Roper Technologies Inc (ROP) 2005 Q4 法說會逐字稿

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

This call is being recorded.

At this time, I would like to turn the call over to Mr. Chris Hix of Roper Industries.

Please go ahead, sir.

Thank you, Jennifer, and thank you all for joining us this morning for Roper Industries 4th quarter 2005 conference call.

Yesterday afternoon we issued a press release announcing our powerful 4th quarter and full year results.

If you've 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 call.

We have prepared slides to accompany the call, available through the webcast and our viewer control.

Slides can also be obtained in pdf format on our website.

If you will turn to Slide 2, you'll again see the Safe Harbor statement.

Today's call does include forward-looking statements so that you will want to review this page and also refer to our SEC filings which indicates specific risks and uncertainties for Roper Industries.

And now, if you will please turn to Slide 3, I will turn the call over to Brian Jellison, Chairman, President, and Chief Executive Officer.

After his prepared remarks, we will take questions from our telephone participants.

Brian?

Thank you, Chris, and good morning, everyone.

The first slide here refers to our net sales for the full year were $1.454 billion, up 50% from last year's 970 level and you can see the '03 comparison as well.

Net earnings were $153 million, up 63% from last year's 94, and up substantially from the 2003 $45 million level.

Next slide.

EPS performance, you can see we reported $1.74.

This is the miracle of rounding.

Some of you will probably think it's $1.75 because on this repatriation of foreign earnings, that gave us a credit of $6.6 million, which basically goes right down to the tax line, and then we had deferred financing costs associated with the cash convertible notes that we have, which came into the basic provision, where we had to recognize that in the 4th quarter, but that is a taxable, non-cash item, and so that reduced the 6.6 by $2.6 million.

You can see the net earnings benefit we got of $4 million.

If you divide that by the total, it's worth $0.04, so we consider our core results to be $1.70 measured against last year's $1.24, although certainly on a pure GAAP basis, the $1.74 number is correct.

The cash results, as always I think are more important than these nominal GAAP EPS numbers, so if we turn the slide, we'll see that.

We've gotten a terrific head start here with the Radio Frequency integration process.

And you can see the operating profits moving there from 12.1 in the 1st quarter to 12.8 in the second, 16.2, and finally in the 4th quarter reporting out at 17.6%, which is certainly ahead of what most people would have expected.

Sales continue to mount there, ending the quarter at $105 million.

Next slide is for the year we had three important acquisitions for us totaling a little over $300 million of investment.

Inovonics, which we did in February, which is the wireless security and sub metering application technology for Radio Frequency.

They're synergistic with both TransCore and Neptune and off to a great start with us.

CIVCO, which we did in the middle of the year, which is our first medical acquisition that creates new opportunities with a lot of bolt-on situations.

It's got a wonderful family of products and needed a larger sales force.

In December we acquired MedTec here in Q4, which has a substantial breadth of products and equally importantly a direct sales force of some size.

So it's very synergistic.

In fact, we've taken Charles Klasson, who runs CIVCO and given him direct responsibility for MedTec and he and that team are already off to a good start and we expect good things out of those businesses in '06.

Next slide would be what I thought happened it was a cash flow slide here, compelling cash flow.

You can see $335 million of EBITDA in 2005, up from $204 million a year ago or 64% increase and up from $95 million in '03.

Cash flow from operations, we just want to make everyone aware in terms of full disclosure, we had benefits in 2004, you can see, of $31 million for NOLs and deferred tax opportunities, and this year that number went up to 42 million, so we kind of look at it as the normalized operating cash flow without those tax benefits was $239 million, then we got the tax benefit of 42, which gives us cash flow from operations of $281 million.

When we get the guidance, you'll see why that's important.

Next slide, working capital progress.

Our year end net working capital as a percent of annualized Q4 sales dropped to its lowest level ever at 13.8%.

If you go back to 2000, where we had 20% networking capital and you see that we basically saved 620 basis points of investment and roll it against the annualized sales of the 4th quarter, that's giving us $98 million more cash from operations because of our efficiency in working capital.

We're proud of that and we think our guys definitely have the message about how important these concepts are.

Next slide.

If we look at the asset velocity ratios, which we measure sort of independently, you can see that inventory dropped from 10.8% of sales in December of last year to 8.4% of sales this year.

Our receivables also dropped from 18.3 to 16.4.

Payables and accruals-- actually regressed a little bit from 14.5 to 13.6, but that's because the inventory's down so much.

And then if you look at those net numbers, you get 11.1.

And so we've made a lot of the progress I expected to make in this area in the last couple of years.

I think the thing that we would point you to in our balance sheet at the end of the year is our sales in 2005 were $484 million more than our sales in 2004, and our inventory actually was reduced by $444,000.

So to add 484 in revenue and actually decrease nominal inventory, I think, speaks to the strength of our operating management and the conviction that everybody in the enterprise has toward these goals.

Next slide.

This is a slide that depicts our trailing 12 months EBITDA performance starting in January of '04, where EBITDA was $112 million.

You can see it's gone up each of these quarters, ending with $335 million, and so really just in this two-year period from the 1st quarter of '04 to the ending quarter here in '05 we've been able to triple EBITDA from $112 to $335 million.

Next slide points to how that's created shareholder value.

If we look at our share price at the end of '02 it was $18.30.

We actually look at what it was in February of '03 it was about $15.

At the end of this past year, it was $39.51, and our market cap had more than tripled from $1.1 billion to $3.4 billion and enterprise value nearly the same from 1.5 to $4.3 billion, reflecting our stock split here, as noted.

And that's important.

As you look at the next slide, we think we've now developed a mature, stable organization with a lot of tail winds behind it and a lot of focused attention, and for investors, we get sort of the benefit of being still a lot of small cap and microcap entities that come together, so we get the nimbleness of a small cap company, and yet, now we've got the scale finally of a mid-cap company, where we can do things at the enterprise level that really drive value.

The shareholder value's been following and we think will consistently follow our operating cash flow and the EBITDA performance we get.

