Roper Technologies Inc (ROP) 2015 Q2 法說會逐字稿

Ladies and gentlemen, the Roper Technologies second-quarter 2015 financial results conference call will now begin.

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

Thank you Orlando, and thank you all for joining us this morning as we discuss our second-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 Planning and Investor Relations.

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

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

We have slides to accompany today's call, which are available through the Webcast, and also available on our website at www.RoperTech.com.

If you'll 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 on our SEC filings.

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

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 on our website.

For the second quarter, the difference between GAAP and adjusted consists of purchase accounting adjustments to acquire deferred revenue, and our recent software acquisitions, including Data Innovations, SHP, SoftWriters, Foodlink and Strata for about $2.5 million.

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

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

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

Brian?

Thank you, John.

We'll start off going through our second-quarter enterprise financial results and then look at the detailed activity within the four segments and the outlook for the rest of 2015, and then take questions and answers from the audience.

So next slide.

You can see here a summary of the second quarter.

We achieved all-time second quarter records for orders, for revenue, for net earnings, for EBITDA, both nominally and a percentage basis, and cash flow.

And margins were really quite outstanding.

Revenue was up 1% to $892 million.

Organic was flat, but FX headwinds were 3% in the quarter.

We had 13% growth in medical and 4% in RF, and we'll talk more about those two areas.

Mid single digit organic growth going forward, and then additional benefits from acquisitions.

We had declines in industrial of 9% and energy in 12%, a lot of that is foreign exchange, as you'll see.

But our oil and gas arena was down a little over 20% in the second quarter, which was about on par, a little bit worse than we had expected.

And we don't really see any improvement in that, though the balance of the year might get slightly worse.

Gross margins, despite the end market headwinds, were up 100 basis points and reached 60.1%.

Our operating margins were up 60 basis points to hit 28.5%, which is truly outstanding margin improvement in this environment.

Net earnings were up 10% to $173 million, and DEPS represented $1.70, and of course, we cover -- there's always about $40 million of non-cash amortization in there.

Free cash flow was up 24% to $162 million, so these really are record results, despite the foreign exchange headwind and the end market difficulty.

Next slide.

Here, we'll look at the quarter two income statement.

You can see book-to-bill was 0.99, and without -- in each of the segments, it was sort of 1.01 to 0.98 or something, so orders were quite consistent with revenue.

Revenue was, as we said, affected by 3% on FX there, but up 1% overall.

Gross profit up 100 basis point, operating margin 60 basis points.

You can see an effect, a benefit we had, that we had planned throughout the year on a state tax matter which has been resolved, as we expected.

We thought it might have occurred at a later point in time, but it's impossible to know when it hit this quarter.

So it lowered our tax rate from the 30.4% of last year to 25.7% this year, and that certainly helped the net earnings being up 10%.

Next slide.

Here we look at the continuing compounding nature of how we grow cash flow.

So in the second quarter, our operating cash flow was $173 million, which was a 23% increase over last year's second-quarter results.

Our free cash flow was $162 million, a 24% increase over last year.

And for the first half of the year now, we've delivered $412 million in free cash flow, which represents a little over 23% of revenue, and gives us a cash conversion ratio of 126%.

And when you think about the compounding nature of us being able to reinvest our cash and transactions that give us still more cash, you can look at 2013 in the first half.

we had $311 million.

And just in the two-year period, we're up 39% in half one to $433 million.

So we still think that cash measurement is far and away the most important thing for people to look at when you're looking at the quality of the Company's performance.

Next slide.

Our asset light business model continues to improve.

Our working capital is a function of our second-quarter annualized net sales, is down to 4%.

Two years ago, that number was 7.5% and people would consistently ask us how you could possibly keep it at 7.5%, and we chose not to.

We got it better.

Virtually cut it in half.

So very nice reductions in inventory from 6.3% of revenue two years ago to 5.5% now.

And that's at a time when there was some considerable destocking in the oil and gas arena, which certainly didn't help us with inventories.

In receivables, they've dropped from 19.7% to 16.6%.

And at the beginning of the quarter, given the difficulties, a lot of energy went into reinforcing our disciplined processes around receivables, because as you know, in periods like this you can have some sloppy activity around getting paid.

And then if we take our inventory at 5.5% and receivables at 16.6%, and we subtract the payables of 18.1%, you can see our total net working capital there is 4%.

Next slide.

If we look at the overall financial position of the Company, our cash increased from a year ago at $679 million versus $565 million.

Our undrawn revolver and the cash together give us almost $1.9 billion in powder.

The reality is we can easily increase that because of our debt ratio.

As you can see, our trailing 12 months EBITDA is now up to $1.232 billion, and while our gross debt to EBITDA is 2, our net debt to EBITDA is only 1.5.

We have deployed $1 billion in acquisitions in the last 12 months, and we have a very active pipeline now.

