Roper Technologies Inc (ROP) 2015 Q1 法說會逐字稿

Good day everyone and welcome to today's Roper Technologies first-quarter 2015 financial results conference call.

Just a reminder that today's call is being recorded.

It is now my pleasure to turn the conference over to John Humphrey, Chief Financial Officer.

Please go ahead, sir.

Thank you, Laurie.

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

Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller; and Rob Crisci, Vice President of Investor Relations.

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

Press release also includes replay information for today's call.

We've prepared slides to accompany today's call which are available through the webcast, available the link for our webcast is available on our website, www.ropertech.com.

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 is further detailed in our SEC filings.

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

If you'll 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 in the appendix.

For the first quarter, the difference between GAAP and adjusted consists of a purchase accounting adjustment to acquire deferred revenue and our recent software acquisitions.

The total of this is about $1.9 million, which is an add-back to both revenue and to operating profit.

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

This is solely as a result of our acquisition that requires us to have this revenue adjustment.

And now if you'll please turn to the next slide I'll 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?

Thanks, John.

Good morning, everybody.

I think you have a slide that says Q1 enterprise results.

So we'll turn past that and discuss Roper Technologies just for a minute.

We're delighted to be bringing this morning's call to you as Roper Technologies for the first time.

We changed the name after the market closed on Friday.

The ticker symbol is going to remain the same at ROP, the way the New York Stock Exchange works on name changes is it takes perhaps two days for the trades to go in as Roper Technologies.

You're certainly available to buy the stock today.

You can expect to begin trading on Wednesday, we believe, in the Roper Tech and John mentioned it's www.ropertech.com now for the website.

That's been changed over the weekend.

I think the link to the slides are on it, if you're having any trouble with normal feeds you can go there.

The reason for Roper Technologies is sort of obvious, I think for those of us that have been talking with you for the last several years.

All you have to really do is look at our gross margins, which this quarter are 60% to recognize that this simply is not an industrial company.

The quality of our businesses, the nature of the amount of money they reinvest to grow themselves and develop technology, the gross margins they have and their long-term growth rates reflect the idea that really is a technology company now.

And the opportunities that we have are far greater than they used to be a decade ago when people were focused on product businesses as opposed to software and medical technologies and information networks that could become ubiquitous for niche applications.

Next slide.

If we look at the first-quarter enterprise results, we were able to power through any of the difficulties with oil and gas upstream stuff that people were talking about, including ourselves going into the quarter.

We achieved record orders, revenue, net earnings, EBITDA and cash flow.

Organic revenue was up 5%.

We had established guidance at around 3% to 5% throughout the year.

Q1 being strong and Q3 being strong, we think over the course of the year on the organic side.

Growth clearly was led by medical and radio frequency segments and we?ll talk specifically about those shortly.

The foreign exchange cost us 3% in the quarter on revenue.

Our gross margins, as I mentioned hit 60% which is a historical breakthrough for us.

They were up 140 basis points.

The operating margin was up 190 basis points, speaking again to leverage and efficiency, to 28.7%.

And when you think about the amortization, the non-cash amortization we have, if you looked at our EBITA results that's how you could see how we do so well on cash, they were 33% in the quarter.

Net earnings were up 7% to $157 million, DEPS, $1.55.

Much more importantly is the cash.

We had the same number of shares that generate cash as generate net earnings, and our free cash flow was $250 million, up 24% in the quarter compared to the $157 million that we report on a diluted EPS basis.

We deployed $590 million on three great medical software companies.

We'll explain those to you during the course of the morning.

So we're really positioned after Q1, which was probably going to -- we always thought would have been the weakest quarter we had, for a record 2015.

Next slide.

If we look at the income statement in Q1 you'll see book-to-bill was 0.98.

You may remember we're always talking about 0.97 to 1.03 as kind of a span that's meaningless, it's just normalcy because we have so many different issues around when projects bid and what have you, so we're quite comfortable with that.

Revenue as we said was up 5%, despite the 3% FX headwinds, as reported it's 4% but on an organic basis it's 5%.

If we look at the gross profit, one of the points I'd make in addition to the 60%, reflecting our technology platforms, it's really amazing to grow 140 basis points of gross margin in a quarter.

If you were a 35% gross margin company getting it to 36%, people would be raving about it.

But it's just amazing when you're at 58.6% that you can get it to 60%.

Operating income was up 11% to $249 million.

We mentioned the margin up 190 basis points above the gross margin improvement.

The earnings before tax were up 11%, but we had real tax headwinds in the first quarter compared to last year.

You'll see our tax rate was up 300 basis points and the headwind cost us $0.07 a share.

Even with that, the DEPS still were $1.55 against $1.46 last year.

Next slide.

If we look at our cash flow, it continues to amaze, as we compound the cash flow, because I suppose if you were using one word to describe the Company anymore it might be that they're really a compounder.

