Roper Technologies Inc (ROP) 2004 Q2 法說會逐字稿

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

This call is being recorded.

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

Thank you, Jamie.

And thank you all for joining us this morning for Roper Industries second quarter 2004 conference call.

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 of our second quarter financial results.

These results included exceptional sales earnings, cash flow and organic growth performance, demonstrating the value of Roper's growth strategy and execution capabilities.

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

The press release also 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 sites 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, I'd like to remind everyone of our Safe Harbor statement, which is included in both the press release and the slides for today's call.

Please also refer to our 2003 Form 10K, which indicates specific risks and uncertainties for Roper Industries.

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

Brian?

Thanks, Chris and good morning everyone.

As you see, the topics for today we'll talk about our record financial results in all three categories, net sales, earnings, and cash flow.

We'll talk a little bit about the margin expansion we achieved in the quarter which we think will continue and actually expand throughout the year.

Certainly the 63 cents was at the high and of our guidance range, which had been 57 to 63 and above the consensus numbers.

The growth strategy continues to work, we'll talk a good deal about our organic growth and with driving some of that.

Neptune continues to perform very well double digit gains in the quarter.

We've got our first acquisition squeezed into the second quarter this year and we'll talk just a little bit about that.

That's integration activities already well underway.

We turn to the next slide, you can see here that net sales were up 40% from 166 to 232 million.

Income from operations was up 370 basis points to 17.5%, and the actual went up 77% from 23 to 41 million.

Our net earnings increased from 13 to 24 million, which is an 86% improvement over the second quarter last year, and our diluted earnings per share of course, hit the 63 cents.

Next page.

If we look at sequential performance, in addition to year over year performance you can see that in the second quarter we were up 11 million over the first quarter and the reported income from operations in the first quarter was 33 million this year it, quarter its 41, which is an $8 million positive variance, but we do want to remind people that the adjusted income in the first quarter would have been 36 million when you add back the inventory revaluation for Neptune's step up, and a little bit of restructuring to complete our CCC activities in the first quarter.

So the honest comp, is 41 million against 36 so we were up 5 million on 11 which is a little over 45%.

And then the cash, of course, continues to be very strong. as you see we've gone cash ops from 26 to 40 million in the quarter.

Next slide, if we look here at the last couple of calls we've talked about, what it's been over a period of time, and you can the right-hand chart demonstrates in the first quarter of '03, we were up maybe 2% or a little less, you can see, but really we had negative organic growth all of that was currency benefit.

So our organic growth in the first quarter of '03 was down about 5% and then went positive in the second quarter and has continued up, with think it's real important for people to focus on the role of currency, and how strong our organic growth is without depending on the currency.

So we reported out in the second quarter of '03 a 7% increase but five points of that was through currency change.

This quarter, we have over 10% organic growth and less than three points of that are currency.

So we continue to outpace most measures here on organic growth and as the second half comps on currency become more difficult, I think this chart lets you know that we're not really concerned about that.

We see organic growth in the second half at least consistent.

In fact, higher than it is here in the quarter at 7%.

So if turn to the next slide, to 7, and look at the income statement.

Here, we see the sales up as we discussed.

Really, pretty broad base strength from a sales viewpoint throughout the entire four segments.

Orders also grew essentially in line with sales.

The orders were up about 10% organically with a little over of 7% of that core, and a little less than 3 FX.

An the orders in all these segments we'll talk about as we get in them, we're up except for energy, which has some lumpy order patterns we're actually down, but a very strong base to grow on.

Gross profit, you can see was still 50%.

The actual gross profit line if you exclude Neptune, was higher than it was a year ago, but as we reported in the past, we expect Neptune to be in the low to mid 40's on a gross margin basis, but with high EBITDA to make up for that.

Income from operations when from 23 to 41 million, and from a 13.8% EBIT number if you will to 17.5%.

And that benefited of course from the sales leverage and also from the restructuring that is behind us and actually, we immediately captured the gains in our CCC operation from first quarter restructuring that we did this year.

Diluted earnings per share went up 58% from 40 to 63, but as we like to focus on cash earnings, I think that tells the real story of what we're doing here.

Next slide.

If you look at the focus on cash here, cash from operations was up 62%, from 25 to 40 million, and the cash conversion number for us was 171%.

The cash DEPS number went from 54 a year ago to 89 cents in the quarter, up 65%, and just to refresh our memory that's the diluted earnings per share plus the depreciation and amortization.

And EBITDA went from $27 million to $51 million, which is an 88% increase, and took our EBITDA margins for the enterprise up to 21.8% which we think is outstanding.

Next page.

And if we look at the balance sheet the situation, you can see that our working capital efforts continue to pay dividends.

At the end of last year we closed out with 13.5% of inventory as a function of sales. and at the end of the first quarter we were down to 12.4 and at the end of the second quarter, were down to 11.7%, so we picked up 180 basis points so far this year.

Receivables have dropped from 18.5% at the end of the year to 17.4 today, so that's another 110%.

Our payables have actually declined as a function of sales from 14.5 to 13.9, which is an anomaly due to some of the acquisition payments we had at the balance sheet at the end of December 2003, which are behind us.

So the 13.9 payables number is a more adventageous one going payables and accruals number for us.

And then the total, if you look at inventory plus receivables less payables and accruals is 15.2, down from 17.5% at the start of the year.

Net working capital improved in the second quarter about $5 million favorable from reductions in the cash impact than the quarter.

