Roper Technologies Inc (ROP) 2016 Q2 法說會逐字稿

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

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

Thank you, Matt and thank you all for joining us this morning as we discuss our second-quarter financial results.

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

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

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

If you would please turn to slide 2, we begin with our Safe Harbor statement.

During the course of today's call, we will make 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 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 second quarter, the difference between our GAAP results and adjusted results consist of two items.

First, a $2.5 million purchase accounting adjustment to acquire deferred revenue for software acquisitions that we've made.

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

Second, a small inventory stepup expense related to the acquisition of RF IDeas last year in the fourth quarter.

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

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

Brian.

Thank you, John.

Good morning, everybody.

We will take a quick look at the summary of the enterprise financial results here in the quarter and then look at individual performance of the segments and the outlook for each segment and then turn to the guidance for the remainder of the year and go to Q&A.

So next slide is simply the introduction to the Q2 Enterprise results.

Next slide is the explanation of those.

So orders were actually up to a record $956 million.

They were up 9% in the quarter and our book-to-bill for the enterprise was 1.02.

Revenue was up 5% to $934 million versus last year's first quarter.

Organic revenue was down 2%.

We had the divestiture that's still in our numbers through the third quarter.

The ABEL divestiture, which pulls 1% away, and acquisitions were up 8%.

We had really terrific growth in medical and in software and in water, we will talk more about that within those respective segments.

But the oil and gas declines were actually worse than we expected.

We went into the year thinking that we'd be down maybe in the high teens to 20%.

In the quarter, we were down 25%.

But in the upstream areas, we were down dramatically more, 44%, 51%, 52%, numbers that really were amazing for us.

Those are, of course, old businesses so they all are directly EPS type businesses because they don't have much in the way of non-cash amortization.

The toll and traffic project delay was also a little bit of a disappointment as Saudi is rolling out the program slowly.

We are on track with everything we do, but their rate of initiation of new zones has been slow.

Our gross margin was another record, up 90 basis points to 61% and EBITDA was up to $314 million, 3.6% of revenue.

Our DEPS number at $1.56 was disappointing from our perspective because it did hit the low end of the range, but in a quarter where we had record orders, record sales, record backlog and record EBITDA and operating profit, we just came up a little light on the revenue side from the oil and gas and project delays, each of which probably cost us $6 million to $7 million of revenue and that's why we were at $1.56 at the lower range instead of being up at the higher end at $1.61.

Our operating cash flow was $170 million, which is strong in Q2.

Year-to-date, our operating cash flow has been $414 million, which is 23% of revenue and that's a particularly pleasing number when you are going through the oil and gas decline that you could still maintain these kind of ratios.

Our recent acquisitions are performing well.

We have an extremely strong pipeline, which is very active, we will talk about it a little bit.

So it was a solid quarter, but we did have to adjust our outlook for the economic realities we see in the second half of the year and we will talk about that when we get to guidance.

Next slide.

Here we are looking at the Q2 income statement.

As you can see, orders up 9%; book to bill 1.02; revenue up 5%; gross profit was up 6%; gross margin up 90 basis points.

The operating income ratio is 27.4% versus last year's 28.5%, but, as you can see, amortization increased by $10 million and our EBITDA performance, if we were reporting that way, would look better in terms of continued sustained upward trends in our ratios.

The earnings before tax number was down 2% and the tax rate was a relatively big headwind in the quarter; although the tax rate is appropriate for us at 29.8%.

Last year, we had an extremely unusual event in the Q2 numbers, which was $15.9 million of a good guy that came from a long-term settlement of a tax position and that really -- that $1.70 if you adjusted it for the $0.16 of that one-time benefit would have been $1.54 and this year, we are at $1.56.

Next slide.

If we look here at the revenue bridge, I think most people will find this to be quite surprising.

The underlying core nature of the business is continuing to grow at double digits.

Here, you can see, if we looked at last year's second quarter, we printed $892 million.

That included the $10 million Puerto Rico situation that we were trying to get out of because of all the reasons everybody knows.

We were successful, but it's still in the number in the second quarter at $10 million.

And then we had the divestiture of the Eastern German pump company for $6 million and then the oil and gas decrement in the second quarter alone was $33 million.

So those things were a $49 million headwind.

If you look at the base then at $843 million, you'll see we added $91 million to that number.

So while the total revenue is up 5%, the revenue excluding the oil and gas and these things that are anniversarying was up 11%.

It's really almost identical to what happened in the first quarter where, if you exclude oil and gas and Puerto Rico and the divestiture, we were also up 11%.

The good news is that, for the balance of the year, we think the second half will be similar where we've got more than 10% excluding oil and gas, but we will have better organic growth so there will be a little less in the acquisition dollars and more in the organic growth dollars or at least until we do another acquisition.