Our first quarter cash flow of $260 million is a 22% increase and we spent around $10 million in CapEx.

So our free cash flow as we said is up 24%.

The conversion rate on our free cash flow is 161%.

Now, that's beyond spectacular.

It represents almost 29% of free cash flow to sales, but in the first quarter we don't have US Fed tax cash payments.

So it tends to be just a little bit overstated in the first quarter.

You can see for that reason we put the trailing 12 months free cash flow of $851 million, which is 24% of revenue and a conversion rate on a trailing 12 months basis of 130%.

In kind of keeping with our commitment that we expect it always to be above 120% over the course of the year.

We still believe strongly that cash is the best measure of performance, not some of the things that other people look at.

We don't provide cash per share, but we sure think about how much the cash is year-over-year.

Next slide.

The asset light business model, it's really a critical important.

Because a lot of people talk about business systems.

Basically our governance process model is our business system.

And one of its core components is our focus on working capital.

Here you can see, if we just look at the last couple of years, inventory has dropped from the end of the first quarter of 2013 at 6.8% to 5.7%.

In this quarter, receivables have come in a little bit.

Payables and accruals are about the same as they were.

So we find that our net working capital number for the end of Q1 is 5%.

That's a 270 basis point improvement in just two years' time.

And what I think is incredibly important is if you look at the long history of this continuous journey we've had on getting more asset light, having much higher velocity, I looked back at where we were in the first quarter 10 years ago in 2005 and at that time our inventory was around 10% versus 5.7% today and receivables were 18.4%.

The payables and accruals were about 14% versus 18%.

So when you net those numbers, 10 years ago we were above 14% in net working capital and here we are now at 5%.

And I can assure you that our governance process has a great deal to do with that focus.

Next slide.

If we look at the financial position of the Company, you can see that cash has gone up from a year agos quarter from $500 million to $615 million.

Our cash and undrawn revolver is still $1.7 billion.

Our trailing 12 months EBITDA has gone up from $1.118 billion to $1.223 billion.

And what is really clear is in the last nine months we've deployed $900 million in acquisitions and yet our gross debt ratio is exactly the same as it was a year ago at 2.1 and our net debt to EBITDA is about 1.6.

So our balance sheet still has lots of room for us to continue to make acquisitions over the next 12 to 15 months and there are a lot of exciting things that we are involved with today.

So we feel both the balance sheet and the pipeline are very strong.

Next slide.

Here we'll get into the specific segment detail of each of the segments.

The next slide is our first-quarter 2015 segment performance where you can see how the four lay out.

They all have great gross margins and EBITDA margins.

But the power of our RF and medical technology businesses becomes much, much clearer to people when you look at these slides.

You'll see, for instance, medical alone in the quarter generated $135 million of EBITDA.

If you added both energy at $36 million and industrial at $63 million together, you get $99 million.

So medical was 136% more EBITDA than those other two businesses combined.

And if we look at RF and medical, they represented 69% of the enterprise EBITDA, compared to 30% for the industrial and energy businesses.

Next slide.

The first segment we'll review today is the energy system because it's -- we go with smallest to largest.

As you can see in the pie chart, the energy business in Q1 represented 11% of Roper EBITDA.

It had negative organic growth of 5% and FX cost us 5%.

The oil and gas markets were as weak as we expected.

Upstream businesses, particularly in orders, were down double digits and we don't see that really improving throughout the year.

I think it'll probably deteriorate a little further.

Large projects remain particularly slow, which affects our compressor controls business and still has decent opportunity in front of it.

But cost actions were taken in some of these businesses.

They're all nimble.

We have a huge advantage because we just have this asset light footprint everywhere because.

So we don't have to do much around plants, but we have done a few things.

Investing a little less than $1 million in restructuring charges within the quarter and that's inside the numbers, not an excluded item.

We had modest organic growth in the refinery application businesses.

People seem to feel that's going to continue to improve throughout the year.

Our other served markets in energy which represents about 40% of the segment, a couple of those businesses that were instrumentation oriented were up and a couple of the businesses that were sensor products were down.

For the second quarter through the fourth quarter of the year, we would think the oil and gas markets will remain challenging with 20% of this business upstream and 40% down to mid-stream.

We wouldn't see that improving during the course of the year, but sequentially it will get better just because Q1 is always our lowest quarter.

We think we'll have flat to modest growth in the other served markets that we have that report through the energy systems segment.

The FX headwind should drive mid-single digit segment decline for the balance of the year in our opinion, but we do think we'll have a stronger sequential reporting numbers in the second quarter than we did in the first.

And I would point out that gross margins in energy in the first quarter were still 55%.

So this is not a business that's under siege by any stretch.

Next slide.

Here if we look at industrial technology, organic revenue was actually just modestly positive, 1 point of organic revenue.

We had FX headwinds which were a negative 4 points in here.

