Roper Technologies Inc (ROP) 2014 Q1 法說會逐字稿

The Roper Industries first-quarter 2014 financial results conference call will now begin.

All participants are in a listen-only mode.

Today's conference is being recorded.

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

Please go ahead.

Thank you, 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, Paul Soni, Vice President and Controller, Rob Crisci, who heads up Planning and Investor Relations for us.

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 on our website at www.roperind.com.

Next slide.

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 further detailed in our SEC filings.

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

If you'll please turn to slide 3, today we will be discussing our income statement results for the quarter primarily on a GAAP basis.

Prior-period results are presented on an adjusted basis for comparison purposes.

A full reconciliation between GAAP and adjusted measures is in our press release this morning, and also included as a part of this presentation, which is available on our website.

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

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

Brian?

Thank you, John.

Good morning, everyone.

We'll go through the first quarter enterprise financial results first.

Then we'll take a look at the detail around each of our four segments and the outlook for those four segments for the second quarter and the full year as a total.

Then what our Q2 guidance is; as you know, we're raising our guidance here for the full year.

And then have a Q&A session.

Next slide: here we'll look at the summary of the enterprise financial results.

We had once again all-time records for orders and backlog.

Revenue, net earnings, EBITDA, cash flow, everything at an all-time record level, really terrific quarter.

Revenue was up 13% with organic revenue up 7%.

The book-to-bill was above 1 at 1.01.

If you look at GAAP to non-GAAP numbers, they've actually came in about the same at 13% revenue up.

Gross margin was up 120 basis points to 58.6%.

I know people are still shocked to see our gross margin and worried that it's their summary version to a mean of those industrial companies that people look at.

But we're not really an industrial Company anymore, and our 58.6% gross margin is in fact up 120 basis points.

If you looked at GAAP to GAAP it would have been up 140 basis points.

Our EBITDA was up 19% to $274 million and our EBITDA margin was up 180 basis points to 32.8%.

If you looked at GAAP to GAAP it would have been up 21%.

Our earnings before tax, which is a really important number this time around, are up 24% to $205 million.

You may remember that a lot of people, ourselves included in the first quarter of 2013, benefited from the extenders in the tax program and double dip benefit on R&D tax credits and they are no benefit yet this year.

We had a discrete item this quarter that benefited us by $0.06 despite the headwind that we had.

Operating cash flow was also up 24%, so the operating cash flow and the earnings before tax were virtually identical.

Free cash flow was up 26% to $202 million, so it's a great start for the year.

Next slide: here, if we look at the income statement, you can see orders came in at $846 million, giving us a book-to-bill of 1.01 against the revenue of $834 million.

We'll talk about growth here in just a minute.

The gross margin, as we said, was up 120 basis points.

Operating income increased by 18.3%; on a GAAP-to-GAAP basis, it was over 20%.

Operating margin was at 26.8%, up 130 basis points.

The earnings before tax number was up 24%, as we said.

The tax rate, you can see the difference here.

Last year it was 23.1%.

This year it was 28.2%, so that's a 510 basis point headwind into the quarter compared to last year.

But that was an unrealistic expectation.

In fact, our 28.2% was a little bit better on the tax side than our guidance had anticipated.

If you do look at the 28.2% and common size it with the first quarter of last year, our earnings would have been $1.19, not $1.27.

When you compare that with $1.46, we're up 23%.

Next slide: on the EBITDA growth and margin expansion, our long term sustainable trends continue.

You see our trailing 12-months EBITDA is now at a $1.118 billion.

That's up 35% in the last two years from $830 million.

Our trailing 12-months EBITDA margin is now at 33.2%, up 320 basis points from just two years ago.

If you really want to see the power of our Roper business model and how the CRI tools work, all you have to do is go back to 2010, with our year-end EBITDA was at 26.7%.

Compare it to our closing year-end EBITDA this past year in 2013 of 32.8% and you'll see 610 basis points of improvement.

Compare that to the S&P 500 on those gross margins which are around 28% in those periods.

Next slide: if you'll look at our cash flow results, you'll see once again terrific results accelerating activity.

We had $213 million in operating cash flow in the quarter, which is over 25% of sales.

Cash conversion was 144%.

On a free cash flow basis we generated $202 million of free cash flow and conversion was 137%.

We earned $1.46 on a diluted basis, but if you look at that conversion at 137%, you can do the math and see what the free cash flow per share was.

