Roper Technologies Inc (ROP) 0 Q0 法說會逐字稿

Good day everyone and welcome to this Roper Industries second-quarter 2005 financial results conference call.

This call is being recorded.

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

Please go ahead.

Thank you, Jamie, and thank you all for joining of this morning for our second-quarter call.

Also participating this morning is Brian Jellison, the Chairman, President and Chief Executive Officer of the Company and Mike Towe, our Chief Financial Officer.

Yesterday afternoon we issued a press release for our second-quarter results which showed another quarter of strong internal growth, superior cash flow and considerable contributions from our acquisitions largely in our new radio frequency or RF segment.

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 call over to Brian for his prepared remarks after which we will take questions from the telephone participants.

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

You can also obtain the slides in PDF format from the investor information section of our website.

Please turn to slide two.

Today's meeting includes forward-looking statements and so I refer you to our Safe Harbor statement which is included in both the press release and the slides for today's call.

Please also refer to our SEC filings which indicate specific risks and uncertainties for Roper Industries.

And now if you will please turn to slide three, Brian will begin his prepared remarks.

Brian?

Thanks Chris.

And good morning everyone.

As you know last night after the market closed we declared a 2-for-1 stock split dividend.

It will be distributed on August 26 to shareholders of record on August 12.

I think that gives us a lot more liquidity and that will be useful for us as we get the share counts up substantially.

And the results we have and the confidence we have in the future make this an easy choice for us.

Next slide.

If we look at second-quarter, it's another record quarter for us where all of our key performance data is up in excess of about 50% over the prior year.

And our diluted earnings per share are $0.82 which exceeded our guidance of 74 to 79.

Our Inovonics acquisition that we made in the first quarter, integration is on track.

They are actually doing a little better than forecast around getting a variety of things going within the company.

We'll talk about how important they've been in getting several businesses;

Hansen, and Roper and Neptune and TransCore to focus on some new product opportunities where we're able to use their sensor technology and their wireless capability.

They also have won national contract for Walgreens to become the wireless standard for Walgreens Stores and we think that bodes well for the future for a variety of other things we're bidding today.

And their security applications continue to be viewed favorably by the market.

CIVCO, which we acquired on June 20, is a disposable medical imaging product company.

We will talk a bit more about that inside the presentation.

It gives us an opportunity to help reposition the imaging businesses around adjacencies in medical applications that you'll hear more about over the coming year we believe.

And of course we continue to execute our growth strategy.

Next slide.

Here you can look at the cash flow and the importance of what we consider to be critical for investors.

While net earnings were up from 24 to 36 million in the quarter, our operating cash flow was up from 40 million to 63 million in the quarter.

And EBITDA went up from 51 to 80 million.

If you look at our cash conversant metric you take the operating cash flow of 63 by the net earnings of 36 and that is up 176%.

Next slide.

Here's something that we are particularly happy about.

You can see for all of these quarters in here consistent growth in EBITDA starting in the first quarter of '04 with 44 million.

Here we are in the second quarter of '05 with 80 million of EBITDA.

And our margins in the second quarter have continued to improve to where the EBITDA margins for the enterprise are 22%.

Next slide.

Here if we look at the balance sheet you'll see we finally have broken through something that has been a goal for a long time which is getting inventory down to less than 10% of sales.

And inventory finished the second quarter at 9.6% of sales; that is a 210 basis point improvement over where we were a year ago.

Receivables also dropped 20 basis points and payables went up 20 basis points so our total of inventory plus receivables minus payables and accruals has dropped from 15.2 a year ago to 12.7.

And networking capital you can see at the bottom.

Our capital structure remains outstanding for us.

We have at the close of the quarter 68 million in cash, $350 million undrawn revolver and our net debt to cap is at 42% despite the acquisition of both Inovonics and CIVCO in the first half of the year.

Next slide.

On the second-quarter specifics, you can see net sales increased from 232 to 362 which is 56%.

Income from operations was up 53%, and net earnings up 51%.

If we look at the next slide, we had really surprisingly strong internal growth that certainly helped lead to outperformance in the quarter.

If you had asked us at the beginning of the year what we thought growth characteristics would be we certainly wouldn't have expected a first half that is nearly double-digit.

Internal growth was 11% and only one point of that is currency.

Net orders were up 15%.

When we get to the imaging area we will tell you we finally got a delayed order from a year ago for Redlake's motion camera business which will go through in the third quarter.

If we adjusted for that, we were more like 13% on net orders.

But still an outstanding number.

The focus on customers and markets and channels we think has all the guys operating pretty well on all eight cylinders.

Next slide.

If we look here at the income statement, here you can see on a quarter-to-quarter comparison orders a year ago of 223 up to 364; sales of 232 up to 362; and pretty much every business really was up.

Unlike last year where had a little bit more benefit of FX, you can see there is no -- how much currency impact in this.

So the quality of the orders and revenue improvement is outstanding.

On the gross profit line, gross profit went up from 116 million a year ago to 180 million this year.

The gross margins were impacted by a $1.7 million inventory step up in the second quarter, most of that for TransCore, a little bit for CIVCO.

If you adjust for that, you'd see the margins would be even higher.

Income from operations was 62 million up from 41 million a year ago.

Here again we've got really outstanding leverage on the incremental revenue we got.

That was above 42% and we continue to believe that another dollar of revenue ought to produce 35 to 40% or more on operating income for us.

The margin grew 150 basis points to 19%.

If you look at interest costs, those have gone up from 7 million to 11 million.

Part of that is a little bit more debt and of course some of it is the higher LIBOR costs for the portion of our debt that floats.

You can see the tax rate has moved around a little bit.

A year ago we were at 30.5.

We had forecasted for people's modeling this year to be at about 32.5.

We got a refund here in the second quarter.

And in today's environment rather than smoothing things out you'd want to take the tax situation as it occurs.

So in the quarter our tax rate was 31.2% versus what we had forecasted to be 32.5.

And that gave us nearly $0.02 here.

In the second half of the year as the domestic profits continue to increase as a function of the total you're going to see a second half tax rate we believe of 33.6, which will bring the full calendar year tax rate to about 32.8.

