Roper Technologies Inc (ROP) 2007 Q3 法說會逐字稿

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

This call is being recorded.

At this time, I would like to turn the call over to Mr.

John Humphrey, Chief Financial Officer, for opening remarks and instructions.

Please go ahead.

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

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

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

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

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

If you now please turn to slide number two you will see once again our Safe Harbor statement.

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

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

I would ask if you listen to today's call in the context of that information.

Now if you would please turn to slide number three 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 participants.

Brian?

Good morning, everyone.

So the third slide here is just a summary what we'll do today.

We'll cover a little about Q3 highlights and the overall enterprise results and then we'll spend some time talking about each of the four segments.

We'll update our guidance for the quarter and the full year numbers and then summarize some things and then take your questions.

So if you turn the page, enterprise Q3 highlights, we're an all-time record quarter again in all of these different categories, sales orders, backlog, EBITDA, operating profit and so forth.

Our internal growth was up 16% with a corresponding quarter over a year ago which included two points OPEX benefit.

Total growth was up 25% as our acquisitions continue to perform well.

On the order side we had internal growth of 12% which included two points of OPEX and total internal orders were up 22% again with ten points coming from acquisitions.

Our ending backlog we finished the quarter at the highest record in history, $532 million, which bodes well for the fourth quarter and a good start to 2008.

Our operating cash flow was up dramatically in the quarter.

We came in with $91 million.

If you take the $91 million by the sales you get 17% of sales appearing as operating cash flow which is a metric we are particularly proud of here.

Our operating margins were up 80 basis points to a record for a Q3 of 21.3%.

And that was in the face of some unusual opportunities for cost in the imaging group that we'll talk about.

The diluted earnings per share number was then up 25% as reported and $0.70 versus last year's $0.56, but the CATS convertible program cost us a penny in the quarter and the higher tax rate versus last year cost us a penny otherwise it would have been $0.72 against the $0.56.

And there were two milestones we reached as we continue to move on, both of which we thought were important.

For the first time our trailing 12 months revenue exceeded $2 billion, and our trailing 12-month EBITDA exceeded $500 million.

If we turn the page you can see our EBITDA growth continues.

And in the third quarter of this year we were up 26%, $137 million of EBITDA against last year's $109 million.

If we look at our sort of two-year march-forward we can see our trailing 12 months EBITDA has now reached $502 million.

Just two years ago that number was $293 million, and last year $398 million, so we are up $209 million in the last two years in EBITDA.

And margins in EBITDA, once again expanded.

We went up 40 basis points to 25.8% EBITDA margins in the quarter.

We look at the next slide, we take a look at the income statement.

You can see here net sales, $533 million, were up from $427 million a year ago.

25% growth there.

Our gross margin reached 51% in the quarter.

That's up 160 basis points from the second quarter this year.

So you see that we still are able to drive these gross margins at quite substantial numbers even as we continue to grow in revenue size.

Our income from operations came in as you can see at 21.3%.

The tax rate, the 35%, was a little disappointing for us.

We would have hoped it would have been a little lower in the quarter, but lots of U.S.

business here and as a result we wound up with the 35% tax.

Our net earnings were up 28% and the diluted EPS was up 28%, but again as I said we had $0.02 there due to tax and cap.

Next slide.

Our continuing operating margin expansion I thought we should spend a moment on.

We don't talk about how our governance of business systems work enough, and here you can see on the slide if you go back Q3 '06, our trailing 12-month operating margins were about 19.7%.

We add another quarter, they went to 19.9%, we add a quarter in Q1 and our TTM margins were 20.2% and now we are at 20.5%.

And this really comes from great field execution inside our governance process where we talk about our break even analysis and our channel and profitability by customer.

And it really helps our people focus on this continuous improvement mode that you see coming up in our margin expansion.

And, of course, in the third quarter operating margins were 21.3%.

So we expect continued margin expansion going forward.

Next slide.

If you look at asset velocity, as most of you know we began an aggressive program a few years ago and it continues to drive down our need for working capital.

Just two years ago we were running 17.4% of revenue.

This year it's down to 15.1%.

So we picked up 230 basis points.

When you apply that to our annualized sales that's a $49 million of investment, which we can use for other purposes.

Next slide.

We'll look again here at our focus on cash.

In the left-hand column is how we measure our field people.

We put a renewed emphasis around this this year in terms of how they are compensated.

And you can see that the inventory continues to improve.

Inventory as a function of sales at the end of the third quarter a year ago was 9.4%.

This year we are down to 8.6%.

Our receivables have dropped by another 60 basis points.

And so in total, our inventory plus receivables less payables is now down to 12.1% of revenue.

It's a 110 basis point improvement.

Then operating cash flow, of course, was dramatically up in the quarter.

This year we did $91 million of operating cash flow.

And on a revenue base that was 17.1%.

Last year we only had $48 million of operating cash flow which was 11.2%.

Next slide.

If we look then at the year-to-date performance on cash flow, you'll see sales this year are up 25% from $1.235 billion through the first nine months to $1.542 billion, but our operating cash flow is up 47% from $154 million for the first nine months to $227 million, and in this particular quarter our operating cash flow divided by net earnings had a cash conversion of 140%.

