Roper Technologies Inc (ROP) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Roper Technologies second-quarter 2017 financial results conference call.

Just a reminder, today's call is being recorded.

For opening remarks and introductions I'll turn the conference over to Zack Moxcey, Vice President Investor Relations.

Thank you, Debbie, and thank you all for joining us this morning as we discuss the second-quarter financial results for Roper Technologies.

Joining me on the call this morning are Brian Jellison, Chairman, President and Chief Executive Officer; Rob Crisci, Vice President and Chief Financial Officer; Neil Hunn, Executive Vice President; Jason Conley, Vice President and Controller; and Shannon O'Callaghan, Vice President of Finance.

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 are also available on our website.

Now if you will 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 also further detailed in our SEC filings.

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

And now please turn to slide 3. Today we will discuss our results for the quarter primarily on an adjusted non-GAAP basis.

A full reconciliation between GAAP and adjusted measures is on our press release and also included as part of this presentation on our website.

For the second quarter, the difference between our GAAP results and adjusted results consists of the following items on a pretax basis: a $16 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions and $1 million of related commission expense.

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

A $73 million adjustment for amortization of acquisition-related intangible assets.

And lastly, a $9 million gain on the sale of an energy product line less a $2 million charge on a minority investment.

And now if you will please turn to slide 4, I will hand the call over to Brian.

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

Brian?

Thank you, Zack, and good morning, everybody.

Here on slide 4 we are detailing the agenda which will be to start by going through the second-quarter financial results and then look at the segment detail for each of our four reporting segments, and then look at the Q3 and, more importantly, full year guidance for the Company and take questions.

So next slide here on 5, we had a record quarter.

It's actually an all time record for any quarter in our history, virtually everything you could measure, certainly including revenue and net earnings, EBITDA and cash flow.

The asset light businesses that are really protected by these niches had tremendous execution this quarter, great focus.

We have extended our quarterly review process so Zack and Shannon and Rob would be able to drive that and hear what everybody is thinking about for the balance of the year.

And it was remarkable at how consistent everybody was with really only one business down throughout the balance of the year.

We'll talk about that later.

Everybody else fundamentally mid-single-digit growth and above.

Our revenue was up 23% in the quarter to $1.151 billion.

We had 6% organic growth and a great thing is that it really was across all four of the segments.

This isn't just related to some bounce in the oil and gas business.

In fact, that really wasn't relevant.

The acquisitions, Deltek and ConstructConnect, continue to perform at an exceptional clip.

You will be able to see that when we get into the RF and software segment.

Gross margins were spectacular; they are up 170 basis points to 62.7%.

So I know a lot of other multi-industry types have had cost creep issues and people worrying about disintermediation and being Amazoned.

And you can see that none of those are risks here at Roper.

Our earnings, our DEPS were $2.24.

Our EBITDA was up 26% to $394 million, sort of a $1.6 billion run rate.

EBITDA margin was up 70 basis points to 34.3%.

And our operating cash flow for the first half of the year was up 33% from last year to $550 million.

That allowed us to reduce our debt in the first half of the year alone by $570 million.

And so, off of those record results for Q2, we will turn now to the income statement.

The income statement, as you can see, revenue, gross profit, EBITDA, interest expense was up from $27 million to $46 million but easily covered by the economic performance.

Just a word on the tax rate.

What we do is we take the adjustment and we assume a 35% tax rate on those adjustments and you apply the GAAP tax rate, which was 29.7%, and the two together form our tax rate, which is 31% for the second quarter.

And we are going to suggest that probably the tax for the second half of the year will be around 30%, with a little bit higher in the third quarter than in the fourth quarter, which should be a little lower.

Net earnings you can see were up 22% to $232 million.

Next slide -- on slide 7 we will look at the continuing ability of us to compound our cash flow.

Here you see operating cash flow last year through the first half was $414 million.

This year it's $550 million.

And if I look back five years ago at the end of June 30 of 2012 our operating cash flow was $261 million, now it is $550 million.

Our year to date free cash flow represents 23% of revenue, which I think is pretty well stand-alone kind of activity from us.

And our deleveraging in the first half was terrific; we are down below 3.5 times our debt to EBITDA credit facility measurement and we expect to continue to pay that down throughout the balance of the year.

