Roper Technologies Inc (ROP) 2008 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Roper Industries third quarter earnings results conference call.

As a reminder, this call is being recorded.

At this time, I would like to turn the call over to John Humphrey, Chief Financial Officer.

Please go ahead, sir.

Thank you, Lea, and thank you, all, for joining us this morning for Roper Industries' third quarter 2008 conference call.

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 third quarter results.

It is available on our website, www.roperind.com The press release also includes telephonic replay information for today's call.

We've prepared slides to accompany the call, which are available through the webcast and also on our website, so you can download those at your leisure.

If you will turn to slide two, you will once again see our Safe Harbor Statement.

We will be making forward-looking statements today.

And you should review those and listen to those statements in light of the risks and uncertainties that are detailed on this page, as well as the specific risks and uncertainties that are discussed in our 10K and other SEC filings.

And now if you will please turn to slide three, I will turn the call to Brian Jellison, President and Chief Executive Officer.

After his prepared remarks, we will take questions from the participates.

Brian?

Thank you, John.

Good morning, everyone.

Fascinating day.

We've fortunately and hopefully prepared the content here in a way that will help you think about how we are doing and where we are going and what the cash implications of the this kind of volatile world is.

So if we start at the beginning, we look at the third quarter 2008 review.

We will have a comment or two about how the overall enterprise is doing and then we want to spend a dedicated amount of time here about cash awareness with the Company and our debt structure.

And then we will talk a bit about third quarter results and review each one of the segments, all of which had something good happening in the quarter and will again, we believe, this fourth quarter.

And then update you on the guidance and take your questions.

Next slide.

On the enterprise overview, you can see sales in the quarter were up 11%.

Internal growth was actually 6%.

If you adjust for the Middle East project of last year, you will see when we get to RF how spectacular that actually is in terms of what the growth was excluding the project, which really talks about the underlying health of what we are doing.

Reported growth, of course, was 5% with 1% currency and 4% organic.

Orders in the quarter were up 9%.

Internal growth was up 5%, again if you exclude the take through the pipeline with the Middle Eastern project.

Gross margins were up 110 basis points to 52.1% demonstrating once again that we have the benefit of pricing power.

We have the capability in continuing to drive value to customers and just don't have the kind of price pressures that so many other firms face day in and day out because they don't have the solutions and they don't have specable products and they don't have the kind of customer service and application engineering capabilities we do routinely every day.

Operating margins were up to 22.3%, up 100 basis points.

It is just something that we are very proud of how well our operating people have performed in the third quarter.

Net earnings were up 19% to $77 million when you exclude the debt extinguishment charge that we indicated we would be taking in the third quarter.

Diluted earnings per share were $0.82 versus $0.70 last year, again excluding the charge which was $0.02.

And operating cash flow, we will talk more about that later, was up 51% to $138 million in the quarter, which represented 23.3% of revenue.

If you divide that $138 million by the $75 million reported earnings, we are up 184% on the cash conversion factor.

If you turn the next slide, we would see the strong balance sheet here.

Our cash at the end of the third quarter was $156 million, net debt $1.190 billion.

And you can see the net debt to cap and trailing 12 months EBITDA I think is important here at $587 million versus the same point a year ago trailing EBITDA would have been $502 million.

Our net debt to EBITDA, even after all the acquisitions that have been done this year, we sit here at basically two times net debt to EBITDA and 12 times interest coverage, so we have very strong investment grade metrics having invested $700 million this year and sitting on the ability to spend another $600 million at will.

Next slide.

Roper cash awareness.

What's really important, I think, when you look at what's happened to the credit issues around the world and the problems that people are going to face, is that fundamentally all of our businesses are self-funding.

We really don't need any external input to drive those businesses.

They throw off more cash, even in any kind of downturn, than they require to run.

So second thing is when you look at people who are going to have very difficult times with their pension plan adjustments, suddenly requiring more inputs, you ought to know that Roper does not have a pension plan.

We only have 401K plans, which are basically self-funded, so we don't have the equity market risk of having to make cash inputs into pension plans.

Thirdly, we don't have any commercial paper program.

There was some confusion, apparently, in the quarter about short-term debt at Roper and the reality is we have no pressures on debt of any kind.

Fourthly, we really strategically refinanced the Company.

In a moment I will give you the detail around that.

And we got that done in July, so that it really didn't affect us as things unwound.

We've got $600 million of cash and undrawn debt capacity in place as we talk to you today.

And we are going to continue to be able to build cash in the fourth quarter and beyond because of the quality of the businesses.

We have very low working capital.

You will see a statistic today that is really unbelievable, where we have been able to cut our working capital in half over a very short period of time.

Our CapEx to sales is less than 1.5%.

In fact, year-to-date, our operating cash flow was about $306 million and our CapEx year-to-date is about $20 million.

And we don't expect it to exceed $30 million and we've already increased our operating cash flow for the year to $410 million or more.

So you have got $410 million less $30 million, looks like $380 million of operating free cash flow to us in that definition.

And our metrics in free cash flow are going to continue to improve because the cash driven business model we have is really perfectly suited to capture the opportunities that are immediately in front of us and are likely to stay in front of us for the next several months.

Next slide.

Here if we look at our debt structure you can see we have a $500 million bond with a 2013 maturity date.

It has a coupon rate of 6.625%.

And the second part of our debt structure is we have another term loan, which is a $350 million term loan, that is due in July of 2010.

And that cost basis on that is LIBOR plus 150 basis points.

And then we have a $230 million senior subordinated convertible note, which is kept.

Even though the maturity is at 2034, with accounting rules the way they are it continues to show up as a short-term debt item and that's what confuses some people.

If that note were called by us or called by the convertible people, we would have cash capability to take care of that at any time.

That's a rate of 3.75% and it goes to a zero coupon in January.

Then we have a $750 million revolving line of credit that we put in place and that's good through July of 2013.

That's at LIBOR plus 130 basis points and at the end of the quarter we had drawn $259 million against that $750 million.

This structure gives us substantial flexibility at reduce the risk around any issues and because we self-generate cash to run the business, we have a lot of flexibility about how to use our forward cash.

Next number.

Here we look just at the third quarter results.

Next slide.

The income statement, as you can see net sales were $593 million in the quarter, up 11%, 6% external if you exclude the Mid-East, 4% if you don't.

