Roper Technologies Inc (ROP) 2015 Q4 法說會逐字稿

Good day, and welcome to the Roper Technologies fourth-quarter 2015 financial results conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Deanna.

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

If you 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 non-GAAP 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 fourth quarter, the difference between our GAAP results and adjusted results consists of three items.

First, we completed the divestiture of ABEL Pumps during the fourth quarter, resulting in a pre-tax book gain of $70.9 million.

This was partially offset by an impairment charge of $9.5 million relating to an imaging investment we made in 2007.

Second, a $4 million purchase accounting adjustment to acquired deferred revenue relating to software acquisitions made in 2015.

This represents revenue that those companies would have recognized if not for our acquisition.

Finally, we have a $2.6 million inventory step-up expense relating to the acquisition of RF IDeas.

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

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

Brian?

Thank you, John.

Good morning, everybody.

We'll start off here with our Q4 results.

They were flat to last year -- we'll talk a little bit about that -- at $948 million.

It's exactly the same number as last year but there's a lot of activity to get you there.

We had another 2 points of FX headwind in the quarter, and then the acquisitions, net of the ABEL divestiture, offset the organic shortfall in energy primarily.

The Industrial and Energy markets declined in the fourth quarter and really had less seasonal adjustment favorable in the fourth quarter than normally.

And we'll talk about that when we get to that segment.

But we had very strong growth in Medical and the RF segments.

Our gross margins continued to escalate.

They were up 190 basis points in the quarter, to 61.8%.

Our EBITDA margin also hit 35.9%.

That's the EBITDA margin, not the gross margin.

And EBITDA was up another 2%, to $341 million, which is an annualized run rate of $1.364 billion.

Our free cash flow was up to $261 million and is 140% cash conversion.

And we also issued a 5- and a 10-year bond which totaled $900 million in the month of December, and deployed over $700 million in the quarter in some very attractive acquisitions.

So, we enjoyed both good execution in the quarter and terrific disciplined capital deployment.

Next slide -- if we look at the income statement in the quarter, you can see that, while the orders and the revenue were exactly the same as the year ago, no two businesses would have been the same, so this was a case of watching the ducks on the pond with a whole lot of paddling going on underneath it.

The book to bill at 0.98 is actually pretty good for a fourth quarter.

Just to give you some sense of history, in 2011 our book to bill in the fourth quarter was 0.94; in 2012 it was 0.95; and in 2013, it was flat, at 1 or 1.01; and 2014 it was 0.98; and this year is 0.98.

So, from an historical perspective it's about what we would expect to see.

Our gross profit, as we said, was up from 59.9%, to 61.8%, and operating income, the margin, was 30.1%, and that absorbed 70 basis points of higher non-cash amortizations as acquisitions came in.

The interest expense was up $5 million due to the bond issuance and a little bit more drawn at the revolver during the quarter.

Net earnings were down 1%, from $187 million to $186 million, which you could see just from the interest.

Next slide -- here we shift into the full-year enterprise results.

Next slide -- on the enterprise results, the whole point of the year really was our ability to demonstrate nimble execution in the field and then deploy capital in, really, a tough acquisition market with great transactions.

If you look at the records, everything once again was a record -- we had the most orders, the highest revenue, the best margins, the highest net earnings, the best EBITDA and cash flow of any year in our history.

The growth was led by Medical and RF.

We had continued margin improvement throughout the year.

The gross margin was up 140 basis points on the year, to 60.7%.

And the operating margin was up 80 basis points, to 29% operating profit margin.

And, of course, EBITDA was higher.

Very strong cash flow.

We were up 11% in cash flow for the year, and that was 26% of revenue.

Our free cash flow was also up 11%, and our cash conversion on our free cash flow basis was 132%.

We deployed $1.8 billion in acquisitions in 2015, with almost entirely a focus on software and medical technologies.

All of our acquisitions are really very high-margin businesses.

They're all asset light, they are very specific leaders in niche market, and they have high recurring revenue and strong management teams at each one of these companies that we acquired.

And our recent acquisitions have been growing in excess of 10% a year which gives us, as they become organic rather than acquisitions, a benefit to our organic notes.

Next slide -- if we look at this bridge we put together, I think really help people understand about the performance and the forward nature of what we'll do in 2016.

If you'll look at the base revenue in 2015, it was $3.552 billion and it ended the year at $3.593 billion.

But that's not the story, being up 1%.

The story is that we had organic growth in our RF segment, we had organic growth in Medical, and we had substantial acquisitions, even though we divested ABEL, which was a $20 million-plus revenue business.

Those three components added 7% to our trailing revenue number for last year.

But we had a 3% currency headwind, almost all of which was in the Energy and Industrial segments.

And that 3% brought the number down And then we had $35 million of negative organic growth in Industrial, almost all of which was in Roper and FTI, which are our upstream fluid handling businesses.

And then we had $72 million negative organic in Energy, the vast majority of which was again upstream, although in the fourth quarter we didn't get the seasonal push that we normally would get so we had a little bit of fall off in the fourth quarter in the mid and downstream business.

