Roper Technologies Inc (ROP) 2015 Q3 法說會逐字稿

The Roper Technologies third-quarter 2015 financial results conference call will now begin.

Today's call is being recorded.

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

Thank you, Wes, and thank you all for joining us this morning as we discuss our third-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 prepared slides to accompany today's call, which are available through the webcast and also on our website at www.ropertech.com.

So if you'll please turn to slide 2, we begin with our Safe Harbor statement.

During the course of today's call, we will be making forward-looking statements which are subject to risks and uncertainties, as described on this page, and as further detailed in our SEC filings.

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

Next slide: 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, available on our website.

For the third quarter, the difference between GAAP and adjusted consists of purchase accounting adjustments.

One, to defer to acquired deferred revenue in our recent software acquisitions; that totals $2.2 million.

In addition, we have an inventory step-up expense for RF IDeas of $2 million.

As a reminder, these adjustments represent adjustments that, absent our acquisition, those businesses would have been able to show their profitability and revenue.

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

And after his prepared remarks, we will take questions from our participants.

Brian?

Thank you, John, and good morning, everyone.

So we start here with our Q3 enterprise highlights.

We had a record third quarter, which we thought was significant, given the sort of issues associated with the end markets and foreign currency.

Our revenue actually was modestly up from last year at $886 million, and our book-to-bill was 1.01, and above 1 most everywhere with the exception of RF, which is, of course, project-driven.

Growth was led by medical, which was up 12% in revenue, and RF technology, which was up 6% in revenue.

The declines that we saw in industrial and energy were virtually exactly as we had modeled.

FX was about a 3% headwind in the quarter, and that resulted in a bit of negative organic.

As you can see, it was about 2% with those industrial and energy headwinds.

Gross margins were spectacular.

They were up 130 basis points to 60.7% over last year, and even up sequentially from the second quarter.

EBITDA margins were up 80 basis points to 34.4%, both records.

Net earnings were up 4%, and our diluted earnings per share were $1.61 versus our guidance of $1.53 to $1.57.

Our free cash flow was $220 million, which was up sharply from the second quarter's $162 million; and the $220 million of free cash flow represents 137% conversion.

We deployed $435 million in three acquisitions -- RF IDeas, Atlantic Health Partners, and On Center -- which we have discussed earlier.

And we just completed the Aderant acquisition on Wednesday, which was a $675 million net of tax benefit acquisition we'll talk more about this morning.

And today we're announcing two more transactions, CliniSys Group and Atlas Medical.

So it was really an outstanding quarter, and of course, great capital deployment for us.

Next slide: If you look at the income statement, we're sort of lapping, because it's the old story about the ducks on the pond, and they're moving along nicely, but underneath, the feet are moving wildly.

Lots of activity, but at the end of the day, we're up $1 million.

But you've got to know that that's in the face of oil and gas being down about 3% of our entire revenue, and FX about 3%, and, of course, the city of Toronto roll-off, another [1%].

So we had to overcome quite a bit of headwinds, and still produced positive results.

Our gross margin was up from 59.4% a year ago to 60.7%.

And it really demonstrates the quality of our businesses, because even in these difficult markets, they not only are holding their gross margins, but oftentimes increasing them.

If you look at the operating margin, it too shows an incredible execution, 27.9% a year ago, and 28.7% this year, up 80 basis points, despite -- having quite a bit of M&A expense that we took in during the quarter for all this activity.

You can see that the tax rate was 30.4%, which was a little bit lower than last year's 31.3%.

But I'd remind you, our second quarter it was only 25.7%.

So there was a $0.12 headwind relative to Q2 on the tax rate, and the tax rate gave us about $0.02 favorable in the quarter.

And then, you can see the DEPS at $1.61.

Next slide: The compounding of cash flow -- if there's any theme around here, it would be that -- that we are, in base, a compounder.

You can see our cash flow -- our operating cash flow has gone up from $579 million during the first three quarters of last year to $660 million now.

The operating cash flow conversion was 141%.

Our free cash flow conversion was 137%.

And what we always ask people to look at, even though we don't report on a cash earnings per share basis, if you take a look here at our revenue, free cash flow, you'll see that 25% of our revenue turned into free cash flow in the quarter.

Our year-to-date free cash flow is up 15% over last year at $632 million.

And we still do think cash is the best measure of performance.

Next slide: We continue to look at the balance sheet, and our asset velocity.

You'll see that we've improved another 160 basis points from the third quarter of 2014 to the third -- through the third quarter of this year.

Everything is better.

Inventory is down.

Receivables are down.

Payables are up.

And so, the net effect is we go from 5.8% at the end of the third quarter of last year to 4.2% now.

And our governance process just continues to drive the working capital focus for everyone here throughout the Entity.

Next slide: We look at the balance sheet.

We ended the quarter with a very strong balance sheet.

We had $700 million in cash; a lot of that's outside the US, of course.

An undrawn revolver, giving us cash and undrawn revolver capacity of about $1.6 billion.

And our gross net number, you can see there is at about $2.8 billion.