And net debt to net capital and you can see has picked up 400 basis points, down from 47 to 43 even though we spent a little over $39 million for the power generation acquisition from RD Tech in the quarter.

Turn to page number 10.

This would be our first segment discussion here around instrumentation.

And again, at the top were the brands that we run under our instrumentation segment.

Net sales here were up 15%.

We have very strong oil and gas market performance for the petroleum analysis business, very favorable trends in the Struers material testing market.

Orders for up a little bit over sales at 17%, pretty strong currency improvements in this segment, but still orders were well above the quarter was well above the 10% level.

Operating margins improved 490 basis points to 17%, as we're capturing the restructuring benefits from last year both at Acton and Struers, and some in Petroleum Analyzer as well.

Very positive outlook for the remainder of the year.

We've got very strong favorable market conditions in all the businesses in this segment, really, so we expect strong second-half performance in orders and shipments.

And we've launched some new products in this segment, particularly at Struers and PAC, that we think are going to be well received.

EBITDA, you can see here, is up from 6.5 million in the second quarter of last year, to 9.9 million, which is a running a clip here of a 20% EBITDA as a function of sales in the quarter.

Next slide, will be to look at energy systems and controls.

Here we've got an improvement in sales even though Gazprom was down about $8 million from the year before revenue level.

Gazprom, is something we could talk a little or a lot about.

We expected this year Gazprom would have somewhere between at least 2% of revenue, which would have been in the 18 to 20 million-dollar arena.

We're pretty far along in our discussions with them and were really of a mind to believe Gazprom could be below $10 million in revenue this year, at the rate of orders we're receiving.

We continue to do installations and service work for them and have very modest commitments around what they're actually going to do on new product, even though the people that we talked to continue to talk about numbers that just don't bear any resemblance to what we see in terms of order rates.

So we're going to view it as about 1% of revenue which puts it in the $9 million arena for the year.

And last year I think that number was around 22 plus million dollars.

Having said that, everything else in compressor Controls is outstanding.

And to focus on other markets beyond Gazprom continues to pay terrific dividends for us.

We have very strong commitments in all the rest of the businesses, and you can see that the restructuring activities have allowed us to have a big 390 basis point improvement in margins here.

And in the quarter we were actually running at 19%.

We also successfully acquired this power generation business from RD Tech up in Quebec, which is quite a similar to the Zetec, and if we look at the next slide here, you'll see how that really bolts on to Zetec.

Zetec's primary markets are in steam generator inspection activities and the power generation business we have, provides for the balance of plant inspection, that gives us a much broader range of activity at the utility then we've enjoyed in the past.

And also expands our technology for testing from eddy current to ultrasonic testing, and fortunately, the Canadian operation of course has a substantial market share in Canada and in France, and that we'll be able to retain we believe and coupled with their technology and our presence in the U.S. and Asia, we see this as adding to our growth profile.

At the time of the acquisition, we expected the business would do about 23 million next year or more.

I think that that's likely to prove a conservative number and it certainly will be accretive next year and once we've got the integration totally finished we'll probably comment a little more about how much accretion, it should be quite nice.

Next slide.

On 13, we look and industrial technology.

Excuse me.

In the Industrial Technology segment we had double-digit sales and in order growth organically, even without Neptune, very strong braced gains throughout almost all the businesses in this segment.

Neptune enjoyed more than 10% year-over-year improvement.

But we do want people to understand, I think part of what might have happened in Q3 modeling was that Neptune shuts down twice in the second half of the year and none in the first half of the year.

We wind up with maintenance shutdown activity that occurs in July and and then we have a holiday shutdown to try to force as many vacations as possible, so that you get continues operation of our foundry there.

So you lose up to two weeks of production in the second half of the year that you have in the first half of the year and generally, that results in $3-4 million less revenue in the second half of the year from Neptune from the first, not related to customer demand but just throughput.

Margins in the segment you can see 22% operating profit margins which were driven by both the sales leverage and the restructuring benefits.

We're getting further production efficiencies out of the small Mexican operation that we started up last year, and that's adding to several businesses in terms of their contribution margins.

And we've got a steady outlook for the remainder of the year, notwithstanding the shutdown activities at Neptune that are historic.

We still see demand strong in industrial technology and our ability to capture it pretty good.

Of course this 27% EBITDA margin, is very encouraging for us when you look at going from 10 million in the second quarter of last year to 27.1 million this year.

Next segment.

Next slide, number 14 is scientific and industrial imaging.

This is a segment that has struggled for a while on revenue generation.

This quarter our sales were up 5% but you can see we've really turned the quarter on orders, we've launched several new products that are pretty important and orders are up 29% in the quarter.

The hand-held instrument business that we acquired as part of Neptune, which is the DAP brand, has launched the products that we wanted to do and that and that's doing very well in the quarter.

The physical science markets remain pretty soft, but we're taken some strong action in that area, trying to get our act in spectroscopy business more closely aligned with our Princeton Instruments Imaging Spectroscopy business. we think that will have solid benefits for us in the third and fourth quarter of the year, and some of the project timing things that we see around the imaging Platform look to be favorable for us in the second half.

Orders we've said were up 29%.

We've got a very strong focus now with quite a bit of new talent in our life science businesses which really comprised the QImaging and Photometrics and Media Cybernetics.

