Roper Technologies Inc (ROP) 2016 Q1 法說會逐字稿

The Roper Technologies first-quarter 2016 financial results conference call will now begin.

As a reminder, today's conference is being recorded.

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

Thank you, Lee Ann.

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

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

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

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

We have 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'll be discussing our 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 as a part of this presentation on our website.

For the first quarter, the difference between our GAAP results and adjusted results consists of three items -- our normal adjustments related to recently acquired businesses on both deferred revenue and inventory valuation, which total $3 million to both revenue and income measures.

We have also adjusted our operating cash flow to account for the cash taxes paid in the first quarter for the ABEL divestiture.

The ABEL divestiture, you may recall, was completed in the fourth quarter of last year.

GAAP requires this amount, $37 million in those tax payments, to be recorded as an operating cash flow item even though it is related to that divestiture.

We've added this $37 million back to reflect the ongoing nature of our cash flow.

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

And after his remarks we'll take questions from our telephone participants.

Brian?

Thank you, John.

We'll go through today the first-quarter enterprise results and we'll look at the detail around the four segments and the outlook for the remaining of the year.

And while we're doing that we'll comment on the second quarter and full-year guidance at the end and then take your questions.

Next slide.

We start with the Q1 enterprise results.

Go to the next slide, slide 6. You can see there's a lot of great things here.

It was a very good quarter for us and certainly puts us on track for a record 2016.

But just one word I'd say before we get started, Mr. Humphrey over here is actually just celebrating this month his tenth completed year with the enterprise.

And as John refers to it, it's actually his 40th quarter.

So, with that, let's take a look at our first quarter -- and congratulations, John.

Revenue was up 4.4% to $906 million versus the first quarter of a year ago.

Organic, you can see, was down 3.2%, which is really not the story because, excluding oil and gas, the Company's organic was actually up around 1%.

And if you look at the headwinds that we knew we had with the end of Toronto and Puerto Rico, and so forth, really, the underlying basis, the activity, seemed better than that, more like a plus 3%.

Our orders are up 9% in the quarter to a record.

Book-to-bill was really spectacular because we haven't had a book-to-bill above 1.01 for two-and-a-half years, and this time, if you combine industrial and energy together, the book-to-bill was 1.04, medical was 1.03, and RF was even just a hair above 1. But actually had an adjustment in there for some debookings around a business that we're doing something with, or otherwise it would have been 1.02.

So very good, backlog at $1.12 billion was also very good.

Gross margin was spectacular.

Gross margin was up 210 basis points to 62.1%.

And what's really remarkable given the macroeconomic challenges around the world is each of our four segments improved their gross margin in the first quarter.

EBITDA was up 4% and reached 34% EBITDA margins.

We're going to talk some more about that.

We still don't report on cash earnings but increasingly we need to make sure people understand the quality of our earnings and the cash earnings nature because we just have so much non-cash amortization.

Our earnings per share in the first quarter were $1.50.

Our operating cash flow was $245 million which represented 27% of our revenue.

And the recent acquisitions that we made in 2015 are really performing beyond very well.

They have outstanding growth, almost all are double-digit growers.

We'll talk more about that throughout today's session.

We deployed $265 million in acquisitions in the first quarter.

We have an extremely big and attractive pipeline and we'll talk a little bit more.

With that, we can move to the next slide, which is 7. On the income statement, just to back up some idea about how important the orders were, I'll give you our book-to-bill for the last eight quarters was -- last year it started out at 0.98, and we are at 1.02 on a consolidated basis here.

The next quarter was 0.99, then 1.01 and 0.98.

The year before that was 1.01, 0.99 1.01, 0.98.

So, you have to go all the way back to Q2 of 2013 to see something as high as the book-to-bill we got here, and that was despite revenue being up.

Gross profit was up 8%.

Our operating income was basically flat to the prior period but that's only because amortization in the quarter was up 120 basis points or $11 million, all of which is non-cash.

So it's a big difference between reporting GAAP operating income and what's really happening on the cash quality of your earnings.

Interest expense was up $7 million.

We did a $900 million bond offering in December, which really termed out what we were doing on the revolver.

So, it gives us substantial capacity, well over $1.08 billion, to be able to deploy here in capital deployment throughout the year, and it's certainly worth the $0.05 impact.

That said, the difference between last year's $1.55 and $1.50 is, in fact, that $0.05.

Next slide.

If we look here at operating and EBITDA margins of the Company, you'll see that incrementally the operating margin went from 28.7% to 27.4%.

That's with 120 basis points of amortization.

If you add it back in, you can see that essentially it was the same outstanding results as the year before.

On the right-hand side though, you can see the EBITA margins, which increasingly are more important for us.

And here there's no D in either side of that equation.