Next slide.

If you look at the balance sheet effect of all this you can see our cash has grown from $69 million at the end of the year to $126 million now.

Our net debt has been reduced from 957 to 852 and, of course, shareholder equity is up substantially and our net debt to net cap is now down to 33.2%.

Net debt to EBITDA is at 1.7 times.

So we have an exceptionally strong balance sheet that will allow us great flexibility in terms of transactions going forward.

We were upgraded by S&P on a credit rating agency basis in May of this year, and then this month of October we were upgraded by Moody's.

Next slide.

If we look now at segment performance, we will look at industrial technology first.

The sales in industrial technology were up 15%.

Orders were only up 2%, but that's an unusual statistical situation really.

In the third quarter Neptune had a very difficult comp from last year's unusual third quarter that was favorable.

Neptune orders in the third quarter of 2006 were up 38% over third quarter 2005.

If you looked at our orders this quarter, Neptune was up 28% over the 2005 number, and we finished the end of the third quarter at Neptune with an 8% higher backlog than we had in the third quarter of last year.

But because on a comparative basis it pulled down what would have been in the industrial sector double-digit growth, which was really led by fluid handling, and by our material testing business that did exceptionally well.

In terms of actual shipments Neptune was up in the mid-teens area in the quarter, and our material test products going through storage were at an all-time high, and our favorable water business out of Cornell and Abel, and our brokers' oil and gas pump business performed at very high levels as well.

Operating margin in the industrial segment increased 270 basis points to 26%.

Then, and that really comes from the various cost reduction programs we have in capturing volume on the higher revenue.

Next slide.

If we look next at the scientific and industrial imaging segment, there is a lot going on in the quarter.

Orders were up 12% and sales were up 9%.

That was driven by high incremental improvements out of the microscopy, life science and medical areas.

But the camera business suffered, and we had throughout the third quarter conversations and activity from that management team on exiting the Redlake motion activities and product lines which is, as you may recall, over the last three or four years have been very problematic business for us.

And also the camera business was negatively affected by lower funding in NIH and various other government agencies.

Operating margins were 17.9% in the quarter but will rebound easily in the fourth quarter to be above 20% once again.

The Redlake motion and that business is basically are what pulled that down.

We have now, as of October 7, exited the Redlake motion activity.

You can see we contributed the product lines out of the motion camera business, really it's sort of the automobile crash test dummy photography stuff, and working capital to a company called integrated design tools in Tallahassee, Florida, and IDT has an operation in Shanghai.

They have some technological developments -- Southern California, a business in Italy.

They are really focused like a laser on automobile technology and opportunities with cameras and we think it's a much better home for them, and it's strategic for us because it eliminates our exposure to the automobile industry with only one thing left being our leak test business.

It avoids additional investment on our part, because we would have been at the point with the motion business that would have required additional investment in R&D and prototyping and it was an investment we would not want to make.

And it gives us really stronger potential opportunities because IDT has a much broader range of products and a direct focus on people beyond the U.S.

auto industry.

So we think they have an opportunity to grow these product lines perhaps better than we were able to.

That moves us to DAP, where we had the second quarter problem with the touch screen quality.

That's completely behind us.

We are getting better than a 99.6% acceptance rate on all our internal testing, no field failures.

So everything is doing well on that product.

It's going to take longer to get it through because a number of the products we asked to be returned and upgraded, people were reluctant to do it because they are working and that slowed our complete execution plan down a little bit.

But it's what customers want.

We expect the sales momentum of DAP to pick up in 2008 so that it shouldn't really a problem any more.

I want to us remember, because I do push hard on imaging, that fundamentally how good the remainder of that sector is -- even with the problem that had you at DAP and the problem that we've had with Redlake motion -- in total this is a business that has EBITDA margins of 23%.

I guess I sort of challenge us to think about how many other industrial companies, and certainly none in the imaging arena, can produce 23% EBITDA margins in a difficult quarter.

So our hats are off to those people who are working very hard.

Next slide.

Energy systems and controls.

Here you have spectacular growth, orders are up 64%.

Internal growth is up 21%.

That's coming from, of course, acquisitions, AC controls, Dynisco, [order beeco] Hardy and Dynamic, which we made in the last 12 months, which are performing very well.

We've had terrific up tech in That's coming from, of course, acquisitions, AC controls, Dynisco, [order beeco] Hardy and Dynamic, which we made in the last 12 months, which are performing very well.

We've had terrific up tech in Zetec up nearly 50% this quarter in terms of orders for steam generation testing equipment.

As you see much more interest globally in the nuclear business where we are particularly strong.

up nearly 50% this quarter in terms of orders for steam generation testing equipment.

As you see much more interest globally in the nuclear business where we are particularly strong.

And then you have CCC pipeline orders for oil and gas which strengthen considerably in the quarter but most of that were 2008 delivery.

And then Amot, in our control valve business, is doing very well as you might expect with oil patch activity.

On the sales side you can see we were up 48% of sales from $88 to $131 million.

Internal growth was 9%.

The acquisitions certainly captured the opportunities that we identified for them in terms of our protective technology initiatives which are frequently outside of the energy arena and where we saw a great synergies in growth.