So actually we felt the growth is pretty solid despite the headwinds.

Next slide.

Here you see that we continue with the governance process we have to make remarkable progress in our asset-light business model.

Two years ago, our inventory was at 6% of revenue and at the end of June this year, it's down to 5.1%, so a 90 basis point improvement.

Receivables actually declined from 17.7% to 16.9% so we've got faster receivables and payables and accruals went up as we'd like from 17.4% to 18.9%.

So we literally cut our working capital as a function of annualized sales in half in the last two years from 6.2% to 3.1%.

And that really speaks to the quality of the work that all of our independent operating people do executing our strategy.

Next slide.

On cash flow performance, again, extremely good cash flow performance.

Year-to-date, it's $414 million, which is 23% of revenue.

Our free cash flow was 22% of revenue and our operating cash flow conversion was 132%.

And note on this slide you'll see two years ago our year-to-date cash flow had been $353 million and last year, we printed $433 million.

But $20 million of that was the one-time payment by Puerto Rico as we got out of that situation with Puerto Rico.

So it's real money, but it was a one-time event.

So you take the $20 million, you are looking at $413 million and this year's $414 million.

Our cash performance will be even stronger in the second half, but still conversion is great.

Next slide.

From a balance sheet perspective, we continue to be very well-positioned.

You can see that we've got a completely undrawn revolver of $1.850 billion at the moment, up from $1.185 billion last year.

So if we look at the cash and undrawn revolver, you are getting about $2.5 billion.

Our trailing 12 months EBITDA is $1.267 billion, so our net debt number to EBITDA is running about 1.9 times and that's after in that 12-month period we've invested $1.450 billion.

So after $1.45 billion, we still have a 1.9 debt to EBITDA number, so ample liquidity.

We've got a very active pipeline and really most of the numerous acquisitions that we are involved with now in late stages are application software companies and it's likely we will be doing something soon.

Next slide.

Here we will look at the individual detail and the outlook for each one of the segments.

Next slide.

All four segments continue to perform remarkably well.

When you look at the kind of falloff in oil and gas that affects the Energy business and to a lesser degree the Industrial Technology because Roper Pump is sitting in there, here these two are clipping along with Energy at 26% EBITDA to revenue and actually sequentially up for the first quarter and Industrial Technology at 31%.

So those remain remarkable performance numbers.

RF Software business at 38%; Medical at 43% as you can see and the enterprise as a whole running at 37% without the corporate expense.

Next slide.

So we will take the largest segment first, which is Medical.

Here you can see that revenue was up 12%.

That came from 8 points of acquisition and 4 points overall organic revenue, although imaging pulled that down by a point.

So Medical organic in the quarter was 5%, which was the 10th consecutive quarter that our Medical organic revenue has been mid-single digits or better and we certainly don't see that slowing.

Growth was really led by the adoption of new products in three of our Medical product companies and software businesses as well.

We had strong adoption of our alternate site healthcare solution businesses where SHP and SoftWriters were growing at a very high rate and our internal software within MHA did well as well.

Our new product launches at Sunquest, which will be very important for 2017 and hopefully important yet as the year winds down, are launched and on schedule.

We've got the sales pipeline which is growing, growing really rapidly and we have a couple of large people that we are talking to, but we would expect to begin to see that affect the second-half results favorably, which you will see below.

In the second half, we think that the organic growth in Medical is going to be in the 6% to 9% range.

The product growth that we have in the core products is going to continue, we think that trend.

The alternate site growth strength is here because we are getting some real push out of SHP and SoftWriters becoming organic rather than just acquisitions.

And then we actually have some favorable comps that will benefit MHA as the year unfolds.

The laboratory software orders are going to increase on the adoption of many new products and while there are literally over 15 different things that are being launched, there are four core large launches around analytics and diagnostic communities and integrated pathologies and clinical content that we think will drive the future of Sunquest.

Our imaging businesses are going to benefit in the second half as the Cryo-EM technology emerges.

It's getting better understood by people and our phones are ringing off the hook.

They have a strong backlog going into the second half and their product releases are on schedule.

Importantly, and here when you look at the operating profit margin, you see 33.7%, which is down from the prior year.

A couple of reasons for that.

The newer acquisitions have a lot of amortization.

In fact, the second-quarter number, 33.7% for OP, when you add back the non-cash amortization at 7.9%, you wind up at 41.6% for every dollar of revenue contributing and on an EBITDA basis, it's nearly 43%.

So a good mix between medical products and software and service and then imaging should do better in the second half.

Next slide.

