Roper Technologies Inc (ROP) 2007 Q2 法說會逐字稿

Good day, and welcome to this Roper Industries second quarter earnings results conference call.

This call is being recorded at this time; I would like to turn the call over to Mr.

John Humphrey for opening remarks and introductions.

Please go ahead, sir.

Thank you, Lindsey, and thank you all for joining us this morning as we discuss the results of our second quarter performance.

Joining me this morning is Brian Jellison, Chairman, President and CEO, and Paul Soni, Vice President and Controller.

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

The press release also includes telephonic replay information for today's call.

We have preparing slides to accompany today's call, which are available through the webcast and also are available on our website at www.RoperInd.com.

We will refer to these charts as we go through the call.

If you'll please turn to Slide 2, you will once again our Safe Harbor Statement.

I want to remind you that today's call includes forward-looking statements, which are subject to risks and uncertainties as described on the page.

Additional information about the specific risks are included in our SEC filings.

You should listen to today's call in the context of that information.

Now, if you'll 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, John, and good morning, everyone.

We start here of course with the Safe Harbor statement after the opening slide.

We go to Slide 3, Roper's second quarter 2007 review.

We'll first cover our quarter 2 highlights, talk about the enterprise results and the segment review.

I'll give you an update on our guidance thinking and future activity, kind of summarize what we've done today and then go into Q&A.

Next slide, the enterprise Q2 highlights you can see, we had all-time records, not just for the second quarter, but for any quarter in the history of the company, and most every category in sales and orders and backlog and EBITDA performance and operating profit, net earnings and diluted earnings per share.

It was really a phenomenal quarter.

Internal order growth was 14%.

That benefited by a rounded-up 2 points of foreign exchange and total order growth was 23% in the quarter.

Sales growth, internal sales growth was 15%, which also benefited by a rounded-up 2 points of foreign exchange, and or total growth was 25%.

Our operating cash flow increased dramatically from last year's second quarter.

It was up 62% to $78 million in the quarter.

Operating margins were up 20 basis points to 20.3%, despite a really substantial isolated vendor problem for touch screens and our DAP product line, we'll talk about when we get into the imaging segment that took a significant bite out of results.

And then we had some one time costs due to some long-term legal settlement and some moving out of Tucson into Vancouver that we took, but didn't treat it as a set-aside here.

Diluted earnings per share were $0.66, up from $0.53 a year ago and the CATZ, with the rising share price diluted us by a $0.01.

It would have been $0.67 compared to our guidance without the CATZ.

Next slide, if you look at the segment performance in the quarter, the radio frequency segment delivered very significant growth.

It improved its operating margins substantially.

It did pull down actually the sector and the enterprise gross margins.

Actually, the international sales in the quarter which were about $15 million for this project had very low margins, accounts for more than all the difference in our gross margin erosion.

We were actually up a gross margin basis if we excluded that.

The mixed results in scientific and industrial imaging really became bifurcated here.

You had the medical microscopy businesses which were up over 10% in revenue and in profit growth and they were able to offset this very severe problem we had with a Japanese touch screen vendor who supplied basically bad product for our touch screens and put us temporarily out of business on that product line and we are pursuing legal action with them.

We've changed the vendor, and everything is righted, but it certainly was an unplanned dip in the quarter performance.

The product line on industrial cameras, you can see, was impacted by lower margin, or low sales in the motion camera business.

Last year we had, you may remember, some sales basically to BMW, General Motors and others that weren't repeated this year.

On the energy side, the sales and margins rebounded, as we said they would from the first quarter.

There were a lot of people asking us in various investor settings about Q2 performance.

Well, you can see the sales growth was up sequentially 21% and the operating profit margin expanded 460 basis points sequentially.

Neptune once again inside industrial had a breathtaking quarter.

They were up over 25%.

They continue to gain share in both residential and commercial meters and in automated meter reading.

From here, next slide, we'll look at the second quarter results in more detail.

Here, you can see the EBITDA growth continues.

Last year's EBITDA was $106 million in the quarter.

This year we produced $130 million of EBITDA.

On a trailing 12-month basis, you can see that our EBITDA margins continue to expand.

At the end of quarter 2, 2005, our EBITDA margins were 21.4%.

At the end of quarter 2, 2006, they were 24.1% and at the end of the second quarter here, our trailing results are 24.9% on $1.9 billion in revenue and we're up $212 million in EBITDA in the last two years.

Next slide.

Our top line performance on both orders and sales was very strong.

We were up $100 million in orders in the quarter.

You can see on the right-hand side, the internal growth of 14% benefited by 2 points of FX, which is really rounded up.

It was closer to, like 1.54.

And net sales were also up, as you can see, by 15%, 2 points of FX.

Next slide, we take a more granular look at the income statement.

Here you can see the orders that we set up, $100 million in the quarter.

