Roper Technologies Inc (ROP) 2011 Q1 法說會逐字稿

Good day, everyone.

Welcome to today's Roper quarter and year financial results conference call.

Today's call is being recorded.

I will now turn the call over to Mr.

John Humphrey, Chief Financial Officer.

Please go ahead.

Thank you, Melody.

And thank you all for joining us this morning as we discuss the record results for our first quarter 2011.

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've prepared slides to accompany today's call which are available through the Webcast and also available on our website at www.roperind.com.

Now if you'll please turn to slide 2.

We begin with our Safe Harbor statement.

During the course of today's call we will 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 3, I will 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, and good morning, everyone.

We'll take you first through the Q1 financial results in detail and then we'll look at the segment performance and the outlook for Q2 and the rest of the year, talk about raising our guidance, and then summarize the quarter and take your questions.

First slide here is the financial results.

You can see we achieved a record, all-time record for Q1 in orders and sales, backlog, net earnings, EBITDA and pretty much every other measurement you can imagine.

The thing that was particularly gratifying was our book-to-bill ratio was 109%(Sic-see press release).

Generally, we're at 0.97 to 1.03, so to be at 1.09 was very encouraging for the remainder of the year.

Our organic growth was really quite spectacular, we thought, with 20% order growth.

And all four of the segments had double digit order growth.

And revenue growth as you can see organically was 16%.

Gross margins increased to 54.3% so any fear of input costs creating any difficulty at Roper was not well founded.

EBITDA margins are up 310 basis points to 27.4%.

Remember with us, that's mostly EBIT-A.

There's not much depreciation here.

Our balance sheet was enhanced as we continued to pay down our revolver.

And we ended the quarter with an all-time record backlog of a record $851 million in revenue which is 43% higher than the backlog at the end of the first quarter last year, up $257 million.

Now, we certainly, when we established our guidance for Q1, thought we would have a strong start but this is even better than our best expectations.

Our income statement here, you can see the bookings at $702 million, up 24% in total and 20% organically.

Net sales at $645 million, up 21% in total and 16% organically.

Our gross profit went from 52.3% in the first quarter last year to 54.3%, here an increase of 200 basis points.

Our operating income was up 41%.

It went from 18.8% last year to 22% this year, so that's really quite outstanding leverage.

In fact we'll talk a little bit more about our leverage on the variable contribution here for the revenue.

Our interest expense was basically flat.

The tax rate was also quite similar to the prior year and that produced net earnings up 49% to $89 million from $59.7 million last year.

And a diluted earnings per share number of $0.91 versus the $0.62 GAAP number from the prior year.

Next slide.

On the asset velocity, while the absolute amount, dollar amount of inventory receivables up a little bit, as a function of the revenue it continues to decline.

You'll see in the first quarter our inventory was 7.7% of revenue, down from 8.2% in the prior year.

Our receivables were down to 16%, a pick up of 50 basis points from the 16.5% in the prior year.

And our payables and liabilities actually increased to 16.1% from 15.8%.

So when we total it, at the end of last year we were 8.9% of sales and this year it's down 130 basis points to 7.6% of revenue.

So year-over-year, we see continued improvement in our asset velocity.

Next slide.

We ended the quarter with a really strong balance sheet.

Cash was $261 million.

We paid down the revolver so there's quite a bit of the revolver left.

When you take the revolver and the cash together we wind up with $813 million of available liquidity.

And of course we'll have very strong cash in Q2 and throughout the rest of the year.

Our net debt is down to $980 million.

And you can see that gives us a net debt to EBITDA ratio on a trailing basis of only 1.4 times.

And our EBITDA will continue to expand rapidly throughout the year on a trailing basis.

Our EBITDA to interest coverage is already at 10.2 times, so these ratios are extremely strong and they really enhance our liquidity and our ability to use the balance sheet in the quarters ahead.

Next slide.

Here, we're going to look at the individual segment performance and the outlook.

Next slide.

Order strength, as you can see, was really spectacular.

Industrial technology was up 30%, RF technology was up 30%, energy systems control 16%, and medical and scientific up 15%.

The book-to-bill ratios were very strong all the way across, anywhere from 1.18 in industrial down to 1.03 in medical and imaging.

We had double digit organic growth in all four segments for revenue, as well.

Next slide.

If we look at RF technology, you can see that orders reached $217 million in the quarter, up 30% from the prior year and 18% organically.

Our sales were $200 million which was up 23% year-over-year and up more than 10% organically.

Our gross margin expanded to 51.4% which was up 170 basis points, and our operating margin was up 270 basis points.

We finished the quarter with an EBITDA margin of 30.7% which was up 450 basis points from the first quarter of 2010, so you see very strong EBITDA performance with our iTrade business contributing a substantial amount of non-cash amortization to the EBITDA measure here.

