Roper Technologies Inc (ROP) 2009 Q4 法說會逐字稿

Good day everyone, and welcome to the Roper fourth quarter 2009 financial results conference call.

As a reminder, today's call is being recorded.

I will now turn the call over to John Humphrey, Chief Financial Officer.

Please go ahead, sir.

Thank you, Augusta, and thank you all for joining us this morning as we discuss the results of our fourth quarter and full year 2009.

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

Earlier 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 have prepared slides to accompany today's call which are available through the Webcast.

And also are available on our website at www.RoperInd.com.

Now, if you'll please turn to slide two.

We begin with our Safe Harbor statement.

During the course of today's call we'll be making forward-looking statements which are subject to risks and uncertainties as described on this page and as detailed 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 telephone participants.

Brian?

Thank you, John.

Good morning everybody.

So, we'll cover kind of an enterprise overview this morning here, and then we'll look at the individual segment performance and the implications for that for 2010, and then discuss our outlook for 2010 and our guidance.

So next slide.

The key 2009 results, I thought we would obviously we'll focus a lot on numbers and quantitative achievements in much of today's material, but I want to start just by commenting on the qualitative side of Roper's performance in 2009.

This year really confirmed the power of our business model and the effectiveness our people in many ways that go beyond just the raw numbers.

First, we really enhanced the foundation for our long-term growth.

The Verathon platform is quite significant for us.

We've expanded the range, reach and global access to tolling opportunities throughout the world.

We have a number of new product initiatives, the most in our history, and have continued growth coming now from an even larger installed base of products and recurring revenue from multi-year contracts.

Second, our asset light business model allowed us to have very modest restructuring, with very substantial paybacks and immediate ones within the year.

We only invested $12 million, unlike many of our other peers who spent far more than that in restructuring, and already those investments are in the money and you can see the fruit of that here in the fourth quarter, with the margins throughout the enterprise.

Third, our governance processes enhanced both nimble and targeted actions in a very volatile economic environment by our field leadership.

The agility and effectiveness that they showed without any top-down, one size fits all mandate is really unprecedented.

Fourth, the excellent margin performance, despite difficult end markets, surprised even us throughout the year.

Whether it be gross margins, to operating margins or EBITDA margins, the strength of the businesses was proven over and over again.

Fifth, our balance sheet quality improved dramatically.

We extended the maturities of our debt instruments and added flexibility.

With maturities now out to the middle of 2013 and 2018, we enjoy the best balance sheet in the history of the enterprise.

Sixth, our free cash flow conversion in 2009 actually equaled what it was in 2008, which we think is quite an accomplishment, given the challenges of 2009.

Seventh, we increased our dividend by 15%, which demonstrates the confidence and faith we have in the cash flow nature of our businesses in the face of a difficult economy.

Eighth, our Q4 seasonality returned to historical norms in every one of our business segments, which was very refreshing.

It's something we've been looking for and a more normal pattern we had hoped for, the kind of year end buying that we had traditionally seen in the company, and we certainly received that.

Ninth, we had outstanding Q4 performance which closed the year on a positive note and so, ten, let's just show and look at the numbers.

Next slide.

In quarter four, unlike prior quarters, where we had to start off talking about sequential improvement, we actually chose to just talk about the flat year on year Q4 results.

For the first time in a year, our orders were actually up 1% compared to the actual orders of a year ago, at $565 million.

You can see here on the slide that came 2 points from acquisitions, 2 from currency and only 3% negative organic growth.

Our sales were down only 4% to $554 million, with acquisitions and currency adding 4 and organic growth negative at 8.

Our gross margins were up 120 basis points to 53%.

Our operating margins were up 180 basis points to 22.9%, when you exclude the restructuring and acquisition cost that occurred in the fourth quarter.

Our diluted earnings per share for the quarter were $0.81, up $0.02 from the fourth quarter of 2008.

Our operating cash flow reached $120 million in the quarter, 22% of revenue and 166% of net income.

And our free cash flow was $112 million in the quarter, representing 20% of sales and 156% of net income, and with order trends improving and outstanding execution, we feel pretty good as we go into 2010.

Next slide.

When we look at what happened sequentially, you can see the amazing turnaround here in Q4.

You'll see that bookings went up from $499 million in the third quarter to $565 million.

Our book-to-bill stayed at 1.02.

Our net sales were up 14% from $486 million to $554 million.

Our gross profit expanded 220 basis points from 50.8% to 53%.

Our income from operations went up 34% to 127 versus 95 in the prior quarter, driven by this operating margin improvement, up 340 basis points to 22.9% in the fourth quarter, versus 19.5%.

If you look at both higher taxes and higher interest costs, we still were able to get our diluted earnings per share up 29% over the third quarter, and incrementals that are a breath-taking 47% with $32 million of operating profit over $68 million of incremental revenue.

Next slide.

Our asset velocity continues to be exceptionally strong.

You can see that inventory here as a function of revenue continued to improve down to 7.4% at the end of the year, and our inventory plus receivables less payables and accruals closed the year out at 8.3%.

All of that of course adds to our free cash flow.

Next slide.

When we look then at the cash generation of the business, you can see that our operating cash flow as we said was $120 million in the quarter.

For the full year, that represented $368 million.