This is just earnings before interest, tax and amortization.

That's actually up in the last two years, 130 basis points from 31.6% to 32.9%.

Furthermore, this gross margin increase that we're getting is encouraging us, which we're doing at a very fast pace to step up our R&D and engineering investment, which in this quarter was up 120 basis points over the first quarter of last year and is now reaching 7% of revenue.

Next slide.

Our asset-light business model continues.

We're still easily able to compound our investment in asset-light businesses and you get some sense about how important that is.

There's two aspects to a slide like this.

One is our governance process with our existing businesses, and the second is the quality of the businesses that we continue to acquire.

At the end of the first quarter, just three years ago in 2013, our net number here was 7.7%.

Today it's 4%, nearly a 50% reduction in just three years.

Inventory back in 2013 was 6.8%, today it's 5.5%.

Receivables are 19.3%, and in a tough market for receivables.

Today they're only 17.4%.

And payables were 18.4% and now they're 19%, all going our way.

So, we go from 7.7% down to 4%.

And even just in the last two years they've gone from 6.3% to 4%, which is truly a remarkable number.

We're very proud of all of our people focusing on asset velocity and the quality of the businesses that new leadership teams are bringing to us as we acquire them.

Next slide.

If you look at our cash flow performance here, you can see in the quarter operating cash flow was 27% of revenue.

Free cash flow was 26% of revenue.

That's not a gross margin number, that's the free cash flow to revenue number, 26%.

Trailing 12 months operating cash conversion is 135%.

Even though the cash conversions in the quarter is above 150% we really thought it's much more balanced to look at the trailing 12 months operating cash flow to eliminate quarterly seasonality that occurs sometimes.

Even there, you can see we've gone from $844 million to $913 million and we fully expect this year's operating cash flow for the full year would be $1 billion or more.

We're continuing to compound cash flow despite these macroeconomic challenges.

They're quite substantial for us.

We had about $100 million of foreign exchange in the last 12 months and another $100 million of oil and gas headwinds, and also the Toronto project for millions of dollars and the Puerto Rico escape which was another $10 million a quarter.

That compounding is still continuing, the same way we would expect it to continue.

We still think cash is the best measure of performance.

Next slide.

If we look at the financial position, the balance sheet's in really great shape.

It gives us tremendous amount of powder for capital deployment.

And our pipeline is really good, maybe the best it's ever been.

Here you can see we still have $0.5 billion in cash.

Our undrawn revolver is actually paid off now.

It's $1.85 billion, (sic - see slide 11, "$1,830 million") which is very substantial.

If you looked at cash and the undrawn revolver you'd be over $2.3 billion.

And you can see the EBITDA at $1.256 billion will continue to grow handsomely throughout the year, so we'll have very solid debt ratio opportunities.

If you look at the last 15 months, we've deployed over $2 billion in acquisitions.

And with a $1.8 billion undrawn revolver, we could absolutely repeat that effort and deploy another $2 billion in the next 15 to 18 months.

Next slide -- here we get into the very specific segment detail.

Next slide.

In the first quarter, the segment performance, you can see here, was again very strong all the way across the line on our EBITDA measurements down at the bottom.

There are two really big messages that we try to convey with this slide.

The first is that our RF software segment and the medical solutions segments together represent over three-quarters of the Company's total EBITDA.

But there's an equally important message here on the left hand side where we look at the energy and industrial businesses, which remain as really extraordinary businesses.

Those two businesses, you can see, have 25% EBITDA in energy.

Even with all of the difficulty that you see, we have very nimble leadership.

And the quality of this businesses still allow us to drive this kind of result.

If you combine the two together, $119 million in energy and $171 million in industrial, you only have $300 million out of our $906 million in revenue, and yet you have $81 million of EBITDA on a $300 million base or 27%, and those EBITDA margins in energy are going to continue to improve throughout the year.

So, great, extraordinary businesses in industrial and energy despite oil and gas.

And oil and gas is becoming less and less critical, and here it's well less than 9% of revenue.

All right, next slide.

We start off with the smallest segment, which is energy.

Energy had negative organic in the quarter of 14%, but essentially all of that was driven by the oil and gas business, which now represents just a little over half of the total segment.

And inside energy, it's different than the industrial portion of oil and gas because our energy business is primarily downstream, about 75% downstream, about 25% upstream.

And the FX, as you can see, was 1 point.

Oil and gas as a portion of the energy segment was down a little over 20%, which is pretty much consistent with what we expected throughout the year.

The biggest challenge in there used to be our diesel engine shutoff valve business.

This year it will shift over, really, to our compressor control business.

They're moving quickly to try to address everything they can do from shortfall in projects that we'll see throughout the year.

Very nimble execution.