In the first quarter of 2011, we had very strong tag sales for both Florida, Oklahoma and Dubai.

In fact, our Amtech business was up over 40%.

Significant growth in our gas automated meter reading business with the Gas de France project and quite substantial increase in the UK.

Our water network metering and monitoring businesses, those were up well in excess of 40% as well.

And then CBORD had an expanded subscriber base.

We won in another major university in Miami, a university in Ohio, a big security win there displacing a long-time occupant in that role.

In Q2, what we would see is that the Gaz de France AMR project ought to continue at similar levels to Q1.

We'll have a very strong seasonal Q2 because CBORD winds up with their annual renewals falling into the second quarter, so we should see double digit growth there.

Our Houston Metro project appears to be on schedule and we ought to see what we have in our forecast for the second quarter.

And iTrade has won a very very significant opportunity to launch a system for a major European food retailer, that we can't yet announce, but the launch is underway and the integration will begin within the year.

It's very encouraging for us to see the direction at RF Technology because last year in 2010's first quarter our organic revenue was down 12%, in the second quarter it was down 7%, third quarter it was down 1%, the fourth quarter was up 6%.

So we're out of the gate here with more than a 10% organic gain here in the first quarter.

And we expect the balance of the year is going to give us double digit growth throughout the next three quarters.

Q2 a little lighter, Q3 much stronger, and Q4 similar to this quarter.

Next slide.

In industrial technology, just absolutely spectacular performance here.

Our orders were up 30% to $201 million.

Of course, that's all organic.

Our sales were up 26%, aided by about 60 basis points of FX, so you could round organic down to 25%.

Gross margins were at 50.4% so they continue to expand.

And our operating margin was up 370 basis points to 27.2%.

EBITDA in industrial technology finished the quarter at 30.6%.

Virtually everyone there had a very strong quarter.

Our fluid handling businesses that deal with gas exploration, with the new products we've launched in the last year-and-a-half just are having extraordinary performance.

These businesses are nearly up 50%.

The material testing business we have, as you continue to get better capacity utilization around the country, is growing very rapidly.

And we actually had double digit growth in our US business in Neptune, and then still more growth as a result of Canada continuing to ship in the Mexico City order we announced in the fourth quarter.

So Neptune had a very strong Q1 and we expect that to continue.

In Q2, the backlog at our fluid handling businesses, Roper and Cornell Pump, will assure double digit growth in the second quarter.

The Toronto project installation phase is going to actually ramp up in Q2, although, because there's a lot of labor in that, it comes in at the expected lower margins that we have there.

End markets remain very strong in all these industrial categories and the operating leverage that we get is continuing to drive margin performance.

You can really see just how effective we are when you look at the spot price for copper in the first quarter last year was $3.55.

Spot price this year is $4.30, and yet our margins expanded across-the-board whether they're gross margins, operating margins or EBITDA margins.

Next slide.

The energy systems and control segment, it continues to perform well.

Here, orders were up 16% all organic, sales up 23%.

Gross margin expanded quite a bit from 350 basis points to 54.1%.

And the operating profit margin increased 450 basis points.

You might remember, we were somewhat disappointed in Q1 2010 with the operating margin.

Got that corrected in the second quarter and this shows the kind of firm disciplined approach to what we needed to do off of that first quarter last year.

And that certainly supports this 450 basis point improvement in OP.

EBITDA margins here are about 26%.

Again, you can say exactly the same thing, the same words that applied to industrial technology -- broad-based strength across all businesses and end markets.

Everything here is really doing exceptionally well.

Very dramatic growth in our diesel engine surge protection business.

We almost called it explosive growth but thought that might scare people.

That business is up nearly 40% this year.

Industrial end market growth continues to drive our sensors business, as capacity utilization back in the latex and rubber industry world looks very good.

And then equipment sales to measure the output of those things are up sharply.

And all of our energy lab equipment businesses are doing okay, as we finally got a little bit improvement in both refining and petrochem markets.

In the second quarter, the end market dynamics we think will continue to be strong.

Our backlog is really quite substantial in our compressor control business which will start to drive better B's here in Q2 and particularly the second half of the year.

And the margin expansion we think will continue to be driven just by the operating leverage as sales increase throughout the year.

Next slide.

Here is the medical and imaging segment.

Orders were up 15%, a tiny bit of FX there so organic was 14%.

Sales were up 12%.

The gross margins here are 62.8%, up 330 basis points.

And our OP was up to 24.1%.

EBITDA in this segment is 29.1%, so EBITDA margins increased by 110 basis points.

We've done quite a bit of dusting in the first quarter in our Verathon business.

We're launching two new products.

One is called [BellaPort], and that has had us incur some growth expense in Q1, and that will continue a little bit into Q2 as we launch all of that collateral literature and various programs, and held a sales meeting in Q1 to kick that product off, along with some other things we're doing, as well.

