Roper Technologies Inc (ROP) 2009 Q2 法說會逐字稿

Good day, everyone.

Welcome to this Roper Industries second quarter earnings results conference call.

This call is being recorded.

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

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

Please go ahead, sir.

Thank you, James.

Thank you, all, for joining us this morning as we discuss the results for our second quarter.

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

This morning we issued a press release announcing our financial results.

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

In addition, we've prepared slides to accompany today's call which are available through the webcast and also are available at www.roperind.com.

Now if you'll please turn to slide two, we start with our Safe Harbor statement.

We'll be making forward-looking statements during today's call, which are subject to risks and uncertainties as described on this page, and as detailed further in our SEC filings.

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

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

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

Brian?

Thank you, John.

Good morning, everyone.

Well, we're going to go through kind of a quick overview of how the enterprise did in the second quarter, and then we'll talk specifically about the segments and progress in the quarter and what we expect for the remainder of the year, and then update our guidance here and go to a summary and take your questions and answers.

And so the first slide, please.

The Q2 enterprise overview, we had sales of $505 million, which is essentially the same as we did in the first quarter.

Orders were up 4% sequentially, primarily due to RF.

Sales then, as you can see, acquisitions added 4% to the enterprise, organic growth was negative 16% and currency hurt us by 3%.

We'll talk a little bit about orders later, we've got a lot of lumpiness in terms of orders, lots of opportunity that could have hit in the quarter but didn't, and orders again really don't provide much insight on a quarter-to-quarter basis for Roper anymore.

Gross margins, you can see, were up 90 bps from the first quarter of 2009, when we exclude the restructuring charge, so gross margins were 50.8%, which we thought were really quite outstanding.

EBITDA margins were up even more, up 170 bps to 24.7%.

The decremental margins in the segments that went backwards on a revenue basis were 27%, and we think that's really quite good performance because gross margins in those areas are 51 and, you know, when people are reporting gross margins, we note with interest that they never comment on what the decremental margin was relative to their gross margin.

In our situation, decremental margins of 27 left us 24 points of contribution, so we still have a very solid and sustainable picture around our margins going forward.

We've got diluted earnings per share of $0.64.

The number would have been $0.67 if you excluded restructuring, $0.56 in the first quarter which would have been $0.59 excluding restructuring.

Q2 the operating cash flow was, we thought, quite good at $110 million.

CapEx was about $7 million.

So you can see our free cash flow was $103 million, well in excess of $1 a share, 20.4% of sales which is pretty good.

And our free cash flow came really from the quality of our earnings and not so much just from changes in working capital as sales diminished.

Next statement -- or slide is the income statement.

Here are the income statements.

You can see sales did stabilize in the quarter, which was very encouraging for us.

We -- we've been consistently concerned about order patterns and sales in terms of the first month of the quarter being good, and then the second month being dismal, and then the third month being okay.

That pattern continued to repeat itself in the second quarter.

But even with that, we wound up with solid, flat sales quarter-to-quarter sequentially, and comparing to the prior year doesn't matter anymore; in our opinion it is about stabilization and sustainability.

Gross profit here was up in the quarter by 90 bps; to have gross margins actually expand on flat revenue in the quarter was particularly good.

And you'll also see there's some mix things that didn't help us a lot, or they would have been even better.

SG&A, you start to see the benefits here because all of our R&D expenses are in there, and they remain at high levels, and yet SG&A dropped by $4 million, which is an annualized $16 million a year, and that's a direct result really of our retrenchment in those areas in restructuring.

Actually, some of our commission expenses went up because there's been more direct sales -- more sales through dealer networks than our direct networks, because of the stimulus holding back decisions.

Income from operations went up sharply from 17.9% to 19.8%, when you exclude the restructuring, so we thought 19.8% margins were pretty outstanding.

Interest costs were flat at $14 million.

We did have a -- what we had to register as a $3 million gain on the sale of certain assets that are quite complicated.

We entered into a new arrangement with a satellite provider around air time and fees, and in exchange for doing the transaction that we had, we did sell some of our GlobalWave assets.

But it's a much better situation for customer service, and every everyone winds up ahead, and it's not a reduction of anything; it will reduce revenue possibly in the out years but not income.

The tax rate went up a little bit from the first quarter; you can see Q1 was 29.3%, it went up to 30.2%.

Net earnings increased by 15%, even though sales were flat.

Next slide.

Decremental margins, here we have created this table so you can kind of monitor how this -- how this goes.

In the first quarter in industrial technology, the decremental margins were 35%; in the second quarter they were only 29%.

So we picked up 6 points of margin improvement there.

In energy systems, decremental margins in the first quarter had been 43% and we committed to people that we would do a much better job in energy systems on a margin basis in Q2, and you'll see the proof in that here as we get into the segment.