The gross profit margin expanded from 51% in third quarter of '07 to 52.1%.

Income from operations was up 16% with sales up 11%.

Operating margins we set up 100 basis points.

Net earnings adjusted for the debt extinguishment are up 19%.

Again favorable leverage sales up 11%.

Income from OPs up 16% and net earnings up 19%.

Next slide.

If you look at the EBITDA growth, which is just -- when you look at how the market is thinking, it's amazing.

If you go back to the third quarter just two years ago, our trailing EBITDA was $398 million.

And two years ago today the stock on October 24th closed at $47.87 with $398 million.

Here we are today closing the quarter with $587 million of EBITDA and we will see where the stock closes.

It is truly a remarkable time.

If we look at margin expansion, you can see here in the 12 month period for October 3, '06, our trailing 12 months EBITDA margins were 24.5%.

They rose in the next 12 month forward period to 25% and now have risen still again in this next period to 25.6%.

We are confident about growth going forward.

We think we can hold on to these margins.

We just don't see the risk that other people are fearful of.

Next slide.

On asset velocity, this is a slide we would put up on every other slide, if you would tolerate it.

Let's take a look at what happened.

Now, you have a Company, those of you are invested in us, own a Company who only needs 6.5% of revenue in this quarter for net working capital to generate its sales.

This is a remarkable performance.

You can see inventory in just two years has dropped from 9.3% of sales to 8.6% and now to 8%.

Payables and accruals are up from 13.9 to 17.6, because we are benefiting from deferred revenue for our base businesses that we've acquired where customers pay us in advance to provide their work over the course of a year.

And this is not just a bubble where we dropped from 13% net working capital, which would be very good compared to any of these people that people think are in the diversified industrial category.

The 12% last year to 6.5%, we will certainly end the year with less than 10% of net working capital to sales and think we won't have trouble running the Company at levels at that or below in the future.

Next slide.

Focusing on cash.

Our Q3 operating cash flow was $138 million.

Year-to-date we are at $306 million, as I indicated, and we've raised guidance to $410 million for the full year.

Very good execution across the businesses on all of these working capital initiatives we put in and then two things that particularly helped in the quarter.

This is the quarter that we get the big seasonal benefit out of CBORD, who is basically providing annual subscriptions for people who pay us in advance for the entire year and much of that money comes in here in the third quarter.

Secondly, we have gotten substantial payments out of our project piece in intelligent traffic systems and design.

Those two things have helped, but it's widespread throughout the Company and you can see our operating cash flow is up 51% over the corresponding quarter of a year ago net.

We go to the segments, sorry, next slide, and you look here at our performance by segment.

You will see nice rebound in imaging.

We got the imaging margin back, we'll talk about that.

24% EBITDA on 54% gross margins.

Still the lowest of our family of businesses, but it's also only 16% of revenue.

Energy holding it at 27%, industrial at 30% with a 49% gross margin.

A lot of industrial companies have got gross margins that are like 38%.

We have got an EBITDA margin that's 30%.

And our RF business is at 31%.

Really just outstanding performance and it shows you the power of the acquisitions we've made this year with our additional Freight Matching business, Horizon and CBORD earlier in the year and now Technolog.

These are just beyond world class businesses, folks.

Next slide.

Scientific and industrial imaging.

Here you can see sales were up 4% as reported, orders up 8%.

Organically the internal numbers you can see a little better than that, so the orders were up 10%.

Most importantly and what we were upset about in the conference call in the second quarter was margin erosion in imaging, which we found unacceptable and we have done a number of things about that.

You can see we have already corrected much of that problem, as it was up 190 basis points in this quarter.

The medical business had a very strong Q3 and continues that kind of run rate, we think, in Q4.

We had additional field operating reviews for the camera businesses that John and myself and others attended, those kind of workout programs that you'd all be familiar with.

And I think we have gotten much better focus on what the economic requirements are for people.

We were very impressed by the quality of the field operating people.

It just reminds us how good they truly are, but we just had a leadership crisis between the people that do the work in the field and some of the P&L management that was not paying attention to what was important and causing confusion and ambiguity and that's no longer there.

The camera business, as we brought all the product managers together and talked about long-term strategy, we were very encouraged about their motivation and their commitment to continue to drive growth and really ended the quarter feeling pretty good about the direction to the point where we think, with the margin expansion and some pricing opportunities that we are going to capitalize on, that we ought to be able to maintain these kind of ratios in the fourth quarter and to have imaging back on track.

Next slide.

Here if we look at the energy systems and controls business, it had an interesting Q3.

Sales were up 5%, orders were down 7% and organically they were down 9%.

Most of that really is tied to a situation in Z-Tech where the nuclear work that would normally get done has been pushed out.

And initially pushed out to Q4 and really now pushed out to the beginning of the year.

Some of that is currency related where people are surprised at their relative currency erosion at the expense of the dollar and we are hoping that maybe that would turn around and their cost of doing the work would go down.

That's probably the one thing in the quarter that we really were surprised by and because of it, it's the leading reason why we just didn't feel we could leave the high end of our guidance out there, because we can't predict when the foreign business that we have in nuclear is likely to release the work.

But they do have to release it.

They can't sit on it.

It's just a matter of when it comes.

Control systems sensors and the protective technology business grew more than double-digits in quarter and remains very healthy.

We had a disappointing quarter around analyzer sales to North American refineries.

And what we can't tell is how much of that is the interruption from hurricane Ike.

In our own case we have four divisions headquartered in Houston that relate to the energy business and they had basically about a ten-day hiatus, where most of our workers were able to get in.

We didn't have power for part of the time.

We had all of our backup plans kicked in place.

We had different Roper businesses issuing invoices and doing work and referring customer service calls.

The field team did a wonderful job.

It's very hard to know how much of the sort of sluggish orders out of the North America refinery business is due to any real change in activity and how much is it that the kind of things they are buying for us, which tend to be not capital expenditures, just kind of fall down in the order of priority and certainly we've experienced some supply chain interruptions from people who have been trying to get their businesses back online and have the belief that most customers are a little bit behind.

It's certainly not an excuse.

It's just a recognition of what was going on there.

Based on already what we are seeing and the commitments out of our different operating divisions, we would expect the fourth quarter to be sharply higher than the third quarter and hopefully at least as good as it was last year, which was a terrific quarter.

