Roper Technologies Inc (ROP) 2008 Q2 法說會逐字稿

The Roper second quarter 2008 financial results conference call will now begin.

Today's call is being recorded.

At this time I will turn the call over to Mr.

John Humphrey, Chief Financial Officer.

Mr.

Humphrey, please go ahead, sir.

Thank you, 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 Chief Executive Officer, and Paul Soni, Vice President and Controller.

Yesterday afternoon we issued a press release announcing our second 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 which is www.roperIND.com.

If you'll please turn to slide two.

You'll once again see our Safe Harbor Statement.

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

Additional information are included in our SEC filings.

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

Now if you'll 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'll take questions.

With that, Brian.

Thank you, John, and good morning, everyone.

If we move to what is labeled slide three, Roper second quarter 2008 overview.

We'll start with the fact this was a record financial performance quarter by virtually any measure.

And when we say a record we don't just mean a record second quarter, we immediate a historical record quarter, for any quarter in the history of the company.

Our orders were $606 million.

Our sales were $594 million, our net earnings were $76 million.

Our EBITDA performance was $151 million in the quarter, and our [depths] number is $0.80, and as many of you noted there is a little noise in that number, and can certainly be viewed as a much higher rate.

We had some specific challenges in the quarter.

Imaging, which we're going to talk about, we can't really excuse the performance from imaging in any way, but it can be put in context so it is more clearly understood.

We had the Middle East toll project comparison, which has a lag on what's happening in terms of internal growth in the company.

We'll explain that.

The reality is it is in a wonderful situation for from us this quarter forward.

Then third, we had a special charge which as you know is very unusual for us to have or to take, and we'll explain what happened around that.

Then we'll look at the financial results and some perspective about our results, some strategic things that occurred in the quarter, and then a review, a little more granular review of the four segments, and then an update on the guidance for Q3 and the rest of the year.

So if we turn to the next slide.

You'll see challenges in the quarter.

For us the organic growth comparison due to the 2007 Mid-East tolling project, where it was starting up in installation with quite a bit of revenue, not a lot of income, which is the way a project like that starts, made it an extremely difficult comparison from a pure organic revenue number, but not a difficult comparison, as you can see from our margin numbers.

That was a drag on organic growth in our quarter of 2%.

Then, in terms of imaging which had disappointing performance, and which was completely off plan, their sales and margin performance reduced our overall organic growth number by 2% as well.

What happened to them is that they had a number of OEM customers, who had slower than expected sales commitments from them, and they had done a specific series of product development projects for three different people, and those were to ship in the second quarter and third quarter, and in reality they seem to have been pushed back until later in the year.

That push-back resulted in them missing their cost structure, because they have the unrecovered product development costs, that they expected to be offsetting against the revenue in those businesses.

What's really amazing, and I know it is absolutely true on a nominal basis, you can see, Q2 was decelerating from Q1.

If you exclude the Mid-East project and you look at all of the rest of the business and Roper, with the exception of imaging, we had exactly the same 8% organic sales growth in the second quarter, that we had in the first quarter.

Imaging added one in Q1, so you saw seven.

If we neutralize imaging, you get eight in the first quarter for everything, and eight in the second quarter for everything, so we do not have an organic growth problem.

We have an imaging problem, and that is being aggressively addressed.

We spent last Friday with imaging.

We had a meeting again last night, with some of their control function people, and we will be meeting some of them again next week.

They have a series of plans in place, and we expect a lot of results out of imaging, in terms of cost issues.

And then thirdly, we have this special $3.5 million charge for Neptune.

Thank goodness Neptune has world class manufacturing, and incredibly fine quality control operation, and it was noted that we had 10-meters, which had what appeared to be some kind of problem, and they were able to take those ten, and really diagnosis what was going on, and we got a bad component supplied by normally good vendor.

We're talking to them about that, but because we have to find those particular items, and it is small number of meters, compared to the total number that we shipped, we're going to have some considerable labor costs around that, in terms of field repair.

And we felt obligated to book that expense, which is what we did at $3.5 million pre-tax, once you tax it and divide by the share count, you can see what that did in terms of earnings per share number.

More importantly, it masked the incredible operating margin and gross margin performance in the quarter, and even with that, it was outstanding, but that took 190 basis points off of our operating margin in industrial, and it took 60 points off of our enterprise number.

Now, despite those difficulties in the quarter, we had a record performance against virtually every measure.

If we go to the next slide, as we said, orders, the backlog, the sales, the earnings, the EBITDA, diluted earnings per share, all a record for any quarter in our history.

Our reported-- as reported, sales are up 12%.

That comes from acquisitions of about 6%.

Our internal growth if you exclude the Middle East project, but allow the negative drag on the imaging performance, was still up 8%, and on a nominally reported basis, you can see was 6% with two points of FX.

On the orders line, orders were up 14%, internal growth again at 8%, excluding the Middle East project, and we'll talk more about that as we go through the morning.

With the reported internal growth as you can see at five with two points of FX.

The gross margins in the quarter were up 200 basis points.

The Company feels particularly good about that, because as we've noticed everybody reporting, you see margin deterioration and very many companies with cost push inflation on material, and energy costs.

And instead of having lower gross margins, they're actually up 200 basis points in the quarter, and that includes the 60 bip special charge, that we had to take for the vendor issue.

Net earnings were up 24% to $76 million, and diluted earnings per share were at $0.80, up from $0.66 in the second quarter of '07.

Operating cash flow was particularly strong for a second quarter in Roper.

