Roper Technologies Inc (ROP) 2010 Q1 法說會逐字稿

Good day.

And welcome to the Roper first quarter 2010 financial results conference call.

Today's call is being recorded.

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

Thank you, Stephanie, and thank you all for joining us this morning as we discuss the results of our first quarter.

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.

We 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 the 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'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer.

After his prepared remarks we'll take questions from our participants.

Brian?

Thank you, John.

Good morning everyone.

We'll cover four areas today, the enterprise overview, the review of the individual four segments, a little bit about our guidance update and then a summary before the call.

In terms of the overall enterprise, the two big things of course are the quite substantial improvement in record free cash flow for Q1, compared to any other Q1 in our history, and the fact that orders were up 20% and the great news about orders is eventually they turn into sales and with our Company, they usually turn into sales with a three to six month lag at the worst.

On the segment review, it's quite substantially different on a segment to segment basis, and we'll spend time explaining what's happening there.

Certainly, held back a bit in terms of revenue this quarter with traffic, execution in terms of what people are doing and when they're doing it.

Sales still were up 6%.

On the guidance side, we've actually now increased our EPS guidance to the point where our net earnings will be an all-time record for Roper in 2010, and that's a big improvement from how things would have looked even just three months ago.

We wouldn't have had the courage to guide you to a record year.

And lastly, certainly the first quarter was a great start and each month got dramatically better with just very sharp increases in February, and then even sharper acceleration in March.

Next slide.

In terms of the overview of the Company, orders as we said were up 20% to $567 million.

That was made up of organic growth of 10% with currency at 12 so internal growth would have been 12% and acquisitions, 8.

Organic sales were down 3.

Currency would have added 2.

So we were nearly flat on organic, and if we would had any kind of follow-through on our normalized project activity in traffic we would have been organic in the quarter.

Most of our businesses were organic, and acquisitions were up 7.

Gross margins in the quarter were up 310 basis points to 53%, which kind of speaks to the value of the work that we'd done last year in cost containment and the activity that we had, although we were also helped a little bit as the traffic was down.

It's the lowest margin portion of our business, anyway.

Operating margins were up 170 basis points to 19.6%, which is quite a strong start for the year for us.

Net earnings up 15% to $62 million.

Cash flow operating cash flow was $95 million in the quarter, and we invested $6 million in CapEx.

So the record free cash flow number of 89% comes in at 17% of sales and cash conversion of 148%.

Next slide.

In terms of the income statement, you can see bookings were basically up $95 million over the $472 million of a year ago.

Net sales trailed that, being up $29 million over the 505, and so that's good news for Q3 in particular and probably some help in Q2.

Income from operations was up $14 million on that $29 million sales spike, and when you get down to the net earnings number you can see it's up 15%.

Next slide.

If you look here at the asset velocity, it continues to be favorable, no matter how good it gets.

We continue to eke out some continuous improvement you can see.

At the end of March 31st of 2008, we were at 11.6% with inventory at 8.8 and it's dropped down to 8.2.

Receivables improved by 20 basis points which was quite a favorable outcome here in the quarter and payables and accruals are up 190 basis points.

So we go from 11.6 just two years ago at the end of Q1 to 8.9% this year, and that trend has continued, as you can see here, and we really believe now that our net working capital as we measure it, inventory plus receivables less payables and accruals, is going to stay below 10% for the Company, given the business models we put in place.

Next slide.

The focus on cash flow, you can see here as we covered before, it's up 95% from the first quarter a year ago, represented 148% of net income and 17% of sales.

I'd call your attention to the bottom of the slide when you can really see the kind of improvement we've made.

Free cash flow as a function of revenue in 2007 first quarter was 11% and in first quarter 2008 it was 12.

Last year was 9.

And this year, it's 17%.

To get out of the box with a free cash flow quarter like this in the first one is really an unprecedented development for us.

Next slide.

If you look at the overall balance sheet, here you'll see at the end of the first quarter of 2009 we had $473 million in undrawn revolver.

Today that number is $700 million.

Cash on hand has increased.

So cash and available liquidity from the revolver is now just about $900 million.

And of course, we'll be adding cash here in the second quarter.

Our net debt's down below $1 billion now, $927 million, with our two $500 million bonds out there.

Shareholder equity went up sharply, nearly 20%, and the net debt to net cap is now down to 27.5%.