We haven't really talked to the market about any restructuring we've done, which has been pretty considerable.

We'll do a little bit more in the second quarter, but we're really not even asking for an adjustment on our restructuring investments because the payback is pretty quick.

Zetec in the quarter did extremely well.

It was up high single digits.

There's a lot of activity around the power generation side of nuclear, and Zetec is best-in-class in this area, and it's going to enjoy some continuing tailwinds for the next couple of years.

And then, just as we move to thinking about the remainder of the year, Q2 through Q4, I'd just remind you that with the pullback in oil and gas, about half of the energy systems business is actually industrial measurement technologies.

We expect high single-digit organic decline in the rest of the year, but that's just because of the oil and gas, and then we think we'll get this modest growth in the other half of the sector.

And we think margins will improve throughout the year sequentially.

And energy, as you can see now, is down to only 9% of the Company's EBITDA.

Next slide.

If you look at industrial technology, same situation with the oil and gas.

Organic as a segment was down 5%.

However, if you exclude oil and gas, industrial was up organically 3% in the quarter.

So the upstream activity, which in here is really Roper Pump and a little bit of adjacency there, that upstream's about 80% of the market.

The total value of that is only about $10 million out of $171 million in the segment, so it's down to less than 5% of revenue.

Neptune had a really strong quarter.

They were up double digits, enjoying very good US which overcame the fact this was the last quarter with the negative Toronto project variance, which was mid millions of dollars of headwind.

This segment EBITDA margins, I think you can look at, too, which were really 30.1% on industrial, so the performance despite any of the headwinds that you see is still very solid.

In second half of the year we're looking at low single digit organic growth for the segment.

We don't see any improvement in upstream oil and gas.

We think that will actually continue to decline a little bit.

But we'll have flat to modest growth in all of the other markets and then very strong growth at Neptune because, as we get into the second quarter, the Toronto project tailwind is essentially behind us.

And that was worth quite a bit of -- will be quite a bit of positive variance now in Q2, Q3 and Q4.

Next slide.

We look at the RF technology and software business, and we have to throw the software recognition in here because the software business is actually becoming as large or larger than the tolling business.

When we look at the segment, you can see organic was down 1% but actually organic would have been up excluding the rolloff of the Puerto Rico exit that we had, which was $10 million, just in that quarter.

We had record margin performance throughout the segment, very strong software and SaaS business growth, with terrific margins and cash flow in all of those businesses.

Aderant, our most recent acquisition, is performing very well.

We got several new wins which are of strategic importance that the legal community can be talking about and has already started to discuss and comment on our share gains.

In the toll and traffic area, as we say, our ITS business was down because of Puerto Rico.

Our tag business continued to be strong.

Very good project execution.

And I also want to point out that that OP margin, which was up 170 basis points to 32.2% again belies the quality of the cash margin.

Our EBITDA margins were at 39.2%, up 360 basis points over the first quarter of a year ago.

As we look to the second quarter we expect flat organic growth in Q2, only because we still have one more quarter of the Puerto Rico drag of about $10 million, and that's 3 to 4 points.

But in the second half we'll have a much stronger organic growth because that Puerto Rico comps will be going away.

We'll get multiple opportunities, we think, in the TransCore projects.

We have a very exceptional amount of bids in line, pretty confident in a lot of those.

The timing of when those are able to be announced will be important for us.

And then RF IDeas, which is doing phenomenally well, will become organic in the fourth quarter, so that will help our organic revenue comparisons.

The software and SaaS businesses should grow mid to high single digits, which is a little bit better than we might have expected previously.

And they give us strong cash returns.

And then Aderant's going to continue to gain share which will help the segment.

Next slide.

Here we look at the medical solutions.

Medical solutions -- boy, it's another EBITDA margin story.

You see the operating profit margin of 34.7%, but that's just because of a lot of non-cash amortization.

Our EBITDA margins are 43.5% in medical.

Organic was up 2%.

Acquisitions added 13%.

But medical's organic as a stand-alone portion of the segment was up 6% organically, while imaging was down 13%.

We had double-digit growth in the medical products, which really was driven primarily by Verathon and Northern Digital.

The acquisitions that we made in this segment are performing extremely well.

If you put them all together, they actually are growing both at double-digit revenue and EBITDA basis.

We had really exceptional growth at Strata, which is up very dramatically, as more hospitals understand what we're doing and are signing up for our SaaS solution on their cost visibility and how to contain and structure their costs.

We acquired a small business called PCI Medical in the quarter, which will boost CIVCO's offering in ultrasound.

That business is closed and will add some revenue for us.

If you look at the balance of the year, you have high single-digit organic growth in the segment.