Net sales were up 25%.

Our gross profit, which was reported a year ago at 50.5, was 49.4, so some of you may wonder what happened to the 110 basis points.

Well, what happened is we recorded about $15 million of the international product revenue, with margins that are exceptionally low, perhaps, you know, in the 10% area.

So that just pulls down something that we can't really avoid, as we're in the very early stages of the low margin portion of the contract.

If you excluded that, we were up 30 basis points in core gross margin.

Income from operations was up 26%.

You can see the op margin was 20.3, up from 20.1 in the year-ago period.

We had over $1.3 million in unusual one-time costs for imaging, settling a legal issue in a red light in Europe and moving some considerable product out of Tucson, Arizona, into Vancouver.

We could have isolated that, I suppose, and set it at $1.3 million and stated higher numbers, with you we chose to just leave it inside.

So our operating profit margin normalized would have been more like 20.6 or more.

Interest costs, you can see tax rate, we had a benefit in the tax rate here, specifically related to a tax law change in Denmark that helped our store's operation.

That's the good news.

The bad news is we're investing considerable time and resources in tax planning strategies.

So the money we spent at corporate, where you'll see the corporate number up a little bit, we spent very substantial amount of money with our friends at Deloitte & Touche on tax planning and strategy, and continue to do that, to find a way to come up with a better tax rate than 35.1%.

Net earnings, you can see in the quarter were up 27% to $61 million and the DEPS we've already covered.

The 25% DEPS would have been up 27% if we exclude the CATZ number.

Next slide, here on asset velocity, we really tip our hat to the operating guys.

We worked hard this year.

I think we've told you in the past we were, even though we have great numbers, we thought we could have done better last year.

Receivables were a focus and inventory.

To their credit, we've moved down to 11.1%, networking capital is a function of revenue from 12.4 two years ago.

We made substantial improvement in inventory turns and really drove down receivables and payables and accruals, of course, stayed about the same.

So you wind up with the 11.1.

Next slide is a little drill-down on how that operating cash flow is generated.

Here you can see the net earnings of 61.

Depreciation in the quarter was $8 million.

Amortization in the quarter is $16 million.

Taxes were unfavorable, too.

Accounts receivable, you can see unfavorable 8, inventory a favorable 10, while the reality is our cash flow from the improvement in accounts receivable inventory and payables added $26 million to operating cash flow versus last year in the quarter.

Our operating cash flow as a function of revenue was 14.8%, and our cash conversion operating cash flow divided by the net earnings was 128%, all of which we think are outstanding numbers.

Next slide, we look at the financial capacity of the firm, which just continues to get better.

We ended the second quarter with $120 million in cash.

Our net debt dropped by $27 million to $930 million.

Shareholders equity was up substantially.

Net debt to cap dropped to 36.4, and with our, with our net debt of 930 and trailing EBITDA now at 473, you can see our net debt to EBITDA is below two times.

And our interest coverage ratio is up at nearly 10 times.

So we also did benefit, of course, in the quarter from Standard & Poor's upgrading us to investment grade status.

You can see we've invested in acquisitions, about $389 million over the last 12 months, 101 year to date, and the rest in the second half of last year, and we think there are a lot of interesting acquisition scenarios that could occur between now and the end of this year.

Next slide is saying let's move now into a little more granularity around the segment performance of each one of the four segments.

So next slide?

Here we look at energy systems and controls.

They had sales a increase in the quarter of 66%.

The internal growth in energy was 21%, sort of three things were about coequal here.

Z Tech had a sharply up result, as they focused more on power generation sales opportunities, and we launched some new technology in measuring steam generation, which has been accepted and is helping us grow.

Our pack flab instrument operation has substantially increased sales throughout Europe and in Latin America, Mexico.

And CCC's project orders in the middle east were up sharply in terms of what we were able to deliver.

Then if you look at orders, orders were up 57%.

Internal growth was 9%.

We expect kind of double-digit growth for the remainder of the year and orders internally in energy and of course are benefiting from both the Dynisco and AC Controls acquisitions of last year.

Energy margins rebounded sequentially.

As we said, they were up 460 basis points from the first quarter and then I think to help you understand the Amortization effect, we had incremental Amortization in the quarter that was quite substantial with Dynisco.

So if you look at the non-cash effect, you got operating margins would have been 25.8% versus last year's 25.1%.

So there isn't really any story around margin erosion and energy.

It's continuing to do well and improving.

The core historical business were up and so that also drove better margin improvement.

We made an acquisition of a company called Dynamic Instruments and Hardy Instruments.

Dynamic and Hardy are focusing on two different markets, both of which effect the protective technology solutions offering we're trying to drive.

It was a very good acquisition for us.

We paid about $31 million and expect first year EBITDA to exceed $4 million.

If we look at the next slide, we can talk a little more about the two businesses.