So given the very robust pipeline here, we do expect to do some interesting things in 2010 on the acquisition front.

Next slide.

Here we get into the individual segments, next slide.

The first, I just want to talk about order strength in the Company here on this slide.

It's, as you'll see, a little dissimilar on a segment by segment basis.

For total Roper we're up 20%, internal growth was up 12%.

In scientific and industrial imaging, where we've got not only medical, but really the microscopy businesses and spectroscopy business are all doing better.

We're up 24% in internal growth, in addition to the adding of the Verathon medical business.

In energy systems and controls, while they had a disappointing margin quarter, they were up 18% in internal growth which is going to yield much, much stronger margins in the second and third quarter.

And industrial technology had double-digit internal growth, with Neptune having a spectacular February and then an all-time record March.

And the RF technology business, which was only up 5% internally, the reason for that, by the way, is we really take the United Toll acquisition and those products are coming in as Transcorp products, so it's very hard to measure any aspects other than their historical contracts that they had, being not up as much as the rest of the family of businesses, but that's just the lumpiness on a quarter by quarter basis that we so frequently see in RF.

Next slide.

Here, if we look at the RF technologies segment, you'll see we finished Q1 with 50% gross margins.

That's up from last year's 47.7 and EBITDA was 26%.

Sales were down and that was really project timing around some unusual activity last year on a comparison basis.

We had a large project in Ohio for expanding some activity there that was kind of a fig through the python and that of course is gone so it somewhat distorts the normalized activity there in the quarter.

Backlog in this segment is exceptional.

It's at a very, very high number, so we're quite assured of the second half providing the kind of results that are reflected in our guidance.

Operating margins, nonetheless, were 19.7% in the segment.

In the tolling and transportation side, I've already covered the sales decline.

The other thing is that with the recession activity, believe it or not, there are of course fewer people on the road and so violation processing is down sharply in many of the states.

There's a 20% reduction in traffic activity which results in a similar reduction in violations and then we get less revenue for the activity that we provide around those subjects.

In freight matching, it's a sharp increase in activity here.

In fact, the spot market is up 4 times what it was in the first quarter of 2009, and while that's not a linear relationship to us, it does improve our subscriber base modestly as you get more people back, and in many markets, we're really seeing capacity constraints now.

So we expect for the rest of the year to get some modest growth and an increase in the number of owner operators that are back in business.

On the education and healthcare front, we had a very significant win with a Memphis, Tennessee K through 12 school system in the first quarter and have some additional bids out.

Activity in that area remains quite robust.

In the university area, we've had substantial growth in security applications on university campuses, places like Virginia Tech and others.

We think we'll get modest growth in education for the rest of the year, although the hospital served market activity is very weak.

We get virtual conformity on subscriptions, but we're not getting a lot of new growth out of the hospital for new systems.

The utilities business here, primarily our Technolog businesses in the UK and France are moving along smartly.

We had some unusual expenses in the first quarter that pulled down the margins a little bit as we build out our French operation, but that will bounce back here throughout the rest of the year.

Next slide.

When we get to energy systems and controls, they had very strong orders as you can see, up 18%.

The Q1 for energy for at least the last four years has generally been the worst margin quarter of the year.

Hopefully that will be the case this year.

They came in at 17.9% operating margins, which is unacceptable in our view, although EBITDA was about 22.4%.

They've assured us, and we have confidence in them, that the second quarter is not going to look like this on a margin performance basis.

It's a very mixed story inside this business.

The sensor and instruments business which we report through energy systems and controls is really more of an industrial business.

It's had a very sharp rebound and is the leader in why the orders are up so much, and it's bounced back nicely as industrial process end markets are operating at higher capacities and it's had quite sharp margin expansion already and we expect that will continue as the cost actions that we took last year really help us in terms of incremental leverage.

In the oil and gas area, it's really two different businesses.

Our compressor control business enjoyed an all-time record for orders in the first quarter, and has very strong field service and retrofit strength.

Our AMOT, Roda, Chalwyn businesses that are really around engine controls had certainly a big improvement in Q1 over last year, which was just beyond abysmal.

Last year though they went into 2009 with a strong backlog and so their sales remained strong even though orders were weak.

They've kind of caught up to that dynamic, so we would think in the second half of the year we'll get double-digit growth against the prior year out of our AMOT family of businesses.

In nuclear testing, we had had double-digit growth in the quarter.

