Roper Technologies Inc (ROP) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to the Roper Technologies fourth-quarter 2016 financial results conference call. Today's conference is being recorded. I will now turn the call over to Robert Crisci, VP of Finance and Investor Relations.

Please go ahead.

Thank you, Laurie.

Thank you all for joining us this morning as we discuss the fourth-quarter financial results for Roper Technologies. Joining me on the call this morning are Brian Jellison, Chairman, President and Chief Executive Officer; John Humphrey, Executive Vice President and Chief Financial Officer; Paul Soni, Vice President and Controller; and Neil Hunn, Group Vice President.

Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and also are available on our website.

Now if you'll please turn to slide 2. We begin with our Safe Harbor statement. During the course of today's call, we will be making forward-looking statements which are subject to risks and uncertainties as described on this page and as further detailed in our SEC filings. You should listen to today's call in the context of that information.

Now please turn to slide 3. 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 included as part of this presentation on our website.

For the fourth quarter, the difference between our GAAP results and adjusted results consists of two items. First, a $7.2 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions. This represents revenue that those companies would have recognized if not for our acquisition. Second, a $6.1 million adjustment for acquisition-related expenses, primarily related to the ConstructConnect and Deltek acquisitions, which were completed in the quarter.

Now if you'll please turn to slide 4, I will turn the car over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants.

Brian?

Thank you, Rob.

Good morning, everybody. We will start out by reviewing how the fourth quarter was and a few comments about how the total 2016 finished. Then a segment detail and outlook for each of the four reporting segments. We'll look at how the first quarter looks from a guidance viewpoint and the full year, establish our cash flow guidance for the year, and then take your questions.

Next slide, slide 5. So if we look at the fourth quarter, we have record results in term of orders, revenue, net earnings, EBITDA, cash flow and a lot of other areas as well.

Orders were really spectacular, up 17%. Our book to bill was 1.07. For those who follow the Company closely, we always say something like a 0.97 to 1.02 is a trend line that doesn't tell you all that much, but if you get below that or above that, it tells you a lot. This rate tells you a great deal about 2017.

We had organic order growth in all four segments, although I think Energy was maybe 0.1, but that's the first time in a long time. Organic orders were up 11%. Now, about half of that comes from the New York City Tunnel project. But without that, it's still very outstanding organic growth.

Revenue in the quarter was up 7% to $1.18 billion with 2% organic growth. Our gross margin was up 50 basis points to 62.3%. We're still making some margin improvement, even with extraordinarily high numbers to begin with.

Our EBITDA in the quarter was up 7% to $365 million. Our operating cash flow for the entire year for the first time in our history exceeded $1 billion. We completed an important bond offering in December that protected us from the vagaries of what might have happened going forward with interest rates and, at the time, certainly saved us a good deal of money.

We deployed $3.4 billion in the fourth quarter acquiring Deltek and ConstructConnect. These are really transformational acquisitions for us, partly because of their size. But they really take us into software end markets and professional services. Gives us a lot more diversification than our software, which had been concentrated in supply chain activities and in medical applications.

So moving greatly into professional services is going to -- a lot of ramp around other things we can acquire over the next several years. It was a quarter in which we hit several milestones and really some transformational things that outline how we're going to perform over the next three years to five years.

Next slide. If we look at the income statement, you can see pretty much all of those things reflected that we just commented on. Orders, revenue, gross profit. The tax rate down there you can see was 29.8% versus 28.8%, so it was a 1% headwind which cost us about $0.02 to $0.03 in the quarter. Not withstanding that, DEPS were $1.86 versus $1.82 last year.

Next slide. Compounding cash flow is really what creates so much shareholder value for all of you over time. Here you can see that despite the Energy headwinds, which have been ferocious for the Company for the last two years, it is really remarkable that we have had 19% growth over the last two years in operating cash flow despite a huge cash headwind in Energy.

So in the fourth quarter, our conversion of operating cash flow you can see was 142%. Our free cash flow at $259 million represented 25% of revenue. For the full year, our operating cash flow, which has been a little over $1 billion, with 149% conversion.

We continue to move up the cash flow to revenue. Back in 2014, it was 23.7%, and of course people were scared to death you couldn't possibly maintain it. Here in 2016, it is 26.3%. So everybody here is very proud of the $1 billion operating cash flow for the first time. It's quite a milestone, and hats off to everybody at Roper for doing that.

Next slide. The Asset-Light business model. This will really cement a critical awareness of people about just how big a cash count compounder we are and we are going to be.

If you look at this slide, which we generally show you each time, people oftentimes think it just could not get better. In 2014, you see that our net working capital as a function of revenue was 5%. Last year in 2015 it was 3.5%. This year, it is 1.8%, cut in half.