We did announce one acquisition we'll talk about when we get to the RF segment, but there are others that we're far along in working on.

Next slide.

Here we'll discuss the individual nature of our segments.

So next slide.

If we look at the four segments, here you can see the second-quarter revenue in the blue chart, and the green chart being the second-quarter EBITDA.

And so now you have really RF and medical representing a little over 70% of the total EBITDA that Roper is generating, and they do that at very high EBITDA margins.

Our energy EBITDA and industrial tech, if you put the two together, it's $100 million of EBITDA and $331 million in revenue.

So even in a more difficult end market with FX pressures, we created EBITDA margins in the second quarter of 30%.

The nice thing about the 70% EBITDA from RF and medical is those businesses are continuing to grow at mid single digits organically.

And they give us higher leverage on the next dollar of revenue than our energy and industrial businesses do.

Next slide.

We look specifically at energy systems.

It was down 12% on revenue versus last year's second quarter, but 5 points of that was due to foreign exchange, and 7 points on organic.

Deleveraging here was very well managed.

You see the operating profit margin in the quarter was 26%.

Gross margins remained above 55%, and we de-levered at only about a 34% ratio.

So once again, they've been able to take their variable cost structure, and immediately adjust it.

The oil and gas markets were weaker than we expected, particularly in those areas directly related to fracking.

Our DES business, the diesel engine shutoff valve business was down 50%, and when we get to industrial, you'll see Roper Pump had some difficult things as well.

The other markets, some of which are industrial, that we report in energy, all were satisfactory, generally flat, a little bit of improvement in one place or another.

The business executed terrifically well in the segment, in the quarter.

They took some additional cost actions, about $1 million in restructuring, which is included in our results.

We're not excluding it.

This demonstrates the benefit of having very few fixed assets.

So we never have to work around absorption issues like others do, and we get a very quick payback on variable cost take-outs.

We've cut about 150 employees in our oil and gas space between energy, and a little bit in Roper and Cornell Pump.

For the second half of the year, we don't really see any kind of forecast improvement in oil and gas markets, it's kind of a mixed bag.

If you listen to various people, I guess, if we were going to say would it get better or worse, we'd be planning that they're getting worse and not better.

But we expect them to be pretty much the way they were in the second quarter.

We expect to get some modest growth in other served markets that these businesses have that are not in the oil and gas arena.

And we think that the FX headwinds are unfortunately going to continue to persist, much as they did in the second quarter.

We think we'll have sort of high single digit organic decline for the rest of the year, but then gives us really easy comps for 2016.

Next slide.

If we look at industrial, industrial continues to perform incredibly on a margin basis.

Their gross margins in the quarter were over 50%.

Our operating margins were over 28%.

They were down 9% on revenue, but 5% of that is foreign exchange, and all of the rest of it is virtually the fact that our Toronto project in Canada with Neptune is winding down, and they did very little in the second quarter.

In fact, it was down $8 million in the second quarter versus last year.

So the rest of the business actually performed fine, would have been flat to modestly up.

Our oil and gas markets again were weaker than expected.

Roper Pump saw some destocking activity in their surface pumps.

Their revenue was down close to 80%, but their reline business was up twice as much as it had been the year before.

So those products continue to be consumed in the ongoing activity of that technology that we've introduced.

Rental markets for flow control, as it relates to the upstream oil and gas, was of course, not good at all.

Our material analysis business, Struers, had just a very, very fine quarter.

They were up more than double digits organic growth.

On a constant currency basis, it was up incredibly, and still up more than 10%, even adjusted for currency.

As the Neptune project sort of -- it appears to us as virtually complete, we're only being asked to do odds and ends now, so that was a negative headwind of $8 million in the quarter.

The rest of Neptune, fortunately, was continuing to grow, and it looks to us like must be continuing to gain share.

In the second half of the year, we don't really see any improvements, as we said, around oil and gas markets.

I don't think they get worse here, likely to get a little bit of favorable increase.

Roper Pump was a little slower than the rest of our businesses to react, so we've now cut about 40 people in flow control, where the end markets have required that.

So we think we'll get a little bit better deleverage performance out of them in the second half of the year than we got in the second quarter.

Our material analysis business, there's no signs of it weakening in any way.

It's continuing to do really very well.

Neptune is continuing to grow in the US market.

The Toronto project headwind in the second half for us is going to be about $20 million.

It's about $30 million for the full year, and that's the thing that happens with these kind of projects, there aren't those big ones that happen very often, and they're working on a few.

But the core US business will have positive growth this year.

So we think we'll have kind of mid single digit organic decline for the segment.

Next slide.

Here, if we look at the RF business, you'll see we had revenue of $256 million, which represented organic growth of 6%.

Actually, the organic growth would have been a little better.

You can see on that top line, FX is down 1% and a divestiture is 1%.