Our trailing 12 months EBITDA is about $1.239 billion.

That's not pro forma.

That's just the actual number.

Pro forma would be higher, of course, with our acquisitions giving us a gross debt-to-EBITDA profile of about 2.3 [times].

Our pipeline opportunities are still really quite good.

So we're going to continue to see acquisitions flowing here in 2016.

We're rapidly getting to the point where we're going to have $1 billion of cash flow very soon on an annual basis.

And, of course, we tend to reinvest that at about 1.3 to 1.5 times that cash flow.

So we still look forward to another $1.5 billion or so of investment opportunity next year.

The Aderant transaction, of course, is going to be around $695 million in terms of the cash cost of that.

So that will take up the rest of our revolver.

And as a result, we've up-sized the revolver from its $1.5 billion to $1.850 billion.

And the CliniSys transaction will be basically funded out of non-US cash, so there's no new borrowing required.

So it gives us a very strong balance sheet.

Next slide: Here we just have a place holder, before we start talking about our segment deal and the outlook.

Next slide: If you look at the performance of all four of the segments, they continue to be just marvelous.

I mean, here you are with these headwinds and currency challenges and everything else in energy, and yet our EBITDA margins in the quarter were 33%.

Our industrial technology, which is only about 10% affected by oil and gas, still had 31% EBITDA margins, while RF had 36% and medical 45%.

So all of these segments have just incredible margins.

And if you think about it from a historical perspective, we were going back to look just at 2011, not very long ago, our collective EBITDA is up about 580 basis points since the third quarter of 2011.

And also, you want to remember, when we report EBITDA, almost all of our D&A is really just non-cash amortization.

And unlike depreciation, that non-cash amortization has no call on future capital spending.

Also, you can see medical and RF are still over two-thirds of our total EBITDA.

Next slide: So we look at the smallest segment, energy systems and controls.

We went into the year saying that it'd be about 60% of that segment would be in oil and gas, and that's actually going to be slightly less than that, just due to the sales.

But notwithstanding that, we have a lot of FX exposure, of course, in energy, with a lot of non-US activity.

So FX was a negative 5% headwind in the quarter.

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

In fact, when we look back about how they performed versus how we modeled them, there was literally no variance.

The other served markets were flat, with a few modest exceptions that were up.

We had really terrific margin performance, as everybody executed very nimbly, on a terrific deleverage performance.

And the operating margin is actually up 60 basis points from a year ago; and I think notably, it's up 330 basis points from what we reported in the second quarter.

So we've gone from 26% OP margin to 29.3% sequentially on effectively the same revenue.

So that's quite an accomplishment.

And I think this -- everybody in this segment to the most part deserves a lot of credit for that.

When we look at its trending into Q4, what we would see is sort of the same level of weakness, but some incremental improvement just because of some seasonal programs that tend to occur inside energy.

But with energy being less than $1 in every $7 of revenue, it won't have a big effect for us.

We had strong growth in our nuclear test business on improving market conditions.

There's a good deal of activity that's emerging, both in China- and Korea-based opportunity in the Middle East, and start-ups again in Japan for their nuclear activity.

So that's going to be a material improvement for us in the fourth quarter and into 2016.

The cost actions that we took earlier this year, you can see, have already improved our margins here in the third quarter, and we expect the margins to improve still a bit more into the fourth quarter of this year.

Next slide: The industrial technology segment, which is about 10% oil and gas by the way, a little less in this quarter, it had a 4% hit on FX.

We also have, in the industrial technology segment, the city of Toronto roll-off from Neptune, which we said this year would be in the neighborhood of $40 million, or about $8 million to $9 million a quarter.

And that's about what it was in this quarter.

So that's most of the organic issue.

Neptune, on the other hand, grew mid-single digits excluding the completion of the Toronto project.

So we were pleased with that.

Oil and gas markets were almost exactly as we expected them in here.

But the margins remained really strong, when you think about the challenges those folks had.

They could have done a little better job on deleveraging, and we've talked to them about that, and I think we'll see better performance in that respect in the fourth quarter.

We continue to have growth in our material analysis businesses, and they are holding up very well, given their European and Asian exposure.

In the fourth quarter, we have already announced as of October 2, that we completed the divestiture of Abel Pumps.

That was a business that we sold for EUR95 million.

It has very strong fourth quarters, so the buyer will be benefited by that.

We had it projected in our guidance at about $14 million of revenue, and about $0.03 a share of earnings, which, of course, now goes away.

On the other hand, we get the EUR95 million, and have already effectively reinvested that money in the acquisitions we've just made in higher-margin businesses that don't require the assets that Abel was going to require to sustain its growth.

Oil and gas is still weak, but growth in the other markets is pretty good, and is offsetting for the most part the oil and gas weakness.

We do think, in the fourth quarter, we'll have better margins with better leverage performance.

Next slide: We look here at RF technology.

We were up, as you can see, 6% in revenue, and up 10% in operating profit.

If you look at that operating margin at 30.3%, up 120 basis points, I want to remind us that the EBITDA margin in this segment is 35.7%.