We think our governance process is filled with a lot of simple-to-understand ideas that yield powerful results because it's great clarity with each one of our P&L people about how they're measured, and where we're going, and we now have a lot of markets that count, many of them literally, and we think we've got sort of a compelling cash flow model and very good execution throughout the business.

With that, we'll turn to a focus on Quarter 4 discussion here.

You can see 4th quarter had record sales profits and EBITDA at all-time high there.

Some sharp changes in terms of foreign currency that we'll talk about in each segment, where foreign currency was a drag on internal growth.

Still record cash flow performance with the working capital, and then the one-time tax benefit we reviewed earlier.

Our debts cap reporting number is $0.57 , including the benefit of this $4 million repatriation of earnings offset by the deferred finance writeoff, and then MedTec was acquired in December and we know that will be one of our more important acquisitions as we get going in building out that platform.

Next slide looks at cash flow performance.

In the quarter you can see that EBITDA was $97 million in the quarter alone, and the EBITDA margins were 24.8%, up 490 basis points from a year ago.

Our operating cash flow came in at $105 million for the quarter.

A lot of that was improvements in working capital, and of course, the earnings didn't hurt either.

Next slide.

If we look at the income statement, here you can see orders, they were depressed a little bit by the currency.

Both sales and orders we think reduced about 4% on foreign currency.

Nonetheless, it's still a very strong 392 million sales similar.

If we look at the gross profit line, you've got gross margins at 50.6%.

We think that's pretty impressive when you've got TransCore in there at lower gross margins and a big piece of revenue.

You can tell the underlying business actually improved its gross margin.

Income from operations finished at 20.6%.

Many of you, we've talked about will we ever really get everybody, including Imaging up to 20%?

You'll see Imaging made over 20% in the quarter, so we think we're on the right track there.

If you look at incremental leverage, we generally would say that on the next dollar revenue, we ought to get 35 to 40, maybe even 45%.

This quarter, if you exclude acquisitions, we actually got 51%, which we think is sort of out of bounds.

I don't think that will happen very frequently, but we certainly had great mix.

Internal-- or sorry, interest costs went from 8 to $11 million.

You do have the difficulty of the floating portion of our debt, which is about $325 million, having higher LIBOR costs associated with that.

And then debt extinguishment, which is this non-cash thing we referred to earlier, cost us $4 million.

The tax rate was artificially low in the quarter because we get the benefit of the $6.6 million repatriation.

If you adjust for that, the full year tax rate was about 33.5%, and in our guidance, we'll tell you our tax rate for '06 ought to be at about 33.8%.

Net earnings doubled from $25 to $50 million.

It was a modest, little benefit from other income.

We had something we'll explain in DAP, which had to be booked into other income that really was above the line profit, and then we had the diluted number we've been through before at $0.57.

Next slide.

If we look at Energy Systems in the quarter, while the orders are flat, that's because we're sort of willfully purging each one of our project kind of businesses.

Actually, we ended the year in a very strong position here.

You can see we were up 31% partly because of the product rationalization that we're doing in CCC and ZETEC.

We've got the best project discipline we've ever had in those businesses, and that's what's driving margins.

We also picked up a benefit from the new facility that we moved ZETEC into in Seattle, which added some margin points for us in the quarter.

Sales would have been up 5%, but they're pulled down 2% by foreign exchange here, which gives you net sales up three.

We are going to be adding in 2006, we're going to move AMOT out of our Industrial segment and move PAC out of Instrumentation and integrate those into our Energy sector under Tim Winfrey, and that will give you a cleaner view of what's really happening with energies and marketplace because both AMOT and PAC were up substantially more than these numbers.

New leadership at CCC, we have Steve Wood on board, who joins us having completed a tour of duty at Agilent.

He's going to make we think a nice difference in our CCC business in terms of driving future growth and helping those folks continue their market segmentation work.

Next slide is RF Technology.

Here our integration and margin improvement has exceeded most people's expectations.

We've had particularly good quarter in terms of certain kinds of order influx.

As always, it's a little lumpy, but we've got about 500,000 Ego Tags that we expect to ship early in the year, perhaps even in the 1st quarter for one project.

We booked $130 million multiple-year contract in the Pacific West that is a very attractive transaction for us, and a $45 million contract in the Mid-Atlantic states that also is very attractive for '06 and '07.

We had a record month in there, sort of nurturing new business around Track & Trace Technologies, which is our Canadian operation.

They've got to work on cost, but they're at least beginning to deliver some sales.

And then we had some very successful test projects.

We have the next generation of Rail Tags for TransCore and some internodal tracking technology that we launched with our core modem.

Those tests are proceeding well and we think those new technology applications will drive sales by the second half of next year.

Next slide.

We look at scientific and Industrial Imaging.

Here you can see orders up 40%-- excuse me, sales up 32.

We had FX negatively impact our sales by about 4%, but even with that, internal sales were up 7% organically, would have been up 11 without the currency.

The rest of course is the CIVCO and MedTec acquisitions.

Operating margins were up 80 basis points in the quarter to 20.1, and importantly, we had a situation with a supplier to DAP, which is our hand-held computer technology, who had a fire, and we had to work around that and wound up getting some payments that would have been beneficial in operating profit that came from the insurance carrier under Business Interruption, and that added about 800,000 of pre-tax benefit that's in that other income line that really should have been here in a normalized situation.

DAP's not under any continuing pressure.

They've got work-arounds that they've got in place and they have the Business Interruption insurance and it's got a very strong order intake and looks forward to a very good 2006.

New products continue to drive growth in the sector.

We've gotten the sales force is completely realigned, and we're now able to take a technological intervention that would have been a new product for one area and apply it across a multiplicity of market channels and that's helping Ben's group do better.

Focused selling activities have given us better share gains than we've enjoyed in the recent past.

And the MedTec acquisition, completed in December, has begun its integration process.

We just finished a board meeting last week and had [Dr.

Whitmore] running through the opportunities we have in these two areas and they are truly exciting.

Next slide.

Here we look at the medical platform strength.