It is important to look at the component. So you can see inventories dropped from 5.1% to 4.6% in the last two years. Receivables are up 20 basis points, from 16.1% to 16.3%. Payables and accruals are up 80 basis points, from 11.1% to 11.9%. But the big change here is deferred revenue. Deferred revenue was 5% in 2014 year end. In the fourth quarter, we exclude acquisitions. So in December 2015, we excluded Aderant and Atlas that had some deferred revenue; yet it was 6.5%.

This year as we close out, we exclude ConstructConnect and Deltek and still are up to 7.2%. This is hugely important because if you look on our balance sheet that's attached to the income statement, you will see that deferred revenue in 2015 was $267 million. You will now see that deferred revenue is up to $488 million. But this is not reflected in our graph here at 7.2%.

So you can imagine that 1.8% number, which is insanely low compared to multi-industry companies, is actually going to become negative in 2017. This is why we get so much more cash to revenue than virtually anybody else. It is truly a transformational change in our cash return.

To get a concept of how important this is, 10 years ago we told people that our inventory was 9% of revenue; today it is 4.5%. We told people receivables were 17.4%; today they are 16.3%. We told people payables and accruals were 15%; today they are 11.9%. But now we have 7.2% of deferred revenue. As we report in the first quarter, you will see that number escalate. So all of the acquisitions that we have been doing the last two years, $5.5 billion worth of investment, has helped to drive these incredible numbers to rates that just have not been seen before.

Next slide. Here we look at the segment detail. We will look at each of the four segments.

Next slide. We start with Energy Systems. The Energy Systems business actually had a book to bill of 1.02. We had organic growth in orders in the Energy segment of 7%, so you got a little bit of improvement in the fourth quarter. Organic revenue, trailing of course, is still minus 8%.

Oil and gas was down about 15%, but that is actually the best negative B for a while, so headwinds have really been abating in that. This Energy segment, about two-thirds of it is oil and gas-related activity. The Industrial Test and Measurement portions of the business actually grew. We had this positive book-to-bill ratio around that. In 2017, we think the segment will be flat to low-single-digit growth off of the base that you see here.

Then if we look at the Industrial segment, which is far less influenced by oil and gas but nonetheless still has Roper Pump in it, so that's a major component. It's organic orders were up 1%; the organic revenue was down 1%.

Material analysis was strong in the quarter. Neptune continued to perform brilliantly. We had some sequential improvement for the first time at Roper Pump, as rig counts moved up. So Roper Pump sequentially was up about 8%.

That said, that business alone in the last two years is off by $50 million of revenue, and represents that drag that we have had. We think that goes away this year. If we look at the results for the segment as a whole, we think it's going to be up low single digits because we will not get much out of the Energy portions, but we get a lot more out of the other pieces of that segment.

If you combine these two, when you look at it, which I was doing in preparation here for the talk today, the combined revenue for these two was $324 million of revenue and had $98 million in OP. So it is really remarkable how great these businesses are, the 30.5% OP to sales in markets that have been declining. So the guys who run these businesses have really performed in an outstanding way the last two years.

Next slide. If we look at the Medical segment, you will see a book to bill here of 1.09. Organic orders were up 8%; total orders were up 15%. Imaging revenue was down 4%, but Medical organic growth was up 5%.

The way that we look at the businesses, they are really three primary areas. The acute-care software business, and it was up, led by connectivity solutions between the left instrumentation that we provide software for and the data-gathering requirements that the hospital needs. Then Strata's decision support software continues to grow at a spectacular rate.

The alternate site healthcare business, which includes MHA, but very importantly includes our software businesses, SoftWriters and SHP, the software businesses grew well. The long-term care pharmacy care business grew in the fourth quarter.

The Medical Products business, which includes a variety of physical products, it's growth was led by Northern Digital. We have technology that people of OEMs, that we've really signed contracts with and cannot discuss because of the proprietary nature of the product, have really interesting growth opportunities in the electromagnetic measurement technology area. We are really at the forefront of that. So there are some very important people that we have been working with and increasingly signing those up, and the prospects for that area are quite good.

Scientific Imaging in the quarter was up on orders. It is about 15% of the segment these days. Book to bill was the strongest it has been in a long time at 1.12. In 2017, we actually believe Imaging will grow because of the cryoEM opportunity that we have there and some spectroscopy technology that we introduced this past year.

In medical, we think we get broad-based medical growth continues at mid-single-digit growth that we have enjoyed for several years. There are a series of initiatives that really were culminating in 2016 and the early part of this year that should make our performance in the growth area, internal organic growth, brighter in 2018 and beyond than it's been in the recent past.