So on balance we think this was kind of a temporary aberration you are seeing.

But even given that, we produced 23.7% operating margins.

Next.

In industrial technology, on the balance these businesses are doing exceptionally well.

You can see here orders were up 7%.

Sales are up 4%.

Internally orders were also up 7% because there is no acquisitions in this segment.

We had double digit growth again in our material test businesses.

They continue to export well.

Very strong orders in our fluid handling business.

Cornell, Roper, Abel and the like doing really well in the agricultural and extraction area in oil and gas markets.

Pretty substantial backlogs in these businesses.

They are really performing so well along with the test businesses that we have in industrial that Neptune had a completely flat third quarter and yet you can see our orders were up 7% and sales were up 4% with Neptune being flat.

And the good news, of course, about Neptune is we have the Toronto project on tap, which will help us in the beginning of 2009.

Business execution plans, we went through all of that with these people.

We looked at their contingency situations.

They are continuing to grow.

The cost programs we have are solid.

You didn't really have basically flat margins, but let's look at those margins at 25.9%.

So we are in good shape there.

And we really see the business ought to continue to be -- have steady activity at Neptune and the rest continue to do organic growth.

Next slide.

On the RF technology segment it would be safe to say this is a blowout quarter.

Sales were up 29%.

Of course, we brought in these terrific acquisitions.

Orders up 29%.

Operating margins up 270 basis points to 26.2%.

Internally if you exclude the Mid-East project, our sales were up 11%.

More importantly, the orders were up 17% internally without that project in the base line.

With it, we were still up double digits in orders in RF.

It was a terrific performance out of the tolling and services side of intelligent traffic systems.

Lots of activity in the Mid-East project and then substantial shipments into Florida as they are switching over more to the eGo tag and multiple protocol readers that we have introduced.

The CBORD Company benefits from this Q3 subscription process that we have and certainly helped our cash, as we mentioned, and it comes in at good margins.

That won't -- the operating quality of the business is sustained throughout the year, but the cash infusion tends to come seasonally here in the third quarter.

We expect RF to have another very strong quarter in the fourth quarter.

We don't really see any slack of any kind there.

And then we will talk a bit about the last two of the three acquisitions we did in the quarter.

In our Q2 call we went over the Freight Matching business that we acquired that fits nicely with our business in Portland, Oregon.

And then this quarter we've acquired Horizon and Technolog.

So next line.

Technolog is a fascinating UK based Company.

There you have basically GSM technology where phones are used to communicate.

And Technolog is the leading provider of network monitoring in the UK and increasingly is finding opportunities on the continent.

There they have a more sophisticated program around pressure management, water pressure, gas pressure, and they have smart metering solutions that go to both the water and energy utilities in the UK.

They have a terrific leadership team.

The products are generally patented.

The AMR solutions they are providing go to all different forms of metering processes, not just water only.

They have an install base of over 250,000 points in their network in Europe.

They have their own field service people doing truck service and meter reading for people and provided data management.

It is a more commercial type of activity than it is residential that we have in the States.

But because they do such a good job with software and firmware and have a lot of data management capability, they are going to help our Neptune business substantially, we believe, in the future.

Next slide.

As we look at Technolog, it has got a terrific track record over the years of growing sales and profitability on a consistent basis.

Certainly a double digit revenue grower.

The business model fits Roper like a glove.

The people there, you would think they were lifers with us.

They are as much like us as we are.

And we are really proud to have them join the Roper family because they are wonderful people.

They have great clients.

Very stable, very loyal customers.

Next slide.

Horizon Software is a fascinating Company, again with solid growth.

This is a business that really provides cashless data collection and software solutions for the kindergarten through 12 lunch programs.

Those of you who have kids that may be in one of these programs, like Atlanta or Dallas or Philadelphia, Los Angeles the most recent big win here.

There are a lot of things that are going on around nutrition management for kids.

Parental involvement, making sure that they don't have cash in their pockets with all the difficulties that can occur.

The opportunity to see what the child actually spent for lunch.

There is control processes that can say these are the kind of things that can be purchased.

There are mandated reporting requirements that differentiate between kids in various meal government programs that might get a couple of dollars of reimbursement from the government versus others who get maybe 60% and still others -- sorry, $0.60 and others who get $0.30.

There is parents who want to add to their card.

They can do that through the software that's provided.

There is some real compelling public information that you can see in the lower right hand portion here just some of the stuff Good Morning America, where the team was interviewed and talked about why this is such a big opportunity in the future.

The prepay on-line, it's enormously valuable to not have children walking around with cash for the reasons we can all understand.

And you see the vending machines up here.

We have entered into an arrangement with people where we are going to be able to make the vending machines cashless, where they can use the school lunch program card to access it and control the kind of machines they can access.

And that's very exciting for everybody involved.

It's a very compelling business model.

It's got long term recurring revenue, just like CBORD, as we bring on board things.

You can see the point of sale register.

It's a different kind of price point and technology using our software than what our point of sale technology is at CBORD.

So that gives us kind of a nice range of things.

Horizon has some military work and is bidding on more military work that we think are interested and we have our Roper Mobile people working with them on how to design that and control it.

They have a 98% customer retention rate, which is terrific.

And again, lots of recurring business and then steady upside growth.

Next slide.

Here if you look at our guidance update.

Next slide.

What we have done is last year we earned $2.68.

What we said, we think the full year looks like it's probably $3.13 to $3.16.

Basically remove the high end of the guidance and drop $0.03 off the low end.

And that's really driven by the higher interest costs, the 6.625% coupon on the bond, coupled with a little bit high LIBOR.

Maybe it won't be that bad in the quarter.

And then we just didn't feel with the Z-Tech pushout that we were apt to get to the high end of the range before.

The $3.16 is certainly an attainable number.

We look at our future acquisitions that aren't included here and the debt extinguishment charge, I think all of this is pretty clear.

And I think sort of equally importantly is that we are increasing our operating cash flow from $390 million to $410 million.

$20 million more cash flow is real cash versus the kind of GAAP based debts reporting that has nothing to do with cash.

Next line.

What's different in 2001 and 2002?

Well, everything is different.

I look here at who we are today versus who we were back in 2001 heading into the slowdown in business activity that occurred in that cycle of 2002.

Today we are investment grade balance sheet, then we had no publicly traded debt.

We were not rated.

We were in insurance debt.