And when we say cash is the best measure of performance, all you have to do is look at these numbers and see why we are so steadfast in our belief about that.

Next slide, we go to slide 8 here, our asset light business model.

In the first quarter this year we actually got to a negative working capital number.

And here you will see we are down to 2.4% negative and the components are really interesting.

If I look at inventory at 4.4% of revenue, five years ago that number was 7.5%.

So terrific results in terms of asset velocity there.

Receivables are at 15.9%; five years ago they were 17.7%.

Our payables are 11.3% and five years ago they were 11.5%.

Deferred revenue is massively different, 11.4%.

It's absolutely a stunning number when you think about the ratios that deferred revenue of 11.4% is greater and exceeds the payables and accruals number of 11.3% and that's what drives us down to a negative number at 2.4%.

Five years ago that number was 9.9%.

So you've got a 1,200 basis points improvement in our balance sheet during that timeframe.

Five years ago we had $100 million of deferred revenue and at the end of this quarter we had $516 million of deferred revenue.

So as we grow we actually have cash provided to us rather than having to use cash to grow, which is an enormous strategic advantage.

Next slide 9, on our segment detail we'll go through each of the four -- most importantly I think, the gross margin is above 50% for all four of our segments.

And that's something that everybody running those segments is very proud of.

Next slide, 10, we look at the largest segment now is the radio frequency technology and software arena.

Here, our revenue was up 64%, our organic growth was up 6% and FX cost us a point.

Deltek was really led by their GovCon business that we discussed in the first quarter and they were successfully able to launch a new software suite that really targets professional services and consulting firms and that's off to a good start.

Our ConstructConnect business, which has just extreme high 90s recurring revenue was up high-single-digits in their recurring revenue alone in the quarter.

And they continue to have expanded opportunities with OnCenter as we can cross sell and do a variety of things there.

Most importantly with ConstructConnect, they finally can now focus on long-term forward growth.

They certainly had to think about their private equity exit all of last year and the assimilation of some small bolt-on acquisitions.

So, I think this is the first time they've been able to really behave in a way that creates the long-term behavior that we expect from our businesses.

We wound up having our annual meeting this year in June in Cincinnati at the headquarters of ConstructConnect and had our Board meeting there so that they could get an in-depth look at the ConstructConnect team.

And we also brought some of the Deltek leadership in to talk about the opportunities we have with the two and discuss some of the bolt-on acquisitions that we'll be making for these two businesses that they were analyzing prior to our acquisition.

And we continue to work with them to see about which ones we might execute and when that would happen.

Aderant continued to gain share in the quarter.

We were very pleased to see their results.

They've had a number of significant wins in large law firms, and so the growth rate there is up to double-digits now.

And our toll and traffic project business was markedly better from a margin viewpoint.

You might remember in the first quarter, because tag sales were abnormally low for a variety of reasons, the Saudi project with TransSuite software doesn't really use tags and the MTA tunnel project is mostly readers and other kind of activity.

So the tag shipments sort of came back to normal here on a relative basis in the second quarter and drove margins.

In fact the leverage in RF sequentially is nothing short of spectacular.

In the second half of the year, we expect to continue to have mid-single-digit growth with continuously good margins and cash performance out of all the software businesses.

The tunnel project is going to come full circle in the fourth quarter where it will still be at a decent rate, but it will have been -- the comp really from the prior year would be in that base.

So you won't see much incremental improvement in that project in Q4.

And we hope to have it completed here by the end of this year.

Our tag shipments though in tolling should continue to improve sequentially.

We are seeing a lot of bit activity and a lot of people trying to get front of the infrastructure interest that they hope to capture in 2018, but none of us are going to count that until we see something out of the government.

We do expect continued momentum at Deltek and ConstructConnect and then Deltek you should know is seasonally strong in the fourth quarter.

So that will help our results there.

And for the entire segment as a whole we think we should expect mid-single-digit organic growth.

Turn to the next segment on slide 11, medical and scientific imaging.

Here we had for medical organic growth of 5%, imaging was down low-single-digits in the quarter, so the net effect was organic growth for the segment of 4%.

FX was 1 point.

The medical products business grew primarily driven by Northern Digital and IPA.