And those are being addressed very well.

And then were had some channel improvements in our energy businesses as we looked at partnering more aggressively outside the U.S.

And that's paying dividends.

Our operating margins reached 24.3% in the quarter.

I know a couple people commented on energy margins.

You need to bifurcate this thing.

Our established businesses are still running above 28% EBITDA margins up there at very high levels.

It's just you got to add in all those acquisitions.

The acquisitions are already in the quarter running at 23% EBITDA margins and 15% operating margins because there's a good deal of intangible goodwill amortization that's occurring in there on the pretax line.

So from a sequential improvement in the third quarter, our energy control business was up 60 bits from what it was in the second quarter.

And, of course, you can see strong performance on any other measurement.

Next slide would be our RF technology business.

Sales here and, of course, this is all organic, sales were up 30% in the quarter.

The middle eastern project that we've been working on tolling in there is now underway.

Quite a few people have talked to me about their presence over there.

And seeing the toll system is a big surprise for people when they visit.

All the administrative operations are in place.

The back office work is behind us for the most part.

We did have substantial tag shipments in the quarter.

And in North America we had strong tag shipments both in Florida and Texas this quarter.

We started tolling the Tacoma, Washington, Tacoma Narrows bridge in July of this year, and then, Inovonics continues to have very strong wireless sensor technology growth throughout North America.

All that drove sales.

Orders in the quarter were up 24%, really all the businesses performed well and we received a significant order from Puerto Rico to extend our program in Puerto Rico around tolling and registration processes and admin in Puerto Rico.

Operating margins of course were spectacular, they were up 660 basis points in the quarter to 23.5%.

Perhaps of more importance in terms of how you model, and think about the business, on a trailing 12-month basis now, the RF segments operating margins are above 20% for the first time, at 20.1% and as you know you can have pretty big adjustments from quarter to quarter but we are beginning to think we have a much higher probability at delivering 20% operating margins on an ongoing basis as opposed to the kind of 15% to 18% people thought would limit us.

The improved margins were actually driven not only by the mix of product but more importantly by improved margins on our design work and our process execution on implementation tasks.

John [Summer] and the guys that have worked at intelligent traffic design have done a great job in getting improved productivity and delivery and execution.

And then of course we got the operating leverage would expect from the higher sales.

Next slide.

Inside RF we are making this acquisition that we announced yesterday which is called Black Diamond Advanced Technology.

You can see here it's a very rugged device.

We think of it as a device, not a rugged computer, because of its flexibility in what it allows people to do with peripherals and add-ons and attachments to the core base of what it is that we have.

You see the military application up here on the right.

This screen is completely viewable in bright sunlight and those of you who try to look at your Blackberry in the sun know that that would be a big benefit.

It has a hot swapable battery so when you're in the field, if you want to change out the battery instead of everything shutting down and having to reboot, you have a couple of minutes in which you can put a new battery in and still be live and maintain all of your connectivity.

It has a removable hard drive which is critical for a lot of security applications and it has a weather-protected keypad that allows it to be used in all forms of data collection in any kind of an environment.

It absorbs input from a lot of different field sources.

So you can attach GPS devices to it.

You can attach pretty much anything you can think of and it becomes just a very durable host for gathering data and recording it back somewhere else.

has an amazing self-diagnostic technology that allows for remote monitoring, and in a very hostile environment it actually prewarns the person that maybe there is too much heat or there is too much of this or too much of that.

It will go into a different running mode to correct and enhance the opportunity for the thing to have uptime on a longer period.

Plus it will send information back to another source indicating that there is a risk of the operability of the device so that somebody can make an external adjustment to it, and it's field upgradable because everything can be set and downloaded.

For those of you who are interested you can go to, as you see here, switch back PC.com and you will learn a lot more about the product.

It's something that the folks at Intel have described as having sort of endless marketplace opportunities, and if we turn the page we'll just describe a few of those.

I don't know how many of you may have seen the American Chopper show, but on a two-segment version of that, July 12 and July 19, the switch-back product technology was featured.

Here you see it mounted on what's become known as the Intel chopper.

And in this case the motorcycle is actually the input device and our switch back product is gathering all of the sensor technology information that's being delivered from the motorcycle for transference in remote applications.

What switch back does and what Black Diamond does in general, it has a wide variety of proprietary integration.

It has exceptional high data transfer capacity and patent pending way of collecting all that with much broader prong basis laterally to drive the input.

It isn't broadband but it's similar to having a much deeper broadband transference.

It has configurable software in the field and best in class total cost of ownership.

In fact one of our programs allows the end user to figure out what he thinks this device would be worth to him, which helps in establishing pricing parameters for these products.

They have a very unique combination of benefits.

They like to call it an uncommon combination, because you have a product which has military spec ruggedness and yet it's an ultra portable form factor which is a terrific thing for people, and with its flexible design it can be used for a wide variety of applications, and it becomes this very durable host for the inputs.

And again, if you're interested, you can go to the American Chopper show from July 12 and 19 and you will see this in-depth explanation of the product and its usage.

On guidance here, one more page.

If we look at our 2007 guidance update, [DAPS] we've raised from $2.63 to $2.67.