Net earnings you can see went up from 24 to 36 and the DEPS as we said, from 63 to 82.

Next slide.

Here we will start into the segments and deal with RF technology first.

We've got a full quarter of Inovonics in Q2 which was helpful as opposed to just a short period in the first quarter.

They really are driving a lot of new product initiatives.

We have a fascinating program that they are working with TransCore on containers security.

They are doing things for remote data feedback for Hansen in the refrigeration arena and some things around remote monitoring for Roper Pump.

And then with Neptune, they are making some progress in our submetering applications.

All in all they are going to drive some excellence in other part of the arena that won't show up in these results, but it's a great company and they've got a lot to offer us.

In TransCore, the freight matching growth continued to be very strong and it appears to have a lot of reasons to go up still more.

I think we've got a focused team in there and what has happened is the number of trailers that are available for people to use has gone up.

And whenever you add capacity to the system, then the freight matching portion becomes more valuable.

We think that's helped drive growth in the quarter and that will continue for the rest of the year.

We've also been able to use the marketing team at freight matching to add additional air time for satellite tracking to our existing customer base.

And that started to take effect in Q2 and we think will continue to grow.

We've gotten a reasonable order that should start to be filled in the third quarter from Border Security projects with the fast program that the government has and that will drive more card and reader sales.

And that will help us in Q3.

I think it may also help us -- it could be some upside in Q4 that is not forecast by the guys.

The highway legislation that is in Congress today and is expected to report out soon has an opportunity to really bolster the tolling projects.

There is an important discussion that's going on at the political level around the states being given the right to toll interstate highways within their state.

That is something that heretofore they had been prohibited from doing.

But as we said tolling becomes one of the most efficient ways to deal with infrastructure development in a state or a city municipality of any kind.

And if in fact the government allows the tolling of existing interstate highway system that is a potential big benefit for us.

We are very far along in pursuing a number of international projects.

That will be I think one of the strategic benefits that Roper is going to bring to TransCore.

We've spent a lot of time and energy around and while we are not really free to talk about the specific countries and projects, if some of the things we bid were to materialize between now and the end of the year, it might give us an opportunity to see a little stronger end of third quarter, certainly fourth quarter.

But that is not in any of our guidance at the moment.

In Q2 we had to eat 1 million 4 of inventory step-up within the segment.

If you add that back to the -- I guess 13 million is a rounded number -- it's probably a little less than that -- put the two together, you'd be a little over 14 million.

So our EBIT run rate here continues to be stronger than expected.

The cost synergies that we've been able to do in TransCore in fact are ahead of schedule.

And hats off to John and all the rest of the team there at TransCore.

Next slide.

If we look here at Energy Systems they just have had a fantastic quarter.

As you can see, orders are up 17%.

Our net sales are up 25%.

We put a lot of supply chain initiatives in there a year ago and they are really paying dividends as were able to quickly capture the order opportunities that have materialized.

Operating margins are up 500 basis points to 23.9%.

We've been able to assimilate or detect nicely within Zetec and we've been able to drive the performance of both the pipeline business and the power generation business within compressor controls at a very fast pace.

Also the control systems business is expanding into some adjacent markets that we haven't talked a lot.

Steel producers, anybody with high power consumption, you know we think we have some things that are attractive to them as we've now gotten resources focused on those opportunities, you see it materialize in these orders and net sales members.

In our metrics business, we made a management change there some time ago and that has been an important positive for us.

We've got new leadership there focused on a little more systems integration and a lot more day-to-day operational excellence.

And that is paying dividends and helped drive the second quarter.

And then in Zetec, we're going to be consolidating a variety of facilities.

When we first bought the business they were spread all over the Greater Seattle area.

I think we said before we thought there were a lot of synergies which we would get and those should start to accrue to us in the third quarter.

We have a brand new facility which is up and running and we'll go from six independently operated satellites to one consolidated entity.

And that will be terrific both from a customer capability and a cost.

Zetec had a breakthrough order in China in the second quarter that exceeded $1 million and that is also encouraging to us as we start to reach out to a broader international audience.

Next slide.

Here is industrial technology.

It also had a very strong second quarter, virtually every business in there performed well.

We don't talk a lot about Fluid Metering and Hank Peterson (ph) and the guys up there I'm sure from time to time, Hanks thinks we have forgotten about him but we never do.

His performance in the second quarter was just absolutely spectacular as the businesses that he have are really doing very well.

Orders as you can see were up 16%; sales were up 10%; operating margins improved 160 basis points to 23.1.

Very strong energy market business.

You've got AMOT Roper Pump just doing very well.

Water and industrial markets doing very well.

Neptune, certainly consistent with our growth targets.

We always said we ought to model that around 4 to 8%.

It certainly was -- did every bit of that in the second quarter again.

And accounted for about half of the growth in revenue you see in the quarter.

Cornell has gotten refocused on its core markets.

Jeff Markham has moved into that business and is doing a terrific job and everything about Cornell for the balance of the year looks very favorable.

We started a small Mexican operation sometime ago.

We moved a little bit of work into there from various businesses within industrial technology.

They are kind of working now on at least six out of the eight cylinders.

We've gotten some cost savings as a result from that.

And we're also able to use that in negotiating with vendors around whether we want to it in-house or have them do it and that has helped the cost picture in this business.

Neptune's annual plant shutdown where we closed the foundry operation and furnaces occurs in the third quarter.

So it is always seasonally a little bit softer than the second quarter just because of capacity.

Certainly the order rate and opportunities there are fine but it is hard to outperform in Q3 for Neptune because of those capacity things and we've asked them to do what they can.

And then we think they will be back of course as strong as ever in Q4.

In Europe, particularly in a couple of plants, we wind up with things that make it sequentially slow in the third quarter versus the second.

We've got able Abel as almost 100% operation in Germany and AMOT has a substantial operation in the UK.

And those businesses always suffer a little bit sequentially in the third quarter over the second and then come back strong in the next quarter.

If we look to next slide, 14.