Share gains at Roper Pump gave us double-digit growth, despite the declines in the upstream market, which is exactly what we predicted when we established the guidance.

Neptune's Toronto project is nearing a successful conclusion.

It's down year-over-year on a quarter basis and will start to be down a little bit more than that the second, third and fourth quarters, compared to the prior year.

So it's a headwind basically for the Company.

We had growth at our Cornell Pump business that was driven by new products and niche applications that they are involved with.

They may have a little bit of a tougher time with rental companies in latter part of the year, but it's still holding up well at the moment.

Our material analysis businesses were down slightly, but we had terrific orders.

In fact, all-time record orders for our Struers?business in the first quarter, which was a pleasant surprise.

If we look at that project completion for Toronto, we think should be sometime this summer.

We think we'll continue to have weakness in the upstream portion of fluid handling for Roper and Cornell.

The material analysis business, we think will continue to improve and given the FX headwinds, we would expect kind of mid-single digit segment decline for the balance of the year after a little bit of positive, and this represents about 20% of the EBITDA for the enterprise.

Next slide.

Here's Roper's RF technology business.

That business had organic revenue growth in the quarter of 11%.

It had a point of FX headwind and we actually sold a product line which is called Black Diamond that was a defense oriented rugged computer technology that really belonged in the hands of somebody that was clearly in that business.

And we achieved a sale of that product line in the quarter which added a little downward pressure and it's been removed from the baseline.

We had very strong growth in toll and traffic.

Our technology, which is trademarked Infinity Digital Lane Systems, continues to be deployed rapidly in Florida and Texas and bidding activity around our Infinity Lane Systems is very robust.

We had very significant tag shipments that benefited both the revenue and the operating margin.

You can see the OP profit at $74 million was up 19% compared to the first quarter of a year ago.

And we had quite significant subscriber additions to our SaaS-based freight matching model that gave us double-digit growth.

Normally that's a business that grows sort of single-digits.

So that was very encouraging.

For the second part of the year, Q2 through Q4, we think the backlog is going to support the toll and traffic growth.

The Riyadh project begins in earnest in the second quarter and our tag shipment strength that we expect to continue with kind of known places for deployment.

Our software and SaaS businesses, I would think will grow mid-single digits, but they do give us very, very outstanding cash returns.

So modest growth there is always worth a lot of cash.

We think we'll have kind of mid-single digit organic growth for the segment for the balance of the year.

And you can see RF represents 27% of our EBITDA here on the pie.

Next slide.

If you look at medical solutions, medical was up 15% in revenue and 22% in operating profit and OP margin was up 230 basis points to 37.3%.

It's a lot of non-cash amortization in medical.

If I look at the EBITA margin it's 44.9%, so truly outstanding businesses.

Organic revenue was up 7%.

We got the 3 points of negative FX in there.

Our MHA business had double-digit growth that was really driven by market conditions and new customer additions that we?ve gotten and as they continue to focus on building that platform.

We had double-digit growth at our Verathon product business.

We got a series of product introductions we talked about last year, all of which are doing well and we continue to build out their channel to get better coverage.

Sunquest growth continued, despite a difficult comparison.

You know last year we had considerable revenue as a result of implementing meaningful use programs.

So one thing is to sell the software, but implementation is different.

A diverse revenue stream and that heightened last year's numbers, so would be difficult as a comp throughout this year.

But the underlying recurring revenue continues to grow nicely.

Scientific imaging businesses were pretty flat here.

As you'll notice, we're really calling out the segment as medical solutions because the scientific imaging portion really is down pretty much to microscopy applications.

There's not a lot of stuff here to talk about anymore.

We did deploy $590 million of investment in three great medical software acquisitions for the medical solutions business.

I will explain those in a moment.

For the balance of the year we think MHA's going to continue to benefit from favorable market conditions, most of us appear to be getting older and there are a wide variety of people to provide services to and the execution that MHA has is really, really world class.

Sunquest we think is going to continue to perform well against those difficult comps I mentioned above.

And Sunquest has a great deal of initiatives around 2016 that are gaining momentum, certainly did in the first quarter and are continuing now.

Some of those we can't really talk a lot about because they're proprietary, but they're very exciting development opportunities for Sunquest.

The medical products growth we think will be led by Verathon and Northern Digital in the last three quarters as their pace picks up, particularly there.

We think we'll get mid-teens revenue growth for the segment and the acquisitions that we made in the quarter are really going to help our future growth, because there are synergies in the marketplace as they coordinate more with Sunquest and MHA in the future.

Next slide.

If we look at these three healthcare IT acquisitions, these are all software companies.

The first, Strata Decision Technologies in Chicago has a great leader, a wonderful team.

They're really providing subscription financial analytics and performance platforms for hospitals.