Our free cash flow was $342 million, and 143% of net income and as we compare that to the last four years you can see in the 2006 and 2007 years it was 122 and 128 and then in 2008, 143 and to repeat that in 2009 given the headwinds demonstrates the capability of our people and the power of our businesses.

It's the 12th consecutive year that our free cash flow has exceeded net income.

Next slide.

If you look at the balance sheet, you'll see we ended the year with our revolver being undrawn to the tune of $661 million out of the $750 million revolver, and just to remind everyone that revolver stays in place through the middle of 2013.

We ended the year with $168 million in cash, despite the acquisitions.

Our net debt was down over the year to $986 million.

Shareholders' equity was up over 20% and our net debt to net capitalization closed the year at 28.9%.

In 2009, we did $355 million in acquisitions, added to the $705 million in 2008, bringing us to about $1.06 billion in the last two years, which is consistent really with us investing about $450 million to $500 million a year and we would expect that that trend would continue.

Next slide.

Here we see the first of the two acquisitions in the quarter.

United Toll Systems, which we've talked about in public environments but not on the call, provides really exciting new technologies in five different areas that we haven't enjoyed before.

We get the IVIS vehicle detection classification system, which is pictured in the top photo you see on the slide.

This allows for much speedier installation and the ease of installation, cutting less deeply into the pavement, and something you can get in and off the job quickly, meaning you don't have to close all of the roadway down to make a change.

VCARS, which is really a video tolling algorithm, that we're using in Texas now.

This allows remote management and online capability with no one in the area to provide the data to do the tolling and violation processing.

Thirdly, it's our TekTrak Gantry system which is hard to depict here but it's very important new technology for the industry because it comes in at a much lower cost than any of the Gantry systems that are used today and it allows you to change the signage over the roadway from the side of the roadway, rather than having to be on the roadway and shutting it down.

Fourth is the online maintenance management system that we have, which allows us to really operate and control things from a back room remote operation elsewhere.

and fifth, it gives us a blade server architecture.

From a customer service, field service viewpoint, If there's an issue, a technician can simply go out, pull the entire blade out of the computer, put a new one in and people are up and running in minutes, rather than having to pull wires and doing field diagnostics.

Next slide.

Here we look at the Verathon medical platform acquisition that closed on December 3rd.

Really offers us several proprietary products, that with a very targeted audience.

These guys have been able to grow in the low to mid double digits for quite some time now.

We don't expect any change in that.

We expect that to continue.

The markets that we have that are addressable are really underpenetrated at the moment.

The products we have are really breakthrough products for people, that it's a matter of range and reach and continued sales driving that kind of growth in the future.

Plus, we're able to give a slightly expanded international footprint for Verathon and we're already off to the races in Australia with we think widespread new opportunities.

It provides us the best platform we've ever had for additional bolt-on acquisitions.

Some of which we're reviewing as we speak.

And we've got a sales force with well over 100 people around the world that are direct sales force, and those of you who know anything about this particular space would know how valuable and how hard it is to have something like that so we're going to be able to bring other product lines into that sales force to leverage their effectiveness and we have terrific partnerships with a wide variety of health providers and institutions.

Next slide.

Well, from here, we'll move into the segment review.

Next slide.

We start with scientific and industrial imaging and it's hard to really not get excited at sort of how many ways could you say wow about what has occurred here with the the turnkey nature of everything that we worked so hard over the last couple years really coming to fruition.

You can see for the first time ever we've got gross margins at 60%.

60%.

Those gross margins were 60%.

Our EBITDA margins were 33% in the quarter.

You got terrific execution all across the line with all of the businesses, and the real wonderful thing is that it's really not the scientific and industrial imaging segment anymore.

Industrial is simply a misnomer, it's an insignificant contributor to this business, this really the medical, life science and spectroscopy business now.

And in the quarter, you can see when we look at the variable results from Q3, our orders are up 35%, sales are up 47%, and operating margins are up 940 bips.

When you compare that to the prior year's fourth quarter, our orders are up 21%, sales are up 24%, and operating margins are up 630 bips.

It's an all-time Q4 record for sales and certainly profit performance, and we are starting to see the signs that the stimulus drag on decision-making in things in the NIH area, plus some year-end spending in Japan, are much better than what we have had recently.

In the medical arena, in terms of the fourth quarter, the international market growth that we had in consumables offset the weakness with hospitals on new equipment purchases, and of course Verathon kicked in from the third of December or something so we got a couple of weeks of Verathon in here.

As we look forward to next year, we see continued growth in the medical businesses, although we do have some difficulty in the hospital markets around radiation oncology.

But the Verathon growth is certainly in place to deliver double-digit plus growth and improvement.

In the second category of microscopy and life science, we had very strong performance in Asia in the fourth quarter.

The new products that we launched in the fourth quarter have been successful and for 2010 what's really great is that those recent launches now passed the early adopter phase are moving to a broader base of adoption with a great deal of commitment around what will happen in 2010.

We've got a very good backlog in this place and so we see continuing growth throughout the year.

In the third category, our Spectroscopy and physical science area, we had significant business in China in the fourth quarter and Japan which we expected.

The markets continue to improve for the physical science business and the new products that have been launched by our people in Princeton have had widespread acceptance.

Next slide.

Second segment here is the energy systems and control segment.

Again, spectacular margin improvement.

We have 56% gross margins, 31% EBITDA margins in the quarter.

If you look at year-over-year performance, it's still not positive organics, but we expect that will change soon.