We ended the calendar year or the, sorry, the fiscal year of 10-31-01 with $16 million of cash.

At the end of the third quarter now we have $156 million in cash, a ten fold improvement.

We had the capacity to draw against debt, but the covenants would have precluded it from really occurring to borrow $94 million.

Today we have undrawn capacity of $438 million.

We have six times the financial capacity today that we did going into the recessionary cycle in '02.

Secondly, our businesses are asset light.

They generate more cash than they are required.

Very different than some of the businesses that we were dependent on back in 2001.

Our businesses throughout have high gross margins that are really generated from the applications we provide, rather than some special arrangement with Gazprom.

We are no longer dependent on either Gazprom or the semiconductor capital spending.

In fact, neither is a rounding error in our results.

We have a diverse international business with broad global reach.

Last year it was up around 40% of the total portfolio.

It continues to expand, as do our domestic business, who look for opportunities outside the United States.

We have long-term contracts in place with renewals and subscriptions and recurring revenue.

We had virtually none of that in 2001.

We have secular growth businesses and applications that dominate the Company today.

We are basically fundamentally a different and stronger enterprise now than we were there.

Next slide.

We have a family of secular growth businesses.

Back in '03, we added water metering and usage information to the portfolio.

In '04 we added radio frequency identification technology applications and solutions.

Then we added sensors and warning indicators, emergency shutoff systems in a variety of smaller acquisitions and one large one.

Then we added high margin medical products and consumables and have continued to build out that platform.

More recently we have been adding multiple software and communication applications.

We have freight matching and logistic software.

We have wireless security technology.

We have utility network data collection monitoring and communication processes.

We have a variety of integrated systems now for campus and healthcare community settings that enable the cashless transaction security administrative processes.

Again, meaning that we are a fundamentally different and stronger enterprise.

And with that I would like to open it up to questions.

Lea, can you start the Q&A portion of the call?

(OPERATOR INSTRUCTIONS) We will take our first question from Alex Blanton from Ingalls and Snyder.

Good morning, Alex.

Been a little bit since you started talking, Brian.

I think you have done a good job of telling us about the some of the cyclical parts of the business, particularly the energy part and compressor controls.

And clearly this is a minor part of the business compared with the growth businesses.

But what the market is concerned about, investors, shareholders in Roper and so on, is what is going to happen in 2009 to the global economy and to these cyclical parts, which you do have some.

And I'm thinking of, for example, compressor controls projects in the energy area where you are providing systems that there may be pushouts or even some cancellations in some of those and some of the other industrial-type products.

So in your judgment, looking at 2009, what is going to be the balance between things that are exposed to the economy and the growth parts?

Are the growth parts, of which you did a good job of enumerating, are they going to more than offset any possible harm that might come to the smaller cyclical parts in 2009 and enable your earnings to continue to grow despite what looks like a very -- a much worse than expected global economy?

Obviously great questions, Alex, and I know it's on everybody's mind.

Are you speaking into the microphone?

Yes, I -- hopefully we are on.

I said it's a great question.

I know it's certainly on everyone's mind.

We haven't really released any 2009 forward-looking guidance, we just talked about the quarter.

I would certainly say that we don't expect the Company to go backwards.

As we look at some of the things people have written suggesting that we'd earn less money in '09 than we are earning in '08, we are kind of chagrined about that kind of concept.

It's very hard to predict how much growth we'd have next year.

The incoming plans that we have from the field are all due this weekend for '09, '10 and '11.

We start our planning reviews on Monday with the industrial businesses.

So we haven't had that.

That is going to take us -- frankly, we have about a six week in depth process where we meet every management team and go through a variety of things.

But none of our teams are -- they are not arrogant.

They are not saying we are going to refuse to participate in a recession that you hear people saying.

But basically, better businesses win whether there are good times or bad.

And our businesses are pretty solid.

So I think they feel pretty confident.

I think that they are concerned about how much growth will be there.

We look at the last two quarters with 4% reported organic growth.

If you strip out the Mid-East project, we actually had 6% growth in both those quarters.

We had 7% growth in the first quarter.

Last year in December we had a kind of big investor meeting where some -- one individual was pushing me about it.

There is a no growth environment, can Roper grow?

We answered that question last year, yes.

I think most people would believe we didn't have any growth in the third quarter when it all comes in.

But Roper grew at 4% organically or 6% adjusted.

So we are certainly all over the different pressures we have.

I think that the things that we are worried about aren't the cyclical things.

We are worried about what is going to happen with municipal spending and what's going to happen with the general economy and what effect that has.

But we are very blessed to have an enormous backlog.

It is over $600 million and the backlogs we report are only those that are shippable within 12 months.

They are much deeper than that.

So I wouldn't say we were fearful.

We are just confident about where we are and we are comfortable about our ability to do things.

I think that if you do have a fall off in organic revenue, there are a lot of other things that come with that.

We will be able to do some things that could lower our debt costs.

We will be able to use our cash in ways that will have really favorable leverage going forward.

We are just trying to be pragmatic.

We debated we could have not changed our Q4 guidance in any way.

But I think that's crazy because who would have expected that the Koreans or the French were going to postpone stuff because they didn't want to have to pay their dollar denominated contracts?

Those things are forces in the world marketplace that everybody is going to be confronted with.

We just think we are better prepared and more nimble to deal with whatever happens than most people are.

Yes, well, by the way, Brian, who are these people that are writing these things.

I'm just looking at all the estimates and every single one of them is for growth next year.

Everyone who has published an estimate on the sell side.

So I haven't seen anyone suggesting that you would have down earnings as yet.

They are out there.

Okay.

The other question I'm going to ask is, in this environment, don't you see prices of potential acquisitions coming down as some of the financial buyers run into problems?

Isn't it a more favorable environment for you in terms of making acquisitions and also typically in a recession weaker competitors drop out, stronger companies gain market share.

Don't you think that will happen?

Yes, I do think that will happen.

It's already happening.

As you know, generally when we do transactions, we might have been involved in them for four months or six months or there may be things that we started in one year and for whatever reason they don't occur until later because of owners.

Today you have a crash of private sellers who are concerned about potential changes to their capital gains tax, who are frantically calling us and then you have other people who need to liquidate for cash purposes that are there.

Certainly private equity has great difficulty in getting the kind of leverage that they'd like to have to do deals.