Last year we earned 213.

Guidance for the fourth quarter will be $0.72 to $0.76, and we need to point out to you if you took the first three quarters and added them, you would get $1.92, but in the wonderful year of rounding, if you take the year to date number for the first three quarters, you will get $1.91 when you do the math.

So $1.91 plus $0.72 gets you to $2.63; $1.91 and $0.76 gets to $2.67 for full year guidance.

More importantly in our view is operating cash flow.

We've raised our guidance for that suggesting operating cash flow for the year will now exceed $320 million, and EBITDA will be up from last year's $420 million to $525 million or more; up $105 million within the year.

Next slide.

If we look then at kind of a summary of how the quarter was, we again established records for any quarter in the history of the company.

Our operating cash flow reached $91 million, 17% of sales.

Our gross margins expanded sequentially by 160 basis points from the second quarter to 51%.

Operate margins expanded 80 basis points to 21.3% compared to Q3 of '06.

The acquisitions helped us drive growth and the EBITDA margins within those acquisitions are continuing to improve.

We had strength really in most of the businesses that bode well for Q4 in 2008.

We had internal growth remain very high.

Total orders up 22%, 12% of which was internal, and sales up 25%, 16% of which was internal.

We ended the quarter with a record backlog of $532 million.

We raised our guidance to 525 plus on EBITDA, 320 on cash flow.

We expect continued margin expansion in operating margins in the fourth quarter.

Our trailing twelve-month EBITDA is now 25% of $2 billion in revenue at 502.

We exited the Redlake motion activity which really does help us sharpen our enterprise portfolio and get people in the industrial camera business focused on the right things.

The Black Diamond acquisition really will drive growth in our security applications.

You'll hear more about that when we frame our guidance for 2008 and talk more about opportunities.

And our pipeline is exceptionally full, and with the balance sheet we wouldn't expect it's far off before we look at some additional investment opportunities, so with that I would open the call up to questions.

(OPERATOR INSTRUCTIONS) First question, Jeff Sprague, Citigroup.

Good morning, everyone.

Good morning, Jeff.

Brian, I'm wondering if you could give us a little more color on what you are seeing in Neptune and I guess one numerical question and maybe one more end market dynamic question.

First, numerically, how much are Neptune orders up year to date?

And then secondly, I'm interested in what you are seeing on the residential side.

I think in the past you've kind of characterized this counter cyclicality if will you to residential activity.

I wonder if that holds in more of a grinding slowdown in the residential end market.

Any color will there on where you are at in penetration, what you are seeing in the marketplace would be very helpful.

Okay.

I think those are great questions.

The situation is that -- a couple ways to look at it.

First of all, year-to-date Neptune is up a little over 10% in terms of its activity in orders.

And, of course, I had it in terms of revenue and certainly ahead with leverage and profitability.

But on the revenue side, our order revenue number it would be up over 10%.

Secondly, the reason we tried to give you a little color here about, it's not a pull back related to residential.

You can think about the housing start situation in the third quarter of '05 and the housing start situation here in the third quarter of '07 would be fundamentally different.

And yet Neptune is up 28% in the third quarter of '07 versus the third quarter of '05.

o this has nothing whatsoever to do with change in the residential construction business, and consumption of water meters for new residential construction.

That's an important thing for people to understand.

It is a sole measurement of the fact that we had unprecedented third quarter order inputs in 2006 where we had won some really very large jobs including Atlanta and other places.

And so orders were really disproportionate.

If they had been smooth you wouldn't see this sort of lumpy comparison that we happen to have in Q3 in industrial.

And then when you think about Neptune, the business today is over half of the business, or at least half of the business, would be automated meter reading on radios and products and shipments.

And those are continuing to grow at a double-digit rate.

And then if the residential water meter business is only 2% or 3% in a particularly bad year, on an aggregate basis for everybody else, the residential water meter this year is flat.

Now we are up, but the market is flat.

So if that gross at GDP, say 3% and that's half the business, you get sort of 1%, 1.5%, and then the other half is growing at 15% or more, you get 7% or 8%, you're still going to get 8% to 10% revenue growth out of a business like this, and then it's going to convert it with just really unprecedented execution capability because it's as fine an operating group of people as you could ever see.

So it would be wrong for us to do anything to suggest that the Q3 industrial order growth of 2% had anything whatsoever to do with residential housing, because that would be an excuse that is absolutely not true.

And just to follow on to that, I mean your answer kind of partially included this, but when you think about your penetration curve given that you are out growing the market, what kind of visibility or comfort do you have in that 7% to 8% revenue growth, are we talking a year or two, or more than that?

Oh no, I think it's much longer than that.

I mean, the adoption rates continue to be pretty good.

What's happening is that the install base of radios has gone up substantially.

Depending on who you listen to and what you read, you would find somewhere between, say, 25% and 33% of the water meters installed in the U.S.

now have radios attached to them or are sending signals to collect automated meter reading.

Even if you took the high number of say 33%, if you had 10% growth a year you are only going to 36% and 39%.

So we don't see growth in automated meter reading and water going below 10% for a very long time.

And then we see us continuing to gain share.

