Roper Technologies Inc (ROP) 2004 Q3 法說會逐字稿

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

This call is being recorded.

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

Please go ahead Mr. Hix.

Thank you.

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

Also participating in today's call is Brian Jellison, Chairman, President, and Chief Executive Officer, and I'm also pleased to announce that Mike Towe has dialed into today's call.

You may recall that Mike is joining Roper on November 8th as our new CFO after his 27-year career with General Electric, which included a variety of CFO roles in America and Asia.

Welcome aboard.

Yesterday afternoon we issue add press release of our third quarter financial results, which include record performance in many metrics, including sales, earnings and cash flow.

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

It 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 call which are available through the webcast and are viewer controlled.

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

Please turn to slide two.

Today's meeting inclusion forward-looking statements and I'd like it remind everyone of our Safe Harbor statement, which is included in both the press release and slides for today's calls.

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

Finally, I should note that we filed a form S 3 registration statement earlier in week which places some limitations on our communications, however, having said that, we will continue to strive to provide the transparency and full disclosure that the investment community has come to expect from Roper .

With that,

I ask you to turn to slide 3 as I turn the call over to Brian Jellison.

Brian.

Good morning everyone.

We'll start here with -- that's a great place, slide three.

The overview of the third quarter, the record results as we talked about in our press release, we'll talk about in depth throughout the call.

But I do want to remind everybody, we had a very unique situation last year in the calendar year, that's the year in which we changed from a fiscal equal year 10/31 quarter to a calendar year-end, 12/31.

And you do get the unusual behavior of in the calendar third quarter last year, we closed on July 31st a quarter, and then had the unique opportunity to close another quarter, a calendar quarter on 9/30, so you had the very unusual benefit of the things that people tend to do at the end of the the quarter to maximize their results.

And that quarter with two months end closes did produce some favorable results last year that made this year's comparisons a little harder than normal.

The second point is talk about our continuing growth strategy.

The Neptune acquisition is performing well ahead of plan.

Had another strong quarter here in the third quarter and we'll talk about that when we get into industrial technology.

The business we acquired from (RD) tech in Canada, the power generation business, has been well integrated into Zetec already and we're starting to see benefits both in sales and we think good accretion into next year.

We also announced our agreement and held an investor meeting earlier this month to explain the TransCore technology business, which we expect will close in December of this year.

We also had a press release on Mike joining the company.

Mike has 27 years with GE.

We know a number of people in a common way.

Had a very extensive search, looked at well over 20 candidates, narrowed it down to 7 and Mike won a very well fought out process.

He had an opportunity to interview with most of our Board before we finalized anything and we spent as, just like acquisition, we weeks not days with Mike in assuring ourselves that this was right person for Roper at this point of our development.

He's currently CFO within the GE equipment services businesses, and what's unique about that is that he's got a good deal of responsibility for their modular space tip business, which actually is quite much in the zone of what TransCore does today.

So went we talk about satellite communications and mobile asset tracking, Mike comes on board with expert knowledge.

The CFO roles he's had, he's work in plastics and lighting and motors early in his career, FMP, and that's a very, very fine set of experiences, and then he had benefit of starting up a plastics operation in Korea and became CFO of GE Capital's operation in Hong Kong and established operations in China.

He'll be here a week from Monday, but he's sort of here in spirit and we're talking to him up-to-date.

He's got his own Roper BlackBerry, and we're trying to do what we can and he and I are going to be working together this weekend.

Next slide.

Strong third quarter results.

You know, pretty much everything about the quarter was good.

We'll talk a little bit about about some sales delays that pulled down the organic revenue that were unfortunate.

But notwithstanding that, sales as you can see were up 40% from the prior year.

Our net earnings were up 53 %.

The diluted earnings per share grew to an all-time Roper record of 73 cents against last year's reported 56 cents.

And the continuing operations number was in the low 60s.

Cash from operations, as you can see, was up 68%, and the cash conversion of net earnings was 130%, which is excellent performance.

Our only disappoint in the quarter was some unexpected delays in our waste water projects out in a business in Oregon, and that was really unforeseen, and one delay in an imaging order that took about 3.5 to $4 million out of our revenue line, and made organic growth a couple of points less than otherwise what it would have been.

Organically the orders were up 17.8% without Gazprom.

The sales were up about 6.5% without Gazprom.

If we move to the next slide, slide 5, you can see again our focus on cash and the way we would challenge our operating people.

Pays us dividends again while the nominal EPS reported number is 73, the cash from operations per share is 95 cents.

Next slide.

Here you can see the improvement that we've made sequentially throughout the entire year in the first quarter, we had net sales of 221, in the second quarter 232, and the most recent quarter 240, which could have been another 3 or 4 million higher.

If you then look at the income from operations number, you can see what's happening in the second quarter we were up about 11 million, and incomes from ops was up about 6 million, close to 50% of the leverage showing up.

This quarter we're up 8 million and income from ops is up 4.

So it's 50% again.

We still think we're in a world where 35 to 40% of increasing revenue tends to fall down to income from operations.

You can see the operating margins have increased from 15.7 to 17.5 and now 18.9 here in the third quarter.

If you look year-on-year, it's flat in the third quarter, but that's because of that very unusual development and also when we get the imaging, you've got some amortization in imaging this year that wasn't there before that causes a little bit of margin shrink there.

On the net earnings and DAP numbers, DAPs numbers I think those are sort of self-explanatory.

Let's turn to slide seven.

On EBITDA performance, can you see the third quarter last year we created $34 million of EBITDA, and this quarter it's 56 million of EBITDA, so it's up 61%.

And our EBITDA margins for the enterprise were 23.2%, which is what I had hoped we would show you folks in the second half of the year.

We think that's outstanding performance.

And then if you look at the quarters this year, you can see in the first quarter on this graph we had 43 million of EBITDA in the second quarter, 51 million of EBITDA and in the third quarter, 56.

