Roper Technologies Inc (ROP) 2006 Q2 法說會逐字稿

Good day, everyone and welcome to this Roper Industries second quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS] At this time for opening remarks and introductions, I would like to turn the call over to John Humphrey Chief Financial Officer, Roper Industries.

Please go ahead, sir.

Thank you, Tanya, and thank you all for joining us this morning for the Roper Industries second quarter 2006 conference call.

Yesterday afternoon we issued a press release announcing record second quarter results.

You can find a copy of this press release and associated financial attachments in the news section of our website, roperind.com.

The press release also includes replay information for this morning's call.

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

A link to the webcast and slides are available in the Investors section of our website.

Now if you'll please turn to Slide 2.

Just a reminder that today's call includes forward-looking statements, which are subject to risks and uncertainty.

Please review this page and also refer to our SEC filings which indicate 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 and Chief Executive Officer.

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

Brian.

Thank you, John.

And good morning everyone.

Well we did have another record quarter as in respect to just about everything we have up here -- orders, sales, net earnings, EBITDA and even diluted earnings per share.

We reported out $0.53 in the quarter versus $0.41 a year ago.

Last year you may remember that we had an unusual benefit of about $1 million due to a every-three-year audit that's done on tax and it was a nonrecurring number.

That really added $0.01.

So frankly we think it's $0.53 on $0.40.

If you look at the little dilution that was caused by the convertible CATs product, that stole $0.01 out of reported DEPS as well.

If we had not had the CATs number in there it would have been $0.54, against our guidance of $0.49 to $0.51.

We'll talk specifically throughout the morning about why it was such a strong quarter, and it will be challenging to have a sequential improvement over that in Q3, because of mix things.

In the second quarter, the tax benefit I covered.

Sales as you can see were up 18% gross and orders up 19%.

Internal growth was 12% in revenue and 13% in orders, and essentially no currency impact in here.

Canada was a little stronger, Europe really no change.

But on balance no real percentage differences by currency.

EBITDA reached 106 million in the quarter up 33% from the second quarter last year.

And what we thought was outstanding was our EBITDA margins expanded from 22% in the second quarter a year ago to 24.9% here in this quarter.

We did 4 transactions, one of which can't close until next week for technical reason.

The investment totals about $94 million for the 4 and we'll talk about each of those briefly throughout the morning.

Next slide.

If we look at those 4 acquisitions, the first is Sinmed which is located in The Netherlands.

It expands basically what MEDTEC does here in North America.

These are companies that have known each other for quite awhile.

We immediately went after them once we had MEDTEC assimilated because we feel Sinmed has products that will do well in North America once they are introduced and we think they are an excellent channel for us to expand into Europe.

Intellitrans is a very unique company that we'll talk quite a bit about this morning when we get into RF.

It's really a software track and trace provider that's just at an inflection point we think with terrific upside growth.

Lumenera, same situation, kind of an early start company.

Very fine management team down there.

I see one of the guys are probably on the call this morning.

We just closed that business on Tuesday.

Very high growth business in our view and we'll talk more specifically about it in image.

We have also got a European-based energy systems acquisition that we expect to close here momentarily, and that business will go sort of right beside a couple of our existing businesses there.

In total you can see about 70 million of projected 2007 revenues and if we're lucky that will be a conservative number.

About 20% EBITDA is expected next year.

We should have more than 10% growth as a family of those businesses, and they take virtually no CapEx.

One of the things that continue to amaze us as we were doing our normal work in the quarter outside with management presentations and the like, particularly in these auctions, is we think there's a lot of difference between EBITDA and EBITDA minus CapEx.

And these 4 transactions when you have EBITDA with essentially no CapEx you get a lot better cash outcome than these guys that are looking at 15% EBITDA companies that have 6% CapEx and they get 9.

They are very synergistic for us.

They actually are going to be able to take our products into their markets, and we're going to be able to take their technology in our markets, probably the most synergistic acquisition we have ever done.

Next slide.

If you look at the actual performance, you can see here, same thing on sales and net orders, EBITDA up 33, net earnings up 35%.

We're getting not only the sort of organic growth, but we're getting the execution around margins and that's exciting for us.

Next slide.

If you look at the last 2 years, sort of says a lot about what the family of businesses we've got doing, and they tend to do it around processes not just systems.

Here you can see 136 million of trailing EBITDA in the second quarter of 2004, went up to 261 last year and this year we're already on a trailing basis at 378 up 242 million in the 2 years and guiding to 405 million for this year.

Next slide.

Continue to sort of measure our networking capital improvement.

You can see here inventory dropped by 90 basis points from the June '05 quarter end was 9.6% of revenue and it is down to 8.7% of revenue here in this quarter.

Receivables dropped from 17.2 to 16.3.

We had a very strong June and so we wound up on a nominal basis with a lot more dollars of receivables at quarter end than we expected, about 16 million more than the year before because sales were up, ratio improved.

Payables and accruals, accruals you can see at 13, so it gave us on our internal operating metrics where you look at inventory plus receivables minus payables, dropped another 70 basis points to 12%.

And the networking capital below which includes all other aspects you can see went from 17.3 to 14.6.

Then if we look at taking our quarter sales and annualizing it and running the math on this you can see it avoided about $90 million worth of additional investment.

Next slide, if we look at the financial position of the Company, you see the undrawn revolver is at 371 million, up with 11 million more capacity than we had at the end of the year.

Total debt is actually down from 894 to 869, cash is flat to the end of the year but we paid down debt and made these transactions.

Net debt is actually down to 816 from 841.

Shareholder equity is up 110 million.