Here we're looking at instrumentation and instrumentation really outstanding performance even better than it looks here because we still have the act in spectroscopy business inside instrumentation.

The other businesses have just done phenomenally well.

Certainly petroleum analyzer and Struers and Uson have done particularly well and the quarter.

Orders up 14%; net sales up 13; operating margins improved 330 basis points to 20.3%.

And in Struers and PAC, they'd be even better.

Year-over-year we see a lot of strength here and think that momentum ought to continue for the balance of the year.

Struers has put in place a direct sales force in China.

Their business is starting to expand there and we think by having a physical presence and not going through distribution but selling direct we ought to be able to get better long-term growth.

In Zetec's test component business, we had moved out so Zetec could focus on the things we want them to do and put that component test business within Uson.

It's fully integrated and that is growing nicely as a result.

If you look at those incremental margins there again, you can see sales up 6 million and operating profit 3.

So we think Will and the folks at instrumentation are very focused.

Next slide.

Here if we look at imaging, you can see -- I'll take a drink of water.

Okay.

Here we are.

Orders up 24% which sounds like they are through the roof; sales up 11, which is terrific.

Operating margins however, are 16.5%.

If we excluded Redlake, they'd be substantially higher.

But the story in the order is that we had from the third quarter of 2004 you might remember a substantial order with a very big auto company which got put on hold for a variety of their reasons.

That finally was released in the second quarter and that is worth about $6 million.

That takes up about half the order growth.

So the core business was growing at around 12 with revenue up around 11.

We've gotten much better performance in the second quarter and we think that will be sustained throughout the year in Japan.

We've made some management moves there and some direct sales moves.

The new products we've talked about recently have a very high level of acceptance which is driving this much better order curve and now it will be a matter of being able to ship those in the third and fourth quarter.

We have one supplier issue that is slowing down, turning new product orders into revenue with a very unique item which has to do with things that the government can use the same item for.

And with current government consumption around this particular item, we are having a hard time getting our fair share of that component to be used in some of our cameras.

We think that problem will be resolved by Q4 as we widen our network of suppliers.

But there are very limited people able to sell the components.

We've got a semiconductor issue in Q3.

For those of you might have hoped we would have raised guidance above the $0.84 to $0.90 level, I can tell you that it pretty much centers around this one situation where our Gatan operation after the quarter close came in with a substantially lower Q3 forecast for revenue.

They've taken as much as $6 million out of their projection for the third quarter.

And that involves, as you would know, quite a bit of operating profit disappearing.

We think that just rolls into the fourth quarter and it really has to do with transmission electron microscopy customers primarily in the semiconductor space who seem to be rolling out orders.

So what might have happened in Q3 may get pushed to Q4.

And what might have happened in four could get pushed into '06.

And as a result we just didn't feel we could raise our guidance substantially higher.

If things improve there, we might be able to do better.

CIVCO which we acquired in June is a terrific company.

We've got a slide here.

We'll talk about it.

One thing here on the earnings side is that we had a little bit of inventory step-up in Q2 and then most of the rest of the inventory step-up will affect us in the third quarter.

And that is pushing $1 million of inventory step-up that has a lag affect.

If we have reported the earnings or guidance in Q3, saying excluding the inventory step-up, it would have been worth another $0.82.

If we look at the next slide on 16.

CIVCO primarily is a disposable medical products company with some new technology we will talk about in a second.

If you see the patient up there -- he's got a surgical cover and the ultrasound device has several covers on it and the surgeon in this case or the technician is -- they've got several series of covers there, all of which are CIVCO related products.

We have very strong OEM relationships with all of the ultrasound people, most of whom are shown done there on the right.

We sell direct to about 7500 hospitals and doctors throughout the world -- a very strong growth trend.

This is a unique business.

As we were doing our diligence over the last 3.5 years every quarter has been an improvement over the prior quarter sequentially.

Generally we would tend to look at year-over-year improvement and certainly some consideration are in sequential but this is just an underlying growth business that's going to continue to perform well every quarter.

It has high margins, very little assets.

And we think it will be at least $0.05 of accretion in 2006.

It also gets our life science imaging people to think about positioning in general.

We think there's a lot of opportunities for us in positioning and improving patient's time in diagnostic or surgical situations.

Next slide.

This is a new product for CIVCO which is being tested today.

It is in several applications.

You are able to take the outstanding acceptance of CIVCO products and Dr. Barcel (ph) and Dr. Wedmore (ph), who have got a global reputation for both creativity and excellence in teaching around all these urology applications -- put together this thing which really positions a patient so that they are less likely to move when they are doing a cat scan or an MRI thing or when somebody is doing a testing.

These things that look like flexible arms are exactly that.

And there is a lot of equipment they can be added to those.

And they all require disposable covers for protecting both the patient and the doctor.

This is a product that is not much in our guidance but we think will be an interesting product for 2006 and beyond.

Next slide.

Here if we look at how the Company continues to position itself with acquisitions like CIVCO, our RF solutions segment is now 28% of revenue; energy at 18; water at 16; and research and medical applications, 14; leaving us with about 24% in our core niche businesses which are all performing well.

But we do like the nature of the portfolio today in terms of better growth opportunities and reduced volatility.

Next slide.

Here if we look at the beginning of the year we always talk about what our enterprise initiatives are -- a few people are up here doing anything.

We said, well, look there are sort of five things that you want to stay focused on.

We went to integrate acquisitions.

We've certainly been successful in doing that with both TransCore and Inovonics and off to a good start with CIVCO.

We want to make complementary and adjacent acquisitions.

We've announced two thus far this year in Inovonics and CIVCO.

The pipeline is certainly as full as ever.

We see a lot of things in RF and medical and health and instrumentation that look attractive to us.

We said we wanted to continue internal growth and we've actually had a little over 9% in the first half of the year which is substantially better than we might have expected.

I think if you had said you were nearly double-digit organic growth to us in the third quarter of last year, we would have found that hard to believe.

But we have achieved that.

We want to continue our progress on cash flow and EBITDA and of course as you can see we've our record levels in that area.

And we wanted to strengthen the enterprise staff.