And you can see the EBITDA margins on the graph continuing up sequentially from 19.4 in the first quarter to this quarter's 23.2%.

And if you take the unrounded number in the third quarter and annualize it, we would have EBITDA of -- before we had in the TransCore EBITDA that would be joining us later in the year.

Next slide, eight, looks at our balance sheet.

And here you can see we're continuing to make progress.

There's still room for improvement.

In fact, we've kind of pushed everybody hard on what we thought was less than acceptable performance on payables at the end of the third quarter.

But you can still see here inventories come down from the end of the year, 13.5% of sales to 11.4 receivables from 18.5 to 17.7.

Payables and accruals from 14.5 to 13.1.

Leaving us with one of our internal metrics which is inventory plus receivables minus payables is down from 17.4 to 15.9.

And 15 was a target we felt people ought to initially try to achieve, and then get better from there.

Our total networking capital has come down 120 basis points from the end of the year.

You can see the quarter-over-quarter progress on the slide at the right.

And then when we look at the cash, we have over a $100 million of cash the balance sheet today, so there our net debt to net cap has dropped from the year-end's 47% to 40.5% at the end of the quarter.

And the good news about the balance sheet is there's still opportunity for improvement in inventory and in payables.

The next slide, nine, will start to look at the quarter's performance on each of the segments.

In instrumentation, you can see orders grew 22%.

We're benefiting from strong end markets, certainly oil and gas that affects our PAC and Antek business is very good and the materials analysis business with Struers continues to be very strong.

Net sales were up 14%.

We do have currency pressures in these businesses because a good deal of this business is located in Europe.

And so you get the fixed cost production overhead in Europe, and a lot of businesses sold in U.S. dollars to the oil and gas industry, and in Struers case exported to the U.S.

So the currency translation makes sales look a little better than they otherwise would, but it does hurt our margin.

And we're not getting the leverage as a result of currency as much as we would like to achieve.

We certainly didn't think the Euro would be at 127 or 128 here in the fourth quarter.

So we'll have to put some additional thought into that if this translation level is going to remain as high as it is.

Then lastly, we expect a very strong fourth quarter out of these businesses.

They've got a, very good orders that are already in-house to fulfill and even with the pressure on currency, you can see EBITDA margins have been about the same throughout the year. 21% in the third quarter.

If we look at the next slide, energy systems and controls, this is just really a phenomenal story when you factor in our old friends from Russia.

The orders for the segment are up 27% but if you exclude last year's Gazprom orders and this year, you will see that the business is up 73%.

You may remember in the first quarter, we restructured our compressor control business so that we were focusing on many other oil and gas markets throughout the world, and power generation markets as well.

And that end market focus has produced these terrific results, along with improvement out of Zetec and RD tech.

We had a $6 million shortfall in Gazprom revenue in the third quarter of this year versus the last year and I think in some ways more importantly, year to date, we've only sold Gazprom $3.3 million of product and last year through the first three quarters it was 17.5 million.

So these record results are really proving that Roper can live without Gazprom in a very effective way.

If you look at the EBITDA margins down here in the first quarter, they were 17%.

In the second quarter, 21 and this quarter, 25%.

So I think that all this focused activity that we had here to create the right distribution channel and the right strategy with the right end users has paid great benefits to us an this segment and our hats are off to the folks who did outstanding work there.

We'll expect a strong quarter in this business as well.

Next slide, # 11, if we look at industrial technology.

Here we had of course outsized orders when you include the acquisition, sales up 133% and orders 153 because of Neptune.

But the segment was up double digits organically.

Very strong performance from most of the business.

The only drag on this was the one pump business with waste water projects which drifted out of the third quarter, and we have been disappointed really for two quarters in a row in that business and as a result, we've made a series of management changes.

We've taken one of our best folks out of Chicago's operations and moved him into Portland and added a new manufacturing operations manager and spent more time focusing their customer service people on end user contacts regarding delivery, because there's been too many surprises in the second and third quarter on people placing orders with dates that turned out to be less firm than normal.

And we think we'll be behind that process and actually could create an opportunity for us in the fourth quarter.

EBITDA performance in industrial technology, I think, is nothing short of outstanding.

In the first quarter, it's 23%.

The second quarter, 27.

We actually reached 28% in this quarter.

And if you think about the effect of Neptune we know it's a very strong EBITDA performing business.

It's in all three of these quarters.

So this is not just a Neptune phenomena.

This is the recognition and realization of those things we did more than a year ago to make these more effective businesses.

The next slide, #12 on scientific and industrial imaging.

It's an interesting quarter for us in this business.

The orders were up 11% and sales were up 8%.

But organic orders were actually flat.

Most of this is the effect of DAP being included in the imaging segment, and it is really starting to gain traction and do well.

Our camera business has struggled throughout the year.

Part of that is that it's Japanese business while not huge is off about 20% year-over-year, so other things have had to pick up that slack.

In this quarter, the sales are a little bit -- they look worse than they are, because we had more than a million dollar order that we expected for one particular client, that's been pushed off into probably the fourth quarter.

So organic is -- had a -- it's a couple of points on the organic side.

Then physical science, a part of the problem has been the Princeton business really struggling to drive more OEM business over the last year or so.

And we've made changes there as well.

We -- at the beginning of the quarter, we put one of our stronger guys, Gene Yasbach, in to run that business, and basically bring the spectroscopy component inside Princeton, and we've made some changes in our sales force, particularly as it relates to OEM strategies going forward.

So we think we have some good building blocks in place for imaging that will produce results next year.

Good news here is that our software business is doing very well, up sharply.

And we're finding that camera business is much, much more dependent every quarter on software and application expertise, than the product portion of the camera business itself.

And folks are working as hard as they can to develop as much software application as is possible.