That comes from continued strength in the medical arena and then Strata, SoftWriters and Data Innovations become organic in Q2, which will make those comps stand out.

We have very strong performance in all of those acquisitions.

The IPA business that we announced some time ago has done particularly well from a growth perspective.

Imaging will continue to improve with substantial gains out of Gatan.

We're pouring a lot of money into innovation at Gatan to focus on cryo EM markets.

These involve significant R&D investments with really exciting outyear opportunities.

Some of you've read about the discovery of the Zika virus and how that was done.

Our products were absolutely crucial to the discovery technologies that have been announced recently.

We have positive contributions from our CliniSys acquisition, although CliniSys comes in initially at lower margins than the rest of our business but we'll continue to improve those as we work with them.

Sunquest investments in genetics continues.

We acquired on just the day after the quarter, so we didn't include it in here, GeneInsight, which is a technology and business that was really built by Partners Health, that we've been doing in concert with, and will have long-term implications in the outyears here at Medical.

Also, I would just say that when you look at Medical in this pie chart down here it's 43% of the Company's total EBITDA.

To put that in perspective, you can see there's energy, the smallest piece of that pie, and industrial is the next smallest.

Those two together are only 24% of our EBITDA and Medical's 43% and RF is 33%.

So, you can see what the future looks like.

Next slide -- here we'll get into the guidance of the Company for the balance of the year.

Next slide.

The guidance update that we're going to continue our current guidance as we articulated at the beginning of the year.

We said the full year would be between $6.85 and $7.15, with the midpoint at $7, and that operating cash flow would be about $1 billion.

Our tax rate guidance is the same as it was at the beginning of the year.

And, really everything else, we see the same revenue opportunities.

There's one thing we'd say about the second quarter where we established the guidance at $1.56 to $1.61.

We had an extraordinary low tax rate in the second quarter last year, I think some people were maybe not looking at carefully.

The tax rate was only 25%.

We would expect the tax rate in the second quarter to be 30% to 30.5%.

Another piece of good news when we look at why we're really comfortable with the second half of the year is that we're not really seeing any industrial contagion at all in those portions of either industrial or the energy businesses that are not oil and gas.

And certainly at the beginning of the year that was something that many people were worried about.

And the high end of our range will really just be dependent on adoption rates and project timing and seasonal activity.

So, we feel quite good about reinforcing the full-year guidance.

Next slide.

If we look at the summary of 2016, a pretty simple series of things here, right?

Revenue's up 4.4%.

Medical and software and Neptune were able to offset all the declines in oil and gas.

Our orders reached a record level and we got over a $1 billion backlog.

Our gross margin, which would let you know how customers continue to feel about us and the products and services we provide, were up 210 basis points.

And, as we said, each of the four segments increased their gross margin.

We're investing at the fastest rate in our history in R&D.

Our EBITA margin, you can see, is 32.9%.

Not all EBITDA is the same.

We're always sometimes a little frustrated.

People tell us about somebody's EBITDA margins, but it's really mostly D and then the CapEx sucks it away.

In our world, the leakage between EBITDA at 34% and EBITA at 32.9% is only 110 basis points.

EBITDA, as we said, was up 4% to $307 million.

Acquisitions performing very well.

We really can't say enough about how well the acquired leadership teams are performing and how well they've embraced the Roper governance process.

Every single one of these acquisitions is outperforming our expectation.

We have a very attractive pipeline.

We had said earlier this year we expect to deploy over $1 billion in the year and it could easily be more than that.

So, a great quarter, on track for a record 2016.

And with that we'll open it up for questions.

(Operator Instructions)

We'll go ahead and take our first question from Scott Davis with Barclays.

Good morning, guys.

I was trying to get a sense -- I don't think I've ever asked this question before and you may not have the answer off the top of your head, but you say 2015 acquisitions are performing very well, and clearly that looks to be the case.

But can you quantify that?

Is there a cash return on capital on those deals that you could quote for the first 12 months out or expected for 2016 or something that we could hang a hat on?

I think you've been around us a lot to know that I'm not a fan of return on invested capital, where people look at stuff and don't add back accumulated depreciation and don't really realize how much of future drawn cash their CapEx will be.

So, in our world we look at cash return on investment.

Yes, that's fine.

In that case, you look at the net earnings of the business and then you add back the non-cash charges, and you divide it by the gross investment which is the physical plant and equipment, plus accumulated depreciation, plus net working capital.

All of those acquisitions are well above 100% cash returns.

Many of them are in the several hundred percent cash return basis.

Some of them get paid in advance for what they do, so they have a negative cash return, which is even more powerful.

So, they're all doing very well.

I think as a general rule anymore you can assume that our acquisitions are going to come in and they're going to be substantially above the 34% EBITDA margin that the overall enterprise has, and that they're going to have higher gross margins than the enterprise and they're going to have higher cash returns than the enterprise.