That's really a direct result of how great each of these individual businesses that we have really are, and their ability to deploy our CRI tools and discipline to create these sustainable cash flows.

As a percent of revenue, you can see free cash flow for the last 12 months has now been 24% of revenue.

We said in this year's annual report and repeated here in the take-away, that we believe cash is the best measure of performance.

I guess maybe it's time we just put that on every one of our slides, that we believe cash is the best measure of performance.

Next slide, asset-like business model: just to demonstrate, even when you get these very low levels, there's room for improvement.

If you look at the first quarter in 2012, our inventory was running 7.5% of sales, and here we are two years later and it's 6.3% of sales.

Receivables have gone from 16.9% to 18.2%.

That's actually favorable, because unbilled receivables are in that number and that's the way we look at the deferred revenue aspect of things.

Payables and accruals are at 18.2%.

They are up nicely, giving us the inventory plus receivables minus payables and accruals line there at 6.3% of revenue, down 320 basis points from just two years ago.

For those people who think we can't continue to improve, we just want to demonstrate that the processes we have do create really unusual values.

Next slide, strong financial position: I think our press release indicates best in our history from a balance sheet viewpoint.

Last May we acquired MHA for a $1 billion.

So we've been able to self-fund virtually that entire $1 billion acquisition during the course of a year.

You can see our cash is now up to $503 million and an undrawn revolver at a $1.4 billion.

We have $1.9 billion of immediate liquidity here.

Our trailing 12-months EBITDA is up from $950 million to $1.118 billion.

The gross debt number EBITDA is about 2.1 versus 2.0 a year ago.

After investing $1.07 billion last year, we would say that we would expect to do the same thing during the next 12 months.

Probably even a greater amount of investment here in capital deployment.

Next slide: we move here into the segment detail and look at each of the individual businesses.

Next slide, we'll start with an overview of how widespread the growth was here in the quarter.

On the left-hand side of this chart you can see the organic growth by segment.

Energy was up 5% and medical and imaging up 7%; RF up 8%; and industrial technology up 9%.

Industrial technology is primarily Neptune and fluid handling.

About a quarter of industrial technology is actually industrial businesses that are instrumentation businesses.

All the rest are really water and fluid handling.

In the RF segment, which was up 8%, that's really the Toll business.

Our SaaS software businesses, our Seaboard and Horizon legacy software businesses, and then just a modest amount of products.

Medical and imaging is really split between the medical IT business, which is the largest now, the medical products business and some scientific instrumentation and a little bit of cameras.

In energy, that 5% growth comes from about two-thirds of the segment is energy-related and one-third of that segment is really industrial-related.

If you look on the right hand side and you see the revenue by region, we actually had favorable organic revenue in every region in the world.

The US, which is about 61% of revenue, and Canada, which is about 6% of revenue, came in up 7%.

Then Europe, which includes Russia by the way, was up 6%, with Russia being a modest portion of the $125 million in revenue in Europe.

Asia was up 9%, with Japan and China being those two biggest areas.

The rest of the world was up 7%.

We report the Middle East and Africa in the rest of the world, which is a big portion of the total revenue.

Currency: I should just mention currency, hurt us by 20 basis points.

It was pretty much all in Canada where it depressed our organic revenue, but as an enterprise it was only a 20 bps negative.

So pretty much a neutral.

Next slide: we'll look first here at the energy systems and control segment.

That generated $37 million in operating profit on $155 million of revenue, which is almost 24% OP margin.

The organic growth was up 5%.

That was led by our compressor controls continued to grow in Asia and in the Middle East.

We had very solid sales of new instruments for our refinery operations, which sometimes can be pretty cyclical.

The Zetec performance improved, so it wasn't as big a drag on the business.

We'll talk about that, in a minute, getting much better throughout the year.

Our Advanced Sensors acquisition, which came in right at the end of last year, which was a $50 million investment in offshore technology, is very interesting technology.

The integration process is under way there, and it will take through the second half before we turn that business into a more profitable entity.

So it was a bit of a drag on margins in the first quarter.

In the second quarter and throughout the year, we expect the oil and gas portions of our energy segment to be up high single-digits, 8%, 9%, led mostly by the liquid natural gas pipeline activity and field service associated with the things we do there.

The Z-tech outlook is much more encouraging.

It will support second-half organic growth, as it was a drag last year in the second half.

The segment in total will be on target for record performance in 2014.