Lead times on those things oftentimes is a bit out, so we're confident that as the rest of the year goes, the trends throughout that segment or that family of business will improve.

And then lastly, refining and PetroChem, which is our petroleum analyzer businesses, selling mostly to refineries, although there's some industrial applications, continued very weak in the quarter.

It's a business whose margins are just not where they traditionally have been, and where some further heavy lifting has got to occur unless we get some stronger revenue growth out of the refining businesses which we certainly aren't seeing anywhere in the world yet.

Next slide.

On industrial technology, here orders were up 11%.

We had really great margin performance.

You can see EBITDA at 28%.

You had even sales up organically, 4.

Operating profit margins were 23.5, and would have been better.

We had an odd event in the Neptune business, where we had a very long-standing customer issue that occurred many years ago that we had an opportunity to kind of settle in a favorable way that allowed us to perhaps create more revenue in the future and so we took that expense, which drove down margins a bit here in the quarter.

The January orders for Neptune were quite bad, similar to what they were in some other parts of last year, but February was exceptionally strong and March was an all-time record for us in orders for any March in Neptune's history.

Fundamentals are certainly better in the market and the growth that we're getting out of our fixed base technology should help throughout the rest of the year.

Our materials test business had double-digit growth, quite substantial here.

Again, it's kind of a rebound V off of very bad comparison from a year ago's weakness, and this is just capacity utilization picking up with consumables growing and of course the consumables are relatively high margin.

We're actually seeing some new instrumentation orders coming into effect that we think will add to growth in the rest of the year.

Flow control has certainly been a laggard in the quarter.

Business performs well but from an order and revenue basis, it's dragging the Company down a tad.

We think end markets will get a little bit better throughout the year.

Next slide.

Here we get to scientific and industrial imaging.

We had just kind of very strong sales and order growth throughout the segment.

Operating margins were up 570 basis points to 25.5%.

EBITDA running 31%, and how about that gross margin number of 62%?

I don't think we've seen one of those in Roper before.

Medical business is doing exceptionally well.

The Verathon acquisition starting for all of you to understand just how great a deal that was for us.

They had double-digit growth in the quarter.

We've made a substantial investment in growing their sales force with lots of new people on a global basis, and then we made a very interesting acquisition of a product line called Heartscape.

This is a technology that has very, very substantial upside once it's refined.

It's been developed.

It's been through a series of tests but it's not in a form factor that we think makes it commercially valuable yet, and so we've got engineering time and energy going into that and we think that will be a 2011 growth element for the Company and it does an incredibly wonderful thing in the emergency room for people who come in and it's not clear whether they have or have not had a heart attack and this diagnoses things in a way that makes it easy for ER people to know what to do with a patient.

Our oncology business and ultrasound businesses did very well in the quarter with consumables kind of back on track with where they were.

I think people having some settlement and understanding what's happening with healthcare have kind of released the strings to go ahead and take normalized product demand.

In the microscopy life science arena we had double-digit growth here.

The execution margin in there improved dramatically.

Ben Wood is focusing on the Catan business now than ever before, did a wonderful job in improving margins in Catan.

We've got very big backlog in the microscopy businesses and we think that the adoption with new products throughout this year is going to add to our growth there.

And lastly, the end markets in our spectroscopy business improved substantially.

We're certainly getting some help out of funding activity and the dynamics throughout the year are going to make this perhaps the best year in history for us for us with that business.

Next slide.

Here we shift into the 2010 guidance update.

Next.

We brought back a slide for you, which is our book-to-bill ratio slide.

If you look at that for a second.

Generally speaking, our book-to-bill runs at about 0.97 to 1.03.

In the quarter, for the first time in three years, you can see we're really favorably out of that, which is part of the reason for us having the confidence to say that we're on track for a record year.

If you go back to the first quarter of 2009, you can see we were dramatically below the line on book-to-bill and then it picked up a little bit in Q2 and Q3 and Q4.

But really broke out here in this quarter and the breakout the first quarter of 2009 held us back for really two more quarters and we think the breakout in 2010 will hold us up for the next couple quarters.

Most of our businesses now are booked and shipped within about a three to six month window, and so direct sales activity isn't much influenced by inventory.

I think some peers have had some inventory build in Q1 that may have helped them and we really can't say we've had that.

And the fact that we get more and more of our business as recurring revenue really normalizes the trend.

So to break out like this when we've got such a high level of recurring revenue is an exceptionally comforting sign for us.