So we have a lot of non-cash amortization, and the 35.7% number demonstrates just how powerful the cash earnings profile of the RF technology segment is.

Organic revenue was up 4%.

FX was a 1% headwind.

The growth continued in our Infinity Lane Systems, both in Florida and Texas, and we have a number of quotations out.

So that looks very favorable as we go into next year.

We had quite reasonable subscriber additions in our various freight matching businesses that supported growth in the quarter.

And then, we acquired RF IDeas in September, and that business has historically grown at double digits, and we certainly expect that that will be the case in the future.

Both Rick and Greg, who are driving that business, have been there a long time.

They have created an unbelievable value-added reseller network, and terrific direct connectivity with OEMs.

Primarily the business provides proprietary card reading technology.

So you can think of it -- it doing for the individual what Neptune reader technology does for a big collective entity -- lots of identification and [authenticity] ID that they have.

A lot of it is for single sign-on things, like printers.

There are literally hundreds and hundreds of applications, and thousands of customers.

It's quite a decent balance sheet, as you might imagine, as our deals are.

If we look to the fourth quarter, the software businesses, we think, will continue to grow at mid-single digits.

We'll get great leverage out of them, and terrific cash flow performance.

The backlog and proposal activity that we have at toll and traffic is pretty good.

We don't see any slowing in that arena.

We'll finally get done with a couple of projects, which have been things that have been challenging to say the least, that will be behind us, and that's really good news.

And then, we'll have very strong segment margin performance, we think, continuing, led by our SaaS and application software businesses.

Last Wednesday, we completed the acquisition of Aderant.

Aderant is really an incredible company.

If we turn the slide here, we can look at a detailed explanation of Aderant.

It's just, in a sentence, it's just a great business.

It has lots of complementary notes that have come to us from various admirers of Aderant and Chris Giglio's team.

I think we've never had as many unsolicited inbound notes about what a great business this is, and thank goodness it's finally in the home of a public company that will continue to invest in it.

There has been an amount of fear, maybe unwarranted, but nonetheless very real, from law firms, who I'm sure it wouldn't shock you that they tend to be somewhat conservative -- who were not too happy to see Aderant in the hands of private equity previously.

And it always makes people worry about whether they can depend on continued internal development and growth.

Aderant has a really end-to-end platform of mission critical software that primarily goes to law firms now, but could be expanded to other professional services organizations.

It has 3,000 of the world's largest law firms and professional service organizations.

They really do a full suite of activity, all the way from time capturing and billing to docketing.

They're in Atlanta.

They've got a great software business also in Auckland, New Zealand, which we were very encouraged by.

We think they are going to generate over $125 million of revenue in 2016 and beyond.

And, of course, it is, as always, a high-margin business.

If you look at our acquisition criteria on the right, you'll see it's got an excellent management team.

In fact, we're retaining everyone, so that's a check the box.

High recurring revenue, yes, you can check that box, over 95% customer retention.

Strong cash flow characteristics; asset-light.

Well, yes, once again, negative working capital, so people pay us in advance for work that we're going to eventually perform.

Very deep domain experience inside, in terms of people who are accustomed and used to working with law firms, and what their needs really are.

And it has multiple growth opportunities, including opportunities to do additional acquisitions at Aderant, which is one of the things that we've been so encouraged by these last three larger transactions in the form of Sunquest, which you see us doing continual bolt-ons to, and MHA, which we continue to do, and now Aderant, which is the third largest acquisition that we've made.

We'll have a very strong forward opportunity to continue to add businesses to this very -- a very good platform.

So another great niche software business for us.

Next slide: If we looked at medical solutions, and have really dropped the reference to scientific imaging.

I mean, the reality is, that it's no longer very material.

And in the quarter, the scientific image business had about a 6% decline, all of which really was our rugged mobile business which we have been just gradually winding down.

As you recall, we sold the Black Diamond business that was reported in RF, but it had both DAP and JLT, and these things should be pretty well cycled through before the end of the year.

If it weren't for that, medical would have -- or I'm sorry, scientific imaging would have been flat in the quarter.

You can see that the medical businesses grew organically by about 5%, while total revenue was up 12% because of the acquisition content.

FX in the segment was a 3% headwind.

We had continued growth at MHA with significant customer acquisitions.

And Mike Sicilian and his team were able to acquire Atlantic Healthcare Partners, which is really a vaccine GPO, but it gives us a new channel direct to physician offices.

It will contribute meaningfully to our EBITDA in 2016, and is a terrific acquisition.

And so, congratulations to Mike and Jason Conley and others there.

Our recurring revenue increased at Sunquest, which was a good sign.

We really do believe Sunquest is going to be positioned for a strong 2016.

And everything that we've seen, as we continue to do these acquisitions we'll talk about in a second, suggests we're putting together a quite impressive platform of opportunities over a long period of time at Sunquest.

Our medical device businesses were quite strong, driven by new product introductions, and the execution around introducing those at both Verathon and Northern Digital.