The decremental margins in energy dropped from 43% to 14%.

And scientific and industrial imaging went from 27% decremental margins to only 12%.

So those fell quite well for the Company, and you can see decremental margins in the second quarter were 9 points better than the first quarter.

You have to give a lot of -- a lot of kudos to our field operating people, who have really remained very nimble and quick in executing and adjusting to things, and so our hats are off to them.

Next slide.

On asset velocity, we continue to take assets off the balance sheet.

You can see here that in the end of the second quarter, our inventory plus receivables less payables and accruals got below 10%, 8.8 % at the end of June 30th, down from just three years ago at -- at 12%.

And to be below 10% we think is quite an achievement in how we manage our asset velocity.

Next slide.

If we look at our continuing focus on cash, you can see free cash flow in the second quarter was 20.4% of sales.

A year ago, our free cash flow was 14.8% of sales in the second quarter.

And then if you look at cash conversion, and we're using free cash flow conversion, we used to always talk about operating cash flow but a number of our investors have asked us to talk about free cash flow, and we're equally delighted to do that, so on a free cash flow basis you can see that the conversion was 173%; last year's second quarter was 118%.

That Q2 operating cash flow or free cash flow of $103 million is an all-time record for any second quarter in the history of the company, and so that we think is quite substantial.

If you look at the next slide, the balance sheet gets more powerful here with each passing quarter.

You can see our undrawn revolver capacity at the end of the second quarter is $543 million.

Our cash on hand is $221 million.

And so we've got just about $750 million sitting here in terms of available liquidity.

Net debt's actually less than it was a year ago at $942 million, even though we made over $300 million in acquisitions with Horizon and GetLoaded and Technolog during that period.

And our net debt to cap is 30.5%, a continued improvement from a year ago.

Next slide.

When we get into the segments, each one has kind of a different pathway for the remainder of the year.

All of them, I think, have quite good execution situations that they've detailed that we look at routinely.

Next slide.

First one is the scientific industrial imaging; these are in the order of revenue to the Company.

You can see that that segment represents about 15% of the Company's revenue.

They had, in terms of orders, difficult conversion here, because the direct sales activity that they have quoted has been held up in a number of research institutions waiting on stimulus money or hoping on stimulus money for projects they would execute.

We think if they don't get the money, they'll still execute most of these projects, and so we're anxious to see that come to a close.

We think we'll have improvement in the second half of the year as a result.

Medical continues to perform well.

We -- we think margin improvement, just as we indicated we'd have better margins in energy in the second quarter, it did.

We think we'll have better margins in the second half for imaging, and we'll be able to confirm that as the year unfolds.

If we look at the basic core businesses, you can see they still are operating at a 56% gross margin with 22% EBITDA.

The medical business, consumables, are holding up well.

We've had solid international growth, which has helped drive revenue in the overall business.

We have a number of new products coming out in the oncology arena which are in-test and being used by people, and we're encouraged about that,\ helping the second half.

When we look at what will happen in the second half on the right side, we think that growth will continue in medical.

We have some very interesting acquisition possibilities that -- that we're looking at and talking to people about, and are encouraged by.

I think -- I think the acquisition scenario in this space looks better with each passing month, frankly.

Our microscopy and life science piece, quote activity is high, and we have a number of new products that are being launched at a trade show right now called [MNM], and those, we think, are going to have a lot of traction.

The early indication is pretty good about that.

We think that we'll continue to grow orders in the second half of the year, and we expect a particularly strong Q4 out of this family of businesses.

The industrial camera businesses, we have some new products that have been launched that are doing relatively well, but the industrial markets, which make the core of those camera activities, remain very weak in terms of process control, revenue.

We do expect modest growth in orders in the second half of the year off of a weak first half base, and last year wasn't that great at the end of the year, either.

And we will have better margins in those businesses, as new products come in with better gross margins than the ones they're replacing.

Overall, we're saying we had this kind of lower direct sales mix, which held back the operating profit margins in the quarter, and -- and that's really because we pay higher commissions to the sales channels that are selling products than -- than we have to eat when we're selling the products directly on our own.

And the -- the hold back really from stimulus on the direct channel hurt us a bit in the quarter, and we think that won't repeat itself for the rest of the year.

The stimulus opportunities, we're commenting in the second half, should support imaging growing modestly.

Okay, next segment.

Here we look at the energy systems and control segment, it is 21% of the revenue of the Company.

Restructuring, which while a little bit light in energy certainly is well underway, and it contributed as planned.

We had strong sequential movement in energy.

The sales certainly stabilized for first quarter.

As you can see, they are virtually flat.

Gross margins were up 160 basis points and operating profit margin was up 540 basis points.

When we look at the refinery and petrochem process control sensor business, there's a lot of industrial in those areas.

The end markets there remain very challenging.