So, about 2.5% of the 3% of negative organic in Industrial and Energy was related directly to oil and gas.

Also, something that gets obscured a bit by the numbers is our organic growth in the first quarter of 2015 was 6%, excluding oil and gas.

And we actually grew 2% in the second, third, and fourth quarter, excluding oil and gas.

So, those headwinds that we've had to contend with in 2015 around oil and gas markets will be dramatically smaller in 2016 than they were this year, although there's still some real challenges.

And the currency isn't going to be $104 million, it'll be probably 80% less than that negative number.

Next slide -- if we look at the outstanding margins you can see on the left-hand side the gross margins.

In 2013, we were at 58.6%, and those were raised 70 basis points in 2014 and then raised twice that, 140 basis points this year, to 60.7%.

Our EBITDA margins in 2013 were 32.8%.

They were raised 100 basis points in 2014, to 33.8%, and another 80 basis points this year, to 34.6%.

So, the continued margin expansion just comes, really, from a focus on our asset-light businesses being able to reinvest for growth in themselves.

And we had great leverage throughout the enterprise as a result.

Next slide -- we get to, really, what's the core of our entire business model, is compounding our cash flow.

And this compounding, you can see, continues to be outstanding in a year where we really only had 1% revenue growth.

Our free cash flow was up 11%.

Our free cash flow, at $929 million, is up $89 million from the $840 million.

So, we had a great quarter in the fourth quarter, with $269 million of cash, but we had a terrific year with the $893 million in cash -- in our view still the best measure of performance.

If you look at our cash guidance, you'll see our cash guidance tells a different story than the EPS guidance.

Next slide -- if you'll look at the financial position of the Company, here you can see cash at the end of this past year closed out at $779 million, up from $610 million the year before and up from $460 million in 2013.

We've deployed almost a third of that here in January to close the CliniSys acquisition, which was a little bit over $250 million.

And that happened in the month of January.

We also upsized our revolver.

Our revolver used to be $1.5 billion.

The revolver is now $1.85 billion.

And, you can see, on our undrawn revolver we have $1.67 billion.

So, between cash and undrawn revolvers, it's about $2.5 billion of powder there.

Our trailing 12 months EBITDA at $1.25 billion -- of course, that's not a pro forma number and it will continue to get bigger as the year goes on.

But even at $1.245 billion our net debt to EBITDA is only 2. At the end of 2013, it was 1.9, so we've done over a couple of billion dollars of acquisitions and only have net debt up about $500 million.

So, we still have a great deal of ample liquidity to do anything we want to do in the acquisition front in 2016.

Next slide -- here we'll start to look at the specific segment detail and outlook.

Next slide -- if we look at the four segments -- the Energy segment, the Industrial, the RF, and the Medical segment -- you'll see that they all are performing phenomenally from an EBITDA and gross margin basis.

So, even though you have a year where Energy and Industrial together came in at $1.333 billion, which was down 12% from the prior year's $1.519 billion, they still delivered 31% EBITDA margins in both years, and both were over 50% in gross margins.

In our RF and Medical space, those guys were up 11% from $2 billion, roughly, to $2.26 billion.

And, of course, they have even stronger margins, with 36% EBITDA for RF and 45% EBITDA for Medical.

And the Medical and RF businesses are now already 70% of our total EBITDA, even though all the segments have extraordinary margins.

Next slide -- we'll start first with Medical, which is our largest segment.

Here you can see, in the quarter, we had organic revenue of plus 3%, acquisitions of plus 12%, and foreign exchange a negative 3%.

The SHP and IPA acquisitions from 2014 finally went to organic and they delivered double-digit growth for us in this quarter.

We had very strong sales out of Verathon, nearly double digit, with new product launches that we had talked about earlier in the year continuing to gain traction.

And our Northern Digital business had an outstanding year -- we're up more than 10%, with very strong revenue growth in the fourth quarter.

Atlas Medical, which is a small acquisition that we bolted into Sunquest in the fourth quarter, its integration activity is doing well and we expect that to contribute in 2016.

MHA, we should comment on, completed an all-time record year.

It's just compounding near their growth and everything going well in that arena.

In 2016, the way we see the year unfolding is that we'll continue to be nimble.

And I want to say our operating leverage for the full year in Medical was 50%.

So, as these grow, they contribute outsized incremental gains for us.

We think we'll have mid-single-digit organic growth in Medical throughout 2016, and we think that will get stronger as the year goes on.

Sunquest has a number of version changes and software release updates that are rolling out in the second half that will be quite beneficial.

And then Strata, Data Innovations, and SoftWriters, which are growing rapidly, will become organic in the second half.

Verathon and Northern Digital are going to continue to grow at a relatively high rate in 2016.

And then we closed, on January 7, the CliniSys acquisition in the UK, which is a European hospital laboratory software provider.

It will add to our acquisition sales growth in 2016.

Next slide -- here we look at RF Technology.