Our net debt to net cap is down from 40-- a little over 40% to 37.4, and then if you look at sort of the investment grade nature of this Company, you can see net debt to EBITDA at 2.2 times versus 2.7 last year at the end, and EBITDA to interest coverage is up over 8.6 times, which is a pretty strong balance sheet.

Next slide.

Here if we look at the income statement there are a few things we want to point out.

Net sales, as we said before, are up 18 with 12% internal growth.

The gross profit was actually up in each one of our 4 segments, and we give a lot of credit to the operating people for that because they have had certainly their share of cost push inflation on material costs and freight costs and still been able to get the gross margins up by 70 basis points in year-over-year comp.

Income from operations you can see up 37% and the operating margin up 280 basis points from 17.3 to 20.1, and certainly that comes not just from leverage on increased revenue but executional excellence within these businesses.

Our interest costs were flat year-over-year.

Our tax rate was a little higher than we would have expected in the quarter.

I mentioned it last year, second quarter included a $1 million credit sort of tax refund that was an unusual thing.

What is hurting us on the tax rate is the sunset of the FSC programs more than anything else, but we also were hurt a little bit by the R&D tax credit that's not passed by Congress, and we're assuming and hoping it will be passed later this year, which will help the tax rate a little bit, and then of course you have domestic content in here.

John can explain those when we get into the Q&A if you are interested.

Net earnings you can see 48 million up from 36.

The DEPS numbers as I mentioned before last year's $0.41 is probably on a fair basis $0.40 because of that tax.

This year's $0.53 without CATs is $0.54, the equity comp is about $0.02, which would get you to $0.56 on a comparable basis, and the tax was another $0.01 on the R&D, so we kind of look like we're up more like 40% over the prior year versus the stationary number you see here at 29.

Next slide on industrial technology.

Just an incredible performance here by these people collectively, Roper Pump all time record, Struers just spectacular performance.

And Neptune, just an unprecedented period of excellence at Neptune, 17-year high at backlog.

By the middle of July, we were scheduling September production and for you who are bid out to Neptune and know about our business we usually have a 5 day lead time, so we're working around the clock to meet the demand for this new E-coder that we launched.

You can see a little picture of that on the slide and one of the big deals here is it's much easier to install, it's a lot more functionality.

A terrific pay back for the utilities and you don't have a wire sticking out of it that you got to connect.

Just labor savings alone on that product are frequently in excess of $10 per unit installed and the adoption rate usually in the industry is pretty slow but in this case the adoption rate frankly has exceeded our expectations so we're gearing up to try to meet that at a faster pace.

Our pump businesses, if you wanted to just look at the little cyclical piece, they are at an all-time high.

Operating margins up 220 basis points to 23.5%, and that's an incredible tribute because Neptune is such a big part of the segment and they are eating the copper cost push and every water meter that they put out, so fortunately we have got these higher technology products that are sitting on top of the water meter and we're driving cost out of the electronics and then the rest of the people are doing a good job as well in the other divisions.

We finally are able to announce, as of Tuesday, that we did in fact win the Atlanta, Georgia water contract.

That's something some people I think thought we might have won, but it actually got signed this week.

We expect to get orders sometime in the second half of the year.

The project will probably last for 3 years with us, because it's so large, and we may get some benefit yet in the fourth quarter from unit volume throughput here.

Next slide.

If we look at energy systems and controls-- excuse me-- here we have got Zetec continues to be the story.

Even though it's a small division, their orders in the second quarter were up 85% over the first quarter.

So that was the good news.

If we exclude Zetec's sales from Energy, Energy sales were up 9% in the quarter but Zetec pulled them down to the point where we had 2 million less sales than we did a year ago, all driven from these pushed out lead times at Zetec.

Operating margins, even with the 2 million in declining sales, were actually up 90 basis points to 25.1%.

We had favorable oil and gas projects at Compressor Control.

We took quite a bit of retrenchment at Zetec and the business system loss we did in Houston-- or launch in Houston with Metrix produced better results than expected and improved our margins there.

And then in this quarter now we have already put that business system in place at CCC and that launch has gone seamlessly.

Petroleum analyzer had strong product sales year-over-year and if we get the sort of return to normalcy in Zetec which is expected in the third quarter here, the segment will start to have very strong year-over-year comps in performance, so we'll expect big things here in Q3 out of this segment.

Next slide.

We look at scientific and industrial imaging, here you see the sales and orders are still very strong, sales up 47%, orders up 22.

Internal sales, when you strip away the acquisitions in medical, were up about 15% in the quarter driven by pretty strong internal sales or order growth in the first quarter, much softer orders activity in the second quarter for the sort of core historical camera business.

It's certainly up but it's not up anywhere near as much as the rest of our businesses.

That growth rate in the industrial imaging is pulling down the total growth rate in the imaging businesses that are related to microscopy and life sciences.

The acquisitions in medical are certainly on target.

CIVCO helped MEDTEC substantially from an operating perspective.

MEDTEC in turn has been able to help Sinmed in The Netherlands.

And as we get those products approved for adoption in the U.S., we're going to get some very nice new sales in North America for Sinmed.

Operating improvements in imaging, [Vince] has done a good job in trying to get the cost down of some of these things.

Relocated some manufacturing out of Tucson into lower cost areas.

And doing the best he can to get the cost out of too many small factorings in a segment that's not growing fast enough.

Sinmed strengthens the medical platform.

We have got very significant European distribution capability because of the market's respect for Sinmed's product, and as we bring a much broader range of activity for Sinmed to sell we think we'll get the media to accept.