These enterprise-wide things are really around the effectiveness and cost reduction opportunities for hospitals and decision support, so that they can kind of think of themselves a little bit more like the rest of us think about cost and continuous improvement, and the technology is really spectacular.

Now, they're already in one out of five US hospitals, with one or more of their applications.

But they're very early stage for the new applications that have been developed which is part of the reason we -- they really needed to be acquired by somebody like us who can rapidly invest in the development of those.

SoftWriters is a business that's going to be coordinated with MHA.

It's in the long-term care pharmacy space.

It provides enterprise software for people who do that work.

It has on-premise software delivery models that get recurred billing, e-prescriptions or something that rapidly is growing and this facilitates that.

They have the exact same customer base really as MHA, so the two together are going to create a better service footprint for customers.

In Data Innovations, this is a business that will closely align with Sunquest.

It's the largest clinical and blood laboratory middleware provider and if you think about middleware, you might think about you having to download your printer driver to get your laptop or CPU to print properly.

Well, Data Innovations for want of a better way to explain it is really the ability to connect, to communicate between lab instruments and the tests that are deployed and then that information showing up where the hospital needs to have it.

Data Innovations has the largest library with over 1,000 laboratory devices, types of devices connected all over the world.

They're deployed in 80 countries and you can just imagine the hundreds of thousands of tests and feedback that are required to the clinical use of the data that they're interacting with.

This adds a lot to our Sunquest capabilities in the hospital laboratory markets and both companies should be better as a result of the synergies that we get out of this transaction.

Next slide would be to update our guidance.

When we look at the -- next slide.

If we look at the second quarter and the full-year guidance, we're raising the guidance from $6.70 to $6.75 on the low end, up to $6.95 at the high end.

Unfortunately the FX headwinds are much greater.

We started the year using the year-end number, and that created a $0.10 drag.

That's now up to a $0.25 drag as a result of where the currencies are at the end of the first quarter.

Our tax rate we still expect to be sort of 30% to 31%, a little higher than it was in the first quarter.

Organic growth we think will still be in the 3% to 5% thing with Q1 being strong, Q3 on organic should be strong, second quarter probably not as strong and the fourth quarter if we get normal year-end activity should be pretty strong again.

We're going to raise our full-year cash flow to $925 million.

And we established guidance in the second quarter of $1.59 to $1.64, which recognizes the FX challenge that we'll have there.

Next slide.

If we look then at the summary, before we open it for questions, we had basically record results across the board in the quarter, which is a nice way to start out with Roper Technologies.

Organic growth at 5% with medical and RF driving mostly all of it.

Operating margins at astonishing records at 28.7%, and free cash flow up 24% to $250 million, demonstrating the importance of focusing on how much cash people generate versus sometimes people looking too much at a net earnings number.

We deployed $590 million on our three great acquisitions.

The pipeline's terrific.

We have a lot of things open that we're interested in and several things that we're really excited about.

We do think we'll have a record year in 2015, just powering through the end market challenges we have in some of our businesses.

And we were able to raise our DEPS and cash flow guidance, even though the FX headwinds increased by another $0.15 a share.

So with that, we'd like to open it up for questions for the first time for Roper Technologies.

Thank you.

(Operator Instructions)

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

Thank you.

Good morning everyone and congratulations on the name change.

Thank you.

Good morning, Deane.

Just to start off, maybe expand your comments on the market share gains at Roper Pump.

It's just the timing of this is pretty impressive that despite all the worries about oil you've got the ability to grow market share.

Are you getting price and are you building backlog in that business?

Well, the thing you want to balance that off with is that we invested in a new facility that gave us larger diameter opportunities to provide product in the drilling side of the business.

And that came live in the second half of last year and has been building.

So we have favorable comp in the first half of this year, where that continues to go up.

The upstream business on core pump technology was okay in the first quarter, but we expect it to be off throughout the remainder of the year.

And in the second half of the year we'll circle up with the comps from last year.

So it will still be better than a year ago and it helps us at the expense of certain other people that we're making those products.

In addition, these drill things get relined.

So that's like a continuous thing that happens, no matter what the level of new drilling is.

You get the relining.

And that's a significant business which is what we do in Houston.

So all that's good.

You still have to moderate that with the fact that the absolute core portion of the upstream pump business will decline throughout the year.

As far as the second part of your question, Deane, around pricing, the benefit of us really being a technology provider more so than a broad line supplier to the end market in total, we have very niche applications where in many cases we're the only person who can really provide the solution that's being required.

So as we went through all of our quarterly reviews, that's one of the things we did ask about and test.

But so far, that's not a concern for us.

A thing that's also reflected in the fact that the gross margin continues to be very strong inside both the energy and industrial segments where it was 55% in energy and 50% in industrial.

That's really the proof with respect to price.

If that's holding well, then gross margins generally hold well.

Thanks.

Can you provide some more color on the restructuring actions that you've taken?

