Roper Technologies Inc (ROP) 2014 Q4 法說會逐字稿

The Roper Industries fourth quarter 2014 financial results call will now begin.

Today's conference is being recorded.

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

Please go ahead, sir.

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

Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller; and Rob Crisci, who heads up planning and Investor Relations for us.

Earlier this morning, we issued a press release announcing our financial results.

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

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

If you will 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 further detailed in our filings with the SEC.

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

If you will please turn to slide 3. Today, we will be discussing our income statement results for the quarter, primarily on an adjusted basis.

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.

For the fourth quarter, the difference between GAAP and adjusted consists of two discrete items.

First, a purchase accounting adjustment to acquire deferred revenue at our recent software acquisitions, Foodlink and SHP, which we completed in the third quarter.

That totals about $1.4 million.

As a reminder, this represents revenue that, absent our acquisition, those businesses would have recognized.

In addition, we had an inventory step-up charge for IPA for about $400,000.

Now if you will please turn to slide 4, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer.

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

Brian?

Thank you, John.

Good morning, everyone.

We'll try to get this call finished before your snow storm.

So if we start with the Q4 enterprise financial results, we had a really terrific year with a great strong finish here in the fourth quarter.

We had all-time records for incoming orders, the revenue that we build and net earnings, EBITDA, cash flow.

Organic revenue in the fourth quarter was up 7%, and we had pretty much broad based growth every place.

Operating margins in the quarter reached 30.1%, which was up 110 basis point, and the operating leverage was pretty spectacular in the quarter at 47%.

We will comment about leverage going forward with our guidance.

Net earnings were up 13% to 187 million or $1.85, and operating cash flow was up sharply, billion-dollar run rate there of $261 million in the quarter, up 11% with free cash flow in that same category.

There's very little CapEx this year, about 1% of revenue, so very strong forth quarter.

Next slide.

We look at the income statement here, you can see the orders were up to $924 million versus $900 million a year ago, up 3%.

Book-to-bill was 0.98, so we said before 0.97 to 1.03 is a normal spread.

But in the fourth quarter, our book-to-bill is always very low or relatively low because we have so much more year-end invoicing.

So really that book-to-bill at 0.98 is not a problem, and we finished the year at 1.0.

Revenue was up 7%.

We had about 2 points of negative foreign exchange headwinds here in the fourth quarter.

Gross profit stayed at a remarkably high level here, about 60%.

The operating margin as we said before had 47% leverage, and that was just strong across-the-board as you'll see.

The tax rate was 60 basis points lower than the fourth quarter of last year, which gave us about a penny and a half, so you can see the DEPS number at $1.85 versus last year's $1.65.

Next slide.

Cash flow performance in the quarter was spectacular.

We had 140% operating cash flow conversion and 136% free cash flow conversion.

Our cash flow has been growing, as you can see, if you look at 2012 and then 2013 and 2014.

That's an 11% CAGR on operating cash flow the last two years, and our free cash flow was 23% of revenue, which is about the same as last year's 23% of revenue, pretty spectacular number.

We still think cash is the best measure of performance, and if you follow our free cash flow and you follow the continued growth in it, you get a much better understanding about the quality of the Company's businesses.

Here, we start the full-year enterprise results, next slide.

If we look at the full-year income statement, orders were above $3.5 billion, they were up 5%, and the book-to-bill was exactly 1.0.

The revenue was up 9% with organic up 6% for the year, which was certainly in the wheel house of what we established as guidance at the beginning of the year.

Gross margin for the full year was up 70 basis points to 59.3%, and our operating margin was up 120 basis points.

And for the full year, we had operating leverage of 42%.

We used to talk about -- I can go back to 25% to 30%, and then it was 30% to 35%.

And recently it's been 35% to 40%, and we're going to suggest that forward guidance for us is going to have operating leverage at 40% or above on the next dollar of revenue.

Operating income was up 13%, earnings before tax were up 16%.

Tax was a head wind for us this year as we suggested it would be at the beginning of the year.

It was 29.9% versus 29% last year, and that caused an $0.08 headwind in our earnings.

But even with that $0.08, we still produced $6.42, up 14%.

And the GAAP number, of course, was up 19% on earnings per share.

Next slide.

In terms of EBITDA and margin on the left-hand side, you will see EBITDA has increased over the last two years by 30% from $925 million in 2012 to $1.2 billion this year.

That's a $276 million increase.

On EBITDA margins, we continued to improve margins I think rather spectacularly.

2012, our EBITDA was 30.8%, and people were saying -- oh, boy, you're going to have to revert to the mean now.

You will be back down with everybody else in the 20%s.

Well of course, quite to the contrary, that's just wrong.

We were at 32.8% last year and 33.8% this year, and that's all about our governance system and the quality of our businesses.

Record EBITDA performance.

Next slide.

Here again, you see a tribute to the governance model that we have and the field execution.

Our asset-light business model inventory now running 5.1%, receivables at 16.1%.

And the way we look at the working capital number, you can see it's dropped from 7% two years ago when people thought that was an unbelievable good number, to now 5% at the end of this year.

So our guys continue to understand how to execute our asset-light business model.

Next slide.

We look at the strong financial position and the balance sheet of the Company.

It's certainly a powerful balance sheet with a lot of powder that we intend to use.