It was up to $96 million which represented about 16.2% of revenue, and given what we have here, and what we'll talk about on a segment by segment basis, we feel particularly good about the second half growth, and are confident we will report record operating cash flow for the full year.

Next slide.

We put the enterprise book-to-bill ratio slide in here, just so we can once again get you to maybe focus on the exceptionally unusual nature of this Middle Eastern project that we had, which we initially started to book in the fourth quarter of 2006.

As you can see if you go up and down a range of 3% to a negative 3%, our book-to-bill ratio comes in between 0.97 and 1.03, most of the time.

And here in the second quarter, our book-to-bill ratio for the company came in at 1.02%, sort of the high-end actually of those kind of variances, and the highest book-to-bill we've had since the first quarter of 2007.

We have very fast cycle times in the company.

Frequently we're on tight end of a two to four-month window of activity, so if somebody pushes something out or we pull something in, you can have variances in the quarter, but on balance, it is a pretty wonderful set of businesses that are delivering consistent growth for us.

Next slide.

Q2 strategic wins.

Really in addition to running the business, and a lot of good things about it, some very important things occurred.

When we go back to talking about the Middle East project, and we rereading some of the things we've said in the past about it, we described that really as missionary work, and it was.

It is certainly very far afield of the normal activity that we've been involved in historically at TransCore.

It is a long way from Florida, and Texas, and Washington.

What was done there was nothing short of spectacular.

And while initially you put a lot of dollars into the design, and the installation, and the equipment pass through, once you get to our pure hardware and our tags, then you get what the whole process was about.

So it did have a drag on organic growth in the quarter for 2%, but that's not negative income or negative cash, and it forms a baseline for continuous secular growth in that project, and other projects that we think will impact us in the future, because we now have a turnkey case study, and we have had a very large number of visitors to look at this project, to see how they could implement a similar thing in their various countries.

We move to the second point, Neptune was selected by Toronto, Canada, to enter into contract discussions to supply the city, and area of Toronto, with a water automated meter reading project.

The potential for that, based on the city council, and the Toronto Globe mail report is a little over $190 million over a multi-year period, and contract discussions with the city are in place, assuming that everything goes well, we could start to see orders for that perhaps as early as the end of this year, with shipments beginning in the first quarter.

At this time we can't book any of that order flow, until we finalize the contract and have it, but the selection has been made that it will be Neptune and our business.

The third area similar kind of break through is the Florida turnpike, has decided to move to our eGo plus sticker tag technology.

This is similar to what happened in Texas a year ago.

We've got an order in house for 1.5 million tags, a significant portion of that will be shipping now.

And we also had a phenomenal second quarter out of CBORD which is a big success story for us.

It is immediately helped, as we knew it would.

You can see that in terms of the gross margins and the RF segment.

You can see it in terms of the operating margins in the RF segment, and the story around CBORD we think will just continue to get better over the next couple of years.

We've seen a number of adjacencies.

We have a variety of projects under way and frankly see some acquisitions in this space that are going to expand CBORD's reach.

Lastly on the significant wins, is a recapitalization of the debt structure of Roper.

We had our debt basically expiring in 2009.

We have a convertible security that was due in January, and we had the rest of the debt structure due later.

We were able to move from a secured credit facility to an unsecured credit facility, and that resulted in Moody's upgrading the company to investment grade status, and we'll talk about the significance of that a little later this morning.

All of those five things really helped position the company for long-term consistent growth.

Next slide.

We'll begin to talk about the second quarter results, in terms of a nominal straight forward numerical look.

The income statement, as you can see net sales were up 12%.

We exclude the Middle East project they were up 8% internally.

The gross profit up from 49.4 to 51.4 would have been of course 52 without the special charge.

Income from ops up 17%.

That of course included the $3.5 million charge, so if you think about leverage and ratios, that 19 if you add 3.5 to it, your 22.5 on a revenue variance up there about 63, so it is an outstanding capture of the incremental margin.

Interests costs actually helped us in the quarter, because we had a terrific amount of cash with $96 million coming in, and a transaction that we're going to talk about later occurred just at the end of the quarter one, just in the past week, so we had a bit more cash on hand.

That saved us about $3 million in interest costs compared to the prior year, and that $3 million largely offset the special charge for $3.5 million, so that was beneficial to us.

The net earnings, as you can see, are up 24%, sales up 12%, net earnings up 24%, and the earnings per share at 80, include the $3.5 million charge, and they also include another penny cost for the increased shares associated with the convertible security product.

Next slide.

Here we look at kind of our trend line information, and how that continues to move forward.

Our trailing twelve-month revenue was $1.566 billion, at the end of the second quarter in 2006.

Last year that trailing twelve-month revenue had reached $1.902 billion, and this year our trailing twelve months revenue has reached $2.230 billion.

Our EBITDA has gone up from $378 million just two years ago, to $473 million last year, and up another $95 million this year to $568 million.

Beneath those bars are the trailing twelve months EBITDA, you will see our EBITDA margins on the twelve-month period ending Q2 2006 24.1%, and this year they're up to 25.5%, so we continue to get the consistent expansion in our margins that you should have become used to.

Next slide, here if we look at the cash generation, it was particularly strong for Q2.

Last year our operating cash flows as a function of revenue was 14.8% in the quarter.

This year it is up 130 basis points to 16.1% in the quarter.

Our networking capital has gone down once again in the second quarter: we picked up a 40 basis points improvement as we look at net working capital as a function of revenue.

In the second quarter it declined to 10.4% compared to the prior year, and our first half operating cash flow has already reached $167 million, up 23% from last year.