We certainly have the highest share point within the year this year and within the year last year versus anybody else.

The only time people can talk about us not being dominant in terms of share is if they go back over a long period of history when we weren't in the category.

But once we entered the category we've had very strong growth and we expect to continue double-digit growth in the meter reading for five years or longer.

Just one other one and I'm pass it on.

On RF, I mean obviously the margins were impressive to say the least.

And you made a forward comment about margins.

But was there an unusually rich mix of tags versus equipment or something in the quarter that we should think about normalizing as we model forward?

Well, part of what happened is we've been suggesting to people on the international order that it would not be a normalized margin, that would be smaller and we tried to suggest roughly how much revenue would be associated with that, and we can probably be clear on that when the year is over in February when we provide full year data.

But in this quarter we did have a better mix of shipments to the Middle East around tags, which inherently have higher margins than our design work does.

But when -- normally you expect fairly low margins out of our design and implementation work, and we had better margins in the quarter, and I think we are going to continue to have a better margin.

The reason we signaled sort of 20% for the TTM basis is I don't expect RF to be able to perform in 23.5% pretax because there is a lot of A in there, if we talk about EBITDA margins it would be a different story, Jeff.

But when we bought the business, people thought it would be sort of 12% to 16% and we kind of talked up 15% to 18%.

I think we are moving on up to a higher number.

But there is four points of intangible amortization in RF.

So that to have 23.5% pretax when you're eating 4% of A is extraordinary.

Thanks a lot.

Next question, Alex Blanton with Ingalls and Snyder.

Please go ahead.

Good morning.

Good morning, Alex.

Don't you think you could have done better?

We can always do better.

Your stock is down two points.

It was up a dollar and a quarter yesterday.

It's an opportunity, an unprecedented buying opportunity, Alex.

That's right.

I might want to point out that your net income for the quarter, $65 million, was approximately equal to your full year sales when did you the IPO in 1992.

Well, thank you for that.

I wanted to talk about or ask about the energy systems business on the internal growth side.

You had a big increase in the orders and internal growth there was 21% for the order rate.

But for sales it was only 9%.

So do you see that picking up in 2008, the internal growth rate.

Yes, absolutely, in the third quarter, our Compressor Controls business revenue wasn't as high as we would normally expect.

It had -- a component of that business is service work, and it had push outs on scheduled service in the third quarter which impacted the growth, otherwise our growth rate would have been a couple points higher.

Which business was that.

Compressor Controls.

It pretty much only had product and system shipments and associated with that would be generally several of millions of dollars of service, and that didn't fall through in the third quarter which was unexpected but it's not business we consider lost, it's just pushed out.

Could you just update us on whether that business is still mainly retrofit?

You know, the OEMs that make these rotating equipment that you go on, when you acquired a company in 1992, had their own control systems, and Compressor Controls was going out and retrofitting them at the request of the owners who found your system to be better than the one they were getting from the OEM.

But the OEMs have big engineering staffs and they like to have their own proprietary controls even though it's only 1% or 2% of the cost of the machine.

How much progress have you made in getting either specked in on the original equipment or just getting accepted by OEMs as their control system?

Well, it's not a large component of our sales for compressor control technology.

We do -- we are not really able to disclose who we provide those to, but our total OEM sales on new equipment would be modest.

It would be less than 15% of our total sales.

So it remains pretty much an after-market business.

And what, when you have very high consumption rates, which do you everywhere, people are more reluctant to make change-outs.

But business is still doing exceptionally well.

When it was acquired in '92, '93, it got the immediate order from the country we no longer discuss.

And that really drove its activity a long time.

The underlying growth in Compressor Controls is really spectacular because you had $30 to $50 million coming from a single point of retrofitting in Russia and that essentially is nothing today, and the business will produce all-time record revenue in 2008, so it's fundamentally got high internal growth rates.

It's just substituted a one-customer orientation now for a global footprint.

Finally, you didn't mention any financial details on Black Diamond, is it --

Well, it's got -- we think it's a quite strategic acquisition and will become more apparent as we can talk more about it in 2008.

This is something we've been working on for six months.

e bought a company earlier this year called JLT, which is more in the rugged computer area.

And when we did that, we had an opportunity to invest in the technology development and execution and an option to purchase Black Diamond as things were proven, and things have certainly been proven in spades.

We have very large companies looking at initial order quantities and tests, and I think it would be ahead of the curve for us to talk about '08 revenue.

But it will be accretive.

It will be cash accretive in '08 and could be material to our organic growth in '08.

And it's complementary to other discussions and things that we have going on.

Thank you.

You're welcome.

Next question, Deane Dray with Goldman Sachs.

Thank you, good morning.

First question is with regard to slide eight, Brian, very interesting that you walked through the margin progression on a trailing twelve-month basis, and it begs the question as to what you think the optimal range for Roper is to date given its business mix.

And then what happens during acquisitions, and are you willing to take underperforming businesses and make them better, and so are you willing to see a step down in these operating margin levels?

Well, we prefer not to do that.

Generally on acquisitions we like to acquire somebody that's kind of 15% to 22% on EBITDA.

But at the time of our diligence process, we only execute if we thought we saw pathways for very rapid improvement in EBITDA.