I think until a month ago, we remained disappointed about many people who just couldn't accept the multiple collapse.

When you tell people -- I don't know what you are thinking, but if you think I'm paying you a larger multiple for your private Company than we are getting paid by our investors publicly, then you are pretty stupid.

That will increasingly be apparent.

What we -- and then plus there is just all of these public companies that continue to go down and down and down.

And our ability to be nimble and flexible around the variety of things that are available, we've never had such a good situation looking forward.

Okay.

What about the market share gains?

Well, the market share gains, we are pretty dominant in our markets, frankly.

When you look at something like compressor control, our OEM relationships are with big players.

We might gain a bit of market share, but our market share is pretty solid.

What we want to make sure is that we keep our working capital low.

That we don't have any inventory exposures.

That we don't have anything to building negatively and that we keep our pricing where it needs to be for people and we maintain our long-term relationships.

It gives us an opportunity.

If there is less customer activity in any short-term period, it means our sales people and our marketing people will be able to develop more long-term relationships.

As you get any kind of turnaround we capitalize on quickly.

We feel pretty good about that.

Thank you.

We will take our next question from Mike Schneider with Robert W.

Baird.

Can we first address Neptune.

I'm curious as to what you've seen in the quarter to explain the flat performance.

We've heard out of Badger that there has been project cancellations, project delays.

If you could just address what's happened in your project activity and then just in your day to day MRO activity.

Well, with Neptune we haven't really had any cancellations, haven't really seen any.

We've had a couple of discussions with them in the last week.

They were at an important specification conference out in Santa Fe.

And I think that we had hoped that the Toronto project would have come in maybe to be able to be booked and maybe had some shipments in Q4.

And it looks like -- I don't know, we might get it booked but it probably won't ship until January.

We've had the natural run up.

The reason they are flat in Q3 is that we had really a difficult comp for Q3 a year ago as we were finishing out North Carolina and some of the places in Florida.

And so it's not really a surprise to us.

I think the surprise for people, just to digress for a second, Mike, is that look at the growth we had in Industrial with Neptune flat.

Most people think Industrial is only Neptune and they are dead wrong.

We still have our great core businesses there.

I think we are cautious about the forward looking activity because of municipal spending and people being concerned about what's happening.

I think that's -- we don't think the business is going to go down, but I think that's a wild card about how much growth we can get out of Neptune.

On the other hand, we already put in place a number of cost actions that are really good at Neptune and we continue to reduce the costs there in terms of material and how we are doing labor and added processes to the electronic components of Neptune.

It had a very solid quarter.

But it was just flat on incoming orders and we would guess it's kind of flat in '04.

But there is no push offs or anything else at all that we have seen.

So to be clear, Neptune didn't miss your internal budget for Q3?

No, I don't think so.

No.

And so they --

They were within 1% of whatever we were looking at.

I mean, yes, they didn't miss.

Did I hear you correctly, Brian, that orders during Q3 were flat as well at Neptune?

Actually, orders were down slightly but within the margin of error, that's for sure and low single digits.

Very low single digit.

And then Struers, can you just address that for a minute, because that must be the driver in industrial and it punctuates your point about there is more to industrial than Neptune.

How is that business, being German based and industrial based, able to grow double digits in this market?

Well, couple of things.

Struers is not the only business there.

What happens with Struers, and they are a Denmark based Company, they are in Copenhagen and we have significant presence in sales and end market presence around the globe and we have an operation in Cleveland and we have another one in Asia for terms of selling.

But that business does well in any kind of environment like this where people are focused on cost reduction and material substitution.

And we have a whole family of physical property databases that people want to buy from us.

So a few years ago we took our MediaCybernetics software into there with the IQ studio.

So there is just a solution set and a wonderful customer service organization and engineering capability there that encourages people to want to continue to use Struers and they do.

So yes, that's big.

But don't underestimate how well Cornell and Abel and Roper pump are doing.

These guys are continuing to do very well.

We have gotten Cornell refocused on the agricultural market.

We have gotten Roper refocused on a variety of new products that's definitely taken share at the expense of other people.

And Abel's had a very nice growth because people are looking at using slurry pumps and water for a variety of things beyond municipal applications and Abel is a leader in that area when you look at extraction.

They are all doing well.

And really the programs that we put in place around recurring revenue and not letting parts pirates get your business and staying close to people post close and extending warranties for long-term contracts are all paying dividends for us.

And Brian, I think final question, just another area of misconception among investors and analysts is the sensitivity of TransCore and the freight matching businesses to what's going on with fuel prices, miles driven, et cetera.

Can you just address for us how you plan and anticipate the fact that municipal budgets are headed lower, miles driven are down again for the second consecutive year, just vis-a-vis TransCore and the freight matching business.

Yes, I think John just talked to them recently, you may want to comment, but the reality is it's kind of an oligopoly and we are down to two players.

The importance of the acquisition we made in July coupled with what we do with our core business out of Portland, Oregon, is very helpful to us.

There is a lot of synergies that we have that we are able to execute against.

We have a much broader range of price points now, so that people can subscribe at lower cost points on some of the areas and pick different levels of service.

Business continues to perform better than it has.

I think some people would say that miles driven have something to do with that, but they just don't.

That is not an indicator.

It might be an indicator about the amount of tolling revenue that authorities collect.

Our request for quotations and design around tolling applications continues at an all-time high and the bids we are doing -- we're really more worried about the speed with which decisions get executed there than we are of cyclical downturn in freight matching.

But, John, maybe you want to add something?

The key on freight matching isn't really how many miles are driven at all.

It's really the number of people who are subscribing to our services.

So it is the number of folks who are participating in the spot market for freight activity.

So if you think about kind of a much less freight being moved in the future, I think that's probably going to be more around the long haul carriers than the folks who are going from the import locations in Long Beach over to the various distribution centers.

You still have this spot market where people who may have taken a load from say Atlanta to St.

Louis, need to be able to have a load to come back because they don't want to come back empty.

And enabling that entire spot market to work and all of the brokers and occasional freight shippers and the vast number of individual and small truck drivers that are out there, it need to be able to have access to that information if they are going to be able to make any type of business plan that they may have work.

And we enable them to have their business plan work effectively.

It's really around the number of people we have subscribing, not the amount of freight that is being moved or the number of miles that are being driven.