It still has both businesses, lots of recurring revenue, very stable non cyclical growth at pretty high levels, high cash returns inside the businesses, very asset-light business models, and by picking up a direct sales force at MedTec, we think that will actually enhance CIVCO's growth profile for '06 and '07, and there are quite a few bolt-on activities in this area that we're focused on today.

Wouldn't surprise me if our next acquisition isn't in this area as well.

Next slide.

In Industrial Technology, you can see orders were up a strong 13%, sales up 5%, dragged down one point by FX, or they would have been up six.

Operating margins were up 130 basis points to 23%.

We had particularly strong Radio Frequency growth.

We don't like to give out individual detail around that, but I can tell you our Radio business was up in excess of 20% in the quarter, so folks who think Neptune isn't competitive in this area ought to really back up and smell the roses.

Neptune and Inovonics are collaborating on a new submetering initiative that we think will surprise some people and drive additional growth there.

Cornell, which is really refocused on standard products had a very strong 4th quarter and we look forward to a strong recovering year in '06 with Cornell.

And as we get AMOT working more with energy, we've already seen some synergistics opportunities with metrics around both human capital and work pace planning and channel access, so we've already started to make the changes to allow us to move that into the energy sector and there will be some physical relocation associated with that as we centralize more operations in Houston.

Next slide.

On Instrumentation, this is one that sort of surprised us with this foreign currency situation.

I think we've looked at this about five times to make sure we've got it right.

We would have had phenomenal sales, would have been up 16%, but 9 points of currency drug us down.

Part of that is the strength of Struers operating in a kroner-based end market environment with deterioration against the dollar in the quarter on repatriated earnings, and then PAC, which has businesses in Germany and France and some business here in the UK, which didn't help.

Operating margins, though, increased 150 basis points to 26.6%, pretty much driven by leverage on incremental volume.

Uson's done a very good job in taking the ZETEC business, which is sort of coming out of energy, would have been reported there in the past and coming into instrumentation as they take the non-destructive testing technology into new channels that ZETEC didn't participate in previously.

The low-sulfur testing business we have has had a particularly strong quarter in process applications.

As we see this moving out of the labs and actually into end line activity.

We got a really good focus sales efforts in Struers and that continues to drive growth there, and the business units in Instrumentation, all of them are going to be moving.

We'll effectively eliminate in '06 the Instrumentation segment as a category and act in integrated designs will be moving into Image, and Struers, Logitech and Uson are really more industry-based businesses.

From there, if we look at the 2006 outlook, the enterprise initiatives we have would be to focus on cash flow and EBITDA, continue the internal growth momentum here, integrate our CIVCO and MedTec medical platform and make complimentary acquisitions throughout the enterprise but with some particular attention to Radio Frequency and Medical here.

Realign our segments to sharpen the market focus.

One of the things early we did here was to move away from totally independent businesses and group them in segments that had common competencies.

We've gotten large enough now, and people have learned enough, that we're going to regroup these businesses in 2006 around end markets, hence the need for eliminating instrumentation because it's a product base reporting structure.

It really needs to go into where the end markets belong.

And then we want to merge our Instrumentation segment, as we said, and sharpen the synergy focus that we have, because there are still some untapped opportunities, particularly in consolidations in Houston and perhaps Seattle.

Next slide, positioned and attractive markets.

The point about this, of course, is it's really reduced our cyclical exposure, increased our growth opportunities.

We see generally nothing but strength in Radio Frequency and radio technologies in the water arena.

The research business is got kind of renewed growth and focus that we think will continue throughout 2006.

The recurring revenue gives us a very safe basis in medical and we think new products that are going to be launched this year that we would talk more about as the year unfolds will be very attractive, and we just don't see much in the way of head winds as it require to markets, and there you can see the mix now down to 78% of the businesses in year Radio Frequency, energy, water or research medical.

Next slide.

Here we look at our outlook assumptions around our guidance for 2006.

We would expect internal growth to continue.

We sort of underestimated last year the strength, I think, that we built into the business and the share slightly more aggressive as we look at internal growth certainly ought to be well in our wheel house of 1.5 to 2 times GDP.

We continue high operating leverage.

We still think under next dollar revenue we're going to make $0.35 to $0.40 or more.

We intend to capture the benefits from the medical acquisitions with CIVCO and MedTec and we think we'll add some bolt-ons to that soon.

We do have some head wind around higher interest costs.

We've got about 325 of floating debt and one place that's LIBOR plus 100 basis points and of course that's now up to about 4.75 plus the spread, so that's a little more cost than we've had to face in the prior couple of years.

Our tax rate, we're going to go with an assumed tax rate of 33.8% for the full year.

Our 123 equity compensation issues, we have a slide coming up.

We want to alert you to the convertible notes dilution situation that we really can't forecast.

We have to leave that to you because we can't forecast share price, although we might have convictions about it.

And then we want to close and integrate some attractive acquisitions, and we're pretty far along with quite a few at the moment.

Our guidance excludes any future acquisition information, and it also excludes any dilution from these convertible notes.

Next slide.

Here you can see the earnings and DEPS guidance.

Earning per share is 153 million.

We expect to do $180 million or better next year.

The DEPS guidance this year, we earned $1.70 at the core.

We reported out on a GAAP basis $1.74.

We would expect to earn somewhere between $1.95 and $2.07 in 2006.

If we look at the next slide, you'll see the equity compensation expense.

In 2004, if 123 had been in place, we would have had an income statement charge of $0.12.

Actually, between options and restricted stock, we had $0.01 in 2004 of income statement expense recognized versus the $0.12.

In 2005, as a restricted stock started to build, options and restricted stock in total would have been $0.12, but we recognized actually $0.03 of cost last year in our income statement.

When you see that $1.70 or $1.74 it included $0.03 of equity cost.

In 2006, we'll actually reduce the number from $0.12 to $0.10, but having to charge it all off on the income statement, our costs will go up from $0.03 to $0.10, so we think as you model, we're suggesting about a $0.07 increase related to options and stock expense associated with the change in accounting.

Next slide.

On 30 is another concept.