In the RF segment, which is really now increasingly split between RF and software, you can see revenue was up 14%; acquisitions were up 18%; organic was down 4%, but the organic revenue on our software and SaaS business segment was up 9%.

Our toll and traffic had very strong orders, but our revenue declined because of the Puerto Rico contract, which finally anniversaried in the second quarter.

So that's a $10 million headwind that goes away and then the Riyadh project is moving much more slowly.

It could easily be $20 million less than what we were told earlier in the year, which is part of the reason for our guide down on the earnings profile.

It's still going to continue to happen.

The contribution margin we are getting as it rolls out is fine; it's just that it's moving more slowly and it's not the only thing going into Saudi Arabia these days that's moving very slowly.

We had very strong segment book to bill here at 1.09.

Orders were up 26% with organic orders being up 9%.

Again, lots of amortization in this segment so you see an OP margin at 31.5%, which is up 20 basis points.

But then you add back the amortization, which was 5.8% of revenue in this segment and you see the EBITA number is 37.3%.

The EBITDA number is 38.1%, up 190 basis points from the second quarter of last year.

We see, at the bottom here in terms of forecasting revenue for the balance of the year earnings, the segment organic revenue we think will be up 5% to 7%.

Toll and traffic will improve in the second half.

We've gotten strong orders in Q2.

The execution of those should be pretty favorable and we have a big pipeline of opportunity.

What has caused us to slow down the guidance for the balance of the year is that the decision-making process around that has been slower than normal, whether that's related to an election situation with people wondering about ensuring their commitments is something that's not clear.

Our software and SaaS businesses continue to grow at high single digits with incredible cash returns that [earns] other investments and acquisitions.

And then our RF IDeas business and our On Center acquisitions from last year will go to organic in the fourth quarter, which is why you'll see this bigger mix of organic in the second half of the year and less on acquisitions than you did in the first two quarters.

Next slide.

On the Industrial Technology segment, here, you can see that orders declined -- actually orders were up 3%, but the organic growth declined by 1%.

The divestiture was 3%.

The organic, if you exclude oil and gas in industrial, was up 4%.

The problem with this segment was simply that the upstream was worse than expected for Roper Pump and we had expected a big down, but it was down 44%.

That's a little bigger than we had anticipated.

The good news is that it does appear that that's the bottom of the situation and of course, Roper Pumps' impact in the segment has dramatically de-escalated as their revenue has dropped so much over the last two years.

Neptune, on the other hand, is doing extremely well.

They had double-digit growth in the second quarter on both orders and revenue.

They continue to gain share in the marketplace despite what people read about other people that are trying to sell their businesses.

Neptune will continue to have record performance.

The material analysis portion of the business, test and measurement, had record orders in the second quarter, which was very encouraging because their revenue had been down high single digits.

So that bodes well for the second half.

If you look at the second half, we think that the overall organic revenue in the business will be flat because we don't see any improvement in the upstream markets, although there is a declining impact in the segment as the underlying base business at Roper Pump is getting very small.

Neptune and instrumentation will be able to offset any of the declines we have in oil and gas.

And finally, in the fourth quarter the divestiture will anniversary and go away.

Next slide.

Here we look at the Energy Systems and Control segment.

You can see that revenue there was down 15% and it's really a tale of two different businesses, the test and measurement business, which was okay and then the oil and gas businesses which were off.

So oil and gas was down 25% in the segment and that really doesn't quite tell the story either because our petroleum analyzer business, if you exclude the small portion of upstream it has, it was really flat with actually improved profit contribution.

But compressor controls, which is a high-margin business, was down by more than a third in revenue and delevered at a quite high rate.

We do feel that from here it no longer is negative on a comparison basis as we started to see, of course, some softness throughout the year.

We did have sequential margin improvement.

The OP margin came in at 22.5% and this segment has some amortization, which brought it to 25.8% and EBITDA a little higher.

The OP margin in the first quarter was 20.4%, so we picked up 210 basis points of sequential margin improvement.

In the second half of the year, we think that the organic revenue, and Energy is likely to be down between 7% and 10%, which is really driven by the continued lack of improvement in any of those oil and gas businesses.

We do have an easier comp in the fourth quarter in those oil and gas businesses than normal, so there may be some optimism there.

And fourth-quarter seasonal increase we assume will be similar to what it was last year, which was not very good and that could be a positive surprise.

The industrial test and measurement businesses will continue to improve.

They are doing pretty well now, certainly in a low to mid-single digits growth mode.

And the margins there are going to continue to improve and so that's quite good.

And the orders, the book to bill in the segment was about 1, so this seems to be pretty well under control.

When we get to the guidance here, next slide, the outlook for the year, we took the full year down to $657 million to $671 million, which gives you a midpoint I guess of $664 million, which is certainly lower than what we had before.