More importantly for Sinmed is their access to the U.S. market where they haven't really participated and people close to this space realize the uniqueness and quality of Sinmed products, so there is some pent-up demand for us to enter the marketplace which we'll do just as soon as we get our approval.

Lumenera, which is a camera business we'll talk specifically about here in a moment, we just did that deal on Tuesday.

We have got a great team of people there.

Those people, it's almost like a venture capital situation.

They got big opportunities and high hopes and our challenge is going to be to help them reach the goals they have.

Because the OEM relationships they have are really spectacular, very, very substantial companies with lots of application opportunities.

Cisco systems being just one of many.

So we think there's a lot of opportunities for us to make a real difference with this business.

Next slide.

If you look at Sinmed specifically you'll see some of the positioning devices that they have, which have-- the very wide range of catalog opportunities, some much more sophisticated than others, but they all are related to positioning solutions for radio therapy and radiographic applications.

It's a perfect complement to MEDTEC's business in Iowa.

These folks have strong secular growth, all of the people in this platform do.

We still expect it to be a double-digit grower.

A lot of recurring revenue, as much as 50% or more, so it really gives you that secular base to build on, and with the ability to have our channels and products on a global basis we expect to accelerate growth in medical by the second half of next year.

Next slide.

This is the Lumenera acquisition.

Lumenera has a wide variety of end markets that they serve but they are serving them today through OEM companies for the most part.

They are certainly a player in the security market and some of the machine vision markets in medical and scientific.

We chose to show you an image here of an astro photography application that they can provide a camera that all of the home astro photography enthusiasts, and there are thousands of these guys, that can buy for a modest cost and couple onto microscope and get some wonderful photography here.

This is a sun flare you see with one of their cameras.

It is a very low cost camera.

It's a rapidly growing business because they have, unlike Roper's historical businesses, use standard interfaces.

So you got USB connections and ethernet capability.

They can import a lot of software from a lot of different people.

They have very fast product development cycles.

They are basically structured around a series of product managers and a centralized engineering application group and pretty much out sourced manufacture.

Very scalable model.

At the bottom you can see the security application.

Sort of a standard closed circuit television monitor and the image below is a Lumenera digital upgrade and that top image which you can't see anything of reflects an industry that ought to invest a little more and we're confident it will.

It's really a commodity industry today where people are thinking about the camera as a commodity rather than a solution.

And what the end user needs is not to buy a camera, but to buy an image and you can see here we're going to be able to provide a solution and sell an image that's a valuable thing for somebody as opposed to the sort of nonsensical CCD process that you see with so many security dealers.

We're not talking about big price point variances.

You may have the standard CCD camera that's 100 to $300 and you could have a Lumenera image quality at maybe $900 up to $2,500.

We just think that this is going to be something that we're going to have very wide success as we approach the market differently than other people have.

Next slide.

RF Technology.

This is-- what can you say, it is sort of a blow-out quarter.

This was a confluence of everything that is great about our strategy in this space, and because we had-- you can see sales up 29, orders up 22.

Operating profit margins up 660 basis points from a year ago to 19.4.

No one here could have expected that we could get to 19.4, except a few of us, and it-- you can get to that number with all of the right mix, and we had an unusually favorable mix in Q2 around projects and product shipments.

Lots of hardware, lots of cards and readers, and you can't count on that every quarter and we're going to tell you not to count on that in the third quarter.

Our efforts around international business are really taking root.

We spent a lot of time, some of you know immediately upon acquisition to look at new avenues and we think there are substantial opportunities for us in places that we'll talk about as we start to win these contracts.

But they are certainly not in any of our thinking about what is going to happen as 2007 approaches and I think we have some amazing opportunities here.

The prior year included an inventory step up for TransCore that depressed earnings by about 140 basis points.

We take the 140 off of 660 we still feel pretty good about the 520-basis point improvement we have in there.

We would have expected to come in this quarter closer to maybe 18% than 19.4 and we think that is probably a more normalized number for your thinking.

TransCore Q3 outlook sales in the third quarter will be up in excess of 10% over the third quarter of a year ago but probably down sequentially from the second quarter due to the mix and delivery schedules we have.

We have a very large job for Florida that probably goes into the fourth quarter as opposed to the third quarter, and there's not a lot of things we can do about that.

You will still see some movement back and forth here between quarters.

We were able to acquire Intellitrans earlier in the second quarter and let's just turn the slide and start talking about tha.

This is a slightly larger acquisition than Lumenera and certainly Sinmed.

And it's also sort of the early curve of its growth cycle.

Intellitrans has been around for awhile,creating software and solutions for basically supply chain opportunities focused on rail.

What they do and now in concert with our sat com work and our rail tags is it gives the big rail people an opportunity to do a lot more track and trace and get better equipment utilization than they ever would have had before.

It really completes the sort of inventory visibility of what is in a car, particularly these bulk transport situations, and where people want the product and why it's taking so long to get there and there's just an endless opportunity of things to provide answers to.

This is software that's currently being used in maintenance facilities, yard management places, and used by end users like Proctor and Gamble that want to have secure control over the contents of a car and know where it is all the time.

So it isn't just just-in-time inventory delivery systems that can rely on this, it's really the proprietary nature of the product and whether it has been held at the right temperature and all of the different things that are important to a shipper.

A lot of money comes in here from software sales and then recurring license fees and hosting fees for these different yards.

By putting it with the TransCore rail tag business we're going to get a lot of applications.

If you look at the next slide you can see the kind of customers we enjoy today.

There are more than 80 track and trace customers here in North America and currently we are monitoring over 250,000 cars.