We didn't want to turn this into an exercise in explaining everything about these convertible notes, but you may remember that in December of 2003, we issued some convertible securities.

At time they were issued, share price was $24.

They have a 32.5% premium conversion factor on top of it, which brings that to 31.80.

Then there was another 20% tick before you had to recognize it as any kind of dilution, but that triggered in the 4th quarter here in 2005.

So as we go into the year, we thought about how best to explain this.

It's a little bit sophisticated in that what really happens is you take whatever the share price is, you subtract from that the 31.80, you multiply that times 7,232,700 shares and then you divide that by the share price trade, and that's the amount of dilution risk you have.

So we try-- we put this curve together for you so you can see the entire time we're trading from 24 up to 31.80, there wasn't anything.

At the end of the year, we were trading at 39.51, which created something on the order or magnitude of 1.8% in dilution, which was already in our current numbers, but as the share prices continue to go up in value, which we're confident they will, we'll have a little bit additional dilution risk.

Now, one thing about these notes is that we've got a fixed rate of interest of 3.75%.

If they were aligned with just floating debt, that would be costing us now 5.75%, so we save 2% on the $230 million, and the whole thing works out a little bit more in a wash than it looks when you see the dilution, but nonetheless, it's a dilutive aspect to the share count that's going to be with us through 2008.

We're going to settle all that principal, by the way, in cash, but nonetheless, with the way GAAP works, we have this dilution scenario that we want to alert you to, and since we can't predict the future share price, we can't really include that in the guidance.

Our next slide, we have a very compelling cash flow story we think for 2006.

You can see we believe EBITDA will exceed $390 million and cash from operating activities, when you add in the 3-minute tax benefits this year should be $280 million or more.

That's pretty high operating cash flow number and we would think that CapEx doesn't really go up much from this year's $25 million.

Next slide is looking at the cash conversion.

Here you can see in 2005 we had $153 million of net earnings, we had $239 million of operating cash flow if we exclude the $42 million tax benefit, which is very real and real cash, but on an on-going basis, if you didn't have it, you would have had the 239 divided by the 153, so cash conversion in excess of 150%, and we're providing the same kind of guidance this year.

We would see cash conversion on the 180 would be 270.

We think it would be 280 or more, so we see the high cash conversion we've enjoyed recently continuing in the future.

Next slide.

If we look at the balance sheet and where we are, you can see we've got a strong situation with an undrawn revolver here that had a $400 million opportunity against it.

Our total debt is 894, but we've got cash of $53 million at the end of the year and of course we will have built some cash in this quarter.

Our net debt, then is $841 million.

If you take the net debt to net capitalization rate, you can see you're 40.2% and total debt against EBITDA is down to 2.67% if you did the cash basis with the rating agencies don't like to see, it would be down below 2.5, but debt to EBITDA is 2.67 and our interest coverage ratios are very high at 7.73.

So we think we're extremely well positioned, even though we're still carrying a Double B-plus rating.

Next item here would be strategic acquisitions.

We think the patience we showed last year, where we rejected a whole lot more than we acquired and we've noted with interest on the things that we didn't buy that people who bought them have-- and I think we make the decisions, we'll leave it at that.

The things we bought we think are just nothing short of spectacular.

They're all non cyclical.

They all have great cash models.

They've got strong leadership.

The current pipeline of activity we have is very substantial and we're live on quite a bit of opportunity as we speak.

There's a significant financial capacity now to support the acquisition process.

We're really better positioned now in this regard than we've ever been with the balance sheet the way it is, the cash available, and the amount of operating cash flow we're throwing off.

Next slide.

Our markets we think we can't sort of end the discussion without talking about how strongly we feel about our markets.

When we say they count, we mean that sort of literally.

Everything we do is adding value to somebody, and it's really driven by customer intimacy.

So instead of looking at the cyclical S curve on where's audits and where's commercial construction, non-residential construction and a whole variety of interest rate factors and what have you, we still think customer intimacy and our application solutions are what drives our revenue.

We've got a lot of balance in our distribution channel where we're dependent on some people, but they in turn need our products.

And every one of our businesses falls into one of these five categories.

They're really providing solutions that are fundamentally the cash register for their industry, Neptune for water and TransCore for infrastructure buildout.

Or they provide process productivity that gives increasing capacity to people who need it or they lower the actual cost of operation for the applications they serve, or they provide information that really makes customers make better decisions that adds to their own cash or their own pricing power or their own asset velocity.

And lastly, some of them are data related to comply with regulations, and we think those forces are still alive and well in the marketplace.

And lastly, as we look at the summary slide here, we think 2005 demonstrates the strength of Roper's strategy.

TransCore and Inovonics have been successfully integrated.

CIVCO and MedTec have been acquired to create a new medical growth platform.

We have compelling cash flow. 4th quarter performance sort of caps the year in total and we think we're positioned for record results in this year because of favorable markets, less dependency on cyclical forces, the cash focus driving operational excellence constantly throughout the business, strong operating teams, not a lot of change required, although we're going to be building substantial strength throughout the organization, and we've got a very attractive acquisition pipeline, and as we said last year, creating shareholder values, what counts we think it's still what counts, and with that, we'll open it up to questions.

Jennifer, we're ready to take questions from our callers.

Thank you.

We'll take our first question from Mike Schneider at Robert W. Baird.

Good morning, guys.

Good morning.

Congratulations on a great year, guys.

In terms of internal growth, you basically finished the year for a total of 8% organic growth.

If I back into the guidance, it looks like you're looking for something around 8 to 12, and I guess first, is that math roughly correct?

And then secondly, it implies that most, if not all of your businesses, will be accelerating in the year.

Maybe you can just talk about some of the bigger accelerations in the portfolio from '05 to '06 in terms of organic growth.

What we did Mike, is we didn't provide any sales guidance, and the reason for that, it's not that we're lazy, but it was just irritating last year.

We put out some sales guidance, and you get into this box with FD, and you're going to update it and formal, so we just wouldn't talk a lot about sales guidance.

We would see more similar performance in terms of organic growth to this year for next year, not those higher numbers you're talking about.