Our financial capacity continues to grow, and this slide probably doesn't depict just how powerful our cash machine has become.

You can see on June 30 this year we had $120 million of cash-- or $146 million, I am sorry.

The net debt was right exactly $1 billion, so net debt is up $70 million from a year ago.

However, we've invested $406 million in the last twelve months in acquisitions, which are driving improved EBITDA performance, and only increased $70 million in debt, so that our metrics are actually better than they were before the $406 million investment of the past twelve months.

Our net debt to debt cap has dropped from 36.4 to 33.8 at the end of the second quarter.

EBITDA is up from 473 to 568.

Our net debt to EBITDA as a ratio, has dropped from 1.97 to 1.76, and our EBITDA to interest coverage ratio has gone from 9.55 to nearly twelve times.

That gives us a lot of capacity to take advantage of what's a very target rich environment in the acquisition arena.

Next slide.

Here is commentary around Moody's, that we think we certainly appreciate.

You can see that they made an upgrade to BAA3 status as investment grade.

Each one of these categories you can see on the website about how they're rated.

You'll see AA ratings and some A ratings on Roper.

The indicative rating for Roper would be BAA1, which is two notches above the current rating we have, and implies the strength and the direction we've driven the company.

Here you can see their own quote, the upgrade considered the significant improvement in Roper scale and diversity characteristics achieved over a period of time, through a number of well-executed acquisitions, as well as the company's demonstrated adherence to a disciplined financial policy, including modest usage of leverage, and maintenance of adequate liquidity, despite its acquisitive growth strategy.

We thank Moody's for the recognition, and all of our operating people who made those numerical numbers possible.

Next slide.

New acquisitions since we last talked with you.

We've had two important acquisitions.

One is pure bolt-on, where we're going to take a UK company called [Chouen].

We're going to integrate that into our AMOT business.

It is another shut-off valve manufacturer for the marine industry, and engine industry, can use for safety protection.

And then we made a more significant acquisition of somebody that's in our TransCore freight matching space.

This is a really a leader in terms of the number of owner operators that subscribe to that service.

They actually have about 30,000 people subscribing to their service.

It is a low cost provider, with a lot of entry level services.

By acquiring this business we get an interesting in-flow of people that become first time participants in the process.

They can stay with the company that we've acquired.

We also have an opportunity to upgrade them into our broader band of services.

There are some synergies associated with this, and we're going to do the integration of this over months, not days.

It is a very, very helpful high margin business, very light asset business, not a lot of sales in here because the margins are really high, and variable costs of winning a customer is very low, but still a terrific business.

We indicated to you that $97 million investment ought to produce more than $11 million of EBITDA in 2009, and the pipeline we have for continuing acquisitions, we can assure you is quite full.

Next slide.

Here if we look at the segment performance of the four segments, we want to focus for just a minute about the relative importance of these businesses, because our industrial segment which includes Neptune represents 31% of our total revenue.

You can see their EBITDA performance is 29%.

Our radio frequency business has caught up actually, to the industrial businesses, and is now neck and neck with them in a race at 29%, and that RF business is now up at 51% gross margin, so let's hear it for CBORD.

And then you move over and you see Energy.

Energy is at 28% EBITDA.

Those three businesses represent 85% of our company.

Then we have our imaging business, which had such disappointing performance in the second quarter, we want to remind ourselves it is only 15% of the enterprise, and inside of that, more than a fourth is our medical business, which we could move into any one of these three graphs on the left-hand side.

So it really is the camera businesses that have frankly spent a lot of money in R&D to deliver products that people aren't yet ready to buy, and we're going to have to sort through that here in this quarter.

We can take a look then at the total enterprise gross margin 51%, EBITDA margins at 25.

We put all of our unallocated corporate costs into that category, and we say again that while imaging can't be excused, it can be put into context.

Next slide.

On the industrial technology front, again 31% of our revenue, you'll see sales were up 14%, orders were up 2%, and operating profit margins were up 90 basis points over the prior period to 26%.

That would have been a higher number if we hadn't had the charge.

On an internal basis it gets a little bit tricky.

The internal sales number of course, because there are no acquisitions is up 14%.

The internal order number was only up 2%.

The reason it is only up 2% is not because we had light orders but because in the second quarter last year, we booked some very large jobs.

Raleigh, North Carolina, and several other places for Neptune, so we had very-- basically flat order situation or less there, but very strong order performance for all the rest of the business.

On an internal growth basis, virtually every one of our industrial businesses, save one, was up more than 10%, and that story line is still very strong and in fine shape.

In this third quarter we would expect the internal growth will return to a more normalized number.

The results we've said include this $3.5 million special charge.

The orders growth was impacted in the quarter, had everything gotten finished with somebody like Toronto, or one of the other project pipelines, you wouldn't have seen this kind of temporary lag in internal orders.

Very strong operating performance across the board.

We just finished our quarterly review with people.

Everybody in the room save this one guy, felt they would do better in the second half than the first half, and wow, when you look at leverage $41 million of operating profit a year ago, $48 million this year, booking $3.5 million would have been $51.5 million, $10.5 million of new operating profit, on what looks to me like $22 million of sales.

That's a ratio most people could live with, about 48%.

Next slide.

Here we're looking at radio frequency business.

It is 30% of Roper sales as we speak, certainly CBORD's addition to this has helped the importance of our RF in our total portfolio.

Sales were up 17%.

Orders were up 32%.

Our operating profit margins went up 330 basis points to 23.8% compared to a year ago.

Now the internal numbers look a little different.