We also launched a major new line of cameras for Princeton Instruments called PIXIS, which fundamentally update the technology in price points of what we had previously at Princeton.

The orders that we had in the second quarter plus what we know we're going to be getting coupled with existing backlog in the new products, tell us that we have a very strong second half of the year in imaging compared the first half.

Having said that, though, we're already running at 19% EBITDA margins in imaging and that's pretty reassuring for us.

Next slide.

If we look at guidance for the year we've got net sales this year, we should exceed 925 million versus last year's 657, part of that benefit of that is the power generation acquisition, and some currency of course.

Which are offsetting the $10 million lower sales to Gazprom than we expect to get.

And probably 15 million lower than sales to Gazprom were last year.

The diluted earnings per share last year were 2.01, and this year we've raised the guidance from 2.50 to 2.58 on the low side, even the the Gazprom sales have been lower.

Kept the high side at 2.70, if we had a surprise from Gazprom on the upside, that would allow us to look at that number higher.

But at the moment, we have no reason to believe that will happen.

So, we're comfortable with this range of 2.58 to 2.70.

Next slide.

On slide 16, here, we're looking at earnings as they progress throughout the year.

First quarter the reported number, of course, 49 cents, but a little over 3 cents was due to the inventory step up at Neptune, and there's another less than a penny in the second quarter in the 63.

With the magic of rounding for the full year, we'll have about $2 million of inventory revaluation, which is worth about 4 cents a share.

What's different about the third quarter than the second and the fourth quarter from the third, in the third quarter we'll have the shutdown and Struers and in Europe but, ISL and Herzog in Europe, and we have the Neptune shutdowns, so we get a little less capacity in the third quarter.

And there is some noise around fiscal third quarter versus calendar third quarter.

Last year we had, the changeover occur in the third quarter so July 31st was the end of our fiscal third quarter and September 30th was the end of our calendar third quarter.

And that created some odd events as you can imagine, this third quarter has only one close in it on September 30th.

Also on our third quarter will have the maximum impact on the Sarbanes Oxley costs.

That's going to be pretty substantial.

We think it's going to run as much as $2.5 million over the course of the year, and likely a $1.5 million or so of that is going to occur in the third quarter and so that depresses the earnings that we can report in Q3.

We've got very strong imaging backlog that gives us confidence about the third quarter and the fourth quarter in terms of these earnings numbers.

Very strong energy projects.

We look for a terrific fourth quarter shipments out at Compressor Controls, on their big project jobs so that will drive a lot of economic value there.

Wastewater project timing at Cornell, we've had some slippage into the fourth quarter on delivery requests from people that we expected in the third, and that's going to also drive better performance in Q4.

The second half of the year we look at a modest sales to Gazprom, on $5 million, $6 million, $7 million perhaps, but those we think a pretty achievable.

And then we think our organic growth initiatives continue to benefit both in the third and fourth quarter.

As a result then, we've established Q3 ranges of 68 cents on the low side to 73, and the fourth quarter from 75 to 82 cents, sorry, that gives us the 2.58 to 2.70.

If we look at the next slide and, we talk about the cash performance in our guidance and cash.

Last year and we made cash DEPS of 2.52.

This year we've raised our guidance from 3.62 to this range of 3.62-3.74, which is up somewhere between 44 and 48% over last year, and then cash from operations using the GAAP measurement, would be somewhere between 150 to 160 million, perhaps even more if we can continue to make improvements on working capital.

And that's a 56 to 67% increase in cash from operations.

And we see that accelerating as it has throughout the third and fourth quarter.

The next slide, I think is an important opportunity to think about just what we've been doing and where we're really going with the ability of Roper to get through these volatile situations its have from time to time in the past.

If you look at the business in the year 2000, you see we reported out 504 million of revenue, $97 million of that came up from three unique situations.

One was a company called Petrotech, which we basically sold to management last year.

The second was the Gazprom thing, that we're all very familiar with, and third was the integrated designs, IDI, which is the photo resist pump product that we have for semiconductor wafer production, and as people were putting in new wafer facilities, you had unusually high demand for that product base.

Well those three businesses which represented 19% of the total Roper business in 2000, today will represent less than 2% of the enterprise, and less than $18 million of revenue.

And yet, will move the needle from 500 million to something above 925 million, and you can see the sort of core growth beneath it in blue, and then the acquisitive or growth in green and what's really transformed us is a that the business acquisitions we've made since 2000, Struers and Zetec and Neptune being the primary transforming businesses we've acquired, all have terrific cash performance, they're all working in favorable end markets.

They all have a lot of recurring revenue, and that's a big plus for Roper, compared to our past.

They'll have a clear growth paths that we can exploit with the management teams we have.

They have scale advantages, because they're large enough to really make a difference, and they are platforms that have continual both on opportunities in all three areas just like the RD Tech acquisition we were able to make for Zetech that nests in so favorably.

So we think we've got the company positioned with a much stronger product and business portfolio than we've ever had that gives us steady growth and reduced volatility going forward.

Next slide.

If we sort of summarize then, before we go to questions where we are.

Our growth initiatives have delivered really powerful results this year and will continue to do that in the third and fourth quarter.

Our cash focus is getting us record performance on any cash measurement that you use.

Our balance sheet has really strengthened as we continued to focus on working capital and pay down debt.

Our working capital velocity is now down to places where we can talk about it without being embarrassed.

And we think we're making great strides here and people really are walking the talk.