If you turn the page -- in the continuous program around achieving that, we've got two new people that are just joining.

We have a new General Counsel, David Liner.

David is a senior person in a law firm in the Michigan area.

He has got practice experience around China and industrial businesses.

He spent 20 years with Richard Manoogian and company at Masco, a very acquisitive company as you know.

Became Vice President General Counsel at Masco Technologies to work with Bill Billinga (ph) from GE.

I've known David for quite a while.

I bought a business off of Masco in a prior life and had the pleasure of negotiating with David.

He is it world-class M&A person.

He's got very terrific experience in billions of dollars arena of acquisitions he's been involved in.

And has spent a lot of time in corporate finance and capital structure work and commercial law.

And David, while he thinks he's joining us August 1, has been working around the clock here for several weeks on activity.

Next thing is the new tax director.

This is a function and historically Roper has outsourced.

And we've hired Joe Cox.

Joe has been on board for several weeks now.

He has had terrific leadership experience being the top tax person at Fisher Scientific and Home Depot and a couple other companies.

Tax is something that Joe lives to do and having come here he's found out there is a lot of opportunity and a lot of things we have to do in our diligence applications.

With Joe we get really a sophisticated expert and we think over time -- sorry to tell the Deloitte & Touche this -- it will reduce our consultancy expense with them.

And Joe should be able to develop an outstanding group here.

Next slide.

If we look at our guidance update, here we raised the EBITDA by 11 million saying instead of a minimum of 314 million for the year, we would go to 325 million.

Our full year DEPS guidance we raised from 315 at the low end to 320; kept the high-end intact for several reasons.

One is we're going to have a higher tax rate in the second half than we expected.

We thought it would be around 32.5.

As I said, it's going to be 33.6 now.

And I guess the tax thing as we sort of suggested at the beginning of the year, is going to jump around a little bit quarter to quarter.

The Q3 DEPS of 84 to 90 is up from last year's actual $0.73.

Neptune -- it's hard for them to push Q3 sequentially over Q2 as I said because of their shutdowns.

But we asked Chuck's guys to do whatever they can.

Traditional European vacations really affect Struers.

The Danes tend to take their vacation in a month of July so that the rest of Europe can come up and visit Denmark in August.

And they have surprisingly without fail decided that they would you that once again this year.

So Struers had just a phenomenal second quarter.

I told John I thought his performance was among the best I'd ever seen.

And whenever they have a little slowness there, it is hard for us to maximize earnings in any given quarter.

And then we have the imaging situation which is kind of a swing factor.

If the transmission electron microscopy business orders were pulled back to where we expected them to be, then we'd have some strength in the quarter.

If they're not, it is hard to make up a $6 million revenue variance in one quarter.

And also TransCore we have a very high level of bids that we have out on contract opportunities which could boost results but we're hesitant to add them into any of our guidance in Q3.

But it is certainly possible if we got some of that work it would carry some early sales cards and readers and that would give us some upside.

Next slide here on 22.

This is just looking at our guidance for the year raising the EBITDA target to 325.

That's a 52% increase over last year's 214 million operating cash flow at 2.25.

Our CapEx we still believe will be less than $25 million this year so lots of operating cash flow against our valuations and a little improvement there in net earnings at the moment.

The conversion, if you look at the operating cash flow of 225 against the 139, it would be 162%.

If you did it against -- if you took the CapEx out at 25, still be pushing 50%.

Next slide.

Summary, we've been able to integrate the acquisitions very well this year, probably better than we might have hoped.

Operating focus is doing well on all the businesses.

The margins are really great other than industrial camera business which still pulls down our overall performance a bit.

A very superior EBITDA performance against any of the measurements we expected; getting a General Counsel and tax guy on board is going to be helpful for us.

And the stock split of course reflects I think our confidence in the Company and we are convinced we will have another record year.

And so with that, I think we can open it to questions, Chris.

Jamie, we're ready to take questions from our telephone participants.

(OPERATOR INSTRUCTIONS) Mike Schneider, Robert W. Baird.

Great quarter.

Maybe you can first just focus on Struers.

It just continues to surprise me they're doing so well in continental Europe given the status of that economy.

Can you give us some sense is it new products, is it market share gains or just new territories within Europe that they are growing within?

I think it is all three, Mike.

If you -- one of the things we did a year ago is relocate Struers into a new facility.

It had been in an old European base situation where people couldn't interact with each other.

Everybody kind of had office with a door and not a modern production facility.

So it was hard to put a simple toll system in there.

And we felt they had a lot of consumables and recurring revenue that they could get at the expense of people and pirates and certainly we've done a very good job of putting the right kind of technology in so that we could have quick response on all of our consumables.

Secondly, they've really focused on Asia and China because of course a lot of their customers are immigrating there.

And we think we've made measured improvement there.

And then they have taken share from one other company that's historically had pretty decent share.

I think they will be able to continue to do that for a while.

It's more around them really focusing on what customers want and fulfilling it better than they ever did before.

It is a very good leadership team.

Are there new products as well boosting the growth?

There are new products.

One of the things we had our media cybernetics people derive some software so that you could get different kind of user interface than they have historically had and that has enabled the sales force to go out and talk to people about applications for solutions rather than just the product itself.

And then the product has improved a little bit to be able to driven by that.

That has helped substantially.

Do think they would agree that their core markets though are soft with the general economy or is there something different?

I'm sorry.

Chris was just trying to tell you that really focused somewhat on the electronic market as well and that is true and that's done well.

So what was the question, Mike?

The question, Brian is -- are there markets at their heart still soft or soft with the general economy over there or is there something unique going on?

The only thing that happens from time to time is that Germany whenever Germany seems to be really slow, we'll have a modest adjustment.

Most of the stuff they make is built to order so there's not an inventory pipeline flux and that helps them.

And then they've got these consumables and the consumables have grown at a faster rate than any offset from slowness.

We would agree that we don't really see anything great going on in Europe.

But they are able to look at a variety of material applications and measuring technologies that tend to do better than the metal bending industries do.

And a lot of their products are going into that arena.