Okay.

High single digits would be really good.

And I think some of the businesses will do better than that, but some are going to be more in the sort of 5% category.

What you might be missing is that we still actually think there's margin expansion in some of the businesses, and some of the synergies that I think we're going to get out as some of the businesses will drive some improvement.

We've got the benefit of RF has improved substantially in the second half of the year we would expect it to continue to have better margin performance in that area versus the first half of the year.

So I don't know, Chris, that you'd said anything around kind of organic guidance, but mid to high single digits.

And Brian, I guess just focusing on what some of the fastest or higher growth businesses will be in '06, you've got RF now going into the organic calculation in '06.

Is that business expected to grow double digits organically?

And what others, just roughly the larger businesses, would you put in that catagory?

We thought Neptune would grow 4% to 8% when we bought it, and it's exceeded that both in '04 and '05, and when we bought TransCore, we thought it ought to grow at 5% to 10%.

We still think over a long point in time that those are the right numbers for those two businesses.

I think that those areas will grow more because of acquisitions that we're likely to make in those spaces, but from an organic growth basis, I don't think anybody ought to assume double digit organic growth from any of our businesses except perhaps Medical, which should have the highest growth profile, and we've got a whole lot of technology that is being rolled out.

The thing that I think will surprise people in '07 and beyond is the strength of what we've done in Medical, and you'd want to remember, these two were owned by private equity, and as you know, private equity doesn't have maybe the same orientation as a public company would around long-term investment and growth, and we have just some of the most wonderful people you'd ever want to meet in a space that's really pristine, and I think we'll have really dramatic growth in Medical in '07.

Brian, just to push you on this, though, I appreciate the comments longer-term, of not expecting double growth out of these businesses, maybe except Medical, but the math doesn't work otherwise in '06.

If you're looking for mid-single digit growth, are some businesses high single digit growth of the total business it means some things are growing in the double digits.

Is that Neptune, TransCore, some of the largest ones that are pulling that weighted average up?

Mike, I think-- this is Chris-- I think that you're looking at a combination of organic growth expectations that Brian articulated as well as the contribution margin capability of kind of' 35 to 45 being very much in the wheel house of what we're looking to do.

We hate to parse it too much for competitive reasons, but those that have the greatest opportunities beyond the Medical that Brian illustrated earlier, Neptune continues to roll along at a good clip, the Energy area has a lot of good, strong global investment going on and we feel very positive about that, and then obviously TransCore's core business in addition to some of the options on, if you will, on other technologies that could provide even further growth opportunities.

So those are the areas generally that we feel are the bigger growth drivers within the business.

Great, thank you.

And one mechanical item.

What share count assumption are you using then given this convertible note issue for '06?

Fundamentally, we're not doing anything with whatever dilution drives that because we can't, because we can't make an assumption about share value, but we ended the year in the sort of 89 to 90 million arena.

We ended the year at, I think it was 88.7 or something like that.

So we're envisioning somewhere between 89 and 90 million, maybe a little 90-plus.

You don't know what happens with option conversions and stuff.

Right, okay.

It's at the high end maybe 91, but you know, 90 probably a fair swag.

Okay, thank you guys.

Yep.

We'll go next to Alex Blanton at Ingalls and Schneider.

Hi, good morning.

Good morning, Alex.

Just sort of a housekeeping question, but the reorganization that you mentioned, are you going to be giving us historical data on the new basis?

We'll go back two years.

Two years of segment breakdown on the new basis?

Yes.

Maybe-- I don't know, hopefully three if we're lucky.

We'll be able to do three.

It's just '03 is really irritating for us because '03, you remember we had an October 31st year end and then we had the stub period and the 12/31 is noise in there, but we'll try to do three years, so you have three, four, and five.

Great.

And this is a change in focus to end markets, is that what I picked up rather than products?

Well, that's absolutely true, but it's natural evolution.

I mean, we've been doing it anyway, and we're at the point now when we get the energy people together, we really need the PAC and AMOT people in that grouping as opposed to elsewhere, and there are other synergies and end markets in Industrial with Struers and Uson, and so we just don't find the idea around having Instrumentation as a stand-alone segment to make much sense.

Okay.

What you've got is a Mish-mash at the moment--

Yes, and it confuses people because they can't see this, what is the strength or weakness of energy, what's really driving that, and the Instrumentation originally used to have Imaging and Instrumentation together, and people would talk about physical science versus life science and what have you, and we've just grown completely away from those kind of categories.

Okay.

Second question is regarding the incremental margin.

You mentioned, I thought you said 35 to 40% and then Chris said 35 to 45, which is it?

It's both.

In this quarter it was 51, but we wouldn't--

Now which margin line are we talking?

We're talking about the operating profit increase divided by the internal sales.

So it was 51% in the 4th quarter?

Yeah.

Exclude acquisitions, yeah.

Excluding-- I guess we can't calculate that ourselves?

No, you can't, you can't, right.

You can't.

We don't get that granular.

Okay.

Well, that is--

But you can take our base business and make some assumptions and say well, if we're going to grow at 5%, you know, we ought to be able to hit that with some other number that's a multiplier.

But mathematically, I mean, that is a very high number.

I mean-- Well, it is a high number.

And 35 to 40 is a very high number, which implies that asymptotically, it will reach that level of operating margin some day.

If you grow long enough, your operating margin will get to 35 to 40%, which seems impossible.

So what normally happens when companies get larger is that there is a point at which they have to expand their fixed costs because they have grown, and fixed costs are no longer fixed; they're variable in the long-run, and therefore, that destroys this incremental margin and pulls it back down so you wind up with something that's lower than that as a long-term goal.

So what's your long-term thinking on operating margin?

It can't be 35 to 40%.

I don't know of any-- you know, maybe the software business, but of course you do have a lot of software in your product line, so that really helps it, but...

Can you address that?

We can address that.

The good news would be that we're only working on one year at a time, so we're not too worried about the 10-year out scenario, but the great thing is that there will be a lot of opportunity for investors over the next five years under that thesis because that means that our underlying ratios would be improving all the time.