As a reminder, it's that segment which is about 15% of the operating profit of the Company, is divided two-thirds to energy and one-third to industrial apps.

Next slide is our industrial technology segment.

Here, we reported out $56 million of operating profit on $197 million in revenue.

Industrial technologies is about 23% of the operating profit of the enterprise.

We had double-digit growth at Neptune and continued margin expansion at Neptune.

I heard various comments from certain competitors that are inconsistent with that, but we're right, they're wrong.

Higher material now since revenues at Struers for both equipment consumables.

The equipment is a big deal because Struers has been living on consumable growth for awhile.

Equipment revenue has been up sharply around the world, so that really bodes well for the rest of the year at Struers.

Our Roper Pumps Houston facility was open.

In fact, all of our senior leaders toured that facility in the first quarter, which is a very impressive operation.

A lot of customers have been through now, saying it's a best-in-class operation of its type anywhere in the world.

We expect that to start to manifest itself in double-digit growth here in the rest of the year, which will improve our margins.

That start-up costs are what brought down the margin in the first quarter by a modest amount.

But that will easily be past us.

And Cornell, which continues to perform remarkably well, had a big quarter with rental markets.

All of which, we think, probably bodes well for the energy side of the activity we have in industrial.

If we look at the second half of year, we're seeing Roper Pumps capacity increase will drive share gains against particular competitors.

It will lead to double-digit growth for us at Roper Pump.

And it will improve our margins in that business, which are already quite sizeable.

Neptune strength we expect to continue, as we get pretty reasonable numbers on new housing starts and continued build-outs and replacement of old meters, and continued deployment in Canada and other systems that we've won.

See modest global industrial production continuing to be up, which helps drive our Struers material analysis business, and on balance, continued growth throughout the sector, strong margins and excellent cash performance throughout the year.

Next slide: here, we look at the radio frequency technology segment.

This delivered about $63 million in operating profit on $226 million in revenue.

So the revenue, all organic, was up 8%.

The Toll and traffic business remained very strong; had double-digit growth in the quarter primarily in three areas: our Florida all-electronic tolling conversion projects, Texas expansion and upgrades to the technology and higher tag shipments in Florida, Texas and California.

Seaboard performed particularly well in the quarter, as its recurring revenue was up nicely from some of these project installs we've had over the last several years: terrific confirmation for continuing license agreements and maintenance with people.

Then we had the modest growth that we traditionally see out of our SaaS businesses.

Which had really amazing and exceptional leverage and cash flow contribution that helps us reinvest to drive overall growth in the entity.

In the remainder of the year, we think TransCore's backlog will support its continued growth.

The project work is continuing as expected throughout the balance of the year from anything we can see.

And our quotation activity around the world on projects remains very strong, and that's encouraging.

In the software businesses, they are continuing to grow with exceptional margins.

We're really starting to see end-user increase drive activity.

Many times in these businesses, it becomes the early adopters, or people who really need to have a technological advantage in competing.

And now the followers are jumping on the band wagon, demanding some access to open solutions.

Being the best provider for those, our demand and quotations are up at best levels ever.

Our college and university hosting activities have been increasing.

Normally in the past they were more reluctant to do hosting than they have been recently.

That may be a positive long-term uptick for us.

Next slide: here, if we look at the medical and scientific imaging business, it really is a medical business.

Imaging is split in two pieces, our scientific business with Gatan and then the camera businesses.

Those things together are less than 25% of the segment.

Medical is 75%, and it's split between the medical IT businesses and the medical product businesses.

Organic revenue was up 7% in the quarter.

We had double-digit revenue growth at Sunquest, as our implementation improvements have really taken hold.

We have more people deployed and we have faster turnarounds on that.

MHA continued to benefit from favorable end markets.

The trends and the share gains that they have are driving growth, certainly ahead of plan.

We've got solid execution and growth across all of our medical device platforms, with extraordinary performance from Northern Digital in the first quarter of the year, more than double-digit growth there.

Our imaging businesses were better, led by growth at Gatan.

So, that eased the drag that that has had on our segment in the past.

We expect that to continue for the rest of the year.

We also expect double-digit growth out of Sunquest.

We've got record backlog at the moment, and we've got a terrific sales funnel.

We've got, that organization continues to mature and deploy resources effectively.

So it's going to have a really quite exceptional year in 2014.

MHA continues as expected.

We think the momentum and everything around its core businesses are solid.