You might remember in the first quarter we sold our Black Diamond rugged mobile business, and that was a little over a $4 million drag on revenue in the second quarter for us.

We had terrific results in our toll and traffic business, and growth continues to expand.

We've got multiple projects for upgrades that are in quotation now.

We probably really never had a better forward-looking opportunity than we do today with toll and traffic.

The Riyadh traffic project started up in the second quarter, and already has resulted in several change orders and extensions that we think will benefit us, particularly in 2016, and perhaps yet this year.

We had double-digit growth in our tag sales for tolling.

The software subscriber additions continued to grow nicely in our freight matching business.

We have three of those, one in the east, one in the west, and one in Canada.

The strength in our RF product line businesses was excellent, particularly pendants for senior care, submetering for apartment and multi-family housing and the UK water application business, Technolog, did well as a result, as well.

For the second half, we still have that little Black Diamond headwind in the second half.

It will be several million dollars that doesn't repeat, but on the other hand, didn't contribute any positive income, so it doesn't have any effect on that.

We've got backlog and proposal activity in toll and traffic, as I said, sort of at an all-time high, with lots of long-term opportunities there.

We don't see any pullback in our subscriber growth in our software businesses, whether they're licensed or SaaS.

And we acquired On Center Software, which is in the Woodlands in Houston, Texas, very nice business, well managed by Cecilia Padilla.

It's really, again, a business that has higher EBITDA margins than Roper's base business.

It's been growing at very solid double-digit revenue, but we actually think it's been under-invested in to support even faster growth.

And that business only just closed on Monday.

So we're just getting started talking with them about how to enhance their growth profile.

We think we'll get mid single digit organic growth for the segment in RF, but total revenue, including acquisitions would be a little better.

Next slide.

Here if we look at medical solutions, you can see once again you got a little story about us pruning businesses.

We got rid, we really exited our rugged mobile product line.

That's in addition to the Black Diamond rugged mobile business, which was a little military app.

This was a $5 million drag in the second quarter, and it's another $7 million drag for the balance of the year.

It's the right thing to do.

This is the time to do it.

It wasn't contributing any income.

The technology portion that we want we've embedded inside our Amtech business, so that's really important for us.

Organic revenue shows up at 2%, but if you adjust it for the rugged mobile discontinuance, organic revenue would have been higher.

FX was a 3% headwind in the quarter from medical, but overall, you can see revenue grew at 13%, even with those issues, and operating profit was up 18%.

And operating margin, that's not EBITDA, operating margin was 36.6%.

We had very strong performance out of Managed Healthcare Associates.

They continue to gain share.

Of course, they have very favorable market conditions as aging continues in the population, but just terrific results.

Double-digit growth in our medical device businesses, Verathon was very strong, Northern Digital very strong, and our CIVCO multi modality business was very strong.

Sunquest, recurring revenue growth was as expected.

It was quite good, but we did have lower license and service sales in the quarter because of the meaningful use, sort of dig through the python that occurred in 2014.

So sort of a hopeless comp, but that will change pretty quickly, as you'll see.

Q1 acquisitions, all three of them, the Strata business, the SoftWriters business, and Data Innovations performed very well.

In fact, the three together were above expectations.

And I mentioned that we exited this rugged mobile product line finally.

In the second half of the year, you can see that we expect MHA to continue to benefit from the market conditions and their ability to execute against that.

We see additional medical products out of Verathon as they launch several things in Europe that are new to the continent, and Northern Digital expands in its sphere business.

The scientific imaging business is basically flat.

Sometimes they look worse than they are because they've had that rugged mobile business in it for quite a long time, and with that gone, that gives us a little better headway for variable performance in the future.

We think we'll get mid single digit organic growth out of this segment, but of course much higher total revenue growth.

And then Sunquest has got a very nice opportunity that mostly benefits us in 2016, but a lot of software module upgrades, now that the meaningful use processes subside with hospitals.

The same people that were involved in those, both at the hospital and at our level, are able to look at enhanced growth as they do product upgrades, software upgrades for various applications within the hospital.

Next slide.

Here, we get to the guidance nature of what we think for the balance of the year.

Next slide.

For the full year, we were at -- we're establishing guidance of $6.61 to $6.75, the midpoint would be $6.68.

Previously we were at $6.75 to $6.95, with a midpoint of $6.85.

And we've really decided to take that down because we thought we'd have organic growth of at least 3%, but it looks to us like it's more like 1% to 2% because of the depth of how much the oil and gas upstream markets really come down.

We said at the beginning of the year upstream was about 5% of the business last year, and about 14% for oil and gas in total.

Now oil and gas is down to 12%, as you might expect, as the rest of the business is growing.

And the upstream portion will continue to decline as a function of total revenue.