Dynamic is -- the vibration monitoring side of activity, these are really sensors, and control technologies that go along nicely with both our metrics business and our Amott business.

Then we have the in-process sensors and display business that we think has some very interesting applications for trans core, both in logistics and in security, as well as in our own internal businesses.

What happens is they are able to look at changes in content from a weight perspective.

You can imagine how that would be beneficial in our track and trace trailer and freight and rail car businesses in addition to the normal things you would have with manufacturing and industrial applications.

So we think it's a great place.

We continue to look at the sensor technology and protective technologies for foam where we're helping them protect their assets as a nice growth space for us.

Next slide.

Scientific and industrial imaging.

Ben Wood is running this business and doing a great job, and says it's kind of hard to put lipstick on this animal for on this animal for the quarter, but actually there's a lot of great things happening.

And just a very unusual thing with our DAP product line that was kind of beyond their control.

Sales and orders were up 9%.

We had more than double-digit growth out of our my microscopy application and medical businesses, and that really allowed us to, to have real sales growth, as you can see.

The supplier problem with the touch screens virtually took a main portion of the product line that DAP has for handhelds off the market for a period of time.

They have basically been reworking stuff, have most of it behind them, with change vendors, people are very shocked about what happened with the existing vendor.

It's a Japanese company that would be postcard for total quality management, but just had a complete breakdown.

So we're in some litigation with them and we can't talk a lot about the exact effect on the business, but it was substantial and certainly well in excess of this one-time charge we're talking about.

The industrial camera business just had bad comps year-over-year, really nothing you could do about that.

They had the large sale last year or two of the auto industry, and we didn't expect it to come back.

On the operating margin side, you can see we proud 18.9% of operating margin in the quarter.

That was down from last year's 21%.

It's easily explained.

We had the one-time costs of 1.4.

If we add that back to 18.9, you would be at 20.3, and I can tell you the problem that the vendor gave us with DAP cost a lot more than 70 basis points of our margin.

The operating profit growth in microscopy and medical more than offset any of the other problems we had in the quarter, and those businesses are on track and doing exciting things in the JLT-Mobile technology business is off to a very good start, with a lot of new opportunity.

We'll probably talk more about that in the third quarter.

Next slide, industrial technology.

Here, the sales were up 18%.

Everybody in the industrial business is doing a great job.

If we excluded Neptune and look at all the rest of the segment, it was up over 10%, but Neptune was up over 25%.

Cornell was the largest driver outside of Neptune.

This is a centrifugal pump business we have in Portland, Oregon, which is doing well on the agricultural markets and waste water and then Hanson has kind of launched an international development strategy from China and other countries, which is doing well.

We had record backlog here.

We had orders of $163 million, so we're still driving orders in excess of sales.

These businesses that we have, if people think about book to bill, it's not the right way to think about these.

We'll generally go into those businesses with maybe half of the quarter in hand and we'll book and ship within the quarter another half of revenue.

Business is very strong, doing well, and we would like to get the backlog down frankly, but the orders continue to come in at such a robust rate, we can't make much of a dip there.

Operating margin, you can see is up 160 basis points to 25.1%.

This is really due to great cost reduction initiatives that we had in Neptune and throughout the company and then some positive volume leverage.

The loss foam technology we put in place last year in Neptune is doing exceptionally well.

John and I were out there last Friday and you can only just give kudos to the kind of work they are doing there and there's more to come as we continue to expand that technology.

Neptune had a $3 million drag on earnings, or costs on a comp basis in quarter 2 versus last year and we blew through all that cost pressure and still proud higher margins, as you can see.

Next slide, radio frequency, here sales were up 18%.

We got a boost certainly from the international project, which is now up and running.

We had a number of e-mails from people who say they have driven through the project and it's doing well.

We're still not allowed by contract to talk much about it, but we can tell you that it is up and running.

And the good news for us is the lowest margin piece of it will soon be behind us.

We'll be back into something that's a little more normalized.

We had a terrific quarter with multiple protocol reader sales into Florida, and expect that will continue for a while.

And we got the initial shipment of our eco tags into the international project and that exceeded expectations in terms of what people thought the volume would be in the first reorder.

We've expanded also our service offerings last year in the freight matching business and the dollar value per subscription has gone up, as people have elected more service and that's helped drive our sales.

On orders, that was an even stronger story.

Orders were up 29% in the quarter.

They were driven by three primary things, plus just the ongoing nature of the recurring revenue in the business.

Our tag orders for Florida, Oklahoma and north Texas were very strong.

We won two new projects, one in Nevada, one in Halifax, Nova Scotia, the international Nova Scotia products is interesting.

It's a bridge that's going to be reworked with our technology and it's a pretty substantial win.

And then we had a substantial win with our Satcom communication technology in Turkey, with the Turkey fishing fleet, who are going to use our technology to monitor the movement of the fleet and the location of the fleet.