Medical remains strong on consumables.

Double digit growth in all these businesses.

And our kidney dialysis application for our dosage delivery pump business continued to be a double digit grower.

Very significant order growth in our high-end imaging cameras and filtering technology.

It was the growth star of the quarter as we looked at the filters for electron microscopy being up very dramatically.

In the second quarter of 2011 we see medical continuing to grow at double digits as we get continuing adoption rates for GlideScope and BellaPort and other new products that have been launched within this year.

And the Scientific Imaging has a really quite substantial backlog that will support a strong Q2.

The Japanese supply risks have proven to be less difficult than what we feared on certain high-end chips that are made very specifically for us.

We've dealt with all those issues and feel quite good about it.

The only thing for Japan is that a substantial portion of our camera business goes into the Japanese market.

It represents a disproportionate share compared to the rest of Roper.

Our total sales into Japan are in the neighborhood of 3% of revenue.

So it's not something that's overly difficult for us but could depress revenue growth for the camera portion of the business in the next quarter or two.

But then that will just build a backlog that will be good news for us later.

Next slide.

Here, as we look at the guidance, we're going to raise the guidance.

Next slide.

We were at $3.82 to $4.02 when we went into the year.

We've raised the base by $0.15 and the top end by $0.10 to take us to $3.97 to $4.12.

The mid point of that is more than a 20% increase over last year's $3.34 on a depths basis.

And in the second quarter we're at $0.95 to $1 which is quite a sharp increase over last year's Q2 performance.

Basically, the sales we expect to have mid-teens organic growth in the second quarter and the second half of the year probably in the high single digit 8%, 10%, or 11%, so full year will be double digit organic growth.

Next slide.

We're still reaffirming that cash flow would be in excess of $550 million, so you can imagine the next three quarters will be quite substantial in terms of operating cash flow will generate.

In quarter one summary, the next slide, all-time record there in Q1 for order sales backlog, net earnings and EBITDA.

Gross margin demonstrated that we didn't have any difficulty with input costs at 54.3%.

Operating margins up 320 basis points to 22%.

That's leverage of 37%, by the way, on the OP line.

And our EBITDA margin's up 310 basis points to 27.4%, gives us leverage of 43%.

That 43% leverage of course benefits from Trade with its amortization.

Organic growth was 20% on orders and 16% on sales.

The $851 million backlog, boy, I can remember when our total sales for the year were $500 million, so being up 43% over the prior year gives us a lot of optimism for the rest.

Most importantly is everything really performed well.

If you look around you could only find two or three things which are quite small in their scope that aren't really doing exceptionally well.

So we raised our guidance up to $3.97 to $4.12 and certainly are positioned for another record year at Roper.

And with that let's open it up to questions, John.

Okay, Melody, we're ready for the Q&A part of the call.

(Operator Instructions) Jeff Sprague with Vertical Research Partners.

Good morning, gentlemen.

Just a couple questions.

Brian, the tone of your press release sounds a little bit more optimistic on the availability of deals, or maybe reasonable properties at reasonable prices.

Could you elaborate on that a little bit and talk about the pipeline?

I would say that there are a lot of opportunities.

There are fewer that are reasonable.

But there are quite a lot that are relatively reasonable.

So we're pretty encouraged by the transactions we have and the people we're talking with.

In the same venue, somebody called me last night from Europe about a transaction that people think we should be interested in, which we never would be, but bragging that they were going to get a debt staple of 6.75% on this transaction.

The frothiness and lack of discipline around debt being applied to sales processes is pretty much back to as bad as it's ever been.

So you do want to be careful about what it is you're doing.

But we have more than enough really outstanding opportunity to execute over the next 12 months, so we're very encouraged.

I would say that the things that we're doing we like as much as the transactions we've done recently with United Toll and with iTrade and with Verathon.

So I think there's exciting days ahead.

And to go to iTrade, if you wouldn't mind, you said you couldn't elaborate too much on this possible European project, or it sounds like it's not possible, it sounds like you booked it, but could you just speak a little bit to, is the scope of that job different than what they've done before?

Really, the essence of my question is, you've brought iTrade into the portfolio.

Are you finding ways to coordinate with some of the capabilities elsewhere in RF?

And even if it doesn't apply to this particular deal, maybe you could give us a little color on that.

Those are two totally different things so let's first just in this European thing.

We just aren't at liberty it to name the name but it would have such a compelling name, if you're thinking of it domestically.

It would be like saying I got Kroger, I got Wal-Mart or something like that.

So it's a very very large significant pan-European opportunity.

And it will take us a couple of years to do everything we're going to be able to do with them, and lots of buildout opportunity and then later analytic opportunity with that.

So we're really excited about it.

That's one of the things we were really hoping we would be able to bring into the wheelhouse.