It really is being driven by the more severe downturn in oil and gas.

We thought maybe we'd be down in the neighborhood of $75 million in oil and gas for the year, but we are going to be down more like $100 million.

So that's a $25 million revenue hit and then the project pushouts in tolling are another $20 million, $25 million and then there's currency that we didn't have, BREXIT and other factors in currency is another $10 million.

So there is about $60 million revenue hit there and you can assume that comes in at close to 50% on a contribution basis.

And then the rest is really just recognition of a somewhat lower global growth environment, so we think that takes a point or maybe 2 points off of the organic growth versus what we expected when we initiated guidance at the very beginning of the year.

We did a very thorough bottoms-up review for guidance this time with all of our senior operating people involved and really rebuilding what everybody had to assure ourselves that we were very comfortable with whatever new guidance we were going to put in place.

We really could have some things that will become favorable for us.

The factors that brought it down are oil and gas, severity, project delays in tolling, global growth challenges.

Maybe there's a little optimism there, but we are not ready to embed any of that in our guidance.

In terms of an upside, certainly the toll projects could accelerate.

I think if people had a clearer view of what's going to happen with the election, they might have a better idea about whether they think they are going to be personally benefited or not economically from policy.

The product launches that we have could ramp faster than we have in our guidance, so it would be nice, but you never know.

And then our capital deployment, which we certainly expect to have more of, will augment growth as the year unfolds, but it's not in our guidance numbers.

We look at forward revenue and EBITDA leverage and the EBITDA leverage is running a little better than a third of new revenue.

So even with the deleverage we got from oil and gas, we are still having overall net positive EBITDA leverage on new revenue.

Organic growth is 2% to 4% with revenue growth at 7% to 9% for the second half.

If we did a bridge like we did at the beginning of the presentation, you'd see it would show similar results with the revenue being up by 10% or more excluding oil and gas.

Second-half tax rate is probably around 30% and then in the third quarter, we are looking at $1.59 to $1.63.

Next slide.

Here if we look at the summary of what happened in the quarter, you can see -- for us normally we would talk about the fact that we had record orders in backlog, record sales and operating putting profit and EBITDA, all of which is good, the margins are good, but we hit the lower end of the guidance, so we just didn't feel like leading with those kind of record results when we were a little bit disappointed on the actual EPS number.

Orders, as we said, were an all-time record and up 9% with a backlog at $1.14 billion and a book to bill well above 1, so we are well-positioned to continue to have a stronger second half.

We get rid of the $10 million a quarter drag from Puerto Rico beginning now here in the third quarter and we get rid of the drag on the divestiture of Abel in the fourth quarter, still a little bit of a drag in Q3.

Revenue being up 5%.

We were able to do that because we had high single digit, low double-digit growth between medical, software and water, which allowed us to survive this greater than 40% reduction in our upstream oil and gas businesses.

Gross margin at 61%; we feel very good about that.

The EBITDA margin is fine, likely to improve in the second half a little bit.

Operating cash flow, the same thing; 132% conversion and $414 million.

It will be stronger as it always is in the second half, so we are quite comfortable with where we are on the operating cash flow.

Back in 2014, our oil and gas business was a little above $500 million and 14% of the Company.

And in 2015, that had dropped to around $400 million and about 11.5% of the Company.

Today, we think it will finish the year out at around $300 million, which will be less than 8% of the Company and the upstream portion is going to be less than 2% of the Company with the midstream being around 6%.

So the worst is behind us for this kind of change and we are looking forward to that.

We've got a very active pipeline.

We are open on quite a few deals.

We said at the beginning of the year we'd expect to deploy $1 billion.

We've put $275 million to work thus far and it's not going to be difficult to find our way to deploying that level of activity.

We still have a great opportunity to continue to compound results.

It really continues to drive our strategy, so we've got our underlying core businesses doing relatively well on a growth perspective.

It's just that the oil and gas and unique situation with Puerto Rico, which was a win for us even though it shows up negatively in the first-half revenue, keeps us and all of our strategies alive and we are very comfortable about our ability to compound results from here out.

So with that, we will open it up to questions.

Thank you.

(Operator Instructions).

Deane Dray, RBC Capital Markets.

Brian or John, I was hoping you could start with bridging the guidance for third quarter and fourth quarter.

It just looks like the guidance cut here this morning is weighing higher obviously on the third quarter, down 12% versus consensus, but not as severe in the fourth quarter and maybe is there some seasonality?

Is it the comps getting easier, better visibility on these product launches, but just some color there on the difference here -- assumptions in third and fourth quarter?

Yes, Deane, so you did touch on it.

So one of the things that we are expecting for this year is maybe not historically strong from a seasonality perspective, but stronger than what we saw last year.