So we were down only 8% on orders and 8% in revenue, but compared to the third quarter you see very sharp momentum shift where orders are up 23%, sales are up 22% and operating profit margins are up 750 basis points.

We really completed the restructuring in there and so some of that leverage is coming from that benefit..

In the fourth quarter in our refining and petrochem we've had solid growth in Middle East and Asia, and the seasonal buying that we've enjoyed traditionally in those businesses returned.

As far as 2010, we see modest growth with end markets being a little bit better than they certainly were in 2009.

Our sensors and instruments business, which had a very challenging year in 2009 is seeing some real improvement from the global industrial end market recovery.

We've got a terrifically lean cost structure and very favorable leverage in that business, so we think with emerging opportunities and sales that have been driven mostly by India and China, that we really have a substantial incremental growth that will contribute in 2010 off of a very low base and easy comp.

In oil and gas, we had a record fourth quarter for our compressor control technology business, driven both by equipment sales and by field service.

And as we move into 2010, we have a very terrific backlog throughout the year, so there's very little book and ship business that's going to be required in 2010 to perform well.

Although the slow growth in the engine protection businesses continues to be challenging, with the engine builders, but we do see two improvements that ought to help us out in that area as well.

Final category of nuclear testing, we had an improved fourth quarter result there with better margins.

In the full year 2010, we expect to have marked improvement here as the work that we've been doing in China with the nuclear facilities that are being added at a fairly fast clip is finally at the phase where plant testing will be under way, and so we're selling a good deal of equipment and technology in how to do the testing in that region.

Next slide.

The industrial technology space had, again, very strong EBITDA margins, despite that being a little more challenging than the rest of the businesses.

You had, certainly sequential improvement in orders, up 9%, sales up 6, operating margins were down 70 bips, but came in at 23.4, which would stack up against anybody else's industrial business and 28% EBITDA with 48% gross margins.

The water meter AMR side of the business had sequential order improvement in the fourth quarter.

We did get, as probably you've seen publicly, the Toronto contract signed after a year and-a-half.

That project really won't kick into any kind of activity until the second half of 2010, with much, much bigger growth in 2011 and 2012 than you'll see in 2010.

Customer budgets around the municipal water markets remain tight and we don't expect double-digit growth out of Neptune in 2010.

Our material test business had a very strong rebound in the fourth quarter.

Demand really kind of returned as we expected it would in the material analytical markets and consumable sales improved sharply as you got better utilization.

Turn to 2010, we would expect that trend would continue and in addition to consumables improving with capacity utilization, we think we'll get an increase in equipment sales as well.

In our flow control businesses, there we had double-digit sequential sales increases in both orders and revenue and we're able to move out some of the backlog we've had in those businesses.

The restructuring benefits helped expand the margins in flow control in the fourth quarter and we'll do even better in 2010.

We completed the relocation of our Hanson business from Chicago into Commerce, Georgia and that of course carries with it some negative variances that appear in the second half of this year that will be gone next year.

So we think with a little bit of modest organic growth we'll see margin improvement in flow control.

Next segment.

Here it would be our RF segment.

The RF segment had certainly a lot of good signs in the quarter.

Most importantly is that our book-to-bill relationship was 1.07.

The Houston order was secured and some of that was booked in Q4.

They've executed well off the backlog and in addition to having terrific margins, you can see the 29% EBITDA and 51% gross margins.

We have a very strong backlog entering 2010 and the project bids for tolling and transformation remain at sort of historic high levels, and given our own ability to execute with tags and readers, coupled with the United Toll product extensions we have, we think that we should have a strong year in 2010.

People continue to ask about the IAG process, the testing is well under way.

We don't have any real knowledge about when a decision would be made but we think it wouldn't happen until the second half of 2010 at the earliest.

On freight matching, the spot market improved dramatically in the fourth quarter.

If you were close to that market, and we provide a lot of public data for people to use around transportation, some of the things you see are amazing.

Wasn't long ago that we were posting 500,000 loads a day and couple of months ago they were down to 40,000 loads a day.

And they're back up to over 75,000 loads a day.

So the spot market is coming back pretty quickly.

We've had very resilient performance in freight matching throughout the year, and the market dynamics are a little bit better than they were, so we expect to continue to do reasonably well in that business in 2010.

Our education and healthcare business centered around and Seaboard and Horizon had record retention rates this year.

Virtually nobody dropping out this year.

That gave us growth in our subscription revenue which is something that's critical for us in those businesses.

The education and the security markets, particularly campus security, continue to improve we think in 2010, which helps offset the hospital spending which remains really quite weak and tepid.

We've had real improvements in Los Angeles and California and the K-12 education market where we had won some awards but they had been delayed.

Those started to ship in the fourth quarter and we got continuing activity in 2010.

Then we had a very significant win, particularly politically, where we've taken George Washington University, which was a landmark account for a competitor, which follows our capture of Princeton University later, last year in 2009.

In the utility arena, this is Technolog and some degree in [Aboniks], field service in UK automated meter reading were particularly strong in Q4.

And our Gaz de France contract, which is a multi-year one, will begin to have positive results in the first half, as that sort of rolls out throughout 2010, 2011 and 2012.

Next slide.

So as we get into the 2010 outlook and guidance, next slide, we would expect really modest growth in most of the end markets, virtually everybody sees some improvement.