Just one question on energy and I don't mean to nit on a negative here because had a great quarter -- it's up 25%.

But I guess I'm somewhat surprised that it wasn't even greater growth this quarter.

And I say that because last quarter you were up 25% as well against a tough comparison.

This quarter you're up 25 just against 1% growth last year.

Is there deceleration occurring there or maybe I'm just being too pessimistic?

We are not really seeing any decelerization.

What we have talked with about the guys.

We put a little stronger control system in place around supply chain activity and they've tried to level load the place.

It used to be that these guys would load up on inventory just in case somebody might have wanted it in the quarter.

And it actually is, as we all know, it never helps anybody.

They might have been able to do even more in the quarter because the orders are there.

But usually their big push is and Q4.

So we would expect the same level of activity that we've had recently.

We are not really see a decelerization.

And while we don't report petroleum analyzer in energy, it really is the same end market.

And we are seeing that PAC, we think PAC will have a particularly strong fourth quarter.

They've had a little bit of pressure on the cost side because they got Herzog in Germany and ISL (ph) in France but were not seeing any decelerization -- slowness.

Right, thank you.

Darryl Pardi.

Merrill Lynch.

Good morning, guys.

Brian, it looks like the highway bill is finally moving forward.

Are any of the non-tolling project that transfer is working on, i.e., the intelligent traffic systems -- are any of those biz projects tied to the federal funding from the bill and if so, what could the financial implications be as we go into '06?

I wouldn't say they are directly tied but the reality is that most of the people that are going to spend money either A) some of them will wait while this thing is coming out because if they think they're going to get a substantial amount of money coming their way they may defer a little bit of projects.

And I think TransCore has seen a tad of that this year.

But what some of them certainly are looking at is if you had this sort of ability to toll places that you weren't able to toll before; it might have an effect on what they are thinking about.

We had three really big wins in the quarter in Pennsylvania, Ohio and Illinois.

It is kind of interesting when you listen to the dynamic there, if people get less money out of highway funding from the government than they had before they've got to immediately find a way to shore up their local infrastructure needs.

Once they know exactly what they're going to get, then they are able to make a crisper decision about what they want to do.

So they may have some tolling projects or design projects that intelligent traffic systems would -- or transportation would do that they would release instantly if they had clear visibility.

So there probably is upside once the bill is done just because it reduces the ambiguity.

Okay.

I know you mentioned --

I might just say though, Darryl, it could result in a lot of orders.

But as we said, that portion of the business is lower margin because it is really coming from product sales that get pulled through from their design.

Those projects are on a bid in a cost-plus basis, correct?

Not necessarily.

They are bid -- it just depends.

They are all over the map and a lot of the projects are bid on a fixed fee basis and then there are change orders that come along that are additional charges.

You said you didn't want to mention countries or projects as far as your international push with TransCore.

But could you give us a sense of what geographic regions you are going after?

I think we're focusing on everything but Africa.

Maybe some island nations and certainly some Asian opportunities and certainly the rest of the world.

It is a very competitive space and political people have high sensitivity.

We need to kind of keep this conversation -- a lot of times people don't know.

It's a different world out there than the U.S. in terms of the way things get bid and understood.

We don't really need to provide competitors with any information.

Okay.

And just my last question and I'll get back in the queue.

You read (ph) your EBITDA guidance by 11 million but have the same outlook for cash from operations.

Is there something about the mix of business in the second half that's going to affect working capital?

No, I don't think so.

I think -- we finally got a breakthrough to get the inventory down to 9.6 but we still feel the core guys have got opportunities for inventory and we think they are looking at having more than we think they need.

So we've got an internal negotiation on that now.

But I wasn't going to raise the working capital cash generation when we are growing this much.

You're just going to have more networking capital when you've grown internally by 10%.

Okay, great.

Thanks.

Wendy Caplan, Wachovia Securities.

Hi, Brian.

My question is actually about the working capital which I thought was very impressive in the quarter.

Inventories and receivables were, if my calculations are correct, each up on an actual basis by 1% despite the 50 plus% sales growth.

Can you -- I just want to be clarified, are those inventory and receivable numbers, working capital numbers include the recent acquisitions?

And if they do, what would they have been?

Do you have that number in terms of excluding recent acquisitions?

Wendy, this is Chris.

I don't have the hard calculation.

They do include the recent acquisitions.

The most recent of which are small enough to where we didn't feel like we had to do a pro forma.

The bigger, certainly the bigger driver would have been adding TransCore to the results at the end of the year and then getting the benefit of that in Q1 and Q2.

So ex the TransCore acquisition, the Company did make progress both in receivables and inventory but we are getting some favorable benefit from the inclusion of TransCore's inventory performance just as we got the benefit a year ago plus from Neptune.

So we continue to make gains both from our internal operations as well as from the companies we add to the portfolio.

Okay.

Thank you, that is helpful.

In your order book, other than the Redlake order, are there any large or unusual orders that would be in there?

No.

No, okay.

And finally, as we looked into this current quarter, you had a laundry list of items that you ticked off in terms of what would cost you something in the quarter or prevent you from reaching higher EPS levels including the Neptune shutdown, Europe's vacations, the imaging shipments question.

The others that you kind of walked through, the inventory step-up at CIVCO and Zetec's consolidation activities -- what is -- do you have a number in terms of the range of what all that cost you -- would cost you in the quarter?

And what is the most likely to not be a problem for the guidance?

I think that the things we would hope people can work around.

Basically getting this information from Gatan on the shortness in the order is really the only thing that is causing any problem.

None of the other stuff is unplanned or unforeseen or anything.

So what we have done is to go back and ask people to see if they can't pick at the pace in Q3 to offset this surprise from Gatan that is like $6 mill of revenue.

We are talking more about Struers' and Neptune's shutdowns make it a little harder in this quarter.

If it might have happened in a different quarter, they would be able to gear up capacity and help a little bit to offset that shortfall.

Unless we can get the customer to kind of move the customers to move back to where they were expected to want deliveries in Q3, it is hard to offset that.

That is all were really saying now.