Okay.

Fair enough.

You put a lot of capital to work last year.

I think it was somewhere in the neighborhood of $1.85 billion.

Would you anticipate -- you say over $1 billion in 2016 but you also said you have $1.8 billion or so of fire power.

Would you anticipate something closer to $1 billion or closer to the $1.8 billion that you have in the hopper as a potential?

Or is it just too early to say?

We don't budget, like let's deploy $1 billion.

The way we think about it is very simple, is we're going to deploy our cash flow, we're going to lever it at 3 times or more debt to the acquired EBITDA.

So, it gives us usually somewhere between 1.35 and 1.5 times the powder of whatever our cash flow is.

So, if we have $1 billion in operating cash flow, we pay out some dividends and whatever, we multiply that with the acquisitions, it would be very easy for us to deploy $1.3 billion to $1.5 billion all the time.

That's why we say we'll deploy $8 billion over the next four or five years.

And, as we said, we deployed $2 billion in the last 15 months.

We could easily deploy $2 billion in the next 15 months.

So, it's not like a budgetary thing, Scott.

We're looking at things now that are over $2 billion and we're looking at things that are in the mid hundreds of millions.

Which ones we do and when they close is never thought of as a budget kind of thing.

But our balance sheet capacity and our debt ratios give us as much or more opportunity to invest as we've ever had.

Okay, good reminder.

Thanks, guys.

Congrats on the start of the year.

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

Thank you.

Good morning, everyone.

Just given all the anxiety we had last quarter regarding oil, it was interesting and some relief the comments that you're expecting to see margins improve sequentially in energy this year.

So, maybe comment on the visibility, the backlog.

And I know you didn't call it out, you mentioned you did restructuring this quarter but could you size for us how much restructuring was done and what that payback is?

We did a little bit towards the end of last year in anticipation of the difficulty.

We did more in the first quarter.

We'll do a couple million dollars here probably in the second quarter.

Some of that, you make the announcement, it takes a long time if people are in Europe.

But we'll continue to pull back a little bit on the baseline SG&A.

But the businesses are really small.

I think if you add them all up, we had about $65 million of oil and gas revenue in energy and about $10 million in industrial.

They really don't have huge cost bases.

They're very high margin businesses.

If you look at them with 30% pretax numbers or higher, there's just not a lot of cost inside that to take out.

We don't have big factories that we have to worry about with absorption issues and what have you.

So, another couple million, I think, and we'd feel like we're where we could be.

And then on organic guidance, I know you had a lot of moving parts in the second quarter especially, but what are you expecting for organic second quarter?

And how about for the year versus the previous guidance of 2% to 4%?

I'll let John, celebrating his 40th quarter, give you his view.

Deane, we're still in the same spot as we were when we initiated guidance with respect to the full year, in the 2% to 4% organic.

That does imply, and in fact it's a part of our expectation, that the second half will be in the mid single-digit organic growth.

Second quarter will be about flat.

Got it.

And then one last quick question.

Corporate expense came in a little bit lighter than what we were looking for.

Were there any unusual items or timing within corporate?

No.

In fact, it was about what we had expected.

That encompasses both some deal expenses as well as the equity compensation for the Company is all recorded at the corporate G&A line, and the fact that the stock price is up nicely from where it was last year.

That's reflected in that number also.

Got it.

I should emphasize it came in higher than what we were looking for.

That is directly tied to the share price going up.

It's all equity comp.

Understood.

Thank you.

We hope it goes up higher again.

It's a non-cash charge.

And we'll go ahead and take our next question from Richard Eastman with Robert W. Baird.

Yes, good morning.

And congrats on the quarter.

A couple things.

In the med-scientific medical products business, the core organic growth in the quarter in orders, what did that look like?

And maybe was there a book-to-bill in the core business there, ex acquisitions?

On an organic basis for Medical, we were up 9% versus last year.

And the book-to-bill ratio was similar to the total, just a little bit above 1, even on a core basis.

Okay.

And MHA's business, is the pricing component there of their business, is it holding flat or has that improved at all?

The pricing component for branded drugs is continuing to be a positive contributor there.

You do have some other impacts around generics which are either down a little bit or flat in the last couple years.

Those have actually been up.

So net-net pricing is up very modestly for them, not very much.

Okay.

But at least flat.

Okay.

And then just one last question.

On the RF business, the EBIT margin there, we have some real positive puts and takes, namely Puerto Rico's exit and then Aderant coming into the revenue and profit number.

But is it a reset EBIT run rate that starts to push 32%?

Does that start to be somewhat sustainable at that level?

Sure, yes.

I think it will be in the low 30% range for the year.