And that's not just on the energy businesses, but also on some of the other industrial businesses that have some more seasonal activity as customers flesh out some of their budgets.

So we do expect that for the fourth quarter and that's why you see slightly higher in the fourth quarter than the third quarter as we look forward to this.

My answer must have left everyone dumbfounded.

Are we still live on the call here?

Yes, you are still live.

All right.

Next question.

Robert McCarthy, Stifel Nicolaus & Company.

Maybe you could talk about the medical business in terms of maybe amplifying your comments around the product launches, the favorable compares in MHA and then what drives to 6% organic growth versus the 9% organic growth for the back half?

We'll give Neil Hunn a chance -- he's responsible for the medical and software businesses there -- an opportunity to explain.

The pipeline is growing candidly more rapidly than we could (technical difficulty) and he can tell you a little bit about what these new launches at Sunquest are designed to do.

So Neil, with that, fire away.

Good morning.

The second half has [slight] across the board, break it down by products and software.

On the product side, there's new products at Verathon.

They continue to gain traction.

On the software side, a number of ideas we talked about before, a number of the faster-growing software businesses, [Turn] Organic, Strata, Data Innovations, SoftWriters, SHP.

And then with the second half, really the MHA, we do see likely -- well, there are easier comps and then the market conditions around new customer adds give us an opportunity to better in the second half than the first half.

So I think people are more interested in Sunquest, so let's just talk about the launch of the new -- you've got four major offerings and then you've got mid-teens in terms of enhancements and upgrades that [Matt's] group are putting in place and we are already starting to solicit revenue, so you might explain what those things do.

Well, Sunquest, we are very excited about Sunquest.

The reality of Sunquest is we have worked very hard for the last 18 months on a series of new products.

We've talked about those number of new products, whether being brand new or material upgrades or enhancement increases, being in the high teens.

We are on track for all of that.

We've just come off a great user conference at Sunquest where the customers were excited about the roadmap and what was happening.

We've seen a pretty meaningful increase in the pipeline, the sales pipeline, the sales funnel of activities that you'd expect to see coming behind a large number of new products.

We'd like to see that pipeline convert in the second half.

We expect it to convert in the second half, so we will see bookings momentum and then that will give us the momentum heading into 2017 for Sunquest that we've talked about in the past.

And switching gears to M&A and capital redeployment, I think the messaging maybe up until this call has been a little more muted in the second quarter given where public valuations are for a lot of companies, given where the cost of funds is.

Maybe you can just talk about -- do you think it's a difficult environment to transact deals just given political uncertainty, [attedantly] a rising stock market with improving valuations and public fundamentals bleeding into private fundamentals and then perhaps some of your Company's thinking about the alternative route for additional public offerings.

Could you just talk about how you look at this environment and how do you think Roper is going to be able to transact in this environment and what kind of cadence you guys can transact in?

I think for us it's kind of a perfect environment, although you are right about the pricing of assets and the expectation of sellers.

It's pretty high, but fortunately for us we are not buying public companies and paying a premium for it.

So we are buying private companies that if they were public would trade at a higher value than they do trade in the private marketplace, which gives us always some beneficial arbitrage.

There are as many things available in the acquisition market as I've ever seen.

We have looked at billions of dollars of transactions this year and we are directly engaged with a couple now that have a higher likelihood of closing I think than the ones that we were looking at earlier in the year because of the quality of the business.

A lot of the people that are running these private companies aren't interested in becoming public.

They would much rather join our firm, have the public equity in our firm and not have the quarterly calls and all of the things that you have to do with investors and banks.

So we remain a very attractive home for people and I think that the acquisitions we've made in the last couple of years give us a wider variety of things that we can look at.

Application software has a huge number of potential verticals and there are a lot of niches within them that the largest people that are rollup people aren't going to be interested in, so it's still a very favorable hunting ground for us.

Now, the challenge I think for the multi-industry guys in buying things is they tend to not buy things that are as high a quality as what we are buying and if you are in a marketplace where you are looking for synergies that are going to be driven by overhead absorption, or business consolidation, or administrative synergies or something, those businesses are trading at a disproportionately high price than where they normally would because the interest rates are so low.

The highest quality businesses oddly enough trade at a much deeper discount to public comps.

People will look at Roper and say, oh my gosh, look, they paid 12 times for something.

Well, if you looked at the public company, it was trading at 25 or 26 times.

So I think if people are focused on product-oriented, more asset-intensive businesses that are trading at 12 or 13 times because of very low interest rates and people are buying them for 12 or 13 or 14, we are not in that space.

We are in a space where we are buying stuff at 12 or 13 or 14 that if it were public would trade at a higher number because of our willingness and experience in how to effectuate those companies joining our public family.

