold for three months and the first phase of the integration is complete, could you talk about any surprises either positive or negative that came out in the first three months?

Well, I wouldn't call it a surprise, but I think what's reassuring is you have a couple of distinct cultures.

One in [inaudible] related to the meter business and one in Quebec related to the instrument business, and I think that there's always an opportunity for integration risk and difficulty that could occur as you start to put in place your governance and financial control systems, and we've had terrific cooperation from all of our people that work in those businesses, and I think the enterprise people have been busy enough not to drive them crazy and they've responded to things we want.

We had a sales he meeting in the Bahamas that was a terrific sales meeting and, you know, we had a chance to talk to everybody.

I think people are energized, their growth in the first quarter is quite strong from a sales perspective in Neptune.

We've got no material cost push, but you can see pressure's coming in the second half in the meter business.

So we're going to have to continue to stay in front of our cost reduction program so that we don't have any material costs push through to us.

That's going to require a little more energy than I thought at the beginning of the quarter because we have long-term contracts.

But there's still some, we don't hedge that and there are some things we're going to have to offset.

And then in the instrument business, we put it in imaging because as we worked more and more with them in addition to distribution channels outside of utility we just felt that there were manufacturing improvement opportunities and there's going to be more work to do there than we saw in our first pass through the business.

We thought that they would be able to execute pretty quickly.

We have to help them more, and I think they'll do a fine job, but there's more work there than we saw initially.

Okay.

Thanks a lot.

Okay.

We'll take our next question from Darryl Party with Merrill Lynch?

Morning.

Good morning, Darryl.

Good morning, Darryl.

This may be a stretch following your response to Alex, but any chance we get organic growth by segment?

Is that possible?

Darryl, I think we could probably characterize the organic protect if that's helpful to you, kind of rank -- rank order that.

If you could, that would be great.

Well, obviously, the reported growth is the same as the organic growth in two of the segments, where there are no acquisitions that impact it.

Excluding the CapEx contribution [inaudible]?

Right but we could --.

The total enterprise FX for sales was 8 million and for orders was 7 million and, of course, Neptune doesn't have any FX exposure, a little bit of --

Yeah, sure.

And Darryl, as we've talked about the FX impact is felt, you know, most largely in instrumentation segment, which has larger concentration of European-based businesses and, you know, and less so than in industrial technology and, by the time you get to imaging and to energy systems even less.

I think it would be fair, I mean, if you ranked we'd say we had the most organic growths in order though our of energy followed by instrumentation followed by industrial and then imaging.

Yeah.

Okay.

Drilling into actually energy systems, some fantastic order growth in the quarter.

It looks like a good bit of of it was from some project activity.

I know you said before most of your orders ship in 12 months, but can you give us some more color.

What it is is the fact we've restructured a company in Iowa called Compressure Controls, this is a company that was very, very much oriented around its activity in Russia and to a lesser degree the CIS.

All of the power in the enterprise laid in the hands of three or four people, who were focused on that, and more than a year ago we saw that that was under utilizing what this business was and how valuable it was and how many markets it could serve.

So we put a very strong guy, Paul Fisher [ph], in over what was originally the Americas, and we've continued to refine the organization, bring new talent into the organization, get rid of people who only wanted to do business in one part of the world, and our orders for control systems in oil and gas are up very, very strongly everywhere outside of Russia.

And I think the reality is that they could have been in the past, but people weren't focused on it.

They were focused on one customer and if they had left over time, they looked at other things around the world.

Today we're looking at all the global markets, and we're active everywhere.

That's my question is what's the lead time on those orders.

Oh, it's, Chris, you were there.

You can comment on that.

Yeah, Darryl, lead times for the projects from the -- you're talking about the sales cycle, your talking about the shipment?

Shipment cycle.

Yeah, shipment cycle tends to generally be sort of three to four months, and some of them will extend a bit longer, but in general, yeah, and if a few rare instances it could be less than that.

And you recognize the revenue say a month or two after that as the customer accepts the shipment?

Well, we tend to talk about, you know, the shipments, but clearly we generally have customer acceptance at the factory before we ship the product.

When we ship we get the revenues.

So the lead times, Chris, we're talking about the lead times to revenue recognition as well as shipment.

Understand.

Order to shipment.

Yeah.

And just lastly during the quarter, you guys used 12 million for acquisitions, was that just related to the purchase of the portion of DAP that you didn't own or were there any earnouts in the quarter?