Our Acton spectroscopy business and Princeton have been basically collaborating on the spectroscopy side here, and we have got some good early wins there and we think that's going to be strategic for us throughout the rest of year and certainly going into next year.

And then we've got a new line of rugged hand-held instruments for DAP, which has been launched and we're expanding our channel.

So that's driven most of the growth for DAP in the quarter.

Even with some struggling organic sales, you can see the EBITDA margins continue to improve in the first quarter they were 18%.

The second quarter, 19, and the third quarter, 21%.

And it would have been better if we could have had the imaging order that we got delayed.

We look at the next slide, we do have -- we reaffirmed our fourth quarter guidance and really didn't narrow it much because there are unique things happening in the fourth quarter.

We -- we expected to spend maybe 2 million on Sarbanes-Oxley this year, maybe a little more, but not much.

We've spent a little less than a million year-to-date.

A good deal of that almost all of it, occurred in the third quarter, but the fourth quarter, the spiraling costs, particularly on all of the things that we have to do in information technology are going to be beyond our wildest expectations.

It's easily going to be in the 3.5 to $4 million arena, and since we probably have some of our friends on the phone, we won't tell you because we're fighting with them for just how much we are spending externally.

It is really an unbelievable drain in the short-term on -- on earnings because that's a cost that have you to bear.

We're doing a terrific job in this area.

I think Mike might comment on it, was one of the things we asked Mike to do, chat with our people and compare our progress to that with other firms that he knows.

We are in great shape here, but it is costing a lot of money.

We had thought it would be a little more normalized throughout the year, but the vast majority of it is going to nail our fourth quarter.

Gazprom activity, we had said at the beginning of this year, we thought we would do less than 20 million in revenue, maybe 15 million, might be something that's rationale.

In our second quarter call, we said, look, we've given up on Gazprom.

We think it will be less than 10 million,n but we didn't think it would be what it is at the moment, 3.3 million year-to-date.

And unless we get some better Gazprom performance in the fourth quarter, which could still happen in the next couple weeks, it's hard to get to the upside of the range as a result of that.

Strong oil and gas markets, they're very, very outstanding as can you see.

We said our energy businesses were up 73% in orders.

That's going to be good news.

The currency conversions really a mix issue of where our sales out of Europe are going, whether they're going in Euro denominated currency, or whether they're going into Yen versus the U.S.

It's always hard to predict that.

But generally we would say it's a positive for sales but a negative for margin.

Then the delayed imaging project and the waste waters, they took at least $3.5 million out of revenue in the third quarter that hopefully will spill into the fourth quarter, which would be a positive push for earnings.

Next slide.

Our full year guidance, we essentially left as as it was.

We're saying sales would be 940 to 945 or more.

And the DAPs -- 258 to 270.

Next slide looks at the cash performance.

On cash from operations, you can see we're up dramatically, year-over-year we expect for the full year to have 150 to 160 million in cash from ops, up from last year's 96 million, which would be an improvement of nearly two-thirds.

The cash from operations earnings per share, around 399 to 426 for the full year.

Next slide, we call your attention to the portfolio changes, which are so beneficial to us, if you go back to 2000 when the Company had revenue of about $500 million, a pretty substantial portion was a Petrotech business which we offloaded last year and the IDI business, which was the little pump and semiconductors and Gazprom.

Today those three businesses collectively are no longer significant to the enterprise and with the addition of TransCore will be not even a 1% effect on the enterprise.

And you can now see why we're getting this continuous improvement in sequential improvement and much less volatility in the Company because since 2000, we've made four great acquisitions.

Neptune and TransCore, all of these are very good cash returns.

They all have favorable end markets.

They have clear growth pathways in terms of product development and channel access.

They have scale advantages we can buy things and put into those businesses.

And their platforms continue to be very solid forward-looking things for us.

Next slide. 17.

Just a few words here about TransCore.

It's another strategic growth platform for Roper.

It will report directly to me, it's a business that's related to radio frequency identification and satellite communication technology.

They have a lot of expertise in proven high growth applications.

A very typical business for us.

It's engineered solutions.

It's a market leader in its space.

Has high margins, outstanding cash flow, it's a financially compelling transaction.

It's easy to look up historically how well it's done and we can't say much about the future because of the registration process.

But it will add a lot of sales to Roper, terrific amount of EBITDA and be a great cash flow contributor to the business.

We have synergies that will be interesting to us moving forward.

The next slide.

Probably the single best thing about TransCore is the quality of its management leadership team.

We're very excited to have this family of folks joining us. and it represents on of the best teams that I've seen in any of the businesses I've run over the years.

John Worthington is an outstanding CEO, and John Sumeler, who is the operating officer for the business understands it intimately and is hard driving fellow and Joe Grabbius, who runs the financial operations is sort of our kind of guy.

We don't have to explain to Joe or the two Johns what it is we're all about.

They're very, very similar to us in every context around shareholder value creation.

Next slide, can you see how great a job this management team has done.

Their business was 41 million in revenue in 1995 and in 2003, it reached $338 million of revenue.

Certainly some of that with acquisitions, but these guys are proven winners.

They've got an end markets that are very good and their long-term relationships are very strong entry (birds) for people.

Next slide looks at the existing growth market applications of TransCore.

They're certainly best known for their automated tolling responsibility where they have a market leadership position, and also market leadership position in asset tracking, knowing where your things are at any given point in time.

And lots of emerging opportunities around Homeland Security.

Next slide. 21.

The most exciting part of that leadership team getting married up to us are things that we've already been doing, pre-emergence here.

We see a lot of evolution to higher value applications, so you start out maybe with tolling and then go to automated tolling and from there you go to high speed open lane tolling, which is an entirely different application and ultimately you get to electronic vehicle compliance, we'll talk more about when we're out on a road show.

RF parking lots, radio frequency monitored parking lots, turn into applications for airports and those in turn turn in to border security and Homeland Security for the country.

The radio frequency rail tags, they have two on every railcar in America.