I know Roper is not big on doing any centralized headquarter directed restructuring.

On the $1 million that's been done so far, is there more to do and what kind of payback are you expecting?

Payback comes within the year itself.

So these are always just discontinued activity and a reduction in headcount.

People are very quick to do that.

We had everybody together in December, challenging field plans for 2015, which we thought were optimistic and unfortunately we were proven correct.

So early in the first quarter as they're monitoring January and then February, they took actions in February based on the first level of trip equilibrium.

They have other things that they could do in the second quarter and they generally would be around people.

It's not -- there aren't any plant sections to close or things like that.

It's just not how the business works.

There's very light factory footprints in all of those businesses.

So we don't have anything planned in Q2 but I think if things were to deteriorate further, they'd take out more people.

Then just last question from me.

Was the Black Diamond divestiture, was that the divestiture you talked about, a small divestiture you were contemplating, is that the one and could you size that for us, please.

It was a very modest divestiture.

It's a business that -- it's a product line that we had picked up a few years back, maybe six, seven years ago, had made some invest investments in order to better commercialize that technology.

At the end of the day, because of its focus on defense-related activity, it's really the only business, the only product line that we had that sold into the defense world.

And so it just wasn't a good fit for us and we actually found a home that we think is going to be a much better fit.

Bu at the end of the day, it was a very, very modest transaction.

Great.

Thank you.

We'll go next to Shannon O'Callaghan at UBS.

Good morning, guys.

Good morning, Shannon.

Hey, on the 60% gross margin in the first quarter, maybe just a little more color on that.

I mean, as you said up 140 bps is a lot and to see that in 1Q, a little more color on what drove that, were there any mix things that were unique to the quarter or how much of it sort of sustains itself?

If you look at industrial's about 50% which was the same as it was before, energy was 55%, it's quite similar to where it was.

RF was 54%, up a little bit.

But medical was 74% gross margin.

So as it drives a bigger and bigger ever-increasing piece of the enterprise, that really helps.

And then frankly, pricing's holding quite well for us across the board in all four segments.

So people are very focused here on gross margin and they're very focused on asset velocity.

It just gets constant attention, the way we look at our business model.

This is a situation where the mix effect is the result of strategic actions that we have taken over the years.

So those areas that have higher gross margin, which generally are higher quality businesses, they're higher quality because they are providing a service or providing a solution that they're able to get paid for.

So that quality measure and our continued investment in those areas is reflected in the fact that our gross margin is higher.

Okay.

Great.

And then just on sort of the -- I guess the non oil and gas parts of energy to some degree, you've got the organic revenue growth in the first quarter down 5% and FX down 5%, so total down 10%.

For the year you're saying down mid singles.

Oil's not expected to get better.

What does get better there in terms of easing pressure or I guess improving growth for the year?

So it's going to be the non-upstream portions of that business.

So the other markets that are served there, which aren't oil and gas related which is about 40% of the segment.

And then frankly there's some things that are expected to occur on the downstream market, particularly for our CTC business and some projects that they have very good line of sight on.

Some of those have been slower on the decision making.

So I think you've started to see that.

Those are still things that we expect to see with still investment around the world in things like LNG plants and other applications.

So it's going to be the non-upstream, but you're right we don't expect the upstream to get any better.

Okay.

Great.

Thanks a lot, guys.

Moving next to Steve Tusa at JPMorgan.

Hey, good morning.

Hey, good morning, Steven.

Can you just talk about the -- I guess just in general, what the kind of second quarter organic number's going to be?

We'll have to let you know at the end of the second quarter.

Expectation is that we'll also be somewhere in the probably 3% to 5% range, probably closer to 3% than 5%.

That's kind of what's baked into our guidance and expectation for the second quarter.

Okay.

And as far as the kind of midpoint to midpoint, you have some things moving around here, obviously kudos to you guys for being able to raise the guidance when others are clearly cutting.

Could you maybe just walk us midpoint to midpoint.

You gave us the ForEx headwind, tax a little bit of a headwind.

How much of the offset is on the EPS line, is on from acquisitions?

The acquisitions are about the same as the FX.

They're pretty close to neutralizing the -- which is really good, because generally you know they're going to be strong cash accretion but actually they're going to be EPS accretive.

So they largely make up for that FX headwind that went up by $0.15.

And the rest of the operations, Steve, you have some puts and takes by segment versus what we thought maybe 90 days ago, both industrial and energy are a little bit weaker than what we thought, but that's more than offset by the fact that medical and our toll and traffic businesses are better than we would have expected 90 days ago.

So the continued push in those areas and the performance out of those businesses is doing a little bit better than the weakness that we see on the energy side.

Right.

And then just to confirm, so obviously if you guys are doing around closer to the 3% in the second quarter, there are things that kind of pick up for you in the back half of the year on -- to kind of get you comfortably within the 3% to 5% range?

Absolutely.