We'll get mid single digit growth out of medical and RF organically, but we'll get additional revenue because of the acquisitions that already have and others that are possibly going to occur.

In oil and gas, we think that's going to continue to be weak.

We think it's going to look much like the second quarter, so we don't see much of a recovery in any of those end markets.

Our tax rate for the year, we said at the beginning of the year, we thought it would be about 30.5%.

We still think it will be 30.5%.

The discrete item that we had in the second quarter around state sales tax was something we expected to happen, and it was in our guidance for the full year, but it did move forward into the second quarter.

Full-year operating cash flow, we're saying should be around $925 million.

In addition to our net earnings we have about $160 million of non-cash amortization.

Our Q3 earnings, which will be just purely the net earnings, the DEPS number is $1.53 to $1.57.

Pressures for the year that we have to keep overcoming that we've done, largely led by foreign exchange, and quite a bit from oil and gas.

We have that Toronto headwind, and then some modest changes in imaging and industrial.

Had a pretty strong June compared to April and May, so we're a little bit encouraged in that respect.

Next slide.

Here, if we look at the second-quarter summary, once again, we have to really compliment our operating people who acted very nimbly in terms of what was happening in the upstream oil and gas segment.

Their ability to change variable cost is always just world class.

They had really terrific execution.

In the meantime, we wound up with record orders and revenue, net earnings and EBITDA for the quarter.

Revenue certainly was hurt by the headwinds of FX, but notwithstanding that, we sort of powered through in a very favorable way.

Acquisitions were up 4%, and that offset the headwinds, and medical and RF were up so much they offset the decline in industrial and energy, which was led by that oil and gas problem.

Gross margins actually increased in the quarter, which is pretty amazing.

If you're starting out at 59.1% and you can still improve gross margins in a quarter that's organically flat, that says a lot about the quality of the operating people we have in place.

Our operating margins were up to 28.5%.

EBITDA margins at 33.9%.

Net earnings, we've covered before.

Free cash flow, up 24% in the quarter.

The first acquisition that we've announced that would have been in the quarter, didn't get done until July 20, was On Center, and we've got an active pipeline.

We would expect to close some additional transactions before the end of the year.

And in reflection, we just see the quarter as being very pleased, given the FX and selected end market difficulty, in terms of how we performed.

So with that, I think we're ready to open it up for questions, John.

We'll start the Q&A portion of the call.

(Operator Instructions)

We'll take our first question from Deane Dray with RBC Capital Markets.

Thank you.

Good morning, everyone.

I was hoping to get some additional color on the energy businesses, broadly.

In the first quarter, you were thinking the whole market that you address would be down 35%, but your businesses might be down 20%, or a little bit more.

That obviously has worsened.

So what are you assuming now for the balance of the year on the energy exposed?

And then, what are you thinking the market does in those businesses, as well?

So Deane, the way I would characterize that, we thought that the oil and gas market broadly, I think we had said maybe down 30%.

It's down at least that, and probably a little bit more.

It's actually worse than what we expected.

When you have rig counts, particularly, down 50% year-over-year, that's worse than what we expected.

And so we saw that really impact those businesses that are in the oil and gas market, that have any exposure to upstream.

If we got something -- if I got something wrong, what I got wrong was there's a little bit of follow-on effect to some more of the downstream and midstream markets, as folks pull back on capital spending on their exposure on the upstream side.

And so what we're expecting as we go forward is really no improvement.

Even though we've seen little hints of improvement in the oil and gas market, that's not what our guidance is based on.

At this point, we're expecting it to remain flat to where it ended the quarter.

Just to clarify, I know you focused on the upstream exposure.

You just mentioned mid and downstream.

Is that still the bulk of the exposure, 3% mid, 6% downstream, and what's the expectations on those businesses?

The exposure is as you described, so about 5% upstream and 9% mid and downstream.

And what we're expecting there is for that to be down in the mid single digits.

Just last one --

Just to be able to -- in the second quarter, because it's already down, it's not 14% of our revenue.

It's more the upstream was about 4% of our revenue, and then mid to downstream was a little less than 8%.

So it's more like 12% on a go-forward basis.

Got it.

Just the last one on the oil side.

The expectation that Roper Pumps might be able to outperform on the ability to gain share: has that played out, or is it just the aftermarket on shale is --?

No, no, what they've done is spectacular.

They more than doubled their revenue on reline products in the second quarter, which is what we were hoping.

So that was a huge bonus.

But what we got that we weren't expecting the degree of is surface pump, the revenue was down 79%.

And we had not expected people would shut that off entirely, and they virtually -- orders were down 91%.

So what that is, even though there's not a lot of stocking, is just people were going to use everything they had, and to end of life, before they did other things.

So, the good news about the Houston reline facility is it performed as expected: actually better than expected, and it continues to gain share.

It's not big enough to offset the core flow control piece that's down so much.