We have new and enhanced products at Verathon, which are game changing.

Those, the early acceptance of that, as we've been showing them, is high.

We expect that will drive revenue throughout the rest of this year.

And then we think the imaging businesses, for the first time in a long time, will have some modest growth that will make the overall segment look better.

Gross margins in this segment are very, very high.

The EBITDA margins for this segment came in this time at 43.9%, not too bad.

Next slide: here, if we look at the guidance outlook for the business as a whole, next slide gets into the detail.

We're raising the guidance from what had been $6.05 to $6.25 for the year to $6.22 to $6.36 on the year.

It's a $0.14 increase at mid point.

Our full-year tax rate we still expect to be about 31%.

It was a little over 28% in the first quarter and likely to be closer to 31% in Q2.

Unfortunately a little bit higher than that in the balance of the year.

We also think our organic revenue, certainly at the bottom, will be higher than expected.

So we've raised our guidance there from 4% to 7%, to 5% to 7%.

And established Q2 GAAP diluted earnings per share of $1.46 to $1.51.

As always, we would tell you that that's an interesting number, but you should follow the cash.

Next slide: if you look at our first quarter, we had record results in just about every category that you can find.

Revenue, again, was up 13%.

Our gross margin was up 120 basis points.

Operating margin up 130 basis points.

EBITDA up here at a run rate far in excess of $1 billion a year.

EBITDA margin at 32.8% compared to S&P 500 industrial gross margins of 28% would tell you something about how great the businesses we have in our portfolio are.

Our operating cash flow was up 24% to $213 million.

The operating cash flow conversion rate we said before was 144%.

Free Cash Flow conversion at 137% on $202 million, divided by the shares, gets you really a spectacular number.

And even our net earnings are up to 17.7% of revenue, which is far and away best-in-class.

Excellent start to the year.

We've raised the guidance.

We think the full year will be pretty spectacular, as well.

And with that, we would like to open it up for Q&A.

Thank you.

(Operator Instructions)

We'll have our first question from Deane Dray, Citi Research.

Thank you.

Good morning, everyone.

Good morning.

Those are solid operating performance across-the-board, whether you looked at top line, incrementals or cash.

On the look forward, Brian, you'd mentioned the $1.7 billion was what you've invested in the last 12 months.

Do you think you can do that or better in the next 12 months?

Maybe some color on the pipeline.

And address the challenges or how you're positioned against private equity bidders.

It was $1.07 billion, not $1.70 billion.

We did $1 billion for MHA and $50 million and change for Advanced Sensors.

So we did a $1 billion deal.

And it total $1.07 billion.

We would expect to do at least that much over the next 12 months.

In terms of what's going on with private equity, basically, the debt staples from banks remain extraordinarily high.

Frequently they're at 7 times debt to EBITDA, almost always at some number close to that.

And their ability to refinance is exceptionally high.

So that puts a lot of pressure around prices paid for assets.

We've said for a while, we think risk premium on the tails of those kind of assets are pretty risky, but they're pretty low cost.

So those guys are going to continue to spend at a rapid rate and pay a lot of money for the things that they are doing.

The kind of businesses that we acquire from them though, aren't really affected by that so much.

Because when they're exiting a particular investment cycle and they're going to go out and sell the business anyway, if the business fits in our categories and meets our standards and the management team is something that we think works with us, we still have a competitive advantage of being able to deploy capital to acquire those assets.

So we actually are seeing as much now as we ever have seen in terms of attractive and available things.

We don't have a timetable for when our next capital deployment would be, but we're active on a lot of different things.

I'm sure within the next 12 months you'd find us deploying as much or more capital that we did in the prior year.

Okay, that's real helpful.

On the businesses within, I know there's lots of attention about the addition of Sunquest and MHA.

But the legacy software as a service business, Seaboard, maybe you can clarify the point on hosting.

I understand access control, I understand the dining hall, I understand the credit card.

But maybe you can expand on the term of hosting activity.

Yes, it's a great question.

Seaboard is at the core a licensed software Company with maintenance and annual fees and revenues and renewals.

We have, because of some of the other things we've done, an ability to convert many more people to a hosted service.

Just like a typical SaaS business would be that we have, in an iTrade operation or in freight matching.

We continue to look at acquisitions that are in those spaces.

We think some of the budget pressure around college and universities is getting them to find it easier to do some of the work that we do for them in the cloud, where they haven't done much.