It's one of those years where we're going to get a lot of singles and continuous people getting on-base, not a lot of home runs.

We see continuing benefits from 2009 actions that we already have, plus the leverage on the higher sales expected to drive very solid income growth in 2010, incremental margins should certainly be above 35% on every dollar of revenue.

We don't have any material restructuring planned for 2010.

We think we're completed with that, although there certainly are contingency plans in place, particularly in the industrial business, if there were any kind of fallback in that area.

We only spent $12 million to restructure in 2010, and we doubt that there will be any new money spent -- I'm sorry, in 2009, doubt any new money will be spent in 2010.

We do expect removal of the stimulus drag on decision-making in most of the markets in 2010.

Certainly, we believe that to be true in our scientific businesses and in most of the RF businesses.

Still a challenge in the US water meter area where we still see very slow decision-making in process.

The Toronto water project begins in the second half, although it will be less than $10 million of contribution we expect in revenue in this year, but then a very sharp ramp-up in 2011 where it ought to more than triple and 2012 where it will be much higher as well.

The Houston Metro toll planning process is under way, things are happening there and that will just roll out throughout the year.

And the Gaz de France gas metering and monitoring project is the same where we've got the people in place now, testing under way and installation and execution will start in more earnest in the second quarter.

Most importantly, our business leaders are much more confident entering 2010.

They've got a lot better visibility than they've had in over a year.

They're very confident in the actions they've taken in 2009 and all of them feel quite reassured as a result of the margins that they were able to prove out around their assumptions in the fourth quarter and the learnings that they got in 2009 and the strong Q4 performance sort of bodes well for motivation and attitudes as we go into 2010.

Next slide.

Here we look at our guidance from a diluted earnings per share basis, we would expect to earn somewhere between $2.83 at the low end and $3.03 at the high end.

The assumptions are that we would grow our revenue 10 to 12%, about half of that coming on internals and about half of that from 2009 acquisitions that will roll out throughout 2010.

We're assuming that the FX rates stay as they were at the beginning of January 2010.

Who's to say what really occurs there.

Our tax rate, very good news.

Even though it will move around from quarter to quarter, we think it can be held in this kind of 30% rate for the entire year as a whole.

Our diluted share count out to be in the neighborhood of 96 million shares for 2010.

As far as the first quarter is concerned, we would expect our diluted earnings per share to be somewhere between $0.62 and $0.65 which would exclude the inventory step-up, $3.9 million of pretax fair value acquisition related inventory expense that's required for us to be taken in the first quarter.

We had a little bit of that in the fourth quarter of last year and then that will be behind us.

In terms of operating cash flow for the calendar year 2010, we would expect to be somewhere in the $375 million to $400 million or more arena.

We would expect modest CapEx, probably in the neighborhood of $25 million, maybe $30 million.

And with that, I think we're ready to open it up, John, for questions.

Thank you.

We'll now go to our question and answer portion of the call.

(Operator Instructions).

We ask that our callers limit their questions to one main question and one follow-up.

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

Our first question will come from Terry Darling of Goldman Sachs.

Good morning, Brian.

Good morning, John.

Good morning, Terry.

Hey, Brian, I wonder if you could maybe take a holistic moment here on China for the Company.

There were a lot of references in the imaging business specifically and so if you could dial in a little bit for the imaging business as well.

How big is China for the Company at this point, kind of growth rates did you see in 2009.

Sounds from your commentary and kind of the order implications that you would expect continued strong growth there.

Yes, we would.

I think John might want to comment on the scale and size.

It's very important on an incremental basis because you're talking about $100 million plus per quarter type of business in total, and so if you're up $5 million in China, it moves the needle on a relative basis.

So China is spending a lot of money in technology development and our imaging technologies always go to the core of any of the analytics they do.

In terms of what we said about scale, John, you would have to help me out.

Right.

As far as our total sales in Asia are about $200 million or so, and China will represent probably about a third of that.

It's the area that's growing inside the Asia market more so than the already-developed nations of Japan and Korea.

Can you help us maybe I think organic in the fourth quarter was, what, down 8 across the Company.

Can you help us a little bit with where Asia was maybe in that context?

Actually, Terry, I don't have that specific information.

Double digits, but --

Would have been double digits?

I would think it would have been modest, 10% or something like that for China and India, not the rest.

Although Korea and -- it was pretty widespread in Q4.

Okay.

And then in terms of the margins which were very, very strong, particularly in imaging and energy, as we think about kind of building the model going forward, anything in there that we might want to think about in terms of nonrecurring, per se, but a one-time snapback from a lot of deferrals over the course of 2009 that as we think about Q4 2010 if there's anything in there that we ought to temper kind of our read across from?

There's nothing as far as Q4 2009 or 2008 being unusual.

What's really happening is that we have had for many years an industrial camera business that we have been winding down over a long period of time and it is all but gone and that's very helpful for us because that was a very, very difficult piece of that segment.

And as that wanes, that gives us direct comparison around the quality of the rest of the businesses.

Secondly the medical businesses continue to grow at a faster clip than the rest of the portfolio that carry with it a little bit better margins.

And then we've really had a dramatic improvement in both the microscopy and spectroscopy businesses around customer strategies.

There was an attempt in the past that we didn't embrace and change where they were getting involved in system selling, buying other people's products to try to compete a solution and many OEMs felt that that was ill-advised strategy and we agreed with the OEMs.