The industrial process control markets are, you know, pretty weak, and it's really hard to fight your way through that, although the cost improvements certainly made the margins more tolerable there.

We expect not much improvement in the third quarter out of that family of businesses, but a seasonally strong fourth quarter, and that's also off an easy comp from last year's fourth quarter.

In the oil and gas, our compressor control CCC branded businesses performed particularly well in the quarter.

Lots of field service activity in field engineering.

There's a dynamic that's helping us here where in the prior years when activity levels were higher, there weren't a lot of people that were able to support our field engineering doing things in -- in facilities, and freeing up manpower because of slowness of some of activity has allowed a lot of our aftermarket activity to grow nicely.

And we expect that trend to continue in the second half, with field service remaining strong and backlogs that are already in place looking very good for the fourth quarter.

Shut-off valve business and our -- our Canadian activity is abysmal at best.

That's been a real drag on enterprise this year.

We don't expect that to get a lot better in the second half.

But, you know, if the Caterpillar and Deutz and Cummins and those people drive more engine growth, then we'll have a better -- better than forecast expectation, but we're not holding our breath on that.

And then in the rest of the segment it is really nuclear testing and vibration measurement businesses.

Those have remained stable.

We had a little bit of improved margins in Q2.

We expect much better results in the second half in terms of the revenue that we'll have with the nuclear testing business, and those are pretty much scheduled, so we see those are mostly in the bag, and the vibration measurement business will continue to improve modestly.

And so a pretty much similar Q3 and a much stronger Q4.

Next segment, our industrial technology, it is 27% of the Company's revenue, with Neptune being about half of that or more.

Here what you're seeing is sequential sales growth in industrial technology, which is pretty refreshing, frankly, up 5% over the first quarter.

Gross margins were up 20 bps from Q1.

The quality of operating earnings is pretty spectacular, 24.9% OP margins.

EBITDA, you can see, is 29% for the segment against 49% gross margins.

And the -- the operating margin was up 160 basis points sequentially, which just points to the quality of the management in these businesses.

If we look at the second quarter for the water meter and AMR business, it performed as expected.

Revenue was up 10% in the -- in that business quarter-over-quarter in a market that clearly shrank.

Second half, we'll get some improvement, everybody believes, from customers who are still hopeful about stimulus decisions being made and timing.

One of the reasons we took the top end of the guidance down though was we don't really expect anything out of Canada for 2009, which is certainly a big surprise for us versus the beginning of the year, when we expected that we'd be able to ship Canadian product in the second half the year, so that just bodes much better than expected for 2010.

On the material test section, they were flat to the first quarter, which was for us great news, because that -- that business was really struggling, and to get that stable is a -- is a very helpful sign.

Consumables remain okay in that business, but the new equipment orders, when you think about the people that we're -- that we're selling to being heavily involved in industrial processes, are certainly not good.

Second half, we'll have a solid seasonal fourth quarter.

The Q3 stuff we -- we worry a bit about what -- what the business is saying because we expect extended shut-down periods, and we tend to think that that has some risk associated with it.

The flow control piece of the businesses, our refrigeration business had a particularly good second quarter.

They're doing really well in emerging markets.

And the industrial oil and gas business continues to be pretty soft here.

We think for second half we'll have kind of the normal seasonal decline that we see every year in Q3, but since it is off of a lower base it won't have a lot of effect.

Q4, we're -- we're going to get known benefits from product enhancements we've made in some of the businesses, particularly Roper Pump, with a new technology for downhole mud pumps.

We've got power generation and mining shipment activity that is going to be strong, and that business is, frankly, kind of in the -- you know, it is a business that we know is going to be there.

So industrial technology will be fine.

Next slide.

The RF technology segment, here you can see sequential gross margins improved a bit, 110 basis points.

Q2 orders were up off of Q1 sequentially by 22%.

And I just want to remind people that this idea of looking at quarterly orders is a waste of energy.

People who are looking at quarterly numbers year-over-year have it wrong; that just has nothing to do with what is occurring.

If you want to smooth it out over 12 or 18 months maybe you can get something out of that.

We had a couple of orders that could have hit in RF, and then everyone would have said, "Oh, wow, look at the spectacular order growth at Roper." Those orders could hit in the third quarter or they could hit in the fourth quarter; it won't be that meaningful.

I would follow our sequential activity.

I think it is a better indicator about the sustainability of what's happened, and the stabilization of all these businesses.

Acquisitions performing very well in this segment.

You can see the gross margins at 49%, EBITDA at 27%.

If we look at what happened in the second quarter in the toll and traffic side of business, we did particularly well on projects, with one exception.

With the -- the tag and hardware revenue, which is better margin, was much lower, but we expected that sequentially.