No, Darryl, the majority of that was cash out lay, that not been made by the end of the year related to fees and expenses on the NTGH transaction.

Yep.

Okay.

So no, -- and shouldn't expect any earn-outs this year.

No.

Okay.

Great.

Thank you.

We'll move to our next question from Ned Armstrong with FBR.

Good morning.

Hi, Ned.

You mentioned in your presentation about how the order rate demonstrated your market oriented focus and your shift towards that type of company.

And there are several elements there that helped drive the growth, product coverage, channel coverage, hit rate, et cetera.

Can you characterize your relative success in each of those arenas and how that led to the increased order growth?

It's a great question.

That's the kind of thing we'll go through as we start our quarterly reviews this afternoon and the guys will tell us what they think it is, and we'll have a chance to listen to them and ask questions.

Right now I can't tell you that.

We don't ask for people to report monthly what they think is there.

I would say though that a big piece of it would be expanded channel coverage and focus on end users.

So if you look at the -- a very substantial portion of order activity was compressor controls and Zetec and that's all about changing, and how we end users and channel expansion and instrumentation, it's certainly -- a lot of it is coming from distribution channel work that Tom McMullen and his guys are doing around the world and that would be true to a lesser extent in the industrial arena.

The industrial part, we've had more discussion around projects and opportunities, but those still are more on the board for plans as opposed to turned into orders in the first quarter and that leaves us with imaging where we're really focused on restructuring our activity.

Thank God we did it, you know, last year and we were ahead of the curve.

We got our life sciences businesses, key imaging and photo metrics with much better focused leadership now and that drove a lot of growth in that segment, and we're hoping that by putting a strong guy in Princeton [ph] Instruments here with Frank Omula [ph] that he can get the revenue piece of that business turned around quickly, but that continues to lag.

So I don't think it's a lot about hit rate.

I think it's probably a little bit of market growth.

A lot of distribution channel coverage.

And that leads to market share.

And going to the -- revisiting the physical science aspect of it, that's one of the weaker end markets that you characterized.

Do you distribute that more to --

Our performance is weak.

I'm unhappy with our performance in that segment.

So you characterize it is -- is more of an internal issue than a market issue.

Well, we've been struggling in Japan.

There's complicated software that goes along with the cameras and our guys in that business, we have to constantly work on our commercial orientation as opposed to working on interesting things to do.

And with regard to Neptune, the Neptune meter business and the automated meter reader equipment is industrial technology, and then the rugged instruments and software is in the scientific and imaging, do I understand that correctly?

Well, you do understand it correctly, except that what we really have just said for imaging, that what they can drive is the handheld instrument businesses.

So we're actually going to leave the -- the brand name DB with its software for utilities in the Neptune industrial technology piece.

And kind of co-lead that.

We've got our imaging guy that will provide any out of of utility applications and people capabilities will come from imaging.

But the economic numbers are going to be inside industrial technology.

Okay.

Thank you.

You're welcome.

Next we'll move to David Smith with Smith Barney.

Good morning, guys.

Good morning.

In the industrial business, you put up 16.9% margins and if you take out the charges about 20%.

How do you see that unfolding from the for the rest of the year and if you could compare it to last year as well, and whether or not that's going to be a seasonal impact as we progress sequentially?

No, in industrial technology, I don't see, it's not real seasonable, it can be a little bit lumpy.

We have a couple of businesses in Oval [ph] and Cornell [ph] that do project work and water/wastewater pump applications.

And those can be lumpy applications.

Occasionally Emont [ph] will do some systems work that could be lumpy, but there's no reason that the margins we got in the first quarter won't improve in the second quarter and there's no reasons we won't have improvement throughout the year against what we did last year.

Does that come mainly from volume or does it come -- you talked about some improvements in material pricing at Neptune, is that emanating?

Well, the Neptune actually was offsetting any future difficulty in terms of pricing there at Neptune.

It's really the benefits we got from restructuring.

We created a Shanghai operation last Fall for AMOT and then we created this Mexican operation outside of Juarez, that helps both AMOT and will help some of the other businesses in this segment, including Roper Pump and a sub-brand within Roper Pump called Namco [ph] -- so those things are improving margins there.

So as far as the year-over-year comp goes -- [inaudible] saying expect to be over what you were --

There are none of those guys in those segments would have the courage to come in here and tell us year over year the have any deterioration.