Those are certainly outperforming the rest of our medical product businesses.

Our recent acquisitions that we've done this year, all of which are performing above our internal plans for how they would do.

We signed an agreement just sort of -- virtually within the last couple of days to acquire CliniSys Group UK.

It's a leading provider of hospital laboratory software, and should just think about it basically as being the Sunquest of Europe.

It has sort of an elongated customary merger control review process that will happen in the UK and Europe.

We expect that we should be able to get that all closed out, and it ought to be inside our reporting entity by the -- maybe the end of January, or certainly early in 2016.

We invested $170 million -- or I'm sorry, GBP170 million in that business, but all of CliniSys will be paid for from our non-US cash.

In the fourth quarter, we think we'll continue to have like mid-single-digit organic growth in the medical businesses.

We think those margins will continue as incredible as they are today.

And once again, you look at the OP margin, where we reported 36.6%, but remember that the EBITDA margin is 45%, so, lots of non-cash detractors.

And the OP margin can confuse people about how great and powerful these businesses are on a cash earnings basis.

We continue to have outstanding margin and cash flow performance in the fourth quarter.

Our Atlas Medical acquisition, which literally we finished yesterday, will also expand our laboratory connectivity.

This is really an amazing business that's been developed by founder Rob Atlas, who is extremely well known in the hospital arena, and Rob will be joining the Sunquest team.

Atlas Medical, his business, will really be a bolt-on for Sunquest, but it provides support mechanism to both Sunquest and Data Innovations.

The connectivity solutions are basically thinking about the lab to the physician outreach that a hospital would have.

And then, within the hospital, the concept of lab-to-lab communication, where oftentimes people can't see the data they want, and it results in unnecessary additional tests.

We like the whole concept of coordinated diagnostics inside the hospital.

We really believe that this gives us a preeminent edge over what other people do in this category.

And over time, you'll hear us talk more and more about Sunquest and Atlas as a combination.

Next slide: Here we'll look at the guidance for the year.

Next slide: We updated our guidance, actually raised the guidance for the full year to $6.69 to $6.75.

Previously it was $6.61 to $6.75, so this moves the mid-point up from $6.68 to $6.72.

So it's a 4-point increase -- $0.04 a share increase.

But remember, this is despite Abel leaving, and Abel will cost us $0.03, maybe $0.04 during this.

So if we had not sold Abel, we would have raised the high end a little more, but we have to absorb that offset.

And again, when you look at the cash conversion, this third quarter was 137%.

Cash conversion for the year certainly should exceed 130%.

So the DEPS number is one thing, but the cash performance is quite -- much more important.

We also raised our operating cash flow target to between $925 million to $940 million for the full year.

And that's another projected increase from what we've suggested in the past.

And CapEx is not running very high this year, less than $40 million.

So it's going to promote a lot of free cash flow.

Next slide: So we go to the summary here for the third quarter -- a really, a record quarter despite the headwinds.

So I'm not sure we could have expected to do as well as we did, but we're quite pleased with the performance.

Book-to-bill at 1.01 is a good sign for the fourth quarter.

And gross margins with reaching 60.7% -- I went back to look at where we were in the third quarter in 2011, and we were at 53.7% gross margins.

So we've added 700 basis points to our gross margins in the last four years here in the third quarter.

Our operating margin is 28.7%, and our EBITDA margin is 34.4%.

And if you go back to the third quarter of 2011, you'll see EBITDA was about 28.6%, and now it's 34.4%.

Our DEPS at $1.61 exceeded our guidance.

Free cash flow at 25% of revenue and 137% conversion.

Full-year DEPS raised, and cash flow guidance raised.

We deployed $435 million in three terrific acquisitions.

And then, just as we began this quarter, we acquired Aderant, our third largest transaction in our history; and yesterday signed an agreement to acquire Atlas Medical.

So we were able to confirm everything we thought that would happen in the fourth quarter, and really believe we're very well positioned to have a record 2016.

But we won't provide guidance around that until we report earnings in January.

So with that, John, I think we're ready for opening up for questions.

So Wes, I think we're ready for the Q&A portion of the call?

Thank you.

(Operator Instructions)

We'll take our first question from Shannon O'Callaghan at UBS.

Good morning, guys.

Hey, good morning, Shannon.

Hey, Brian, on -- as you further expand into software, right, we're in medical, now we're adding legal, and you mentioned the ability to go into potentially other professional services, is there any eventual barrier where a certain industry has some level of domain expertise where you couldn't acquire, and succeed with a software business like this, in that industry?

Maybe just a little understanding of why can you succeed in legal, or why could you take this to other areas, and is there ultimately somewhere you couldn't go?

Well, I think, that we're always bounded by these niche transactions.

So we don't want to go into some situation where people are going to write software off of our software.

We're really providing some kind of service to somebody, and we happen to be using software to achieve the benefit of what it is.

But you have to have domain experience.

So our guys at the core aren't software people.

They're domain experts who use software to create a solution for somebody, that's efficient and effective for them.

So as long as we continue to see things that are in those spaces, we'll be able to make the acquisitions.