The internal numbers are down 1%, but again this is all about the Middle Eastern project, and of course the fact that CBORD grew dramatically in the quarter but goes to acquisition revenue.

It doesn't go to our baseline.

If it were in our baseline, you would have seen very strong double-digit order growth out of that business.

Orders were up 6%.

The transition that the transfer guys have been able to make in the Middle East is really a wonderful thing for them.

If you exclude that projects, kind of pig through the python situation, you'd find internal sales in the quarter were not down 1%, but were up 5%, and that internal orders were actually up 17% in the quarter.

CBORD was off to a terrific start, they had an all time record quarter, they got prepaid for a variety of things, their subscription revenue was up well above 15%.

Each one of the businesses that we have in here has a very solid program in place to continue to improve margins, and looking particularly in the traffic design area, and John has done great work on getting projects and service margins up, which is helping us.

And of course getting out of the installation phase in the Middle East helps us, and we're positioned very well, we think for a strong third and fourth quarter in this segment.

Next slide.

Here we look at Energy Systems and Controls.

It is now 24% of Roper's revenue.

Its sales were up 15%.

The orders were up 13%.

Operating margins improved 90 basis points to 24.6%.

Most of this is internal, as you can see internal sales were up 11%, internal orders were up 9%.

We continue to have strong demand for the control systems that we produce, the sensors that we provide, and the other protective technologies that we're used out, in oil and gas markets in marine applications.

The acquisition that we made in there, these bolt-ons over the last two years, are all performing well.

The operating leverage we continue to get, because as we bring out new products, they tend to have better margins.

And this bolt-on acquisition that we mentioned in the UK, the [Chouen] guys, are going to give us a broader family of products like Roda Deaco did for Western Canada, for Europe, and Asia, so we think that will really improve our suite of products to offer.

Next slide.

On scientific and industrial imaging, last, and in this case least, I suppose, it certainly was an unacceptable quarter.

Their sales were down 3%.

Orders were up 3%.

Their operating margins declined 210 basis points compared to the prior year.

Internal sales weren't really any better.

You can see they were down one.

Orders were up five, so they're encouraged by the orders, but expected orders to be up substantially more than that.

They've got a lot of excuses.

We said it was like watching the British Open the other day.

Lots of headwinds, lots of terrible execution, but wonderful reasons why, and you could all understand them.

And as we went through all of this with them, we were empathetic to the reasons that they articulated, but you still have to the make the shots, and they simply didn't.

The OEMs have pushed out orders.

That's really okay, but at Roper we don't really accept those things, so we'll have to take action in that area.

The margin performance was just a failed process around their budgeting on product development.

We had to listen to people humiliatingly say, I guess maybe, gee whiz, wow.

The controller that's in that core business is no longer with the company, and we've got an aggressive overview of what's going on there.

We have a lot of current actions in place, and talk more about that in the third quarter.

Next slide.

Here we look at our guidance.

The guidance for the rest of the year, and this requires a little bit of explanation as well, I think.

Last year we earned 268.

Our guidance going into yesterday was 313 to 321.

Now we've raised the full year guidance to 316 to 322, but that includes eating the $0.02 or $0.03 or more of this special charge, so frankly the guidance needs to be 319 to 325, in order for us to produce 316 to 322.

So we intend to produce between the 316 to 322 based on us eating that special charge, so we raised the guidance perhaps more than it looks like in our press release.

In the third quarter we expect to earn between $0.81 and $0.83.

We have established operating cash flow guidance for the year at $390 million, or to exceed $390 million.

Then you can see our EBITDA, we've increased again, to suggest that we will produce more than $610 million of EBITDA in 2008, and net earnings will exceed $299 million, based on the low end of the guidance.

Next slide.

Here is the conference call summary.

We had, as we've indicated, record performance across virtually every area.

The organic growth trends are actually better than they can appear.

I am sure there was a way for to us articulate that better in our press release, but we spent a lot of time on it, with the best we could do.

It is the fist time we put a table like that in there.

We probably need to introduce asterisks for you, so that you can better understand it.

We're positioned for second half growth and record operating cash flow.

The first half acquisitions that we've made are all contributing immediately.

They are immediately crash accretive.

No dilution in any of them.

The new unsecured credit facility means we can continue to move forward with our deal structure, and not be faced with a risk of what kind of debt we would have going into 2209.

The upgrade at Moody's means long term borrowing costs will be less than they were if we were simply a split rated enterprise.

And more importantly right now, it means we have access to the debt markets to do whatever we want to do inside our firm commitment to remain investment grade going forward.

The Florida turnpike enterprise upgrade to eGo sticker technology is a major win for us, and we think it will prove to be so for the state of Florida.

The Toronto selection of Neptune to enter into contract discussions, to put in place the process to fulfill this order for over $190 million is of course an enormous win, maybe the biggest water project that's ever happened in North America.

CBORD off to a great start, record quarter.

You can see why we love the business.

All you have to look it look at the margin variances that we're already producing in RF.

Our backlog reached a record of $602 million, so that felt good to us, and the acquisition pipeline, not only is attractive, but it is really exciting, and we think our guidance reflects that.

So we're positioned for more records throughout the year.

And with that we would open it up for questions.

Thank you sir.

We will now go to our question-and-answer session portion of the call.

(OPERATOR INSTRUCTIONS).

We'll pause for just a moment to assemble the question roster.

For our first question we go to Jeff Sprague with Citi.

Thank you, good morning everyone.

Good morning, Jeff.