RF Technology was up, in the fourth quarter, 4% organically.

It had a negative FX of 1 point.

And acquisitions and divestitures added 15%, so the revenue was up 18%, operating profit up 30%, and the operating profit margin 31.1%.

Software throughout the segment performed exceptionally well in the fourth quarter as we returned a pretty good growth at iTrade and double-digit growth at freight matching.

Aderant was acquired in October and it's off to a great start with the Aderant team.

In fact, some of us are working with them in terms of coordinating some of the large clients, being more secure going in with Aderant in the future as opposed to the fact that they were run by private equity in the past.

Toll and traffic projects are progressing really quite well.

Riyadh is doing all right, although the startups in traffic in Riyadh tend to be more civil engineering at the beginning before we get all the software revenue.

But they are still fine.

And our infinitive lanes (sic - see slide 17, "Infinity lanes") that we've been rolling out in Florida and Texas are on schedule and contributing substantially.

We think we'll have mid-single-digit organic growth for the year, with stronger growth in the second half, for RF, primarily because TransCore is finally out of an arrangement where we were providing tolling administration in Puerto Rico.

That's been quite a challenge in the last half of this past year, and will be completely out of our business model this year.

So, it's a little bit dilutive to our revenue but it's very much accretive to our sanity, as trying to get money out of Puerto Rico, as you know, is not an easy task.

But that will put a drag on revenue in the first two quarters, about $10 million each quarter, but that's revenue we're happy to avoid.

Our operating leverage for this segment, by the way, in 2015 was 56%.

So, here again, as we get incremental revenue, and we expect to have that in 2016, you'll see continued margin enhancement.

The software businesses we think will grow at mid-single digits, but they do have exceptional margins that allow us to use cash to reinvest in other transactions.

And then, the recent acquisitions that we've had -- Aderant, RF IDeas, and On Center -- are all growing at a pretty strong rate, and they have excellent cash flow performance and eventually they, too, will become organic.

Next slide -- if we look at Industrial Technology, here, in the fourth quarter, organic revenue was down 8%.

It's all pretty much all oil and gas upstream with our businesses that are related to that.

To get some context about this, in 2014, the oil and gas portion of Industrial Technology was about 12% of revenue.

And, unlike RF, where it's zero, and Medical, where it's zero, in Industrial Tech it was 12% in 2014 and this year that dropped down to 9% of revenue.

And, in our forecast for 2016, we think it will be down to about 6% of revenue in the segment.

It's almost exclusively upstream activity for surface and water-pumping projects.

We also had the divestiture, which came full circle, with ABEL, with about in the low 20s of revenue that contributed nothing in the fourth quarter of this year, and of course will be out all of next year.

Neptune grew really quite well, double-digit growth in the US in the fourth quarter.

The Toronto project was still there as a headwind, as we told you last year -- it's close to $10 million a quarter -- but it finally sunsets in the first quarter of next year.

So, Neptune's growth in 2016 will be outsized compared to the way it has looked with the Toronto headwind in the past.

We're forecasting continuing declines, really, in the upstream oil and gas.

It was off about 30% for 2015.

And we think it will be off another 30% in 2016, but, of course, it gets to be down to a smaller number.

So, it's about a $20 million headwind for this segment going into 2016.

And the rest of the businesses we think will grow at low single-digit numbers, maybe a little bit better than that.

So we go to the next slide.

I should say that OP leverage in Industrial for the year, it delevered at 40%.

So, with gross margins above 50% and delevering at 40%, we think that was pretty good performance.

Next slide -- on Energy Systems and Controls, they had this continued fall off, as one would expect, particularly in the upstream arena.

Their operating leverage for 2015, though, was really quite good at a negative 39%.

And their gross margins were 58%.

So, I think everybody performed quite nimbly.

Although, in the fourth quarter, Compressor Controls started to see a really deep dive on their project work and hadn't really restructured around that yet.

That activity will happen here in the first quarter.

They've contributed terrifically over the last several years but are going to have to face the reality of a major decline in project work that's not going to recur for some long period of time.

Now, in the quarter, organic growth, then, was off, as you can see, 17%; FX, by 4%.

Our seasonal improvement actually did occur as we forecasted, just not quite as much.

We were up 9% seasonally in the fourth quarter in Energy, but normally we're up 17% to 20% and occasionally 25% in the fourth quarter.

So, we had thought we would be up maybe 15% in the fourth quarter, and by only coming up 9%, that pulled back our revenue a tad in the fourth quarter, which was a direct result of seeing a little less revenue than we expected out of them.

Certainly backlogs are reduced in this segment and the oil and gas project businesses is going to rapidly deteriorate, although that's not a surprise.

They had unbelievable growth in Zetec, as both South Korea, Japan, and Middle East are roaring back.

And, in fact, we were up quite dramatically in Zetec, and we think that will accrete to very strong performance for Zetec in 2016.

The operating margin, which really speaks to the nimbleness of the operating people we have in these businesses, was still 32.7%, even though the segment was down substantially in revenue.