You can see that cash has gone up to $610 million, and now a lot of that's not in the US, but our cash and undrawn revolver gives us a $2.1 billion capacity.

The trailing 12 months EBITDA now has gone up to $1.2 billion, so our gross debt number at $2.2 billion is 1.8 times our EBITDA, and we're going to be quite comfortable if it's at least a turn higher.

We'll discuss our activity that's going to be occurring in the first quarter and throughout the year later, but we still believe we're going to deploy about $8 billion over the next five years in transactions.

Next slide.

We will get into the specific detail now on the segment.

If we look first at the revenue growth by segment last year, you'll see on the left-hand side on an organic basis energy was up 5%; industrial technology, half of which is Neptune, was up 7%; our radio frequency was up 5%; and medical was up 8%.

If we look at the total revenue growth by segment, you will see medical was up 16% as the acquisitions added to the organic number.

Next slide.

Here we look at the overall segment performance on a dollar value, an EBITDA basis so that you can get some better clarity on the fact that RF and medical represents about two thirds of our total EBITDA progression, and it's well over half of our revenue now.

So the original energy business is the smallest segment we have at $692 million, still outstanding performance with $226 million of EBITDA in the large section.

First time I think we've ever had a billion-dollar segment in Roper, so you now have medical with $1.082 billion in revenue; pretty good solid standalone entity with $472 million in EBITDA.

Next slide.

If we look at the oil and gas component of the Company, the legacy of the Company was oil and gas, and up until through 2007, it was a pretty big portion of the overall Company.

Today, it's a very, very small portion.

Our upstream represents 5%.

Our medical, RF and software water markets are 86% of the Company, and the downstream midstream, which is actually going to have modest growth this year, is about 9%.

Now, what the slide's showing you in addition to the breakout here, our upstream business is about 5% of revenue.

Some of that's in the energy sector, and some is in the industrial technology sector where Roper Pump resides.

We have -- even though the market we think will be down 20%, perhaps even a little bit more, we have a benefit in that Roper Pump has these technologies that we launched and the new facility to get broader categories of those into the marketplace quickly in Houston a year ago.

Well, those shipments didn't really start to occur until the second half of the year at any level, so we have an easy comp with the first half of 2015 in those products in which we're gaining share.

So that will mitigate what normally would have been a deeper decline in upstream.

And our field service and retrofit activity in midstream is actually continuing to move up a little bit.

And then we have the refinery instrumentation businesses and the field service associated with that also, which will have modest growth.

One of the things we did in December is we had all of our oil and gas people in for a couple of day meeting where we did a focused review to recast what they had originally submitted for 2015 projections.

We had them bridge the risk by customer and by category, by product line.

We reviewed the contingency plans and the triggers that they had in place.

These guys are world class in nimble execution as they need to do stuff.

They've made a few changes already and are monitoring activity routinely.

In fact, Friday we had a dust up on exactly where we were January to date.

I'd have to say that the momentum is actually as good as it was in the fourth quarter.

We really aren't seeing anything related to product falloff at all.

It's above our expectation through the first three weeks of January, which doesn't necessarily mean anything.

But there has not been any early indicator yet, other than project delays, and what you hear from other people who aren't really determining their CapEx plans until later,.

But most of our products are not going into CapEx-driven activity.

The guidance that we've established and I will talk about reflects the up-to-date business expectations of all of our oil and gas people as of January 23, and as I say, the product activity hasn't slowed.

The other thing I think as I've read some of the commentary about the Company is people thinking that there's some way to ascertain something that happened in 2008 or 2009 for our Company, and I guess we just failed to do a good enough job to remind people who we are.

If you look at 2008, we added CBORD in February, and later in the year, we added Horizon and Getloaded and Techlog, three software companies.

And those weren't in full year for 2008.

And then if you look at our acquisitions since 2008 where people are doing comparisons, we've added United Toll; which is a software system that's driving so much of our growth in TransCore; the iTradeNetwork; Verathon; Northern Digital Medical; Ascension Medical; Managed Healthcare Associates; Sunquest; Strategic Healthcare Programs last year; Innovative Product Achievements last year; Foodink; and now Strata Decision Technology.

All these are either medical or software companies that created over $1 billion of revenue that's in our numbers today that wasn't there in 2007.

So to say there's some quid pro quo on this just belies the reality of who we are and what we've become.

Next slide.

Here, if we look at the energy systems and control sector, we can tell you that there is about $125 million of revenue upstream out of our total energy systems and controls business.

You can see in the fourth quarter their operating profit was up 11%.

Their OP margin reached 36.1%, up 280 basis points, and EBITDA for energy in the fourth quarter was 39%.

Organic revenue was up 4%.

We had very significant strength really in some of the businesses that people think are going backwards, which as far as now are not.

So our diesel engine shutoff safety systems was up in the high teens, and so was vibration monitoring.

Field service growth continued, but we did see project activity declining at CCC or postponement, so that's something that we'll be watching carefully throughout 2015.

As we look at guidance establishing for next year, we look at upstream declining, which is about 20% of the revenue in the segment.

And then we think the midstream and downstream will have very modest growth, and that represents about 40% of the total segment.

And then the non-oil and gas businesses are another 40% of the energy systems and control segment.