So you can see that the acquisitions that are in energy, which some people would look flat at energy and say, gee, the margins have gown down from 28% to 23% or 24.6%, and our acquisitions are 23% and so that, we've made very immediate execution improvements there.

But we are not a sort of buy and fix place.

We wouldn't by something that had a 10% operating margin and hope to get it to 15%.

We would rather buy something that's maybe 18% and hope to get it to 23% or 25%.

But looking at that, the march up on the operating margin wouldn't, we wouldn't be afraid to buy a business that diluted the operating margin.

And in fact what happens to us, Deane, is that if you look at the EBITDA margin and you add back A, that's a big deal.

Somebody could say, gee, those acquisitions on an operating margin basis are performing at 15%.

Well, yes, but they are not.

You got a whole bunch of non-cash charges that very much confuse the concept of what an operating margin creates in shareholder value.

So we would want to do things that continue to be cash accretive more than worry about a non-cash charge under GAAP.

Great.

That's very helpful.

And I'm noticing in the slides that in some cases you do give organic revenue growth by segment like did you for energy.

How about the other segments, do you provide that or do we get that off-line.

Generally we do.

Of course RF is all organic and industrial I believe is segregated.

It's industrial is all organic.

It just so happens that recently our acquisitions have been focused in energy because they've all been sensor and protective technology kind of thing.

I don't know if we missed one, it might have been imaging which as John is saying was probably 5% organic.

That's helpful.

Did I hear you correctly on Black Diamond, you said it could be accretive to organic growth in '08.

But when did it close?

Just now, it was something we finished in the third quarter but it just closed late in the third quarter.

I don't know, last week of September or something.

There's no numbers in the third quarter related to Black Diamond.

That's helpful.

Then last question, just as we go through slides nine and ten, when you referenced cash flow, this is cash flow from operating activities.

So what's missing if we want to do free cash flow is CAPEX.

Is there a reason that you don't include the CAPEX as part of the equation for Roper?

It's always so small.

You know, CAPEX is like 1.5%.

In this particular quarter I think CAPEX was $7 million.

So the $91 million, you could take seven off for CAPEX and you get $84 million.

So, and you got $84 million, there's probably some rounding around 84 on 65 would have been sort of 130% free cash flow.

Which is stellar no matter how you want to slice it, either with or without the CAPEX.

Is there anything unique among the cash flow items this quarter that --

No, not this quarter, and on the comp, the reason we showed you year-to-date cash flow number is because last year's third quarter was uncharacteristically low at $48 million.

Nothing unique.

You got D&A was $24 million net earnings were $65 million.

So that's $89 million right there.

That's very helpful, thank you.

Our next question is from Shannon O'Callaghan with Lehman Brothers.

Good morning, guys.

Good morning.

Brian, on the imaging margins getting to over 20% in the fourth quarter, is that just the DAP issues behind us or some Redlake going away?

What's the sequential driver.

Redlake going away.

Redlake going away.

Redlake going away.

Okay, I guess I'll leave that one at that.

In terms of industrial tech margins in the quarter, 26% there, you sort of talked through RF and your ability there where you think it might get, I mean that was a big margin improvement in industrial tech, too.

Can you give us a calibration going forward there kind of like did you for RF?

I don't know -- going to focus on industrial, there?

think TTM margin is right at a little bit over 25%, and we finished last year at about 23.5%.

And in industrial of course doesn't have very much amortization in it, these are really businesses that we've owned for quite awhile and we continue to drive growth in those established businesses.

We've been able to capture the incremental operating leverage on that growth, and generally those are revenues that will come in and follow the bottom line at a 35% to 40% rate, and we would expect that to continue as they continue to grow.

So in RF there was sort of the mix issue that might have benefited --

You had imaging lower than it should be, normalized when you had RF up higher, then it should be normalized.

We would like to keep RF at the performance we saw in the quarter, and that's the challenge that Mark and John and John and others have.

But it wasn't a spectacular quarter and you won't always be that fortunate.

But there wasn't anything like that sort of in industrial that we --

No, no, not at all.

Okay.

And then can you just update us a little bit on the work you are doing on the tax rate?

And also you showed this margin progression and that's actually including corporate expense which has been kind of going up.

So you probably are better than that when you factor out that.

But some of that I think was, some of what was in corporate was the tax work you are doing.

Can you give us sort of an update there?

Yes, John will fire away.

Yes, we do continue to look for tax opportunities.

It is one of those situations where because we are growing very rapidly in the U.S.

and the incremental tax rate on every dollar in the U.S.

is going to come in at somewhere between 38% to 39%.

That provides natural upward pressure on our tax rate, and we do have a substantial amount of international operations, but there are some tax planning strategies that are really related to taking all of the international activity and putting them together, which kind of goes against our culture of having businesses that are very focused on markets and being able to grow and drive their growth organically.

And so we look for that balance to [inaudible] up and we'll continue to look for those opportunities.

Brian, you mentioned in the core the tax rate was a little higher than you would have liked, does that mean you're hoping already to see some progress this quarter, or how soon should we think that you might start to make a little traction on getting the tax rate down?

He was staring right at me when he made that comment.