If we look at what we're talking about here for 2016, you can see high single-digit organic decline for the segment.

Oil and gas we think will be down about 15%, which will be about a $50 million drag on the settlement.

So, about $20 million out of Industrial, about $50 million out of Energy.

The project activity is going to force Compressor Controls to do some aggressive restructuring.

I know that it's a challenge for everybody but there's no question the market requires us to do that.

And then we think we'll have modest growth in the rest of the areas in the industrial arena and nuclear arena.

Next slide -- here is we get into the 2016 guidance.

Next slide -- we created another bridge for you here for 2016 so you get a sense of what's really going on in the health of the overall business.

You can see we finished this past year 2015 at $3.593 billion.

We expect revenue to be up between 8% and 10% in 2016.

And we think organic revenue will be between 2% and 4% in the coming year.

So, we'll get mid-single-digits organic growth out of RF and mid-single-digits organic growth out of Medical.

I think we'll have low single-digit organic growth out of Industrial, whereas last year, you might remember, it was a negative number.

And then, already completed acquisitions, net of the ABEL divestiture, are going to contribute a sizeable portion of revenue in 2016.

We think we'll still have the high single-digit organic drop in Energy, but that's a big improvement over last year's organic drop.

And then foreign exchange, which was $104 million last year, is probably going to be about an 80% less headwind for us in 2016, so maybe something in the $20 million to $25 million arena.

And that makes -- just as we showed you we grew last year at 7% until you hit the oil and gas number -- just easier comps throughout the year for us once we get past the first quarter.

Next slide -- if we look at the 2016 guidance, you can see for the full year we're saying operating cash flow we would hope would meet or exceed $1 billion.

That operating cash flow is going to have just a very limited CapEx drag for it to convert to free cash flow.

This past year I think our CapEx was $36 million.

We wouldn't expect it to be to be any higher than that this year, so certainly less than 1% of revenue, probably quite a bit less than 1% of revenue.

Free cash flow -- I'm sorry, full-year adjusted DEPS, we're saying are $6.85 to $7.15.

And the key assumptions around that is that we get, for the full year, revenue growth of 8% to 10%, organic growth of 2% to 4%.

Comps ease after the first quarter.

In the first quarter, we got a lot of headwinds.

We've got the revenue drag out of Puerto Rico.

Oil and gas had not really hit us in the first quarter last year.

And we had some unique revenue coming out of Roper Pump that won't continue.

We had a little higher interest cost because of the bigger draw with the acquisitions, but we also get a benefit in earnings.

But Q1 last year had 6% organic, and the last three quarters had 2% organic, so we certainly don't expect 6% organic, net of oil and gas, in the first quarter.

Our non-cash amortization increases by $30 million.

So, our non-cash amortization will be $195 million in 2016.

And, if you want to use cash earnings, you can add that back to the net earnings number.

Interest expense is about $25 million higher than last year, to $109 million.

Our tax rate's going to be somewhat similar to this past year in the 30% to 30.5% arena.

And, of course, none of these include any new acquisitions, and we do expect to be pretty active in 2016 in adding additional high-quality businesses.

In the first quarter, we're going to establish guidance at $1.42 to $1.47 because of those things we have to face in the first quarter that were not there last year.

But we'll get improvement throughout the year on those things with quite dramatic improvement in the second half, which is not based on hope but just the reality of what we know to be the case.

Next slide -- as we look at the 2015 summary and then the outlook for the year, we delivered record annual results for orders and revenue, margin and net earnings, EBITDA and cash flow in 2015.

And that was despite probably the biggest headwind period we've had with so much coming from currency and oil and gas.

Our operating cash flow was up 11%, free cash flow also up 11%.

We had terrific margin improvement with gross margins up 140 basis points to 60.7%.

EBITDA margin's up 80 basis points to 34.6%.

And free cash flow, at $893 million, represented 25% of every dollar of our revenue and 132% cash conversion versus the DEPS number.

We deployed $1.8 billion in really attractive acquisitions, so we increased our dividend by 20%.

As we go into this year, we expect to deliver record performance in 2016, with that revenue growth we mentioned just the slide before at 8% to 10%, operating cash flow around $1 billion.

We think we'll deploy well over $1 billion in acquisitions.

It could easily be higher than that.

And we've already closed our first one, with CliniSys, for about $250 million in January.

We've got a very attractive pipeline.

We're looking at a transaction on Friday and another one on Monday.

So, there's just a great deal of activity going on, probably the most that we've ever seen in terms of the pipeline.

We continued to compound cash and create shareholder value last year.

You got a lot of Alpha of us in 2015, and there's no reason to think we can't continue to increase our cash as we look at 2016.

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

I think so.

Deanna, we're ready for the Q&A portion of our call.

(Operator Instructions)

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

Good morning, guys.

Brian, just on the assumptions on the oil and gas stuff -- the down 30% for industrial tech, the down 15% for energy -- maybe just explain a little bit more the differences between those two decline rates?