It's really an amazing stat that it's not unusual for a car to only be used once in a month.

The opportunity for asset utilization is just wonderful.

Literally there are thousands of exceptions in these 250,000 cars we monitor monthly where people don't know where the car is.

They don't know which portion of the train it's on and yet here we are with the tag technology to allow that all to be learned.

So now we couple that with the software applications that provide real time feedback and the sat com communication capture, and we're a solution that people aren't going to resist.

We have got 4 global op-centers today that provide information to all but Union Pacific as you can see the other 5 key railroad customers and we think their adoption rate of this technology will be quite substantial.

Next slide.

Intellitrans continues to build out the RF platform.

What it really gives us is software and services for trains and facilities in ports that we didn't have with TransCore's other software and service businesses.

And it only leaves sat com for cars which we don't think is a practical solution for quite some time and sat com for port facilities that we don't think is going to play an enormous role.

We continue to focus on the sort of asset light opportunities with applications that we understand and places where we're the leading provider in RF and we still see a lot of upside in this business.

Next slide.

If you look at our Q3 guidance and our full year guidance you can see in the third quarter, a year ago we made $0.45.

We established guidance this year at $0.52 to $0.54, so year-over-year will be up nicely in our view.

The quarter-to-quarter sequential difference will be harder.

We'll talk about that in a second.

If you look at the full year DEPS then we have raised the guidance.

At the beginning of the year we were at $1.95 to $2.07, at the end of the first quarter we raised that to $1.98 to $2.08, now we're raising it to $2.05 off the low end and $ 2.11 on the high.

I recently took the $2.05 number and feel secure about that.

It's just the order quality and the backlog activity should allow us to reach that with very limited risk.

And then these acquisitions we get a little bit of cash accretion out of them and the additional earnings power is going to drive up our full year EBITDA.

So we raised the EBITDA in the year to 405 million plus from what had been a $390 million guidance number since the first of the year.

The guidance, of course, excludes any future acquisitions that we would make yet this year and any additional converts dilution that could occur.

And as you can see from the balance sheet it's conceivable we might still make some acquisitions this year.

Next slide.

If you look at the summary here you can see the market posted segments that we created.

You remember at the beginning of the year we went from 5 to 4 segments, we have been planning that in sort of the last half of last year.

We think they hit the road running and have been driving this improving organic growth and then the operational execution as well as we're starting to get these synergies inside these things that are serving similar markets.

The gross and operating margins expanded in all 4 segments despite the sort of cost-push inflation we had.

Q3 sequentially we got, of course, European shut down, we got Neptune shut down in the summer, we got fewer manufacturing days in the quarter, and just a lot of things that make it hard to think that we can match the sort of 425 million with the numbers we have got, but we'll give it our best shot.

Guidance, we raised as we said $0.52 to $0.54 in the quarter, which kind of mirrors the second quarter actual and up as much as 20% over the prior year.

And then strategic acquisitions that we have talked about here, we think actually we'll pull through synergistic opportunities within the segments they have.

So not only are they accretive in 2007 and growing, but they are actually going to make our other businesses better and that hopes for us to be our constant story that we got kind of simple ideas here.

We think we know how to execute and produce [inaudible] results.

And with that I would be glad to take questions.

[OPERATOR INSTRUCTIONS] We will take our first question from Curt Woodworth with J.P. Morgan.

Yes, good morning.

Morning.

Brian, can you talk a little bit more about the AMR market, how fully penetrated do you feel this market is right now?

And with some of the new technology that you are launching clearly it is driving higher adoption rates.

Do you feel like there's an opportunity in addition to the penetration to have sort of a retrofit opportunity on some of the legacy AMR technology out there?

Well, sort of two different things.

I always want to remind people with AMR, that this is water AMR, not the electrical and gas stuff.

The water AMR business we think retrofit, most people would rather have one of our hydro systems on a retrofit as opposed to the E-coder technology.

You really don't know what the person is going to select.

So if they are going to go to the higher end technology, they are probably going to replace the entire system as opposed to taking the technology we have today and installing it as a meter fails or they want to get a better reading quality on the meter.

So when you go to an entire system like Atlanta or some of the other systems we're working on right now, that is only about 20% penetrated today, and it has been growing at about 20%.

So if you put a 20% baseline activity and add a 20% compound growth rate you have a long ramp space ahead of us.

Uh-huh.

And what the E-coder does for people maybe that were slow to make a decision about adoption, is it reduces their installation cost dramatically so that may be a big inducement for them to adopt at a faster rate.

Great.

In terms of Intellitrans can you give us a sense of the revenue of that business and how much it contributed this quarter.

It didn't contribute-- it was just negligible in the quarter.

Okay.

So it doesn't have any significance in the quarter in terms of revenue or earnings and it will be accretive in '07.

The size of that business we probably suggested somewhere in the 20 to 25 million area, and that the two medical acquisitions together, say 20 to 25 million plus, and with the camera, and then the last is the one we haven't announced yet that's really in the energy system's arena is around 20-plus million so you put them together and they are about 70 million.

Great.

One last question, on slide 18 you said the chart-- kind of the matrix where you are in the RF segment, and it feels like you penetrated most of the areas you want to and there is not many white spaces left.

Is that a fair assumption to make?

Do you feel like there's holes you still need to fit.

Well there are opportunities, but I would be careful about the chart, if you look at what we talked about with Rich Gerstein and Intellitrans we doubt that we have got more than 5 to 7% of the market penetrated.

So it is like early stage development in AMR.

There's a lot of opportunity for very substantial growth in Intellitrans.