The Medical segment, really in the last two years is up $283 million in revenue. So that has largely offset the drag, about $265 million drag, we had out of Energy and Industrial. Especially when you exclude the [Oble] disposition.

Next slide. Here we would look at RF technology. That segment will explode, of course, in 2017. You can see on the chart here, it's book to bill was 1.1 in the fourth quarter. Organic orders were up 24%. A good deal of that was the New York City Tunnel project most of which got booked in the fourth quarter. Total orders were up 38%. Organic revenue was up 8%.

Growth in the Toll and Traffic applications was strong in the quarter. Importantly, we had a faster start to the all electronic tolling in the New York City Bridge and Tunnel program than we expected. So we get about $15 million in the fourth quarter. That leaves us -- the total project is about $52 million for the installation and technology purchase. So it gives us maybe $37 million for the coming year. Then there is another $20 million in maintenance that lasts for $5 million a year for four years to get us back to the $72 million number that were talking about. So excellent start to that.

We had middle-single-digit organic growth in our software businesses. Freight matching did a little better than that. CBORD had a particularly strong quarter, up double digits with security deployments for universities.

Aderant continued to book and gain share in the large law office component. We completed the Deltek and ConstructConnect acquisitions, which really greatly expands our application software footprint and capabilities. It gives us some new platforms for growth in professional services. There are a lot of interesting things, end markets to explore, and other things to bolt on to the business.

If you look over at this revenue graph, you see it going from $904 million to $1.224 billion. If we put the 2017 chart on there, we'd have to change the whole page because we're going to do over $1.9 billion in our (inaudible) software in 2017.

So in 2014, it was up $47 million; and in 2015, it was up $86 million. Last year it was up $187 million. It will be up $650 million to $700 million or more this year. We think that we will continue in 2017 with strong software growth, with a really incredible cash performance out of those businesses.

We will continue to grow in toll and traffic projects. But a lot of this is TransSuite software projects, which do not involve toll tags. So for this year, we should have nice growth out of completing the New York City project and the continuation of our Saudi project. But we are going to have fewer tag shipments. We have seen a fall-off in tags in 2016 related to railcars, which would not surprise anybody and people tend to forget about it. But we have a tag on every railcar that gets produced.

Next line is our segment revenue is expected to grow about 60%, with huge contributions from ConstructConnect and Deltek. Incrementally, those people probably add about $650 million of revenue this year versus last year, where we got a little bit of contribution out of them in the fourth quarter. In total, organic revenue ought to be in the mid single digits; but the big story is all the added growth that you see there.

Next slide. Next slide is just a page identifier that we're going to now talk about the 2017 guidance. So we will go to the next slide.

In establishing the 2017 guidance, we have got an adjustment in terms of what we are adding to our adjusted numbers. A lot of people have asked us about this. We have explained our view historically, and an increasing number of you think this is something we ought to do.

We have given it a lot of thought. We have looked at a lot of information and do think it is a better way to report our earnings with taking the acquisition-related intangible amortization, affecting it by tax, and including it in the adjustment. So you will see we did not talk about that at all during the fourth quarter discussion, but we will be talking about it from now on as the way we will report earnings and compare our performance against the prior year. There is additional information, you will see, in our appendix that can help you with that.

Full-year 2017 guidance then would be an adjusted earnings number, $8.82 to $9.22 a share. That represents about 20% to 22% revenue growth for the Company in 2017, of which 3% to 5% would be organic. We're assuming a tax rate of about 30%.

Everybody has heard the conversations about how much somebody like Roper would be benefited if you had a change in business tax. But for our guidance, we're going with 30%. Now, it's true that a very high percentage of our income is in the US. So we are as interested as any of the rest of you are in what is going to happen to tax rates in the US.

Operating cash flows is up 15% from last year. We were saying operating cash flow would come in at $1.150 billion, up from $1 billion last year.

Our Q1 guidance is $1.92 to $2 a share, in fact only an $0.08 spread in there. The reason for that is of course we're into the quarter already, so we have a pretty good view about that. For the full year, we've established a $0.40 variance, at $8.82 to $9.22, with a midpoint at $9.02.

You should know that in the first quarter, Deltek is seasonably soft in the first quarter; it's just how their business is. Then up dramatically in the second quarter. So they do have a little seasonality in the way the incoming renewals and new business gets generated.

If we look then to the next slide, we can summarize how the year wound up and how we're positioned for this current year. As we said, we had record results for orders in revenue, net earnings, EBITDA, and cash. Really significant milestones in the fourth quarter. It is the first time we have ever had $1 billion in quarterly revenue. Of course you can see from our guidance, it is going to be more the norm in the future.