If that bounces back in Q4 so you have a very strong performance out of Gatan in Q4, and then PAC and Struers are going to do really well in Q4 sequentially compared to the third quarter and TransCore's product mix is going to be strong we think in Q4 on cards and readers and we're hopeful we might get at least one substantial new order.

Okay.

And finally, before I pass it on.

Your comments about your new General Counsel, Mr. Liner, working hard despite his August 1 start date.

I assume that says something about your level of M&A activity and can you give us some sense of what the pipeline looks like and whether we are close to something else?

Well, you know -- you are always close to something else.

We have a lot of things we are doing.

And we have some things we are looking in the RF space and we some things in instrumentation we are looking at.

And we have some things in sort of medical and health that we're looking at.

We are far down the road in conversations and work but it is impossible to predict whether we will do any of them or they will happen soon.

Last year we looked at $5 billion worth of stuff and wound up spending about 600 million.

This year our pace of opportunity and diligence that we've performed is certainly the largest it's been in the four years I've been here.

So there is a lot of opportunity.

Everybody's got an appetite for this stuff.

As you said, it's the year of M&A.

There are a lot of people out there doing a lot of things.

We remain pretty focused about what we are willing to do and still think that you've got to throw off a lot of cash.

We are not a buy it and fix it guy.

We can make it better but we like good things.

Thanks so much.

Matt Summerville, Keybanc Capital Markets.

Good morning.

A couple of questions.

Just to clarify this thing around Gatan, Brian, are you forecasting, are you counting on that $6 million in your fourth-quarter outlook?

Oh, I'm sorry.

In the fourth quarter?

Well, I don't know.

The trouble with answering that question easily, Matt, is we were counting on it in the third quarter.

And so what the guys really did that was the only surprise we've had all year in operating reviews where they were really stunned because one particular customer preannounced and said they were closing a facility and a whole other things around that.

That is an important customer for Gatan.

And I think at the time and probably even as of today, we got a couple guys out there working with them right now, there aren't a lot of places you go to replace that.

So I think they think some of that slips into the fourth quarter; some of it could slip into next year.

Gee, it is only $6 million out of the whole year out of whatever it's going to be.

It's more of a quarterly movement thing.

I don't think that they really know because I don't think the customer really knows.

Okay.

That is fair.

I just wanted to try to clarify whether or not that's in your 320 to 335 number for the year.

I would say this.

In a way it's not because the overall -- they basically have reduced their full year by almost that much.

Okay, perfect.

That is what I was looking for.

Can you talk about or give us a sense of the dilution that the industrial imaging business is providing to that segment overall and what has to happen to get margins higher there?

Their Redlake business actually in the third quarter will make some money because it's got this pig going through the python, this $6 million order.

And of course it will have some margin associated with it.

But basically the motion, the industrial piece is around in the neighborhood of $30 million I think we said from time to time.

It is a little better than breakeven but not a lot.

So if you just adjust, if you look at the segment with 30 million less revenue and not much operating profit, you can kind of get a sense of about where it would be.

Other than a little help on margins in the third quarter though I mean longer-term what are you doing to get that performance up to kind of Roper standards?

Well, that is a good question.

We continue to take out overhead kind of things.

We've actually got the operational throughput of the business has been reassigned to Gene Yazbak whose got responsibility for both Princeton and Acton.

And that is going to help us.

We're going to move the cameras.

In addition to retaining their flash (ph) test in image photography they're going to move into research applications and we're going to use the Princeton sales arm to try to sell some of the Redlake technology.

Because it is so competitive on the auto side that we don't think that that would ever -- that would be a business that would be best integrated with somebody who's got more activity in that space and we can think of some of those.

Okay and then my last question just on compressor controls.

You just mentioned steel as one newer application that you are looking at.

Can you talk about some of the other new initiatives that you have in that business?

I'm going to let Chris do that.

He is a compressor control junkie here.

Thanks for that intro, Brian.

As Brian indicated, starting a couple years ago we got the business refocused away from the gas prong (ph) onto looking at --

You said it, you said it.

-- to looking at market adjacencies, probably because we could take the technology and to where we could develop new products.

The folks at the business unit have done a very strong job of developing products for example gas turbine control which is an area that in the past was treated as more of a just kind of an adjunct to the compressor control business.

Now it is actually a pure market focus for us and one that we're getting some good traction with the new Guardian product, for example.

In addition to that, we've taken the technology into some of the power -- generation and power distribution arena, places where our technology can improve the quality of distribution or the quality of generation primarily in some of the lesser developed parts of the world.

There is a lot of opportunity there.

I'll give you another example.

In the ethylene plant which was a key market for us in the early development of that business we actually developed an entirely new approach to market and are now getting the first success we've had back in that marketplace in at least five, six years.

So there's a lot of activity, a lot of good new verticals and new products that are part of the answer for that but it is also market focus that makes that happen.

Great, thanks a lot guys.

David Smith, Smith Barney.

Good morning guys.

A couple questions for you on Neptune.

Can you give us a sense -- it sounds like it is trending higher than the 6 to 8% that you had indicated at least during the call where you though it may be coming in at -- ?

A little higher.

-- when you bought the company.

Can you give us a sense of where it is and what the order trends look like there?

And then also any update on project related activity?

When we bought the company, we said we thought it ought to grow around 4 to 8% a year and we kind of split that and say that you've got sort of the core installed base residential water meter business is -- represents about two-thirds of the meter sales that they have.

And that is going to grow at sort of slow GDP kind of rate.

And then you have the adoption of AMR and in Chuck Delore (ph) runs the businesses in Cincinnati I think today with a big ceremony as they install the 100,000th R900 meter reading device in the country.

In AMR, we've gained share faster than the model would have indicated at the time of the acquisition and I think we've had a lot to do with that.

But we're gaining share faster.

So that's has been growing in the high double digits and it will probably turned the corner this year -- it will be over half the total business will be registers and collection technology.

So you are right, 4 to 8 was thinking that you got maybe double digits on one and pretty slow on the other.

Now we also said when we bought the company, we were going to ask them to focus on commercial water meters which we thought had been an underserved area.