Results are going to continually improve throughout this year, so we're getting this kind of sequential improvement that I think great companies drive, and the portfolio transformation gives us a much more solid base from which to continue to build a great company.

So that, we'll turn it over to questions.

And Jamie, were ready to take questions from our callers now.

Thank you.

Ladies and gentlemen if you'd like to ask a question at this time you may do so by pressing the star key followed by the digit one on your touch-tone telephone.

Again, start one for questions or comments at this time.

We'll go first to Michael Schneider with Robert W. Baird.

Good morning, guys.

Good morning Mike.

Very nice quarter.

First I guess the guidance is going to be the question of the day.

On the third quarter, most of the analysts, including myself, were well above where you're guiding people to and the reverse for the fourth quarter.

You laid out some of the elements and I guess I'm still confused, because Zetec was historically the most seasonal of the businesses, the larger businesses you have and it was my understanding that the second and fourth quarters were the seasonal strong periods in that business, which run contrary to your guidance, and with the acquisition of Neptune now, I would have thought that the impact of European shutdowns would even be lesser on your business which again, cuts against the guidance.

Could just walk us through in more detail as to what's changed in the business last year versus this year,and granted I accept that there was a big fiscal calendar year change last year that disrupted things, but any more color you can give us to give us comfort that this is the status quo going forward on the seasonal mix?

Well, Mike, there was a couple questions in there.

The Zetech thing let me just talk about that first.

That's a lot of moving parts to how to model the Zetec situation.

Of course, when were first bought it we were in a fiscal period, so you can get really tied up between quarters, fiscal versus calendar.

The reality of Zetech, is that the end market for Zetec starts in February, and it kind of ends in May, so it has a sort of mid February to end of May strong period.

And then it has a very strong period in September through sort of mid November.

And there's some weather related activity related to utilities, so air-conditioning requirements are heavy or heating requirements are heavy.

There tends to be less outages when they do the preventative maintenance and testing that they're required to do.

So I think from a modeling viewpoint, probably what we said about quarters in the fiscal basis was pretty close to right, and then later we entrapped maybe in a calendar discussion around it, but if you just look at the way it is here, from kind of mid February to May and in September through mid November you can't go too wrong with that.

It was only last year in the 2003 quarter, that at the third quarter turned into the strongest period, so that may have been an anomaly.

Generally, their fourth quarter has been pretty strong, it but I just stick with what I said.

There's another thing and we're getting much much better at Zetec.

I explained to people when we bought it it was one of the factory operations needed lots of work, and we needed strength in some of the management team.

We brought a lot of talent into Zetec, and we've got a lot of expectation around where it's going.

They spent a lot of time in customer intimacy, and trying to get customers to understand when we can produce things, to get better level loading from an inventory management and a customer delivery.

So that's Zetec.

Neptune of course has, they close for maintenance in July, so that's a pretty big Q3 hit to our capacity.

If you look at a lost week at Neptune, that could easily amount up to $2-3 million of revenue.

And then the fourth quarter close on Neptune is really to encourage people to take vacations around the holiday, so that vacation management throughout the year is easier for Hank and Chuck to manage.

As far as other Q3 factors of course, the Sarbanes Oxley situation that depresses earnings in third quarter, hopefully it's more of a one time event although clearly it is going to drive some added cost from an administrative level throughout the organization, as you continue to drive the processes and document the activity and we have beefed up our control functions, both in corporate and in the field.

I think the rest of it, is we continue to grow here on an order basis with sort of Imaging and instrumentation and Industrial Technology leading the way.

So if you're growing it's a little harder to get absolutely clear versus a mature company that's got predictable seasonality.

I don't know if that helps you answer the question.

We of course have some businesses like Cornell and Compressor Controls, that get lumpy order situations, Gatan I'd throw into that.

Sometimes delivery situations can change from quarter to quarter, but the trends are all positive.

This year we would have expected certainly more Gazprom of say $6 million in Q3, than we think we're going to get now, and that's something that once this comparable period on Gazprom is over in 2004 and again to start the model that at 1%, I think it will be much easier to run the expectations of quarter versus quarter performance.

That's very helpful, Brian.

One follow up on Gazprom.

When you're giving your guidance for the year -- well, I guess it's my understanding is Gazprom is seasonally strong in the summer months.

So is the collapse or the further cut in Gazprom forecast, does it disproportionately hit the third quarter?

Well, we expected that we would of had revenue in Gazprom this quarter and I think as you see, it's only 800,000 and last year was 8.7 million.

Right.

We would have expected something like 5 million plus or minus, in two, three, and maybe some in the fourth quarter.

You know, we don't expect that now.

We're probably or to get in the neighborhood of 5 million or little more in the second half of the year and whether, if we could move that from the fourth quarter into the third, that would be the one way the third quarter could go up a little bit.

Thanks again.

The next question will come from Alex Blanton with Ingalls and Snyder.

Just following along, I think also Brian that when you had an October fiscal year, the first quarter was always very weak.

Absolutely.

And so that included the November and December.

So now November and December are in your fourth quarter and people modeled fourth quarter weak.

And that's where that idea came from, and I had this same kind of thing in my model.

So the fact that you are not seeing a weak fourth quarter in your budget, isn't that a sign as you alluded to that you've got very good momentum going into 2005?

Yeah, I think so.

But it's also just human behavior, Alex.

If we move the fourth quarter to July 8 than we would have a strong July and.