We're offering them solutions that they find easy to migrate to.

So we have been encouraged by people asking us if we could do more in that arena.

Switching in those businesses, it's got a really high switching cost.

It gives us a leg up relative to other people to try to enter that market.

Just to clarify, what percent of that Seaboard base today is on a hosted basis?

And what are the economics?

It's still a pretty low number, it's less than 5% of their base.

Primarily in one of their applications called Net Menu, which is really around menu planning and nutritional information.

And being able to be the front end of starting that food supply chain through those campus locations.

As far as the economics are concerned, the economics are really good for Seaboard, whether you're going with the traditional license plus ongoing maintenance or a more SaaS base.

There's really no difference in the customer acquisition costs, so it's probably a little bit higher, but a little bit lower up front.

But largely the economics are going to look very similar to the underlying economics with the rest of the Seaboard business.

Great, thank you.

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

Hi, good morning, gentlemen.

Good morning Mark.

Great start to the year.

Looking at your guidance on the organic growth, 1Q was the easiest comp.

Your guidance implies organic growth to continue to maintain this close to 7% level, even with comps getting more challenging the second half.

Dive a little bit more into what's giving you the confidence in the second half.

Do you think it will be that strong?

Do you have some extra things in the backlog?

Can you highlight that?

Sure.

First of all I'm not sure, I know what the numbers say, but I'm not sure I would agree with the easy comp in Q1.

Only because Q1 last year was when we had the biggest variance associated with that lost customer of Neptune.

So it's not like it was artificially depressed, it's just the run rate as of last year.

And we did build some momentum throughout the year, so in some cases, you are correct.

But based upon yet another quarter where the book-to-bill was above 1, so we did build some backlog even, with the tremendous 7% organic growth in the first quarter, gives us the confidence.

We have continued visibility, pretty good visibility, within our toll and traffic area, parts of our energy end market we have pretty good visibility on.

It's continued momentum on execution, particularly in our medical platform, where we not only have the backlog associated with Sunquest and deploying new upgrades to their software customers.

But also a couple of new products that are being introduced in our medical products area that we think is going to drive incremental growth there also.

I think it's the totality of backlog plus ongoing momentum inside some of our key end markets.

Okay.

I don't know if I said easy comp, but easiest comp.

(laughter)

Talking about the pumps market, curious what's happening in the underlying market?

Are we looking at low single-digit growth, mid single-?

Trying to get a sense of how much of your double-digit growth is new product launch and increased capacity versus product mix.

You're outgrowing the market, seems like you're outgrowing the market.

Well I think that we have three discrete pump businesses.

Each of the three should have a record year this year, each one for a different reason.

We have ABEL pump in Germany, which we don't talk a lot about, that has strong demand drivers in India.

It's slurry pumps and things that have to do with moving anything from a mining capacity or whatever.

That business is up a little bit.

Then we have our double-digit reference that we made to Roper Pump, where we've been capacity-constrained on larger diameter directional drilling things.

And that's what this factory solved.

As that comes, we'll just be taking share from other applications without naming customers with large people, that's a guarantee upside to us.

The underlying core business is okay as well, probably more high single-digit growth in that Roper pump business.

Then Cornell has fluctuations around rental markets when people are looking at wastewater markets and putting together platforms.

If you get a little bit more activity back around fracking and gas, then they're benefited by that.

It's got a big business in agricultural irrigation projects.

It's pretty much a domestic business, a little bit in the Middle East.

It's growing, but I think there have been some people that are in similar spaces to Cornell who had pretty decent growth in the first quarter as well.

Okay, thank you.

We'll have our next question from Jeff Sprague with Vertical Research.

Thank you.

Good morning, everyone.

Good morning, Jeff.

Just a couple questions.

Brian, wondering on medical margins, this is two quarters in a row in the 35% ballpark, extraordinarily strong.

I'm just wondering if there's something, mix effects or something, that's caused this to step up to this level?

Or is this the normalized run rate we should think about going forward?

Well, if you look at those gross profit margins in those businesses and our ability to execute, it probably would answer that question.

It's not going to have a lot of difficulty maintaining and improving its margins.

The business is well over 75% healthcare IT and medical products now, as opposed to being one very strong business like Gatan in scientific instruments and the camera businesses, which have high gross margins but have high R&D expenses.

Usually double digit R&D as a function of sales in those businesses because of product life cycles.