Understood.

Thank you.

Our next question comes from John Quealy with Canaccord Genuity.

Thanks very much.

First for On Center, can you give us a little bit on the metrics, the multiple, its SaaS versus perpetual license, a little bit there?

Thanks.

They have a lot of license and maintenance, and they've introduced a SaaS model, so people are shifting over some to the SaaS model.

But a lot of the things that they do have to do with bids and estimation, and actual architectural moving of walls and things.

It's just phenomenal what their system's able to do.

That's a business that's going to be a little less than $30 million of revenue with a little less than 50% EBITDA, and its positive leverage going forward is quite high, and the growth rate is double digit, so you can figure it out from there.

Perfect.

Thanks.

And then the future acquisition pipeline, can you talk about with oil being severely depressed, have multiples come in?

Thanks.

I wouldn't say that we've been following the multiples for acquisitions in the oil space for quite some time.

It's been a decade since we've made any acquisition in that segment.

I think Dynisco was the last one we made, and it was in 2006.

So despite whatever multiples might be doing in that space, that's really not where our focus has been.

We continue to remain focused on the higher technology areas, the things that have exposure to end markets that aren't cyclical, like medical and other areas, where we have a niche software or network type of business that we're looking at.

That continues to be the types of things that we're looking for, or some type of proprietary technology that benefits an existing area.

That continues to be our focus area, rather than trying to bottom feed in something like oil and gas.

And our next question comes from Scott Davis with Barclays.

Brian, I'm curious to hear your view of the world.

The last time we had your energy and industrial businesses down this much, we were falling into a pretty big recession, not far after that.

Do you look at this time as having a risk profile, or at least similar characteristics to what you've seen in the past, when the world's about ready to fall apart, or is this too isolated to the commodity itself, oil?

No, no, no.

We're debating.

We could have gotten more granular in our remarks.

But just, because I think it's just so instructive about how good our business model is.

If you go back and you look at how the segments were in the second quarter of 2009, and compared the second quarter of 2009 to the second quarter of 2008, and then you looked at the comparison of the second quarter of 2015 to the second quarter of 2014, to see the rates of change, you'd be astonished at how much better all these are.

The thing that is amazing, in the second quarter of 2009 our industrial tech business, which is largely Neptune and flow control, it had $32.5 million of operating profit on a reported basis.

And that was on $136 million of revenue.

So its margin, it was 23.8% in OP at a time that people were concerned the world was ending.

This time, this reduction, our OP in industrial is $52.2 million, not $32.5 million, and our revenue's $186 million, not $136 million.

So we have now OP margins of 28% in industrial in the quarter versus 23.8% in the second quarter of 2009.

And it's nothing like the second quarter of 2009, in terms of the rate of de-escalation.

Second quarter of 2009 over 2008, our sales in the flow control segment were down 25.5%.

OP was down 31.7%.

There wasn't a lot of currency issues either.

This time, our revenue is down 9%, not 25%, and our OP was down 13%, not 32%.

And if you look at the energy segment, the energy segment in the second quarter of 2009 had $23 million of OP on $105 million in revenue.

So it had OP margins of 22%.

This time it's got $37.7 million in OP on $145 million in revenue, so the margins are 26%, up 400 basis points from the second quarter of 2009.

The sales trend in 2009 versus 2008 was down 27%.

This time it's 12.5% of that's FX and OP was down 35%, this time it's down 15%.

Entirely different.

And then it's always, for us, painful because people ask these read across questions about these two businesses, which represent less than 30% of our EBITDA.

Roper, let's go to medical.

Medical in the second quarter of 2009 we had $12.4 million of OP on $76 million of revenue, 16.3%.

This quarter, medical had $109 million in OP, 8 times -- 9 times the number, on $302 million in revenue, and it wasn't down.

Its was up 12% on sales, and was up 16% on OP.

Our margin in medical was 36.1% versus last year's second quarter of 16.3%.

Our challenge is simply to continue to grow these things as well as we can.

In our RF segment, in 2009 the second quarter had $39 million of OP on $187 million in revenue, so our margin profile was 21.1%.

Today, RF had $79.9 million, double OP, and it had $255.6 million in revenue.

So sales were up 4 -- they're really up more than that organically, and the OP was up dramatically.

So you're looking at margins of 31.3% versus 21.1%.

In total, Roper, in the second quarter, when people thought the businesses was ending, had $96 million of OP on $505 million in revenue, 19%.

This quarter had $252 million in OP on $890 million in revenue, 28.3%.

So we're up 930 basis points quarter-over-quarter in the as-reported GAAP OP number.

So yes, there's a sharp reduction.

Yes, we got rid of 150 people.

Yes, the investment in that restructuring will turn cash positive in the fourth quarter, and no, we're not really worried about it.

Okay.

I think that's clear.