Turn into asset tracking technology devices and ultimately that turns into a secure port security, and secure knowledge of where your loads are throughout the United States.

So we just think it's an outstanding business.

Next slide, 22.

Because it is RFID, there's a lot of different things people associate with radio frequency identification.

It's important to know that this is a high technology company.

It has over 100 patents.

We're talking about very experienced software application engineering and lots of satellite communication.

Not to be confused with the low cost tags that people would talk about with Wal-Mart.

Next slide.

This is just an example of the kind of technological advances they bring.

Instead of only reading a card, can you read and write to their card, which gives a higher degree of efficacy for customers.

Can move from low batteries to no batteries required, multiple protocols so they can read other people's readers, and the list goes on and on.

Next slide.

These are some of the technology and capabilities synergies that we're going to be able to exploit with TransCore and Roper.

In the automated meter reading with Neptune, we see a lot of data collection capability around the communication knowledge and the RFID knowledge that our friends here at TransCore will help with in the imaging area, it's a great channel access for security to us.

Lots of low light imaging applications and motion imaging applications that we have, so we expect it to add growth to our imaging segment.

Then monitoring applications for businesses like compressor control and metrics and where we have vibratory measurement businesses that don't have much remote monitoring capability.

Next slide is just sort of an overview on TransCore.

Here it's a -- the reason that we think it's such a compelling addition to our portfolio is that it already starts out with Roper-type margins.

You've got a lot of free cash flow that's going to be generated.

This is a business that needs very little capital expenditure.

It has very little working capital associated with it.

It's got a terrific amount of recurring revenue and an even higher percentage of recurring EBITDA performance from recurring revenue.

The radio frequency identification value added applications are sure to drive growth because we've got such a strong position with existing customers and there's so much application dependency on TransCore to continue to grow the effectiveness of the systems that are in place.

You've got very strong technology, Kelly Gravelle and the people that work throughout the country have just -- do a wonderful job here and a great leadership team that we're proud to be a part of.

We think that both Roper and TransCore are going to benefit from being together, and there's a lot of things that we think we can help them with, and there's a lot of things that they're going to help us.

It's clearly a compelling case for being together than apart.

The last slide then is just a summary of the quarter.

Our initiatives that we talked about earlier this year have in fact delivered a lot of organic sales and order growth, organic orders in the quarter were up 17.8% exclusive of Gazprom.

There's only about two points of currency in that -- in that order growth.

So it's really outstanding quarterly performance.

The operational executions delivered what we thought in the way of cash and we'll have a wonderful fourth quarter cash number.

Sequential results of improved each quarter throughout the year.

Must say when you're above 23% EBITDA, that trees don't grow to heaven I guess, but everybody's doing what we expect.

Working capital velocities increase throughout the year but there's still a lot of room for improvement there, and our operating guys know that.

Acquisition integration, both in Neptune and RD tech's power generation business are ahead of plan.

The platform expansion with TransCore is exactly what Roper needed at this point in our history.

And strengthening the leadership team was an important thing for us.

Mike Towe is an outstanding guy.

There's a number of folks that you know can verify that with, and very big jobs around the country and with me starting out at GE for most of my first 10 years, Mike and have I a lot of things that make it easier for to us talk in shorthand, and he's going to be great addition.

We'll take questions for any and all of us and you --

-- you want to let Mike add a few comments or we'll wait?

Let's go through with the questions and when we're done, we'll let Mike make a few comments.

We're ready to take questions from our callers.

Thank you, gentlemen. (OPERATOR INSTRUCTIONS) We'll take our first question from Michael Schneider with Robert W. Baird.

Please go ahead.

Good morning, guys.

Good morning, Mike.

Wonder if you could just help us out there.

There's no nifty slide this quarter on organic growth in orders on the reconciliation.

Could you just run through what base orders were and base organic growth were excluding currency and excluding acquisitions?

Yeah, sure, Mike.

I think it's -- first of all, let me set aside the currency issue.

I think as Brian mentioned here in the summary, of the presentation or of the prepared comments, the currency benefit in the quarter was about two points.

So I'll go ahead and give you you the rest of the numbers, which are gross movement numbers an can you decide if you want to net out the currency fit.

On the order side, the total organic orders were up about 11% and again, that includes some currency benefit that we just described.

And if you were to exclude Gazprom, that number is up 18%.

On the sales side, the total organic growth is about 3% and then if you exclude Gazprom, it's about 6.5%.

Okay.

And again, that is about two points of currency there.

I think Brian's comment at the beginning of the presentation is a good one to remind folks that we had this super normal quarter in the third quarter of last year as we closed out our third fiscal quarter and then we had the change in year-end, and -- to a calendar base and then closed it again in September.

Okay.

That's helpful.

And then drilling down into the energy segment, it is impressive what you've been able to do, x-Gazprom there.

For organic orders, it looks like they were up, excluding Gazprom, about 50 to 55%, excluding the RD acquisition?

Very sharply.

Okay.

And then secondly, what is the drag on profitability because -- because of Gazprom?

Are you still suffering excess overhead, excess engineers, et cetera in that business and as Gazprom essentially goes to zero, you can relieve yourselves of some of these costs and deploy them elsewhere?

Well, it's an excellent question.

It's going to be interesting to see what happens in the next eight weeks for Gazprom.

You know, we've heard a lot of different things and Tim Winfrey, who runs our energy business is a very solid guy, and you know, we put a lot of energy and time strength in our financial controls in those businesses, and there's still an opportunity to have less cost in those businesses if we're going to have as poor a level of sales in 2005 as we had this year.

So you know, you already have great EBITDA performance at 25% and you've got people who have gotten much smarter about controlling costs in Des Moines.

But we don't need as many people in Des Moines, if we're not going to have anything more than $5 million of Gazprom business.

And certainly the Moscow office would have some opportunity for continued restructuring there.