We're not a value-added reseller so as we're back on top of those businesses, focusing on what we do around technology development and solutions for other customers, we're being rewarded by better pricing and better results in the segment.

The other thing I would add to that is we traditionally do have our best margin performance in the fourth quarter.

Largely because of the higher volume associated with some of the year-end buying activities.

Of course that did not happen in 2008 but did happen in 2009.

But oftentimes those kind of year-end buying activities are around some of our more higher margin products around consumables and spare parts and the like.

Okay.

And then pleasantly surprised, a little more optimistic commentary on organic in the energy segment, looking into 2010.

Brian, wonder if you could put a little more fine point on your comments there.

You talked about compressor control equipment coming back a little bit.

When do you think that segment does finally turn positive on an organic basis and maybe just flush out some of the other drivers from the segments.

Well, we don't think we have to wait very long.

You've got some situations there that are really low.

One of the things that -- we have two businesses in there that really are more industrial than they are energy.

Our AMOT valve control business that's around engine shutoff valves and Marine applications.

Marine applications are as bad as they've ever been.

I mean, that's a really dead space.

And the engine shutoff valves are close to as bad as they've been, after being spectacular in the two or three years prior, particularly with diesel engines going into the Canadian marketplace.

So I don't think those turn around, but the rest of the businesses turn around pretty quickly, off of easy comps.

So there's a bunch of internal bets around but we'll have positive organic growth we believe in 2010.

Whether that shows up in Q2 versus Q1, we'll have to kind of stay tuned and see, because our sensor business is really a process control sensor business and that really needs some better capacity utilization.

We did really well in India in the fourth quarter.

In that business we launched a lot of lower price products.

Some point those businesses ought to be reported in industrial and not be confusing what's going on in our energy segment.

Thanks very much, guys.

Our next question will come from Mark Douglass of Longbow Research.

Good morning, gentlemen.

Good morning, Mark.

Hi.

I'd like to talk about the orders a little bit.

How did the order trends track in December versus the entire quarter?

Then how is January tracking, kind of similar rates as to the quarter?

Well, December was the best month of the quarter, and once again, a lot of that was I think due to some year-end buying activity.

But I think even if you strip that out, we were definitely doing better in December than in October.

And January, you'll need to wait until we finish the first quarter.

I would say one of the things that we've been looking for, talking about for probably four quarters is up until this quarter, we had a frustrating situation where the first month of the quarter tends to be relatively good, the second month of the quarter is abysmal and then the third month of the quarter sort of saves the day for us.

This time we saw more normal linearity in what we'd expect and that got bolstered by the year-end leftover MR and capital budgets that could be deployed with our really short turnaround products in that space.

Thank you.

And then kind of similar, talking about the scientific, scientifically it's going to have a large seasonal drop in the first quarter.

With the higher percentage of medical business, does that trend continue going forward or is that kind of less seasonal than, say, your old camera business and the microscopy markets?

There's some seasonal activity even in the medical arena but it's not as pronounced as in the imaging end markets.

So at the margin, it's probably a little bit less of a falloff than we would normally see, Q4 to Q1.

Now, of course the first quarter will be bolstered by the full quarter revenue from the Verathon acquisition also, but you're right, it does moderate a little bit of the seasonality but there is still some seasonal behavior in medical.

Okay.

And then what was the new -- can you describe the new products you were talking about in microscopy life science.

Thanks.

Well, there's really quite a number.

We have a camera that we're calling Evolve which comes out of our photo metrics operation.

We have a new family of cameras that are coming out of our Q imaging business.

We have several things from Gatan which are being deployed in the microscopy businesses.

All of those are really doing well.

The Evolve camera was kind of a technological breakthrough that early adopters bought as they always do but now it's getting into the regular routine marketplace.

We had in the medical space a new suite of products which are generally branded Protrua which are couch tops and those are starting to come alive.

And then the rest of the segments have sort of different things.

We have a new line of hardness testers we launched out of in Denmark.

We've got in Zetec a software technology called Revispec that we've launched for plant testing that's being picked up at a very fast pace and a new line of gas chromatography products in energy and then we've got the DuraTorque which is a new drilling technology using a very different form of heat treatment, that never has been used in the past to go deeper in drilling technologies and a new line of kind of low cost tolling tag applications that are called 6C that we're launching in certain limited markets.

Thank you.

Our next question will come from Deane Dray with FBR Capital Markets.

Thank you.

Good morning, everyone.

If we could just go back to scientific and industrial for a moment and I know you don't break out the individual business units but this is such an upside on the operating performance for the quarter, begs the question, is how does that spread across the three business units?

Is it evenly performance for the quarter or was the medical provided the upside?

No, no, no, I'd say it's pretty -- certainly medical's good, but no, it would have been the microscopy businesses were substantially better, Gatan had all-time record performance, massive conversion on incremental revenue and Princeton really had much improved margin so I'd say it was across the board.

Do you have a sense of how much was the seasonal year-end buying versus stimulus related from NIH?

That's a very hard thing to be able to break out.

Clearly we saw some benefit from stimulus on NIH, and we also saw some stimulus benefit in some of the Asia markets as well.

It's not just the US that did some stimulus funding.

This is the one area that we had always been talking about that might see some benefit, and I think we started to see a little bit of that in the fourth quarter and would expect to see a little bit more of that in 2010.