A couple of sessions ago I said, when we did Sunquest and we did MHA, they were really, really as important for the future of Roper Technologies, as Neptune and TransCore were back in 2003 and 2004 for Roper Industries.

Sunquest and MHA gives us world-class and leadership organizations that allow us to do bolt-on acquisitions in things that are complementary to them.

And most of what we've done this year has something to do with one or the other of those organizations.

Aderant is similarly positioned to do that.

It's a great organization.

I don't know, you can go back and look at Chris Giglio's, he did a YouTube video on the day of the acquisition that was just brilliant.

You can see how he is expressing the fact that now being owned by a public company, people, his customers can have confidence that they'll get the continued investment for his program to continue to become the most important player in that area.

So we're always kind of agnostic about what it is the business does.

So we don't really have a boundary around the business.

As long as it hits the excellent management team, high recurring revenue, great cash flow, prefer to have few if any assets and domain experience, then we're pretty wide open on what it -- where we would deploy our capital.

Now we also have some internal things.

We always want to be able to add value to the business in some meaningful way that we can understand.

And we want to think that people working in our governance system will perform better than they were, than they weren't in it.

And if we think in our diligence process, that neither of those would happen, then we would abandon the deal.

Okay.

No, that helps.

And then on some of -- pressure against -- or the performance amidst the oil and gas pressure, you talked about the sequential margin improvement that you got in energy, but a little less happy with the margin performance in industrial tech in the quarter.

Can you just talk about the differences, in terms of it's just basic blocking and tackling of costs out, or maybe just a little bit more on what drove that, and what you expect to improve in the fourth quarter?

Well, I think that what we got out of deleveraging in energy was more traditional in the sort of 30%, 35%, 38% type of stuff that we saw in most of the businesses.

We didn't think that the upstream guys in oil and gas and industrial, which by the way was less than 10% of our revenue, they delevered it more than 50%, which we thought was unacceptable, and we've shared our wisdom with them.

So I -- they were moving pretty quickly, but they haven't been as used to that kind of change.

Because they've been driven really by the fracking opportunity, and there really wasn't any cyclical uptick -- or I mean, it always just have gone up.

They've never really gone back for a long period of time, and they just didn't do as quite a good a job as quickly, as the energy people did.

But that problem's behind us.

Okay.

Great.

Thanks, guys.

(multiple speakers) -- yes, the city of Toronto cycling through, so that's an $8 million or $9 million negative income thing which isn't useful.

Right.

Got it.

All right.

Thanks, guys.

We'll take the next question from Deane Dray at RBC Capital Markets.

Thank you.

Good morning, everyone.

Hey, good morning, Deane.

I'd like to stay on the oil side of the business for a moment.

And you mentioned that in the energy segment, you were expecting to see some cost savings benefits flow through, as well as fourth quarter seeing some seasonal benefits.

I was hoping you could provide some color there?

Well, usually you get, particularly our petroleum analyzer business, we'll get in metrics, they get fourth quarter seasonal activity that is often times MRO that's left over.

These things we have, are really not capital sales.

And so they have every year, even I think in 2009, every year, they have an increase in the fourth quarter.

So that will just give us a little bit more revenue in Q4 than we enjoyed in Q3.

And with that, get a little bit better margin.

They have been very nimble in responding.

I don't know, John, if you want to add anything to that?

Yes, I mean, what I would say is that we're expecting some sequential increase from Q3 to Q4.

Not as much as what we have seen in the past, in terms of the dollar increase.

If you look back at kind of how the segment has performed in 2012 and 2013 and 2014, they have always had a nice jump up there.

We're expecting some, but not as much as in the past, just because of the other headwinds that are present in the oil and gas markets.

How about the cost savings benefit?

The cost savings benefit will continue to just manifest itself.

Most of the cost-out happened in the first half.

And so, that flow-through just continues in the fourth quarter against last year cost levels.

I do think from a read across basis -- everybody believes they're at the kind of nadir what they're seeing from a revenue viewpoint.

We went through our quarterly review process, and people certainly didn't have any optimism for the fourth quarter.

But they all thought things had pretty well bottomed out, and they were feeling better about Q4, than they did Q3, and we don't yet have their forecasts for 2016.

But in the verbal discussions, I think people feel a little bit better.

So the good news for us, is it's getting to be such a small portion of the enterprise that it doesn't have much effect as you can see here.

Because upstream is probably down 35% this year.

And even with that kind of drag, we had record revenue, and a record cash and earnings performance in the quarter.

Thank you.

And just a follow-up on Aderant.

Could you -- did you disclose what the growth rate has been for Aderant and the renewal rates?

No, renewal was -- we said retention was about 95%.

I don't think we've said a lot about growth, but it's going through a little bit of a growth spurt, as its gaining share against its primary competitor, who's got some issues they will have to deal with in terms of the software that supports their system historically.

And also remember, that this is another business that has substantial install base, so you get a lot of maintenance revenue, right?

So this is not a SaaS business.

They have a small SaaS offering, which we think has very interesting prospects.