As a follow-up, can you give us a sense of -- you just mentioned the word restructuring.

That was going to be my follow-up question.

The sense of how much the, the quote, restructuring impacted the quarter, so we can get a sense of --?

About $1 million pretax.

Okay.

So de minimis.

And going forward, is that number -- do you feel like you've done what you need to do?

Is there more to be done there?

Absolutely, I think we've done what we need to do.

We'll see a little more that will come out in the third quarter, just because of notifications and a lag on how that works.

There will be a few other people coming out in the third quarter, but all totaled, we think it's going to be in the name neighborhood of 150 people out of 10,000, so it's not very material.

Fair enough.

Good luck.

Thank you.

Shannon O'Callaghan with UBS has our next question.

On the industrial business, so ex-Toronto, it was flattish even with the surface pumps down 79%.

Can you talk about a little bit more, the other pieces there that grew in the quarter, and what's driving that?

The core thing was our Struers business in Denmark, which had nearly, on a constant currency basis, it grew nearly 20%.

But it really was up sharply.

We had a resurgence in Germany.

Struers does sell somewhat into the technology side of auto, so that's pretty powerful for them, at the moment.

And they don't really see any shortfall in any of that activity.

I think Asia's more modest, but Europe's up.

Actually, Europe in total, for the Company, was surprisingly strong in the quarter at -- on an as-reported basis, it's down a bit, but the currency was down 20%.

So if you look at the constant currency performance, it's pretty solid.

In fact, Shannon, you're exactly correct.

If you exclude the Toronto project, the industrial segment was about flat organic.

That also speaks to the earlier question about, oh my gosh, is this broadly going to impact all these end markets?

No, is the short answer to that.

And no, because what we're seeing is not anything like what we saw last time, where the decline is really only focused on those businesses that have exposure to oil and gas end markets, and the other end markets that we serve in these two segments still performed pretty well.

No, that's helpful.

Thanks.

And then on medical in the second half, I know you had a tough comp this quarter, it was only up 2%.

You had mid single digits in the second half.

Anything in particular?

You mentioned a couple things, anything in particular accelerating versus the 2Q rate?

Acceleration is going to be around new product introductions at Verathon.

And then just continued share gains, a little bit of the meaningful use upgrades, a few more of those happened in the second quarter for Sunquest than happened throughout the rest of the year.

So we actually expect the Sunquest fee to get better in the second half than it was in the second quarter, but that was largely as expected for the way the year was going to roll out.

And the software module upgrades you're talking about there: it's more of a 2016 thing.

Could that be a big number?

Time will tell.

We're hoping it will be a big number.

We'll get around to that when we get to the 2016 guidance.

The hospitals just have to understand how much energy they had to devote to the meaningful use requirement for the government, and if you're doing that, you're not doing a lot of other things.

And most of them have that challenge behind them, and so does our organization.

So we don't have to spend as much time in that phase of the implementation with them, and we can turn our attention to demonstrating the immediate payback of upgrades to a wide variety of various things we offer.

Okay.

Great.

Thanks.

We'll now hear from Joe Ritchie with Goldman Sachs.

So, I recognize that energy is clearly a smaller piece of the puzzle today, but just want to focus on it for a second.

I think last quarter you talked about some projects in compressor controls that you were looking at.

I'm just curious whether those projects just got deferred, or whether there are some cancellations.

I'm also interested in hearing anything that you can tell us about the inventory levels in the channel, and what you're seeing from a pricing standpoint?

We really don't have any inventory levels in the channel.

If you look at the energy systems business, the largest component of that is compressor controls, and it's always a build for a specific application for the firmware that goes along with the software that we provide to people.

It's really a systems business.

The little bit of products in there are really related to valves that we have, which are for these diesel engine shutoffs.

And certainly, that had just come to a dramatic reduction of about 50%.

So there's a little bit of inventory they've got to work off, but not a lot in the pipeline, because the factory basically sells direct on a lot of these products, and they have very fast turnaround.

So there's not a lot of -- there really aren't channel partners out here, or stocking and reselling stuff.

The only thing that we have that gets stocked are standard Neptune water meters, and that's through our proprietary distribution network, and certainly no inventory problems there.

As far as CCC is concerned, it's really around slowness in people deciding what they're going to do, so they haven't lost any projects.

We haven't seen any projects that are canceled, that just things are relatively slow, as you would expect they would be for people to make big capital decisions right now.

Okay.

That's helpful.

Brian, any color on pricing?

Well, our gross margins were up 100 basis points.

Our gross margins in energy are 57%.

Our gross margins in industrial are 50%.

So I wouldn't say we have a lot of pricing problems.

Okay.

And so what you were booking into backlog still appeared at least comparable to what you booked previously?

You're probably looking at read-across stuff from others, and that's not what we do.

We have very, very specific applications, not a lot of competition.