We believe so.

And then one more quick question, just Brian, maybe just the State of the Union on the deal environment?

Well, it's kind of encouraging.

There have been a couple of deals that people were trying to sell that did not get done which is a nice early warning indicator for people who may not have adjusted their valuation expectations.

And you got a lot of people who are interested in getting deals done because it's not quite clear how the high yield credit markets are going to hold up here in perpetuity.

Guys are looking at 450 basis point spreads on high yield.

There's amazing amount of different opinions around how that goes, but there's a great deal of assets that are in the marketplace for sale.

I do think you have to work harder than ever because a lot of the best things have traded in the last couple of years and some of the really great things that are out there, people are kind of holding off on until next year.

But given the fact that we want to deploy another $1 billion, $1.5 billion in the next 12 months, we don't really have -- we don't see a challenge around that.

It's easy to do.

It's getting harder to find a $2 billion deal right now than it was two years ago.

But I'd say it's a little bit better environment for transactions than it was.

Okay.

Great.

Thanks a lot.

Our next question is from Christopher Glynn at Oppenheimer.

Thanks.

Good morning.

Good morning.

Good morning.

So just had a question about the levity in the margin at RF.

What are the take-aways there?

Between volume leverage, mix, and then maybe productivity or value based pricing, I know there was some succession there.

You mean -- I'm sorry, you said that with respect to RF?

Yes.

So what you see in RF for this quarter, particularly, is very strong performance and high shipments of tags and associated technology from our toll and traffic business.

So Chris, as you know, we have inside there we have the very consistently high margin software businesses.

So the variances are generally going to be driven by our toll and traffic business.

If you have more project work, then that adds pressure on the margin but if you have more hardware, tag and technology shipments then you have margin upside.

That's what we saw this quarter.

So very strong shipments for the Infinity Lane System as well as additional tags being sold and shipped to Texas and Florida and lots of other places, North Carolina, et cetera, Oklahoma also.

So those tag shipments help us out on the margin front and that was the case for the first quarter.

Is there a long-term shift underway towards more favorable mix within toll and traffic?

Our Infinity Lane Technology is really very proprietary, right, so more and more people recognize how much more effective it is as a technology than other things people have used for a very long period of time.

And I think it will be for some considerable period a longer -- a bigger piece of the pie.

And so as that happens, that's very beneficial.

Thanks.

And then on a separate matter, to what extent are MHA and Sunquest now identifying some of the deals and how -- with these properties, how is the deal sourcing process evolving?

Is it becoming more distributed?

Yes and no.

What happens is that they have really a wide platform that you can add things to and there are a lot of small niche businesses that can be helped by joining up with either an MHA or a Sunquest.

And they're very well-known to us.

So there's a long list of things that we could continue to build out, but we're also building the human capital inside both these businesses quickly.

So we've added -- the people that are running Data Innovations and software and Strata, these are really great people.

They bring with them the ability to make bolt-on stuff and get it integrated much more effective than some of the other businesses we've owned in the past.

So that's helpful.

And there are a lot of small players.

I mean, we've invested $900 million in the last nine months, but we've done six deals to do it.

And our general MO would be, we would have done one $1 billion transaction, like an MHA.

So having the leadership teams at MHA and Sunquest makes the acquisition capital deployment investment situation easier for us.

Now, that said, we're still doing it here in Sarasota.

We'll bring those management teams with us.

But the decision around capital deployment's going to remain at the headquarters.

Thanks.

Congrats on the recent deals.

Thank you.

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

Just a couple questions.

Good morning, Brian.

Good morning, John.

Good morning.

Just a couple questions.

On the tolling business, traffic and tolling business, was the Riyadh order, was that booked in the first quarter here?

Part of it, a little bit was.

Very small portion was in the first quarter, but the bulk of that was in the second quarter.

It was in the second quarter?

Okay.

And then is that the infinity -- sorry.

Rick, I'm sorry, I misspoke.

It was booked in the first quarter.

And then is that for the Infinity Lane System?

No.

Does that project include that?

No, it does not.

This is a signaling and traffic management solution.

So the trend suite software, as well as all of the other work that goes along with putting in a modern traffic management system inside a very congested city, is what that project is.

So it's not a toll solution.

It's a traffic management solution.

Okay.

Just conversely, then, as Riyadh starts to ship in the second quarter, the margins in the toll -- in the RF business probably settle down a bit with that mix?

Is that a fair way to think about the margin profile going forward?

The overall mix particularly at the beginning is going to be lower.

So think of it as Manhattan where we see trends -- the traffic light system in Manhattan.

So that's what we're going to do in Riyadh.

But there's a lot of heavy lifting upfront to accommodate the ability to get this technology embedded every place it needs to be.

So the technology is higher margin, but the service component with local people doing that work will be low margin.

Understand.

Okay.

Lower margin stuff comes first.

Sure.