And then some of the other businesses around the oil and gas stuff within the energy segment that you have a better outlook for?

In industrial, Roper Pump is almost exclusively oriented around upstream oil and gas.

It's not a huge business but it has a big drawback when you have the change in fracking.

It's primarily a US business.

Its oil and gas component was down 30% in 2015 from 2014, and we expect it will be down another 30% in 2016 from 2015.

But it's still a fairly small number.

It's about a $20 million revenue drag that we're modeling into 2016.

None of the other businesses in industrial technology have anything to do with oil and gas.

They are instrument companies, or over half is the Neptune water meter business, which is going to grow next year.

So, it's just that one isolated.

And there's no midstream and downstream activity, really, in industrial.

When you get into energy, much bigger total dollars of what you're talking about.

About 60% of the segment is oil and gas but only some of it is upstream.

Primarily the upstream portion, or a couple of very small businesses -- Viatran and [DAS], a little bit of AMOT -- and then quite a lot of Compressor Controls.

Compressor Controls has been living off of a great project backlog.

Their service work, we expect, could be a record this year in 2016.

But we think their project work will drop really dramatically.

It could drop $30 million, $40 million.

The midstream and downstream activity for the year has been really decent all the way along.

The only drag has been the currency.

But then in the fourth quarter we didn't get as much of a seasonal uptick in those downstream businesses as we normally do, so mostly testing businesses.

That bodes for slight deterioration probably in 2016.

The rest of the energy businesses, the $40 million, are really mostly test and measurement businesses.

And then we're up really sharply at Zetec, so that helps offset that.

That's why we're saying 15% for energy, but it's 30% for the upstream portion of industrial.

Okay.

And then, within industrial, in terms of getting from organic declines to starting to grow there again, what is the Toronto comp impact?

What was it in Q4, what is it in Q1?

And then, what's driving that double-digit Neptune growth?

Is that a sustainable rate?

Or what's driving that?

It's certainly going to be very solid growth in 2016.

It's about a $10 million divot each quarter for the Toronto project as it fell off.

There's a little bit of revenue we're still getting out of Toronto for last minute adjustments but it's not very meaningful.

It's just domestic growth in commercial water meters and new wins in projects.

We are having share gains that are really obvious to us when we look at the data.

And we're going to have further share gains in 2016 that we're confident enough of based on all of our contacts with our bid process.

Shannon, the Toronto project really completed substantially in the first quarter of 2015.

So it was still in that $10 million comp range in the fourth quarter against the fourth quarter of 2014.

And then we'll have a little bit of a headwind in the first quarter on a year-over-year basis.

But then after that it's going to be more normalized.

So it's not an acceleration that we're looking for; it's really some headwinds that start to go away.

Okay, thanks, guys.

I'll pass it on.

We'll take our next question from Deane Dray of RBC Capital Markets.

Thank you.

Good morning, everyone.

I'd like to go back on to the oil exposures for industrial and energy; and just talk about, if you could, your visibility in the businesses, specifically around orders in the quarter.

And then, on the organic assumed declines, maybe discuss what's volume versus pricing?

There's a lot of supplier squeezing that's going on in the sector, and wouldn't be surprised if you're seeing some pricing pressure, as well.

If you talk to our salesmen they will tell you it was massive pricing.

But there's no pricing pressure.

That's just silly.

That's not the issue at all.

It's just pure -- the biggest component, of course, is currency.

Then from a unit situation, it's the project work at Compressor Controls this year, and it's really easy to detail that out.

Those numbers are pretty good.

Last year, we actually said when we initiated guidance, we thought upstream would be down about 20%.

You correctly challenged us about -- CapEx is down 30%, might it not be down 30%?

And we said, it could be down more than 20% but we thought -- we had a particular arrangement around surface drilling, which is new technology, which has rapidly gained share, and it was doing that at the time and we thought that would continue in the second quarter.

But in the second quarter they basically stopped all ordering and consumed all inventory they could and that hurt us a little bit.

And then in the fourth quarter, we didn't get any seasonal bounce -- well, we did, but not as much as you normally would.

So, we're very comfortable around guiding down $20 million on oil and gas and industrial and around $50 million in energy.

I think that's quite correct.

And then there will still be a little bit more drag on a nominal number basis with currency.

But it's definitely not pricing.

The guys have been pretty correct all year long except for that Q2 situation at Roper Pump where our supply agreement got suspended for that quarter.

What were orders in the quarter for both?

The segment book to bill was like 0.88 for energy in the fourth quarter.

And it was 0.97 for industrial.

On the industrial side, that 0.97 is typical for a fourth quarter, but it's definitely lighter.

You asked about visibility also.

For the product businesses, particularly around upstream and even on the mid- and downstream, those are generally going to be book and shipped inside of a relatively short window, two months or so.

Where we do have better visibility, and why we're talking more about this, is on the Compressor Controls side, because it's more of a project business.