Over $1.5 billion in backlog versus $1.07 billion last year, so we are up about $500 million of backlog going into the year. We have $1 billion in operating cash flow for the first time. We look back on what we said at the beginning of the last year. Our guidance was we could do about $1 billion, and we actually did a little over $1 billion for the first time.

Really a transformational year for us on many levels. We invested $3.7 billion in software acquisitions this year, after $1.8 billion the year before. Half of our EBITDA in 2017 is gong to come from our software and network businesses and the other half from products. Some of those are medical products.

We are looking for about 20% revenue growth in 2017. We have really broad-based opportunities. It is a better situation for us as we enter 2017 because the macro economic drivers fit our businesses really well.

That headwind that we have had to fight through over a $265 million dividend in energy is gone. The end markets we see are much more optimistic. Our business leaders were 80% through our 2017 review process with the field. The optimism is pretty good, maybe even better than what we're willing to endorse yet.

We're going to continue to expand and compound our cash flow. I think being up 15% cash flow in 2017 over 2016 in a business that's basically not cyclical any more is a pretty good achievement. So we get results and very strong, exciting momentum as we go into 2017 and beyond.

With that, Rob, let's open it up for questions.

(Operator Instructions)

Scott Davis, Barclays.

Good morning, guys.

Good morning, Scott.

Thanks for moving the cash earnings. It's what all the rest of our companies do, so it makes it a little easier for everybody, for us at least. So thanks for that.

I am curious to hear, Brian, your opinion on why you think orders came snapping back in the quarter, when you think about Medical and Scientific Imaging? Is this a bit of a post-election -- people were holding off on stuff and then it came through, or is there some legitimate recovery views out there? I am just curious to see how you think about that.

I don't think it is anything related to post-election activity or people holding up because of where the orders are. So you didn't have a negative dip in orders in Industrial or Energy. So that helps at the beginning. And then you had unusual situation with a large booked order for the tunnel project. If you took that out, then organic orders were more like 6% or something like that.

Okay.

I think that the improvement in Medical was pretty good. People think about the Sunquest lab business, but it is actually the acute care software business, and it's doing really well.

It is just that the lab business has been a laggard for the last two years organically, even though it's continued to improve. But the ancillary things around it are growing at double digits. So they are getting bigger and their growth is organic, and it comes in and you see stronger support.

Same thing, we went through a little bit of a hiccup at MHA at the beginning of 2016, and we are constantly monitoring drug issues, and pricing, and what is happening with generics, and what is happening with the things we serve which are not the big risk drug things. So MHA is improving a bit.

But the two software components that go into home health and alternate site treatment for people are performing exceptionally well. Again, these are double-digit growers. So I think that is good.

We had, generally our seaboard business does really well in Q2, and that's most of the year, but it had a pretty good Q4. There is a level of optimism. Throughout our reviews when we do each business, a year ago people were really apprehensive and nervous. And you don't get that from anybody.

So I think, as Rob and myself and Neil and John and Paul put these numbers together for the year, our governance model creates what you see in the way of guidance. Maybe there will be some better euphoria throughout the year, but we're not banking on it.

Fair. Then did Roper Pumps actually turn positive on orders year over year, or is it still year over year negative?

It was down -- I can tell you, it was actually up 8% in revenue sequentially in the fourth quarter over the third quarter. But not the orders, the revenue.

No, Roper Pump is still negative on orders and revenue in the fourth quarter. But sequentially a little bit better, but year over year still a headwind.

Okay. I will follow up with you guys afterwards, but thank you and good luck.

Shannon O'Callaghan, UBS.

Morning, guys.

Hey, good morning, Shannon.

Brian, just on the deferred revenue, one, is that -- I haven't seen it presented that way before on your working capital slide. Is that a redefinition of the metric internally, too, or are you just showing it differently to us? And is that going to be the main driver of the improvement in working capital from here as receivables and payables reach a natural stopping point and this deferred revenue is going to be the driver from here? Maybe just some thoughts on that.

As far as the reporting convention, it has always been in our numbers. So this is not a change. We decided to split it away from the payables and accruals line in order to show the increase in that deferred revenue side.

There is always more opportunity on all of these line items, whether it is receivables or inventory or payables. But I do think most of the future improvement will continue to be the growth that we see in software, and we get paid in advance for that. So that continues to build the deferred revenue balance.

I anticipate that is where we will see most of the incremental change. Of course, the change in the first quarter will be substantial because we will be able to roll in a full quarter of deferred revenue for ConstructConnect and Deltek, in addition to their revenue.