Of course, the timing of that -- the software businesses that we have are clearly higher margin.

The timing associated with some of our toll and traffic projects, which are oftentimes a little bit more on the sweat equity side and have a little bit more of a cost component to them, even though there's not any negative drag from a cash flow perspective, those margins come in a little bit below the average for the segment.

So, it's about timing of the ITS projects, the toll and traffic projects that will affect that.

And we still see north of 30% margins here for the remainder of the year.

Okay.

Very good.

Thank you.

We'll take our next question from Shannon O'Callaghan with UBS.

Good morning, guys.

A couple questions on medical.

One, in terms of the plus 6% ex the imaging fees, the plus 6%, MHA, I think, had some comps in the quarter.

With MHA down, would medical have been up even more?

And then, also, as we think about margins for the second quarter and the year, should medical margins be down again because of either MHA comps or other comps or anything else?

Or should we think about those starting to grow again?

I think the thing on the medical that we want to have people understand, we're going to continue to make acquisitions there.

We have extraordinary margins that we had with Sunquest and MHA.

We're going to make a lot of acquisitions that are going to have better than enterprise margins, but they'll be dilutive to software components inside Medical.

It doesn't bother us in any way.

Medical products had spectacular performance versus the medical software and services, so we would put Sunquest and MHA in the medical software services component.

And they were down a little bit organically in the first quarter.

Medical products was up more than double digits.

And then, of course, we still have a little bit of corruption around imaging because we've actually been intentionally winding down certain kinds of imaging businesses, while we're going to have much better growth in Gatan.

But the camera stuff, we're trying to only participate in profitable markets.

I don't know if that helps you, but that's the best way to explain it.

The margins in this segment are just extraordinary.

We expect on an operating basis to maintain in the mid-30% all year.

Yes, that's fine.

I knew that there was some lumpiness this quarter.

Just in terms of getting the margins and the modeling and just lumpiness in terms of some of the margin contracts, that's all I meant.

In terms of energy, Brian, you sound pretty constructive on the non oil and gas parts of energy.

Can you give a little more color there, Zetec and also the other pieces, what you're seeing there that you like?

We like that they're not going down.

They're inching ahead into low single-digit growth in both sectors.

But industrial's going to have better growth because of Neptune.

And then in energy we're getting a little bit better -- we have a small business called DJ Instruments, we have a business called Alpha that should have a stronger second half.

And Zetec is high single digits, might even get to be 10% growth.

That's really becoming a secular trend for that.

For a while, with Fukushima and other problems with bringing things online, Zetec was really challenged.

But today people are working with us on all kinds of new applications so we feel really quite good about that.

But it's a relatively small business within the enterprise but nonetheless important.

Okay.

Thanks a lot, guys.

And our next question will come from Joe Ritchie with Goldman Sachs.

Thanks.

Good morning everyone and nice quarter.

My first question's, going back to your comment on M&A, Brian, you said it's the best it's ever been.

I'm just curious, how much of that is being driven by the IPO market not being all that great right now and PEs having a hard time exiting?

I'm just wondering what the driving factors are there.

I don't think it's really the IPO market because generally the kind of things we acquire are things that probably wouldn't go the IPO route.

They would either go to a strategic or they'd get flipped to another private equity group.

I think there's a lot of forces at work.

There's certainly been lumpy feedback, the sellers, about just how much debt capacity they can get on things, although frankly we don't ever see any -- well, we see one thing right now, it's got a 6 times staple, but another one that we're really pursuing has a 6.75 staple.

There's still some 7 staples.

But the cost of debt has flipped around quite a lot.

Sometimes the mezzanine portion unsecured bonds are 10.5%, other times they're 9%.

The LIBOR floor comes into play sometimes.

Maybe they get 4.75% on the term loan, but there really isn't because there will be a LIBOR floor of 100 paying 5.75%.

So, I do think that there are a lot of private equity people who feel if they've got an asset that they're going to sell in the foreseeable future, it may still be as good a time now to sell.

And they change weekly.

They're very opportunistic.

Our own situation, we're not affected by those things, and our ability to finance stuff is certainly easier and better than their cost of debt.

So, I think that helps.

But also a lot of things we're looking at have been in various portfolios for a while and they need to get out.

They might be more worried about the financing markets in 2017 than they are now.

I can't think of a time we may have called somebody and talked to them about their business that they haven't said come on over.

That's interesting color and helpful.

Maybe switching gears a little bit, you mentioned some of the known headwinds in the first half with Puerto Rico and Toronto.

As we look into the second-half ramp, what do you need to see from an order standpoint?

And how important is the second quarter to hit your organic growth ramp in the second half?

You know what happens is just think about the things that are going away that are affecting us negatively.