And that's where we saw an order shortfall in the fourth quarter leading to that 0.9 book to bill area, and why we're expecting that to be a tough year for the project-based business because we have good visibility in that area.

Brian, you referenced back in the second quarter some of our expectations that the upstream could be worse.

Just to give you a data point, we had lunch on Friday with the CEO of Schlumberger; and their expectations, upstream could be down 35%.

So, we're in that right neighborhood.

And just last question for me would be, these businesses -- so, when we talk about Roper Pump and Compressor Controls -- these are legacy Roper Industries businesses and certainly not something that you would be looking to invest in today.

Now, in the teeth of the oil pressures here is certainly not a time to talk about divesting, but would there be an opportunity at some point to separate the Roper Industry legacy businesses from Roper Technologies, where you're focusing today?

It's certainly possible.

We talk about it quite a lot and there are a lot of different avenues for achieving that.

It could be spun off as an independent entity where people would be able to make a one-for-one decision about whether they wanted to be in that space as an investor.

It could be put together with another business in some kind of merger.

Again, it's not something we would likely sell because the tax [leakage in the] sale is just pretty prohibitive.

And the businesses are very good.

The oil and gas businesses -- when we put the whole thing together, they have an EBITDA margin of 34%.

And they don't take a lot of assets.

They are very cash accretive to our number.

And for those people who like EPS, they give us terrific EPS, but there's no amortization.

But you're right.

It's something we're always going to look at.

And certainly there have been more than one phone call inbound about people who'd like to do something.

But selling them is not the best thing for our investors.

Finding a tax-free alternative to that would be more attractive.

Thank you.

We'll take our next question from Joe Giordano of Cowen and Company.

Hello, guys -- how you doing?

What I've been trying to get with, with everyone's guidance, is to separate how much of the progression throughout the year is anticipating a market upturn, like underlying market upturn?

And how much is specific to the company as a cadence of revenue that's already in hand, or orders that you already have in hand?

So, how would you separate your expectation of a better second half versus what you know and what you're hoping?

It's a whole lot more of what we know than what we hope.

We don't really have very many businesses, only one or two, that have any tie to something that's a larger macro end-market.

The markets that we serve are so niche that they end up being more driven by our activity around new products or new software releases rather than a hope for some macroeconomic recovery.

We're not really expecting any of that.

That's not something we try to forecast.

It really doesn't drive very many of our businesses.

But it's not as simple as orders in hand, because we really don't have orders in hand for products or for activity that's going to ship in the third quarter or fourth quarter.

So we're not a project type of E&C business like that.

But it's really around things that we know that we're going to be able to introduce to the niche markets that we serve; and uptake and new products growth in those areas.

Fair enough.

And then as you look at your pipeline into 2016, what have you seen in terms of across the various sectors that you play in, in terms of bid-ask spreads and how they're moderating, or how they are moving?

Which areas are looking increasingly more attractive or increasingly less so in terms of valuations?

In terms of acquisition?

Yes.

The bid-ask spread is wide.

It's always wide.

But we were able to deploy $1.8 billion last year and we've already got $0.25 billion done now.

We don't anticipate any difficulty at all.

I do think that the notes out today are interesting.

There weren't any IPOs in January.

If you were a seller of private equity, you might continue to say whatever you think somebody is going to listen to, but the reality is, their net costs are going up and their exit strategies are diminishing.

And we remain the best mid-market acquirer of assets on the face of the earth.

So we're not going to have any difficulty finding high-quality businesses at rational prices.

Maybe last for me -- at what point do you start looking -- you guys are ahead of pivoting away from some of these energy industrial type of applications into where you are with your medical businesses.

At what point do you start to look opportunistically a little bit more aggressively at some of these sectors that have been beaten down a little bit more?

You know what?

We always look at it as the cash return we can get out of an investment.

What happens is, it's usually difficult for an industrial asset to have the kind of cash returns that we are going to demand.

But whenever we see them we're willing to make investments in those.

We bought a pure product company in RF IDeas this year, which is just a world-class business with terrific leadership, very high margins.

Relatively light assets, but they are certainly making stuff and they are selling stuff.

So, it depends on the quality of what it is we see.

But we would never buy something at a public market deep discount.

Let's say some energy business dropped 30%.

We wouldn't buy something because it dropped 30%.

We would only buy something because its forward cash returns were extremely attractive.

Generally, as a rule, people over-pay for low-quality assets under the theory they are going to find some way to make them better.

We'll leave the buying of distressed assets to others.

We want to buy businesses that have consistent growth and recurring revenue and light asset models.

And we haven't seen anything, other than RF IDeas, in the last two years in the industrial segment that qualifies for that.

Good.

Thanks, guys.

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

Yes, good morning.

Brian, could you just speak for a minute or two to the medical segment in general?

Again, given the 2016 guidance, mid single-digit growth, and the core order growth of 7% in the fourth quarter -- that looks real attractive.

Is there anything in the mix to be alert for in 2016 between medical products, software, and SaaS and imaging?