And we are making some growth investments in that because we have to increase our server space.

We have to have specific things in Europe for these people to access.

In terms of other opportunities within Roper, we have opportunities both in freight matching and in CBORD around menu planning and nutrition information which we continue to work on.

We've had some, they're not cross-selling, they're technology sharing opportunities for applications.

And we've had important household names in the food industry in just recently in Miami for an extensive program, and we're going to continue to do that throughout the year.

So yes, I think we will see some, I think most those sales will accrete to iTrade but some may accrete to other things within the software-as-a-service platform we're building within RF.

And just one other, if I could, and I'll pass it on.

Neptune did sound like it was very strong and you cited US.

Is that some fresh penetration in places?

Or is that business becoming mature enough now that you're seeing some replacement activity?

Just a little color there, please.

It was up about 20% in the US, so we thought we would just comment on that because other people were wondering about people gaining share at our expense.

Never happened.

Isn't going to happen.

And all you've got to do is look at the other people in Q1 and look at us.

So this is the best premier business in the world in what it does.

I would say the markets are fairly mature, certainly held back dramatically by the lack of housing starts.

My goodness, if you had any housing starts, you'd think how much more organic growth we would get back in that business.

It's just well positioned with the right sort of hybrid ability to deal with fixed networks or mobile and any form of integration and migration.

There's another thing that's emerging that people haven't paid enough attention to and that is that we have the only US lead-free water meter, period, end of discussion.

If anybody ever enforces Buy American or says I want lead-free water meters, which is a mandated requirement, in the coming years, we're the sole sourceability to do that.

Somebody who's making lead-free and lead in the same factory in Mexico, I hardly think would qualify as a Buy American lead-free only water meter.

So we're very proud of Neptune.

It's a wonderful management team.

They're very dedicated.

They're working a lot on forward technologies, and we may make further investments in that space to help them.

Christopher Glynn with Oppenheimer.

Thanks.

Brian, just wondering on the imaging trends, Verathon seems to be in a pretty strong ramp throughout last year.

Just wondering if those initial product lines are more approaching run rate.

And if you could add any color on what the commercial opportunity might look like for some of the new product launches there.

Let me have John talk to that.

I've got John really focused on Verathon here.

Sure, I'll go ahead and speak to that.

The adoption rate, particularly for GlideScope, continues to be very strong.

With a lot of product enhancements and other things that we're doing there to make it more mobile so more people are able to have access to that in a hospital setting.

So continued product refinements are continuing the adoption rate on the GlideScope side.

And on the BladderScan side, continuing to take the core technology of the ultrasound and be able to make that apply to other areas.

That's what we've done with the AortaScan, that's what we're going to do with BellaPort also in order to make it easier to have an IV needle inserted into someone's arm when the vein may be very difficult to find or difficult to see.

So taking that same basic technology and making new products and new applications out of it is one of the things that Gerald and the team are just fabulous at being able to do out there at Verathon.

And we continue to see lots of opportunities for that going forward.

And in addition, don't forget we did acquire a product line called Heartscape about this time last year.

And we expect that to have some product introductions into the marketplace late in 2011 and that will also add to growth in 2012.

So we're excited about what we see and the investments that we're making in Verathon will pay off.

Thanks, that's really helpful.

And then on the RF mix of the business, just looking if RF, the tolling orders are really a dam breaking, maybe a lot of pent-up demand and projects coming through, will we have a mix impact on operating margins this year?

And also the double digits growth guidance, was that organic?

Oh, yes, yes.

All of that guidance we were talking about was organic.

The situation in Q1, we had a good mix because we had tag shipments to Dubai and Florida and Oklahoma.

And that will continue somewhat in the second quarter.

But unfortunately, the tag shipments are always lumpy.

We can't do much about those.

And so within the next three quarters, there will be different results based on the mix of just the normal service work we do and product shipments.

It's a huge variance there both from a gross margin basis and cash contribution.

Deane Dray with Citi.

Thank you, good morning everyone.

Brian, I'd be interested in hearing your comments about some of the competitor actions in your space very recently.

And would love to hear your comments about how that is either an opportunity or a threat or not meaningful.

And the two I'd like you to comment on, if you could.

The first would be the joint venture between two of your competitors in the tolling space, Sirit and the new owner of Mark IV, KTC.

And the other would be the development at Blackboard which is in a space with you.

I think there's always misperceptions about what the actual overlap is, but, if anything, it's a validation that this is an attractive space considering they put themselves up for sale.

But where is the overlap, where is the adjacencies within Blackboard?

Thank you.

Let me take the Blackboard first.

Blackboard really has two businesses.

They have a business which is like CBORD which we feel we continue to gain share against them in that space.

That, for them, may be viewed more as a legacy business.

You'd have to ask them.

That's their university business.

And then they have their business which is really education software that had to not be involved with the university in the same traditional teaching setting we're familiar with.