Operating margins in the quarter were up 110 basis points to a record for RF at 20.5%.

The international project certainly diluted gross margins versus the prior year, as we expected, but it did come in line with our bid and our expectations and frankly earlier.

The higher RFID and freight matching mix helped drive the margin expansion that you can see, and we expect a strong second half in sales revenue in RF technology because of the order flow and where we are.

Next slide, here we would talk about the guidance of the company for the rest of the year.

Sorry.

Next slide.

If you'll look at the diluted earnings per share, last year was $2.13.

We're raising this year's guidance from $2.54 on the bottom end of $2.60 and from $2.64 on the high end to $2.66.

And then if we look at the EBITDA number, we're now raising EBITDA where last year we're saying we'll produce more than $100 million in new EBITDA in 2007, so we expect to be over $520 million in EBITDA.

Cash flow would tend not to change during the course of the year, so we're saying that will still be in excess of $310 million, net earnings at the bottom side.

The guidance would be over $242 million for the year.

Next slide.

If we go then to the kind of summary of the quarter, first thing is we established records for any quarter of the history of the country, not just Q2, in most every category, our internal growth frankly exceeded our expectations.

It's hard for us to think that we're going to grow in excess of 8 to 10% and yet we continue to do that and expect pretty good growth in the third quarter.

Strength throughout most businesses other than DAP product line scenario, which is very unique and a little bit of softness in industrial camera, everything else is outstanding.

Our backlog as we enter the third quarter is $529 million, a record with the order growth in the quarter, we're in very good position to continue to deliver well in Q3 and beyond.

The important new orders in trans core are very helpful.

We love to see this business continue to expand as it did in the Middle East and now as it's done in Nova Scotia and other things we think could happen in the foreseeable future and that just bodes well long-term for us.

Our operating cash flow, which was a strong focus with our operating people, up sharply in the quarter to $78 million.

The gross margins, which look to be below 50% really are only that way because of this one sort of peg through the pipeline with the planned low margin international project, which is missionary work, but it's doing exactly what we wanted it to do.

Operating margins expanded despite the one-time costs and this vendor problem.

Year to date, we've invested $101 million in acquisitions, with very attractive pipeline.

We don't see any pullback in our ability to get things done in that area, and of course the balance sheet certainly makes that easy.

We raised our guidance to $520 million on EBITDA and $2.60 to $2.66 on DEPS and we wanted to just remind people that on a trailing basis now, our last 12 months we've produced $473 million of EBITDA, which is 24.9% of our $1.9 billion in revenue.

And with that, we would open it up to questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll first take our first question from Michael Schneider with Robert W.

Baird.

Hello?

Our next question comes from Shannon O'Callaghan.

Good morning.

Good morning.

Brian, just a question, I guess on leverage.

You got the upgrade now.

You're at less than two times net debt to EBITDA.

Give us an update on where you would like to be in terms of leverage and maybe just a comment on the pace of, pace of acquisitions, which, I think there were a couple of things that almost had done.

You still stay in the pipeline.

You -- can you fill out that thought a little bit?

Yeah, the, I think we would be a lot more comfortable at 3 to 3.5 times debt to EBITDA, so we've got certainly a full turn of EBITDA.

And if you forecast that at 520 at the end of the year, as we get closer to the end of the year, then as you reinvest the EBITDA, if you leverage it about three times, it's worth about 1.5 times the purchase power, so we could do a 7 or $800 million transaction or series of transactions without stressing anything on our balance sheet and we're looking at a wide variety of things.

We've got two things that are quite large and we've got about five things that are modest.

It's very hard, Shannon, to say, what will close and what won't close.

It's been very interesting week in that respect.

We've got a lot of calls from people saying, boy, you know, with private equity having a $300 billion need to get stuff done in the next three or four months, we're rethinking about maybe we should be talking to you instead of talking about this IPO or thinking we can flip it to private equity.

I don't know what will happen.

It's going to be an exciting time out there, but we've got a world class balance sheet and a lot of opportunity and some great businesses we're looking at.

We never feel any pressure to try to do something in one quarter or another and there's an opportunity cost to every deal you have.

We did, we did have some, some costs in Q2 because we didn't complete one transaction that we were close to doing.

We sort of noted that transaction hasn't been financed yet either, either, so it's hard to say what will happen.

But I think the opportunities are very good and we don't, we don't see any unusual difficulties in being able to close transactions.

You just want to be very careful about the markets that we serve and whether we think they have inherent growth in them.

Okay.

And then, you made the point on the tax rate, I guess there was some extra costs related to deals as well as their potential deals, as well as the tax work you're doing.

I mean when, what kind of tax rate improvement do you think is possible and when might we begin to see some improvement?

Well, one thing, I'll let John wield that and we'll give him a second to catch his breath.