Brian, I wonder if you can give us a little bit of a back drop of how Toronto evolved, what you think drove the decision in your favor, and it is the second or third quarter in a row now where we heard about Mexico, or Africa, and now it is Toronto.

Maybe what else is in the forward pipeline of things you're working on, even if you can't name names, so to speak.

Toronto is such a large thing thing.

It is an enormous project.

Just think about-- recently New York selected a fixed network system for high density application, and doesn't involve us because it is not what we do, and everybody thinks that's wonderful.

It is $30 million or something.

This is $190 million.

Get out of here.

It is an enormous job.

We're going to be leading all the elements of the job using a variety of different products that we have, and some things we'll be acquiring from others, so we're very excited about that.

It confirms again to people that are considering big projects, that we're the most sophisticated and most customer friendly group to deal with those.

And there are other products you could buy which are less expensive, but on balance people want accuracy and want quality, and they want friendly service, and all of those things are important.

This is a very long-term project that Dave Stoddard has been working on in Canada for Neptune, and they've put a lot of time and energy into this.

In Canada and unlike the US we actually install the meter frequently for an additional fee, and I think our track record in working in frozen tundra, and having meters that don't leak, and digital readouts that work in a very tough environmental area was important.

Now having said that, it is a public bid process.

Everybody knows what you bid.

They know what our average price for the register is.

They know what the meter was, and we were certainly low, or the highest value producer of anybody, and all the stuff is really public.

There is a city of Toronto thing out there, we were reading through again last night to make sure we weren't misquoting anything.

But there is a lot of negotiations still going on.

The city has to decide how fast it will roll this out, and what have you.

As far as other projects we continue to find a growing number of people who are deeply concerned about the accuracy of the reading of information.

And this tends to be an opportunity that until last year we probably were missing internationally, so we have quite a few quotes out, in places you just wouldn't think about, basically the stand countries where they're realizing that, hey, I don't really know for sure what people are consuming, and it is about time I found out, because their consumption is something I want to discourage, and I don't want third party people, not telling me the truth about consumption.

So we really beefed up that activity, and I think we know better how to address those markets, so I think that's good.

Now, having said that, I do think that Neptune is going to have a little bit of lumpiness.

This quarter, certainly people were very worried about us having decelerating internal growth, because we had out performance in the second quarter a year ago, and wouldn't replace the Raleigh project in the second quarter.

But, wow, if Toronto was something you could have booked, then people would have blown through it say we had accelerating performance.

Over a continuous twelve month measure period we expect to move ahead.

Great.

And then I guess on a similar vane, different business, as you indicated now that you have a firm marker in the ground, turn-key in the Middle East, people kicking the tires on the idea.

Could we, should we expect some new development there in the next whatever you want to call it, six months, twelve months, on the project side in some other area?

I will say this.

We've had a tremendous of amount of activity, because people, one, they like to go to the place and check it out.

There are several people who have been there more than once.

We are fielding a lot of questions about how that works.

There is some considerable international activity in and around that area, but we don't have any firm commitments from anybody about them rolling out something similar to what we've done here.

But we are effectively providing people with information about the design and cost structures and time for install and what have you.

So I think we would be surprised if anything happened in the next six months, but I wouldn't rule it out.

And I think it is more likely that neighboring countries, or people who are visiting there and see the opportunity for it, would think about deploying it, and I think the good news is unlike the US, when an international player decides to deploy, they actually decide to deploy and they do it.

You don't have a whole lot of issues, because there tends to be less political push-back.

Here you always have these kind of political things that draw things out for very long period of time, so clearly if we didn't have the install base in the Middle East, we wouldn't have an opportunity to do another $100 million project.

But because we've got it and it is working flawlessly, it is giving us a lot of new opportunities.

When we'll take advantage of those, I have no idea.

Great.

Thanks a lot.

We go next to Mike Schneider, with Robert Baird.

Good morning, guys.

Good morning, Mike.

Sticking with Toronto for a second, is it a drive by, or is it a fixed network project, Brian?

There are several different aspects.

We're going to be deploying what used to be the hexagram fixed network for a portion of this, that we will get from them, and install ourselves with our radios and registers.

So it is primarily a fixed network, maybe with some drive by on the periphery?

Right.

And then do you anticipate supplying the reasonable underlying meters as well, I assume?

Oh, yes, absolutely.

Then the margin impact, when you had large projects like this in the past, the Middle East, for example, in the tolling space, they've generally been lower margin, and we've talked about that several quarters as it is run through the P&L.

Is that going to be the case with Toronto in the industrial tech segment?

Nothing like the situation that you have with an install in traffic.

It won't-- first of all, nothing Neptune does is low margin.

It won't be much of a drag, but there will be some stuff that's passed through, and to the degree we have the pass through, and we'll give everybody plenty of warning around that.

It will be in our guidance as things roll out.

That won't be-- you can't take the 190 and assume a full normalized industrial EBITDA number on every aspect of it.

Because there will be pass through on the hex--?

Some, but you make money on everything.

It is not like this kind of 6% to 8% margin work, 10% margin work that you're doing.

There is some install work because Dave does a lot of install in Canada, and that's okay, doesn't type any assets, but it will still be quite substantial.

Okay.

And switching to tolling, the Florida order of 1.5 million tags, at least I have learned that the first year projection of tag rollouts, I believe was only 600,000, and I believe the early adoption just in the first three weeks of July was very strong.

Is this a multi-year order, or do they expect to actually exceed the initial estimate of 600 by more than two?

I wouldn't speak for them, but it is an immediate order.

We're making product and shipping product.