It's definitely more than he would like.

It's more than I would like, too.

We got a lot of deal activity.

I mean it's at an all time zenith in terms of what's going on.

There's some period costs in the quarter around that and then we got equity compensation costs that are really up because we have a much higher share of products.

Shareholders have benefited from that but it does add a little bit of cost to our corporate structure because that's how a large portion of compensation gets paid to our leadership team.

That was going to be my last one but since you mentioned the zenith, I guess a comment on filling that out a little bit?

Well, it's a, you never know, you just never know.

The year is not over.

There's a lot of happening here and it's hard to say.

We are heavily engaged in three very exciting transactions and we are kind of debating of which of those we might like to do and you never know, you might not do any of them.

You don't know.

They are all exciting.

They all have hair.

And they all have great upside.

And you never know.

And those are things that could happen between now and the end of the year?

Well, we never forecast when anything would happen because we are never going to put that kind of pressure on ourselves to do something, but we have a balance sheet that's getting pretty amazing that when we look at our debt to EBITDA at 1.7 that's our current number and we just raised our EBITDA guidance.

You take that 852 net debt number and we realize we are going to be producing a lot of cash here in the fourth quarter, you divide it by any kind of future EBITDA margin, you would expect that we would be making some kind of investment in the foreseeable future and I would think that we would.

Okay, thanks a lot.

It's not a wonderful time.

You want to be very smart about what you are doing with your investments and how you manage everything.

Debt markets are largely inappropriate on a long-term basis, and so we are pretty opportunistic here and stay focused and we are going to do the right thing when the opportunity arises.

Thanks.

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

Please go ahead.

Ms.

Kaplan?

Her line has disconnected.

We will move to Scott Graham with Bear, Stearns.

Please go ahead.

Hey, good morning.

Good morning, Scott.

Are you guys looking at any other prunings of the portfolio?

I don't know that we are.

Other people might be, but we get a lot of calls about various things, and we are always going to do what's going to be in the kind of balanced best interest of the shareholder.

If somebody wants to make us a proposal around a business that's got more value than we can generate internally, we are going to certainly entertain discussions with a person.

Fair enough.

The decline in the energy margin, was that because sequentially Dynisco had more sales in this quarter than it did last quarter because I'm having a little trouble lining that up a bit?

Sequentially margins expanded in energy I think by about 60 basis points, and the year-over-year impact, as we tried to layout on the slide is really related to the incremental non-cash amortization for the acquired companies, kind of in total their 23% EBITDA, which perversely kind of drags down the average for the bagless energy segment.

But 15% operating margin is largely because of the amortization.

I guess what I was referring to was the decline in that margin was more year over year this quarter than it was last quarter, suggesting to me that Dynisco was higher sales.

So you're saying that that's not correct.

The acquisitions are certainly growing, and it isn't just Dynisco, remember there's five deals in there.

I'm good.

Thanks.

We will take our next question from Robert McCarthy with Banc of America.

Please go ahead.

Good morning.

Just in terms of, I know you have a very limited cyclical outlook, or cyclical exposure, rather, given the structural nature of so many of your businesses, but any comment on the cyclical end markets, what you are seeing there, any kind of handicapping for the underlying economic growth in 2008?

Well, I don't know about '08 but the, in terms what have we are seeing, we are not really seeing anything -- the most cyclical business, but historically what would happen would be the pump business and the valve businesses and they are probably as a category performing at double-digit revenue growth rates.

So they are doing well and we are up in third quarter.

So we don't see any early indications around anything like that.

The only businesses -- and it is exceptionally small -- is things that are related to auto have struggled all year long.

But they are not material to the enterprise.

So we don't see anything really dropping down.

If you look at Q3's order rate and revenue rate it's pretty similar really to Q2.

What other people reported softness, we have not seen that.

We are kind of blessed with better end markets.

Absolutely.

And obviously it's a minimal exposure to you, for you.

In terms of just drilling down the portfolio question again, I think, Brian, you've been fairly vocal about your lack of affection for Redlake for many years now, so it wasn't particularly a surprise that eventually an exit was found.

Is there any other parts of the portfolio aside from -- I understand there's a price for everything -- that you think definitely has an incremental investment coming or something where you think would be on review?

Well, everything's on review every quarter, I mean if you talk to any of our guys, they know how the governance process works, but we don't have anything actively for sale.

We don't have any books put together to sell anything at this time.

Okay, and then in terms of -- it sounds like you have a lot of acquisition opportunities, just talking about that question again, could you talk about the environment, what is the relative valuation opportunity for you now that it looks like private equity has moved away.

It might've also reduced the number of transaction volume, so that might create some muted effect, but can you comment on the environment now versus three or four months ago, and maybe a comment about, could we see you maybe plunge into a distinct vertical along the lines of what you did with RFID a couple of years ago.

I don't think the environment actually, in terms of the sellers, has changed much at all.

It's never private equity, it's really the banks that are the issue, and what kind of debts they -- and if you get a bank that's willing to staple six and seven in a year, and some times eight times debt to EBITDA, you can't blame private equity for driving multiples up because they put returns of EBITDA equity on a transaction.