We have nothing to do with them in that space.

That's the largest portion of their revenue.

How profitable it is, is something you'd have to talk to them about.

So there's a small group of competitors like CBORD and Blackboard that are driving what's happening from an adoption viewpoint with universities.

We've got, we think, the best offering in the space.

So if Blackboard, in fact, does transact and someone else takes it over, we wouldn't see that as anything other than what you said, which is validating the quality of the space.

If you look at the kind of trading moguls Blackboard had even before this 35% premium jackup, you'd get why sometimes we get frustrated about people thinking about us as a multi-industry company as opposed to a diversified growth company.

Because so many of our assets today in the SAS platform space are just, their values are extraordinary compared to the multi-industry multiples.

And we think people should focus on the quality of the assets we hold in that space.

In the second area as far as, Sirit was basically unprofitable or bad trading dollar business in Canada.

That was acquired by Federal Signal.

So we don't think of it as Sirit now, we think of it as Federal Signal.

Which is primarily a business selling to different municipal aspects of stuff.

Sirit is at the low end of technology certainly.

And then if you go over to Kapsch, which is an Austrian Company, publicly traded, they bought the Mark IV assets out of the transaction around Mark IV and bankruptcy and all those things that were tangential to that.

We haven't seen any resurgence of anything under Federal Signal and we certainly haven't seen any resurgence of anything other than Mark IV just continuing sale of product into E-ZPass.

They don't win anything new.

We have been winning business in California with platforms that one of those people used to be involved with.

It certainly doesn't hurt us in any way.

We wind up with Canadians and the Austrians, and once again we're the only American company.

If people focused on the Buy American provisions, we would be getting even more of the business that those businesses used to enjoy.

It hasn't happened yet but we do think people should focus on that.

We have a wide range of technologies.

We can do anything that those competitors can do at the bottom end or the high end, so we're a one-stop shop.

I don't see that really changing.

Great.

And just a follow-up for me would be on the E-ZPass.

Any new development there and expectations to how long this takes to play out?

Whatever the long side is, Deane, you take that.

But there are people who claim that a decision would be made in August.

We're encouraged to hear that.

We're always wondering what kinds of decision would that be.

The testing is completed on everything, I believe.

And what's happened that we enjoy is North Carolina completed their testing for all of our products and have started to take deliveries.

And in North Carolina, we've got a ubiquitous solution that allows a whole lot of freedom for people using various tags that has never been in the marketplace before.

So we know from a technology viewpoint we have a winning formula and then it's just a matter of what kind of decision ever gets made by these New York and New Jersey people and the rest of the consortium which makes up the inter-agency group.

Mark Douglass with Longbow Research.

Good morning, gentlemen.

Brian, can you update on your initiatives to grow internationally?

I'm thinking particularly in your industrial businesses, industrial technology and energy?

Several of our businesses are not in the US in the industrial platform.

Our Logitech business is based in Scotland and our Struers business is based in Denmark.

The vast majority of their revenue is not in the US, and they're growing quite substantially.

Our [inauble] business is a German-based business and it has, I'm sure, a record Q1 order makeup for that business which is very different than the domestic US flow control businesses we have.

And then the Roper Pump business is mostly a domestic business which has done exceptionally well now because of our directional drilling and our technology which allows the fracking that you hear so much about.

And then our Cornell Pump business is primarily a domestic centrifugal pump business.

Occasionally we'll ship stuff to the Middle East but for the most part it's designed to be a North American business for North American agriculture and municipal water handling.

The scale of those businesses is such that we would not invest a lot of money in sales outside the United States for those businesses, other than things that we have just unique niche applications for.

So the mix of industrial is not dissimilar outside the US, 40%, 50% versus in the US.

So but you don't have any large scale plans to really take some of the Roper Pump and other things to more international sales?

No, I think people in flow control industries have about 25 times more assets that are needed around the globe.

There's competent players everywhere.

We've just selected markets that we have unique competency in and wouldn't be making dramatic new capital investments to make more pumps for the world.

Okay.

And then on medical and imaging, what's the ratio now of medical to imaging, the sales break out?

And what's possible on the OP margin here?

Is Verathon, the expected savings synergies already gained here and baked into the results or is there still some more head room as far as operating margins?

Thanks.

Actually what's happened, we're investing at a pretty fast rate so in some ways we're depressing the operating margins intentionally here, for launching these new products that John spoke about earlier at Verathon.

And we've been investing quite a bit in Gatan, as well.

So, as those products are launched and become a little more mature, we'll get some margin improvement there.

Plus we just get terrific capture on leverage.

It's like we said for the whole enterprise, our EBITDA leverage is 43% and it would be safe to say in Verathon's case it would be higher.

So they have high gross margins in those businesses.

The mix between medical, medical is about half, maybe a little over half now, of the total segment.