They've done that and they are having a terrific year in commercial water meter business.

They are certainly up in excess of 8% in the first half of this year.

And the order flow is pretty strong.

On new projects, they are in this -- everybody knows everything about it, nobody ever wants to talk about it.

So its kind of industry trend data you've got to read to get answers because customers are very reluctant to have us talk in a really public forum about which contracts they've gotten.

So we try to honor Neptune's desire for that.

But there haven't been any massive contracts.

You know everybody reflects on this PG&E contract out in California but that was for electric and gas meters which didn't have anything to do with Neptune.

So there hasn't been a major water installation announced this year.

Okay.

You touched on the electric side.

Is there any interest in Roper expanding into that eventually?

Well, you know the thing is both Cornell and Abel in the pump business make wastewater products.

They are kind of dissimilar.

Generally the assets in the water arena either are too intensive for our business model or somebody values them maybe more than we think we're prepared because we have opportunity investments that have better cash returns on investment than most water things we see.

I think everybody knows some people pay just astonishing multiples for those businesses.

But certainly if we found something -- I mean we have a transaction we're exploring today that touches on measurement and filtration.

We don't rule it out but I don't see a lot of assets that are sort of our kinds of purchased multiples.

I think I was getting more at the electricity market though, Brian.

Oh.

Well, that is a different situation.

We have something, David, we haven't talked a lot about.

I think probably it is better to talk about later.

And that is that we own a software company that Neptune now has under its wing.

And that software company has the right to do some things in terms of reading other people's products.

And over time you might see a little bit of activity but we've never been interested in the electric meter market as such because we thin it's pretty commoditized.

And the gas meters are very, very slow growth.

We look at those assets when they become available.

But the electrical utility industry is in time of day usage charges and lots of information bits and value creation there may well be around who owns the data and whether they are willing to pay for it.

And there's a lot of different business models and some accomplished companies that are in that space.

It is not something that we see as a strategic next step for us.

Okay.

On TransCore, I know you're not going to talk specifically about these projects up for bid.

But is the intent -- I guess if I look at Europe, I don't think there is much penetration there on the tolling side.

Is that where we can assume that growth might come from in international markets?

I think that could be true but probably not in the next year.

I think that there -- you know country to country jealousy around that if you are over there and you watch what happens, the collection of the gas tax and the fights between countries like Italy and Germany and others is really intense.

So I'd say, no.

I think if we got a big order it would be in on the short run likely to be someplace other than Western Europe.

Okay.

Is there any timing on the easy passing?

I thought that was a 2007 thing?

It is a 2007 bid.

I'm not sure what we can really say.

I could just give you -- there are some I think market forces at work where perhaps the existing vendor to them has maybe tried to do some things and our understanding is that the interagency group is certainly standing together, that they are going to bid this project in an open way in 2007.

So I know our guys are working feverishly on it as we speak.

It wouldn't be in '06; we shouldn't look for that?

No.

Whatever happens, it would be the ultimate stuff.

There are people writing specs around it and what have you now.

Certainly TransCore is totally on top of what is going on.

Just a final thing.

You mentioned the Walgreens contract.

Was that a material deal for, it sounds like Inovonics?

Yes, for Inovonics.

Yes, I think we can't really disclose the numbers.

It is more important in terms of what it says about a national company accepting a wireless standard, which is driven by Inovonics technology.

I think that is what is important, not necessarily the size of that one order or the buildout over a couple of years.

Great, thanks.

Roger Liddell of Ingalls & Snyder.

Good morning, gentlemen.

Good morning, Roger.

A couple of clarifying points that were just discussed in the last couple of minutes.

In terms of the state's right to toll that provision of the highway bill, is there any serious opposition to it, or is this effectively a done deal?

I don't think that we want to really comment on who is lobbying whom around what.

I mean we're not following the opposing forces in there, Roger, so I don't know how strongly some people feel about that.

I would -- certainly, none of the states are going to want to oppose it.

So it is going to be people on the privacy side of the equation that are going to argue that it's an invasion of privacy or whatever they want to talk about.

But as we've said for a long time, if the government decides it's going to be okay to toll, people are going to toll.

Right.

Second, I'd like to try to frame a question on the Homeland Security per se aspect of TransCore.

I'm well aware and I think everyone on the call is aware of the easy pass and tolling play, and there is the airport parking and railroads, and on and on it goes.

Then at least in my own thinking, there are separate issues like border, like container tracking, and myriad opportunities there.

The question then is what is the probability of there being a step function that we might see in a year or two, which we could call specifically driven by Homeland Security concerns, the London bombing horror?

Could these things give us a step function?

I think it is possible.

I think we don't want to hype that relative to investors.

I think we are uniquely well-positioned in that we've got Inovonics with its wireless security technology, and you've got TransCore with its collection capability for data.

And Andy Drenick and Kelly, they are working a lot on the subject.

We've got a product which is -- we're showing to people now that is easily added to a container or to a trailer and solves some of the problems that people have.

You still have -- a lot of the people in the container industry are concerned about mandates and whether they can pass through the costs associated with that.

If the government were to require something, then I think we are extremely well poised to take advantage of a mandate that got created.

But we are not out creating any mandates.

We are sort of standing ready to serve.

And predicting when something like that might happen is hard.

But the technological things that make it difficult are rapidly going away.

All right.

Final question regards Neptune.

I believe you said you had opened up some facility, some capability in Mexico.

I'm not sure whether that was Neptune specifically or broader applications.

But drinking water looks more and more like energy of today, the demographic issues, the strategic issues just playing out, and this could be years and years.

If there, through the Mexican operation, a shot at becoming more internationally oriented on metering technologies?

Well, I think that is more likely to be done with our own internal product development and with acquisitions.

The Mexican operation is fundamentally an opportunity for us to bring work in that is currently outsourced, so that we get a little bit more vertically integrated down there.

And we haven't really moved work out of our Tallasee operation into Mexico, but we have lowered costs by bringing in-house assembly things that we used to buy from others.

So that Mexican operation is really around lean manufacturing and structural cost.

It is not about business development.