But we do have a lot of good people and we've got a lot of other things we're working on in Russia, notwithstanding Gazprom.

So you know, we're not at all giving up on the markets or our people.

But we have kind of given up as we said in the second quarter, on counting on Gazprom to -- it's just become a very political environment over there, as anyone who reads the paper knows, and, you know, we're here to provide great products and services and application but we're not going participate in any politics.

Right.

Brian, could you spend a minute and give us some specifics on where the growth is coming from excluding Gazprom or outside of Gazprom because it seems like --?

In energy?

What happens is that you had -- you had a management team in the past in Des Moines that was very centric around Russia and former CIS countries and we didn't have the resources dedicated to the North America market, or the Asian markets, that we have today.

And we didn't have resources dedicated to the selling to OEM suppliers who could sell to other people.

So we've got a totally different end market forecast in channel distribution strategy than we ever had before, and because of that, we're just capturing business that frankly we should have had five years ago instead of letting Gazprom drive the entire strategy around compressor controls.

And some specifics as to where that growth is coming from geographically or what type of customer or project?

Well, you got certainly strong LNG markets which are good every place.

Chris is trying to fire away.

Other Middle East and Asian applications.

Mike, I guess I would just supplement that by saying that geographically speaking the lion's share of the activity remains in the Middle East and Asia where the build outs are happening.

On the LNG side we're participating in that on a global basis. we have a very strong market position in that particular segment.

We're helping people with application things that we wouldn't have done in the past, frankly, so we're going to be more solution centric going forward.

Okay.

Thanks again.

Thanks.

We will take our next question from Matt Summerville with McDonald Investments.

Good morning, two questions.

Within the industrial technology business, can you talk about Brian, from an end markets standpoint.what you saw in the quarter outside of water, waste water?

I think you said the core business was up over 10% so, obviously you had some pretty good growth elsewhere.

Can you just elaborate?

Yeah, there really wasn't -- there's no industrial market.

The only place we're struggling, which is not the fault of the leadership team is our German pump company, which has opportunities to sell in to dollar denominated markets and it's very hard for them to do that with the strength of the Euro at the moment, particularly on municipal water projects.

The rest of the businesses are universally good and if we had had the project business shipping, we would have been, you know, even higher number.

So, Matt, it's hard for me to say that there's any -- there's not really one stand out in there.

Everybody's performing pretty well and pretty much everybody is probably up in excess of 10% in that -- you know, certainly we have some protective valve technology in our Amot businesses and they've come back strongly this year.

They were down last year because they -- some of the customers in portable power generation areas were very soft, so that business has rebounded.

I'm -- gee, our handset business around refrigeration will have a record year and continues to do very well and Roper pump has rebounded pretty strongly this year from sort of three years of mediocre performance.

Okay.

Then maybe just a question here on Neptune.

Can you talk about what you're seeing as for as RFP activity, are there any major new wins to talk about?

There really aren't things we're going to say a lot about I think there are a couple of things that could be significant if they were we'd probably actually cite them when they occurred.

But I wouldn't -- I wouldn't want get ahead of those stories.

There's a certain rhythm to how that whole process works.

But gosh, our AMR business is up dramatically for the year.

Where do you think your market share will shake out for the full year there?

Well, it's getting in to market shares in those businesses is something we prefer not to talk a lot about.

It's still true that the census business and the Neptune business are the market leaders by far and they may exchange a few points one way or another and from time time, some of the smaller players may win a particular project but on the AMR side, we're certainly not losing share, I'll just leave it at that.

Just last question, as far as the delays you saw in shipments in imaging and industrial technology, how much confidence do you have that in fact you will recoup that in Q4 versus maybe being pushed to the first quarter of '05?

You know, that's the reason we just left the guidance the way it is and reaffirmed it as opposed to maybe narrowing it.

It's -- the -- those events are largely beyond our control.

If they happen, they'll be good news in the quarter.

If they don't, it will be a little bit of pressure on the quarter if you look at the trend, it's -- there's -- there's only good things ahead of us and the orders are strong and the focus is good, and the management teams are getting better.

So I don't see any real problem but it's impossible to say, with still eight ,or night weeks left in the year, how secure they are in Q4 versus slipping into the first quarter of next year.

I think our guys are pretty hopeful.

Great.

Thank you.

Well take our next question comes from Jim Lucas with Janney Montgomery Scott.

Thanks.

First question on the housekeeping side.

Could you comment on the tax rate in the quarter?

It seemed to come in a little bit lower.

Yeah.

We do an audit every three years on R&D credits, and the tax return gets filed and signed off in the middle of the year, as you may know.

And with the certification process and the way that you're reporting earnings, you don't want to -- we don't really do any accrual adjustments, so if you have a variance quarter-to-quarter that you know about, you would recognize it when it occurred and in the third quarter, he with had about a $900,000 favorable variance on R&D tax credits.

So we had to take that gain in the in the quarter, but we didn't see that really change our regular tax rate.

So the tax rate -- I wouldn't make an assumption that anything's changed.

The tax rate is about 30.5% and that's where we expect it to be for the balance of the year.

Okay.

That's helpful.

You talked about a couple of businesses where there are been some less than favorable surprises this year, the waste water project delays at Princeton on the imaging side, and the management changes.

In general, do you feel that you've got your arms around most of the issues and these negative surprises won't be appearing in the future?

Well, there aren't many issues.

I think that --

That's a strong word.

I think we got our arms around everything.

I know our operating guys feel hugs daily.

So there's no question everybody knows what's going on.

I think what happened in Princeton is that you had a leader who was a little more product centric than solution centric, and a guy who was seeing a fall off in his OEM business, and not finding a way to get back.

We're talking a penny or something.

It's not huge.

In the waste water business, that particular entity, they've been able to do more and more projects, which wasn't the historical core of that business.

The core of the business was really agriculture irrigation and particular unique pump products.