And medical will continue to grow more rapidly at a double digit rate than the imaging portion of the platforms which are much more stable, mature research application businesses that are going to maybe grow it mid single digits or something.

Where the others are going to grow into the teens on a regular ongoing basis.

So eventually the imaging portion of the portfolio will be much less critical.

Alex Blanton with Clear Harbor Asset Managment.

Good morning.

Brian, I remember when your sales were only $70 million.

That was 1992.

And so I'd like to point out that your sales have grown better than 20% a year.

This is the 19th year of that kind of growth which is truly outstanding.

But how long do you think you can keep that going with the size of the acquisitions that you're contemplating plus the organic growth?

Could you do it another five years?

I don't think the next five years would be harder than the last five years have been.

We haven't established any multiple year guidance for people but I think history is a pretty good barometer of what people can do.

If the markets cooperate and we get some kind of rational thinking around certain activities in the marketplace, our growth prospects are probably better than -- what we say historically is that we ought to grow 1.5 to 2 times global GDP, and we've been able to do a little better than that.

Okay.

The second question is on the diesel engine surge protection that you mentioned, up 40%.

Is that the AMOT business?

It's in the AMOT business but we acquired two other companies.

We acquired a company called [Rotodico], and another company called [Chowan].

Chowan's in the UK, and Rotodico basically got of the oil sands activity.

Plus you've got the explosions that people have from, frankly, diesel engine surges.

They're controlled as well as they could be.

We think these products should be mandatory on every diesel engine in the world.

It's a slow slug to get everybody to recognize that.

And once people do it, they see the efficiency of it and then the adoption rates continue to increase.

As you've had a return to oil sands production activity, that's driven a lot of growth.

And the contribution on these is really quite good.

Installation of those diesel engines is not growing at that rate so it must have been the accident in the Gulf that caused people to start--

No, the accident in Houston at the refinery, that was another wake up call for people.

A lot of folks think that that was an explosion that was caused for various reasons but not the least of which is when you shut off the diesel engine and it continues to run, could be a real problem.

And the shut off valves we have with AMOT plus Rotodico and Chowan gives us a very unique global platform where we have we believe the best technology in the world for this.

So this is really a lot of retrofit going on here.

Absolutely.

Matt Summerville with KeyBanc.

Good morning, a couple questions.

First, Brian, given the overall size of the Toronto project and the significance of that, can you give us a little more granularity on what that contributed to revenue in '10 and how that ramp looks in '11 and '12?

And would you say -- I know it got delayed but would you say relative to where you expected it to be today, is it back on track in that regard?

Yes, the Toronto ramp.

I'm going to let John handle that because I'm not sure exactly what he said there.

Be good to have you verify it.

Sure.

Toronto is ramping up as expected.

Of course first quarter installations are always slow as the ground is usually frozen there.

And we're still into the buildout phase of the system that captures and collects and analyzes all of the data.

So we're really doing a couple of things there, not only the meter installation as well as the network, but also helping on the data management side.

And then as we move forward through the year we'll be ramping up as far as installations are concerned.

Now, remember, Toronto is the unique situation where we will be overseeing the installation in addition to selling meters,.

So we'll have a mix impact that as we do the installation that actually, obviously, comes at lower margin than the more technology that's embedded and the meter does.

And that, of course, is roughly a $200 million project that will ramp up to, it may end up at a run rate in the $35 million to $40 million range at its peak as we get there in 2012 and '013.

And then look to have this project completed and moving into replacement and ongoing data services beyond the 2014, 2015 time frame.

I think, Matt, that last year in our base data it's less than $10 million.

That's correct.

I think $5 million, $6 million, $7 million.

And then this year maybe it will be five times that or something like that.

So the real expansion is in '13 and '14.

This year we'll get some improvement in revenue, less than 1% of our total growth, attributed to that at the enterprise level.

Not a lot.

Got it.

And then just overall, when you look across your businesses, Brian, are you concerned about municipal spending, municipal budgets or lack thereof?

How do you reconcile those trends with how you're guiding your businesses right now?

We are worried about that.

We worry about that from a state and municipal spending level.

We worry about it from Department of Transportation funding and the like.

One of the reasons that we were really pleased with Q1 getting 20% organic growth was that we didn't see any kind of slowness or holdbacks on the things that we've been working with people there.

And we've done a very deep dive in looking at how much of our spending on the water meter side is really related to municipalities versus related to the other facilities that are funded in different ways.

We're actually much more optimistic about what's happening in how we distribute and go to market and create revenue.

We wouldn't have anything good to say about municipal spending or state spending, but the DOTs and the people we work with in those arenas are really outside of that list because everything we do in these spaces is revenue generation.

It's not, you don't need a budget or a muni bond to fund the activity that is going to happen with us.