So the size of that initial revenue belies what that is going to become in the next several years.

Do you have a sense for how big that market is?

We do.

If you look at bulk storage alone, we think the bulk storage area and movement in the $300 million arena, if you took track and trace it's over $1 billion.

Great.

Thank you very much.

Okay.

We'll go next to Shannon O'Callaghan with Lehman Brothers.

Morning, guys.

Good morning.

Maybe just to follow on that question, bigger picture for some of the other platforms like medical.

If you were-- put a chart like that together for medical, I mean how far penetrated do you think you are and what you are able to do, are you going to be able to bring more things through the same distribution channel or how are you thinking about it?

You will be able to bring more things.

Hopefully we'll have an analyst meeting before the year is over that we'll be able to demonstrate a lot of things for people.

I've said to John one of the things I want to do is get us back out on the road a little more later in the year where we can have some focused presentations to people about it because if you don't see the products it's really hard to kind of think about what we're doing here in this space.

Fundamentally we're going to create solutions that people don't know are available to them.

So it's not like a mature situation where you are dealing with a known market size.

We know the number of activities that are conducted on people, and our penetration in improving how people are positioned is exceedingly low against the opportunity that's there.

But we're the dominant player in the market, if you look at what people are doing.

So it's really about moving people from archaic methods of positioning to more sophisticated methods that are more comfortable for the patients and give a better outcome to the physician.

It is hard to predict the adoption rate.

It's got lots of ramp space.

So I mean-- it seems like there's still plenty of ramp space building on the existing sort of platforms that you have.

I mean is there any thought towards adding another leg here at any point or are you just working on what you have for now.

No, we still-- we spent a lot of time in security.

You could wind up with something there, you never know about that.

Our primary focus is to create shareholder value and we think that's done by looking at cash, and if we can find a space that we think we can add value to that's going to create a lot of cash growth for shareholders, then we're not against moving in that direction.

And you have had some cyclical boost-- if -- we read all of these other sort of capital market competitor stuff and look at what they're saying about their cyclical business.

If I want to put a slide up on our little cyclical business, I would take it against anybody's.

But that's a cyclical business so do we want to become a secular company.

So if we can find something that we love that's more secular you could still see us trading out things that give us a more solid base like we have at Neptune and RF Technology.

Okay.

Just on Zetec, I mean these push outs, I mean when things pick up there is it just going sort of resume, or is there a catch up where we're going to see some sort of outsized growth for a period?

Well, Zetec is sort of a -- it's really a cash cow kind of business, and it's got a very high percentage of all of the market activity.

So-- and the market is growing at a very modest clip, and the probes we're using are higher quality than ever before so you don't get as much replacement and all of that stuff, but it's still a valuable business.

What will happen is we'll have very strong sequential performance in the third quarter which will offset any softness hopefully we have out of the RF third quarter and then fourth quarter they'll both be hitting on all cylinders.

So there's not some great new market gain opportunity in Zetec.

We just need to hold on to what we have, and the reason we had to talk about the variance it pulled down Energy and people would think we're not doing well in Energy when we're doing quite fine, thank you.

Right.

Okay.

And just the last one on the cash flow.

I mean, you mentioned the unusual receivables.

One, I guess, where did that come from?

I'm assuming it is RF and should sort of we see a reverse dynamic as those come in next quarter?

If you look at the ratio, our receivables at the end of the first quarter were 16.4% of sales and at the end of the second quarter they were 16.3%.

So it's not that people got less efficient on receivables.

It's Compressor Control had a lot of shipments right at the end that gave us outsize receivables so that should come back to us here in Q3.

Okay.

Thanks a lot, guys.

Okay.

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

Good morning.

If my math is right it looks like you paid about 6.5 - 6.7 times EBITDA for the 3 acquisitions as a group.

Were there any outliers there, or was that kind of around the price for each of them.

And along those lines you said 20% EBITDA, again, outliers?

Or are they all pretty much grouped around that?

And finally growth prospects, guessing you don't want to specify by company but could you order the companies as to growth and again the EBITDA potential?

It's-- we think they all have similar growth potential.

The contribution margins we get from growth in all 3 businesses, Intellitrans, Sinmed and Lumenera, are similar.

Intellitrans has a lot of software so you have got generally a low cost of goods, that's pretty good.

Intellitrans, ultimately Intellitrans, has quite substantial sales opportunities for them because of the size of the markets that they are going after compared to Sinmed and Lumenera and the one that we can't yet announce.

But they are pretty similar.

I mean, as a bag when you put them together, I tried to answer the first question, Wendy to suggest that Intellitrans you probably want to add 20, 25 million to RF, and Sinmed and Lumenera together are probably going to be 25 million inside the medical imaging piece.

So that leaves this other business at about 20 million in Energy it is going to probably grow at a slower rate than the other 3.

But we have huge synergies in the last one that are going to marry up with our existing businesses.

So it is going to have outsized EBITDA sequential improvement for probably a year, year and a half, and then it will be a wonderful business but won't have the growth profile that Intellitrans, Sinmed and Lumenera have.

Okay.

And the Intellitrans business, can you talk about-- where do you bump up against GE Harris in the market or where the competition comes from in that rail market?

Fact of the matter is that we have to be a little careful about it but GE was a major investment in this, and we're completely on board with us doing what we're doing, so they got bought out of this.

It's-- we have very tight relationships with those 5 carriers we talked about, and this-- it became a natural discussion, these guys are in Atlanta.

We talked more and more with Rich about our rail tag strategy and his software application capability.

He described his business as an ERP system for rail, and that's okay with us.