So when we net it all together with declines in the upstream, modest growth in the non-oil and gas arena, this segment we think will come in flat to modest organic growth for the year.

Next slide.

Here we'll look at industrial technology, in industrial technology, we have about $75 million of upstream revenue in the entire segment.

Oil and gas split a little bit between the upstream, not much downstream in the segment.

Maybe another $25 million at the most.

Here, you can see that organic growth was 13% in the fourth quarter.

Broad based throughout the different businesses in the segment.

Our Roper Pump had all-time performance records.

They continue to win new customers with the newer technology, and the product investments that we made over the last two years have really driven substantial revenue growth and certainly help us as you get the end market falloff in that activity.

We had growth at Neptune driven by strength in the US market.

We're starting to see the Toronto project wind down, and we will talk about that here in the guidance.

We had double-digit growth in material analysis, and the OP margins in our industrial segment in the fourth quarter you could see were 31.4%, up 190 basis points, and EBITDA hit $74.3 million at 33.8% of the revenue.

So in guiding in 2015, we think Roper Pump share gains will support flat revenue for them in total, despite a pretty steep decline in the market.

Neptune we think will continue to grow in the US.

The Toronto project completion is expected in the first half of next year.

You can never put your finger exactly on that, but they have been moving at a faster pace than they originally suggested.

We expect continued growth in material analysis, although you've got some currency issues with the Danish Krone.

And then we've got the modest organic growth we're seeing in this segment in whole, only because the Toronto RF project completion should occur some time in the year, and that could really create about a $25 million to $30 million divet in the segment on revenue, which is the bad news.

But the good news is we've got another RF product that's going to offset all of that and then some that we'll talk about as we look at the radio frequency technology segment next.

So next slide.

So here we go into RF technology.

We will just talk about the good news here.

We were awarded a substantial contract for Riyadh, Saudi Arabia traffic management system.

This will be using our trans suite software transportation management system.

This is totally different than trolling now.

This is the stop light transactions in Midtown Manhattan.

There's a lot of installation management in this project which of course is lower margin work, and it's a five year contract to support it post close.

We do expect it will completely offset the Toronto winddown of Neptune even though both are RF businesses, one happens to report in industrial now and one in RF.

So now we look at the segment as a whole, you can see the revenue was up just slightly.

Toll and traffic infinity lane project execution remained very strong with favorable variances both in Texas and Florida.

We had terrific subscriber growth in our trade matching businesses, DIT and Getloaded.

And iTrade strength in the US was pretty good, but unfortunately offset by the UK weakness and problems in the UK with that business.

Technolog declined, another UK-based software business in the utility industry, but bid activity was pretty strong, and Technolog tends to be a little bit up and down business and should be up again in 2015.

So then if we look in addition to that OP margin at 28.4%, EBITDA for this segment was $82.4 million at 34.3%, and RF now represents 26% of the Enterprises EBITDA.

In addition to the Saudi contract that was awarded, we do expect additional scope in the foreseeable future around this because the Riyadh of course is a very important city but only one of many.

TransCore's backlog and quote activity is going to support segment growth for 2015.

And the toll tag growth that we have enjoyed recently is going to continue particularly in Florida and Texas where people continue to migrate to our very small, stiffer tag as opposed to the plastic boxes that so many people in New England still use.

Software and SaaS businesses are going to continue to grow mid single digits, very high margins,.

They throw off a lot of cash that allows us to make reinvestments in their own businesses or buy bolt-on things for them.

And the segment we think at the end of the year will have mid single digit organic growth.

So next let's look at medical.

I think this will be the last time in a call that we will be able to contain medical on one slide.

As you can see, we work very hard to try to achieve that and pretty much made it.

But I don't think all that's going on there and everything we know about will allow us to do that ever again.

So prepare yourself for two slides in 2015.

So here we are with a very strong fourth quarter up 12% in revenue, OP was up 15%.

Operating margins 35.5 aren't the real story here.

The real story here is EBITDA.

We delivered $126.3 million in the fourth quarter in EBITDA, which was 43.9% EBITDA margin.

Really, the way you have to think about this segment now is that it's medical products in one leg and software and service in another leg, and then the residual life science imaging component that we have in there.

Organic revenue in the fourth quarter was up 9%.

We had double-digit growth at MHA with share gains and favorable end markets which continue.

Sunquest growth continued.

We had some customer implementation that customers delayed into 2015 that we thought was interesting, which is fine with us.

New products at Verathon really throw spectacular growth in the fourth quarter at Verathon, and we like to think that's going to continue throughout 2015.

Our imaging family improved somewhat with Gatan had a strong quarter which really lead that growth.

And Gatan shifted much more emphasis around life science.

It used to be split between physical science and life science, but with the new technologies we've introduced with the exceptions of the K2 camera technology and filters, more and more life science is coming our way.

And the last bullet point here, SHP, which is Strategic Healthcare Programs, and IPA, Innovative Products, performed really well.

They are certainly on track with what we thought at the time they acquired them and probably have better forward growth than we might have guessed.

As we think about 2015, I think you have to start with the context of understanding that MHA and Sunquest are really truly transformational for Roper.

They are more transformational today than Neptune and TransCore were in the early point of the audit.