But the majority of this business is a traditional license and maintenance model.

And so, when you talk about what's the growth rate, you have the underlying growth rate of the ongoing maintenance, which is kind of in the low single digit range.

But then you have the upside opportunity, as well as what they're capturing today, which is new share and new applications which is growing much faster than that.

So you blend it all together, and it has a similar to Sunquest, kind of in the mid to high single digit, but is what we expect for this business going forward.

Great.

Thank you.

The next question will come from Scott Davis of Barclays.

Hi, good morning, guys.

Hey, good morning, Scott.

I have been following your stock for a long time, and I don't think I remember a time period where we've had such a flurry of deals, and pretty attractive stuff on the surface at least.

But talk to us a little bit about what would you attribute that to?

I mean, sometimes maybe these things just work out and the timing.

But is there an acceleration on the part of sponsors, to try to pare some assets off their books at this point, and you're benefiting from that?

I think that might be the case more so in the next 18 months, than it has been in the last 18 months.

There has been a lot of stuff for sale, but there's always a lot of stuff in the pipeline.

But I do think you're starting to see the signs of people getting worried about -- if you get any kind of uptick on the risk premium around triple C credits and financing, people are going to start to worry about their exit multiples, versus what their entrance multiples were.

So I think everybody is wondering about what their exit time ought to be, if it should be moved up.

But boy, the guys that we work with and talk to all the time, I mean, they're still deploying capital like crazy.

So you see them making big bets in lots of areas, and paying very high trailing multiples at least, for what they hope will be able to grow into.

So I don't think that there was anything particularly unusual.

I think that we've owned Sunquest long enough, that we have a real purposeful strategy about what we're building out there, that's just starting to be able to be seen.

And we're still not going to tell everybody exactly what we are doing.

But boy, when you look back, and you see what we've done with data acquisitions and with strategic healthcare partners for MHA, and Atlantic Healthcare for MHA, and what we're doing here with CliniSys, and what we're doing with Atlas, a couple years from now I think people will -- we won't ever get another question about what rig counts look like.

(Laughter) understood.

And just to follow-up -- and I don't understand this business that well, but when you talked about CliniSys being kind of the Sunquest of Europe.

Is the product offering comparable enough that you could consider merging those two entities, or having commonality in management, or any synergies that would be not traditional or less traditional for Roper?

Well, the problem, of course, is the UK health system, right?

Germany is different, the UK is different.

So they are reasonably specific regulated industries that require different kinds of performance criteria, versus what Sunquest base is in the US.

There certainly will be synergies in the sense of -- on proving our software development capability for both entities, and that's good.

I can see John's anxious to add to it.

Yes, I don't think there's any -- in fact, I know there's no plan to merge those things.

What we do see is the opportunity for these businesses to work together to bring new solutions to the market.

There are kind of similar unmet needs and opportunities to do things, whether it's around blood bank or other solutions.

And so, there may be some opportunities for the two businesses to work together in the future.

But as far as the core offering, it's very, very niche and kind of purpose-built, and we don't expect those things to have any overlap.

Fair enough.

Thanks.

Good luck, guys.

Thank you.

Thank you.

We'll take our next question from Joe Ritchie at Goldman Sachs.

Thanks.

Good morning, guys.

Good morning, Joe.

So you guys operated really well this quarter, despite the organic growth turning negative.

And I guess, I'm just trying to parse out some of the comments for 4Q and beyond.

Do you guys see the third quarter as a trough in your organic growth?

And as you kind of think about 2016, you're, clearly there's some headwinds this year with energy, the Toronto project, tough software comps in Sunquest.

I'm just trying to get a sense for general comments across your portfolio on your organic growth in 2016?

Well, I think 2016 is going to be a lot easier for us, because the headwinds that we face this year should all subside.

So I don't think that oil and gas would be worse in 2016 in a material way than it has been in 2015.

It's likely to be stable, or perhaps up a little bit on some of the areas.

I think our fourth quarter will be similar to the third quarter, but 2016 is a different story.

So we're going to enjoy -- some of the acquisitions that we made will become organic in 2016, and that always helps.

So I -- just about everything is favorable in 2016.

You get rid of the city of Toronto drag, which it's there.

We get rid of the rugged mobile kind of winding that thing down.

We get -- we just rid of a lot of drags.

And so, organic fees will be more favorable next year.

Okay.

That's helpful, Brian.

And maybe on my follow-up, it seems like this year you've been a little bit more apt to take a look at your portfolio a little bit closer, with the divestitures of both Black Diamond and ABEL.

I'm just curious whether you guys are -- as you think over the next couple years, will there be continued portfolio pruning, as you continue to become more of a software type entity?

Well, we still love our cash generation businesses out there.

They don't have any amortization.

I don't know, maybe one of these days, we haven't reported on cash earnings, it would be a different story.

But man, the EPS we get out of our historical businesses is pretty spectacular, 33% EBITDA in fluid handling.

It's hard to find something with 33% EBITDA, right?

So these businesses are really great.