There is that factor, too.

And on Gazprom, year over year in the quarter it looks like a normal incremental profit, that's 7 or 8 cents a share that wasn't there.

Yes.

-- versus last year.

So had you had last year's volume, you might have done 70 cents.

And is similarly for the year it would be about double that, the shortfall you're indicating.

How do you, currently the 5 million you expect for the second half, how do you expect to break down between the third and fourth currently?

Probably a million in the third quarter and 4 million in the fourth.

It could change.

We're getting 1 million plus out of Service and Installation, and then the rest becomes equipment, so that's what we think.

One to 2 million in the third and three to four in the fourth.

Maybe at this point we should just just view anything from Gazprom as a bonus.

I think that's right.

We're just going to say let's look at it at 1%, and whatever happens, happens.

In reality they're only halfway through their conversion process, they've got tons of money, they just issued a billion dollar bond offering, what's holding it back?

It is simply the fact that they're running so far behind on installing the stuff you already sent?

And so, if that's the case, then we can expect a pickup.

If they decided they don't want to do any more and convert -- and rehabilitate the other half of their system, if they don't want to do that, it's another thing entirely.

What's your sense of it?

I think it's very hard to read what they're saying.

I think that they've got a lot of different demands now for capital even though they're raising money.

They've got this whole discussion of a new pipeline in north China, they have new fields that they're putting in place.

So I think the opportunity costs of maximizing what's already installed, meets these challenges of other sources and uses of funds.

And people that we talk with routinely for, last year these same people told us they expected to do 30 million, we did 22 and something.

This year but they were talking about numbers that were similar, and we just didn't accept it, ever.

But even in our most conservative mind, I think we said 15 million will be the kind absolute downside.

It is what it is and we were thinking about recording the Soprano's line, and somebody could say 'forget about it.'

Whatever happens in this is going to be X plus business and we've created a portfolio that doesn't have to depend in any way on the business, now or in the future.

Right.

We're certainly well positioned to serve the markets, and we're not seeing other people coming in and grabbing a massive work there and, so we just cannot predict if and when Gazprom would comeback, or what levels it came back.

I would say this, if it did come back we would treat it differently.

I think we would just talk about it as sort of an X dividend opportunity, instead of people modeling it in to any kind of long-term program.

Couple more things.

Do you still expect operating margins over 20% coming up and when?

They are at 19.1% now in total and secondly, what are these products you talked about in imaging that came from the hand-held business.

Are those new products entirely?

Yes.

They are outgrowths of technologies we have, but they're either running it at cooler temperatures or they're running with less costs, or we've got better sensor sourcing today.

We've got more application focus with solutions, so we'll add more than just the camera itself to the proposition that the person is buying.

We're doing more and more software from Media Cybernetics.

We've launched a couple of platforms there that are good.

And then on the side of, our fourth quarter operating profit we would assume would be above 20%.

The fourth quarter profit in total?

Right.

Absolutely.

What I mean was, in the hand-held instrument part --

Sorry.

In the hand-held instrument, that's a whole other thing.

If you checked in at Hertz and saw the little thing that they use, it's called a quarter screen, and so we have a quarter screen product and we have a have screen product.

We've now launched a tablet PC that's a full screen, that you can use just like your Blackberry device.

And that product is going to drive demand in the future, as people go to something that's easier to read and see, and when we couple it with our DB Microware software, for route mapping.

People can actually follow the screen, instead of squinting or having to pull over and look at.

And then we're getting expanded channels in imaging that are really important for us.

And better share of the channel mind, and DAP is also benefiting from what we're doing.

Because we have value added resellers and the VARs that have looked at that product, like it and see some opportunities there.

And as the year unfolds, we'll have our full CE software range running on DAP products, and that will be a big plus from the old software they had.

Okay.

Thank you.

We'll go now to David Smith with Smith Barney.

The morning, guys.

Morning, David.

Quick follow-up on Alex's questions on Gazprom.

Does the guidance include Gazprom , I'm kind of getting the sense that you're saying it's not.

The guidance includes Gaz -- we're assuming around 10 million in revenue to Gazprom for the year, I think, and the guidance assumes that we would get at least that.

The kind of lower end would be if Gazprom didn't come to what you're saying, is what you said, am I reading that right?

I wouldn't put 12 cents completely around Gazprom one way or another, Chris, I don't know what you responded to.

I think it's fair.

The Gazprom is baked into the numbers going forward.

We talked about the full year being less than $10 million.

But the range does include some range of activity that is, say the guidance range includes a range of activity for sales to Gazprom, but to Brian's point, certainly not the whole 12 cents.

Just reading it one step further, any upside to the numbers seems like it would really be depended upon Gazprom at this point.

Yeah, that's probably true.

Right.

Okay.

We talked briefly, Brian, you mentioned waste water ,can you kind of go over all of your water exposure.

I know Neptune, but how much right now is wastewater and what are you kind of seeing overall in water.

We've heard from ITT, Penter, Badger meter, it sounds like the water business seems to be doing pretty well.

Yeah, David is Chris.

The water wastewater exposure that we have is obviously primarily around the Neptune business, which is the North American metering and measurement, AMR activity.

But before the Neptune acquisition, we also had some participation on the wastewater side through our Cornell and Abel Pump businesses, and lesser so with our Metrix business, which does vibration control and analysis on rotating equipment ,which has a lot of applications for the waste water plant.