When we look at the rest of the year, we'll have a difficult Q3 in the tag area, because we had substantial shipments last year into certain states but those are going to largely repeat very well in the fourth quarter.

So we've got substantial known revenue and income and margin improvement that we'll have in Q4 on the toll and traffic side.

There have also been some significant things that -- that we think are in the pipeline that we -- we can't really talk about, one -- two on the West Coast and one somewhere else.

And so those -- those things look interesting for us.

In the education and healthcare arena, orders for CBORD and Horizon were -- were fine in the second quarter.

People, in terms of renewals, we had a very solid year in terms of contract renewals.

We have a lot of deferred revenue in these businesses, and so it is critical for Q2 to do well in that respect.

We had a major win at Princeton University, basically deplacing another person in there.

And that will -- that really helps when we're talking about other applications for that university and for people in general.

Second half you see we'll have strong sales growth, just from the existing contracts that are now in place.

We think that the margins will continue to expand at Horizon, as we continue to integrate that business in our governance model.

We get to freight matching, freight matching has been a very pleasant for the year.

We expected, with difficulty in the transportation arena, that they would have some challenges this year, but GetLoaded has performed spectacularly.

The integration there has really helped our margins overall.

The performance we see, we've made a -- a few changes in terms of productivity strategies there which are working well, so we think it will be solid again for the second half.

In terms of the other areas, the satellite access situation, we were sole sourced with one satellite vendor which has issues around its longevity, in our opinion, and we've been searching for a way to deal with that to get another satellite provider, and to have some situation that assures continuity over a long period of time at a rational program.

We finally did select somebody, and as part of that negotiation a number of things happened, and we agreed to sell some of our GlobalWave assets to that.

But you shouldn't look at this as a gain on a sale, and that thing goes away.

That's not what's happening here.

What is happening here really is that we've had to relinquish some assets in order to get a long-term agreement that provides better service and better customer access for us.

And the way that the accounting works is the way that it works.

But over time, we'll probably be booking a little less revenue around satellite time but it -- it won't hurt our margins.

The acquisitions in the RF arena that we're involved with today are very interesting.

You know, it is exciting, as always, and we think there are a lot of favorable things.

And then in the second half Technolog has an opportunity to do really quite well.

We have an exciting bid there that is very reminiscent of what happened when we had TransCore and we were taking it into regions of the world that they didn't have a lot of experience in, and we think that we're on the verge of that with Technolog, which is really quite exciting.

Next slide.

Here we look at the guidance update.

Sorry, next slide.

2009 guidance, we've increased our operating cash flow guidance from $325 million to $350 million or more, and that's off the strength of much better visibility than we've had in the past, and being comfortable with what occurred in Q2 and the sustainability of those margins.

Full year DEPS, we kept the $2.60 low end of range, the high end we went to $2.72, really just singularly as a result of saying, hey, how are you going to get any of this Canadian business when you don't have this thing finalized?

Q3 DEPS we established at $0.61 to $0.67.

Our Q2 had been $0.61 to $0.65, so we think $0.61 to $0.67 is reasonable.

And Q4 then is much stronger, and we know -- we're quite confident that it will be at $0.73 to $0.79.

The numbers kind of -- you can add on your own.

Next slide.

So in summary then, for Q2 what we've got are DEPS were $0.64, which excluded the $0.03 of restructuring.

Sales stabilized; orders were up 4% sequentially.

Much better visibility in the second half on a business-by-business basis, we were quite encouraged by our [quarterly] reviews this year.

Each segment has built a pathway, we think, to improved second half results, which allows us to provide guidance not only for Q3 but Q4 and the full year with some confidence.

The restructuring benefits that we're getting are really quite large; you can see the $16 million in S&A, and gross margins reflect this as well.

And yet we've only spent $7.7 million year-to-date on this, versus a lot of people that are getting nowhere near those results who are spending tens and hundreds of millions of dollars.

Sequential margins have improved significantly; gross margins up 90 basis points, operating margin up 190 bps, and EBITDA up 170 bps we think is pretty solid performance.

Decremental margins, as we said, down 27%.

Q2 record operating cash flow, record free cash flow, greater than 20% of revenue.

Increased the cash flow guidance, and we're sitting on over $760 million for a much improving environment around acquisitions.

So, in summary, what we see are great cash returns, sustainable results now, and improved visibility for the second half.

So with that, we'd open it up to questions.

Thank you.

(Operator Instructions)

We'll take our first question from Alex Blanton with Ingalls & Snyder.

Good morning.

Good morning, Alex.

Your margins are quite remarkable, considering the decline in the sales and -- both year-over-year and sequentially, as you pointed out.

Can you tell us how much pricing is helping?

It strikes me that that might be one of the factors.

Or is it hurting, and you're able to offset that?

What's the pricing situation?

I know you've got a lot of different businesses, but if you can generalize?