We think they're valued pretty highly inside our overall portfolio.

I think people approach us, I mean, our phone rang off the hook when people saw that we sold ABEL.

Everybody in the world is calling us up about, hey, can we buy your pump businesses?

Can we buy your energy businesses, can we do this, can we do that?

And the answer is no.

I mean, what are you talking about?

You guys traded at a multiple that's lower than the imputed value on our business.

If we're going to do anything, we're going to do it for shareholders, and that shareholders get a premium to what they would be.

So I do think there are creative things that people can approach us on, and we're always willing to listen to various things.

But we like the businesses that we own today for the most part.

Okay.

Thanks, Brian.

Helpful color.

We'll take the next question from Christopher Glynn at Oppenheimer.

Thanks.

Good morning.

I'll resist the temptation to seize the fleeting opportunity to ask about rig counts (laughter).

But sticking with energy, you did have a really dramatic sequential improvement on flat revs with margin there.

So just wonder if there are any tradeoffs with that kind of material, really abrupt margin upside?

And then, how to think about what that says about the leverage or the margin performance as those markets actually return?

All good news, if they -- you'd want us to know when they're going to return by the way.

We're not aware of that yet, Christopher.

But if they do come back, we'll be printing money there, there's no question about that.

We're already printing money in a hideous market.

So yes, that's all good news.

But a little bit of loss, the fall numbers, right?

The difference I think, if you look at the Op in energy in the second quarter, and then the Op in energy in the third quarter, we're up about $4 million in operating profit quarter over- quarter on the same revenue.

So you get sort of a nice kick there.

And also -- (multiple speakers)

So structural?

So structural, so the structural piece of piece businesses is the fact that they have a highly variable cost structure.

So we don't have a lot of fixed costs that are hard and expensive and time-consuming to take out.

And then also hard and expensive and time consuming to put back in.

So these are primarily people-related expenses.

And so, I don't expect that to be structural from that standpoint.

It's flexible.

And that's the important thing for those businesses, and to make sure that they're able to flex very quickly with volume decreases, but also be able to capture opportunities when volume comes back.

Makes sense.

Great.

Thanks.

We'll go next to Jeffrey Sprague at Vertical Research Partners.

Thank you.

Good morning, gentlemen.

Hey, good morning.

Hey, I just wanted to circle back to the kind of the deal activity again, a lot of moving pieces there.

First, just to help us get our head around everything, can you just kind of square us up?

I'm sure you don't want to go through every deal individually, but collectively the $1.7 billion you're spending here in 2015, kind of what the combined EBITDA multiple might be, or the run rate revenues from this basket of deals?

Well, we got some tax benefits in here, but on balance I'd say our purchase price for these things has been around 11 times first year EBITDA.

So you can kind of use that as a guidepost into what we would expect for next year.

How about revenue (multiple speakers)?

In terms of revenue, for our first 12 months of ownership for all of them, right?

So the first 12 months for Strada and SoftWriters, and Data Innovations is largely in our numbers this year.

But when we add all of that up, we get to something in the $375 million range.

Right.

That's helpful.

Thank you.

And then, just a -- actually just a quick modeling question.

John, is the tax rate got a downward bias here?

Is that part of the guidance construct into Q4?

Not really.

Probably 31% or something like that into the fourth quarter, right, 31.5%, [30%] (multiple speakers).

A downward bias, it's hard to feel you have a downward bias when you pay our tax rates.

We're not an inversion, and we don't -- we just don't have any kind of things that are going on around the world.

So our tax rate, pretty much for the year, if you look back historically, it's going to be around 29% to 30% most of the time.

Right.

And then, just one other one.

Brian, I totally get your point on the industrial businesses, right?

They get a Roper multiple, instead of some other multiple, which makes it difficult to exit, and you've got a lot of cash you can deploy.

But can you just give us a little bit of additional color on why ABEL, and why that might be different from the others, and how you will be looking at these things, because I'm sure you do have an open mind around value over time.

But just what's just kind of the overall thought process there?

So ABEL is really unique, in terms of it -- the pumping technology that it uses is unrelated to what we do at Cornell, and it's unrelated to what we do at Roper, which are our other two pump businesses.

So it really offers us no synergies of any kind from a technological development viewpoint.

The PP&E that's used to generate a ABEL pump -- these are really large.

They are more like a Flowserve or [progressive Rand], or something like that, or are just totally atypical.

You need large test facilities, mostly witness tests.

A lot of their growth, which should be quite good will be in India, related to power generation.

And so, the end markets that they serve were going to require additional capital deployment for us to continue to grow those businesses.

And it wasn't a place we felt like we should invest.

Therefore, we really felt that we would be better if we cut this loose to somebody who was seeing it as a growth platform, which it can become.

I think it's a good acquisition for the people that bought it, and I think it will perform quite well for them.

But we're able to get out of it EUR95 million, and we'd be hard-pressed to say, sort of 12 times trailing number was something we should turn down.

Great.

Thank you.

We'll take our next question from Richard Eastman at Robert W. Baird.