So the growth that we've got in Q1 and that we expect throughout the year is certainly ahead of our fears which is really part of the reason we were willing to raise guidance as much as we did.

And then lastly, Brian, I think one of your last prepared remarks talked about your incremental operating margins being somewhere in the range of 37% in the quarter, which is obviously very good.

How do you feel about sustainability of that type of number given some of the mix dynamics that have come out on this call?

We're always thinking we ought to be able to capture quite a bit.

You've got gross margins that are above 50%, so we would tend to think that we ought to be in that 25% to 35% range on a regular ongoing basis, and really could do better than that.

What's happening right now is that we've got intangible amortization associated with iTrade which confuses the world.

If you only look at GAAP you can get really confused, as we all know.

iTrade is a phenomenal business.

It's given us a lot more.

So the OP was 37%, maybe much more importantly the EBITDA was 43%.

So I think this idea that Roper will do 25% to 30% is exceptionally conservative.

So we're probably going to do 30% to 35%, and that might even be conservative.

Wendy Caplan with SunTrust Capital.

Hi, good morning.

Brian, that $700 million worth of orders in the quarter, was there anything unusual in it in terms of especially large order, any kind of annualized orders or blanket orders or were they--

No, not at all.

The only thing that was unusual was how broad based it was.

When you can't find anybody to beat up it's just spectacular.

Okay.

And speaking of beating people up, your breakeven lowering mandate for the Company, can you talk about whether there's anything specific this year that we should be looking for in terms of particular projects to lower breakeven at various businesses?

I think all you've got to do is just look at the leverage.

When you get that 37% OP leverage and 43% on EBITDA leverage, that it demonstrates the discipline everybody has about keeping their fixed expense really quite low and react creatively to whatever variable output needs they have.

We haven't had to do anything to ramp up to meet the increased demand.

And with the book-to-bill of 1.09, we ought to be able to do pretty well on the revenue in the second quarter and the rest of the year.

So when we started the year, we thought we'd probably have a pretty good Q1 and Q2 will be okay and it ought to trail off.

We don't think that way anymore.

So Q1 is really quite good, Q2 should be quite good, and the rest of the year ought to be really good.

But not trailing off as much as we originally thought.

And Wendy, if I can just chime in on that.

Remember what we do with the breakeven analysis.

It's not that we have a mandate to always lower that but we always want to make sure that we look at our businesses and that they look at their performance in terms of what their fixed cost and their variables, so they understand what the next dollar of revenue should contribute in terms of leverage.

And that when they make investment decisions, that those are conscience, thoughtful, prudent decisions to invest for growth opportunities.

So we always want to make sure that we separate out the fixed cost infrastructure from the leverage on incremental growth so our business leaders are able to make smart decisions about how to grow it going forward.

Okay.

And finally, given just the comments you just made, Brian, and in the slides, it says expected strong start and did even better.

Can you give us some sense of what were the two or three things that really impressed you in the first quarter that changed your view for the full year?

I would just say the breadth of everything.

Every business at industrial, every business in energy outperformed, really, our expectations and their own expectations.

And so it isn't that one business had a blowout.

Certainly, our Cornell and Roper businesses had all-time record performance, which is good, but again, the scale of those is not enough to really drive the enterprise.

So it's really just the breadth of things that drove the enterprise.

We'll go next to Richard Eastman of Robert W.

Baird.

Yes, just two quick follow-ups.

Just on the industrial technology side platform, the EBIT margin, did that benefit significantly from mix in that segment?

We talked about maybe Toronto ramping slowly, a little slower here in terms of meter sales.

Was there any mix issue there at the pumps and materials business being much stronger?

No, I really wouldn't say there was a mix benefit.

There was clearly no mix downside from the additional installation revenue that we do expect at some point in the future with Neptune and Toronto ramping up.

But the nice thing about these businesses is that they have similar operating characteristics and similar margins.

And even on the equipment side versus the aftermarket, obviously the aftermarket parts will be a little bit higher margin but it's not a dramatic change.

It's not like an aerospace business where maybe you don't make anything on the OE and you make it all on the aftermarket.

That's not at all what we're seeing in the industrial.

Our new equipment revenue, we would love to see it because it not only generates more spare parts in the future but it generates more cash today.

So really there's not a huge mix impact there.

But the pumps and material handling piece there versus, say, Neptune, I would think the contribution margin there would have been above that total platform level?

No, I wouldn't say there's a dramatic difference.

Not much.

Not that dramatic so you can read into that about what you want about other data.

And then Brian, just real quickly, has there been any uptick in interest and perhaps orders at Zetec, given what happened in Japan and the forced global inspection requirements maybe on the nuclear industry elsewhere outside of Japan?

Great question, Rick.

We haven't included anything in terms of Zetec growth at all in our pathway.

We've had lengthy calls on that with people and we're doing a lot and we have volunteered a lot of resources for people to do various testing things.