It is not a multi-year order.

This is just the initial order for the product.

Okay.

CBORD.

Final question.

What type of growth if you look on their organic basis, are they growing at this point?

Mid-teens.

Okay.

Thank you and congratulations, guys.

Okay.

We go next to Wendy Caplan with Wachovia.

Hello.

Good morning.

Hello, good morning.

Brian, the imaging problems that you referenced, they're really not-- it is not really new news.

This is a business that's been problematic for awhile.

Can you sort of walk through for us, what your-- first break out the camera business for us, so we know what we're dealing with today, and also your thoughts in terms of strategic actions that we might see regarding this camera business?

Well, I think that you will see some strategic actions.

We have brought back a terrific person who some of you know, Don Templeman who used to be involved in Gatan, and was involved in Princeton Instruments and used to run Cornell.

So he's had a lot of experience, and was our Investor Relations person for awhile.

And Don has done a terrific in trying to rescue the Princeton camera business down there, and was instrumental in us being able to divest the red light motion business.

We had Don join us on Friday for a walk through, of what Ben calls the micro imaging analyses group, which is Gatan, Photometrics and Q.

Photometrics has in past years, used to be coupled up with Princeton, as Roper Scientific, and Gatan felt that they could drive more out of Photometrics by integrating it more with Gatan, and they achieved that.

They've driven more of the profit out of Photometrics, driven more the organic growth out of it, and they've managed to do everything that one worries about when you let people consolidate.

That is a failed-- that was a failed concept, and we worked with them all day Friday.

We brought other people in.

We brought people in who previously had responsibility for the business, and we are going to look strategically at what we want to do about this business, because it is just flat out not acceptable.

It is about half of the imaging segment, so if you-- don't have that number in front of me but --

Roughly 90 million in the quarter.

The cameras might have been 50 or something like that.

Okay.

That's very helpful.

Thank you.

The acquisitions that you mentioned, I don't think I heard you give us annualized revenue numbers, kind of if you could just--

I will tell you, it is a sensitive matter for us.

One of them is really a software business provider, and it is going to be married up with an existing situation, so it does tend to have extreme margins, and doesn't have as much revenue because its contribution margins are extreme.

The other one, the [Chouen] business, when we put the two together we're talking about something that's going to have very high, maybe twice Roper's EBITDA margins, and it is maybe going to generate $25 million to $30 million, $35 million of revenue over the next 15 months.

Okay.

Thanks very much.

Lots of cash, lots of synergies.

Okay.

Thank you.

You're welcome.

We go next to Alex Blanton, with Ingalls & Snyder.

Good morning.

Good morning, Alex.

Just a clarification.

You did $0.83 without that charge if you add the tax affected amount to the actual net income, and compute it that way, it was slightly below that, but then you rounded up to $0.83.

Was that in your guidance?

The charge?

You mean the forward guidance?

The guidance you gave us in in the second quarter--

The 3.16 to 3.22 includes eating the charge of that $0.03.

I realize that.

The guidance you gave us at the end of the first quarter was $0.77 to $0.79 for the quarter.

We didn't know about this.

We only learned about this in literally the last week of June, and I just can't tell you what an an incredibly great job Neptune did to take ten meters, and recognize that it is actually a component problem, and how it is going to have to be resolved.

That's great, so you did $0.83 versus $0.77 and $0.79 anticipated.

Right?

Am I right?

I can't do that math for you.

But you beat-- you top in by $0.04 excluding the charge.

That's what I am getting at.

Okay.

I mean, anything wrong with that way of thinking?

Well, listen, we're always instructed that we could tell you what the charge was, and we could tell you what the shares are, but we cannot do a calculation about that number.

So we're conservative about that and that's why we didn't in our press release, say exactly what that was.

I don't understand these nitty gritty things, but--

we don't necessarily understand it, but we comply with them.

Okay.

Now, S&P on the ratings situation, S&P raised their rating too, but you didn't comment on that.

Is that because they didn't quite get--

John, why don't you explain that.

Sure.

What S&P did is, we had an existing shelf out there registered awhile back, that at the time we were a lower rated company, when we went to an unsecured facility for our credit facility.

That required S&P to take a fresh look at the shelf, so they came out with their upgrade for that shelf.

We remain at BBB minus, with us a stable outlook, with Moody's as we have been for about the last nine months.

So what is S&P's rating?

S&P is at a BBB minus with us a stable outlook, and Moody's is now at a BAA3--

The S&P is slightly below the Moody's?

No, those ary equivalent ratings.

The BBB minus is the same as--

They're both investment grade, then?

Absolutely, yes, they're both investment grade.

I am not a bond person, so just wanted to clarify that.

They're both the first step into investment grading.

Got it..

Moody's went up.

Yes.

You have announced the third quarter debt extinguish charge, I think it is $0.02.

That's not in your guidance.

It is not in our guidance.

We view that as a non-cash administrative matter, and whenever we've had debt extinguishment in the past, we've excluded it.

Do you know if the analysts will include it or not, because otherwise it gets confusing.

I have no idea what they're going to do.

Our history has been, when pretty much anybody I have ever seen on I debt extinguishment non-cash charge it is not included in the-- it is just an extraordinary item.

Let's hope not otherwise, we're going to have noncomparable numbers out there.

Finally, the Middle East project.

You indicated that there was a $0.04-- 4% delta between including it and not including it in the sales, which works out to be about $20 million for the quarter.

That was actually a 2% delta which would be half of the number you just mentioned.

I thought you said up 12% versus up 8%.