I'd just say it isn't just the stimulus itself, it's the decision finally released that well there isn't going to be any or yes there is and then normal buying behavior returns.

That hurt us more during the year than the stimulus helped us at the end.

Clearly.

There was a little bit of restocking then on the consumables side, is that fair?

Well, yes, on consumables I'd say that's true.

Just on restructuring, if I heard you correctly, say you're not expecting much in the way of additional restructuring in 2010.

How about what type of savings carrying over from the actions that you took in 2009, what will we see in 2010 in terms of savings.

We did see a headcount reduction and you've seen that already flow through in terms of the margin performance.

We as a general rule, the 12, $12.5 million of restructuring spend in 2009 was primarily for severance related activities.

And so of course as soon as that happens, we start to see the benefit in the P&L.

But you're right, there probably will be a little bit of roll-over benefit in 2010, which will help the margin performance.

So on our incremental margins rather than being our traditional 30 to 35% we'll probably be in the 35 to 40% range during the first half.

Can you say specifically how much of that carries into 2010 out of the 12, assuming a 12 month payback or a little bit more?

No, I'd actually say it's a faster, it's much faster payback than that.

It's probably somewhere in the $10 million to $15 million pretax range that will roll into 2010.

And that would be incremental versus what you already realized in 2009?

That is correct.

Last question.

Was very interesting, Brian and maybe this reflects a bit about what distinguishes Roper from a more decentralized organization is just reflect on how you all responded to the downturn from a business unit standpoint in terms of what kind of headcount reductions, what kind of cost restructuring.

It didn't sound as though it was all orchestrated from headquarters.

That would be true.

We always provide a template and what happens that was so helpful for everybody is because we operate everything off of a breakeven analysis cost structure, they're all seeing their trends immediately, every month, and so they get a lot of variance analysis that's provided to them by us.

We had a multiple point list of things and the first thing was first do no harm and so they knew exactly what we wanted to do.

They had their contingency plans in place.

You've got kind of up to 30 P&Ls out there that really know their own individual dynamics the the best of anybody.

We didn't give them a specific mandate.

We just provided a series of things.

They responded against their contingency plans, executed in the fourth quarter last year.

Energy was a little slow out of the gate and their performance would have been better if they had reacted more quickly, but the rest of the people did a beautiful job and energy finally caught up to that performance in the fourth quarter.

So we have a whole lot of basis tells that people utilize but their execution is up to themselves and we don't drive that from here.

We measure.

We coach.

We encourage and we reward.

But we don't make individual decisions at the business unit level.

Thank you.

Our next question will come from Alex Blanton of Ingalls & Snyder.

Good morning.

Good morning, Alex.

I'd like to just ask you to clarify the incremental margin comment that you made.

Around -- from Q4 to Q3?

No, for next year, for 2010.

Next year.

I think we August to be in the sort of 35 plus incremental operating profit margins on the next dollar of revenue.

Now, that's from what base?

Are you measuring it from the non-GAAP base, excluding the restructuring charges and so on?

Yes.

Or from the GAAP base?

No, on a consistent basis, excluding the restructuring charges and the inventory step-up costs.

Okay.

Second question is on the comment you made that you had taken business from a competitor at Georgetown.

George Washington.

George Washington.

Oh, George Washington University.

Okay.

Yes.

Would you care to name who that was and exactly how did you do that?

What were the things that they liked about you and didn't like about the competitor?

Why did they switch?

Well, it would be safe to say that we're not going to speak for George Washington University but it is the premier account for our largest competitor.

It's sitting right there in their territory.

So I would say that the reason that we win, consistently, is that we've got the best transaction analytical work that's available.

We've got the best hosted services that interact with things.

We have the broadest range of things that the university can take advantage of.

The universities increasingly look with trying to compete with the right kind of support systems for students.

Our technology allows them to have a real advantage, whether they're using our student advantage technology card for off-campus purchases or they're using it for planning the campus activities or access control or whatever, we really think we've got a product that's frankly, without peer, but there is a large installed base out there in addition to ourselves and we're trying to erode that with every passing year.

Could you compare the sizes of yourself in that business with that competitor?

It's the largest competitor.

Are they larger than you, smaller, or how do you compare?

I don't think we really ever talk a lot about it.

It's a space where their core business is something other than that.

Okay.

And their core business is around other forms of education markets.

Yes .

So that's larger than we would be, than Seaboard would be in that space but in that direct niche that we're there, we certainly consider that we have a leadership position.

Okay.

But there's more business you could take from them, I assume?

We're reasonably confident of that.

Okay.

And finally, could you comment on the opportunities in Europe for the tolling business?

There was a new Frost and Sullivan study released on January 29th, that mentions that traffic congestion has boosted the global electronic toll market in Europe.

Haven't read the report.

I'm just looking at the release from them.

But they mentioned problems in terms of standardized approaches between countries.

This is holding things back.

How do you see that market developing and what would be your opportunities there?

Well, that's a -- to do that justice requires a half an hour answer to the question.

I figured that.

The situation in Europe is really different, because you have much more telephony applications that can be used in Europe than you do in this country, and tolling has kind of different networks that it can use from a ubiquitous nature in Europe.

As a general rule, there are certain things that are easier to do there with license plate recognition because of standardized approach to license plates, where they don't have affinity plates like we do in the US that interfere with the data collection.