Next slide.

In terms of guidance, we've raised our full year guidance from $2.83 on the low end to $2.95, and $3.03 on the high end to $3.10.

Clearly, the second half is going to be stronger than the first half, as the organic growth turns into leveraged revenue.

In the second quarter, we're going with guidance of $0.71 to $0.75, as we think the momentum around revenue growth won't really manifest itself until closer into Q3.

And then we raised the operating cash flow from $375 million there to $400 million to $425 million, and we think CapEx should easily be contained in that sort of $25 million range.

And that's where we're going to leave it at this time, so I think we're ready, John, for questions.

Stephanie, if you could open up the question and answer session?

Certainly.

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

(Operator Instructions).

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

And we'll take our first question from Terry Darling with Vertical Research Partners.

So, is it Jeff Sprague or Terry Darling.

Jeff Sprague with Vertical Research Partners.

We would know that voice anywhere.

How's it going, fellows?

It's pretty good.

A lot better than last year's first quarter.

I'm wondering if you could elaborate a little bit, Brian, you made a comment, you see some interesting things on the acquisition front.

Is the size, complexion, valuations of what you're seeing out there changing dramatically?

Well, I'm not sure how to answer the size, Jeff.

I mean, it's an interesting time.

There's more stuff available to acquire than any time I can remember, at least that we're seeing.

I mean, we have been contacted by an awful lot of people that are thinking about what they want to do.

There's still a pretty substantial bid-ask spread in terms of what people are thinking about on values and there's a lot of dynamics going on.

You have private equity in many cases who are hoping to get something closed before the end of the year to take advantage of carried interest versus ordinary income taxes.

You've got IPO markets that every once in a while look pretty good, and other times, don't look very good, and that has an influence on them changing in a mercurial way, frequently.

And there's a lot of really bad stuff out there.

I mean, if somebody wanted to buy stuff cheap, there's a lot of stuff that should be cheap that's available that we tend not to look at.

So we're still focused on our same criteria for looking at things and more times than not our best hope is to find somebody that really wanted to do an IPO but that we become a better venue for them and most of our discussions are centered around that type of activity.

Maybe it's just coincidental, but Heartscape today and United Toll in the prior quarter were both kind of technology companies that maybe weren't quite commercial yet.

I think that's a little bit new bent for you guys.

Should we expect more of that -- is that characterization correct?

Should we expect more of that?

Is it just coincidental?

I think it's coincidental.

We might do one more of those, but I think that's very unusual.

Heartscape could become quite a substantial situation and we actually have a better platform.

Without Verathon, we wouldn't have done Heartscape.

Because we wouldn't have had the right channel to take that to market.

It's not going to be an inexpensive product.

It's going to be a professional sale.

And Heartscape's had a very substantial amount of money invested in it over a longer period of time and, unfortunately, the money that was invested, I think they would have been benefited by spending a little more money on a form factor.

This is a vest that you put on to get a lot of feedback and if you saw -- the concepts are right.

The technology is right.

The patents are right.

But it's not friendly for the user, and we're going to fix that, and then it will be the kind of thing that we actually bought before it was commercialized, and we would have had to pay a dramatically higher multiple.

So that's the reason we did that.

The same, United Toll, was a situation where it really wasn't dissimilar where we're taking it through TransCore.

We might do one more.

It's not what we were trying to accomplish.

These were just deals that were just too good not to do.

Finally, a totally different topic, something like Memphis K through 12, can you give us some idea what a mid-sized city like that is kind of worth in revenue opportunity and I don't know if you sold the full suite in or what have you, but just kind of bigger than a bread box type of color, what something like that might be worth to you over time.

Surprisingly enough, Memphis is one of the top 25 school districts in the US.

So I would actually qualify it as one of the larger ones.

It's not Los Angeles or New York or Chicago.

Once you get outside of those three, Memphis is still a pretty sizable one.

The interesting thing about the Horizon suite of software, which really helps the entire reimbursement situation for school lunch programs, is that it's not a real large up-front cost but there's a very substantial recurring revenue stream associated with it.

So a school district of that size can really start to implement for $1 million or even less than that, but yet that's a recurring amount that we will continue to enjoy at very high renewal rates, because it's not really a huge upfront capital cost.

It's the implementation, which we help with on the training side, and then after that, it kind of drops down from the upfront implementation cost, maybe 20% below that number really into perpetuity.