They have really great focused opportunities to build on each one of those businesses, Sunquest and MHA, including acquisitions that the number of acquisitions we can make is much broader than anything we've ever had.

One disappointment around Neptune is it's done exceedingly well, but we haven't been able to acquire things because its competitors are less than exciting and most of the people we see in the space are not the kind of companies we want to own.

Thank goodness Neptune has outperformed all those over these years.

TransCore we have been able to build out somewhat through acquisitions, but mostly its been organic growth.

But Sunquest and MHA are a different story.

MHA is capturing new opportunities, it's benefiting from favorable demographics.

Its acquisition of Strategic Healthcare Programs was really the first addition we've had to MHA in the third quarter of 2014.

We expect another one that's going to happen yet within this quarter.

Sunquest has had this moderating growth for 2015 because of the meaningful use upgrades that have been driving such high level growth in the recent past, but our investments in eternal development, the things we're doing with partners that we aren't really able to talk about yet and the opportunities that they have in front of them are really exciting.

We're likely to announce another important acquisition here soon that relates to Sunquest, so both MHA and Sunquest, I think you will see continued acquisitions building those very large platforms down the road.

The medical device businesses are on a pretty solid growth path for 2015.

We think that Verathon is going to continue to have its market share gains and product replacements going on.

And then we just last week announced our first deal of the year -- won't be the last -- and that's Strategic Decision Technology which is a Company run by Dan Michelson in Chicago.

It's a very exciting Company with a new product.

It's a small Company, low -- just turned past $30 million of revenue.

But they've been growing at 20% the last three years, and now with an infusion of capital from us, they're going to be able to continue to raise that growth specter.

They have a new phenomenal product which is so important for the country around cost containment, cost improvement for hospitals.

Their StrataJazz platform has been running a number of hospitals in a variety of ways, but the new programs that Dan and his team are going to be offering, that came out of a project that they did for Northwestern Hospital University, is really spectacular.

In total then for the segment, we think we'll have mid to high single digit organic growth for this segment by the end of the year.

And I commit to you that we won't crowd the slide.

We will just do two in the future.

Now 2015 guidance.

Here if we turn the page, so full year guidance we established at $6.70 to $6.94, and we put a good deal of energy into looking at this.

The organic revenue growth for next year we think will be around 3% to 5%, and that's after completely adjusting for the newer macroeconomic trends that people have seen since December 30 to now.

Operating profit leverage we can proudly say will be above 40%, and that's pretty good by anybody's standards.

Our foreign exchange rate is going to hurt us.

All of our guidance is still predicated on the year-end numbers.

We think that's going to cost us about $0.10, which is inside these numbers.

If the dollar continued to strengthen even more, you'd have a little bit more risk.

It could be as high as twice that number if today's rates lasted for the entire year or got worse.

Tax rate we think will come in around 30% to 31%.

That's about a nickel headwind into the comparative earnings at the mid point, so it could be a little higher if the tax rate got higher.

Last year, if you'll remember, was 29.9%.

So we're hoping it will be around 30%, but could certainly go up to 31%.

The guidance at $6.70 to $6.94 gives you a mid point of $6.82, is -- excludes any future acquisitions that will occur or any divestitures.

And the full operating cash flow we're establishing at the beginning of the year would exceed $900 million of operating cash flow for 2015 with our normally strong cash conversion.

First quarter we established DEPS at $1.47 to $1.53, and it includes Strata but it excludes any other acquisitions that will happen in the first quarter or any divestitures that could occur.

Next slide.

So here we look at the 2014 summary and 2015 prospects.

So Q4 we had record performance, very strong finish to a terrific year.

For the full year, we achieved record results in all these categories, orders, revenue, net earnings, EBITDA and cash flow.

Revenue was up 9% with organic up 6%.

Very significant financial achievement, sort of threshold level activity where you see operating profit exceeded $1 billion in the Company for the first time, margin at 28.2%, 42% operating profit leverage.

The EBITDA exceeded $1.2 billion for the first time, and EBITDA margin got all the way up to 33.8%.

Free cash flow was 23% of revenue, and we expanded our medical and software platforms with three acquisitions of Strategic Healthcare, Innovative Products and Foodlink.

And these three deals, which are smaller than the things we've done recently, are really a precursor of some of the types of outstanding businesses you're going to see us continuing to add in medical and software where they have higher growth characteristics but tend to be somewhat smaller revenue businesses.

And there are a lot of these that we're involved with as we speak.

In 2015, we expect to have record performance of Roper despite the fears around macro-economics.

We're going to deploy over $1 billion we're very confident of in the year, could easily be more than that.

The first deal Strata, we talked about a little, bit but it's not going to be the only deal in the first quarter that's likely.

I think it's important as we close out the call and get ready for the Q&A here that we are really well positioned in 2015 because the Company really -- the emergence as a technology platforms and our ability to deploy capital are frankly more important than many of the macroeconomic considerations in markets that so many people talk about.

So we're looking forward to a great year in 2015, and with that, we would like to open it up to Q&A.

Thank you.

(Operator Instructions)

We will go first to Joe Ritchie at Goldman Sachs.

Good morning, everyone.

Good morning, Joe.

So I guess I will be bracing myself for the second slide on medical and scientific imaging coming next quarter, but the first question I had was --

That won't be very important in that second slide, that term scientific imaging.