But we think it is a track and trace business that as adoption rates go up and people are more concerned about asset velocity it's going to do really nicely.

And so we're really not worried about bigger players to be candid.

Union Pacific has their own proprietary system but we wouldn't think that that's going to grow with the other 5 people and since we have got proprietary rail tag that is patented and a virtual 100% usage factor on it which is coming on line here in Q2 and throughout the year that we're going to have a very big leg up on who wants to use our track and trace software.

Okay.

Thanks, and one more.

Speaking of asset velocity, do we-- I know you said that the announced acquisitions do not have a lot of CapEx exposure, but when we're looking at the working capital metric at the end of next quarter, will that go up, and is there significant-- is there any kind of SG&A that's high relative to those new acquisitions as well?

No, but what happens a little bit in our stats in the quarter when you do these acquisitions you get whatever inventory they have comes in, and you got this tiny stub period sales that distort your performance a little bit so the performance should improve in Q3 relative to Q2 on those metrics.

Thanks, Brian.

You're welcome.

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

Yes, good morning.

I just really have two questions about two of the segments, Brian.

If you were to characterize the organic growth in the scientific imaging, call it industrial versus medical, as well as in RF, sort of the core tolling, versus everything else RF, would you be able to put some numbers or some body language on that for us?

Well in the imaging scenario we have got-- if you-- the sort of core camera businesses that Roper has had for several years it-- the spectroscopy side which is affecting industrial applications is very slow growth.

The microscopy side that is life sciences has recently been higher growth but still slow growth compared to the medical businesses that we're creating.

So in-- if you looked at it you would rank the medical business growing certainly at a low double-digit rate for revenue, and camera business is pulling that growth rate back for the segment as a whole.

In RF the tolling business is actually a lot of recurring revenue, coupled with new project design.

So you have lumpy projects that ultimately lead to the recurring revenue so you don't get huge variances over the course of the year.

We said that ought to have an inherent growth rate of around 5 to 10% and I think that's true over the course of the year.

We had a really great Q3 because there were a lot of deliveries of cards sort of at the end of the quarter, and in the third quarter probably won't be as good and it doesn't mean anything has happened in the market at all.

And then in the fourth quarter you'll have Florida up with the multiple protocol readers coming on line and it will look good again.

So I think we have to do like a 12 month smoothing when we're looking at RF.

Okay.

That's helpful, thank you.

I guess the other question would be also in RF is as you continue to move into these non-tolling areas, obviously you have a different brand of competition in these areas, and I know there was a previous question on this, but I was hoping you could maybe elaborate on that.

Who are you seeing, some of the bigger companies that are out there?

Or is it -- I know there are several large companies out there that you are going to see, but in addition there are a lot of small companies that service niche applications both U.S. and Europe, and I'm wondering if they impact pricing?

Could you maybe characterize the non-tolling competitive landscape for RF as you have made now a couple of acquisitions to bolt on to this business?

Yes, I think we have said all along we have no intention to play in the RF space as it relates to the Wal-Mart tag palletization progress.

We're not competing against the [Zebra and Acarma] and people like that.

We're really -- take Intellitrans, is really a very focused application.

It's going to compete against an SAP or P system.

So you want to have something that doesn't give you the derived value that your looking for or do you to have this niche application that you can hang on to [inaudible] and architecture.

We're going to go for the niche.

If there were good niche businesses out there, we'll certainly look at those on an ongoing regular routine basis.

I think what maybe is getting people not seeing that will be the upside surprise with what we're doing with RF is we're not-- rarely are we that worried about competition.

We're worried about end users and whether or not we can get the solution that we design adopted by the end user, and if you do then you get a lot of word of mouth success in picking the right categories.

So we think we got the right categories with RF today, we just need to get a faster adoption rate.

Instead of having bulk containers at 7% utilization it might be good to get them to 30 and that represents a lot of growth over quite a long period of time.

It's just like the water build out .

We think we're in the right part of the space as opposed to maybe a flash in the pan situation that could happen with an electrical gain one day that looks good but if you normalize it looks less good over time.

Understood.

Last question.

On RF again, is there -- given some of the acquisitions that you have made and again, the non-tolling, do you see a lot of available assets out there right now?

I mean, sort of that sub 10 times EBITDA range.

Well that's 2 totally different questions.

We see a lot of available assets.

We haven't seen any, except for Intellitrans yet that we're ready to own and pricing -- all you have to do is look at what some people have paid for things that don't make money.

So it's a seller's dream to be in the RF space these days.

And we're pretty disciplined about how we look at it so we're not going to buy somebody's dream.

We're going to help somebody achieve their dream.

That's helpful.

Thanks very much.

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

Good morning, guys.

Good morning, Mike.

Brian, maybe you can just address the acquisitions first as the topic.

The EBIT number that's associated with the acquisitions?

You gave us, EBITDA.

Would you happen to have an EBIT forecast for 2007?

We haven't got all the intangible valuation work done.

There will almost no D in those businesses and what I can't tell you is how much intangible amortization we will pull out of the EBIT number, so we don't feel like we should give an accretion number.

I mean we have heard some numbers floating around that don't sound really bad, but we won't get anything probably between now and the end of the year, just because of the acquisition accounting things you have to do.

Right.

But it will be immediately accretive in January.

And that's about all I can say.

Presumably, though, amortization in total is probably less for all of the deals less than 3 million a year.

Let me think about that-- the general-- intangible amortization we generally model between 25 and 35% of the acquisition price.

And then you have a problem about how long the amortization table is because of the different kind of things that you have to amortize now.

Right.