We should have said we hire add new Tax Director, who is on board from Del Monte, who is a terrific guy, and he's getting started.

We've done a lot of planning work looking at the way the businesses are put together and if we did want to exit category or two and move around, that requires a good deal of work, but we spent a substantial amount of money in the second quarter on that.

As far as the future tax rate, we would like to get the GE 16%.

We think the quality of our attorney, our cash flow and everything you do, when you consider our tax rate's pretty outstanding, about but go ahead, John.

It actually may be a couple of years before we get down to the 16% level, of course.

Right.

But we are doing an awful lot of planning work.

We do think there are opportunities to offset some of the head wind we face with respect to our growing domestic business -- which of course comes in kind of at an incremental marginal rate of almost 40%.

And so we think there's some opportunity, but as we identify those, you'll learn about those in our forecast results.

Okay.

Good luck on getting to the 16.

Yeah, we would be happy at 33 for the time being.

Last one for me, just on the RF margin, bumping now north of 20%, , given what you know about the mix going forward, is that a sustainable type margin?

What do

Well, fundamentally what happens is it really depends on how much project work we do in a quarter.

If prompt work is only normalized in a quarter, I think that's a sustainable goal.

If we have outsized project work, it's -- the project work's going to come in at very low -- generally 10%.

It's not going to have a lot of profit there, and this international project, if you pull out the 15 million for that, whatever number you want to model, it's not a lot over 10%.

You can see we had really an even more outstanding quarter, so as long as we're shipping products as opposed to doing service work for people, we're going to do well.

And as long as our freight matching business continues to grow and we're doing things with our Satcom technology, we'll we'll have good margins, so it's really a mix question.

Okay.

Thanks a lot.

Yeah, you're welcome.

(OPERATOR INSTRUCTIONS).

We'll take our next question from Michael Schneider with Robert W.

Baird.

Hello, Michael?

Good morning, guys.

Can you hear me?

We can.

Yes, we can.

We can.

Oh, maybe we can start just on Neptune.

Can you give us a sense, the market isn't growing 25%.

What do you believe the market is growing and can you give us the one or two main drivers you believe are growing, driving the above average growth rate?

Yeah, absolutely.

We, we can kind of feedback some data that's available publicly, if you work hard at it, and John, you got that right in front of you there.

Yeah, I think I do.

I think in total, the meter units are up probably less than 5%.

Probably the average selling price is going up a little bit as people continue to adopt mobile AMR technology, but clearly it's probably in the mid single digit in total for the market.

There are people who think we shipped half of the, half of the AMR products in water last year last year.

We're, we're not confirming or denying it, but our growth rate in AMR is, remains robust.

We thought that that business would be in the meters may be 4 to 6% kind of business and that we would grow 10% on the automated meter reading, but we've had quarters certainly including the first half of this year where we've grown over 20% in the automated meter reading, and so that drives outsized performance as we continue to gain share.

We certainly had the highest share this year in automated meter reading and water, but net service for just buying new meters, I believe, is about 4% this year.

And what do you believe the splitting growth is between the actual AMR portion and the actual basic meter is?

Well, our baseline -- over half of our revenue in Neptune is coming from encoder sales, and that growth rate, we still think can sustain itself above 10% for a long period of time, and then we think that the meter business, while we have gained a couple points of share in the last two years, is slower growth, maybe 4 or 5% kind of growth.

I don't know if that answers your question.

Well, I guess specific to the first half, Neptune's been up over 20% in the first half.

What were the rough respective growth rates?

AMR, presumably that's grown over 30.

And the core meter business is growing single digits?

I'm not sure about over 30, but it must be in that, in that area.

Part of the reason that we're not so crystal on it is just the dollars associated with the integrated meter are substantially higher, so you would be, you would be right if you're thinking about dollars and a lot of our data we're looking at in units.

So we're certainly growing in excess of 20% in units for automated meter reading and then we're growing in excess of 5% for meters themselves, which is what's producing this above 25% growth rate.

Okay, and then on the price cost curve today, you mentioned the $3 million drag.

Was that net in the quarter, or are you actually still behind the curve and have you gone out with pricing?

We spent about $3.3 million more in Q2 this year for copper than we did in Q2 last year.

That's a real cash bearing.

So on the other hand, we assumed cost increase is standard and we've done some things to buy forward and we've done some things to manage our costs and what's really helped us a lot is -- I mean we've been able to pass through some pricing, but we also have this lost phone technology that's new that most of you haven't had an opportunity to see that's really spectacular, and that has cut our consumption per meter, because we get so much higher yield and that -- the cost reductions have largely offset the cost push inflation from the metal.

And do you have pricing yet to flow fully through the income statement?

Yeah, I would say that's true, but if you only looked at just meters themselves, you, you would have a tiny bit of margin erosion net of cost reduction.