Think about medical and software, Joe.

Fair enough.

So I thought good quarter, good year.

Brian, I know your Company has undergone a significant transformation since the 2008, 2009 time frame when we had -- energy price ebb and flowed.

But a lot of the acquisitions have occurred outside of energy, and the question I have is really on the energy portfolio and how has that evolved really since 2008, 2009 where you did see some pretty significant organic growth to clients during that time frame.

And I'm just trying to get a sense for how the portfolio there has evolved and how you expect to have a more resilient earnings stream in energy during this downturn that we see.

Well certainly a big part of what happens in energy is our [third door] technology which has been very important for the continuous operation of what's going on with fracking and doesn't require new wells and doesn't require rig count or anything else, and we didn't have that technology in 2008.

That only just appeared really in 2013 and 2014, so that's like an additional business but wasn't there previously.

We also acquired a software control company called United Controls or CCC that offers various things we didn't have out of CCC in terms of dealing with different types of gas turbine engine technologies on a retrofit basis, and that's useful.

We have online software we added to our pack business, Cambridge Viscosity and Trinity Software for CCC, so we've got some things that continue to grow and aren't related to rig counts and upstream activity.

So that's good.

I would say though that our businesses that are in oil and gas are spectacularly great businesses.

They have EBITDA margins that are consistent with the overall enterprise EBITDA margins and pretty much were best-in-class activity.

Thank goodness the vast majority of their activity is not upstream.

Well over 60% of those businesses are downstream and midstream, so that helps a lot.

The other thing I would say Joe is that who wants to learn from the successes we had and what did occur in these businesses during 2009, but 2009 was really a demand shock.

It wasn't that price went down and therefore everything else went down.

The price went down because everything else went down.

So let's understand that we don't see an enormous decline, so therefore, the large installed base we have around compressor controls and instrumentation for PAC which serves midstream and downstream markets, those will continue because those are more throughput driven.

And we don't see the 15% immediate demand shock across not only that segment, but the entire world we saw in 2009.

So we want to make sure that we are very nimble in the way that we act and particularly on the upstream side where it's always a little more cyclical than the rest of the oil stream market.

Okay, that's helpful color guys, and I guess maybe just one follow-up here.

You talked about historically your incremental margins being in that 35% to 40% range, but yet you continue to do 40% plus.

As you head into 2015, your growth rate is going to be slightly slower than 2014, at least that's what you're projecting today.

And you had some headwinds in that RFX business in 2014, and so I'm just trying to get a sense for your confidence in that 40% plus incremental and how are you thinking about that across the different parts of your portfolio?

So a little north of that number in medical given the underlying margin structure and the amount of software that we have not only there, but also in RF.

When we look at industrial and energy, that's where we are probably a little more conformable in the 35% to 45% range or a little bit wider variation there because not as much of it is the consistently high margin that we see across the other two.

But in terms of confidence going into 2015, we have a lot of confidence around that.

We've demonstrated our ability to have that type of leverage not only around 2014 but also in previous years, and with the continued mix toward more technology, I think that's a reasonable expectation for you.

I think you will want to remember in 2015 that most of the incremental revenue which will result in the operating profit leverage is going to come from RF and from medical.

We're not going to have a lot of incremental revenue in energy and industrial in 2015, so wouldn't worry so much about what that ratio is because it may be a very high number on a very small base.

Yes, it's a fair point.

I will get back in queue guys, thank you.

We will move next to [Shannon O'Callahan] at UBS.

Good morning guys.

Good morning, Shannon, welcome back.

Yes, thanks, good to be back.

Maybe start with medical.

Brian, you sound very optimistic there.

Just curious how much of that is related to just where Roper has evolved to and the M&A opportunities you're seeing versus how much you actually see the overall medical market getting better out there?

Well we've got a lot of different businesses here.

So if we look at our medical products businesses, those things are getting driven not so much by demography but by product technology that we continue to introduce.

And there are high-margin businesses.

We do a lot of reinvestment in them, and they really have market leading technology.

So they aren't really driven by some aggregate number about demography or a medical market.

And then if you get to our Sunquest and MHA businesses which are software and software light, they have a lot of demography benefits.

There's going to be more testing, not less testing.

There's going to be more needs for post acute care.

There's going to be more activity around hospice and nursing homes and skilled nursing facilities and all those things that MHA does so well.

We're certainly going to bolt on some acquisition this year for MHA that you will see will just reinforce all those things in a big way.

So they are creating markets more so than anything else.

These guys really are the leaders in their marketplace.

People do read across us with somebody with a read across for Sunquest if you will look at Cerner.

So look they're doing well, we're doing well, epic is doing well and space is doing well.

If you look then at the life science business, that business -- Gatan has preemptive technology related to filtering and camera technology for life science, things if you're looking at molecular biology.

So it's a great space, and it's going to do well.

The other one which are very small really are less medical and really more about nanotechnology and development in the physical sciences.

So that has less drive demand than the others do.

Great.

That was a helpful walkthrough, thanks.

And then I'm just obviously a lot more volatile world here so far in 2015.

How do you think that's impacting the M&A world?

You obviously sound very optimistic, I don't know if that's related or unrelated to the volatility, but is this all a good or bad thing in terms of what you think you can get done out there?