And we also have this robotic testing technology which is really quite important technology called Revaspec.

We would like to believe we would see a spike in the second half of the year on inspections in the US (inaudible).

When the thing initially happened and people started talking about it, we felt we might get a 25% spike and have to, but, remember, it's not a real large business.

But we're not seeing that scheduled in any way, which is really interesting.

So I think everybody has actually stopped work and is thinking about what it is they need to do and what's a prioritization of that.

And our stuff is just measuring the structural integrity of the cooling towers.

So it may well be that it will have a bigger impact in 2012 than it will have in 2011 for us.

Okay.

And just the last question.

When I look at maybe your core growth commentary per quarter going forward, we end calendar '11 at double digit maybe forecast for organic growth.

I think we were thinking 10% to 11%.

Is there a little bit of an uptick there?

And does that come from just the book-to-bill in the first quarter and some visibility into the second?

You mean for the full year?

Yes, you said midteens for Q2 and maybe 8% to 11% for each of Q3.

I think we said 9% to 11% organically, as I recall.

So we'll probably do better than that.

Okay.

And that's, again, just confidence at this point given the book-to-bill here off the first quarter and just visibility?

Yes, and you don't have to be overly optimistic when you have $157 million improvement in the backlog.

Melody, I think we have time for just one more question.

Terry Darling with Goldman Sachs.

Thanks.

Brian, we're seeing a lot of companies raise earnings guidance for the year but leave cash flow unchanged, as you have done.

I'm just wondering what the message in the Roper context is there.

Is it just the practical realities of the strong growth at this point of the cycle?

Is it the right investment tradeoff to be making or are you just being a little conservative there?

I think at this point, it's probably a little bit early for us to be able to forecast how the incremental growth that we're seeing, and probably a little bit stronger than what we had thought maybe three months ago, how that will translate into year-end working capital balances.

If you think about the net income impact of, say, raising $0.15 on the bottom for us, that's about $15 million of net income and $15 million of after-tax cash But, like I said, it's a little early to forecast exactly what those year-end balances will be.

So we're comfortable still at $550 million or more of operating cash flow.

And as we get closer to the end of the year, we'll be able to have a better view on what some of those working capital balances will look like.

Okay.

And then, Brian, wondering if you can just put a little more color on your earlier M&A comments from the standpoint of size of transactions, whether that might require some, or give you an opportunity to do some equity there?

And in terms of the platforms where you're seeing the better opportunities, can you provide a little bit of comment there too?

I think that there's more things to do than we would be willing to do with our capital structure, always.

We're going to remain an investment grade performer so you don't really want to have much more than, say, three times debt to EBITDA.

And if you look at our trailing EBITDA, it's going to ramp up quite dramatically here in the next quarter and the third quarter.

So we're going to have well in excess of a $1 billion capacity with our existing structure without having to issue equity.

I can't imagine issuing equity.

It would have to just be one heck of a breath-taking opportunity for us, and I just don't see that happening.

I wouldn't rule it out if you had some kind of Nirvana opportunity.

But we continue to just reinvest our cash flow.

We think $500 million, $600 million a year is probably where you go when you lever it up to three times.

It could be more.

We've got a lot of capacity now, interest costs are exceptionally low.

So maybe it goes up but I wouldn't think we would be doing some $2 billion transaction.

I think we would do a $1 billion one first.

And then platforms where pipeline's more robust -- energy, industrial, medical, RF, across-the-board -- any color there?

Every industrial asset in the world is probably for sale.

So we're not overly excited by the stuff we're seeing in that space, or the lack of discipline that people have and what they're paying.

So we continue to think that the software-as-a-service arena and the medical arena remain quite attractive businesses.

And there's plenty of growth in those businesses in terms of investment acquisitions.

And they really crowd out most of the other investment opportunities in terms of their cash on cash returns over time.

So that remains our sharp focus.

Maybe there will be some niche thing along the way that we think is particularly good but other than that, pretty much we're focused in those two areas.

And I would just say, Terry, I think we had $87 million of operating cash flow in the quarter.

Not unusual for a Q1.

So with $550 million for the full year, we're talking about generating $463 million of operating cash flow in the next three quarters.

And that $463 million in operating cash flow will be quite substantial as a function of revenue for the balance of the year.

And when you've already got $800 million in available liquidity and you know you're going to create another $400-plus million of free cash flow between now and the end of the year, that gives us all the powder we're going to need to make real high quality transactions.

Ladies and gentlemen, that does conclude today's question and answer session.

We'll now turn the conference back over to Mr.

Humphrey for any additional closing remarks.

Thank you, Melody.

And thank you all for joining us this morning and we look forward to talking to you as we finish the second quarter and talk to you again in July.

Thank you.

And that does conclude today's conference.

We thank you all for your participation.