Okay, and then switching to RF, on the freight matching business, can you give us a sense of what revenue per account is up?

No, I think anything we do there on subscriptions is really we view as very proprietary from a competitive viewpoint.

So I really can't do that.

Okay.

Thanks again, and great quarter, guys.

Thank you.

Next question comes from Wendy Caplan with Wachovia.

Good morning.

Good morning.

Just to clarify, the touch screen problem is behind us now, or does it leak into Q3?

Well, it -- the -- I think there will be some problem in Q3, but it won't be as acute as it was in Q2 and we have been assured by the vendor, who created the problem, that they had the problem resolved and within hand and so we basically rebuilt some stuff, fixed some things and they were wrong.

It really wasn't, and we had to change vendors.

So it was a more draconian effect in the second quarter.

Now we know all that.

We have a new vendor lined up.

Everything is fine with the quality of what's being produced, but if -- it will have a drag because it really shut down sales of that product line because no one, including us, had much confidence in it.

And so it -- we won't have good performance out of the DAP product line in the third quarter, but we will have much better performance as JLP comes in and we start to use the, their products and a lot of the mobile computing applications.

So it will be a drag, but we will overcome it.

And just to get a sense of timing, it was all quarter, half the quarter?

I mean just a feel for that.

Well, I think -- it really was all the quarter, but it wasn't our understanding -- we didn't really -- there wasn't concurrence about the severity of this until the middle of June frankly.

And so that, that -- it really did catch us.

I think the former General Manager of DAP thought that he had the problem under control, but he didn't.

Former?

That's correct.

Okay, and, Brian, the industrial camera business, it's kind of been a thorn a bit over time and I'm wondering what your strategic thoughts are here.

I mean does it -- are there new products, new applications, new customers, or maybe is this a company that would do better in a, with another home?

Well, it's, it's, it's a very well-intended group of people who do a great job in a variety of areas.

If they were with somebody that was focused on this, the -- part of it is that the category that they are in, the economic performance of our business is better than the economic performance of most other people in the category.

So it's a tough category.

The difficulty is that for us, it isn't a drag because our economic performance is unusual and this business never contributes incrementally to what we do and it doesn't have much recurring revenue, and our model would be more around recurring revenue and we get recurring customers with the industrial camera business.

Part of the tax work we're doing is to clear up the way.

We've been basically -- the irony is that the company was set up as an operating company in its structure as opposed to a holding company in its structure, and now we've become more of an operating company than a holding company, but we need the holding company structure sometimes to deal with these businesses being properly isolated so that you can act on the opportunities that occur from time to time, and that's all part of this extra expense we're building up to in tax and other areas to get us to be able to take advantage of opportunities easily.

Okay.

The -- you spoke to the mix at RF.

Given your knowledge of the backlog, should we expect that 20% margin to be kind of sustainable through this year, or do we anticipate -- I know you mentioned a couple of projects, new projects.

What else is in the pipeline in terms of new projects and kind of how should we think about that mix over the next 6 to 12 months?

Well, it's a good chance for John to chime in.

We have a number of new project opportunities, a couple we talked about in the call of course.

As we look forward, we do expect part of the overall performance for the RF segment in the year to be consistent and up from last year by at least 100 basis points, if not a little more.

At the second half, of course this is still -- the project work is a book and then you ship over quite a period of time, but an awful lot of the tag shipments are still very book and ship in type of quarters, so it's difficult to predict what the timing of those product sales are going to be, but we do think there are opportunities there.

The second quarter was our best margin performance last year, and it was, again, up and our best performance this year as well.

Okay, and finally, I'm not sure you said this, so I just want to be sure I understood it.

The freight matching business, can you give us just some sense of the order of magnitude in terms of the relative growth of this business?

Well, what we, what we -- the way we would like to depict that is to say if you think about our radio frequency area, we've got wireless sensor technology.

We've got freight matching.

We've got track and trace.

There's a variety of things.

If we got into each one, it just -- you get too many points of touching in terms of what we do here.

But the, the tolling activity, the project work, the design work, the queueing theory work, represents a little over half of our total segment revenue, but the well over half of the segment profitability comes really from all of the product things that we do, including the freight matching.

So freight matching has a low variable cost and high contribution margin for an incremental dollar, as does most of the products that we have in the RF and wireless sensor arena.

We don't get much variable contribution out of another dollar of service revenue or design revenue, because it's basically a people business.

And so the variable contributions you're going to see are always mix related.

The -- certainly the highest margin portion of anything we do would be those kinds of things that are subscription-based and software-driven because the cost variability is not high.

You have a significant fixed cost base to get those things up and running.

So growth, growth in freight matching is critical for us to continue to drive the kind of cash flow growth we're discussing in radio frequency.

All right.

Thank you very much, Brian and John.

You're welcome.