Okay, you touched on, briefly, material costs, can you characterize what you're seeing across the whole company as far as increases go and what you're doing maybe in terms of price increases to offset some of that?

You know, we really had very little cost push material things.

If you look at the enterprise, we have the benefit of moores law helping us out in instrumentation and imaging and then you do have the material cost push in industrial technology which we've seen very little of.

We started to ask a little more about that in terms of purchase price, variances for material, we still haven't seen much.

But clearly vendors are trying to do more.

I think we're pretty tough on them.

We haven't done a lot of free markets activity because we have relatively small niche businesses, but our vendors know we're geared up and ready to do that when necessary.

We'll start to do some things in sourcing around buys for container board and things like that.

Most of our costs, you know,, frankly, are people costs, and the bigger problem for us is medical excalation that's been not very favorable in the last nine months.

But material hasn't been a problem.

Now having said all that, we're watching more carefully our guys are watching more carefully any vendor changes in any cost push comes from vendors has to be sign off by a division president.

So that I think if as we go through the quarterly review process, if we see some of that start to emerge, then we'll try to deal with that.

What kind of numbers in health care are you, you know, what's the increase you're seeing on that?

It's really been double digit for a while.

And there was -- for a period it kind of slowed, the cost push.

You know, we're large enough that we pretty much a PPA situation with claims, but the claims have gone up.

Yeah,.

The cost push as Brian says, was in the kind of 10 to 20% range during much of last year.

It's flattened out somewhat in the first quarter.

And we trust that some actions and program changes will show their benefits.

But it's very much out there, particularly in the drug side of the medical cost equation.

That's where the biggest cost push is at the moment.

Okay.

As far as inventory costs, reevaluations going to the second quarter, I think you mentioned that [inaudible] carry from the first to the second/last quarter.

Is that still true on Neptune?

No.

The step up, you mean the inventory step up.

Yes.

The inventory step up in Neptune we got all done in the quarter.

A little bit--

The DAP piece and the imaging segment there will be less than a penny of that in the second quarter and then we'll be through it all.

At it's beginning of the year we thought it would be about $2 million and I think that estimate's going to turn out to be about right.

Yeah.

And most of that occurred now in this first quarter.

You talked but productivity improvements, I think, for manufacturing cost reductions at Neptune.

Is there going to be any charges on that?

No.

Okay

We're done with charges.

This is the last quarter.

We won't say anything more about restructuring investment any time in the near term.

Okay.

Last thing.

Working capital looked great this quarter compared to last in last year.

Do you see that getting better as the year unfolds?

Yeah.

We like to get better than we are.

I mean, this is way better than it was two years ago, but we can still do better.

I think we're doing better on inventory than we are on receivables.

So we got a little work to go on receivables and we can still do a little better on payables.

We don't buy a lot of material so a lot of our payables are employee costs and I'm not aware of any employees, including myself, that like to defer the payment, so that's not as easy as if if you were a big manufacturing company and 60% of your cost was material.

What about [inaudible] on inventory and receivables.

Do you have any targets you want to hit on that as far as day sales go, or day supply?

Really, people do use a day's metric but we are, our days take the trailing quarter and annualize it, so in an up sales growth, we still like to look at the ratios of inventory and accounts receivable to sales.

And we'd like to drive those down with payables.

We'd like to get the payable and accruals to more than offset our inventory investments so that when at the end of the day the only you've got out there is accounts receivables and let's look at that in terms of how we want to manage in terms of condition and sale and people didn't think we didn't get there, but I don't have those numbers in front of me -- you can see- -- [inaudible ] and inventory was 13 or something, 12 [inaudible] -- 12.4 so we've already exceeded that, and we're still fighting the cultural battle on payables.

How much better is Neptune or was Neptune?

I think I remember you saying that it is quite a bit better than Roper as a whole.

Is that driving most of the gain are you seeing it pretty much across-the-board on inventory.

On working capital do you mean?

Yeah, inventory.

Oh, inventory.

On inventory, yes, Neptune is part of the benefit, but we are seeing also gains elsewhere.

There is still other operations, where there are other gains to be harvested, which is why we believe we can improve from where we are here.

So it's broader based.

But it's not broadly based across all the operations.

Okay.

Great,.

Thanks, guys.

Thanks.

We'll go next to Roger Liddell with Ingalls and Snyder.

Yeah, good morning.

My question involves the transition from the fiscal year to the calendar year.

You touched on it in, I believe it was an earlier question.