Okay.

Just a quick question on the core local currency growth rate assumption, when you mentioned industrial tech and also the energy business, I'm thinking you had commented on the total growth for those segments, including FX.

So if we just back out FX for the industrial tech business, is the core growth there still modest positive and then for energy is it -- what does that look like without currency for the full year?

Okay.

So for the full year, so let me go for the remainder of the year.

So for the remainder of the year we expect energy to be about flat.

Okay.

On an organic basis, plus or minus a little bit.

Okay.

And then industrial tech?

And industrial tech, very similar, once again.

Remember, we're completing the Toronto project.

That's correct.

So the completion of that project gives us about a $30 million headwind this year in total and so including that, we expect on an organic basis, industrial to also be flat, maybe up a little bit.

Okay.

I'm with you.

Okay.

So that's really unchanged from the expectation post 4Q?

I would say it's modestly lower, but we're also modestly a little bit more bullish on the medical and what we're seeing out of RF.

Yes.

Very good.

Okay.

Thank you much.

Very nice quarter.

Thanks.

We'll go next to Joe Ritchie at Goldman Sachs.

Sir?

Thanks.

Good morning, guys.

Good morning, Joe.

So my first question, I guess with the name change to Roper Technologies, maybe a broader question, any thoughts on larger scale portfolio divestitures.

I know you did one during this quarter, clearly you're moving much more towards a software/SaaS based model.

So I'm just curious, Brian, whether that changes what you currently have within your portfolio today?

No, I don't think so.

I mean, all our businesses -- when you look at our energy businesses or the industrial businesses, they have over 50% gross margin.

So the economics of those businesses similar to most of the technology companies you'd see that are not pure software.

Our software businesses outperform software companies.

Our industrial businesses outperform industrial companies.

So as long as we get outperformance out of these things, we think the market's incredibly smart and it has a pretty good idea about what things are worth.

And while we're always undervalued, we think that very hard to ever get rid of anything we have here.

It would have to be a compelling reason and those certainly could exist in the future.

They really could.

But today, we think we're perfectly positioned and I think this quarter sort of demonstrates that.

Okay.

That's helpful.

John, maybe following up on your comment on energy.

With the start to the year down 5% on the organic growth side and the expectation to get to flat, I guess two questions.

What's driving the confidence in the uptick in energy as the year progresses?

And then secondly, just within the margin profile this quarter, I saw that your operating margins were down about 200 basis points.

I know part of that was the restructuring.

What else really kind of drove the decline in operating margins on the energy business?

I'll take the second question first.

If you look at the detrimental leverage, so revenue down 10%, operating profit down 18%, you do the math on that, it's about a 43% leverage.

So you pull the one-time expenses associated with restructuring out of that and you get down into the mid-30% range for the detrimental leverage.

That's not at all different than what we would expect.

We actually think that's very impressive performance out of those businesses, given that they start with 55% gross margin.

So there's real cost actions, real belt tightening that has to happen and that will happen and it has and will continue to happen in order to be able to hold that detrimental leverage in the mid-30% to 40% range.

Now, as far as going forward when you think about sequential improvement, little bit throughout the year, like I said it's really driven by the non oil and gas portion.

So our things that are selling into, whether it be plastics or polymers or nondestructive testing, other markets that are not oil and gas related, which is about 40% of the segment.

That was down modestly in the first quarter.

We expect that to be up modestly as we go forward throughout the year.

And then the other piece is the timing associated with some of the project deliveries at CCC, which most of those are for downstream and midstream applications, more downstream, frankly.

And those are things that we expect to come to fruition later in the year.

So those are the drivers for why we expect the minus 5% organic in the first quarter to be closer to flat throughout the rest of the year.

Okay.

And then just clarification there.

The detrimental leverage that you talked about organically, that didn't include any pricing pressure in the quarter?

And is the expectation as the year progresses that price will continue to hold?

The specific areas that we play in, that is the expectation.

And I wouldn't separate it out as pricing versus cost.

I would separate it out as gross margin.

So gross margin was actually flat in the quarter versus last year for energy at 55.4%, and we expect to be able to hold our gross margin very similar to what we had last year in this segment, which on a full year basis was right at 58%.

And we see no reason that, that won't be the case this year as well with the actions that have already been taken.

Maybe one last question, Brian, on the free cash flow conversion it was really impressive this quarter.

I know some of that must have also -- the acquisitions must have buoyed some of the conversion.

But your free cash flow conversion has been moving up steadily with the acquisitions that you've done in medical and scientific imaging.

The question I have is, is the 130% conversion target that we've used kind of like a long-term target, that is the right target or are you continuing to move above that target as you progress over the long term?

Well, I think the 130% is what we said as the trailing 12 months actual, with $851 million of free cash flow.

Our CapEx isn't going to be moving up.

It's going to be 1% to 1.5% of revenue.