If you will indulge me in one last question them and I apologize at the outset to be a little impolite, but do you think this is the last guidance cut we are going to face for 2016?

I do.

I'd bet money on that.

I will leave it there.

Maybe Deane will get back up on his seat.

Joe Giordano, Cowen and Company.

I don't want to beat on Sunquest too much; we've already talked about it, but can you get into a little bit more detail about what these new products are actually -- what actually are they?

How are they expanding the platform and maybe talk a bit about the competitive dynamics in that market versus you guys and Epic and Cerner and how that's been progressing over the last maybe 12 months or something like that?

Yes.

It's a great question, Joe.

So, Neil, you can explain these four core products and all the enhancements.

Sure.

Well, appreciate the opportunity.

So let me give you 30 seconds on the importance of what Sunquest does for our customers.

So Sunquest customers are the largest, most complicated laboratories in the United States.

These are laboratories that do millions of tests a year and what our software does is automate from start to finish the laboratory processes.

So you get super high quality results at low cost to operate the labs.

So what Sunquest, the current product (inaudible) for Sunquest is to extend that capability that's been steeped in the blood side or the fluid side of the lab and extend it to the other parts of the laboratory.

So first is a major product that is the integration of the pathologies inside of a hospital.

So it integrates the blood to the tissue to the molecular genetic.

Very important product for us and for our customers as they deliver medicine inside of their institutions.

The second one is a completely refreshed view about how you collect samples at the bedside.

It's mobile-enabled.

It's integrated into a nurse workflow.

Important in terms of getting the draws correct at the right location with the right patient and get it to the laboratory as quickly as possible.

The third category of new products is helping the hospitals extend their reach into the communities.

Importantly, in the changing reimbursement landscape and US healthcare, hospitals want the laboratory samples that are in the community, meaning where the physicians that feed patients into their hospitals, they want the blood tests that are collected and all the laboratory tests that are collected in the physicians' offices to be routed into the hospital's laboratory, not just to drive volume in laboratory, but to get the clinical information.

And so we have a series of tools that integrate into the electronic medical records at the physicians' offices for ordering and resulting.

And then finally the laboratory space has been vacant of any meaningful analytics about how they run the operations, how they benchmark themselves against their peers and improve the operations, so we have a large analytics release that's happening in the second half of this year.

Those are four new net opportunities.

As we talked about earlier, there's a series of other meaningful upgrades.

We've just released a major upgrade to our core clinical [pathology] in our core blood bank.

We've seen the opportunities associated with those upgrades, a number in the hundreds.

And so we are very excited about what the team has been able to build on a product perspective at Sunquest.

Thanks for that good color.

That's really helpful.

Just going with that, typically, we see a pretty steep margin ramp in the second half for that segment overall and I'm guessing most of us are probably in that boat right now.

So can you talk us through what drives that historically and is that something we should still think is applicable for this year?

Yes, it really is.

It's something that we are expecting as well and it's really volume-driven, and this segment has our highest gross margins across the enterprise with gross margins that are north of 70%.

Some of our businesses here even have gross margins above that.

And so as we see incremental growth on the top side, we expect that to fall through and so that really is what drives the margin improvement as we go throughout the year.

And that's true on not only the software-type businesses, like Neil was just talking about, but also our products businesses and particularly at Gatan and some of our imaging businesses where they have very high gross margins because of all the technology and all the R&D that we invest there.

It does result in high gross margins.

So as the volume increases, we expect that fallthrough to improve and that results in a higher margin in the fourth quarter than what we had throughout the first part of the year.

Just last from me quick, on the order growth at RF Tech, is that driven more by TransCore, is that software-related?

I just want to link that with your comments on who becomes President on the infrastructure side because it does seem like a lot of the roadbuilders and those kind of guys are seeing pretty positive outlooks right now.

So wanted to see what you guys are thinking about that business in the US particularly in the second half.

Well, as far as the numbers are concerned, I will turn it over to Brian on the commentary around the business outlook, but the order growth was both on the toll and traffic side where the book-to-bill ratio was very strong, 1.14, I believe.

But it was also on the software side.

Now a little bit of that is seasonal.

It's our CBORD business in particular, which serves the college and university market.

They have a lot of their renewals and upgrades and security applications that are booked in the second quarter and then delivered or recognized as revenue throughout the year.

And so a little bit of that is seasonal, but we saw fundamental growth on the software orders as well.

But the largest reason for the book to bill being well above 1 is the backlog that's building on the toll and traffic side.

Even though we've seen delays there, we still see fundamental growth happening there in the second half.

Thanks, guys.

Joe Ritchie, Goldman Sachs.