I would say on balance pricing, at worst, is neutral.

We're not getting hurt by price anywhere.

I mean there certainly are aggressive bid scenarios that you are faced with and what have you but price -- pricing, it is really some reductions in restructuring that have improved some of gross margins in here more than price, I would say.

But, you know, competitively we're certainly going to remain competitive with the value proposition that we have, but we're -- we're not getting a lot in pricing, and the public bid scenarios are -- you know, they are aggressive on pricing.

So we've got to make sure that we are cutting the expenses to keep abreast of whatever is going on in -- in the pricing scenario.

John, maybe you want to take a swag at that?

Alex, I mean with our gross margins what they are, which is really one of the key metrics that we look at to make sure that the value proposition that our businesses are providing the customers are reflected in the pricing we're able to generate, the nice thing is we don't have an awful lot of standard products, probably 15% of our revenue comes from areas where you have to have a price list, the rest of them are more customized solutions.

So it is sometimes difficult to really track what exactly is happening with pricing.

We tend to just look at gross margin, and make sure that the value we are provided is being reflected.

Okay.

Second question, looking at your medical products, and you mentioned that there are some interesting medical acquisitions available right now, could -- could you tell us in your opinion what effect the healthcare reform bill or -- and I know it is hard to tell how it is finally going to come out, but what is your thinking on that and how it might or might not affect you in the medical field?

Well, that's a -- that's a great question.

And no one knows the answer to the question, which is why a whole lot of medical companies are suddenly willing to talk that were reluctant to do so in the past.

And so the amount of time that we've had to spend with companies in this arena has gone up, as we're trying to figure out whether there are reasons for willing to being acquired is related to Obama-care, or whether it is some other factor that is going on.

So -- you know, we're in a very small niche.

You know it is -- take an acquisition that occurred this week, or will, with Agilent taking over Varian, we look at something like that and say, no, don't want to do that.

But it is interesting to look at things in urology, in radiation, oncology, that are right in our sweet spot, our medical people, our staff, medical guys are really world-class people, and so we very much rely on them.

Our business development guy in that arena comes from a very large cap global company, is extremely knowledgeable about that.

And so I think that if we do something in that space, it will be something that is very easy to explain to investors, that doesn't have risks associated with it.

And I think trying to get your handle around future growth rates is difficult in this arena.

And making sure that you don't buy things that are CMS reimbursement schedule-driven things I think is very important.

Okay.

Thank you.

Thanks, Alex.

Next we'll hear from Deane Dray with FBR Capital Markets.

When -- you referred to the scientific business that some of the research customers are holding up orders because of the potential stimulus, but you added a comment that you thought they'll still buy if they don't get exactly the same stimulus funding.

So are these in backlog or where is that funding actually going to come if it is not Obama dollars?

Well, the -- the -- unfortunately you heard us correctly.

I mean what -- what we've run into in that arena are things people intended to do saying, oh, wait a minute, I think that I might be able to get funding for that, and if I get funding for it I want to wait to commit to the order to use the funding for that, as opposed to normalcy.

And so we -- we actually think there would be a modest uptick because of stimulus.

But, you know, it keeps dragging out here until the end of the year, could drag out all the way until 2010 some people think, although we have a hard time believing that, but maybe it is true.

So we don't -- we don't think we're losing any business.

We just think that we got some business postponed in Q2 and -- and we're hopeful that that won't be the case as the year unfolds.

Hey, Brian, you brought up the Agilent/Varian transaction yesterday, and I would be interested because Roper has a number of businesses that are in the analytical instrument market, and your focus is more on applications rather than the tools themselves, but what parts of that business do you find interesting potentially for Roper?

Well, in terms of instrumentation when -- you know, we used to have a segment that we called analytical instrumentation, and we discontinued that grouping several years ago because we -- we thought the problem with analytical instrumentation -- not thought, was the problem, is it was product-centric.

So we wanted to go to end markets, and that's why we went into some of those businesses going into energy, and other of those businesses going into the scientific and industrial imaging segment.

And since then we've actually experienced better growth and better margins, we've had better gross and operating margins and better asset velocity, and I think better product development.

And so we've -- we kind of like that scenario.

So we we wouldn't -- you know, we wouldn't -- we wouldn't be interested in acquiring an instrumentation company that wasn't squarely in the end markets that we care about.

And as we've said before, we don't -- we don't consider the research arena -- we like medical better than research because it's so lumpy on -- on research dollar commitments, and we've never been overly comfortable with being dependent on the National Institute of Health releasing monies, or the same thing in Japan.

So I don't think that you will see us being a big acquirer in that space.

And so the application, the PAC business for Roper is probably the best example of the way that you like -- the commercial opportunity in analytical instruments?

Yes, I would say that is right.