Yes, good morning, Brian, John, Rob.

Hey, good morning.

Just Brian, a quick question.

TransCore has had some really nice wins recently in Massachusetts, central Florida.

There has also been some commentary about Saudi Arabia and the Riyadh may be dialing down the Metro spend in Riyadh.

And I'm just curious, when we sift through all that, and put the wins in there, with potentially a little bit of softness in Riyadh, how does that business look over the next 12 months?

Is it -- is the backlog support, comfortably support a mid single digit growth rate for TransCore?

I think so.

I mean, (multiple speakers) it's cyclical, up and down in terms of projects.

It's not sort of cyclical with the economy.

But we're certainly not seeing any slowness out of Riyadh.

They are expanding the project.

So I was reading, somebody sent me a thing this morning, oh, my goodness, Saudi Arabia, they need to borrow money.

They won't have any cash.

They can't do anything.

I mean, wow, I know people do react to a lot of various things.

I do not think Saudi Arabia is going out of business in the next month and-a-half.

I don't think Riyadh is either.

So this is a multi-year contract.

And once you have the work deployed, people have to have the backroom operations.

They can't do it on their own.

So there's a lot of different things that happen.

Now this is mostly a traffic [trans fleet] project, with a lot of upfront opportunity that's more civil engineering.

And as that gets behind us, and actually margins will improve.

Okay.

And then again, with the wins, it seems like most of that is incremental and new wins, so you have to feel pretty comfortable about the business then?

Look, we have ample opportunities to go through with TransCore, and the of rest of our businesses to see what the next 12 months, or the next three years looks like.

And we'll be able to share that totality of that picture after the fourth quarter, and when we initiate guidance for 2016.

So I mean, just picking out one piece, yes, we feel very good about that.

But wait for the whole picture.

Okay.

And then can I also just ask you internally -- within Atlantic and MHA and all the conversations going on around generic pricing on the drug side, just what have been the internal discussions there on the price component at those two GPOs?

It sounds like you had some new customer wins here, which is really a positive.

But any internal discussions around this generic pricing issue and the impact, positive or negative, it could have on those two businesses?

So it, I mean, so far it has been modestly positive.

But I would say that we're not in those conversations.

We don't set prices.

We help our members negotiate the best pricing and the best supply chain solutions that they can obtain.

But so it's been modestly helpful.

But not by any stretch is it the largest piece of the MHA growth that we have experienced.

Okay.

Nice work, and congrats on the quarter.

Thank you.

We'll take the next question from Joe Giordano at Cowen.

Hi, good morning, everyone.

Thanks for taking my questions.

Good morning.

I had a question on the CliniSys, and maybe if you can help frame that in market generally?

You have your positioning with Sunquest, kind of niche in the United States, and then CliniSys, you said is the Sunquest of Europe type property.

Maybe some color on, how many across the -- if we look globally, how -- what does this market look like, how many major players of that kind of size really are there?

Well, here's the situation.

We just signed the agreement.

When we're filing a lot of material, like we do here with HSR, so that's all going into customary merger control reviews.

So we've agreed with the seller that we're not going to provide any information until after the deal closes.

So I can't tell you a lot about that.

But the end markets are quite similar to what happens in -- here in the United States.

The hospitals, while people think that there's universal healthcare in the UK, there's actually a wide variety of provincial providers inside that system, and CliniSys allows these people to have a uniform operating platform around all the things that go on with labs.

And we'll be able to make them be more efficient for the healthcare system, because they'll now get access to our Data Innovations technology, and they'll get access to some of the ways we do things at Sunquest.

So we think from an end user viewpoint, Fiona who has built this very good business in the UK, and recently acquired a business similar to it in Germany, will benefit from providing additional services and clarity to the people that [core] system to drive their laboratory.

So we're bullish about that.

But that's about as far as I can go, Joe.

Fair enough.

You mentioned the slight strength in materials analysis in industrial tech.

And I'm just trying to get a sense of how much is that a market dynamic, and how much is that unique to your businesses there?

And maybe we could touch on that for a second?

It's probably about 50/50.

And so, as you see global industrial production whether that's around steel or automobiles, so that has generally been a little bit of a positive tailwind.

But you also have a lot of you new and upgraded products, and the expansion of the Struers global reach.

And so, it puts them in very good position to continue to take some share.

And they also have a very good line of other things, not just on the material analysis, their traditional area, but also some new things around hardness testing, and some things they're introducing there that has helped them.

So it's a little bit of both, a little bit of market, a little bit of self help.

Great.

And then, just lastly, one quick housekeeping one.

Do you guys having any impact of Aderant in the fourth quarter guidance that you put out?

Sure.

And like on an adjusted level, you have adjusted accretion in there?

I, yes, I mean, it will help us out by a couple million, by a couple pennies.

Okay.

Fair enough.

Thanks, guys.

Appreciate it.

You're welcome.

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

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

Okay.

Well, thank you all for joining us this morning, and we look forward to talking to you again in late January.

And that concludes today's call.

Thank you for your participation.

You may now disconnect.