So my first question is on the portfolio.

Brian, clearly, energy a surprise to the downside.

Industrial remains weak, but you guys are continuing to evolve as a technology company.

I'm just wondering whether any of the end-market dynamics have changed your view about the portfolio and whether there is any potential divestitures that you guys are considering.

I would say the answer is no.

We went into the year thinking that we'd be down about $100 million in oil and gas, which comes in a little bit into industrial, mostly into energy -- I'm sorry -- thought we'd be down $75 million; now we are going to be down $100 million.

So that $25 million extra negative situation on revenue is disappointing because it comes in at 50% or frankly 60% contribution, so it's a big EPS number.

It doesn't really diminish our cash performance by much at all.

And those businesses at the moment are just a free shot on goal for 2017 and 2018.

They are on the books for extremely low basis, so the only way -- if you were going to do something with them, you'd want to do either a straight spin or a sponsored spin or you'd want to do an RMT with somebody.

It would be safe to say that our phone has been ringing off the hook with people who want to do those kind of things.

But we actually think there's substantial upside in these businesses, just not this year and probably not in the first three quarters of next year.

But if they start cranking just modestly in 2018, we are going to have windfall kind of results, so we'd prefer to hold onto them, continue to invest.

The industrial business was 26% EBITDA in the quarter for heaven's sake; and the energy business, you've got 31% in industrial and 26% in energy.

So these are really good businesses.

Most of our investors when we talk to the long guys, their fear is, gee, if you put those someplace, how could we trust they could run them as well as you can.

And we always humbly say, well, you may be right.

So these are great businesses.

They are just in a situation where if somebody is off 44% to 52%, it's incredible that they are still able to perform at the levels they are because they are so nimble.

So I don't really see those as necessary sales.

We know how to run them.

We know how to run them well.

If they didn't have this extra $25 million headwind in the second half, our guidance reduction wouldn't have been so great.

And then no one could have predicted what happened with -- what's going on in Saudi is certainly an interesting time and it's affected several of our businesses' revenues in the second quarter.

So I think the underlying thesis for us is we've got some cash cow businesses that are at their absolute nadir.

They are going to continue to drive a lot of performance over the years and they are a great annuity value for our investors.

Got you.

And that's helpful color, Brian.

Maybe switching gears.

John, one quick question for you on the medical and scientific imaging margins.

In the first half of the year, down 250 plus basis points year-over-year.

It looks like the D&A as a percentage of sales was roughly the same as last year.

So I'm just wondering were there any mix issues that impacted the first half as well beyond just the M&A.

Sure.

The M&A does have an impact here because we acquired CliniSys, which on an operating profit basis is below the segment average.

And frankly even on an EBITDA basis, it's below the segment average, right?

Remember the segment average here is in the low 40% EBITDA margin range.

So the fact that CliniSys comes in at only in the 35%, maybe a little bit less than that, EBITDA margin range means it drags it down.

So that is a contributor.

And then the other piece is the relative mix between -- so our medical growth so far this year -- in fact, for the remainder of the year as well, although not as much in the fourth quarter -- has been driven more by medical product sales.

Still terrific businesses and great margin, but not the highest margin businesses inside the segment, which is really more of the software and services side.

So it's more of a mix issue, but we see that mix issue actually moderating as we go throughout the year and, to an earlier question, that's why we see some fallthrough in margin expansion in the fourth quarter.

Got it.

Thanks, guys.

I will get back in queue.

Christopher Glynn, Oppenheimer.

If we looked at the tolling and traffic timing, maybe dive into that a little bit more.

I think you called out another $25 million or so second-half headwind.

And I guess that's a mix of Riyadh and non-Riyadh pieces, but does this project strength into the first half of 2017?

Is that the best way to think about that?

There's no question about that.

That decision is made.

It's done.

We've started.

But we would have expected it to be in the 30s of millions of dollars and totally offset some of the issues with Puerto Rico.

It's going to be above $10 million.

How much above that is hard to say.

They are doing a massive transit system over there.

They've got lots of priorities.

They are extremely happy with our performance.

We are happy with the relationship.

It's going to be extremely valuable over a long period of time, but in the short run we are going to likely get at least $20 million less than we expected at the beginning of the year and we got somewhat less in the quarter.

In this quarter, and all of our numbers issues are really just around the severity of the upstream being far worse than we thought and the toll and traffic stuff, if you look at the quarter, it's pretty significant.

When you look at the year, it's easier to calibrate now.

Okay.

And then the non --?

Just so you understand, it's true, the projects are just getting pushed out.

So if we are not having them now, they will come in.

Whether they come in in the fourth quarter or they come in in the first quarter, they are going to come in.

Okay.

And that holds for Riyadh and non-Riyadh, correct?