And TransCore's susceptibility to lower municipal budgets, et cetera?

Probably less so on the tolling side.

To the extent that we are working closely with them to understand the impact on what may happen there.

Maybe municipalities or cities may not want to invest to make their traffic run as smoothly as maybe they would during a good time.

But on the other hand they will be looking for ways to be able to generate revenue from their existing infrastructure, so they have existing roads that do not have tolls on them today.

So to the extent they may not invest as much for traffic efficiency, they may actually look at other tolling solutions that they wouldn't have looked at otherwise.

I think one thing, too, to keep in mind about TransCore is because we have been able to make it a much more global effort, that while we had this Mid-East project, which has distorted organic growth a bit last year and then sort of understated it this year as we get it in, when we get into '09 it is in our base, we don't have any distortion any more and that remains very high quality business and there is going to be substantial business in the Middle East next year.

So it does help insulate us from a downturn on the municipal spending in TransCore.

And remember, RF, I think this is something that people are only maybe getting to start to understand, isn't all about TransCore.

The TransCore is a critical component.

But Inovonics is a wonderful Company.

Technolog is a wonderful Company.

CBORD is just beyond a world class Company.

Horizon is going to give us massive synergies and opportunities.

We have got big growth engines inside radio frequency that have nothing to do with transportation, which was a big, big win for us this year in terms of how we continue to build out RF.

Thank you.

And we will take our next question from Deane Dray from Goldman Sachs.

Can I start with a clarification on the backlog.

I now you mentioned the Z-Tech nuclear business being pushed out to '09, have there been any other material cancellations or pushouts that you can comment on?

No.

We could comment on any and all of them, but there have been none.

That's the only thing and we weren't really expecting that.

And it's really currency driven.

We'd like to believe it would come back here in the fourth quarter, but we don't think so.

We think it is going to be first quarter.

Okay.

And then, Brian, I will try to be diplomatic with this.

But there really is a remarkable disconnect between your commentary this morning about end market growth and opportunities heading into '09 versus every other multi-industry Company this quarter that is addressing the pending global recession.

What we didn't hear from you was anything about commentary on restructuring or contingency plans and instead we heard a very optimistic tone.

Are there within your contingency planning an expectation to see slowing growth?

I think that we are sitting here with 26% of the EBITDA in the quarter and we certainly have contingency plans in place that a traditional industrial Company would have with vertically integrated manufacturing in all those locations that we have it.

The oddity, I think, is that the -- to the degree that we have pressure next year that you would be worried about, it is really less not a problem with our industrial businesses.

It's really a problem with municipal spending risk and slowness in decisions.

And that's the bad news.

The good news is that we have got underlying long-term contracts with those.

We continue to be able to sustain our performance in most of those markets, but maybe won't be able to grow and add to them as much as we would have liked.

So that's what we are going to struggle with to figure out what kind of 2009 we think we are going to have.

We don't have -- most of our manufacturing facilities are test and assembly bases.

We don't -- they don't -- they kind of swing on a variable basis.

So there isn't some big thing, oh, if we shut this down we could do that or if we did this we could do that.

And that's kind of where we are.

I mean, we are not arrogantly sitting here saying that we aren't going to have a problem if every other Company in the world has a problem.

But the solution to our problem isn't necessarily saying I'm taking a charged earnings and whacking all these people out, because the areas that you tend to do that are continuing to perform very well.

So just to clarify it, at this stage you are not expecting any change, any deterioration in your backlog and order rates heading into '09?

I can't really say that without providing guidance about '09.

I don't think that we know that.

A private [better], I think we have a conference with you coming up soon.

I will know more between now and then.

We are just starting Monday on looking at everybody.

I think that we are -- we have the same kind of concerns everybody else would be.

To say, come on, now, yes, you had a terrific Q3 in orders here when you look at Neptune being flat and a pushout in one energy situation.

If those things hadn't happened and we'd a had break through organic growth, I wouldn't have had the courage to tell you that I think, wow, we grew at 8% or 9% and we are going to continue to do that.

We always said over any kind of cycle we ought to grow at 1 to 2 times GDP and people think we are conservative about this because of our growth.

Boy, you look at where we are at today, Deane.

I guess part of what gets me is we had a closing price October 24th of $47.87 in October 24th of 2006.

Two years ago from our call.

And here we are trading at wherever we are today and we have got base that will give 50% more EBITDA and we don't expect our EBITDA performance or cash performance to deteriorate.

We expect it to improve.

As always, we are just cautious about indicating what order growth could be in '09 or what revenue would be in '09.

But certainly as we get into the first part of January and February we will be able to give you a better answer.

Great.

Thank you.

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

Thanks.

Good morning.

Brian, you referred to the camera business a couple times in terms of the meetings that you've had that you felt encouraged about.

Can you give us some specifics about the actions that camera is taking to improve the margin?

Yes.

I think that it's hard to be diplomatic about this.

It's a classic case of the general manager over those businesses simply not being focused on what's important.

And I think people were confused and people were relying on the wrong kind of things.

They were very encouraged to be reminded who we are, what we do and how we react and they were excited to get back to what they thought was who we were.

We've unwound a number of things.

We had a guy running a business who was trying to put these things together in an artificial way.

We've killed all that and we've moved back to focusing on the niches that they serve.

We've got the sales people aligned on the things they ought to be aligned on instead of out here chasing windmills with systems designed for cellular research.

And we have got a great organization there and this odd instance they just were poorly led.

Okay.

That's helpful.

And, John, Brian described the working capital changes as unbelievable.

And they are pretty remarkable.

It looks like most of it came from payables.

Is there something unusual in that number?

And is it sustainable at that level?

If you look at the combination of the accounts receivable as well as unbilled.

We do have some unbilled receivables that run through that payables and accruals and other accrued liabilities line on the cash flow statement.

If you kind of add up the accounts receivable, the change in accounts receivable and the unbilled and deferred revenue, so we do get cash in advance so that also goes into some other deferred accounts there, take that plus inventory plus accounts payable.

Net-net that gave us about $3 million positive in the quarter and a quarter of where we had 11% growth and 4% organic growth.

So we are still able to grow the Company and that would naturally lead to larger receivables balances.

But because of better collection efforts and where we have the opportunity of really getting the advanced payments that are very helpful to be able to fund our business, those are the areas that we have been able to focus on, along with just a relentless focus on inventory management.