And as business has grown a little bit here in projects, I think that their supply chain professionalism needed to be improved and that's why we made those changes.

So I think they became clear to us and I don't think giving a guy one quarter of explanation and then a quarter to execute is unfair.

Those are both behind us an we're moving ahead.

Okay.

Finally, on the working capital side, you commented that payables were an area that you were surprised at in the quarter.

Yeah, we didn't -- you know, we were too good.

And we should have -- you know, we should have had a higher level of payables.

Our payables were down well over a hundred points.

Payables and accruals you can see were 13.1% in the quarter at the end of last year, they were 14.5%.

If they had been the same, that would have been 140 basis points of additional improvement in our networking capital number.

Would you attribute that more to the learning curve?

No, I don't think it's a learning curve.

I think people were -- you know, you've got all the controllers are completely wrapped up in Sarbanes Oxley.

And everybody is buried in completing all of our work.

And they're doing a great job and I think, you know, our -- the payroll clerical functions were doing a good job, and didn't get pushed as hard as they should have in the quarter.

Okay.

Thanks a lot.

Thank you, Jim.

We will take our next question comes from Darryl Party with Merrill Lynch.

Please go ahead.

Good morning.

Good morning, Darryl.

Could you discuss -- last couple of quarters we've been talking about from the new products in imaging, and interest in customer base and building some backlog.

Can you just discuss where those products are being shipped and sort of what the customer interest is at this point?

Well, the situation on new products in image, something we're doing quite a bit of work around specific applications for OEMs where our products will be a subset of things that other people are selling.

A lot of that focus is for process people.

Some of it is for the academic community.

Geographically, the -- you've got a fall off in those OEM businesses that's getting made up with our end user businesses and distribution channel activity, so you're getting good growth in those but it's struggling to get it on total ahead of where you'd like to be.

So that you know the life science customer sort of universally aren't as strong as weren't as strong in the third quarter as we would have expected, but I really can't talk about, you know, specific customer applications because they're all proprietary and that's difficult.

The -- there's one particular family of products that Princeton's working on that's taking them longer to get into the market place than we expected, but the orders for those products are very good.

Okay.

And with -- in conjunction with the recapitalization, any thoughts on locking in some of your interest rate exposure?

Yeah, we can't really talk about the whole process there, Darryl.

Chris maybe wants to --

Yeah, Darryl, given that we filed a registration statement, we don't want to I think go into great detail about the financing that we talked about earlier.

But I think it's safe to say,, just as we looked at interest rate swaps a year ago when we went through this process, we will examine all the financing alternatives to make sure that we strike the right balance for the capital structure.

Okay.

Fair enough.

Thanks.

We will go next to David Smith with Smith Barney.

Please go ahead.

Good morning, guys.

Good morning, David.

Just -- excuse me.

To summarize, as far as the waste water and the imaging cost, can you just summarize for us what the sales impact was and the earnings impact this quarter?

It's about 3.5 million in revenue - that we would have expected in the quarter, and you can take your swag on that.

If you said 40% of that or whatever, you got to figure out your own.

Okay.

The other thing on the waste water side, are you typically just as far as the business goes, are you finding that it's up year-over-year and you did mention project opportunities.

Could this be something that has a bit more impact on the company going forward?

It's possible.

I mean, there's a lot of opportunity there.

We're always partnering with people because we're -- our centrifical pumps are -- have unique applications that generally are getting merged with other people who don't have what we have in the niche.

So a lot of times it's a family of people doing something.

Those businesses are -- while they're good businesses are harder to predict.

But you know, I -- if you look at where we are and you look at the size of that business, it's a rounding error but it will have a little bit of an effect from quarter to quarter.

There's lot of upside for next year.

One of the potential big upsides is that you've got access to Iraq and Libya that you were precluded from selling to and we've historically received lots of requests that we always turn down.

So we are considering opening an office in the Middle East to take advantage of the demand that we're seeing and that's currently under study.

Okay.

You mentioned, Sarbanes Oxley.

Just correct me if I'm wrong but you're saying that it's going to be $3 million in cost in Q4.

Very likely.

3 million plus, by the sound of it.

Spiraling costs.

Are there any other costs like on a one-time basis like insurance or healthcare that we should be aware of that are moving up like this?

No, I don't think so.

You know, insurance experience has been you know not spectacular.

It's -- we -- it's -- no, there's no one-time things.

Okay.

And the other thing on inventory, you know, the numbers like look they're coming through a lot of better but did say that there's room for improvement.

Where do you see that going?

Candidly, I see it everywhere.

The businesses that are buying sensor and chip technology you know, it's expensive items to buy and lead times are long and we're still trying to work on continuous sourcing strategies to get that better.

And we've got -- internally we want to continue to push towards a 15% net working capital number.

We close the quarter out at 18.8 and it's a little bit of everything.

You need to do a little more aggressive job on payables and you need to improve receivables a bit and you need to improve inventory: I think that the guys will continue to do that as they have throughout this year.

With TransCore though, that should be a pretty easy --

It will help a lot.

It has a very low net working capital number.

On a pro forma bay ace, if you were to consolidate it today, where would you --

I can't give you any forward-looking statements on a pro forma.

But if you look at the investor presentation that was out there, as well as the S1 that was on file, you think you can develop a model pretty quickly.

TransCore was about 10%, was it not?

David, you got to just go back and look at what's available publicly.

We can't really give you new information.

I'm just saying that it will significantly improve that position.

Absolutely.

It will help the enterprise number.

Thanks.

We will take our next question from Wendy Caplan with Wachovia.

Please go ahead.

Thank you.

Good morning.

Good morning, Wendy.

Sarbanes Oxley question, just a clarification, is is it the documentation of the programs that you are paying up here for, or is it underlying controls in the business that need to be corrected?

No, it's mostly the documentation.

It's the IT expenditures are beyond our wildest early quotations from the consultant folks.