If you adjusted for all of our headwinds, which is ridiculous.

When you adjust for everything, it's bad.

But if you really look at the true headwinds we would have been up over 3.5% organically right now.

So, the idea that we're going to be up 2% to 4% organically over the course of the year is not a big challenge.

We should do pretty well in the second half.

Now, things that can affect that are going to be the adoption rate of new products and some versions of software that are rolling out in the second half.

And you never know what those adoption rates will look like.

So, if they're high, then we have a much better opportunity to get to that midpoint number and above.

If they're moderate, then it's harder.

The second thing are the tolling projects.

We have an enormous amount of bid activity right now but there's never anything us, as a supplier, can do to influence the beginning of the execution of those projects.

So, if they go at an expected pace, then that helps.

If they go at a slow pace, then it's not particularly helpful.

And then last year we got nothing out of the year-end instrumentation businesses in terms of seasonality.

That's the only time that's happened in a decade.

So, we would expect to get some more modest return to seasonality in the fourth quarter in those instrumentation businesses.

Those are the things that will determine where we're at.

But within our guidance we're certainly comfortable that we're going to be within our guidance for the year irrespective of what happens with Q2 orders.

Okay.

Very good.

Thanks, guys.

We'll take our next question from Steve Tusa with JPMorgan.

Hey, guys.

Good morning.

Just a quick one on healthcare.

What do you think for the second quarter organic?

And then these acquisitions are obviously crushing it.

Just remind us of the impact on the ones that are coming in in the second quarter.

And then when you say they're growing strong, I think it's Strata and Data Innovations.

Are you talking these things are growing 20%-plus?

Just trying to understand those dynamics because the acquisitions coming in are a big driver.

As far as the segment is concerned we expect that to be up high single digits in the second quarter on an organic basis.

And that is aided a little bit by those acquisitions that turn organic because they've been growing, you're right, well into the double digits, even above 20%, or maybe even a little more.

So, they add a couple points to us for that segment.

And those combined last year were like $25 million, something in that range, in the quarter?

That sounds right.

Okay.

And then so if you're doing flat in the second quarter to get to 3%, the midpoint of the range organic, it looks like you have to do something in the 7% range in the second half of the year.

You mentioned mid single digits as a tweener.

I think some companies we cover would round that up to high single digits to make it look better.

But for you guys you're a little more conservative with your messaging.

Is that the right math we're talking about?

Do you think there's a chance you're in the 7% range in the second half?

At the high end of our guidance, absolutely.

Okay, so that's the high end of the guidance.

To get to the 4%, you're absolutely right on the math.

At the midpoint it's closer to the 6% range for the second half.

Okay.

Got it.

Thanks.

Sorry, one more on Neptune, sorry about that, more detail.

What was the debooking there?

I haven't heard that term that you guys have used before.

We didn't have any debooking at Neptune.

Where was the debooking?

That was in radio frequency software where we had a situation in the UK that we really decided all parties would be better if they did something other than what they were asking us to do.

So we debooked a couple million dollars in the quarter.

And that comes through in orders obviously.

But that's reflected in your orders number or is that adjusted out?

Yes, that's correct.

Okay.

Great.

Thanks a lot.

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

Good morning, everyone.

Following up on some of these questions that have been raised, the second half organic growth outlook, are you going to have a better sense on the 2Q call what the adoption rates are going to be that drive the variability in your guidance, or is it not something you're going to know until mid 3Q?

We'll have a better view on the tolling projects.

We'll have probably not a widely different view on product launches, a little bit in the medical products, a little less so on the software version updates.

But I think maybe if you want to think about the fact, we have this artificial -- it's real, but we have a 3% to 4% organic drag because of Puerto Rico that goes away, Toronto goes away.

So, some of these things go away in those segments and they wind up with -- if they were growing 3% or 4% organically, some of them are already growing 3% organically.

They're just --.

Right.

And my only question is, can you declare victory one way or the other on the guide when you report in July, or is it still going to be unclear, is my question.

We never declare victory until the game's over.

Or you do a big deal.

Now, moving on to the restructuring, obviously that's something to be applauded.

You do a lot of restructuring.

It flows through numbers.

Do you have a size across the segments or any flavor we can give?

Obviously the returns are incredibly high in terms of what you do.

But anything around the narrative around restructuring that would be helpful?

All the restructuring is centered around the oil and gas businesses.

A substantial amount of that is at Roper Pump, which is virtually all, not -- almost all upstream and has just collapsed.

It takes your breath away if you look at the numbers in the first quarter of 2014 versus here.

So, we've done quite a bit of restructuring there.

And we've done some restructuring in Compressor Controls, and we'll continue to do more because their underlying service revenue will continue to be good and even grow, but the project activity around Compressor Controls will be off quite substantially.