We don't want to have people who are looking at economic order quantities as some traditional way to be able to get to a price break.

And instead grab the price break but not with the economic order of quantities and be able to work with suppliers just so they hold inventory instead of we hold inventory.

The whole working capital management area is not overly sophisticated, but it does come down to discipline and having great operating people and we benefit from both those things.

And I also just want to say I think what's really great, we may not have 6.5%, maybe we get that every third quarter or something like that because of the prepayment and the deferred revenue that comes into the system.

But I think we really have this thing down now with the mix of businesses we have and the discipline in place that we are going to be able to run networking capital in the single digit framework, which is really what my dream was when we instituted this program several years ago.

And pretty much everybody knows when we come in we want to look at how the payables are compared to inventory.

We like to have them be equal and we want to have receivables looked at as a function of pricing and terms with people and we view that almost as an investment.

And we've kind of won the day with people.

Not everybody is there.

But you are also beginning to see the power of the acquisitions that we made, all throughout this year we are -- other people are focused on exactly what was their base revenue and exactly what are they going to do and we were focused on the fact that they don't need assets to run their businesses and they throw off a lot of cash.

Finally, Brian, can you give us some sense of the tone of the breakeven, how you do in meetings that you've recently had with your managers?

Well, probably have to ask us again.

Our breakeven stuff, it's absolutely crucial to how we talk and feel.

I think that all of our industrial based people and energy based people are going to pay even more attention to the breakeven discipline as they go through the planning cycle with us which starts Monday, because you -- we are human and we are going to participate in this general economics situation whether we want to or not.

And they are at the forefront of that.

So I love the discipline.

We try not to force people to do things, but to try to teach people what might be best and let them do it.

And occasionally we get it wrong.

We got it wrong with the imaging people because we allowed them to go a little further and they weren't paying attention to the knitting.

They let their breakeven expand.

It was a good learning lesson for us because we -- it's a smaller part of the portfolio.

Parts of it are just really terrific anyway.

And shame on us for not being more disciplined with those people.

But we are on the case now and our data on breakeven, Wendy, helped us a lot to focus on what went wrong.

Thanks a lot.

You're welcome.

Our next question from Scott Davis with Morgan Stanley.

Good morning, gentlemen.

Good morning.

Can you -- I'm not sure whether you disclosed this before and I just didn't see it, but the revenues that were added with Horizon and Technolog?

For Horizon and Technolog we spent about $225 million for those two businesses and they will contribute in excess of $25 million of EBITDA in next year.

Now we only had them for a very small portion during the third quarter.

About three weeks for Technolog and maybe five weeks or so for Horizon.

so they contributed modestly during the quarter.

But we will be able to get a full quarters' of revenue from them in the fourth quarter.

Okay.

I was really intrigued by the comments you made earlier in your prepared remarks about deal multiples finally coming down.

I think most everyone else we have talked to have said that deal multiples have remained stubbornly high.

There just isn't the price discovery, obviously, in private markets that there is in public markets right now.

If your stocks are cheap.

You are trading at six times EBITDA.

Does it make sense to start looking at more public deals and just wait, or do you actually think that these private market multiples are going to finally get down to those kind of levels?

It's barely been ten years since we have seen deals down at six times EBITDA.

That's the environment we are in, unfortunately.

I think in the short run that you know what people would say publicly who were involved in that if you are talking to private equity people and what people will say -- I have a lot of time for people who say they are not seeing the multiples come down.

But those are probably people who aren't directly involved in activity right now.

I can tell you that we walked away from two transactions, both in medical, both with double digit growth, both with substantial EBITDA, both with synergies that we thought were really good.

And they would have been bought at a multiple that was reasonable in a public market environment.

We would have bought them less in the public market environment.

But with a collapse in the multiples we told both parties, through no fault of their own that we just were no longer interested.

That we were not going to pay more for a Company, I don't care how good you are, than we are.

With all due respect to you, we are better than you are because we are less risk -- .

I know that both the private equity sellers, we ended those conversations in a friendly way.

They understand it.

Those two people would not agree with what I'm saying.

But they lost their deals to us.

And it isn't going to take very long before they are going to ask themselves whether they were the dumb guy who didn't take the right offer for his house and wound up selling it later for 40% less.

So I understand where they are headed.

I agree it's a public Company world.

We would have always said you wouldn't find Roper looking at public companies because we wouldn't pay a control premium off an appropriate market base price.

There are so many companies that are mispriced in the marketplace today.

We've spent the better part of the last three weeks modeling everybody and looking at people with cash on their balance sheet and people that have a variety of reasons to reconsider stuff.

We have opportunities we never dreamed

I would imagine so.

And just lastly, guys and I guess there's been some -- this Pennsylvania turnpike failure was a little bit of a surprise to most people.

Does this stuff actually matter that much to you?

Whether it's privately owned or publicly owned, they pretty much need to buy your services.

Is there any disappointment there that as a privatized turnpike they might actually spend more for collection or upgrade in technology?

Well, that's a, considering our customers, that's a question that one would ask -- want to answer diplomatically.

Fundamentally, we've always believed that if you had more PPPs, public, private partnership situations, they might spend more capital and they would maybe look at payback analysis and net present value and the kind of things that a capital expenditure would look at.

When you are working directly with the end user, it's critically important politically that you get the right Kiosk with the right exit location.

If a state congressman is on exit 22, I can guarantee you there is a lot of pressure to have a Kiosk at exit 22.

It's fundamentally different.

We think we have the preeminent technology in the space.

We can read a variety of different people's technology.

So for us, we are the best ubiquitous play for tolling in North America by a mile and we are the best data collection technology globally.

We may not be the least expensive globally, because people do use some other technologies and that's kind of it.

I don't think it goes one way or another too much.

I think if we did believe if people like McCory and Global V and others were continuing to do what they were doing that it might escalate our growth in that area.

At the moment it doesn't matter, the business we have is locked in long-term and will continue and the growth is not clear.

Okay.

Fair enough.

Thanks, guys.

Our next question comes from Jeff Sprague with City Investment Research.

Covered a lot of ground.

Just a couple quick things.

On the Z-Tech thing, Brian, it sounds a little peculiar in a sense.

I just wonder if you think maybe there is something broader going on with some of this nuke spending.

In other words, a nuke upgrade is big dollars.