In terms of PAC, PAC has -- a lot of businesses is really oil and gas, but it also has things that we can do to build it out in food, for instance.

So there are things that we can do in that business that relate to soft drinks and bottling in India and places like that.

And so we would pursue that kind of product line extension through an existing organization, more than we would buying some small niche business that isn't going to give us any leverage globally.

Great.

And just last question for me, would be interesting hearing a little bit more, and I know that you have to be guarded in your comments, but this win for CBORD at Princeton is a big deal, it's a high-profile win.

But give us some more color in terms of what the bidding process was like; did they take all the features?

Is this a full service, full application of CBORD?

And what should we expect in terms of the pipeline?

Dean, you are right, it was a -- it was an important win for us, and like many of CBORD's locations when -- even when we replace an existing incumbent, the full sweep of what CBORD is able to provide is usually not where a university will start.

And of course we continue to add functionality every year with the software they provide.

So, no, it doesn't start with the full suite, but it does have card and security access and -- and things that help enable commerce in a -- in a -- in an university environment.

So that's where it starts, and we look forward to being able to grow with -- to grow with Princeton.

And how was pricing?

Pricing was --

Never high enough!

Pricing was acceptable to us.

Great.

And then installation and timing?

You know, I don't know the to that because it is just a brand new win, and we'd have to talk to the CBORD guys, but we'll get back to you on that.

I -- I wouldn't think it would be around the corner, it would be later in the year.

Got it.

Thank you.

Thank you.

Our next question will come from Mike Schneider with Robert W.

Baird.

Good morning, guys.

Good morning, Mike.

On TransCore you mentioned the Q4 potential for a fourth quarter ramp, and it sounds like it is related to existing roll-outs; is that true, or is the ramp expected on some projects you're waiting for awards?

No, we have -- we have some awards we can't really talk about yet.

But, no, it is really related to orders we know we're getting and -- and commitments that we have from states.

It is around a -- particularly around the -- the tag sales that -- that we'll have in existing markets will be much, much better in Q4 than they were in the second and third quarter.

And then we have really important wins that are done that relate to all the early-stage activity for ITS, and one of those is in California, I think there's some sensitivity about us saying exactly what and where.

Another one is the Pennsylvania Turnpike.

I mean there are quite a few things that are going on that are -- that are good.

Okay.

So these are orders in backlog, or with high certainty to go into backlog?

Yes.

Yes.

Okay.

And then just a clarification, John, on the guidance, does the guidance include the $0.03 gain booked this quarter?

Yes, it does, yes.

Okay.

And it also includes the transition costs that we expect to incur over the next three to six months, and the slight diminution in revenue, as Brian talked about, because that was really a sale in conjunction with a few other things we were doing with the satellite communications business, and actually, although only at the margin, it will actually help our cash return on investment, because it reduces our investment, and the cash return really won't change dramatically.

Okay.

And then the gross margins are impressive.

And I'm curious, if you look at revenue being flat, basically gross income is up, call it $4 million, sequentially.

Where is that savings coming from?

Is -- and maybe you can just lay out exactly where head count stands today versus the start of the year.

How much raw materials are contributing, just if you can bucket in general terms where the savings are coming from at the gross margin line?

Well, it's a combination of things, it is not only those areas that you mentioned but just other overhead cost savings.

I mean we're down in the range of 750 folks from year end, which is a little bit less than 10%, and that's spread across production employees, which of course will hit up in the gross margin line but also in the SG&A area.

You know, tracking individual buckets of costs is not something that I think we spend very much time at, and frankly I wouldn't encourage others to spend that much time at; rather, we always like to make sure that our business leaders have enough flexibility and empowerment to make sure that they are working on whatever is important for their business.

So we really don't have a top-down initiative to say that you have to take 4% out of this cost bucket and 8% out of that one.

On the other hand, we have very clear objectives and solid business leaders who understand how to grow margins, even in a difficult and tough economy.

Yes, I do think our -- that the fact that we use this break-even technology, which is an economic look at how a business does in addition to accounting, it is absolutely critical to our culture and so it -- you know, every month the guy's got to reset his break-even, and I do not think that many people do that, and that is really why we're more nimble that people understand.

And just in raw materials, have you seen the full benefit of lower raw materials flowing through income sheet or --

Not at all.

No, not yet.

No, no, not at all.

That will happen, but we haven't yet -- we've gotten next to nothing out of that at this stage of year.

Is that Q3 or Q4 where you hit the full savings?

Depends on volume.

Okay, thank you.

All right, thanks, Mike.

Shannon O'Callaghan with Barclays Capital has our next question.

Good morning, guys.

Good morning.

Brian, you talked about the tags in 4Q.

You know, the 4Q weighting is a little higher than I would have thought.

Anything else going into your head in terms of caution around 3Q versus 4Q, or things that are weighted?