So, it gets the banks to be more realistic, and of course there's been a general shortfall by the banks' willingness.

Finally, to put these debt staples on in such high multiples, today I think most people think that if you can get a debt staple at five or six times, one of the prices for that would be an increased amount of equity.

So I think deal multiples that have been well above ten times for most people, and a lot of deals have been getting done at 15 times, certainly coming down for some, but the biggest deals that have occurred lately have been very high, EBITDA multiples, you won't find us out there at high EBITDA multiples.

There's a lot of stuff that's available.

I think we've had a lot of calls from people who weren't considering selling earlier in the year, who were thinking about IPOs who are reconsidering the difficulty with that, and asking about where we are in that.

As far as a new vertical, it's certainly possible that we would wind up with something that was a new thing, but it's more likely that we would try to stay around the security aspects of RF than around RF in general, medical opportunities in general, or the perfected technology arena.

There's plenty of world-class assets that are available there and that is likely our focus, but we're also thinking about other opportunities that could arise.

One last question if you'll indulge me.

About your team right now, could you rate your overall assessment of your team right now, how you feel about your team, will there be any changes going forward, will t here be additions, just talk about the overall management and the retention of talent.

How do you feel about that?

There isn't a better team in the world, and you can't produce 17% operating cash flows.

Our sales have back-to-back record quarters on every measurement that there is.

Drive-down working capital has marginal increases, and focus on drive and internal growth at rates far beyond what any other company is doing without having the best people in the world.

We're proud to have them here.

I'll leave it at that.

Next question is from Mike Schneider from Robert W.

Baird.

Good morning, guys.

First just back on Neptune for a minute.

You laid out the case very well about the tough comp at Neptune.

I'm curious, can you refresh us, what occurred a year ago, was that the first burst of orders for the integrated meter?

Really, I'm not sure I could say that.

She had big orders placed in the third quarter.

We had increasing demand.

People were starting to get worried about delivery.

We were almost on allocation in the third quarter last year.

Whenever you get that, people overreact.

We were getting stock orders for people, and not really wanting to fill them, telling them -- no one ever missed a shipment or didn't get what they needed, but we didn't want to do anything except make the order on those things.

So, it was really a bit of an artificial spike in the third quarter last year.

So we're settling into beyond that introduction and initial fill, we're just settling into a more normalized growth rate.

Absolutely.

I think that we're getting a lot more comfortable saying Neptune can grow routinely at 8% to 10% than we ever would have been before, and maybe it really be a 10% revenue growth rate for quite a long time.

Okay, and then on the fixed net worth side of the business, have you had any additional wins, via the Hexagram alliance?

Yes, there's nothing we can talk about now.

But anything meaningful that is actually in the numbers this quarter?

No.

There's a lot of bids out, I don't have a bid number in front of me, there are probably a number of bids out.

I don't have a bid number in front of me either.

Okay, and then, just the one organic growth number we didn't get, I think was in imaging, John, what were orders up organically?

They were up 12% in total in imaging, but what was the organic number?

I think it was very similar to what revenue was up, in the mid single digits, I'll have to get back to you on the exact number, I think it was 5% or so, maybe 5.5%.

And then in energy, you mentioned that Zetec had a good quarter with the steam generation orders.

I presume that's just given the power plant construction that's going on globally, but is

No really it's not the nuclear outage on steam generation, structural integrity work, which has been accumulating because of high utilization of facilities, and they can't wait forever to do the regulatory compliance work, so we've got an entirely new technology called [Ms.

80], which I can't explain on the phone, but we're actually going to cover that at your conference.

And the Ms.

80 is a wonderful technology for end users, and they're adopting that now at this rapid rate which will drive growth in

And then the CCC pipeline orders, can you describe where those are going today, if they're not going into Russia -- is it primarily the mid east and eastern Europe?

We look at geographic numbers, and I don't think you can say it's primarily unique to any one area.

They are not -- when you sell an order it's not like a $5 million order.

We might sell an order that's $500,000 or $1.5 million, but they're pretty widespread.

We can't really point to a large project, turnkey situation.

A few years we had a really big project in Kuwait, and we've had a couple of large projects in eastern Europe, but this year we haven't had any outside projects.

Okay, then, first the backlog of $532 million.

Do you know what that number is up organically because there's so many acquisitions it's difficult to sort through backlog.

It will be very similar to what the internal -- our order rate is.

There's not a dramatic difference there.

It's over double digits, I can tell you that.

I'm going to say it's at least 12%.

Okay, with that number, Brian, what's your -- as you use about 2008 now, you've been doing 12% to 14% organic growth this year, certainly very tough comps ahead, what is your view about organic growth in 2008, and what is reasonable for the [inaudible] model?

You'll just have to stay tuned.

We're just starting our strategic plan reviews with all the businesses, and we're going to commence those starting November 12, and that will take us through December 12, and I'd really hesitate to say what will happen there.

But I think irrespective the GDP we're going to continue to grow.

Thank you.

This will conclude today's question and answer session.

I will now turn the call over to Mr.

Humphrey for closing comments.

Thank you all for joining us today, and we look forward to talking you again in about 90 more days.

Ladies and gentlemen, this will conclude today's presentation.

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