So yes, we would expect to have very, very solid margins in the healthcare IT businesses like Sunquest and MHA.

And then coming back around to deals.

What you said earlier to Deane's question, pretty straightforward, but you do sound more confident.

Just reading some of the transcripts from the conference circuit and everything, it sounds like you were viewing things as much more difficult to get done.

What else has changed?

Is the complexion of what's available out of private equity changing?

Or is there some other dynamic that raises your confidence level a little bit?

No, I wouldn't say that.

I think that we've come close to doing a couple of larger transactions in the first part of the year that, for a variety of reasons, didn't occur.

Yet, we're always involved in things that look pretty attractive and we're aware of things that are happening later on this year that are attractive.

We try to explain to people, there are different reasons why private equity is selling assets.

If it's the end of a life of a fund and they've got to sell as opposed to recap, they thought for an unusual period where the cost of debt is so low and risks on the mezzanine piece are so mispriced, that it's easy for them to recap stuff.

But they can't recap it forever; they've got to cut the cord.

If they need the management team to stay in place, then there are only a few people around, like us, that are in the business of acquiring great management teams and making them better.

So that's why we're confident that we're always able to execute and capital deployment.

It's just we don't have a budgeted time frame for saying, let's do $250 million a quarter.

We're going to say no let's do $1 billion, $1.5 billion or more a year.

Great, thank you very much.

We'll go next to Matt Summerville, KeyBanc.

Morning.

Just a couple questions.

First on Neptune, that business up double-digits again.

Brian or John, how much of that would you say is market-related versus market share?

And why or why not should we expect that to continue?

You know, inside the quarter I'm not sure I could make the split between market versus market share.

We continue to execute in Canada for the large Toronto project at a pretty healthy rate, so that's helpful.

The rest of it, we generally take a little bit wider lens on the market share question.

I would not say that that is substantially changed.

I suspect most of this is going to be market-driven, but quarter-to-quarter, based upon how projects are rolling out.

New rollouts of fixed network or mobile network implementations in various cities will move that a little bit.

But we're still in the high 30% share range for Neptune.

It's one of the things we like about that in the market, frankly, the switching costs are pretty high.

We have a pretty good representation in those areas that are probably disproportionately affected by new housing starts.

So that probably over time gives us a little bit of tailwind.

Lastly -- I'm sorry, go ahead.

It's important to also recognize if you have new housing starts that are on the uptick as opposed to in the tank the way they were for a couple of years, we're likely to have a disproportionate share of that because of where new housing starts are.

We have a higher share in places that require pit water meters because of our technology being dramatically superior to other people's performance.

If you have a hard application and you're building in the Southeast or the Southwest, we're going to have higher than our national share.

We just automatically gain at the expense of others, as new housing starts are on the uptick.

Got it.

Then lastly, with respect to Verathon, can you provide a little more granularity into some of the new products you're launching there?

And then a brief update in what you're seeing in your Dynisco business?

Sure I'll take the second one first.

Dynisco is doing just fine, it's on of the more industrial-focused areas, as Brian was talking about, inside our energy segment.

It was up in the low single-digit range in the first quarter.

Pretty good operating performance margin, was up a little bit.

With respect to Verathon, what they're doing is really a refresh of a couple of their product lines.

Coming out with a titanium glide scope, so it removes some of the plastic and actually makes it slightly smaller for the intubation insertion.

Which is a big deal for the doctors, or a big deal for the emergency responders.

So that small size difference is actually quite significant in terms of the success rate of being able to have a successful intubation.

Then also a little bit later, a redesigned bladder scan unit that has significantly higher reliability and performance and ease-of-use for the nurses.

It's really a refresh of the existing product lines, but with some real fundamental game changers, particularly on the glide scope side.

Great, thanks.

Our next question comes from Steve Tusa, JPMorgan.

Hi, good morning.

Good morning, Steve.

You guys had mentioned, I think in mid March, you guys were talking about some potential for weather-related disruptions.

It didn't seem to be the case, but maybe if you could just expand on that.

Maybe March you recouped all that in March, or something like that.

Just curious.

Yes, I think we said we didn't expect a lot of trouble from the polar vortex.

But we had to run some overtime, but it really worked itself out.

We had a little bit more backlog at Neptune than we otherwise would have had, but there wasn't anything material about weather.

It doesn't really, there's not some big windfall we get from additional shipments in the second quarter.

It helped a little bit in that respect, but not much.