Well, I think the only thing about the third quarter that, you know, we said was more related to energy and industrial, that worries us is the -- the extended shutdowns.

You know, if you look at Q4 last year you had these much extended shutdowns.

And we've really gone through Europe on a -- on an almost customer by customer basis.

And so we -- we do -- we wonder about that a little bit.

The -- some of the field guys think they'll do better than we -- we think.

But, you know, unfortunately -- but, you know, unfortunately we've been pretty correct along the way.

We have a normal seasonal fall-off in the third quarter because of our European presence, and there's no reason to think that that wouldn't repeat itself.

I think the thing that -- that has frustrated us now for almost a year-and-a-half is that first month is -- in a quarter has been okay, and second month has been usually weak, sometimes really bad.

And then the third quarter comes back well enough to limp into the end zone, you know?

And -- and we're assuming that that will continue to be the case in Q3.

I mean, if -- if August came in better than we'd expect, and we'd feel pretty good but, you know, fourth quarter, we just have so much stuff committed to the fourth quarter that -- that, you know, things would have to really change.

We -- we had one situation that we hoped would happen in the second quarter that still hasn't yet happened that we have pretty high degree of confidence in if that happens, then that will make these numbers, you know, pretty -- pretty straightforward to obtain.

Okay.

And then could you fill out on Toronto a little bit?

I mean talking about making the 2010 picture better, what is your visibility into when that's actually going to start up next year?

Yes, we have a great guy up there, and poor guy, you know, he -- he -- he has to limp into a meeting with this.

The -- the Toronto folks are all on strike up there.

Wow, what's going on is truly amazing.

We -- we've gotten back all the legal stuff, and we've responded to all that, so we're waiting on that.

You know, we basically are saying it is a 2010 event and not going to happen this calendar year; just think about the weather alone, you know, if they haven't started in Q3 I don't see them shoveling frozen tundra in Q4.

So we -- we'd love -- we'd love to be able to record the order.

It is actually one year ago today on our second quarter call we announced that we'd won this order for, you know, a very substantial amount, and here we are a year later and haven't been able to recognize any revenue or book any of it.

So, you know, I just -- I would throw it out the window and assume it is going to happen in Q1.

If it happens in the fourth quarter, then somebody who wants to talk about orders will say our orders are up dramatically.

All right.

And just last one, tax rate expectation for the year at this point?

Well, as far as the second half is concerned, we'll probably be somewhere in the, oh, 32% to 33% range, absent any discrete items that may hit.

And we have a few things that we're working on as far as the something half is considered, but I really can't tell you exactly when -- when those things might happen.

We -- we've actually done quite a bit of work on the tax front, added some resources here, some very talented individuals here at the corporate office, who have been working with our businesses on some tax strategies.

So what -- what used to be a 34% or 35% tax rate, I think it's fair to model on a going forward basis kind of in the 32.5% to 33% range not only this year but the rest of the year but also going forward.

Okay, great, thanks a lot.

All right.

Our next question comes from Jeff Sprague with Citigroup.

Thank you, good morning.

Hey, good morning, Jeff.

Hey.

Just a -- a few things.

Brian, first on M&A, do you see the ice breaking anywhere other than healthcare?

Well, it's breaking everywhere.

That is -- the -- the -- it -- it -- what -- one of the things that's happened is that spreads have come down so much on the high-yield debt, you know, like, they are down 1,100 basis points, so guys are kind of getting some clarity to say, okay, I think that I can do this, that and the other, and then they can run their numbers, and then decide whether having a transaction with a strategic like this makes sense, or they want to go ahead and run the risk of doing whatever they want to do.

So that has been one thing that has helped.

I think second, public company valuations have snapped back, and more cyclical and, frankly, less attractive companies have bounced a bit more than others, and so that's also given the private equity guys a better handle on maybe what really their price expectation could be.

So those two things are good.

Now the bad thing is that there are all kinds of industrial businesses -- we're blooded with opportunities.

We look at those guys and their cash returns are 10%, 15%, or 20%, which, you know, we don't think is very good.

And, you know, if you think that you are going to get those cash returns up to 50%, you've got to believe in a hockey stick approach on revenue, and we don't believe in that.

And so, you know, I -- I -- even though the market's broken loose, I don't think you'll see us act in that area unless we found some green technology that looked really great on a global basis that got us a better entry into India, China, the Middle East or places like that.

So what we're focused on are a wide variety of companies that deal with RF and -- and a few that deal with medical that could be in our space.

And then we're also looking at some application companies that are interesting that are outside our current segments a little bit.

And then the CBORD/Horizon area remains really very interesting, the things that you can accrete to that business and the good leadership that we have in those businesses are -- are pretty doggone good.

Great.

And as it relates to power gen, I think you specifically called that out as some visibility on getting better.