And then there -- I mean, that's going to be a loan well in excess of $1.5 million.

And I must tell you that that's not adding anything to the quality of anything.

But we have to do that.

And so some of the things you do around it are -- you know, when' -- have you a pretty decentralized organization and you've got people worried about password control, and how long a screen stays on before it goes dark, we've actually created some generic documentation using 2 of our better businesses in this arena to help the smaller entrepreneurial people catch up, but we've had to use a lot of external resources for documentation.

Okay.

Thanks for the clarification.

And your 15% net working capital target, when should we expect the beneficial impact of TransCore?

For the existing businesses, what's our time frame for that 15%?

My time frame always seems to be faster than everybody else's in the field, but it's -- it's an evolutionary situation.

We haven't gone through next year's plan to see where everybody is, but I expect it will improve again in the fourth quarter.

You know, if it's 18.8 and we had done a better job on payables, it might have gotten it down to 17.5 already.

It could well take longer than I would like.

You know, if I give you a number, Wendy, then everybody's moving to that number.

So guys we'd like to see that in the first quarter next year.

You know, they have to run their businesses.

I'm not running their businesses for them, but we can do better here.

We should have -- we should have better inventory turns than we have.

That's fair.

And Brian, your comments, something about the trees touching the sky in terms of the EBITDA margins.

Yeah.

Can you give us some sense specifically whether the energy margin of 25% and the industrial technology margin of 28% are peak levels, are they -- or whether they're sustainable at that level, how we should be thinking about those margins.

I think they're pretty sustainable.

I they we ought to continue to get better.

You've heard me say before, I think the margin of world real class excellence is if you take the gross margin and subtract the R&D cost from it, and you can get half of that number then you ought to start to feel that you've begun to make real progress.

And if you take sort of 50% gross margins and at least 5 points of R&D at 45, you would be at 22.5.

And we finally -- we've done that at the enterprise level, we're at 23.2.

And I don't see it being peak, Wendy, because of sales.

In fact, the third quarter sales because of the -- the these couple of push outs was a little lower organic sales growth than I'd like to see, and we still achieved the EBITDA performance.

I think all the -- you know, the powerful inertia around all of these things is in place, and it's going to continue to carry us through.

So unless we had a shortfall turn around in the economy, I don't see any excuse for anybody to have lower margins than we enjoyed in the third quarter.

Okay.

And finally, once again this quarter you're the only company that we follow that -- or have listened to in terms of conference calls that haven't referred very vehemently to steel prices.

Clearly we don't have much as exposure at Roper but can you give us some sense of pricing in terms of what we're paying and what we're being paid for our products?

I think we're doing a better in the third quarter on our costs on material than we were.

I think that throughout the year, we've had some cost push in the industrial side of the business.

And we've been able to pass most of that along pretty effectively.

But the -- from an acquisition thing, it's really a lot of little things.

It's more -- other people's business that supplies sub assemblies to us who have had more demand trying to raise prices with us trying to fight back on that subject.

But we haven't really had much cost erosion much we've been able to keep the cost improvement cart ahead of that cost push and I would just single out Hank Goldman at Neptune for doing a great job this year, because his castings and brass costs and what have you have gone up throughout the year because there is some cost sharing on the up side of that.

But I don't see it as a real -- as a risk, economic risk to our performance.

Thanks, Brian.

Okay.

We will take our next question from Ned Armstrong with Friedman Billings, Ramsey.

Go ahead.

Good morning.

Going back to the imaging order delay, can you elaborate somewhat on what exactly caused that delay?

With an it is production orient ed

No it's not our delay.

It's an end user who has got a capital project underway that's taking a substantial solution set from us, who has delayed that project.

And it was -- it was scheduled for delivery in the third quarter and has been pushed out and they're continuing to meet -- the customer is meeting with their own situation on when they're going to take delivery, so it's a timing thing.

What type of situation is creating the delay from the customer's perspective?

I think that they're -- they're trying to decide exactly how they're going to complete the process that they have underway for this particular application.

And I think they've had some folks at the last minute talking about how much they want to do of a particular type of application, but it really doesn't have an effect much on us.

We're a subset of what's going on there.

Okay.

So it's purely a timing issue, not a potential cancellation or severe remodification issue?

Yeah, that's right.

We're talk about a million dollars, you know.

Right.

So I think that -- let's look at the friends.

I mean, who -- a million dollars of revenue in a quarter, of project slippage, we -- we're going to tell what you it is so that you can understand what happened so you continue to keep models alive, but I mean, it's not too important.

Okay.

Thank you.

Okay.

Well take our next question from Kurt Woodworth with J.P. Morgan.

Please go ahead.

Hi, good morning.

I just had a few quick questions on TransCore.

Can you break out what sales of TransCore is for the electronic toll collection market?

Would that be about 40% of the business?

Dynamics there in terms of the recurring revenue stream is it the sale of the tags, of the readers, do you get revenue per collection and then a quick question on the strategy to get in the security market for some of the RFID applications.

Do you have products in place to target that market and how do you see that evolving if you can talk on that?

I appreciate it.

I'm take the first couple of questions and I'll let Brian address the strategic question about security.

You know, in the issue of providing -- I guess your first question is providing more information about the revenues that are coming out of TransCore.

As I mentioned at the beginning of the call, since we're in registration we can't provide more information beyond what's in the S1 that they originally had on file, and the information we provided at the time we announced the transaction.

But to the second question about reoccurring revenue, there is substantial reoccurring revenue which comes in several forms.

It comes in the form of multi year contracts with government customers.

These are customers that they've had long-term relationships with.

They've never lost a customer.

They also come in the form of the tags which are oftentimes not captured in the long-term contracts but once have you a system up and running you have the end users, that is the folks in their cars and trucks, vehicles that are purchasing the tags.

You have that going on as well.

Then finally have you the freight matching side.