On a reported basis our total sales were up 12%, but we also have acquisition benefit, so on an internal basis sales were up 6%.

If you adjust for the impact of the Middle East polling project, internal sales were up 8%.

The impact on the tolling company was 2 points.

2%?

2% on the growth side.

That's 10 million for the quarter.

About a ten million dollars delta year-over-year.

If I annualize that it's $40 million, but i don't know if I can annualized it, because I don't know if it was there for the entire quarter or just first up.

You can't really annualize that number.

It was flat year-over-year in the first quarter, and then it will be an impact in the third quarter as well.

Additional impact?

A similar impact in the third quarter and moving into the fourth.

It is not a full quarter impact in the fourth.

Okay.

Thank you.

You are welcome.

We go next to Matt Summerville with KeyBanc.

Two questions.

First, back to imaging.

Brian, what kind of average duration are you seeing in terms of these delays, and right now would you say you have a little bit better visibility into the business?

And then just can you talk about how the performance of a medical pieces within scientific industrial imaging segment have been performing, and what the outlook is there?

Yes Matt, let's just-- medical first.

Medical continues to do well.

They have a big trade show coming up here.

They're going to be launching a bunch of interesting oncology support materials.

The business is still growing nicely, has above Roper EBITDA performance, low asset base.

They did have some difficulty in the quarter because we have two facilities, one in Calona and one in Orange City, Iowa.

The flood did affect them.

Didn't do any damage to the facility, but it affected people who had to deal with issues around Cedar Rapids and what have you.

That will immediately right itself here in the third quarter.

We weren't going to use the Iowa flood for an excuse for any of the margin deterioration we had.

We still very much like that business.

It is doing well internationally.

We still think it ought to be a double-digit grower.

We're talking about something in the neighborhood of $100 million of revenue in that business.

So the reason we're so disappointed with imaging is when you have one of the most attractive business elements inside your segment, and you still have deteriorating performance, it makes it frankly much more unacceptable.

As far as the visibility, what's really happened to some very well intended people, is they took a couple of their OEMs at their word, and the OEMs got involved in situations that they didn't foresee.

One of our customers, a publicly trading company laid off 60 people in the second quarter, and it is very well known what kind of problems they're going through.

One of the competitors I see that one of them has, I just got a copy out of the UK, that somebody might be buying them, so I think there is a lot of activity in the space.

I think that the margins would not have deteriorated if they hasn't spent as much money ahead as they did, and Gatan moved out of its facility to get completely integrated another facility in Pleasanton.

That drove up their costs.

They did an unacceptable job in budgeting, and I think John and I felt that commitments made to us weren't lived up to, and that's why we took people actions there recently.

I think as far as visibility, we're not worried about imaging having further deterioration.

I think it will be flat in the next quarter.

Hopefully it starts to get a little bit better, but it is a short term drag on our performance, and as somebody else said we're going to take a hard look at what we're going to do with that business.

We're either going to reconsolidate that business, or think about somebody else doing it.

The other question is just around the Energy Systems and Controls segment.

If I break the segment into buckets, you have Instruments, Control Systems, protected technologies, and then the Zetec power business.

Can you talk about fundamentally what you're seeing a across those four buckets?

Frankly they're all doing really well.

The protective technology business is in terms of variable contributions on revenue is leading the pack.

The sensor business is doing really well, up quite a bit in the quarter.

So those two were at the high-end of favorable results, and then Zetec and Compression Controls were in short, similarly up.

Zetec is a little smaller business, than compression control.

So they actually outperformed a bit more.

The business that lagged in the quarter, (inaudible) still up was our petroleum analyzer business, which had soft North American activity compared to what we would expect, and they're projecting a really, really strong second half of the year.

So we see favorable comps in energy and Q3 and Q4.

The comment you made on M&A pipeline being relatively full, the transactions you're looking at, Brian, are they more along the lines of the smaller deals you closed on here very recently, or are there things in the pipeline of historical size, similar to the Neptunes and TransCores?

Well, I would say the short answer to that is yes, but we look at over $5 billion a year in transactions.

So far this year we've actually invested some real money.

We don't think we're done this year, and some of those could be smaller, and some could be larger.

I think what's really a little different, when we bought Neptune, we really-- that was a very big deal, because we had to spend over four times our trailing EBITDA to acquire Neptune.

We issues equity, and we issued a convertable security.

When we acquired TransCore core we still spend over 3.5 times our trailing EBITDA.

At that time we had to get the company debt rated.

We had to establish all the relationships.

We didn't have a thing here, prior to 2003.

We put in place I think a world class corporate team, and now it is really a sophisticated and straight forward standard company.

It is an investment grade company, and that company is going to remain investment grade.

To do that, it is not going to get a balance sheet debt to EBITDA situation, like it had, that had to invest in to become a great company.

So I think you're going to see us running at this I understand kind of two and a half times debt to EBITDA, and you can put a pencil to that, and you can see what kind of capacity we have going forward.

We have a lot of opportunity, but we're not going to having taken four years to get this company into the status that it is, squander that by making a big deal that doesn't fit our investment grade metrics.

Now, we got a lot of opportunity for that, and we also have some tangible assets.

We may have been talking about one this morning, and if we cashed out some of our assets that we're less happy with, we would have more powder to do a larger transaction, so I think I will just stop there.

Thanks a lot, Brian.

You're welcome.

We go next to Deane Dray with Goldman Sachs.

Thank you.

Good morning.

Couple points first, just to clarify there was a question earlier about whether debt extinguishment is treated as one time, and typically it is treated as one time, so you're right on that Brian.