So I think-- we kind of think maybe on balance about 8 years and so then if you had 94 million of acquisition costs-- let's just say it's 100 million of acquisition costs, if you had to amortize 30 million and have 30 million over-- yes, 10 years would get you 3 million.

You're-- it sounds good.

Okay.

Perfect.

And ROIC targets -- we have seen now a number of large deals you have done.

You have been extremely successful in them.

What are you using now in today's pricing environment as an ROIC target and I guess over what time frame?

We haven't really looked at payback analysis in terms of a measure and then return on invested capital.

You got to really ask exactly what one -- how is somebody going to measure that.

What we look at is the cash return we're going to get out of something.

Right.

So in our world that's how we model it, but unfortunately you're buying in an open market system and everybody is buying enterprise value over EBITDA multiples.

And the amount of debt people are putting on transactions are very high in the U.S., it's still 5 even 6 times trailing EBITDA for debt, and so what we have to do is say-- I mean, we see a lot of stuff we would like to buy that's going for 10, 11, 12 times enterprise value to EBITDA and you can make a case that it's above the cost of capital easily but we still aren't going there because it doesn't give us the cash returns that we want to have.

Let me phrase it differently.

What do you view as your cost of capital today?

We have never really put out a number but everybody has got its own number floating around, so it's not-- we don't have a sponsored number in cost of capital.

Okay.

And then switching just to Neptune specifically, the Atlanta contract is obviously sizable.

How do you view the pipeline of some of the major deployments?

And maybe you can put some numbers around just as to what the bidding or RFP pool you see today is versus a year ago.

We're in-- all we can do is apologize for our inability to talk about what we're doing.

We have the highest bid level in our history, and we have a lot of open projects.

So I think we have more opportunity than we have ever had at Neptune for project work, and I think the E-coder is making it a little easier for people to do their payback analysis because the insulation cost goes down and they can also look at they are going to get more revenue because they don't get people adjusting the meter to avoid putting back flow in and lowering their rate.

So that's very favorable.

The Neptune guys have in excess of 50 projects that they are working on that are all new, all of the time, but the-- we pretty much always have to sign a non-disclosure about anything we're doing.

I mean there's one huge job floating around that everybody in the industry knows about in Chicago, and I don't think people think that's probably-- while Neptune maybe ought to get the job I don't think most people think they will.

I think all of the other jobs out there most people would think Neptune has a high probability of winning.

What specifically was the AMR revenue growth this quarter just to separate out just the meters?

I don't know.

Yes.

We'll need to get back to you on that one.

I'm not sure we have that information at our fingertips here.

Okay.

And then just in terms of with this record bid or quote activity at Neptune.

Do you sense that because of the E-coder that your win rate is actually rising?

Absolutely.

And that's-- I know last year at least we estimate you gained about 5 to 6 points a market share.

Certainly gaining share in AMR and we're also actually gaining share in the residential water market.

Okay.

And finally I would be remiss if I didn't ask about the IEG contract.

Any update there or any updated thoughts?

We have a lot of updated thoughts, but there's no update available.

Okay.

Take care.

Thank you.

We'll go next to Matt Summerville with KeyBanc.

A couple questions on the Energy business.

You talked several times already on Zetec.

I was curious if you could provide a little more detail in terms of orders and demand that you are seeing across the other businesses and whether or not you have seen any signs of slowing there?

In Energy, Matt?

Yes.

Excluding Zetec?

Yes.

No, it's fine.

Didn't we give-- we gave some number, I thought.

I mean we know sales were up 9% without Zetec in the quarter.

We have got very strong backlog orders were good at every one of the businesses except for-- well, I mean the orders in the quarter were good at Zetec sequentially.

No, I mean, it ought to be high single digit growth for the foreseeable future.

Okay.

And then firmness of the Zetec orders in the back half--

They are rock solid.

Slip further.

You could have slippage, I suppose in the fourth quarter but we're not going to have any slippage in the third quarter.

It's just going to be-- they have an entirely new product line called [Mis 80] that everybody is adopting so it-- that's an execution risk, but it's not a market risk.

Okay.

And then I-- you may have already covered this, so if so I apologize, but what should we be modeling for your tax rate for the year.

That's a [Expletive] of a question there, Matt.

The-- we have a big chart here, I don't know if we have time this morning-- that-- we're going to assume that the R&D tax credit legislation will eventually get signed.

And if that's true, then we haven't gotten any R&D credit in the first half of the year, we ought to get all of that credit coming in the second half of the year and that should actually lower the 35% tax rate.

And we went into the year thinking we would be somewhere between 33.5 and 34.

We would still like to get out of the year at 34, but Q2 was 35.1.

So-- I mean if you are doing 35 you are going to be safely modeling the worst case scenario in our view.

Is that 35 embedded in the 205 to 211 and within your guidance, I'm sorry.

Probably closer to 34.

Okay.

That's all I have.

Thank you.

You're welcome.

We'll go next to Jack Kelly with Goldman Sachs.

Good morning.

Brian, on Intellitrans you had mentioned 300 million and then 1 billion as potential market.

Just wanted to clarify.

The 300 million in revenues would relate to Intellitrans revenues of 20 to 25?

Yes.

But that's just in bulk shipment of goods, and so if you expand it beyond the bulk shipment of goods you get $1 billion track and trace market.

Okay.

If you looked at more of the intermodal traffic.

Right so the key for Intellitrans to get more of the 300-- is that a railroad driven market?

Yes, it's an adoption rate and it's the rail industry getting used to the fact that, wow, I can use your software for my embedded collection devices I'm putting on these cars this year?