You have the reoccurring revenue of customers who sign up and paying their fees on an annual contract or monthly basis and are typically signing up for additional service at the end of the contracts.

Brian maybe you can comment on the question about the strategy to leverage this more into security.

Well, we've -- we're looking at a lot of the spaces there that we see as interesting to us for future platforms.

But our imaging business has a lot of proprietary technology in low light image photography that's better than what people can acquire in the marketplace for weather-related surveillance and night-time surveillance.

And port security applications, things like that.

But we don't have a channel of that because we're pretty much selling only in the scientific markets.

Historically our imaging because has gone to physical science applications and life science applications, and never really to the security arena.

And TransCore gets close proximity to customers that are -- much more aligned around that.

They already have applications for border access in the United States.

And we've done a lot of early work with TransCore technologies around where we can use our cameras.

And you know, we'll have more on that in the future.

So that's a big place and then actually there are light RF technologies that we have both at Neptune, and will have at TransCore that have security applications that you will hear more about next year.

Okay.

And then just a quick question on the government contracts for some of the electronic toll collection, how -- is the -- how is the pricing of the revenues sort -- is it a fixed contract that you know, you know you're going to have year to year, is it a variability in the contracts?

Well, there are a lot of different applications that depends what kind of thing.

If they have a project business that does consultation around design and then they have a business that's basically outsourced monitoring and surveillance of the activity.

They have businesses that are providing vehicular information to the authorities.

They have businesses that actually monitor and provide customer service to end users who want to buy another card or need a new reader or are -- have a dispute about whether or not they actually drove through that toll collection process, and the person may think they're calling the state or the county or whatever, but that may be actually that they're calling TransCore, who's providing that service.

So some of that is an ongoing thing that would tend to be renewal.

And then in the case of products, you've literally got people who lose cards and people who want multiple cards or multiple reader accesses for different vehicles they have.

Those tend to be ex-contract.

They could be purchased through other channels or direct from TransCore.

So it -- there isn't an easy answer to that.

One of the reasons TransCore's EBITDAs continue to improve and their margins are improving is that more and more of the sales are product related that carry with them higher margins than the projects and service business does.

Well go back to Michael Schneider with Robert W. Baird.

Brian, on the topic of Sarbanes-Oxley, I think you and virtually every company today is admitting that their year-end costs are far higher than anybody would have guessed.

Looking into '05, is there another lurking risk that these costs don't fade in '05 as most companies are predicting?

Well, you know, Mike, the frustration for us was more around this IT stuff.

I think you know, we had -- we really have pretty good controls and because of not too long ago we changed auditors, so we kind reaudit and then we issued equity and we had reaudited.

So our guys are pretty on top of all of that.

And we don't rely on IT to drive a lot of things in the enterprise.

So we probably underestimated how much documentation would be required.

I think having made that investment and done that work, I don't see why that would really reoccur next year.

I think what will happen is that you will have more internal costs for a variety of reasons around financial control than you had maybe a year ago, but still, net net it's going to cost less next year than it did this past year.

I don't see this -- it's a bit more like an ISO 2000 world where you got to get everything documented, you don't necessarily have to be the best quality company.

Once it's done, the maintenance associated with that is there's some cost but nothing like the initial startup.

Sarbanes-Oxley, we've had a lot more startup costs.

And we have a very thin corporate staff.

So we've got a half dozen folks in house.

We're adding an IT auditor now to deal with that and we're going to put a guy or person in Europe to deal with that because we didn't -- there have been a lot of travel costs and what have you for the consultant people.

I don't think it's anywhere near as bad next year as it was this year.

Okay.

And final question on AMR and Neptune, do you have a sense of how big the project pool is today or proposed project pool is, is it up, down or about the same?

I've been trying to get some sense because it seems like we have very little advisability in what Neptune's bid pool is these days.

Yeah, Mike, it's Chris.

The -- I think the reason that we provide little visibility in the pool of projects that they're chasing is strictly for competitive reasons.

There is considerable amount of AMR activity, and as Brian mentioned earlier, there will some substantial projects that are underway and to Brian's point, I think we'll wait and announce those once they're landed.

Okay.

Thank you.

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

I will now turn the call over to Chris Hix for any closing remarks.

A couple of things.

We'd like to reintroduce the fact that Mike Towe is on the call.

And give Mike an opportunity to maybe answer a question or two related to his decision to join Roper.

So Mike, why don't I just suggest that you say a few words, if you would.

Thanks a lot, Brian.

Good morning everybody.

As Brian said, the recruitment process was quite interesting and I really had a great chance to be introduced to the Roper story, you know the -- both the growth strategy, as well as the ability to execute that strategy.

And I think you just heard the third quarter results and it was really just a great testament to my feeling as I took a look at Roper.

The other point that is interesting to note is really that Roper doesn't really have a bad business and as you've heard and as I've been able to take a quick peek, there have some businesses that could be doing better but you know this is obviously a Company that he is -- that's really well managed that was very appealing to me as I looked to make the jump.

Brian also alluded to the fact that both him and I have a bit of a common frame of reference with our GE background and experience, and so Brian had a pretty good sense of -- what GE brings to the table in terms of its best practices and I was really impressed with you know, with both Brian and his management team there, how well they're focused on execution as well as really creating the shareholder value.

So -- to me this was a no brainer in terms of you know, really getting a chance to enter this type of a -- you know, a fast-paced growth company.

I'm really excited and anxious to get started and really look forward to meeting and working with you as I try to get up to speed as quickly as I can.

Brian, thank you so much for your comments.

Any questions that people would like to address to Mike?

As a reminder, if you would like to ask a question at this time, please press star one.

Well, this will be the last call, Mike, that that will happen.

Great.

All right.

Very good.

Thanks everyone.

We appreciate it.

Thank you very much.

This will conclude today's conference call.

We thank you for your participation and you may disconnect at this time.