Anything in particular there that's actually starting to move, or is it just some project timing that's specific to you?

Well, it's all project timing but, you know, basically what people keep telling us, when you look at heavy oil applications, if you could get oil up to $75 a barrel and, you know, they -- they tend to spend more time in remote sites, which means they're running diesel engines, and it means they need shutoff valves from us and so, you know, there is some -- there is some glimmer of hope out there.

We're not rooting for higher oil, by the way, but that is really the genesis of that.

Plus, Z-Tech has got a number of things going that are beneficial in the testing market around power generation, and so there are a couple of things in energy that -- you know, they're not hugely material, but at the margin they could give us some upside.

And what should we think as far as timing with something as it relates to the EZPass recompete?

I don't know.

Did you read the New York Post article?

Yes, I did.

You know, we can't talk a lot about it, but we certainly have spent a lot of time, and are continuing to spend a lot of time with them.

I think we've spelled out an exceptionally clear pathway around how we see the world, and how they could benefit from our technology, and we're -- you know, can't talk much about any of the conversations that are going on, and so I wouldn't -- I wouldn't count anything there.

Even if you can't reveal it, is there date certainty to a decision?

I'd say no.

I mean there are -- there are dates like -- there have been actions which have occurred, some really quite recently, and there are further actions which are occurring that are timed commitments.

But I -- I -- I don't think that the -- the group would feel obligated that there's a hard, fast time, and I think most people would think there would be testing and -- and a variety of things that went on before they firmed up something, even if they had an expression of interest.

So I -- I mean, I -- certainly in -- in -- if we were fortunate enough to win any part of that award, I don't think you'd see any economic benefit to us before 2010.

Okay.

Great.

Thanks a lot.

You're welcome.

Next we'll hear from Matt Summerville with KeyBanc.

A couple questions.

Brian, you obviously had very favorable decremental margins relative to your organic sales performance in the second quarter.

Do you think the same level of decremental margin is sustainable based on what you though about your core business, how that looks in the back half of the year, as well as taking into account mix?

And then my second question relates to how much in your guidance are you really counting on help from stimulus in second half '09?

Well, let's say this first we -- we wouldn't count on anything on stimulus support.

So, you know, I think that what -- a lot of our operating people are hopeful about that; you know, we're -- we're very conservative on that subject.

So on the part about decremental margins, I -- it -- there certainly is a mix issue in that that benefits us.

If you look at the mix of things that happened in the second quarter, you had terrific improvement in energy systems control on the margin basis, up 540 points from the first quarter.

I think what impressed us, going through our own internal quarterly review process, is the strength and commitment people had about the sustainability of what they did in the second quarter.

So the proper answer to your question would be, only mix should really change our ability to manage margins in the third and fourth quarter.

Now we know we'll have unfavorable mix and tags in Q3, but there really isn't any other area that we should have unfavorable mix in the third quarter.

We -- we certainly get a seasonal a seasonally strong Q2 out of CBORD because of the way that whole process works, and of course it is a high-margin business.

So that helps, and then we won't get as much help out of them in the third quarter as we did in the second.

But on balance we feel pretty good.

But I won't wouldn't start forecasting decremental margins in terms of guidance, any more than we like to forecast orders in terms of guidance.

Within your energy business, just sticking with the refinery and petrochemical piece, are you seeing any stabilization in incoming order rates there?

And then I'm obviously netting out the seasonality you expect in the fourth quarter, have you seen signs of a bottoming yet?

I don't know if I would call -- yes, I think so.

We're pretty stable into that business, the area where we serve into refining and petrochem is more our petroleum analyzer business, and although the instrument sales continue to be at a pretty low level, the consumables have held in there nicely.

And we saw a Q2 that was similar to Q1, and we expect a Q3 that is kind of similar to what Q2 was, with a seasonal benefit, which we have always seen in that business, even actually last year, although not -- not to the same extent, kicking in in the fourth quarter.

I think our fear, Matt, was that, you know, Q2 would have a continued decline sequentially from Q1, and that was a huge worry.

And to get that quarter behind us, with basically flat revenue and -- and a situation where -- where -- where guys are really quite confident about sustainability, we go into a seasonally weak third quarter for Roper, boy, if we could -- if we could maintain flat sales, it just proves the sustainability is there.

And you look at the margin improvement and, wow, upside leverage on the next [dollar] of revenue is going to be pretty breathtaking.

And so we're feeling pretty good about the fourth quarter in 2010 subject to, you know, the whole economy blowing up again, which is certainly a risk that you have to factor in.

Thanks, Brian.

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

We now return back to John Humphrey for any closing remarks.

Okay.

Thank you, James.

Thank you all for joining us, and as always we look forward to talking to you again in three months after we finish the third quarter.

Have a good day.

That does conclude today's conference call.

Thank you for your participation.