But if end markets are off we catch a cold, and that's what's happened.

Doesn't affect our -- we're not in a competitive marketplace where we're overly concerned about pricing.

And in a market like this that's end-market driven, it doesn't matter what your pricing it.

People aren't going to buy more because the price is lower.

Okay.

Fair enough.

Thank you.

I'll get back in queue.

We'll now hear from Steve Tusa with JPMorgan.

On the acquisition pipeline, any sense of a change at all as the market gets a bit more volatile?

There's some financial issues perhaps globally, maybe some of these guys pulling back a little bit from a private equity perspective.

Any change on pricing broadly?

They have so much new money that keeps coming in from investors, that they're not the least bit worried about pricing with other people's money.

I can assure you they're just as aggressive as they've ever been.

You still have lots of forums.

We look at the large banks, like a JPMorgan, getting told let's watch how much I'm putting on debt staples here, let's not get above five times and so forth.

There's all these other kind of people out here, pension funds from unions in Canada, they've got all kinds of people that are happy to supply all kinds of debt.

So we still see 6.5 times debt on anything that's really a good business.

So that drives up multiples, so multiples are still high.

But On Center is the perfect example of the kind of things that we do.

Harry's got a very well-run business in a very nice market.

It's pretty niche-oriented kind of thing.

Doesn't lend itself to an Oracle or SAP coming in and trying to take it over.

It's a business that management wants to stay with and drive the business, and they want to have a home that will invest in them.

We fit that better than private equity.

So all of those things worked to our favor and nothing like that's changed.

The acquisitions that we have right now are all similar to those kind of things.

So we don't see that as a constraint.

Got you.

And then just one last question.

I think this is a little more just like top down, always trying to learn about how you manage these businesses, since your operating model is pretty unique and a little more decentralized.

When an oil and gas issue, or an issue like this pops up, I think it happened a couple years ago when you had the nuclear business that fell off, are those coming to you and saying late in the quarter, obviously, hey, we're weaker than expected, here's our plan?

And you say okay, good plan, go to it?

Is there any wrangling?

Is there any top-down from you, more of a discussion where you push more aggressive actions down?

I wouldn't think that's the way that you manage it because you have such great operating people.

But I'm just wondering how this makes its way up to the pipeline to you, and then what you do, if anything, to tweak the way that they're responding to an end market like this, that's obviously highly unique and a surprise.

That's a great question.

We have an enormous benefit here, in that each month, the second day after the month ends, we know what their orders and their revenue were.

And as you remember, we run this place on both economics and accounting, because GAAP accounting can give you such distorted information about what's really happening with the cash nature of the business.

So we know what the breakeven of the business is going into a quarter, means what the marginal contribution will be after they have covered that on a revenue basis.

So we immediately, two days after a month ends, have a very good idea about what's happening to their trend, and we will talk to them at the end of that month.

They'll provide us a quadrant feedback about what's hot in the business, what's happening in terms of what they're winning or difficulty that they're having, how the quantitative nature of the business is in the month, and what they're concerned about.

That becomes more of a Socratic discussion, but we're going to encourage them to take the actions that they need to take, but never harm the business.

So we always start out with do no harm.

And we've done it so much for so long, it's just a cultural thing.

Nobody would hide stuff here.

It's not like your typical multi-industry Company that many of our senior leaders grew up in, where a really bad quarter, make sure you paint the plant.

So that's not how it works here, and people know that.

Okay.

Great.

Thanks a lot.

Next we'll hear from Richard Eastman with Robert W. Baird.

Brian, just a couple questions around the RF tech piece of the business.

Really two things.

One is on the EBIT margin there, the 31.3%, is that again -- is that very influenced by the non-tolling businesses?

Just in general, is there a mix issue there that got the profitability that high?

Secondly --

The non-tolling business -- we have software businesses in there.

They're high margin.

The tolling services side of activity has a lower margin, but the technology product side, with the readers that we deploy, and the tags that go along with it, are much higher margin.

So they come in with a blended margin that's quite good, but more like the rest of our businesses than the software businesses, which are higher.

So to the degree you have higher software, it's good.

But, right at the moment, you've got quite a large piece of our activity is in tolling, so it has a big effect.

And they certainly are much more profitable today than they used to be.

Okay.

And then the deadline for this interoperability is 2016, and is that -- aside from Riyadh in the tolling business, are we seeing that influence, or have we seen it, or should it accelerate when it comes to TransCore?

The benefit that TransCore has is, we have the best technology.

So we have readers that are capable of reading what are called multiple protocols, so we can read a wide variety of things.

The people who are sitting in Chicago, and the people on the East Coast are stuck with a proprietary very old technology there, out of the Austrians.

And you'd have to ask them how they feel about their future, but we're heavily engaged all the time with people around interoperability, and ways that we can facilitate that.