And the costs that we had were immaterial.

Right.

And then moving to the businesses, on the traditional imaging side.

It sounds like you guys are a little more positive on that.

I think that was hit hard by the NIH budget last year.

Any updates on that business?

It did better in Japan.

They had quite a robust Q1 with Japan.

Most of those businesses are really non-US businesses, other than NIH here.

They're okay, they will perform at the lowest level of incremental change or positive organic that we have in the Company.

They may have decent fees relative to the last year not being a very good year.

You've got to remember that more than 75% of that business is really all healthcare.

The imaging is split, so you've got maybe 10% or so that are cameras and 10% or so, a little more than that, that's Gatan.

Gatan is in a completely different world class business.

The cameras are the ones that really are always waiting on midi funding out of Japan and something from China and NIH here.

Those are the ones that have the cyclical risk, not the other half which is Gatan.

Right.

Then one last question.

When I look out to next year, with your raised guidance now, I think the Street number for next year looks like it's at like 5% to 7% EPS growth.

There's been a lot that's moved around in your businesses, you had a couple of businesses fall off last year.

Maybe there's some moving parts that I'm not accounting for, but is there something about the margins you guys are putting up?

Should next year be an unusually weak margin year?

It seems like the organic growth is holding up in the mid 5% to 7% range.

That kind of number would imply very limited margin improvement.

Obviously nobody's baking in any kind of real incremental acquisition accretion.

Is there anything unusual about the organic profile you put up this quarter and this year that shouldn't carry into the next year?

No.

The number seems very low, 5% to 7% EPS growth seems very low.

I think the EPS growth, we never put any guidance around EPS growth for 2015.

But we would say we expect to do 1.5 to 2 times GDP.

Certainly doing a little better than that now and we might continue to do better for all of this year, could be all of next year.

I think there's a reasonable amount of optimism on the part of our field people.

We just maybe do things a little different than some people.

We went through our planning process for this year in February.

We don't do it in the fourth quarter, because we rely all our bonuses are on incremental change year over year, not planned performance.

So we don't pay off budget plans, our guys are pretty optimistic.

We would be hard pressed to name a business that sees any fall-off in 2015 from the planning cycle, but it's a long way away.

Right, okay, thanks.

We'll go next to Christopher Glynn, Oppenheimer.

Thanks, good morning.

Good morning.

Wanted to extend Steve's question there, with your comment for the revenues, 1.5 to 2 times GDP.

Is there a 1 point something to put on EPS relative to top line growth over the cycle?

What we have generally wanted to guide folks for the way to think about that incremental growth is, given our margin profile we would expect that next dollar of revenue to convert to the pretax line at somewhere between $0.30 and $0.40.

Maybe a little bit higher than that in some years but not lower than that.

I think if you run the math using that, and this is not really a time for us to be thinking much about 2015.

We'll leave that to you all, we'll wait for our planning process and the detailed discussions and strategic plan reviews that we have with our businesses, to be able to have a much more informed view of 2015 and beyond.

But that's much later in the year.

Fair enough.

Then on RF, I'm wondering if the linearity has changed.

It looks like you had anticipated having project breadth in the first half.

Now it sounds like things may be spreading out a little bit more throughout the balance of the year?

We still expect RF to be stronger in the first half than the second half.

We started some of these projects toward the second half of last year.

Overall, of course with the balance of revenue coming from all of our segments, we still feel comfortable that the 5% to 7% for the full year is generally where all four of the segments will be.

Probably a little bit higher than that in medical, but the other three segments will be in that range of 5% to 7% for the full year.

Great, thanks a lot.

We'll go next to Richard Eastman, Robert W. Baird.

Yes, good morning Brian, John, Rob.

A quick question on the energy business.

When I look in the quarter and I look at the order number, were there any timing issues there?

Or were you comfortable with the orders in the quarter?

Sequentially, it looked like perhaps were there any weather impact or anything that held those back a little bit in the quarter?

No, I don't think there's anything there.

I think that anything, energy's order flow is a little more like RF in the sense, you've got CCC, which is a large player and it could be really lumpy.

They could get a $20 million order that didn't happen in Q1 and it happens in Q2 and it doesn't mean anything.

You have to look at that over a 12-month trending period and the trend for them is certainly up.

Okay.

And then also on the IT business, the margins good, but maybe down a little bit year over year.

Is that piece of the business, is that where you saw a little bit of weather impact on the margins?