All right.

Thank you.

Our next question comes from Alex Blanton with Ingalls & Snyder.

Good morning.

Good morning, Alex.

That was a great quarter.

It really was.

Listen.

Could you elaborate a little bit on the Heartscape product?

Is it ready to go to market, or you said, you have some things that need to be done to it first?

And also, I wondered whether it would be -- you said it's a vest, so it struck me that it might even be used by EMT people in their vehicles before you get to the emergency room.

But could you give us a little more on that?

Well, I think some of those other go-to-market considerations are still under development for us.

It's a very interesting technology.

It's really a much more robust electrocardiogram to help determine if someone has had a heart attack or if they are having a heart attack.

As I understand it, that's a very big problem in ERs.

It's a very big problem.

Right, right.

That's why we think this is something and really with Gerald and the team at Verathon, and they have the engineering capability and the expertise to be able to put things into a very user-friendly form factor.

And with the very strong sales channel, I think it gives us a platform to be able to bring that to market once it kind of gets the form factor right for the application.

We're encouraged by that.

It's not something that's going to affect the 2010 results in any material fashion but we do expect that to start to add to revenue next year.

But could it be used in the vehicle as well as in the stationary facility?

Absolutely it could but that's not really -- that's not the sweet spot for it.

If you know exactly what's happening in the vehicle, you don't have the really the assets to do anything about it.

At least it would be done before you get to the hospital, though.

Yes.

Right?

That would speed things up a bit.

It would.

It's much more valuable to have -- the ER needs to know how to process this patient.

Had they already had a heart attack or just have these other symptoms.

And the feedback on this is spectacular.

This has already gone through a bunch of trials and it's in place in luminary hospitals.

This is a well understood and appreciated technology.

You just have to see how cumbersome it is.

With all due respect to its designers, you needed people that thought like a patient instead of thought like the design engineer guy.

And you mentioned your recurring revenue.

Did you give us a figure for that?

No, we haven't done it.

It continues to mount, John, if you want to comment.

The way we defined recurring revenue, Alex, is really the aftermarket, it ranges from aftermarket parts and service based on the large installed base that we have in a number of places in our pump businesses and the Neptune, all the way to our subscription based businesses, like Seaboard and Horizon and our freight matching businesses.

So when we define the recurring revenue like that, we kind of end up in a 40 to 45% of the Company's revenue that we classify as recurring revenue in nature.

Okay.

And just one more, if I can.

Why is it that CCC had record orders?

Are they gaining market share?

It strikes me that that business isn't that dynamic at the moment, but go ahead.

Well, you're right.

It's not that dynamic at the moment, but the things that they are doing are quite dynamic.

We've really invested a lot in additional field service and aftermarket activities, and taken an awful lot of the intellectual capital and expertise that we have in the CCC business and have refocused our efforts around field service engineering, where there's really a lack of talent oftentimes out in the field around how to do things around what CCC does and that's where we're seeing a lot of the growth right now.

And we are taking share in other geographies.

Traditionally, we haven't been very strong in the Middle East, and we've dramatically changed our footprint in the Middle East and that's certainly helping.

So you get nothing out of Russia, but we're getting a lot out of the Middle East now.

Okay.

Thank you.

Thanks, Alex.

Our next question comes from Mark Douglass with Longbow Research.

Good morning, gentlemen.

Good morning, Mark.

John, can you walk through the puts and takes in your guidance raise here, how much of it is just a better sales environment versus your previous expectations.

How much is profitability?

How much is better than expected performance from your closed acquisitions.

Interest, tax rates, et cetera.

We really haven't changed our expectations with respect to tax or interest.

Really what we're seeing is a slightly better organic growth rate and that's where it's coming from.

We previously were kind of in the 10 to 12% on revenue in total, and we're probably a little bit above that at this point, based on the strength of the orders.

Okay.

And then that would even be against maybe taking back your currency assumptions a little bit?

Yes, that's right.

Currency, which we expected to be a bit of a tailwind, will probably end up being neutral based on the closing rates at 3/31.

And then what were the sales contributions of Verathon and UTS and how did they perform relative to their respective segment margins?

Well, first, on the UTS side, I think you can kind of get this information from the slides, because we break out what the ex-acquisition activity is.

It's a modest addition on the revenue side for UTS.

And really, from a margin standpoint, it all flows through TransCore.