Well the M&A world hasn't changed very much when you think about the world in which we participate, which is really primarily acquiring companies from private equity.

So we're not out shopping around for public companies if you see a distorted value or something.

We tend to think public companies acquisitions are problematic for the most part.

It could happen but it's not where we're looking.

So the only good new development in the M&A front is there's a lot more pressure on the banks to limit their debt to EBITDA staples to 6 times or 5 times.

And most of the last several years, DEPS staples have been 7, 7.5, mezzanine coming on top of it.

So private equity could put in three or four turns of other peoples money and use dept extremely high leverage ratios and be very competitive in the acquisition market.

So pretty much our competitors for when we think about who our competitors are and this is a capital deployment Company at its core, we look at all of the large private equity guys.

And we love them because they own a lot of stuff we want to acquire.

But we're not willing to go up to 4 or 5 or 6 times debt to EBITDA.

They start at 6 or 7 times debt to EBITDA, so it's still a tough market for us.

Okay, great.

Thanks a lot guys.

We will go next to Deane Dray at RBC Capital Markets.

Thank you, good morning, everyone.

Good morning.

We appreciate the additional color on the disclosures on the oil and gas business because obviously still a lot of scrutiny there and recognizing this is 5% of your business on the upstream side.

Can you provide some more color on the assumption on the 20% market down, because if you look at the CapEx sensitivity where oil is, you could push that to 35% down, 40% down.

But a lot of that hinges on CapEx and the falloff in customer CapEx, and you said several times that you're not so levered to customer CapEx.

So maybe expand on that, how much is after market, the retrofit and field service part of your business.

So how do you, I'm sure that leads you to that down 20% as your assumption, so maybe just walk through how you're seeing that play out.

John and I are looking at each other fighting to see who wants to answer this very fair question.

Unfortunately, there's never any one answer because we have a roll up here with the revenue we've shared with you, and 5% is upstream and 9% is midstream and downstream.

But while our products and the markets we serve are so niche that they don't lend themselves to the same macroeconomic situation that you see with other people where you could look at rig counts.

For instance, what we haven't talked about is how much of our business is upstream oil and how much is upstream gas.

How much is in the United States.

How much is outside the United States, and for competitive reasons, don't want to get more granular than we have, right?

So we just feel that the retrofit activity that CCC does and already has booked and continues to do will have growth.

The upstream portion that they have related to any new LNG projects is going to be down, and it could be down substantially beyond 20%.

But it wouldn't affect us until the second half of the year because the things we do on a project basis are still rolling along when one of our high-growth small businesses is diesel engine shutoff valves which somebody had downstream, but it's really an upstream business.

That business last year was up 16%, so we can't imagine that it could be up, so we think it's going to be down.

The reversal will be more.

So about the only fair way to answer the question is if CapEx and other things fell off an you had a B of 35%, our view would be 35% in the second half of the year but maybe 15% in the first half of the year.

So I think those people who are writing about fears in 2016, we're reading everything everybody is writing.

But we've got no data to support any downturn yet except us being conservative and taking a 20% wack off of everything that goes into those markets.

John, do you want to add anything?

Yes, I wouldn't add much to that.

I think Brian described what our views are with respect to the guidance and to the expectations for the end market.

One thing that I would say is that our businesses, one of the great things about our business structure is we have people who are very close to their customers.

We have six different businesses that have some exposure to oil and gas.

And so whether it's Russ or Kevin or Joe, any of the guys that we know individually, they are very close to their customers and can react very quickly to changes in demand.

They aren't waiting for us and our assumptions about what's going to happen in the macro world to set their plans.

These are very quick businesses to act, the asset light nature of our business means that they don't have a lot of fixed costs that require a long lead time in order to make adjustments to the cost structure.

So I have every confidence that these guys are very close to what's happening or will be able to act quickly whether that means that the market is going to be worse than we currently expect or if it's going to be better than we currently expect.

They aren't looking to us for those answers.

They get to be very close with our customers and know exactly what's going on, on a realtime basis.

I think we need to also add because we probably don't explain this well enough is that our businesses in this space are not the least bit capital intensive.

These aren't factory driven businesses.

These businesses can flex immediately, and they have all kinds of flexing ability with manpower.

So most of the other companies in these segments, they've got big factory operations.

So what happens in a downturn for them is absorption wipes them off the face of the earth.

We just don't have anything like that.

We just don't.

If you look at the physical asset investment that we have and add back accumulated appreciation to that number, our gross investment is very, very small, even in the oil and gas arena.

These are mostly test and assembly businesses.

There are only a few things we do that involve machining operations, so a downturn to us is a lot different than a downturn to GE's oil and gas business.

Look, that's exactly the additional color that we were looking for on why you can set a number at 20% for that upstream piece, so that's exactly what we were digging at.

And just as a follow-up, a couple here.

Maybe you can flesh out the expectations on the share gain for Roper Pump, just anything quantitative, what happened in 2014 regarding market share, what the opportunity is.

And then for John, with the FX pressures, we're seeing a number of companies engaging for the first time some additional currency hedging, and would that be appropriate for you guys?

So I will take the second one first.

No, we don't do hedging.

Our FX risk is not transactional.

We have a very good balance between where we generate revenue and where our cost structure lies, so we aren't really subject to that risk.