And John, we appreciate that inclusion of core revenue growth in the release, so in fact we had to double check to make sure that really was a Roper release we were looking at.

That was a new item for us, I appreciate it.

Always trying to be transparent.

Terrific.

If we could, I would love to get more detail around this manufacturing issue at Neptune.

Just from your description is begs a lot of questions here, to the extent you can, just take us through what is this component?

Why is it not covered under warranty?

Is there going to be litigation, a big recall, or is this very contained at this stage?

Start there.

It is very contained at the stage.

It won't be a big recall.

Because we are-- the provider of this is a very large company, with very deep pockets, and very deep personal reserves.

It is quite clear to us that they are completely responsible for this, and it is exceptionally fortunate for them, and everybody involved that we were able to catch this, because it is a component that would go into a significant number of our automatic meter reading devices.

And the situation, it is a very inexpensive component, and so we do some other business with this company which gets to be larger in detail, but the problem is already known.

It is already resolved, so it isn't getting worse as we speak, so it is a finite thing, involving a relatively small number of in-stock and installed devices.

The bad news is that you can't just pluck out the component.

These things aren't that expensive in total, so we've got quite a bit of labor, and we talked about it here.

It is actually, because we learned about it in the last week in June, and people worked continuously through the Fourth of July to make sure we understood exactly what it was and what the remedies were, we felt obligate to book this, but I think the amount of money we booked is clearly adequate.

Our responsibility for this, we think gets transferred ultimately to the provider.

They need to fess up, and handle this as a warranty item for themselves, in addition to a whole lot of other costs that we're providing, so it is not a product recall.

It is something that can be fixed in the field, but unfortunately you don't walk into a plant and do it.

You have to go into the guy's yard, open up the meter pit, make a change, and it is labor will be expensive, but parts are negligent.

And just to clarify if you could, is this an electrical component?

It is an electrical component.

We would like to tell you what it was.

We initially had that, decided we shouldn't do it, because it wouldn't be that hard to figure out who the person was, the vendors ask to us work with them, so we're going to work with them, but like they should do the right thing.

It is your sense the charge as it stands today will adequately cover--

Absolutely.

We've been through that.

We took [T.W.] through that, when we booked it.

We're very comfortable that that charge reflects the right methodology.

It is just your sense that this is should be treated as a one-time item?

Why is it not part of your manufacturing challenges, and on a regular basis?

The way we treat it is a reduction in cost of goods sold.

We'll probably put it through the warranty reserve, but we don't-- we don't think-- in fact, it validates kind of our reserved methodology because we caught it so early, just a weird thing, it is going to cost all this labor.

I think each person has-- we're not asking people.

We believe it is a one-time item, but we didn't say we earned $0.83.

We said we earned $0.80, so if people want to give us credit for that as a one-time item, we thank them very much for that, but our guidance assumes people don't give us credit for that.

I understand.

Thank you.

You're welcome.

Rufus, we have time for one more question.

That question comes from Shannon O'Callaghan, with Lehman Brothers.

Good morning, guys.

Good morning.

Just a couple things.

One more follow-up on imaging.

Just in terms of the actions you're taking, and how you're thinking about it in the future, sounded like a lot of what was deemed unacceptable was kind of controller ship issues, you've made some of these people changes in the business.

What else is there, there that makes you question whether you really want to this be a Roper business?

Well, it has been a frustrating business for us for several years because we're getting up to the point where like half of our revenue is recurring revenue, or subscription services and things like that, and the trouble with the camera businesses is it is always a new sale.

It is always an application design.

It is always something the guy can buy a little bit later.

Frequently it is government funded.

You're looking for the Japanese government to spend money on research, or you're looking for the US government.

We get worn out with the excuses that we get from the camera people.

They actually are always correct, okay, but investors don't reward us because we can articulate what went wrong.

They reward us for anticipating what can go wrong, and taking action in advance.

We've been too patient, too long with the camera businesses, and actually it is a good thing what what happened this quarter, because we are no longer going to tolerate the kind of stuff that we have to live with.

It is not going to happen in 2009 or ever again.

I think that everybody involved in those processes knows and understands exactly what we're saying.

Great.

That helps.

And a couple of things on the margins.

You mentioned these industrial margins ex the charge.

Those are pretty wild, with kind of contribution margins you put up there, even though industrial has been tracking with very strong contribution margins as it is, that's looks like a bit of an outlier.

Was there anything unusual there in the quarter?

We had phenomenal shipments out of Neptune, an all time record.

So you got really good-- I hate to use the term absorption.

Really terrific, but everybody is doing well.

We had one small business in there that is struggling.

Our pump businesses are doing phenomenally well.

Right at the moment this is the time you would say, wow, I really love our industrial business, what do I have to talk about all of this other stuff for, because we would be up double-digits organically.

We would have everything in the world looks wonderful, so everybody is doing great.

We came off a two-day quarterly review session with them last Wednesday or Thursday and in Atlanta, and when we walked out, I was saying to the guys this feels more like a strategic review, than a quarterly review.

I can't explain about anything.

We did find things to complain, but they are really just knocking the ball out of the ballpark.

Okay.

Great.

I'll leave it at that.

Thanks, guys.

Thanks.

That will end our question and answer session for the call.

We now return to John Humphrey for any closing remarks.

Okay.

I guess my closing remarks are to thank everyone for joining us this morning, and as always we look forward to talking to you again in three months.

Ladies and gentlemen, this does conclude the Roper second quarter 2008 financial results conference call.

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