As far as Verathon is concerned, they performed very well in the first quarter and their EBITDA margins, as we had indicated, are a little bit above the Company average.

Although the operating margin, because of the impact of amortization, is kind of in line with the segment in total.

Okay.

Thank you.

Our next question comes from Chris Glynn with Oppenheimer.

Thanks.

You had some pretty interesting complexion on the acceleration through February and March.

Just wondering what you see particularly with Neptune and imaging as far as the dynamics that inform your view of sustainability and visibility there.

Well, I think in the imaging situation, we expect things to be robust throughout the year, sort of each one of the areas that are important to them are pretty good.

Neptune was down in January relative to the prior year, but the prior year had an actually unusual January.

Had a very bad February and March.

We were up enough in February to offset the weakness in January and then March was just kind of a blow-out favorable situation for Neptune.

So you're starting to see people make normalized purchases and instead of buying 10 of something, they buy 20 of something.

Neptune might be the one place where we actually have a little bit of inventory restocking that's favorable to us.

Trends in Neptune look better.

We're not going to expect to have each one of the residual months this year be a record, but it's certainly a hopeful sign, and it's a sharp turnaround from anything we've seen for probably 17 months at Neptune.

Okay.

And as far as imaging margins, how much variability do you expect going forward around mix versus volume?

And I think you mentioned energy usually trends up a little through the year and at least the last few years imaging has had a little dip mid-year.

Well, I hope that's less likely.

I think we took actions last year in those businesses and one of the things that continues to improve is that the segment really ought to be renamed.

It doesn't have anything to speak of to do with industrial imaging anymore.

And our industrial imaging businesses in the past are largely what would bring that down from time to time.

And we've done I think a reasonably artful process over the last three years of getting rid of all of that kind of activity with just a very small amount left.

So we wouldn't look to have any margin deterioration in our camera businesses, and we would continue to see the medical businesses driving margin improvement in addition to the leveraged growth we get out of the imaging business.

Okay.

And thank you.

The last one.

On energy, Brian, you seemed a little non committal on the timing of some improvement there.

Is there sort of a process to go through, like imaging had gone through?

Well, we shouldn't have to have that, but the refining business was exceptionally disappointing in the quarter.

We just had an unacceptable review with them and have challenged them to re-energize themselves around what they're doing.

I mean, we're not going to accept weakness in end markets as an excuse for margin deterioration, and they've got to get back to work.

Their gross margins slipped.

Our gross margins never slip.

It's the single biggest turnaround that needs to occur.

We do accept that the refining markets are not very good, but these businesses, we've got a wonderful business in Germany and a wonderful business in France but the US business performance is just not going to be tolerated.

So we do have some turnaround there.

Thank you very much.

Our next question comes from Terry Darling with Goldman Sachs.

Thanks.

Good morning.

Good morning, Terry.

John, wondering if you can help us with what the organic revenue growth by segment in the first quarter was.

And I'm sorry, I got on the call a little bit late, if you mentioned that earlier.

Actually, we had not mentioned that.

It was 1% on industrial, it was down kind of 3.5 in energy, plus 9 in imaging and down 11 in RF.

Okay.

And on the full year, you mentioned you took up the total revenues.

I'm wondering if you can be a little more specific on what the organic piece would be in that shift?

Sure.

I mean, our previous guidance around the organic side was kind of in the 3 to 5% range, and we're probably at the high end of that now.

Okay.

And in terms of kind of where you would expect the orders in the second quarter to end up, I'm just trying to understand how you guys are translating the strength in March on a go-forward basis.

What would you expect for orders in the second quarter?

Not a specific number but just in terms of that momentum in March carrying through all the way or just partly or just trying to calibrate that.

I hesitate to kind of get too granular on the expectations.

I mean, we have our own set of roll-ups but banking on a 10% organic growth as we saw in the first quarter is a little more aggressive than I think we would like to be at this point.

I mean, we feel comfortable that the guidance around the second quarter, $0.71 to $0.75, is reasonable and it's something that I think we can achieve and so as far as orders for the second quarter, we'll probably have to wait and talk in three months.

Okay.

And then --

If we talk 10% organic, we'd accept it, Terry.

I think that's probably not realistic.

I think we had this spectacular February and March for Neptune and I don't think the end market orientation around it is going to sustain that.

You have that offsetting that, as we had very odd order flows, in particular revenue flows, in our traffic business that won't be reflected in the full year but might still be reflected in the second quarter.