Next question comes from Deane Dray with Goldman Sachs.

Thank you.

Good morning.

This is a follow-up to Wendy's question.

Brian, I was interested in how you referred to the international project as missionary work, and I'm pretty sure I follow your point there, but what is the opportunity beyond this project?

Are there other projects behind it, or do you just, as you said, start getting the service part, people part behind you and more product?

Well, there are two things there, Deane.

Let's say the first thing on the project itself is that we're at the lowest margin base of that project today, which is the roll out, the installation, the project management work, working with the government entities.

Since the project is up and running now, that -- those lower margin things are somewhat behind us, so we would expect margin improvement for the remainder of the year and in the future.

Secondly, with that project, it's at a different reading level.

There are different frequencies that happen in Europe and some other parts of the world.

They will use a different reading level.

This is one of those.

It's the first time we've proven that we could perform at a very different level of RF reading technology, and that's very helpful for us.

By getting this very highly visible project, it's encouraged a lot of other international people to seek us out.

It's validated that we've got the best technology in the world because the customer in this case could have picked anything he wanted to do.

it's very, very useful for us, plus it gives people a chance to see this new design of how everything's done.

So all of that's great from a missionary standpoint.

And then once you've done it, it just makes the rest of our international calls easier because everybody is interested to go visit this application that can't be made.

Great.

You can't talk about it, but you certainly could use it for marketing.

Absolutely.

We had two of our board members sent me an e-mail yesterday, had driven through the thing saying, wow, this is really neat!

But we, by contract, we can't mention the exact country that has selected this, but everybody in the trade knows who it is.

Great.

And then just to switch over to the backlog, and some of your commentary about, the high quality problem of getting more orders and not working through the backlog, that it's a question about bottlenecks and lead times.

So where might be, especially on industrial technology, where might lead times be going and do you feel as though you -- at capacity?

We really have generally capacity.

There's a little bit of constraint in one aspect of our foundry operation, but that's not really a problem.

The situation that we have is it's not like a big factory operation where you've got -- you're looking for absorption.

The problem that we have is more in the supply chain than it is with us, so we're, we're kind of at least sort of a half, we call them bookments, where you got to book and ship within the quarter.

We would like to have even less inventory.

Generally we don't have enough common elements of inventory to keep everything and you can't have a just in time strategy with vendors where they are holding your inventory because it's too unique.

So that's where we will get held up, and that's sort of -- if you do have a little softer performance on those other posts -- for instance in, Houston today, hard to get any machine shop support utilization.

Those guys are working around the clock, so they will hold you up a little bit.

It -- we don't need any bricks and mortar or anything like that to be able to continue to cut the backlog.

I would leave it at that.

Okay, but are you anticipating any supply chain issues there?

I think that our supply chain issues get better.

I think that our people have been favorably surprised, frankly, by the volume of our, of our internal growth, but -- nobody here would have believed we would have 15% internal growth in the first half of the year.

It's just if we're at fault, it would be for just not thinking we could have that level of activity, but everybody's working through it.

I think doing a good job.

We pretty much matched our sales with our orders in the quarter, and wouldn't bother us if we actually beat the sales versus orders in the third quarter, but we would like to get all the orders that are available.

Sure.

Just last question, and John, if you have this number handy, can you split for us core revenue growth by major geography, U.S., Europe, Asia?

That's something I'll have to follow up with you on.

I don't have that information at my fingertips.

That's fine.

Thank you.

and it's a difficult thing for us because you see the flower activity and what goes where, a lot of our business is going into OEM suppliers who resell it somewhere else.

So we would look at the neighborhood of at least 40% of the stuff that we're doing is going outside of North America.

Thank you.

Okay.

Next question comes from Matt Summerville with KeyBanc.

Good morning.

Question on the imaging business, as we move into the back half, Brian, I was wondering if you could comment on how we should think about top line trends there.

You're up against fairly easy comparisons and many maybe talk in a little more detail about the trends that you're seeing in the medical versus research-related businesses there.

You've already kind of hit on the industrial side.

With the medical business and the microscopy business are what we think of in kind of research.

Those are going to grow in excess of 10% for the remainder of this year in terms of orders and revenue.

And they are good high margin contributors on incremental revenue.

The, the industrial camera business exclusive of the motion stuff we think will actually grow in the second half of the year and then the motion business we continue to wind down and we have strategy with that, that hopefully we can get executed in the next couple months.

And so what -- there's going to be a crap shoot a little bit in imaging in that we've got to get all of the strategies we'll have around JLT moving in the adoption rate of some really spectacular new technology we're launching's hard to predict, but we think it will be very good.

We'll talk a lot more about that on the quarter 3 call.

And then DAP, it's hopefully not too much of a drag, but it will pull us down a little bit.

So, maybe you model 10% on the imaging side and then as they get pulled down by much on the -- supply chain situation.