Okay, thanks. Then, in terms of the Medical segment, do you feel like that is getting to a point where it can now grow 5% plus on a consistent basis? Or is the nature of the Imaging business, as well as some of the pieces of the Medical business, is it such that we are going to average to mid-single digits but we are going to go through these periods of low singles and high singles? Maybe just some thoughts around the steadiness or lack thereof of the whole segment in total.

Sure, Shannon. So really, this is the 12th consecutive quarter that the Medical businesses have been up mid-single digits or better organically. So really the noise in the segment has been with the Imaging businesses. As we mentioned [this quarter], the Imaging business is down, so the segment was only up 3% but the core Medical businesses have been consistently mid-single-digit growers now for three years. And then we certainly expect that to continue.

Okay. Great. Thanks, guys.

Christopher Glynn, Oppenheimer.

Thanks, good morning.

Morning.

I'm just wondering on the Energy segment, with I think some of the (technical difficulty) stronger than you expected probably and the orders were good. Is that proving a little earlier cycle than you might have expected the sensitivity?

All you can see is that the rate of decline improved. It was still down year over year, except for those orders. So I think we think it is going to be flat to low single-digit growth in 2017.

But of the businesses we have that were involved in it, we really only see one of them that still has headwinds going into 2017. That is our compressor control business which has a lot of service content. But on the new applications, it still has to struggle quite a bit.

And you had rig counts were up a little bit, so that you get a little bit of improvement at Roper Pump. The materiality of Energy in 2017 is it won't be a headwind.

Sure. And then the corporate unallocated line looks like it had a lot of deal expenses in the first quarter. What is the outlook for that line for next year? And does the first quarter include some carryover from the heavy processes that you executed in the fourth quarter?

I do not expect there to be any carryover. Remember, we did adjust out the substantial acquisition expenses in the fourth quarter for both Deltek and ConstructConnect. So what you see there as far as the variance on a year-over-year basis is, frankly, our stock price is higher, and so our equity compensation expense is higher as a result.

We expect that to be somewhere in the range of $140 million, the total for the corporate G&A line. About $140 million for 2017, reflecting the increase in the equity compensation primarily.

Got it. Thanks.

Deane Dray, RBC Capital Markets.

Thank you. Good morning, everyone.

Good morning, Deane.

You guys disappointed you're missing all the fun snowstorm in the northeast today?

Terribly disappointed. We got 4 inches of sunshine this morning here in Florida, so, sorry.

Very jealous. Maybe we could talk about the first quarter. The guide looks a little bit like -- give us an update how the quarter is tracking versus the year organic 3% to 5%? Is there anything unusual in timing? You called out Deltek, seasonally weak. Is there anything else you would highlight?

I think that just because it is historically a little light in the first quarter, and then it's really strong in the second quarter and the rest of the year. So I think organic is -- Q1 and Q4 would be 3% to 4%, and Q2 and Q3 would be 4% to 5% or 6% or something like that. So for the year we're at 3% to 5% with maybe a little hope for upside.

Got it. Then, it was interesting you called out that your mix today is 50% in software and network businesses. What do you see is the optimal mix for Roper over time?

Our focus will be to continue to compound the cash. So the more we can grow in the software and network businesses, the happier we are because they just inherently are going to throw off more cash that we can reinvest for further compounding in the future than the products businesses.

But our products businesses are about half of the EBITDA. Now, a chunk of that, a notable chunk of that is our medical products businesses.

And then you have got the instrumentation businesses and you have got the oil and gas-related stuff. We may enjoy a little bit of a cyclical spike on oil and gas, but it won't materially affect the balance of the Company's EBITDA profile.

Our businesses -- as I said, you look at the OP alone in the fourth quarter, between energy and industrial, it is 30.5%. So we love the businesses. They are positive cash; they do not have much amortization in them. But moving the needle on compounding cash will come from software and networks.

Got it. One last clarification: I know you are not factoring in any of the potential changes in corporate tax. But for your Medical products, are you considering any uncertainty in terms of ordering with uncertainty around the repeal or changes in the Affordable Care Act in terms of the outlook for 2017?

We will let Neil comment on that.

Good morning, Deane. So the short answer is we're not expecting much headwind at all, just like we did not expect much tailwind when it came in. The majority of what we do is not procedure or patient driven; it is more elements that help the totality of the healthcare system do what they do. And so if we had a lot of things that were consumed in a procedure, then we would have then benefited and we might have some headwinds, but that is not the nature of what we do.

That is helpful. Thank you.

Steve Tusa, JPMorgan.

Good morning.

Good morning.

On all the Trump stuff, I am sure you guys have done a little bit of analysis. You obviously have a bunch of different subsidiaries that roll up into the total. So it is hard for us to tell, but you do have a lot of US-related revenue. So what kind of impact would it have on your tax rate if you did have a lowering to that 15% to 20% range?