The acute software business, which includes our decision-support SaaS business for hospitals and diagnostic connectivity, grew and was also helped by some international business that we were growing now.

The alternate site healthcare business was fine; MHA performed very well in the quarter and both soft riders and SHP, which are derivatives of that business, did well.

The imaging business, while it declined just modestly on a revenue basis, right at the end of the quarter had considerable order placements and requests for some new camera technology that we have been launching that will go into this cryo EM space.

And it's going to drive an unusual second half of the year where we'll be relatively soft in the Gatan business in the third quarter as they are gearing up for this sort of changeover to the new camera technology and then that will result in an extremely strong fourth-quarter for them.

So for the rest of the second half we still think we'll have sustained mid-single-digit growth out of medical.

All three platforms we think sort of will perform similar in that category.

We continue to increase our investment in R&D and channel development for all of those businesses.

In fact, in the second quarter this year our investment in R&D and channel is up about 18% year-over-year, yet you can still see margin improvement.

Those focuses are really around genetics workflow, some things at NDI that we can't talk much about from a proprietary viewpoint.

They are really nonmedical electromagnetic applications for virtual reality and augmented reality.

We talk about how imaging will go and then mid-single-digit organic growth for the entire segment.

The next segment here on slide 12, we will start with industrial.

And you can see industrial grew 9% organically with 1 point of FX.

Neptune was really -- had a spectacular quarter.

It was a record in every category and Struers did extremely well.

Our fluid handling businesses were fine and then Roper, which is inside the industrial segment, did have a bounce back from abnormally low numbers in the past, but not overly material to the segment but certainly good news for Roper.

On the second half of the year we think we get mid- to high-single-digit growth and we do expect to have a record year for Neptune's water meter business.

We got terrific leverage on the growth, as you can see, in the segment and the same with energy.

So if we shift to the energy segment, organic revenue was up 7% here with 2 points of FX.

About 35% of the energy segment is industrial.

And we made two small transactions in here as we fine-tune what we are doing.

We sold our SETPOINT business which was a portion of compressor controls to [Aspectrix] in the quarter and that was a little over $10 million.

And then we acquired a Canadian company using Canadian cash to acquire Phase Tech, which is a precision instrument company that will be managed inside our PAC business.

So net we made a modest outlay of cash to achieve those things.

And they will wash themselves out in revenue, but it will give us some positive EBITDA for 2018.

The industrial businesses as a whole grew high-single-digits which were led really by Dynisco's polymer instruments and rubber instruments.

You've probably seeing all of the tire companies investing heavily for new technology.

Oil and gas had modest growth on improvement in the upstream, but that was largely offset by the continued expected decline in compressor controls.

So there's not a lot of a bounce.

Those businesses were down dramatically in 2015 and 2016 and they are going to be up a little bit this year.

The important thing to think about, the little portion of energy that's inside industrial and in the two-thirds that are inside energy, is that in 2014 they represented about 17.5% of the Company's revenue.

Today they represent about 8.5% of the Company's revenue.

So EBITDA variance in the those of any direction will no longer have the effect that it once did for the enterprise.

Next slide.

If we look at slide 15, the guidance update.

That's slide 14, sorry.

So as we look at the guidance, we are going to raise all three categories of our guidance, raising the adjusted DEPS to $9.12 up to $9.30.

It previously had been $8.98 to $9.28.

We actually started the year at $8.82 to $9.22.

Revenue, we started the year at 3% to 5% organic, and at the end of the first quarter we said, well, maybe 4% to 5%.

Now we are going to say will be above 5% for the year.

And total revenue, we started out the year saying maybe 20% to 22%, and then we went up to 21% to 22% and now we are saying revenue will be above 22% for the year.

Our operating cash flow is now going to exceed $1.150 billion for the year.

And tax, I think I commented on before, we think the tax rate for the balance of the year will probably be in the 30% arena, higher in the third quarter, lower in the fourth quarter.

And then third quarter DEPS is at $2.24 to $2.30, primarily because of the shifting technology in imaging with cameras which is going to pull stuff into the fourth quarter and out of the third quarter as people would prefer the new products.

I think that's about all there is to say on guidance, all good news.

We shift then to the summary on business; you can see that we did have these record results in all of the important categories.

Cash return on investment continues to improve at Roper.