So that's okay with us.

Our businesses don't take a lot of fixed costs.

They don't have a lot of gross PP & E in them.

It's one of the great benefits of the business model that we've developed here so that it's a pretty asset-light place, and the gross margins are pretty high.

So, if you have gross margins at 50% and you continue to hold the line on your breakeven cost strategies and you don't let people add much to fixed costs, our fixed cost doesn't go up much.

It's been a battle to keep medical expenses down and certain other things, and we don't have as much material content in the business as some people, so while we think we're very good at supply chain management, you don't have the same deal, but there's a long way to go from 35 to 40% incremental margins when you're at an 18% pace in the prior year.

So 20% in the quarter looks good, and it ought to continue to escalate.

Okay, thanks.

You're welcome.

We'll go next to Scott Graham at Bear Stearns.

Hey, good morning.

Nice quarter.

Thank you.

A couple of things.

On Page 33, where your net debt to EBITDA calculation is-- I'm sorry, is that a net debt to EBITDA calculation or a debt to EBITDA?

And is that EBITDA pro forma?

The debt is just, it's gross debt, so it's not net debt, and the EBITDA is trailing 12 months, so it's not a pro forma number.

Very good.

Thought so.

Chris, we talked last night about the other income line.

Can you guys talk about that briefly?

What that number was?

It was a little high.

Yeah, the two things in the other income, we have the situation that's about $800,000 of it is really should be normalized operating profit in imaging for DAP.

The supplier, but we have a service interruption payment and that has to go into other income under GAAP.

We can't book it as income, so that's just an oddity that happened to occur in the quarter, and then there was a sale of minority interest in an asset we owned that gave us sort of a similar amount of money and the rest was just the noise.

Very good.

The energy and Industrial Technology margins, those were up a lot more than what I thought they would be.

I was wondering if you could tell beyond operating leverage what you think is going on or what is going on in that business?

Is it mix?

Are you doing something on the cost side?

Can you explain?

Scott, as we indicated on the slides there, and I think we've talked about this throughout 2005, that we really have spent a lot of time putting greater discipline into the project process in that segment, and that's everything from customer selection to project negotiation and all the way through project execution, and I think what you've seen in this case is the fruits of that labor being fully realized, and so it really has a lot to do with that very disciplined process about choosing customers, so maybe you didn't see quite the gain on the top line that you would have expected, but certainly where it counts on the bottom line is where we're delivering.

I would agree.

Thanks.

And we'll go next to Robert McCarthy at CIBC World Markets.

Good morning, gentlemen.

Good morning, Rob.

Without a doubt a great quarter.

Going to RFID, it looks like once again you surprised on the up side of margins there.

What should we think about the long-term margin opportunity there?

And can you just amplify your comments about how you've been able to kind of expand the margins there, specifically deploying people from the central office or cleaning up the acquisition integration or fundamentally rethinking the model; how have you been able to get that margin expansion so dramatically?

We have a lot of simple ideas that draw powerful results, and instead of packaging it as the Roper business system, we simply do simple things.

We start by forcing every business to look at its breakeven cost structure.

We don't think many people do that anymore.

It's a lost art.

And as you go through a breakeven cost structure and you start to really drive ABC costing analysis and pricing strategies, you get a lot of learning in an organization.

So when somebody comes on relatively early and they have to go through the grist mill of our quarterly review process and planning process around those things, they frequently learn a lot of things that they then go out and execute, instead of us sending in a S.W.A.T.

Team to do some temporary kind of move that you hope will stay in place.

What we do is to put a new governance philosophy in place around what people talk about and what they measure, and that really has driven a lot of the improvement in Radio Frequency.

Secondly, we're not going to take all the business that's available.

We're going to be real selective about what we take and we're going to learn in terms of contribution margin by customer and by end market focus and follow-on activity where we want to focus our attention.

So we won't make every sales call I think I made previously, but we'll make the ones that make the difference, and that drives long-term benefit.

We've always said we'd like to see our businesses be at least 20%, and we closed out the quarter in the high 17% area, so we think there's plenty of room for margin improvement inside Radio Frequency, and we think that acquisitions that we'll continue to make in that area will have high margins associated with them as well.

Some of TransCore's business is related to lower margin activity.

One of the second things we've always done with our business is to say we want to look at the gross margin, look at the true R&D costs, subtract it from that and you ought to capture half of that in EBITDA performance to enter the game at Roper, and you know, at the collective entity, we've achieved that, but there are some businesses who still aren't there and we think there will be margin improvement there.

You sound very excited, particularly about the medical opportunity right now.

Can you talk about what you're seeing in terms of acquisition opportunities, the space?

And then there is one notable conglomerate that is breaking up right now and has a variety of interesting medical properties, particularly on the Imaging side.

Are those the kind of properties you would be looking at, or just characterize the space given fact that there's a lot of equity money out there chasing these deals as well?

I think we're in a really tight niche around positioning people, and CIVCO's got a lot of recurring revenues from covering devices and support vehicles and MedTec's got a lot of opportunity in both software and products that position and hold people in place so that surgery can be done in a more precise manner, and we have our Imaging Technology businesses that have served the Life Science community for a long time, so we get a measure of all these things at one point.

We think there's a niche markets that we can really excel in, so I wouldn't expect that we would make a $500 million acquisition in the Medical arena.

I would expect we would make a variety of bolt-on, build-out things related to imaging technology and medical applications, and that's an area we see a lot of opportunity.

Doesn't mean we wouldn't look at medical instrumentation and the like.

We do look at that, but generally, the purchase price multiples for those businesses are really hard to get the kind of returns we expect.

And before we go with it, I'll leave it with one last question, you kind of' explained your strategy for giving up operating margins.

Why do you think you've done such a good job on working capital management recently?

Similar processes, similar ideas of thinking about it, how do you think about it?

A substantial portion of the bonus around here is based on asset velocity improvement, and every one of our guys knows that we're going to look at that every quarter and we're going to bridge the sequential change.