And then, I think exports are 13%-ish of your revenues. Is there a material import component that offsets that? That is the first question.

So let's deal with the border tax side first. There is not much there. We do have some assembly operations in Mexico that we get subcomponents from, for one, two of our businesses, but it is not a lot.

Most of our international businesses are selling globally, and our domestic businesses don't export -- they're really not domestic businesses, they're global businesses. The locus might be here in the US, but they have manufacturing operations outside the US and they could ship from any of them. So I don't think the border tax would be a lot; if we did a back-of-the-napkin assessment about that would be, probably 75% to 80% of our operating profit would be generated in the United States.

So if we are telling you about a 30% blended tax rate, the US tax rate, of course, it's 35% and above. So you can do the math on our net earnings number, and look at 80% of it, and then take a 20% reduction of that or a 10% reduction or whatever you think, and then add back the increased costs to the border tax. And net-net, it would be quite a material increase in our cash.

Right.

Steve, of course, there is no proposal yet.

Yes.

As soon as we see a proposal, we can give you a much better answer. But the elements of exactly whatever tax change, all of this is headlines in the newspaper so far.

And twitter feeds or whatever handles or whatever you call them. On the infrastructure side, the same question or same topic. Assuming -- if they do something, I would assume that the tolling business would perhaps be exposed there.

Are there any other businesses there that would be positively exposed to any of this infrastructure discussion that's out there? Again, there is no official proposal, but assuming they do spend on some of the roads and bridges and things like that.

Well, I think that all of our professional services businesses, including these last two acquisitions, ConstructConnect and Deltek, would be dramatically benefited by the number of seats and the number of users that would want to get access to those technologies. Particularly at Deltek with the Costpoint technology, which is ubiquitous for people that supply the government; that would be very helpful.

In the tolling area, it is interesting, there's actually -- we've gone through this huge technology transformation to our sticker tags away from what other people get stuck with, with the plastic box from Austria, and that had a huge rollout in all of the big tolling states. So that is behind us, that rollout. So you just have the maintenance. The maintenance is huge, the number of reorders. We're always amazed where all these tags go.

So it is good, but the project growth and infrastructure could well be in our TransSuite software and traffic management arena. That is really what the Saudi project is. And the electronic tolling project in New York for instance does not have -- it is all electronic, so there's no tags.

So it would definitely help us, particularly in revenue. It will probably not help us as much as it would have historically in the margin where people are also using the tags. But it would be favorable to us.

Then I think if you get -- you've got the various elements that appear to be going through that would get us back into production around shale. We came down $265 million in two years in Energy and Industrial; we won't go back up $265 million but we won't be going down. We might go up more than we think. So that is a little bit of a question mark for us.

Right. One more question just on the first quarter, following up to Deane's question on the 3% to 4% organic is solid. I guess the earnings number is a little bit below what I would have expected. So is there anything that you travel from the top line to the bottom line, whether it is acquisition charges that maybe people do not have in their models or mix dynamics? Anything there, corporate, that we have to keep in mind for the first quarter that stands out?

Well, I think you just have the situation around -- you have got all of the interest cost in Q1 for Deltek, and its contribution doesn't come in as much until Q2 and beyond. So it's timing.

But in reality, first-quarter guidance is about 22% of the full-year guidance, and that is not that unusual. Q1 -- it would be rare if Q1 was 25% of the full year. I think it is just an out-of-the-box situation. Q2 will be critical for us.

Okay. It is helpful you guys give -- a lot of companies do not give the quarterly guidance. So it is helpful to levelset people and get everybody on the same page. So I appreciate that. Thanks a lot.

Robert McCarthy, Stifel.

Good morning, everyone.

Good morning, Robert.

Obviously, you have just completed two very large deals, transformative debatably, and you are digesting that. But maybe you could just talk about, over the next 3 to 4 years, what is your M&A outlook firepower? How are you thinking about it? How we should be thinking about it? Because as you know, money never sleeps. So as good as what you've just done over the last four months, and the changes you have made to your reporting structure, clearly investors remain focused on the continued compounding nature of the Company.

A few years ago, people would remember, I said, we already know the next $5 billion we want to deploy. It's just a question of when it happens. So we have done that all. We've really got these things. The good news is we still know where the next $5 billion of deployment needs to be and who they are and when they're ready to be assimilated.

I think if you look at 2017, 2018, and 2019, I would think we would deploy about $4 billion, just not much of it in 2017. We want to pay back existing debt to EBITDA unless there's some other source of cash that comes up that we have not talked about. We are looking to pay down that debt level by $700 million or more. That still gives us room for bolt-ons this year, and then much larger acquisitions in 2018 and 2019 as the compounding cash is coming up, and we self-generate the ability to do $1.5 billion a year. We just want to get our debt holders comfortable as this year unfolds.