Most of the multi-industry people are around 20% to 40%.

We are going to be over 200% this year.

Our cash earnings will be higher and our net working capital and physical plant, equipment and accumulated appreciation taken together will be lower as a function of sales and that's what produces the higher cash return.

Half of our EBITDA this year, probably a little more than that, will come from software and network businesses.

We are going to enjoy, as we have in the second quarter, we think broad-based organic growth throughout the year.

The gross margins, which really demonstrate -- for those of you that are worried about people being dis-intermediated, which is one of the things that we've spent a great deal of time on over the last five years as we reinvented the Company to assure we didn't buy assets that had that risk -- that clearly isn't happening when you have a 170 point increase in your gross margins.

Year-to-date operating cash flow we said before up a third to $550 million.

Should be even better in the second half of the year.

The existing acquisitions, Deltek and ConstructConnect, outperforming the enterprise anyway.

They are just truly exceptional.

And our negative working capital gives us an ability to compound cash as we grow at a faster clip than we have in the past, which was still best-in-class.

And then by rapidly deleveraging here, taking $570 million out in the first half with considerable cash still to come yet this year, it demonstrates the reinvention strategy that we had with the kind of deals we made in 2015 and 2016.

And then the fruit of those gets delivered here in 2017.

Very disciplined capital deployment process that's still alive and well and you can expect substantial capital deployment in 2018 and beyond and there may still be some yet this year.

It will be a breakout year for Roper, a year everybody can feel really good about.

And lastly before the Q, I just want to complement Rob Crisci and Jason Conley and Shannon O'Callaghan and Zack and our operating EVPs, Paul Soni and Neil Hunn in this transition that occurred in the second quarter.

It's very seamless.

If anything we've been a little bit more efficient in getting prepared for the call.

And I think you'll find everybody is up to speed and knowledgeable about everything that's going on.

And it's a nice transition to be able to achieve all that mostly with internal people.

So with that I think we will open it up to questions.

(Operator Instructions).

Christopher Glynn, Oppenheimer.

Thanks, good morning.

Good to see the transition, a lot of nice new exciting faces there.

Hey, the RF margins -- it ramped a little faster from the first Q2 the second than I expected.

I know the new deals have some more back half weighted seasonality.

Just wondered of that margin ramp was a little steeper than you expected within the first half.

No, really the big story there is the Amtech tag business.

And in the first quarter it was extremely low compared to any kind of normalcy.

And the margins associated without the operating profit are substantially higher than the service business.

Now Deltek and ConstructConnect certainly help as well, but it's really getting rid of the boat anchor that we had in the first quarter that made the difference as large as it is.

Now that said, sequentially, I think they did produce about $25 million OP on $26 million of revenue.

So we probably won't have that same leverage every quarter.

But leverage is going to be terrific around here at 40% or so.

Okay and then within diagnostics, just wondering if you could update the broader complexion for genomics in molecular, how that adoption and progression is taking shape there.

Had, it is Neil Hunn.

Good morning to you.

We continue to invest behind the molecular genetic opportunity.

It's a new laboratory being set up in virtually every hospital across the world.

The adoption -- the number of tests going into practice, it's a slow build, right, so we have to be there to automate the workflows and we are there today.

But we expect this to be a longer-term multi-year build.

And so, it's still relatively immaterial in our results today.

We'd expect that, candidly, for the next year or so, maybe two, and then slowly build into a nice recurring highly profitable business for us.

Great, thanks.

Deane Dray, RBC Capital Markets.

Thanks, good morning, everyone.

I'd love to give a shout out to the two rookies on the call if I could.

Zack and Shannon, welcome and best of luck.

And Brian, maybe we can start off with forward-looking thoughts on the pipeline of SaaS businesses that you are looking at, what the competition is against private equity, stable financing.

And then you did call out some bolt-ons with ConstructConnect and Deltek and how realistic and near-term might those be.

Sort of a bifurcated answer there on regular deal flow.

Deal flow for the world is down about 20% first half this year over last year just in terms of M&A activity.

Private equities is very aggressive -- probably more so there may have been.

People continue to pour money into private equity, so the more money they get the less disciplined they have to be.

Their internal rate of returns continue to get reduced, which doesn't get a lot of conversation.