When you're talking about mid single-digit growth, are any of those three lead in core growth and could give us an upward bias on the margin line for medical?

It's a good question; but, sorry, I have to dissect it.

Remember that in the medical and software we have a huge amount of recurring revenue.

So the recurring revenue -- it's not going to grow by a high number.

So when we say mid to high single digits, that has to be something that takes the whole segment into consideration.

The product portion and the new software sales have to be higher than that in order to get the whole segment up to mid single digits.

I don't think that there's any -- certainly, Sunquest in the second half of the year should have outsized growth to what it's had throughout 2015 because we've had the meaningful use improvement in 2014 and beginning of 2015 that is a comparative drag, and that will go away as 2016 matures.

I don't think there's really any particular driver in the medical software.

In the software businesses in the RF component there are some drivers that have had escalating growth.

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

No, I don't think so.

I think it really will be -- we expect 2016 to be led by more higher, probably a higher V on the medical products side, with some continued new product introductions.

We introduced some things at Verathon in the latter part of 2015, so those start to really ramp up.

We have other new products that are being introduced to the market, as well, as well as continued growth around some image-guided surgery applications that Northern Digital continues to just perform phenomenally well on.

And, as Brian mentioned, on the software and services side, that's a mid single-digit grower, anyway, because of the huge amount of recurring revenue.

And that's what we expect, particularly in the latter part of 2016.

We're not expecting a whole lot of recovery at all in the imaging world.

I think that's expected to be flat to maybe up a little bit.

Okay.

And then just one last question: John, when you speak to 2016 overall -- again, we all have our estimates as to what acquisitions completed will contribute to the EBIT line.

But on that 2% to 4% core growth, what's a midpoint conversion rate that we should see on the 2% to 4% for the core business?

Conversion -- you mean like leverage?

Yes, to the EBIT line.

You'll have to come up to your own.

We expect that to be in 40% to 50% range.

Got you.

Thank you.

We'll take our next question from Robert McCarthy of Stifel.

Good morning, everyone, how are you doing?

Two questions -- one is just the old chestnut that people asked about Roper and M&A.

Clearly, given the environment we're seeing, and one of the co-founders of Apollo just talked about the financing markets are shutting down, the sky is falling.

But in terms of just coming back to that question, is there particular types of companies that you're looking at now that really lend themselves to be acquired in these environments, where, really, there is a real crowd-out of traditional private equity and you can sweep in -- besides just the normal?

Is there a particular vertical or end market where you're really well-positioned and well-advantaged?

And does this allow for bigger deals of size or of a certain decile to be shaken out in this environment?

It is certainly true that, on things that are relatively large in a potential acquisition, maybe there will be less competition for those assets as the year unfolds than there have been in the last three years.

I notice on some of the large things that we looked at, if they get bought by private equity, it isn't one fund.

It's three guys going together.

But debt staples are still out there.

We're looking at a deal Friday that has a 6.5 times debt staple on it.

As long as debt staples are that high -- we wouldn't use it, because private equity is going to use that, right?

They can put in 4 turns of EBITDA and you're still at 10.5 times EBITDA.

The kind of businesses that we acquire, if they were public they tend to trade at 25 times enterprise value to EBITDA or more.

I know it's hard for people to follow that, because they're looking at traditional multi-industry stuff, multiples that are dramatically less.

So we're going to continue to look at these things that are worth a great deal from an arbitrage perspective in a public market versus what we have to pay for them.

And those tend to crowd out the lesser-quality businesses where people pay 8, 9, 10 times for something that's worth 10.

We tend to pay 11 and 12 times for something that's worth 25.

That's really how we get all of this alpha performance consistently over a long period of time, and that's going to continue.

Now, last year, we did something that I wouldn't have forecast, which is, we did six or seven deals to get to $2 billion.

We would have rather done a $1.5 billion deal and a $500 million deal.

But the small deals were unbelievably compelling and they are all growing double digits, so it was a good thing to do.

We are still seeing a lot of those kind of opportunities.

So as the year unfolds it will be a battle between saving our powder for a really large transaction or going ahead and investing early on things that are somewhat modest.

At the end of the day for our shareholders, the results about the same.

It's just it's easier for us to do a large deal than five small deals.

It should be an easy year for us to deploy capita;, it's very favorable.

Okay, thank you for that.

And as a follow up, just obviously in ramping up coverage of you all again after a long dormancy, the cash return on investment metric you use, and to animate your M&A and capital redeployment strategy, obviously makes a heck of a lot of sense.

I certainly have drunk the kool-ade with respect to the discipline around it.

I think the most important epiphany coming out of it is basically the strategy and the metrics are completely aligned.

In other words, you don't stretch for what is perceived as a strategic deal because a strategic deal is one which meets the metrics, right?

So, the only question I have is, where do you think there are risks to the CRI discipline?

Or maybe the businesses you are looking at?

Do you think it's maybe an assessment of the code?

I know you use a third-party consultancy to look at the related intellectual property and software and association with deals.