But you've had a sales force that has been attuned to a fiscal quarter cycle and there may be dynamics that developed over time between sales and customers, and will there be noise for a while, difficult for you to sort out exactly what's going on and, therefore, difficult for us to sort out what's going on?

I don't think that there's noise related to the field sales activity.

We've been putting in a more sophisticated approach to how you manage sales efficiency and who are A, B, and C-level customers and the like.

I think that it was true at the end of last year.

Basically you had an October 31st close, and so we were curious to see whether December 31st of '03 would be similar to the close out opportunity you had in October 31st.

I think the biggest question for Roper related to quarter behavior on the one, it's how our guys forecast to us about how they're doing.

I think that takes more than one or two quarters of activity to get that right.

But, it's really what's happening with the CapEx deductible opportunity, that the government has in place for people, that could have a strong upside second half gain for some of our businesses and we haven't yet seen much of that in any of this activity.

Our stuff is sort of falls in between MRO and capital.

The a lot of things are $200,000, a lot of things are $80,000, but an if a person wanted to capitalize some of them they could and we're more concerned about our sales force seizing those opportunities -- talking that way about pay back analysis and we've got some work to do with them then.

But, the compensation -- anything that we've done is, you know, all rolled to the calendar year behavior so I don't see that there's some -- we're going to get hit wrong, you know, well March isn't an important month because it's not the close of a fiscal period.

In the third quarter, we'll have a interesting situation, because in the third quarter a year ago, we had a fiscal month close of a quarter, and then we had a calendar month close in the calendar quarter.

And Martin and I have wondered and still wonder a little bit about would the third quarter be the tough comparison for us.

But I don't think the second quarter or the fourth quarter is anything but good news as it relates to calendar versus fiscal behavior.

All right.

My other question involves Neptune.

And what you will be able to convey to us about Neptune.

And I come to that question by virtue of Neptune being quite different, maybe unique, versus the businesses Roper has acquired in the past, where they tended to be dominant in their niche and, therefore, if you're the dominant player you could speak with more openness than were you in a tough competitive markets share battle.

So my impression is that a number of relationships that Neptune had in the past were either threatened or damaged by -- with technological and other issues, particularly AMR, will you be able to speak to us with the candor and openness about Neptune that you have been so able to do in the past?

Well, I certainly hope so.

I think what happens is that it's an interesting industry, and the reality is you have to two important market leaders who have nearly two-thirds or 70% of the installed base in North America, the products.

One of those is now owned privately by Jordan industries in Chicago, and then we're public.

But the industry has lots of reporting information that's publicly available.

And in that information, you know, we can talk -- so it wouldn't be long before -- sometimes is in the second quarter some of the stuff comes out, and then it's easy for us to speak to that.

There is lots of noise in the industry about unit prices and mix because we asked Neptune immediately to focus on large and intermediate meters, in addition to the world class job they're doing in small meters and, you know, they've responded and had a very strong quarter in those areas and we think they're going to continue to do well in those areas.

In AMR there's an arrangement that they had in the past with Motorola, with selling that telephony products, that actually limited their growth and we've done, I think, some creative things there that will allow us to perhaps continue to do things with Sellnet in the future and still do everything else we always do in AMR and we only report on our Neptune branded AMR products.

We don't he talk a lot about Sellnet products, but we had a helluva first quarter in AMR. in unit ship, and something in this 10 to 15% plus growth range in revenue in AMR, so, I think, we can always expand to questions of front unit.

You've got other public companies out there and I think we can pretty transparent about comments related to what other public companies say and we can be transparent about the public information.

Okay.

Thank you.

We will take our final question from Alex Blanton at Ingalls and Snider.

Chris, this isn't a question but I was wondering if you have any plans to take us all to see the Neptune operations down there in Georgia sometime?

Yeah, that's Alex, that's a great question.

We're actually -- we are working to putting a schedule for that later this year, obviously we don't want to interfere with some of the important trade show activities that are going on the business and some of the growth initiatives, but we are working on something and we hope to communicate that at a later point in time this year.

Thank you.

Thanks Alex.

That does conclude today's question-and-answer session.

At this time I'll turn the call over to Mr. Jellison for any additional remarks.

Thanks, everyone for attending, we appreciate the questions, and hope we answered them -- we certainly did as best we could and we look forward to our second quarter call.

Thank you.

And that does conclude's today's conference.

Again, thank you for your participation.