Our operating cash flow is going to continue to escalate a little bit.

It's already best-in-class.

The conversion rate, we always talk about it being expected to be above 120% over time.

So actually, at 130% it's kind of crept up above that.

Things that we have, it will continue to improve a little bit.

Our legacy business actually has been improving.

They frankly tripled their cash return on investment in the last decade, which nobody recognizes, and the acquisitions help.

But I don't think our conversion ratios are likely to change dramatically.

They're enormous and I just wish we'd get more people to talk about our real cash earnings instead of talking about the DEPS number, not commenting enough about the non-cash intangible amortization stuff.

Okay.

Great.

Thanks for the clarification.

Our next question is from Jeff Sprague at Vertical Research.

Thank you.

Good morning, gentlemen.

Just a question around the medical businesses, Brian.

If I think about a lot of your businesses, historically they've kind of been portfolio companies and have not particularly integrated.

But it seems like that is now starting to happen with some of these software deals and it obviously makes a lot of sense.

It's kind of dizzying to think about how many software systems a hospital might have if you think about all these different things you're starting to put together.

I guess the nature of my question really is, is there a significant opportunity to do that?

Do you move to kind of a larger provider of software systems with kind of different modalities and things that you're selling out of a bundle, or do you see these businesses actually remaining fairly separate?

Maybe there's a few that overlap.

It's a good and complicated question in that the -- it's absolutely true that there's going to be more interaction between some of these niche businesses that are acquired that are smaller with the two big footprint businesses, MHA and Sunquest, than we would have had in the past.

If you think about Neptune, we never added anything to it except they wanted to have this rugged mobile DAP business that we rolled over on and it never really went anywhere.

In TransCore's case, we have made acquisitions that have been very strategic.

Several years ago we acquired this company called United Toll.

United Toll has become the entire technology leadership position around the world in toll and traffic with this Infinity Lane Systems.

Very critical acquisition we made and it's kind of fully integrated and gets sold as a bundle.

When you think about MHA, I don't think many things necessarily would be sold as a bundle.

SoftWriters, they continue to be sold and MHA's product branding would continue to be sold, but they're going to work in an integrated way with one another and in many cases some of these niche acquisitions will report to the MHA or Sunquest platform business.

So that's why we suggested that they were transformational in the way that Neptune and TransCore were transformational in 2003 and 2004.

I think we are a little surprised.

If somebody would have asked us your next $900 million of deployment would be in one business or six, we would have thought it would be one.

But they're so great and so good that we're happy to do those and I think there will be more smaller acquisitions that are closely correlated.

That said, they're still All going to be individual niche businesses.

We're not going to be the Fuller Brush man to hospital administrators with a lot of different stuff that you pull out of the bag.

Makes sense.

And the three deals that you did in the quarter, can you give a sense of the annualized revenue run rate of those?

I guess there was some impact in --

We think those are going to be up to maybe $100 million of revenue, with about 40% EBITDA over the next 12 months.

Okay.

Also we had huge tax benefits in these deals that --

Right.

That are really significant.

And we see those tax benefits in your cash flow but not your reported tax rate going forward, is that correct?

That is absolutely correct.

So it's a little -- it's north of $100 million of gross tax benefits that we will recognize over the next 12 to 15 years.

So it is a reduction in our cash taxes over that time frame.

And then just one last follow-up.

Looking at these working capital changes and thinking about John's answer, maybe it was your answer, Brian, about the gross margins in medical, what percent of your business now runs on negative working capital?

Not enough.

But it's certainly helpful.

We wouldn't have gotten from 14%-plus to 5% without having several businesses that have negative working capital.

And most of the acquisitions that we're making now are going to come in with negative working capital.

We're going to get paid in advance for the work that they do.

Not always, but sometimes they get paid a month in advance, sometimes they get paid three months in advance, sometimes they get paid a year in advance on a subscription.

It's interesting.

So in terms of the negative working capital, so more of the things that we have acquired and are looking at are more on the subscription software, so they're SaaS businesses, which generally don't run with quite as much negative working capital as the licensed software does.

Because you have the maintenance that is almost always billed a full year in advance, whereas subscription software is going to be billed either monthly or quarterly.

So it's not as much around trying to become even more negative, as it is continuing to grow those areas that have the high subscription revenue and the wonderful balance sheet that comes along with that.

Right, right.

Thanks for the color.

Appreciate it.

Ladies and gentlemen, that will conclude the question-and-answer session for this conference.

I'd like to turn the program back over to Mr. Humphrey for any additional or concluding remarks.

Sir?

Thanks, Laurie.

And thanks everyone for joining us with our first quarterly call as Roper Technologies.

We look forward to talking to you with our second quarterly call as Roper Technologies as we finish up the second quarter.

Thanks.

Ladies and gentlemen, once again, that does conclude today's conference.

Again, thank you for joining us.