And there can be obviously risks there.

There can be risk of technological substitution.

Maybe you could just talk about where you level-headedly think about the risks in association with your capital redeployment strategy.

Maybe just for a second, let's just think about risk in general when you look at transactions, because people are asking questions about, would we buy some cheap stuff?

The cheap stuff in industrial -- and there's all kinds of stuff and their public stocks are going to continue to deteriorate and you could buy them -- what's wrong with those is, they can get disintermediated from distribution channels.

They can wind up with a freemium model out at Google on some bizarre thing, or they wind up with Amazon selling past their competition at low price points.

There's all kinds of things that happen.

They desperately need absorption.

If revenue falls off there's nothing they can do without big restructuring charges.

When we get to our space, it's really around whether or not the people in the niche that we acquire have domain expertise, which is very hard for somebody to break into.

The entry barriers for their success are entirely different.

The risk is that we continue to assess the quality of the management teams that we acquire well, and we understand whether or not there are technologies that could leapfrog what they do.

We spend most of our time around the people aspects of the business, and then around maybe risks that those people don't see that we would put a different factor on.

We tend to discount their forward growth projections because we don't pay for synergies for forward growth.

We only pay for what we think the business is going to deliver at the time of the acquisition.

And that really puts a huge dampening effect on the risk that we might otherwise have.

And we've been blessed to be fortunate in that arena.

But I think our disciplines are such, we actually start with somebody's balance sheet and then we start with what it takes to run the business.

We don't do -- what a lot of private equity people do is, they'll buy a software company and they will mandate an immediate 10% reduction.

One of the private equity firms out there actually goes in and does a listing of the highest paid people and they whack off the highest paid people and put new college guys in at big salary reductions.

And then that kind of hideous activity doesn't manifest itself in the business for four or five years.

You have to understand what each private equity group's business model is when you're looking at the assets they hold and you're acquiring it.

And I think we can do that better than anybody.

Thanks for your time.

We'll take our next question from Christopher Glynn of Oppenheimer.

Thanks, good morning.

Just wondering -- in medical here, the product cycles and the devices seems to be coming on pretty well.

Wondering if Northern Digital, Verathon -- you're looking at those to be able to climb into double-digit run rates at some point.

Are the product cycles that have been notable the past few quarters -- is that a couple-year dynamic, do you think?

Yes, I do think so.

What we're really seeing out of Verathon is a refresh, so it's not a completely new product category, which actually reduces the risk for us.

These are really upgrades and extensions of their existing GlideScope in 2015 and then BladderScan in 2016.

So those are a couple-year adoption rates that go on there.

Northern Digital doesn't have to get up to double digits.

They just have to continue double-digit growth.

They've been growing at double digits here for a couple years, as they are really the leader in both the optical tracking as well as the electromagnetic tracking for computer-assisted surgery applications.

And those continue to just expand, those applications just continue to expand.

Whenever there's a new one that an OEM customer wants to design, they always come back to Northern Digital because they are the world leaders in that technology.

Okay.

And then, just if there's any room left, I just wanted to expand on Rob's line of questioning a little bit where you had a record year last year in deal flow and talked about, I think, record pipeline volume or breadth.

Have you transitioned more wholeheartedly to CRI?

And is increasingly tolerant definition of strategic part of the reason why your pipeline and your yield has accelerated to somewhat unpredictable levels?

No.

Let's go back and think about.

The reason I said some time ago that the Sunquest and MHA acquisitions were more transformational than the Neptune and TransCore transformations were is because, at Neptune, we paid 4 times EBITDA the enterprise in December of 2003 to acquire Neptune at what some people probably thought was a high price, for $500 million.

The next year, in 2004, we paid about 4 times, again, the trailing revenue of the firm, 3.5 or something, for TransCore at $600 million.

Neither one of those businesses have lend themselves to adding exciting bolt-on activities to them, or giving you domain experience in an area that was easily widened.

So, when you acquire a leading laboratory software provider in a world that's going to have more and more laboratory instrument usage, and will move to genomics in the immediate future, you have big upside ramp.

When you have MHA, with senior living and nursing homes and all of the things around non-acute hospitalization shifts in demography -- these things just give you all kinds of opportunity.

Good heavens, we've acquired now SoftWriters for MHA, which is growing at double digits.

It's a terrific acquisition.

We've been able to acquire CliniSys, which we can connect, really, with Sunquest.

We acquired Data Innovations, which is a phenomenal company that guides all of the instrumentation in a hospital into various systems, and yet it's part of Sunquest.

That's why we can look at these things, which are somewhat synergistic, at least in the marketplace or in the information technology side of them, that we couldn't do with the industrial and energy businesses.

Sounds good, thanks.

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

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

Thank you.

And thank you all for joining us.

I know there were a couple of folks still on the line for follow-up questions; we'll get back to you as soon as we can.

Otherwise, we look forward to talking to everyone in three months at the end of the first quarter.

That will conclude today's conference.

Thank you for your participation.

You may now disconnect.