In Q2 I'm going to guess $2 million additional as some of these European things finally come to bore.

Be less than $3 million or $4 million in the last six months, I'd say.

To put a little bit more context on this, if you look at the number of people, the number of people in industrial and technology is down 10% from where it was last year, first quarter this year versus first quarter last year.

And in our Energy segment it's down, I think, 7% or 8%.

So, our costs, unlike most other companies, are people related.

We never like to brag about having to reduce people but when volume goes down it's a necessary part of the retrenchment process.

To put a little bit of context around that, we don't take big restructuring charges that cost a lot of cash because you have to close down factories or take out capacity, but we have had quite a substantial reduction in the number of people who work for us in those two segments.

And, Robert, where you really see it, look at the decremental margins in energy and you can see that they're dramatically lower than the gross margin.

People really do a great job in fine-tuning things.

The last question would be just around the portfolio.

This has been asked before so it's not exactly novel.

But would you consider just separating into two companies, just allowing -- obviously taking the playbook of a noted competitor and then thinking about pursuing the higher growth opportunities?

Do you think there's any crowd-out there that hurts the businesses that perhaps don't have quite the characteristics that your best businesses have?

The reality is that if you look at the industrial and energy businesses they just have outstanding independent results.

So, they'd be consolidated businesses with 30% EBITDA.

They get all the internal investment they need and they throw off positive cash.

So, our view on that, at least for now, is that, good grief, why wouldn't you want to have a portfolio that you could deploy all of your cash into the highest possible returning businesses?

So, why cheat the capital deployment model by forcing to invest in businesses with inherently lower returns than the technology businesses with inherently higher returns?

It just doesn't make any sense for our investors.

From an investor viewpoint, if you split the industrial and energy, and say -- oh, whoopee, you're going to redeploy cash and stuff that produces dramatically lower returns than the high stuff?

I don't know why investors would like us for doing that.

Thanks for your time.

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

Good morning.

Brian, just wondering if, as it sounded, perhaps you're foreshadowing that Roper will switch to a cash-based pre-amortization earnings model.

I don't think so.

We'll continue to watch what people say about that.

GAAP really does distort a lot of things around cash.

So, I think we're content with showing people what the GAAP number is and what the non-GAAP number is.

This particular year, though, because all these acquisitions come in with lots of non-cash amortization, so it doesn't show up in operating profit, it distorts the numbers.

So, we want to have people understand that things are absolutely fine here.

But we haven't gone to the point of saying -- here's what the cash earnings are and here's our share count and that's the earnings, cash earnings per share basis.

We think investors are smart enough to figure that out.

Okay.

And then perhaps another area where there's a little distortion from the sales of the acquired businesses.

You talked about the added amortization component of SG&A but that was up a lot, too.

Is that an area to whittle away at the deals and that contribution on SG&A to sales?

Or is your comment on ramping up RD&E a more important thought there?

I'm not sure we understand that question, Christopher.

Here's what happens.

When you do an acquisition -- say, you do a $1 billion acquisition -- you're going to have 2.5%, 3% or maybe more of the purchase price going into non-cash amortization.

So if you deploy $1 billion, you're going to have all that cash deployment, that's gone, it's a sunk thing, it's never coming back.

It's not like capital you reinvest and have to continue to reinvest in and the depreciation is a call on the future.

So, that non-cash amortization on $1 billion might be $30 million.

So it shows up in GAAP as a reduction in operating profit when in reality it's an increase in cash earnings.

So, that's all we're talking about.

Right.

Yes, I guess I worded my question poorly.

But even independent of the 120 basis points you called out, SG&A to sales was still up a good bit, so I was just wondering.

We're absolutely investing in product management.

Just like we said, R&D was up 120 basis points.

Our sales investments in product management and direct selling are probably up another 110 basis points.

That isn't going to change.

We're going to continue to drive for long-term growth.

And as we continue to really become much more of a technology company as opposed to a manufacturing company, SG&A, that's where our value add is for customers.

It's not really in the cost of goods sold line where it's about whether you're able to machine the widget more efficiently than the next guy.

It's the intellectual capital which is inherent in the research and development, it's in the engineering, it's in the customer support and customer application people who show up as G&A.

But those are value added resources for us.

And as we continue to be more of a technology company, that's how our P&L will continue to look like, with less cost of goods sold and more on the SG&A side, not as a cost to be reduced but as an investment in the value producing parts of our enterprise.

Perfect.

Got it.

Thanks.

That will end our Q&A session for this call.

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

Thank you.

And thank you all for joining us this morning and we look forward to talking to you again in July.

And that does conclude today's conference.

Thank you for your participation.

You may now disconnect.