I mean, most famous thing in Europe of course is the London congestion pricing and time of day usage charges, which is largely a form of video applications.

As is often the case in Europe, you have country by country dominance around the markets.

So the romantic language countries have certain kind of applications, the UK has a different one, northern Europe has a different one, and Germany has a different one and there are reasonable players in each of the markets.

To say that there's a pan European market for a single source person, no one has successfully exploited that.

Now, we are launching some 6C technology here in an application in Georgia and going to use that in certain other applications that people hadn't previously thought about and didn't see us coming in that arena and we'll have more to say on that throughout 2010 and those kind of things come at a different value proposition and are very appropriate for the south American markets and for Europe as well.

Thank you.

We'll go next to Christopher Glynn of Oppenheimer.

Thanks.

Good morning.

Good morning.

Just a little clean-up, a lot of stuff's been asked.

The comment on the incremental margins for next year, would that include or exclude the RF which kind of acts a little differently?

No, it would include RF.

Okay.

And then just in the fourth quarter, question on the industrial tech margins.

You had a little bit of a down-tick in the margins, then uptick in the revs, just kind of looking for some complexion around that.

Sure.

One of the activities that we had undertaken really in the third quarter and continued into the fourth quarter was around kind of the movement of a factory from one location to another.

It's the one area that we actually did have a small facility closure, and so we had some pay as you go costs that go along with that that are not a part of the restructuring charges, which are really things that you can approve for the pay as you go costs are of course just ongoing in nature until you're completed with that.

Now, we are completed with that activity.

But if you exclude that impact, the decremental margins for -- and the margins for industrial were in line with what they were during the rest of the year.

Great.

Thanks a lot.

All right, Chris.

We'll go next to Jeff Sprague of Citi.

Thank you.

Good morning everyone.

Hey, good morning, Jeff.

Good morning, Jeff.

Just a couple topics.

I was hoping, Brian, you could elaborate a little bit more on Houston.

Obviously it's a very large, high occupancy project, and I'm just wondering to what extent you've kind of layered on some of the more nuance-y applications like real-time pricing or other things like that that have been talked about or is it, although it's large, is it just kind of standard, per se.

No, there's -- it's really hard, we can't get out in front of tolling authorities in terms of what it is that they are going to do and how they're going to do it, and so we're just hesitant to talk about the execution.

But the high occupancy vehicle tolling application in Houston will have all of the kind of things that you can think of in terms of -- it's not just -- it's not the norm.

It's more going to be the prototypical situation around access and lane reversal and time of day applications and going one way in the morning and converting it back in the evening and things like that.

But we would have to defer to Houston Metro to articulate exactly what they're doing and when they're doing it.

And somewhat related to that, United Toll obviously a Company with a set of products, but more of a probably a technology acquisition for you than a product acquisition.

Can you just give us a little color, obviously it's early days, but how quickly you can integrate some of that technology and turn around and be selling it into your current customer base?

Well, we certainly have begun the integration process there.

We have some really gifted software engineers in that business, and they're highly integrated.

We have one of our most important management people out of TransCore somewhat embedded at UTS now.

We continue to try to treat UTS as an independent business throughout 2010, and a supplier to our TransCore distribution network, but a willing supplier to other people as well for its applications.

And so we're quoting UTS product in many of the jobs that we have right now.

And there are certain technologies they have that we haven't had previously that haven't been installed, so people are a little -- they want to do trials before they go to a ubiquitous solution around that.

We are quoting and deploying VCARS and IVIS.

We haven't yet done our first turnkey on the Gantry technology, but expect to do that soon.

And then just one final one from me, if I could squeeze it in.

Toronto, obviously a long time coming and you laid out the ramp pretty clearly.

Do you think that triggers anything additional?

In other words, once you get this thing going, is the scope of the project potentially become larger?

Are there areas of the city that weren't included in the initial bid, for example, that maybe get opened up as this gets going and kind of proof of concept works itself out?

Well, you know, if history's a prologue in any way, that generally does happen, but we certainly don't have any guidance from them around that.

I mean, these guys are way behind on what the early execution idea was.

This is something that 18 months ago we were thinking we would be well into it in 2010, and I think we're going to get less than $10 million of revenue this year and triple or quadruple that the next year and then it goes up.

So I don't know.

It would be nice, but we're not really counting on that.

Great.

Thank you very much.

We'll go next to Mike Schneider of Robert W.

Baird.

Good morning, guys.

Good morning, Mike.

Just sticking with Neptune for a second.

The Toronto contract, given that we are 18 months kind of from the first time we talked about this, was that project rebid or in any way reshaped over that time period or indeed are you executing on what you talked about 18 months ago?

Unfortunately, it's just the latter.

I mean, the whole -- it was a very long administrative review process and I don't know if we'll ever fully understand why it took that long, but it did.

So instead of saying oh, gee, well, our ability to ramp that project up is immediate but it's just going to go at the same pace of that entire window.

If it's going to be five years, it's five years over the next five years, it's not make up the first year and-a-half and catch up.

There doesn't appear to be any willingness for that to occur.

And of course, digging a lot of water pits, doing a lot of stuff there.

We've got a number of subcontractors involved and different things that are happening up there.

And I don't think any of us think that there's a faster ramp on that than what the original roll-out was.

And the pricing wasn't reset during that process?