Absolutely correct.

Okay.

And then the Neptune growth was really a standout.

Any lumpy there or is that just broad-based rich execution?

I think it's a combination of marketshare growth in all their normalized stuff and then them getting what we knew would be the lion's share of new business from a customer that they didn't do much business with for the last couple of years.

So other people were talking about big revenue; we are showing big revenue.

Okay.

And then energy systems.

You alluded to the -- what's baked into the guidance is a weak 4Q seasonal ramp like last year, but you dangled the positive surprise prospects in there.

What's the thought process behind dangling that?

Well, we just don't know.

Last year was -- basically because people have a lot of MRO left at the end of the year -- but we didn't see any benefit of that because people just shut down.

This year all year long anybody who's in the upstream business would know that people are cannibalizing what they got.

Nobody is buying anything.

Rental fleets are in distress.

But there are an increasing number of signals that would say that the cannibalization of all the stacked horsepower business out there at some point will turn into new orders and revenue.

We just have no idea where it will be.

We do expect a modest improvement in the fourth quarter of this year versus last year.

And could it be even better?

I don't know.

Okay.

Thank you.

Richard Eastman, Robert W. Baird.

Brian or John, could you just speak for a second.

The order number that you put up there, what was the core order number in the quarter?

Organically orders were up 2%.

Plus 2%.

Okay.

And then the assumption would be that that's pretty much driven by med scientific, is that reasonable -- core orders?

So the organic orders -- I'll (technical difficulty) to you by segment.

So in the Medical segment, it was plus 2%; in RF, it was plus 9%; it was plus 2% in Industrial; and minus 11% in Energy.

Energy, okay, all right, I see.

Okay.

And then also within the med scientific piece of the business, could you just maybe sift through -- the core revenue growth local currency was plus 4%.

How did the medical products do versus the software and SaaS business?

I was just trying to pick up on the cadence there.

The software and SaaS business you expect to be much better in the second half.

How was it relative to the 4% core growth this quarter?

So the medical products was up by -- I think it was in the 9% or 10% range with the medical software and services up I think 1%.

And so as we go throughout the year, that relative mix probably changes a little bit.

I don't know if it goes to 8% and 2% or if it goes to 7% and 3%, but it's in that range, maybe even stays at 8% and the medical software and services comes up a little bit.

But that's the relative contribution right there.

That's also a little bit of what we were talking about with the margin impact and the outlook for the rest of the year.

I understand.

Okay.

And then just one last question for Brian.

You had mentioned earlier the M&A pipeline is full, the application software businesses, there were a lot of those prospects in there.

Is there anything that Roper could do in that application software area that would have more scale?

We've seen good success with Sunquest and MHA and tucking in some related businesses at Sunquest, at CliniSys and GeneInsight and Atlas and I'm curious do we stay on that path with more of the bolt-ons to Sunquest and MHA, or is there something in there with some scale that we could pull in?

So it's a really good question.

The answer is yes and yes.

One of the incredible things about Sunquest and MHA is their platform status.

So they allow us to do these incredibly attractive small acquisitions that we wouldn't do on our own, things like SoftWriters and Strata -- they are just really amazing.

These are very high growth businesses and hopefully will continue like that even though they are on a small base.

If you look at -- the last larger transaction was Aderant.

There are a lot of things that are the size of Aderant, and Aderant also offers us an opportunity for some bolt-on acquisitions to grow its platform status.

I would hope that the next acquisition we have is more like that where it's meaningful; it's something that we know how to do; people would be confident that we are already doing those kind of things.

So that is likely what the next thing would be.

Now that said, this year, we looked at a number of very large transactions and those are always of interest.

We are incredibly conservative and careful around those, but I would be disappointed in the next two or three years if we didn't do a quite large transaction.

Are there opportunities or targets in the pipeline that are not medical scientific?

I know Aderant was an exception there, but I'm thinking anything literally -- it's a bad word these days -- but something on the industrial side that would be more software or SaaS?

Is there any of those opportunities in the pipeline?

Well, there aren't a lot of industrial situations.

There are a few, but there are a lot of things that are not medical that are verticals just like Aderant is certainly not a medical business.

Some of the other acquisitions we've made are not medical at all.

I think that you are likely to see some acquisitions that are not medical at all, that's why we are suggesting there's a lot of attractive application software businesses that are immediately in front of us.

And there are project management businesses that are out there, quite a few of those, that are very interesting, some which are horizontal opportunities and others that are small verticals.

So we have enough internal intellectual capital to handle a large acquisition that would not be in the medical space.

Okay.

Very good.

Thank you.

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

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

Thank you, Matt and thank you all this morning and we look forward to talking to you again in October.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.