We spend a pretty substantial amount of time talking with all of the different global metering companies.

I think we are pretty well-connected around that, and we are also pretty well-connected around emerging collection technology.

And I do think sometime in the next couple of years, you'll see us make additional acquisitions in that area.

Great.

Thank you, Chris; thank you, Brian.

Ian Fleischer with Friedman, Billings, Ramsey.

Hi, good morning.

At a high level can you give us a sense as to TransCore's organic sales and orders growth in the quarter and how we should think about that on a normalized basis going forward?

You know, when we talk about the business, Ian, we portray the business over the cycle having kind of a 5 to 10% organic growth opportunity.

We've discussed some of the breakout opportunities that could get us beyond that.

But we've modeled it, thought about it, and bought the business as though it is 5 to 10%.

At the same time, we talked about the difficulty in the initial period of ownership getting these guys oriented around quarters, and really focusing more on the year-to-year performance.

So I think at the stage it is still a little early for us to be communicating about the individual quarters, especially over pro forma data when they were under ownership of the private equity and so forth.

But clearly, the business has all the growth characteristics in it that we thought, and we are still very bullish on growth not only in the core tolling market and freight matching and so forth, but in these breakout opportunities that we allude to from time to time like the electronic vehicle compliance.

Okay.

And in the RF segment, the operating margin went to 12.8 from 12.1 last quarter.

Can you talk about the drivers behind that?

Well, the second quarter includes the benefits from Inovonics as well.

And as we described at the time of the acquisition announcement of Inovonics, that is a business that has higher EBIT or operating margins banned TransCore certainly.

In addition to that, we've mentioned that TransCore is actually running a little bit ahead of schedule on some of the cost reduction efforts that they are working on.

And then finally, there is some noise in the numbers around the inventory step-up charge having gone from, I believe, about 2.8 or 2.9 million in the first quarter for TransCore down to about 1.4 million.

There is some additional step-up charge for Inovonics that's running through there as well.

But essentially, those are the three major drivers.

You've got Inovonics higher margins, you've got inventory step-up charge declining rapidly, and then again the cost reduction efforts underway at TransCore and then really being ahead of schedule.

Are the inventory step-ups, have they flowed through the P&L fully for TransCore at this point?

Yes, they have.

Yes.

One last quick one.

CIVCO, is there any seasonality in that business?

No, it just gets better every quarter.

Right, Charles?

It gets better every quarter.

Great, thanks.

Scott Graham with Bear Stearns.

Good morning, nice quarter.

A couple of questions for you on the margins.

The energy systems and controls margin continues to make your eyes pop out.

I'm wondering are we getting close to where this is the peak, or will we continue to see margin growth off of operating leverage with good sales growth?

I think the good news is that it's not like a spike in the sense that, yes, I think we've got business really right-sized.

We will have captured most of the synergies from the RD Tech bolt-on in Zetec and what have you.

So we would expect really solid margins like this, but not a lot of additional upside in the operating margins.

Okay.

Let's maybe talk to where there are -- there does seem to be some upside in that, would be in TransCore.

Given that things are running a little bit ahead of plan on the integration, do you have visibility, Brian, on what the margin at TransCore looks like a year from today?

Is this that 15% business that you had hoped it would be, given the line of sight cost opportunities, or are we maybe higher, maybe not quite that level?

Can you give us at least an idea?

Yes, I think what we've said is we thought it would be about a 20% EBITDA business, about 8 of which would be D&A and about 12 of operating profit.

It's going to do better on an operating profit basis than we suggested in year one.

It's going to have a little less A because we've got a little less intangible amortization than the first pass looked like.

But yes, I think the business is going to improve its margins as we get better controls around all the aspects of the business and John's guys have a chance to really see the independent P&L's in the business which historically have been kind of consolidated.

So once you start to split the overhead out, everybody sees exactly where it is, people can make good choices about where it ought to be and how much they ought to have.

That is doing pretty well.

I don't see any reason that is going to stop anytime soon.

I think when we do our '06 plan here in the fall, that that will give us another opportunity to lock in on what kind of improvement we have in '05 -- or '06, and I think that will be good.

And I also think that we are being pretty selective on what we bid.

I think we have a nice process in place where we look at the bids, and we are not going to be too likely to bid work that we think we can't take money on because it is interesting.

I think the other applications outside of tolling tend to be a little bit more attractive from a margin viewpoint.

Everything about TransCore points to continued improvement in margins over the next year and a half to two years.

Very good.

Two more questions.

Was pricing maybe plus one this quarter?

Do you typically talk to that?

Yes, we ask questions about it, people talk to us about it, and it always comes down to mix.

So it is a very hard thing to measure.

But we haven't seen any real erosion in very many places around pricing.

So it doesn't appear to be a risk factor in our view going forward.

Very good.

Last question.

Scientific and industrial imaging is a business that had a pretty good core sales growth quarter, yet the operating margin improvement was once again fairly nominal.

You purchased CIVCO to attach to this business this quarter, and it looks like you are trying to sort of redress it maybe a fourth or fifth time in the last several years.

I'm just -- I guess what I'm wondering here, Brian, is at what point do we maybe go the other way and just look for just a hard and fast focus on improving the margins of the business before we try to redress it again?

Well, I think in this business the margins are more driven by increased revenue.

There is not a lot of fixed cost in the businesses.

They've got a pretty good break even in most of the enterprise and a pretty good contribution margin above it.

They have just struggled with the industrial piece.

And those markets are not super strong.

The life science piece margins are really good.

So I think the more likely question is would we ever do anything about the industrial piece of the business?

And just stay focused on life science and medical adjacencies.

That could happen.

Is a possible that you might do a selective divestiture within this business?

It is always possible if you've got to the right buyer at the right price that you'd consider something like that.

Okay, thinks a lot.

Ladies and gentlemen, that will conclude our question-and-answer session for this call.

I'll now turn the conference back over to Chris Hix for any closing comments.

We just want to thank everyone for participating and also for your continued interest in Roper Industries.

Thank you very much.

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

Thank you for your participation.

You may disconnect at this time.