So we're going to expect much stronger performance in three and four than we do two and if two comes in outperforming, then we've been conservative.

Yes.

That's helpful.

And Brian, I guess translating your commentary on the imaging margins, I'm a little surprised, given how it's a pretty significant piece of the Company and you're not -- doesn't sound like you're worried about energy staying in a depressed state for any extended period of time, that the guide that the margins implied in guidance did not move up as well, if the imaging margins are sustainable in this range and hopefully building, if not only seasonally, but maybe you can talk about some of the other pieces inside the Company that may be offsetting that strength in imaging in terms of the full year guidance margin assumptions.

Yes.

The problem there is just that we had a lower than normal traffic book of business and revenue in the first quarter, probably unfortunately that's probably true in Q2.

It's going to be really robust in the second half of the year and that's the worst margins we have.

The gross margins in this business are nowhere near the enterprise gross margins.

On the other hand, there's no assets tied up in that business so it's a wonderful cash business.

But it will put a damper on margin enhancement as it grows at the expense of the other businesses in the first half.

Okay.

And then on the second quarter, just the comment in your slide deck here, stronger second half as organic growth turns positive.

One could interpret that as meaning that you do not think that total Company organic is positive in the second quarter.

I just want to make sure I'm -- we're all clear, it's got to be positive.

I didn't mean to imply that, no.

It will be much stronger in the second half.

When you got the orders up 20%, internal is up 12%, the order lag for us is three to six months now.

So we really didn't feel that we could promise more sales recognition in the second quarter that it's more likely that that occurs we hope early in the third quarter.

That's the reason we chose those words.

Okay.

Makes sense, just want to make sure we're on the same page.

Wonder if you could talk about the pace of activity you're seeing around the whole smart grid business.

A lot of people getting excited about some of the prospects there and so if you could speak to kind of what you're seeing from that perspective on an organic.

And secondly, maybe tie in any shift in your thinking on strategy around M&A as it relates to your smart grid business.

Our business is purely around water, a little bit around gas, very, very little around electric and it's only when it's a combination utility.

So we really are not impacted favorably or negatively by the idea of the smart grid.

If people are looking for investments on the electric side of the house, you've got to look someplace other than Roper.

Our fixed network communications solutions are more than robust enough for any of the water applications, but we just don't have a distribution channel to the electrical utility business.

It's a fundamentally different business, and there's a host of guys who are coming out with IPOs and people in the marketplace that are the vehicles for that, not us.

And I'm just wondering if you think longer term there may be some margin benefits to competitors who are bigger in electric and gas as the volumes in those parts of the business ramp up to the extent that that can help their purchasing and so forth on their meters business, more broadly, or whether you do see your strong margins and competitive advantage in water as sustainable?

We think it's more than sustainable.

We look at what people say in the space we're in and we consistently outperform them from a gross margin, cash margins, asset velocity.

We don't have a peer in that space, despite what people might write.

I mean, we are totally preeminent in the economic performance in this space.

And part of the reason is, we're really focused around the water business, primarily in North America.

The electric meter business has global overcapacity.

The technology around those meters is quite simple and straightforward.

They're very easy to produce and there's a lot of people in the space.

So we don't consider it to be a commodity business -- or we do consider it to be a commodity business.

We don't consider it to be a niche business.

We do look at all the assets that come available in that.

We certainly looked at all the IPOs people have projected.

We haven't found anything that would come close to hitting a Roper metric.

Appreciate the help.

Our next question comes from Matt Summerville with KeyBanc.

Speaking to Neptune, to try and become more prominent in the commercial applications in and around that product and then what you're doing to take that product outside North America and then a similar question with TransCore.

If you can just comment on what you're seeing from an international business standpoint there.

I know a couple years ago you had a big Mideast project.

Is there anything like that on the table right now?

Good morning, Matt.

With respect to Neptune, I mean, one of the things to always remember about Neptune, it is largely, although not exclusively, it's largely a North American business and that's primarily because of the requirements around flow rates and pressure for North American water utilities.

You have lower pressure and lower flow rates in Western Europe, specifically, and so the meter technology really doesn't translate from us to them or from them to us.

We do see some global growth areas in those places that are adopting the North American standard, oftentimes when they're wanting to put it in high pressure, high flow rate systems for some type of process industries or some other things and they would want to then piggyback on the top of that with their residential water meters.