I don't have to have a guy with a flashlight out in the yard trying to read the information any more, I can walk by with a DAP handheld and I could collect all of this information with Intellitrans software and get it off the tag that TransCore has?

Let's talk about that.

Okay.

So you are really not displacing captive systems with the railroads you are educating on this is something they need.

Well, what the railroads have-- we have this transponder system that's already embedded and has been for several years throughout the North American rail and they put on each side of the rail car we sell one rail tag, but they haven't-- it provides certain usage.

The technology that we have embedded in that will now provide a massive amount of new usage that's easily captured, and so you need the software to capture it.

We have got that software with Intellitrans.

Now it's just a matter of us selling the functionality to the rail system.

Then talking about the billion dollar market that would involve new software on the part of Intellitrans.

Not a lot of new software actually, Jack.

I mean, this is a very robust suite that's been developed over the last 5 to 7 years and not really.

It would really be us coupling it with our global wave core modem technology that we have and getting more hardware applied to trucking and logistics and rail than we have today and then using their technology to provide the value to the customers.

But in those other cases, then it would-- applying your software to someone else's tag versus in railroads you're applying it to your own tag?

Well, you could.

But that's not where the gold would be.

The gold would be with all of our hosting technology we would want to have a tag that we were collecting the information from and forwarding it through our software to the end user.

Okay.

Second question.

You had given internal growth for the entire Company of 12%; you mentioned what it was for industrial, I believe, up 13.

Can you give it for the other segments?

Or do you have it for the other segments?

We have.

I would want to go back and see what we just said on those charts which is hard for me to go back to.

Yes.

Industrial is the only one I picked up.

Yes.

Yes, organic bookings we-- talking sales or bookings?

I thought-- I thought the 12 the 13 were--

13 is total on orders and 12 on sales, yes.

Organically.

You had strong organic growth in industrial and you have got relatively weak in energy and then you have got very strong in RF and modest on scientific and industrial imaging.

We didn't give every number.

People can triangulate against it.

Okay.

There was a question on AMR.

You mentioned you didn't have the growth in Neptune, do you have--

Substantial-- Neptune is up way beyond low double-digit.

They are up in the-- well above 10% growth in the quarter, and a lot of-- generally speaking our AMR growth is getting close to half of the total revenue at Neptune versus the meters being the other half.

And the meters, we tend to encourage people to model sort of GDP growth profile around the meters, and then maybe hopefully 20% growth profile on the other piece.

So if you get 20% growth in a quarter on all of the meter reading technology we have.

And that's half, you get 10 and if you get a couple points on meters you get 12.

So that's how I would think about that business.

Okay.

Finally on Neptune.

You indicated on the chart for industrial that margins for the industrial group were up despite higher comp costs at Neptune.

Yes.

Were you implying that Neptune overcame those costs or just other things in industrial?

Neptune overcame those costs, they actually improved their margins, an all time record, but that is great credit to one of the best manufacturing teams you will ever meet.

Because they have got a couple of pounds of copper they got to eat in every transaction they have.

But we have got Moore's Law working for us on the electronic side and lots of efficiency.

So that's offsetting.

Finally coming back to slide 18 which is where you had all of the check marks for kind of the RF business.

As we look at Intellitrans do we-- or penetrating other parts of the RF market, do you need more software capability or is that kind of done with Intellitrans and now you would move on to checking off another box--?

We don't need more robust technology than what we already have to do all of those things in those spaces.

We would need more manpower.

We would need more application people as we grow.

So those are businesses that are going to require additional knowledge workers.

Okay.

Thanks.

Welcome.

We'll go next to Christopher Glynn with CIBC World Markets.

Hey, how are you doing today.

I'm good.

Good.

Just a quick question on the cash flow.

I don't think you updated cash flow guidance, and I know you had a lot of sales at the end of the quarter in packing receivables, but cash flow as a percent of full year target a little behind last year, adjusting for the tax impact to cash flow last year.

Uh-huh.

Any update there on cash flow guidance.?

I think we had cash flow for the operating cash flow on GAAP at about 280, which would still be what we would be shooting for.

Okay.

Any reason that doesn't go up along with everything else, EPS, EBITDA and better than expected organic growth?

It does but when you are growing this rate you got to kind of watch the nominal receivables number.

Okay.

Thank you.

We'll go next to Chris Kotowicz with AG Edwards.

Hi, guys.

Hey.

I wanted to circle back real quick on the raw material cost pressure.

How much roughly did you have to work through in the quarter?

Well, --

More than 20 million or--

More-- no.

No.

10 million or less?

Well, look, quarter sales were 425 million and cost of goods was 50% so you got 210 of cost, and direct material were 40% of the cost of goods sold you have got an 80 million swag.

At the margin, when you are thinking about earnings, it's important.

It could be a couple of pennies of risk, but we didn't-- we out performed against those risks, so it wasn't a problem.

Okay.

You did that with pricing, productivity or a little of both?

In Neptune, you don't really do it with pricing on meters; it's very competitive on the standard replacement meter market.

So there you got to do it with efficiency and getting cost out of other products.

In our pump business we have actually been able to pass through any material variances, pretty much in the form of surcharges for people.

So that hasn't been a really big problem for us.

Okay.

That's all I got for now.

Thanks.

Okay.

That does conclude today's question and answer session.

I will now turn the call over to John Humphrey for any closing remarks.

Okay.

Thank you everyone for joining us this morning, and I'll be available for any follow-up calls.

And with that, thank you, again.

All right.

Same here; thank you.

Okay.

This does conclude today's conference call.

You may disconnect at this time.

Thank you for participating.