The impact that we have is the translation effect of earnings as they're generated, whether they be in Canadian dollars or Euros or pounds.

And with respect to hedging, you can change the timing but you can't change the magnitude, unless someone has figured out a way to hedge for the next 20 years and they know what the currencies are going to do.

You can hedge for a little while, but those are folks that are really more plan-driven and have much longer cycles than I think our Company does.

As we look at the sensitivity, I think Brian already mentioned the fact that we are expecting a little bit less than 2% headwind from an FX standpoint for 2015.

That translates to about $0.10, so we will have to see what the future holds.

And on the market share expectations?

So Roper Pump was up about 20% in 2014 with -- frankly they were up almost double that in the second half of 2014, as production ramped up for the facility, not really facility driven but the fact we have the share gains required us to go ahead and expand some capabilities there.

And so it really doubled their growth rate toward the back half of the year.

And as Brian said, it gives us a little bit of an easier comp in the first half of the year because we do expect to maintain those share gains with the expansion of some of our product lines.

Great, thank you.

We will go next to Jeff Sprague at Vertical Research.

Thank you, good morning, gents.

Good morning.

Just a couple things.

Brian, you've mentioned divestitures twice in your pitch.

I was wondering if you could just obviously you aren't going to identify businesses, but it sounds like you are more actively looking at that, perhaps just a little bit more color on your thought process there?

Well I don't know about us looking at it more actively, but we certainly have had more inbound requests than we follow-up on.

It's very rare there's anything we own that we're interested getting rid of, but somebody might talk us out of something.

So I think it's possible that you could see a divestiture within 2015, but it wouldn't be a very meaningful -- it would be a non-strategic asset if we did sell.

I see.

Could you roughly size maybe just as a percent of the segment the three buckets in medical now?

Between medical products and software and life science imaging?

Yes.

Sure.

So medical represents about 80% of the segment, and that is split very evenly between the medical service and technology, the medical products.

Now I'm talking from a revenue perspective now, so call it 40% medical technology and service, 40% medical products and 20% imaging.

Now from a contribution to earnings, the medical technology comes in higher from the EBITDA perspective so it's even more strong on the medical technology front.

Brian, this question also comes up strategically, but it tweaks me to ask it.

You mentioned Cerner as the comp trading at some 40 times earnings or so.

You do have a very interesting, unique portfolio here that's really not an industrial company anymore.

What's your thought process around the Company and its current configuration?

We like the configuration.

We've got a great industrial and energy business that throws off a massive amount of cash that provides a wonderful annuity for us to go out and maintain an investment grade status and acquire a lot of great software and medical businesses.

And that's what we've been doing for a long time.

When there's a confluence of reports that you see out there, I think they fundamentally keep talking about how are you trading as a premium to the multi-industry group.

It seems so high when in reality it's pitifully low against who we actually compete against for market capital.

So at some point in time if that doesn't get recognized better than it does from time to time, there's always flexibility in what we would do.

But we're going to keep building out our situation.

Now we've started from next to nothing to create a billion-dollar medical and software company.

Our RF business is largely a software company and industrial with Neptune, Neptune is not industrial, it's really radio frequency, it's just reports over there.

So I think you're likely to see more internal strategic developments around these various businesses than you are seeing something that would result in us selling off a big component of it or anything like that.

Just one other really quick one.

You're at 1.8 turns, and you said to be comfortable to add a turn, so let's call it basically 3-ish.

Are you comfortable to just operate perpetually at 3, or is that you flexed to 3 and work it back down to 2 sort of thing?

I think it would just depend on the quality of everything we see.

It's not -- when we model ourselves, we model very modest organic growth and 2.5 times debt to EBITDA.

And I think when we're below 2.5 times, we feel under invested, and if we got up to 3.25, we wouldn't be the least bit concerned with the quality of our cash.

Last year for instance, we closed out year-over-year that balance sheet up $400 million in cash, and we paid for $300 million of acquisitions.

And if you look at $2.2 billion of powder, you've got to figure another $900 million of operating cash flow this year, so it would be at $3 billion.

It would be nice to get $1.5 billion to work over the next 12 to 15 months to keep our ratios where we are.

So at the moment we're under invested, but that's because of our discipline not because of the opportunity.

And like I said, Strata is not going to be our only acquisition this quarter.

Thank you very much.

Audra, even though we're at 9:30, I think we have time for maybe one or two more questions.

We will go next to Christopher Glynn at Oppenheimer.

Good morning.

Good morning.

Couple of questions within TransCore and iTrade.

TransCore I think historically, the international deals have been one off, and it sounds like now you're alluding, Brian, to maybe more sustained scale opportunity, so curious about that.

And then with iTradeNetwork, just if we could elaborate on what's off the tracks in the UK and how FoodLink is opening up the addressable markets there for ITN.

Well the international business for TransCore is sizeable and very important.

There's a lot of things we do, but they have been -- it's not broad based.

They are specific situations where developing a relationship with the government or developing a relationship with a particular agency, so that's the case in Dubai.

Well, people travel in and out of Dubai, marvel at the simplicity of all of the way that traffic moves and how easy it is to buy a tag.

Certainly not lost on any of the other Arab countries, all of whom would like to be deploying these technologies.

So the Saudis now have this breakthrough project in Riyadh.