And so those are some areas where we have seen some growth in Africa and in Latin America.

But it's primarily a North American based business.

And as far as commercial activity, I mean, we do serve both the residential and commercial.

The residential has a tendency to be much higher volume.

But the same technology and the same set of solutions that we provide on the residential side put us really in a market share leading position on the commercial side as well.

And then on TransCore, I'd say we have substantial international businesses in the Middle East and Puerto Rico and Asia.

Those businesses do tend to be spotty.

They certainly none of them helped us in the first quarter other than cash, and at some point in time we would expect that those would be a little better, but it would be safe to say that the activity around Dubai is certainly not as robust as it was in the last several years.

But wouldn't surprise us if something favorable developed over time there.

We spend a lot of time quoting international projects.

We're doing some development work now around some technology that really has lower cost applications for people who are less concerned about privacy, which is sometimes the case outside the US.

Generally something we don't like, but it is -- if somebody wants a cheap and dirty system, we've got some stuff we can do internationally in that arena.

But I wouldn't look for either of those dynamics around the question to be significant in how we achieve the guidance we just established today.

Brian, if I look back over the last couple quarters in revenue versus order trends and RF tech, you've been building backlog now for several quarters sequentially.

From a timing standpoint, when does that trend start to reverse?

I think that's a Q3 dynamic.

We've got this backlog coming around Houston, which was quite modest or I mean the backlog will be bigger, but the project nature of that should start soon.

We expect a little more of that, candidly, in Q1 and Q2, than what's happened and we're not at all worried about what will happen for the year, but these projects in municipal at municipal and in states work at a slower pace than people who work in those projects think they will.

There will be some kind of dam break there that is going to accelerate that activity.

There isn't much we can do to break that log jam, except continue to build the capability to deliver when they're ready to have that happen.

And then just one final question on the life sciences, medical related businesses.

Is there any way for you to quantify, Brian, how much of that you think is being driven by stimulus right now?

Well, certainly when you look at the segment, some of the microscopy is directed to research and that's certainly helped and some of the spectroscopy is related to research, although not that much, really.

There, it's really new and improved products that we've delivered that have better value propositions for end users.

So some portion of it.

How much would you say would it be 10% of total imaging sales exclusive of medical?

I don't think so.

Okay.

Thanks, Brian.

Okay.

And our next question comes from Richard Eastman with Robert W Baird.

Yes, good morning.

Good morning.

A few questions on the IT side of the business.

Was the non-Neptune, the industrial pieces of that business, did you see the same type of order spike there that you saw at Neptune?

No.

There's really three components.

It's the fluid handling piece which very much lagged the rest of the Company.

And then the material testing piece, which was very sharply up, over 30%, and then you had the Neptune piece which was sharply up in the second and third month but very bad in January.

I see.

And then on the backlog at Neptune, and given the order flow late in the quarter, is there any issue with the margin in the backlog, given copper price is up so dramatically in the first quarter?

No, we're usually a little ahead of all of that activity.

So no, the copper won't have an effect at all in Q2 for us.

Okay.

And then on the RF side of the business, it sounds like there was very little in the way of shipments to either Houston or France.

Did you book any orders on either of those projects in the first quarter?

Yes, what would have been booked for those projects is whatever is shippable in the first quarter of 2010, because the base amount of the -- the first quarter of 2011, I should have said, because the base amount for 2010 shipments is already in the backlog.

Because we only define orders or backlog as that which is shippable within 12 months, once a project is booked then we really get to a normalized situation where there's not a dramatic difference between bookings and revenue growth after the initial one year order is consummated.

It will just roll forward a quarter?

Exactly.

What you're doing?

Okay.

Then just two questions on the core growth, just so I understand maybe your line of thought here.

I think originally we were talking about perhaps 5 to 6% core growth for calendar 2010.

I presume that included a couple points of currency versus the current forecast for maybe 5%, which includes like a neutral currency?

Is that the way to reconcile those?

Yes, I think that's a fair assessment.

And in the second quarter, there was a question earlier about the core growth.

Is there -- are you comfortable that the core growth turns positive in the second quarter, given last year's comparison?

On a revenue basis, absolutely, yes.

Okay.

Great.

Thank you very much.

Okay.

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

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

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

And we look forward to talking to you again in three months at the conclusion of our second quarter.

Again, that does conclude today's conference.

Thank you for joining.