And to your point, this is a sector of activity that's been favorable for Roper for several quarters, and we've talked about it from time to time.

It does tend be lumpy obviously, because projects, you have project timing, and as Brian alluded to in his earlier remarks, we've seen certain projects this year have been shifted from Q3 to Q4, which supports the sequentially improving trend that we put forward today.

Is there any way to characterize the kind of orders that you're seeing in water?

Would be fair to say like you're received a double digit increase in orders from water these days?

I think if you characterize it in a longer-term basis rather than just a weekly or quarterly basis, a shorter term, it's an area that we've seen, over time, kind of anywhere from the respectable, high single digits to occasionally double-digit performance.

Yet to be little careful there.

We have two very different businesses that are both in wastewater.

We have the Cornell business which is doing well and has the strength that Chris is talking about.

We have a business in Germany, Abel, and they are struggling a bit because their whole cost structure is in Germany, just outside Hamburg, so their ability to bid in to the U.S. market has been a substantially injured from a currency perspective, and they're doing okay in their home markets, but those are very mature, pretty low growth applications for them.

So the business is performing well, but it's not growing as much, so that's sort of a little bit of a brake on our waste water total, but it's still good organic growth in total.

Would you say then overall, that water is still in that 25% range of the total company?

Yes.

And kind of with an upward bias?

Well, we'd like them all to be a growing so -- but waters got more organic growth in it than most of the other segments, so if we didn't change anything about the portfolio, or didn't have more growth somewhere, I think you're going to find our life science business growing, and that will help the research portion of our equation, and energy is continuing to perform well.

So I don't -- I think that the research market and life science and energy markets aren't being outpaced by water.

Okay.

Just following on the energy side.

What's happening these days was CCC, you had talked in the past about more opportunities over in eastern Europe, what's playing out there these days?

We haven't really closed anything, but there's a lot of flotation and and what we have is different people creating demand and different people working with people on application opportunities we've had in the past, because we're not doing that through any of the Russian conduit, all that's done direct out of Des Moines and Amsterdam, so we've done a lot of work in power generation which would be a new vertical for us from pipelines and were starting to get some orders in family of product.

I think at the end of the year when we talk to you about '05 and what you see I think we can be very clear about the opportunities in that area.

Okay.

Last thing.

The great numbers on working capital, I'm just wondering especially on inventory where do you see that going?

It's certainly getting down much more to a world class multi Industry, a kind of company level.

Is it continuing to improve?

Yes, I think it will continue to improve.

I think the first few years are the hardest, and then you get sort of nested and people know what they can do and where they're going.

We still have payables and accruals are now at least about inventory and when we first started talking about it, it had to be greater than inventory, people thought we were from Mars.

So that's the that's a pretty good -- but there is still opportunity inventory.

I hate to throw a specific target out there about what we could do, but we can do more.

We're doing a much better job in getting the imaging guys to think about what they have to buy and how much they have to buy and when they have to buy .

Negotiating with vendors, so this opportunity is there, our Amot people are making great strides in improving their inventory situation.

I don't see anybody who isn't going to continue to get better in that arena.

It's not solely coming from Neptune, then?

No, no, no.

So it's pretty broad based.

No, it's very broad based.

Great.

Thank you.

Will not go now to Wendy Kaplan with Wachovia Securities.

Thank you.

Good morning.

Good morning Wendy.

And it would seem to me that the Industrial Technology segment would be the one that would have the most impact from raw material costs.

Can you comment on that, what we saw in the quarter and what we've seen him in terms of pricing overall and global forcing comments?

Well, we've been very fortunate early in the year in challenging his everybody to make sure they put surcharges in place on castings and steel and commodities that they were seeing.

They've been pretty successful in that.

We've actually had better gross margins, exclusive of Neptune, in the second quarter and that is a pretty good predictor of the fact that we've been able to move pricing up, at least as much as we needed to to offset any material cost push inflation.

A lot of the products, though, we have the benefit as I said in the past, of Moore's law working for us on instrumentation and imaging, and industrial technology has had some pressure.

Neptune has buy forward contracts on things but nonetheless there's some sharing of costs that they have to hit, but they actually have improved their operating profit margins and been able to absorb the hit in the material costs, so we really haven't had any deterioration and we can't use that as an excuse for operating profit performance in any of the businesses.

So we're really not seeing a big problem and we don't really anticipate a big problem.

And those surcharges are continuing to rise as the cost of steel rises?

Yes, we basically -- and rather than raising prices in the pump segments for instance, which is simply rolled off an X plus, almost like a fuel surcharge if you will, for the shopping people.

And we felt that was an effective way to deal with it because people presume it will go away and you know it's not something we're arguing about on negotiated prices and everybody in those categories knows what's going on, so we really haven't had much deterioration and we don't expect those prices to go up forever, either.

Okay.

Your comment that cash from operations could be in the 150 to 160 range what does that assume in terms of working capital for the balance of the year?

Wendy, this is Martin.

It basically assumes that it will be another 5 to 10 million coming out of the balance sheet for the balance of the year.

Thank you.

And finally, last quarter when you talked about beating the 270 number for the year, he said that three things happen when been a better and Gazprom, which looks like it's not happening, a stronger U.S. dollar, I don't know, probably not, and Neptune's growth in their AMR business.

How is that looking at this point and would you add anything else to support the higher than 270 number?

Well, I think that the first to you are probably right.