Okay.

That's helpful.

Then one follow-up question on M&A.

You mentioned you're looking at a couple large transactions and maybe some more moderate sized.

What sort of business of those inner segments would those mostly fall into, just some detail on what you're following there.

Well, the two large ones are -- they would both be new segments, but they would be affiliated with the existing segments.

The small ones, we continue to look at this protective technology arena and we think there's a lot of things to do in the sensor and monitoring area that are, that are interesting.

We're looking at some things for Neptune.

We're looking at some things for Trans Core.

We're looking at some things for Inabonics and that's about all I can say.

Great.

Thanks a lot.

Next question comes from Jeff Sprague with Citigroup.

Thank you, good morning.

Good morning, Jeff.

Just a little bit more on RF and tolling and some of the prior questions hit that pretty significantly, but I was wondering what kind of future evolution you might be seeing and what the customer is looking for around, some of these things like congestion pricing, realtime pricing, more creative use of HOV lanes and things like that.

Is there, kind of a proposal, kind of backlog developing around some of those technologies?

Yeah, you know, one of the things, it's a great question and it's a proper question.

We are so constrained as to what we can say, because, we're working with governments.

I think we have some really interesting things that, that are very close to resolution.

We have a strong belief that the HOV lanes are sort of grossly underutilized because they are, they are there for multi-occupant usage and we would like to see them tolled so that a single driver could pay a toll using our technology and it takes very little capital investment.

They get an immediate payback.

We think this is going to happen in a very important state soon.

We think some of this activity going on where we used to be, but, if we talk about it, then it hits the front page of the newspaper locally and our customers don't like that very well.

So I -- what's happening in New York, where you're going to read the paper about adjustment pricing, we could talk for 30 minutes about our views on that and what the implications are, but unfortunately you -- we just can't say things about it.

So I don't know how to, , sort of frankly answer your question other than to say that we think that as people do initial adoptions, then you have a political timeframe where people want to resist it, but ultimately the technology wins.

The congestion pricing in London has been pretty, pretty effective.

I don't know.

Did the New York legislature vote on the Bloomberg's proposal and say yes or no?

You know, not on top of that this week, but it's going to happen and it's going to be a big growth opportunity for us because we think we have the right kind of surveillance technology.

We think we have the right kind of reading technology and we have the best cost structure for variable tag costs for these people to adopt and now we have multiple protocol readers that allow our technology to capture data from a variety of different tags so people don't have to switch over all the tags in an industry.

But there are forces aligned to keep the old technology alive and we do everything we can to try to get new people to look at bidding.

But there is a lot of politics in

Great, and you also keep kind of alluding to a bigger play in security around RF, and there was a tiny mention of that kind of creeping in with this Dynamic and Hardy acquisition.

Can you just elaborate a little bit more on--

Yeah, it's really -- we've got something that we plan to roll out, we can kind of generally explain.

It's so wonderful in that technology because of what they do.

One of their applications that have intrigued us initially when we were talking with them is cement trucks and a guy goes out and he drops his first load from the cement truck and then he goes to the next place.

It's an imperfect science about how much was really delivered.

Was that X yards or whatever?

And so people are always concerned about what happened to the stuff that got delivered and you get to weights and measure people and everybody's familiar with the gasoline, but there is a whole lot of other applications.

The first one that came to our mind when we got everybody together, so we've got these freight car tags, where we got a tag on each side of the commercial freight car in the U.S., but we now have the technology to weigh the car at the point of inception and its contents.

We have the technology to monitor everything that's happening with the car.

We have the technology to know not only when the car stopped and whether it was opened correctly or violated, and what, what's going to happen with the contents.

So that is a kind of an application that will take us a little while to get ingrained, but there are a lot of those.

So these guys were looking at it as process control and we're going to do that and we're going to do that because we've got a much better reach than they this, but in addition to that, we're going to look at it from a security aspect with Trans Core -- instead of being protective technology business.

And then just finally for me, I believe on the acquisition, the comment of $4 million EBITDA would be kind of the forward-looking -- including your synergies.

Could you give us the sense of how much cost improvement or synergy you're expecting in that deal?

No, one of the things we do -- that's just our next 12 months EBITDA with their rhythm.

We will do more.

We never price in synergies and we never really make any commitments about it.

We've never done an acquisition, certainly since I've been here, and suggest that the next 12 months EBITDA, is different than what we project with the rhythm of the existing business.

And so, we would hope to outperform that.

Okay, great.

Thank you very much.

And there are no further questions at this time.

Okay.

Thank you, Lindsey, and thank you all for joining us this morning to talk about our record second quarter results.

And we look forward to talking to you again in three months after the third quarter.

Thank you.

Thank you.

That does conclude today's conference.

We appreciate your participation, and you may disconnect your lines at this time.