Now, as you look at it, and this is a question that might be a little bit more for broader application than Roper. But, Brian, since you've been doing deals for a very long time, and you historically worked at companies which maybe had higher fixed cost assets and drove a lot of value through cost take out, how do you look at the environment right now?

If you are an acquirer, and it is unclear given border adjustability and other issues, how are you going to get the cost synergies to delever what could be ostensibly a high multiple to get a lower multiple? Now that's not your game any more, I understand, but I wanted to get your view. Do you think it creates a tougher, cloudier M&A environment for the standard acquirer or strategic acquirer in the industrial space, or how would you look at the M&A environment as being -- from your perch?

Fortunately, we look at it differently than the hypothesis there from our perch. If we're looking at M&A as a category of activity, the big unknown question is, is interest going to be deductible in some kind of change in US tax. So if interest is not going to be deductible, you can imagine what an effect that has on private equity as they are thinking about what multiples they are going to put to work.

So if you are accustomed to putting 7 and 8 times debt to EBITDA and getting a tax deduction for that, that gives you massive ability to compete with strategics. If you lose the interest deduction, your ability to compete with strategics goes down. If you remove one of the biggest acquirer of entities from the market, the strategics should have a field day.

That said, most of the multi-industry people have very complicated import/export arrangements. So I would imagine that they've got a lot of issues with the border tax; thankfully we don't.

I think the M&A environment for us, as interest rates go up, irrespective of whether you can deduct the interest, as interest rates go up we are in a better position with each passing month that occurs because we have so much self-generated free cash flow. If we do acquisitions with our own cash flow, and lever them about 3 times debt to EBITDA, which is our model, we wind up with purchase powder requiring very little if any new debt of about $1.5 billion a year. And that's why I'm very comfortable saying I think over the next three years or a month or two beyond that, we will deploy $4 billion; it's easy for us.

We're going to do it in acquiring things that are going to compound their cash. We just keep getting more cash to reinvest as opposed to having to do big debt structures. So that would be my best answer.

Thanks for the color. I appreciate it very much.

Joe Giordano, Cowen.

Hey, guys. How are you doing?

Good morning, Joe.

Going back to TransCore, I'm curious. Obviously an infrastructure package from the federal government would be positive, but what are you seeing out there just in terms of things that have passed at the state and local level already? I know there's some big packages in California, Washington State; it looks like California DOT is set to increase their budget if they get their legislation passed. So just curious what that forward outlook is there as well?

There is a lot of bid activity, and there's a lot of the sweat equity that goes into things. We sell the Title 21 tags into California. We do the Bay Bridge; we have various other traffic projects that are currently under quote.

But I would not say that we have seen -- and we've seen a big increase in the last two years in terms of quotations and project opportunities. But we have not seen something in the last two months that's a big deal.

I think that you'd want to be careful that if you look at total transportation spending, the tolling and traffic side is not a big percentage of that total. But nonetheless, if it goes up, there is more money available. We'll get more growth than we have now.

Then shifting over to Neptune, we have not really spoken much about that. What do you see in commentary on the muni sector in general and levels of spending there? I think there's been a little bit of a mixed signal so far from people in that space across the last couple months. So just curious what you are seeing there?

We have not seen any falloff at all at Neptune. It's probably going to grow at mid-single digits in 2017, and it continues to have good cash performance. So there is a little bit of headwind for people that are not vertically integrated like we are around copper pricing. So I think our competitors will probably struggle more than we will, but we are in good shape.

Also remember that water utilities are generally self contained in terms of, they charge for water, and they use that revenue in order to basically maintain the system. And so it has generally not been subject to the larger swings in municipal budget spending. It is generally its own little P&L inside the municipal world.

Yes, absolutely. Just last one from me on M&A: You said that you have already -- you already know, laid out the map of where you want to spend your next $5 billion; it is just a question of when they pop free. Now, given where you guys right now are financially, if one of those larger ones was to pop free soon, would the leverage today preclude you from doing something like that, or would you consider equity if it was something sooner?

I think that would just always be related to the quality of what it was that we saw. And the things that we are hoping to acquire over the next three years, none of them are available today at noon. So it is not a situation that we have to really be bothered with.

But we continue to monitor everything, and have routine conversations. If you get the share price up here to what it is really worth, given all this cash, be a consideration I suppose. But I would not issue equity today.

Sure. Okay, thanks, guys.

Richard Eastman, Robert W. Baird.