The higher degree of interoperability, when we have the best protocol technologies to read, all the different things that are already embedded should be favorable to us.

The other thing I would say on that, Rick, is we've also recently introduced, within the last year, I believe, not only the multiple protocol reader that Brian talked about, but also a multi-protocol tag.

So we're actually selling tags right now to real customers, and that tag can be used all across the country, no matter where the driver, most of these are commercial applications right now.

We're on over-the-road vehicles, trucks, et cetera.

We will want to be able to have that single tag that can go through all the locations.

We're at the leading forefront of the technology change there.

We can deploy faster than others.

But also the change out coming from government sometimes is slower than they're suggesting.

Understood.

Understood.

Okay.

And then secondly, on the medical solutions business, looks like MHA had a fantastic quarter and so --

They did.

Two questions there.

One is, can you give us a sense of -- I presume that your market -- your favorable market conditions comment is maybe perhaps around pricing.

Could you give us a sense of what the double-digit growth at MHA, maybe how much of that was pricing pass-through?

And then secondly, CVS Healthcare is buying Omnicare, and some of the Omnicare drugs, I believe, go through MHA to specialty pharmas.

And I was just curious, is that an opportunity, that acquisition, or is that a potential threat to MHA going forward?

We certainly don't see it as a threat.

Omnicare is not our biggest customer.

But just so people understand, we get a percentage of things that happen in terms of the billions of dollars of stuff we're processing.

The revenue that we get is just a percentage of that.

So we don't raise prices, in terms of that percentage that we're getting from somebody.

But if generic drugs, for instance, go up in price versus where they were before, then we'll get a benefit from that, because the activity comes out at a higher price.

If you have formulary drugs that get converted to generic and the price goes down, that's a decrement for us.

We have benefited by generic pharma pricing being higher in the last two years versus the way we modeled it at the time of the acquisition, so that has been a benefit.

And then you see today, with what Teva's doing with a $40 billion transaction.

I mean, generally, the things that are going on in the marketplace are favorable to us.

Okay.

Very good.

Thank you.

Our next question comes from Christopher Glynn with Oppenheimer.

Thanks.

Good morning.

And I think you just got to some of the question I'm about to ask, but how are some of the RF growth strategies playing out, and how should we think about the compounding opportunity, as you're building out this installed base further?

Well, in the software businesses they have very high marginal contribution rates.

So as they grow, you get more cash to reinvest in other acquisitions.

They really don't need to consume more cash inside themselves, so that helps us.

The TransCore situation in RF, because it's a big piece of the segment, is flatly just better managed today than it used to be.

It used to be on their service side stuff, particularly almost civil engineering and the design of things at the beginning of roadway exits and what have you, they would have cost-plus contracts, but they would have retention issues.

And I think today TransCore is about 10 times better as an operating Company than it was when we acquired it.

And so they don't -- they get pretty decent margins out of that.

But big revenue growth out of them on the service side doesn't have the same margin contribution that all the rest of our RF businesses do.

And the other thing I would say there is that on the toll and traffic piece, it's not the same type of compounding that's on the software side, but because we execute so effectively, because the TransCore guys execute, they're able to win projects in adjacent areas.

Our execution around our software for the New York City traffic control system was the reason why we won the Riyadh project, in addition to our proven ability to execute in the region with our toll solution for Dubai.

So those things don't always have a linear relationship, in terms of building on themselves, but the larger that we become there, the more opportunities that we see.

Yes, definitely noting a big difference in that business.

And then you noted the challenges on working capital improvement in times of disruptive oil and gas markets and sloppy payments, and such and very complimentary to employees there.

What are the key enablers there?

Is there a lot of customer selectivity historically, or tough collections practices?

I would say that the primary thing is we provide, customers rely upon.

So we provide the discipline for our businesses, so they have the ability to say no to people.

That's one of the benefits that we're able to provide for folks.

And because customers aren't reliant upon the specific technology or the solution that we're providing, it's not something that they can just say okay, I'm not going to hold payment, you can't ship to me anymore.

That's too important to our customers.

So it's good execution in terms of the discipline, but primarily, it's because of the position that we have in the end markets that we serve.

Thanks.

I would say there's another thing having worked in very large environments.

If you go into a typical multi-industry Company and you ask somebody, who's responsible for receivables, you'll get a different answer than you'll get here.

Because if you go and you ask somebody running one of our niche businesses, which remember, may only be $80 million in revenue, who's responsible for receivables, he's going to say it's our [outbridge], Betty, and she's been here this long, and she knows that.

So there's a focus level here that is just very helpful.

Thanks.

Thank you.

And I think John, with that, we'll --.

I think we reached the end of our time.

So, I want to thank everyone for your participation today, and we look forward to talking to you again in three months.

Ladies and gentlemen, that concludes the conference for today.

We thank you for your participation.