I mean there's some momentum and pride in what people have achieved and that continues to build results so maybe they'll surprise us a little bit on the quality of operating performance in their core business, that would be one way that we could continue to do even better.

The Neptune AMR business there haven't been any a major contracts lead.

Our shipments are up sharply this year over the prior year, but that's from the demand created in the past.

There are opportunities at Neptune I think to perform better in the second half than our current forecast numbers, so that, certainly an upside there.

And there's upside, depending on the adoption rate of the new products that we've launched in imaging.

They really are pretty exciting products for people and we've got a lot of energy in imaging, that we'll probably talk about in our next call, as we have hopefully good performance in Q3.

So that help, but 2.70 against last year's 2.01 is pretty good, so to try to beat it, it would have to really come from more organic growth than we're seeing at the moment.

We're laying in here with about 7% plus organic growth, if that continued to get even better than that maybe there's some opportunity on the upside.

And when you say that Neptune has to perform better, is that on the sales line or on the margin line?

No, they're doing traffic on both.

I don't mean they have to perform better.

That would be the upshot.

To beat the 2.70..

Sales.

Sales.

Okay.

Thanks very much.

Okay.

We'll now go to Jim Lucas with Janney Montgomery Scott.

Thanks.

Good morning, guys.

Can we step back and expand a little bit more on the imaging business where there have been a couple of brief comments regarding it but it looks at long last, as if the orders are coming more in line, the cost structure is better positioned, but could talk a little bit more about what you're seeing, not so much for the second half but really as we go into next year?

Well, a lot of what we're doing in imaging is focus, focus, focus.

If you go back two years ago there was a consolidation of businesses that are pretty dissimilar in terms of end markets and channels.

With Princeton Instruments and Photometrics.

Photometrics has been refocused entirely with a new person, Tom Connally running the business on life science and not confused about any other areas, and it's got very specific channels to work with.

We brought a terrific sales guy back, Pat Lourdy, who was there in the past and we brought a lot of talent into that business and a new engineering manager.

Q Imaging we've completely shaken that up.

We have a Ph.D. who was doing marketing for the imaging group who we have up there providing direction for Q Imaging and working directly with Photometrics, so that we're getting great synergies between the two organizations and they understand the value of selling solutions instead of products now and that gives us much more share of value added resellers minds and that's important for us.

And then in Princeton Instruments, we've ask them to get much more focused around the growth in spectroscopy and worry a little less about the shortfall in the imaging business that comes from the slowness ind physical science, and we're putting our Acton business and our Princeton Instrument's businesses together.

We just announced internally yesterday, that we've taking whenever one of our best guys, Gene Yasbak, and he's going to be providing direction over the new structure that we have for looking at how we can grow spectroscopy and that gets us into markets that we're really excited about.

So it's really more about us of being closer to customers, better distribution channel, faster product development, a variety of price points, and that's going to drive growth for a long period of time, because those are cultures we needed to add to very good technology people who weren't getting the commercialization right.

Okay.

When you look at that, a big increase in orders from a timing perspective, is that a longer cycle or can you give us a little color on the visibility there?

Well, but most of the stuff that we can do in imaging you can do in a three month period and we think that that order rate is related to the kind of new products and focus than commitments that our channels are giving us.

And that will continue to expand throughout the year.

We expect double digit year over year gains in imaging from last year in terms of sales and orders, contributions.

Okay.

Finally, since the question hasn't been asked today could you just give us a little bit of an update in terms of what the acquisition environment is looking like right now?

Huge amount of opportunity, there's a lot of things that we're looking at in conversations we're having, most of them are pretty interesting.

I think there's pricing in the marketplace is not as crazy as it was a little while ago, although, there are some undisciplined people doing things that we smile about around here, but we see lots of opportunity to continue to buy very exciting businesses in the 7 to 9 times EBITDA first year performance pattern, and we see a lot of bolt on opportunities and platform opportunities.

So we're working as hard as we can to get everything right, but - as you know, where pretty disciplined about it.

We've looked nearly $4 billion of opportunity this year already, Jim, and only announced 1 deal with the year's not over and we're encouraged by everything we see.

Final question, just following up on the pricing.

In terms of geographic location are you looking more at the U.S., Europe, a combination of the two?

For acquisitions?

Yes.

We don't only have a bias although it is hard to buy a European company with U.S. dollars, and look at the structures compared to the past.

I mean everybody we're looking at -- and the majority of people we're looking are global players, but based in the U.S.

But that's not the reason we're looking at them, it just happens to be the pipeline of the moment.

Great.

Thanks a lot.

Will go now to Darrell Party with Merrill Lynch.

Good morning.

Good morning, Darrell.

In Energy Control Systems, could you discuss your outlook for second half, in light of the slightly weaker orders in the quarter?

You discussed Zetec, and you touched on CCC and Eastern Europe, but could you just kind of pull the picture together?

Yeah, Darrell, this is Chris.

What we've seen in this segment of activity is obviously some good project level, both in terms of orders, in terms of prospects going forward.

It's just a segment where we've had reasonably good visibility, both in terms of the time to execute from order to shipment.

In addition to that just the feet on the street that we have a global basis talking to customers.

So it's a combination of I think the orders that we've already got in house, that are in backlog, as well as projects that we continue to pursue both from our pressure controls business, as well as the Zetec conversation that Brian led us through before, and the final piece in there is metrics, that's a business that's obviously a much smaller piece of the segment than the other two businesses, but continues to have great opportunities, not just in the water/wastewater segment that I mentioned earlier in answer to another question but also some of its primary energy related markets.