We have -- there's a pricing clause around copper in there and some pricing resets because of that but I think that was actually embedded in the terms anyway.

Pricing generally in AMR, could you just talk to Neptune's ability to win some of these larger contracts now, because there's certainly a lot of press coming out of ITRON and Badger about some of the big wins there and all the smart meter opportunities.

I'm just curious if you could take a step back and just comment on Neptune's competitive position and whether Smart Grid is an opportunity or a threat, I guess, to their existing business?

I think that ITRON is certainly much more engaged around the electrical arena.

We're not in that space so we really don't have electric meters and we're not involved in smart grid technology.

We have our own proprietary fixed network system for water.

We still see a lot of mobile network deployments because time of day usage charges in water aren't really required or necessary.

All you care about is leak detection and accuracy of the read and minimizing human time and transpositional error and data collection.

So it's a very different market.

We tip continue to be the lead player in that market.

We've got a big installed base.

So Neptune certainly was a drag on year on year performance in 2009 for us, and frankly, we're really not counting on it to be more than a modest grower in 2010.

If there's an additional upside to 2010, it would come from Neptune having broader order input.

Other people, without naming them, there are certainly low price guys with plastic water meters that are deployed in certain areas.

That's not the quality standard that we adhere to.

So we're sticking with our lead-free water meters and proud to do that.

Okay.

And final question.

Pardon me for this elevator ride.

If you look at the guidance range, $2.83 to $3.03 it strikes me that if we just take the fourth quarter earnings and Q1 earnings, which if you add the $0.81 and $0.62, you're at $1.43, and a six month earnings window, let's just say conservatively you double that, you basically get to the low end of the range.

So it strikes me either the guidance range assumes little or no growth on the low end, and even at the high end, again, annualizing the six month earnings rate, you've only got 6% earnings growth built in.

So can you just comment on what other factors in there are I guess are baked into embed some conservatism, expenses, headwinds that we may not have discussed or indeed is there just a healthy dose of conservatism in this range, given that it embeds seemingly little or no growth from the current run rate?

We're expecting of course a higher share count will impact that, as will a slightly higher tax rate.

We finished our tax rate in 2009 at 29.5.

We expect that to go up a little bit, maybe a point, maybe a little bit less, that's why we put in the chart kind of around 30%.

It may be a little bit higher than that.

So we do have some headwinds associated with some of the kind of below the line items, as well as probably some higher interest costs associated with the bond offering that we did kind of midway through the third quarter.

So you take all of those things into account, plus the kind of half of the 10 to 12% coming from internal activities and half coming from acquisitions, and the conversion and I don't think it's quite the soft ball that you're implying with the question.

I mean, it's our best range on what we think the results will be for the year, as our guidance always is.

Okay.

I appreciate it, guys.

Thank you.

We'll go next to Shannon O'Callaghan with Barclays Capital.

Good morning, guys.

Good morning, Shannon.

Hey, John, just one follow-up on that tax rate.

So I mean, 30%, I mean, it's come down, I mean, anything unusual going on there?

Is this a sustainable rate going forward?

Do you have anything going on with R&D tax credit or any of that kind of thing.

I'm not ready to say that we'll be able to stay at 30% forever.

Tax policy always changes.

We had some things in the tax planning world in 2009 that will provide some continuing benefit in 2010 for us.

So I still think of kind of longer term tax rate being somewhere in the 31 to 32% range.

But we're always working on a number of things in order to make that as small as possible.

Okay.

And then just Brian or John, when you're looking across and talking to your businesses, in terms of the pace of decision making, seems like you're having some things finally start to accelerate, some of the things in imaging, but Neptune sounds a little slower when you look at the utilities.

Can you just kind of characterize across the businesses how much of the decision making delays have started to loosen up?

What's still stuck?

Give us a little flavor.

I think you've already sort of answered the question.

Certainly you've got year-end buying behaviors out of Japan which is good.

I think you're going to have headwinds from what everybody says about scientific investment in Japan and in their fiscal 2010 year, you've got consistent improvement here on NIH funding, even with the rest of the stuff you read about.

That appears to be continued uptick in 2010 and so I think that renews peoples' confidence in the scientific side of the businesses we have.

The Verathon acquisition, it had double-digit growth.

It blew right through the recession with no difficulty.

We expect it will continue to do that.

So there's no decision slowness there.

We've had slowness in the hospital side of new deployments for our meal planning technology and nutrition management in Seaboard.

To a lesser degree Horizon, and that we were still a little frustrated with that.

We'd like to see some changes there.

Clearly that's hung up with healthcare reform and people's unwillingness to spend.

So that -- there could be some upside there as the year goes on.

Neptune is -- I think we've said before, I think that we have such a large market share at Neptune that in the past we wouldn't have cared about new housing starts and residential construction but my goodness, nobody saw it dropping 1.5 million units.

If you get 30 or 40% of all that housing units, that holds Neptune back really more than the stimulus slowness.

Through 2009, we had a lot of frustration around slow decision making.

Going into 2010, the reason we don't have a stronger view of that water meter business is because there's just no reason to perceive that housing starts are going to pop up.

Okay.

Great.

Helps a lot.

Thanks.

Okay.

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

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

Thank you, Augusta, and thank you all for joining us today.

And we look forward to talking to you again in April after our first quarter.

Bye-bye.

Thank you.

That does conclude today's conference.

Thank you all for your participation.