We assume it will be wildly successful, and that will encourage them to put in change orders to expand it there and hopefully over the next 10 years, we will have a much larger degree of penetration around the Arab Peninsula.

We're very well positioned in that area to continue to grow.

If you hadn't had the Arab Spring, you would have seen a lot more activity than has been able to occur.

In Europe, they are pretty well served today, so I don't think we're going to expand much in Europe.

But in Asia, generally we have a lot of issues when you get around to flotation, we have very specific boundaries.

One is no foreign corrupt practices act, and some of the people competing in this space don't seem to be bothered by that.

But we're very conservative in that arena, so this Saudi project is a big deal.

It's going to be pushing $100 million over the next several years, and we expect it to be $25 million or $30 million this year to offset the Toronto wind down.

On the subject of iTrade, iTrade is really doing much better now in the US, and FoodLink is substantially ahead of the early commitments after just a few months.

I think we made a number of improvements to their processes, and they've got good leadership from their own people and our people that are supporting them.

In the UK, the business has been off quite a bit, and the UK had considerable difficulty with -- really it's not iTrade.

It's an acquisition that the KKR people had done just before we bought it that we would have never done.

And its always been problematic and it's really more about data analytics that really ought to be owned by somebody in the packaged good analytics arena, but we're going to try to clean it up and make it a little bit better.

The end markets haven't been very favorable.

Great.

Thanks for the stories.

We will go next to Richard Eastman at Robert W. Baird.

Good morning, Brian, John, Rob.

Brian, could you just talk for a second about Strata?

Maybe give some, could you just talk about how much you maybe paid for the business?

And then also, is there a tie in with SHP here in terms of taking their accounting software from the non-profit environment to the clinical market?

And then maybe just lastly on that acquisition, it seems there's a number of these smaller healthcare software businesses owned by private equity, and perhaps private equity hasn't been able to build the scale with these businesses that you might otherwise think they could.

And I'm curious under your ownership, are you more confident that you can cobble these businesses together and create some scale here?

We're going to do a great job in the businesses, but it won't be by cobbling together.

We're uncobblers here.

Consolidation rarely sustains growth companies.

These businesses -- when private equity owns them, they always own them with an eye to exit.

So their first year, 18 months of ownership they are happy to make investments, but they got to stop on a dime, and they have to capitalize the leverage they get out of those investments because they got to get rid of it in four or five years.

So almost invariable when we acquire them, we're acquiring something that has been under invested in for growth for an18-month or two-year period.

And the people can't focus as much on their end markets and growth as they can when they come here because now they can stop worrying about managing for a sale and start worrying about serving their customers and thinking clearly about where to put their resources.

That's the reason that we're the successful acquirer of so many of these kinds of businesses.

I'm sure that Barbara at Strategic Healthcare could have frankly gotten a larger number from somebody else who would have wiped out everything she built in Santa Barbara and absorbed it because they would have wanted to cobble it together with something.

And same thing would be true in Dan's business in Chicago with Strata.

So Strata is going to be a platform for us even though it's relatively small now.

It's not something that gets cobbled together with Sunquest or with MHA.

Now we're going to make other acquisitions, some very quickly, that will be very complementary to an MHA and very complementary to Sunquest.

So there is a lot of opportunity that we didn't have to find those kinds of things.

We're always looking for great teams, great ability to grow.

Buying a business that's got a little over $30 million in revenue and to grow at 20% is more interesting than buying a business at $50 million of revenue that can't grow at all, so we are excited about that.

If you noted in Strata, that's an LLC, so one of the big things about the economics here is we get a really big tax benefit.

In fact, our gross tax benefit on Strata is going to be over $40 million, so that's a major part of the consideration in the purchase price of the business.

And Strata is a business that's going to have over $30 million of revenue and it's going to have EBITDA in our typical Roper strategies.

And the purchase price was $140 million, but that included the $40 million plus of tax benefits.

Well, when I talk about -- again, when I look at their customer base in Strata, it would just seem that you could share and leverage the customer bases at some of these other businesses, say SHP.

Because I look at -- again, I look at Strata having been around for -- since 1996 and the $30 million revenue number.

So the dynamics and economics for that business for their customers has improved apparently over the last five years and the demand factor there?

Yes, I think that's true and also just the expansion that Dan and his team have been able to do in terms of the product lines and the other things to help people on the cost side.

What I would say is that look, we do see opportunities for these businesses to be able to one, learn from each other.

I know both Strata and SHP are very excited about the product lines each of them have and the opportunities to be able to learn from each other, and it's always a balance for us.

We think there is incredible value in having a business focused on its niche and on its existing customers, particularly one that has so much runway and ability to capture opportunities like Strata.

But we do see the ability to have Strata work with maybe another market opportunity that MHA may have.

So we see those as future opportunities, but we never want to have someone take their eye off the ball of the current niche focus that they have.

So we aren't going to try to combine anything together, but we always think if we have smart people in the room together, they will be able to learn something.

I've got it.

Okay, well thank you.

Thanks for getting the question in.

Thanks Rich.

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

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

Okay, thank you, Audra.

Once again thanks for joining us today.

We look forward to talking to you again in three months as we finish up our first quarter.

Again, that does conclude today's conference.

Thank you for your participation.