Are there particular projects that you could share with us?

I don't think that there's any particular project that could be substantial growth overall.

I think that we have a number of projects that are in hand that are typically are going to be $1 million or less.

It's very rare for us to have projects that exceed that amount, so you're really talking about a volume of projects, rather than a specific project that's going to move the needle for Roper.

Some of your businesses that are more international, can you just comment on what you're seeing in in Europe, we saw kind of mixed results for a lot companies.

Didn't hear you talk about geography --

Germany is not -- certainly not on fire and that's been a frustration for a couple of our businesses.

But our European businesses will do better this year in Europe than they did last year but they're not -- I mean it's very modest.

It's a growth drag as opposed to a benefit to growth.

I don't see that changing a lot.

It's an export challenge for them, in Struers has got great sales everyplace in the world, but its sales within the country, I think they are higher this year but are disappointed and they expected more than they had in Germany and France.

Most of the rest of the things we sell out of Europe or really sold to global markets, going different places.

But I think the spirit of your question is around home country demand for the European businesses and that's lucky to be 2% up.

Okay.

Great.

Thanks.

We'll go next to Michael Schneider with Robert W. Baird.

And Brian, maybe you can first address Neptune and when you did the acquisition, you were modeling something between 4 and 8% organic growth.

You've had two solid quarters of double-digit growth now presumably 10 to 12% or so.

What are you budgeted for the second half and what does that imply for the guidance?

I think Neptune's is going to be the high end of that range.

We thought it would be 10 to 15 cents accretive, it will be at the high end of that.

We said 4 to 8% growth, sort of on going, I think it will be at the high end of that as well.

And then the water meter business is doing very well.

The software business, DP Microware, that's in there has not done as well as they expected and I think we're adding resources and doing things to that business, but it will pull down the double digit growth think about, and then DAP has, depending on reaction to the new products that we've launched and getting better distribution channels up and running, might not have double digit growth for the whole year versus last year.

So the sort of 8% number might turn out to be accurate.

So when you talk --

The to be a little upside on that.

They have a lot of project bids out and so forth.

Brian?

Yes.

I was cut off there for a second.

The forecast for 48% growth sale when you talk about double digit Neptune growth, is that just the AMR portion of is that is the entire --

It's the entire Neptune water meter business, which probably ought to be a little bit careful about the DB Microware and DAP.

Is there any reason when you look at the shipment schedule for large projects like Cincinnati or something, that the second half is expected to be down in growth versus the first half at Neptune?

No, not really down in growth.

Sequentially it might be down by $1.5 million to $3 million in the second half versus the first half, but that's because you've got the two shut down weeks.

Sure.

Switching gears to imaging.

I'm still curious by the experience that you guys have seen in the physical science markets, and I guess first maybe you could just shed some light on specifically what businesses you're talking about is it is just Princeton or --

Pretty much Princeton.

We were fortunate at Gatan, we launched a new product called the GIF Tridiem, and it's acceptance is just terrific, and that's driving some good things there, but Princeton has started to see improvement in the spectroscopy piece of the business, but the imaging portion of the business basically they're sales to OEM customers has been depressing.

Okay.

What's going on there and that's -- you know, people that we've got to do some more work with.

Am I right that there is a disconnect between their performance and many of the other companies that have reported, I know they're not perfect comps, but if you look across the landscape, Perk&Elmer, Waters, Vico, FEI, all these guys reporting big order growth in some cases, record order growth, is that indeed a disconnect that your worried about?

I think that's slightly different markets there.

Gatan's performance relative to the names you said there is pretty good.

Princeton's performance is a disconnect.

But they're not primarily going into semiconductor markets.

What's happened is that the research side of physical science isn't getting the funding that it enjoyed in prior years.

The life science people are getting the funding and so the research guys are starting to write up a lot of life science projects for their funding that doesn't help Princeton in any way.

By research, you mean academic?

Yes.

Okay.

And just a final question, when you talk about Physical Sciences and imaging, could you give us an update on how the MASD side of Redlake is doing is that still a drag?

No, the Redlake situation is we put a lot of money into product development and Redlake is growing and its economic performance is getting better each quarter, and it will contribute incrementally this year over last year, and it will contribute more next year than this year.

Okay.

Thank you.

Will go next to his Alex Blanton with Ingalls and Snyder.

Just a quick follow-up.

Someone mentioned that 10 million is expected from Gazprom, I think it was Brian, but you've only done 2 million so far, so if you do 5 million in the second half there's --

I think made more that.

I think what we said -- I just want to be clear, we said less than 10 million is what's expected, and in Brian's remarks, he sort of talked about 5 to 7 million of activity in the back half of the year.

So 10 million is kind of the -- You don't expect that.

We're figuring -- we're figuring another 5 million in the second half of the year, probably.

Maybe a little bit of upside, but we don't know that there is any.

Thank you.

Ladies and gentleman that does conclude today's question and answer session.

I'll will now turn the call back over to Mr. Chris Hicks for any closing remarks.

Thank you very much.

Obviously we're available for follow-up questions today and we thank you for your time this morning at our call.

Thank you.

Once again ladies and gentlemen, that concludes today's call.

Thank you for your participation, you may now disconnect.