Good morning. Brian, when you look at the current portfolio of businesses at Roper, how do you think about core incremental margins on the current businesses? I would think with as much software as you have, the core incremental must be -- is it 45%-ish?

And then it strikes me that, even the Energy businesses on a bounce, now again we are not expecting that in 2017. But I remember the decrementals there have been reasonably high. So would you look at the current business and step up into that core incremental EBIT potential of 45%? Is that a fair assumption here?

So, I think that the way to think about this is it depends on where it comes from. You are absolutely right. To the extent that we have more growth from the software businesses, that will come in at 50%, maybe even above that. Across the Enterprise, I think what you will see is that we will have somewhere between 35% and 50% to 55% incrementals, depending on where it comes from.

And I would say that the decrementals that we saw on the Energy side, they might be high relative to others but they were actually low relative to our gross margin. So we still delevered at a rate below our gross margins. We were able to take the cost out ahead of just what the decline of revenue would have resulted in.

So I actually think that we did a nice job, and I think our businesses did a nice job on the decremental side there, even though it's a probably higher number than most other companies. But that is a margin discussion rather than a performance discussion.

Maybe that is the point that obviously taking the cost out on the way down, managing the decremental does potentially give you more upside as you lever off of that cost base. Is pricing -- again, I would think in the current portfolio, do you have a price capture number for 2016?

No.

Okay. Has your pricing flexibility though improved with this portfolio as well?

We do not have standard products. We are an application-oriented company. So you do not call up and order the same thing you bought last year.

You might have recurring revenue. There may be some built-in maintenance fees associated with that, or if it's SaaS, there may be some annual escalation.

But we are not a product company with standard products. Even the products that we have are pretty unique products. So they do not tend to have a standard pricelist that people can work off of. There is a few exceptions to that, but not many.

And the other thing that -- what we do look at with respect to price, is really what is the value capture that we are able to get inside the niche markets and applications that we have. If you just look at the Industrial Technology segment by itself, the gross profit margin I think is the thing to look at when you think about value and price and cost and things like that.

Our Industrial Technology business is actually a 50.6% gross margin in 2016, up 80 basis points from where it was in 2015. Energy Systems and controls, still clicking along at 57% gross profit margin.

So, folks who try to say price as a discrete measure, just follow their gross margin and see if any of that price really shows up there. That is how we think about it, rather than having standard pricelists and what a nominal price change might be advertised at. The proof is in the gross profit margin.

Okay. Then, John, just one last question. As we move forward into 2017 here, with really more of a cash earnings number, is it the intent to report EBITDA by segment, or will we continue to report a GAAP profit by segment and then add the amortization consolidated?

I think what you will see us do is move to a segment profit description, which would add back the non-cash purchase accounting-related amortization in order to be able to have the same comparability for all of the same reasons at the total.

Okay. Thank you.

John Quealy, Canaccord.

Hey, good morning. Thanks for squeezing me in. First question, on Deltek, in that RF and software guidance, would Deltek be right in line with that mid-single-digit organic growth, or perhaps are they a little bit more on the cash flow side? So perhaps a little bit less organic growth but better cash flow margins vis-a-vis its peers in that segment?

So of course, Deltek is not included in our organic results or forecast for 2017; that will all be acquisition related. On an apples-to-apples basis, of course, you always have to take what their prior results were with a little bit of grain of salt. But we expect that to be a mid-single-digit grower. I think they are reporting something a little bit higher than that, but we expect mid-single-digit organic growth on a long-term basis out of that acquisition.

Okay, great. Then quickly, lastly, much more speculative question, but if tax structure changes, and I know you guys are loathe to sell major assets given low tax basis, but would you consider, given the right tax regime, letting go some bigger assets perhaps on the fixed costs side? I'm thinking Neptune for example as a core asset, given the market seems to be giving these types of water companies good multiples. Would you consider selling a bigger asset if the cash return looked more promising? Thanks, guys.

No, we'd expect the market is smart enough, and we believe it is, to give the value for us for Neptune being worth more than any of the other water companies. It's imputed in our price. There could be other businesses we have that are different, but Neptune is very different. We're going to move it increasingly into technology and all kinds of exciting things going on there which we're not going to talk about openly until it is too late for people to respond.

But I will say, when you look at some of the deeper product businesses, the legacy product businesses, or some of the instrumentation businesses, you could see something happen there, but people would have to basically pay our tax. So if tax burden goes down to the acquirer, then, hey, maybe they're more interested, I don't know.

Perfect. Thank you, guys.

That will end our question-and-answer session for this call. We now return back to Robert Crisci for closing remarks.

Thank you again, everyone, for joining us, and we look forward to speaking to you in a few months.

That will conclude today's conference. Thank you for your participation.