What would be dispersed to pay Z-Tech would seem be very, very minor in that grand scheme of things.

Do you think there is some other sub plot to what's going on in that end market?

No.

Actually I will let John cover that.

It's all maintenance work and I don't, just don't want to name the countries.

Most a little obvious.

One of them's had a kind of 40% currency swing and that's refurbishment activity and stuff they have to do and the guy is sitting here saying the dollar isn't going to stay there.

And, of course, without commenting on his decision, it would have cost him less if we had done in Q3.

I don't know.

Maybe it swings in Q1.

I think whatever is going happen with currency is an enormous question about 2009.

Go ahead, John.

And at the end of the day, these operators still need to be able to perform their required maintenance and we give them the ability to do so.

How they do that is what changed a little bit in the third quarter.

They can either use maybe existing equipment that may be outdated but still sufficient in order to comply with whatever regulations they have.

Or they could adopt what's really become more of an industry standard, our MIZ-80iD technology, which is a robotic way of being able to accurately test for any cracks or any other structural integrity issues inside the cooling tower.

Some folks really just made a decision to use their older technology instead of the newer thing that we introduced almost three years ago now.

You can imagine these nuclear power plants are not the fastest of new technology adopters and so that the adoption curve of the newer technology continues to be very positive.

But some folks that we were expecting to go ahead and upgrade in the third quarter have now delayed that.

They are buying instead of a new instrument with new probes, they are just buying new probes.

So that delayed their decision a little bit and pushed that off into what we think may be their next outage season, which could be the first quarter.

And I wouldn't read too much into -- it happen to hit us.

It's about probably an $8 million to $10 million swing here in a $2.3 billion Company.

And then on another energy related topic, Brian, oil sands.

I would think the economics of some of those projects are looking a little squishy with $60, $70 oil.

Is there any change in dialogue up there in Alberta as it relates to what's going on with your businesses?

No, not with our businesses.

Not really.

I mean, we have got an installed base of activity.

You have got shutoff valves for diesel engines and you've got the (inaudible) eco business that we acquired and it is going to have record results.

Our ram up business is doing exceptionally well.

We are not really seeing anything there that is material at all.

And then just finally on Horizon, maybe just a little bit more understanding on how their business model works.

Are you selling seats of software?

How does the revenue actually get generated.

Sounds as like it's a little bit different than what happens with CBORD.

And then just your initial thoughts on how you might actually put the businesses together and leverage some synergy there.

I will take the first part of that.

Their revenue recognition model is really very similar to CBORD.

They sell software to schools.

Now they have a slightly different because they are not really as much in the renting software business as CBORD is.

So CBORD really doesn't sell the software.

They sale a license which allows the customer to use it for a year and then they sell that same license again the next year.

Horizon really sells the software.

For them it's around an installed base and upgrade model that then goes along.

There are two other pieces to what Horizon does in terms of revenue.

One is going to be whatever equipment that goes along with that which enables either a point of sale device to be able to host the software, so they will sell the point of sale device as well as what we hope to be a key part of their growth going forward is the vending machines which will also have communication with the software so what is vended in the vending machine is also known and can be reported as something that a student would have been able to consume for lunch instead of standing in the long line.

So those are their key areas around revenue.

And I will turn it over to Brian around the synergy opportunity.

We have Horizon that has -- we have several very strong people and they have been building a better organization as well to deal with their growth because they have been growing nicely and they have taken these, especially with now the execution against the Los Angeles school district is enormous.

We actually have Horizon reporting through the CBORD.

So Tim Tighe, who runs CBORD, is looking after the integration of the Horizon business.

There is an immediate synergy for us because we are using Micros technology to point of sale activity in CBORD, which is a relatively high cost allocation technology and with much lower application technology for processing.

The work that's going on in K through 12 world is frankly less sophisticated.

What happens is that in the meal market there is like $2.30, $2.60 that the school can claim against government lunch programs for certain kind of people and $0.60 for other kind of people and $0.30 for other kind of people.

And you can imagine how difficult that collection technology is.

And if you can offer software that's proven, you have a big leg up as people deal with this.

And we would expect more mandated requirements not less in the area.

With childhood obesity that you see, there are really big opportunities to continue to do things.

We have good software people at Horizon, but we just got a much deeper scale business in CBORD and CBORD Horizon are going to be better together than having them separate.

And just finally, John, real quick, is the early debt extinguishment charge in other expense or is it in interest expense.

It's in other expense.

Thank you.

You're welcome.

Next we will hear from Matt Summerville from Keybanc.

Morning.

Most of my questions have been answered, Brian.

I was just curious as to with Technolog and Horizon how much of the revenue there would you say is recurring?

And then just on a year-over-year basis in the second half of the year I think you maybe said $8 million to $10 million, but in percentage terms how much is Z-Tech's business down?

Just in Q3 just with one customer it was down $4 million.

And I think in total it was down about $8 million for what would have been -- and it's not in the bookings either.

It was an order in sales variance in Q3.

And we still did okay.

But what -- we couldn't roll it into what we thought we would be able to ship in Q4.

So we just took it out.

And then my first question on Technolog and Horizon, how much of their revenue would you classify as recurring.

Almost all of it.

With Technolog it's a kind of a unique model.

They sell the collection technology, so that is certainly new.

But then they are paid to provide the information.

It's a radically different model than what happens in the U.S.

where people will sell the automated meter reading hardware and not be involved in the collecting of the information to billing and the information in providing people stuff.

In the UK there is a lot of concern about gas leakage and carbon dioxide.

Just all kinds of issues that they want data on and we are maintaining all the infrastructure to provide that data to the utilities.

It's a different business model than you have in North America.

And they are getting routine service work in addition to producing the cello product that when we get out and start traveling you will be able to see.

It's as good a group of leadership people as we have ever been able to acquire in the Company.

And these people have been building a great business for quite a long period of time.

And we were just very fortunate that they wanted to, given their growth opportunities, to get involved with somebody that was going to be able to continue to invest in them as opposed to them having to try to go public in this market.

Great.

That's all I have.

Thanks a lot, operator.

That will end our question-and-answer session for this call.

We will now turn back to John Humphrey for any closing remarks.

Thank you, Lea, and thank you all for joining us this morning.

And if you have anything further, you can give me a call and we look forward to talking to you again in another three months.

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

Thank you for your attendance.

Have a great day.