We're going to bridge year-over-year and we're going to be really granular on turn measurements and absolute nominal dollar measurements.

So it was -- a long time ago I learned one of the best tests of on-going management is how well it manages inventory, and our modus operandi around here is you shouldn't have any money tied up in the difference between inventory and payables, and when I came on board five years ago, people were throwing bricks at me, but it was right then, it's right now and we'll ton make improvements.

One more and thanks for indulging me.

Just with respect to the-- sounds like a reclassification is coming and you're probably going to do it around the end markets.

Any idea generally of timing of that and any additional clarity?

As soon as we can get it done.

We'd like to get it done before the end of Q1 so we can report that way all year long, but we've got a lot of work to do.

I look forward to the recast.

Thank you, gentlemen.

Okay.

We'll go next to Matt Summerville at KeyBanc Capital Markets.

Couple quiz.

First on the RF business.

I don't recall if you made a comment on what the overall backlog in that division looks like, and then can you also talk about the kind of changes that you've seen in 2005 versus '04 in overall proposal activity?

And then you talked about a number of new products that you're launching over the next couple of quarters.

As you look at that as a percent of your revenue, how should we think about that for the business?

Yeah, Matt, I guess just to kind of' process the questions a bit at a time here.

As you look at TransCore's activity starting with the backlog, the backlog is up pretty nicely over the prior year.

We mentioned in the 3rd quarter, a very large project win.

We mentioned in this call a couple of other large project wins, and so backlog in general year-over-year has performed nicely, and I think that demonstrates to your second question about how the business performed '05 versus '04, it's business that has performed very nicely, meeting the criteria and the expectations of Roper that we laid out when we bought the business.

I think we're very excited about the newer technologies that are in the business because they provide, although today being a very small part of the business, they provide a lot more up side as it results to some of the asset tracking applications that Brian mentioned--

Recurring revenue.

Yeah, and the recurring revenue, and of course a lot of technology is embedded in the day-to-day work that they do in polling and some of their core applications.

So it's kind of' hard to separate in a way the technology from the newer applications versus the older, because it's really exploiting and leveraging the technology into a broad variety of markets and fields. (talking simultaneously).

I think a lot of confidence around the fact that you're gaining pretty meaningful market share in the Neptune business.

Can you talk about whether or not you feel it's confident today to make that same conclusion about where you're at with RF Technology?

Matt, I was just coaching Chris when-- the first part of that, I'm not sure--

I'm trying to get a feel for if you've owned TransCore for about a year now, you've owned Neptune about two years, and you expressed a lot of confidence in the progress you've made with market share in Neptune.

If you can also comment to that extent what you've been able to do here with TransCore?

Well, you know, when we look at the asset-like business model breakeven analysis and customer pricing profitability, what's happening, you'd see growth beyond people's expectations in our freight matching business, and the people in Portland-- I was up there in November, and I just salute them.

They've just done a spectacular job.

They've got a wonderful group of technology people and passionate sales people, and they're growing very nicely.

There are other people who are involved in interesting technologies, but they don't have their costs right and they don't have their rollout strategy right and we don't feel as good about them, and those people will be under continuous pressure from us in the first half of this year to get a better business model instead of pursuing interesting things to do.

So when you look at the absolute level of revenue growth in TransCore, I would be less worried about that.

I would be more worried about how they're doing on margins and absolute contribution, because we're focusing on the organic growth areas that we want to focus on.

Now, having said that, Neptune in the publicly available data that you see, you'll see that Neptune's automated meter reading market share reached about 20% in '04 and is up in excess of 23, 24% here in '05, and their Radio business alone in the 4th quarter was well up over 20%.

So we still think that they got a long way to go, and we love the water business and a lot of people get confused when they bring in DISH network discussions around electricity, but Neptune is exceptionally well positioned in automated meter reading and water and having wonderful results.

So we see both those things continuing to grow nicely, but in areas that we're driving.

We'll go next to Wendy Caplan at Wachovia Securities.

Thank you.

I'd like to ask a couple mix questions.

I somehow remember reading in the energy segment that you have lower SG&A as the mix shifts towards power.

Was that part of the margin expansion in the quarter, and can you speak a little bit about what you're expecting there?

Well, there could be two different things there, Wendy.

If we think about CCC, a portion of the business is oil and gas, and a portion of the business is power generation, and a portion of the business is still sort of Eastern European pipelines, and the power generation portion of CCC's business carries lower margins with it than the rest of the activity, and we have been really tough on the kind of things they bid on and where they can participate.

So as those go down and oil and gas comes up, you get better margins in CCC.

In ZETEC, ZETEC's margins don't start out to be quite as good as CCC margins, and the power generation side of that business is not as large.

It's the utilities side and the current testing technology that's a terrific portion of their business, and when that's up at the expense of any of the other aerospace activity they have or non-destructive testing activity, then it gives you a better mix of activity.

That's not what happened in Q4 in ZETEC.

Q4 was better because of productivity around the new facility.

They didn't have a particularly great 4th quarter on sales.

CCC had a very strong 4th quarter and full year in oil and gas, and so that's helping the margins.

Lastly, it's just the huge reduction in sales through distribution that we used to have going into Russia and very high costs associated with those sales, which have effectively disappeared because we've eliminated all of those, most of the infrastructure.

So as you choose to bid on more selective, I guess in terms of projects, notably power, and perhaps the power business spills a bit at ZETEC, that would represent operating leverage in that segment, in the energy segment?

Yeah, I think it's right, but I think it's a little hard to model and quantify.

Okay, and another mix question.

As you rejigger the segments here, what should we-- I mean, Instrumentation was a great contributor this 4th quarter.

Should we assume that the remaining segments' margin go up or down with the new mix within them?

I mean, I would assume Industrial and Imaging probably go up; energy may not go up.

How do you look at it?

Well, that's what we're working on now, to make sure we've got good non-contaminated data for the three years so that we can roll it out.

The margins across Instrumentation are good, and so I mean all our margins are good, so I don't think it will have a huge material change on any of the segments.

Okay, thanks, Brian!

Okay.