Or was that -- just curious how you looked at the margins there in the quarter.

Both EBIT and gross.

People are helping me understand IT and your phrase was industrial technology, I'm sorry.

It's not how we think here.

No problem, I shouldn't have abbreviated.

The only problem with our IT business is has -- no that's just Roper pump starting up Houston.

You've got all of the expense of the start-up.

We take that period costs, and just barely getting started on shipments.

So that will right itself right away as we start to ship out product from there.

I see, okay.

Then last question.

Brian, I noticed in the proxy that Roper's petitioned for a change in its GICS code.

I'm curious, it wasn't mentioned to what, but are we thinking medical technology?

Are we thinking software?

Well, the situation is, we have our primary GICS codes now are application software, medical healthcare IT, medical products and there's some analytical instrumentation, I'm not sure what that GICS code is.

But because we have a lot of diversity, they really only, the two places that are obvious, they put us into like it's a financial, almost capital markets thing, which is where I think they finally just put Berkshire Hathaway.

But in our case they were going to have to put us in the conglomerate category, so we will be with Daniher, and GE, and United Technology, I think there's like only six people in there.

Unfortunately they are quite large, I think Carlyle might be in there, I don't know why.

But that's what we would expect, that we would go into the industrial conglomerates, I think it's called.

That will happen, we would expect that to be announced by the end of the month, I think.

I see, okay, very good.

Well, thank you.

We'll just say, to make sure from a proxy viewpoint, we were in electrical components or something.

We don't have a single business in the GICS code to which we were assigned.

Not a single one.

Yes, okay.

Thank you.

Alex Blanton, Clear Harbor Asset Management.

Good morning.

Good morning, Alex.

I wanted to ask you about what you said about the Roper Pump facility in Houston.

That was your original business and that was originally acquired before you were public by Orstrom 30 years ago and yet under continuous improvement, you're still improving it apparently.

Could you tell us exactly why your customers are saying that that's a world-class, best-in-class facility in the world?

The situation is, we've got several products in Roper pumps.

Some of which are OEM products and some, which are now fastening products for the fracking operations, where they're doing drilling.

So one of the things that happened is, one of the large people in the space acquired another company, Robbins & Myers.

I think there are some customers who, end-users, who think they would rather buy from maybe some other person like us.

We've been approached by people about could we do larger-diameter products than we do in our commerce Georgia facility?

Which is the founding operation of Roper, back in the reference you have.

We had difficulty doing these larger things, because you've got to have a couple of cranes, you need some automation, got special heat treat situations we need to do.

And then we had our alpha instruments business, which is part of the Dynisco acquisition, that's an instrument Company that is a very knowledgeable about rubber and latex.

They came up with a way for us to have a substance that wraps the product that we're making here, in a way that allows it to operate at faster speeds and higher rates of temperature, it's an entirely new technology for the industry.

That facility will be sole sourced on providing those larger-diameter products in that arena.

As it comes on line, it will gain share from people who have less effective products now.

Then they get used quickly.

They have a short life and so they get relined.

So by moving to Texas, we're close to the market where people can shift back the drills, they can get relined and go back for second-use applications.

That sounds great.

The second question is about what you said about the Russian business.

What are you doing in Russia?

And also Asia was up 9%.

What's the biggest contribution you're getting from Asia?

Well, in Asia there's three areas of growth for us.

You have everything grows a little bit there, but you have Japan was up this past year on technological purchases.

China was up modestly and India was up sharply, somewhat with our pump businesses actually and some instrumentation businesses.

So those are the three bell weathers there.

In Europe, we did $125 million of revenue in the second quarter and $5 million of that was Russia.

Going back to your days that you would remember with gas being the single most important entity that affected Roper for off most of the 1990s, it's an irrelevant factor today.

So Russia was 4% of European activity.

How that will do in the balance of the year with whatever is going to happen politically, will be interesting.

But it's nothing like it used to be, where if you had a problem in Russia, and Roper in 1995, the business was threatened.

Yes, okay.

So that's still a little bit with gas problem?

No, not necessarily.

A tiny bit, but there are people who serve the install base.

So we have products that go into that, and we also have some old AMOT products that still go into Russia.

It's just in the energy segment.

Okay, thank you.

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

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

Thank you.

And once again, thank you all for joining us this morning.

We look forward to talking to you at the end of our second quarter.

Have a good day.

That concludes today's conference.

Thank you for your participation.