We'll go next to David Smith of Citigroup.

Good morning, guys.

Hey, good morning, David.

On-- you've talked very positively about the Neptune business.

Can you give us a sense of the timing of projects in the first half of '06?

Does it pick up a bit as compared to the 4th quarter?

Yeah, David.

Neptune is pursuing a number of projects.

As you know, their core strategy is with the smaller and mid-sized utilities, and every once in a while, they will announce a very large project win, which gets great headlines, but the primary driver for their market share gain and their success in the marketplaces and some of the smaller projects, but I wouldn't be surprised if in 2006 you end up with some other headline news, but we certainly don't want to I think make a comment about Q4 specifically rolling into the first half of the year.

As Brian mentioned earlier, we're very bullish on Neptune's continued success and growth in the marketplace as we enter 2006.

Okay.

Switching to the RF business, the margin obviously great gains over the years.

What should we be thinking more in terms of an annual number?

I'm assuming the 4th quarter shouldn't be an annual number, but what should we be thinking in terms of a sustainable margin there?

Hix is holding me down, so I'm going to let him answer.

I'm sorry, I didn't quite capture that--

The answer always, David, as John Worthington and similar know is more and faster is our motto, so, and they're doing a wonderful job of trying to keep up, but we like to regress around here, so you may see quarter-to-quarter sequential variances because of mix issues that happen in TransCore, but we expect to have higher margins in 2006 than we had in total in 2005 in Radio Frequency.

Okay.

Touching on the backlog in that business it went down sequentially.

You talked about a couple new contracts.

Are they in the backlog and maybe you can just talk to the decline sequentially?

They're not totally in the backlog because we only book things and put it in the backlog that's shippable within a 12-month period, and it's frequent that contracts will book for TransCore will have longer time horizons.

It's not unusual for them to be two to five years, and it's not unusual for large contracts to be five to ten years.

And then they get added to along the way with change orders and buildouts.

We had, I think the segment was something like $133 million of orders in Q3 and 90-plus in Q4.

So you got 220-plus in the second half of the year, and all that's going to get shipped during the course of '06 plus all the new business.

So a backlog is well ahead of last year.

Was there something that drove 3rd quarter up significantly?

Sounds like-- was there--

We had, there was a big booking in there.

Okay.

So Q3 was unusually high.

At the time-- let's not-- it was very strong, what's this unusual high stuff?

Be careful.

I know, I'm just saying it's not sustainable.

As far as the--

Come on, David.

No, I'm just looking at a 23% drop.

That's why we don't give you any sales guidance.

I can see-- you know.

That's right.

We expect them to do well in '06, and it will be lumpy quarter-to-quarter.

Right, and I guess that's the word with the large projects you've kept.

It is, yep.

Has there been any European bookings?

Not as much as we want.

We have work to do there.

Okay, okay.

You've talked about bolt-on acquisitions in some areas, specifically I guess healthcare, but as far as AMR goes, you've seen consolidation on the electric and gas side lately.

Any thoughts as to where you might go there?

We certainly understand the space exceedingly well, and are aware of the transactions that have occurred and monitor and keep a close watch on what's going on there.

That's about all I can tell you.

Okay.

Last thing.

You talked a lot about recurring revenues.

Maybe you can give us a sense of what the organization's recurring revenues would be as a percentage of total amount and maybe compare--

For the whole enterprise?

Yeah.

Yeah, that's one thing that we were trying to-- we really are a little light on that.

It's moving up into the 25 to 35% range, and I think it's going to continue to escalate, and it's a rollup number that we're still working on.

I don't have a perfect number for the call, but we will have in Q1.

Okay, great, thanks.

We'll go next to Darryl Pardi at Merrill Lynch.

Good morning.

Good morning.

The RF segment grew a bit slower than the 5% to 10% long-term growth that you've been looking for, and Brian, you alluded to some of the issues, freight matching was doing quite well, but there was some challenges in some of the rest of the business.

Can you just elaborate on what the challenges were in '05 and what changes we get into '06 and '07?

Darryl, as we indicated earlier in the call there, the first year of ownership, the primary focus for the management team I think was getting oriented around the market segmentation and the opportunities within the markets and increasing the discipline around the project work and really increasing their financial acumen.

Very great group of guys, very market-focused, and through that work, they were able to reduce their cost structure, to improve their discipline around projects, and as we demonstrated earlier, we ended up with higher profitability I think than a lot of people would have expected.

With that behind us as we enter 2006, we've got a lot of momentum in our core totaling and traffic market that carries us into growth mode in '06, and some of the technology initiatives that are underway that are successful, the continued growth in the freight matching business, so I think as we enter 2006, we're actually pretty bullish on this--

I think Darryl, also, that to, when you think about the work Kelly Gravelle's been doing and others, we had a big push on our core modem technology, which gets us into intermodal track and trace work, and we see a lot of opportunity in track and trace work, and so we've kind of' redoubled our efforts in investing in that as opposed to launching things before they're ready to go, and our next generation Rail Tags, same situation.

Our Super Ego technology that similar guys have been working on is very terrific stuff.

All that's out in the marketplace just now, so we would expect some growth improvements in '06 versus '05 where we were trying to consolidate, clarify, and get the technology map in place to drive sales over the next five years.

Okay.

Have there been any management changes at TransCore over the past year?

No.

Not at the senior level.

Okay.

We've put a new couple of people in, but not at the top of the organization.

Okay.

This is the second year in a row that you've narrowed the range of EPS in your guidance.

What gives you comfort today to give a $0.12 range versus a $0.25 range as we headed into '04?

Well, we split the stock, so.

You know, we thought $0.12 was $0.24 before the split, I suppose.

Oh, fair.

Thanks.

Very good, thanks, Darryl.

And this does conclude the question-and-answer session.

Mr. Hix, I'll turn the conference back to you for any additional remarks.

Well, we thank you all for your continued interest and support of Roper Industries, and we look forward to reporting to you on our success throughout 2006.

Thank you all.

And this does conclude today's conference call.

We thank you for your participation.

You may disconnect at this time.