And high-yield debt still assumes there's no risk in the world and so it's really, really cheap.

All those things lead to very high price multiples.

We haven't seen much in the way of a falloff of activity.

There have been a couple things we've talked to people about that probably coming in at maybe two turns of price to EBITDA lower than people were suggesting they would be.

Fortunately we still are seeing a lot of activity that would be attractive for us.

We are just being cautious throughout the year to get the balance sheet where we want it.

So I think supply and demand is okay.

On these bolt-ons, when we were working in the fourth quarter last year we did a lot of work around market development for particularly Deltek and certainly to some extent for ConstructConnect.

So we kind of went through about a dozen different small potential niche bolt-ons for people and told them we would take a hard look at those beginning in the second half depending on how the first half went.

And certainly the integration of those businesses, the governance model which has been adopted and in place, and then the in-depth review we had at our Board meeting in June has given us confidence to go ahead and execute a couple of these bolt-ons.

Whether they will happen between now and the end of the year or the first part of next year hard to predict.

Their conversations of that were ongoing before we acquired the businesses and they will continue to be held.

But there is a possibility we might agree to one or two or three of these, but they wouldn't be large.

Got it.

And then a question for Rob.

So look, I see operating cash flow for the year is up 33%, but the free cash flow conversion this quarter was a touch light versus your historical second quarters.

And was there anything unusual, any timing of payments?

I wouldn't say unusual.

I'd say it's true we have two tax payments in the second quarter and no tax payments in the first quarter.

So given the fact that we have increasing earnings this year then we have a little bit higher tax payments.

We also have the new bonds that we did last year.

That payment hits in the second quarter, so that's another incremental $10 million that happened -- $20 million in cash but think of it as $10 million that would have been in Q1 but actually hits in Q2.

I think on a full-year basis if you look at our current guidance we are at about 120% plus operating cash conversion.

I think that's important to note.

People like to call this new earnings convention cash EPS.

And the reality is its adjusted EPS and our cash number is always going to be quite a bit higher.

So, we will do a 120% operating cash conversion on the adjusted EPS number on a full-year basis.

So I'd say we are right on track, if not above, where we thought we would be three months ago.

Good to hear.

Thank you.

Robert McCarthy, Stifel.

Good morning, everyone.

I guess the first question I would have is -- and I only get two -- is with respect to the book to bill you saw the quarter, how would you comment?

Would you say it's strong, weak versus your own expectations?

How do you expect to channel the fill through the back half of the year in terms of the order environment?

I'd say it was strong.

We are really trying to avoid talking a lot about orders because I'm so unimportant when you get to all these software businesses.

They don't -- it's not like these book and ship businesses where they go, but certainly orders were strong in all four segments.

Book to bill was fine; it was [102] or something --.

[102] for the Company, book to bill and industrial [105].

That's a really good number we had.

We talk about the record year at Neptune.

They had a record orders quarter as well.

I think in individual businesses for us it's very helpful.

To Brian's point, overall as a Company as we've moved so much toward software, it's becoming less and less an important metric for us at the enterprise level.

And then I guess taking the vein of that question to the working capital, obviously continued impressive in terms of this transformation to more of an asset light business model.

But help us in terms of what businesses will lead the way in terms of continuing to improve that versus what businesses may be load stones to there, maybe talk about the product software mix.

If you think about half the EBITDA coming from the software network businesses, generally all of those or none of those would really have a positive working capital number.

They would all be modestly negative, some more so than others.

Those businesses have extremely high recurring revenue, so the recurring revenue portion doesn't drive a lot more new deferred revenue.

It's only the net new business they get that drives the deferred revenue.

Then you have the other half of the enterprise that is the product businesses and those have had -- they probably have 90% of the asset velocity improvement that they are going to get over the last really 10 years and in particular really five.

You might remember when I started I said I want to have payables offset the total cost of inventory.

And then all you are doing is managing receivables.

And receivables are a different subject because you get pricing and terms and various things that have to do with growth around receivables.

So those businesses don't get the benefit of the deferred revenue, but they do get the asset velocity.

They continue to get rewarded qualitatively for improving the asset velocity.

It's such a big part of the culture -- I'm sure somebody like Shannon who's inside now from outside probably is surprised at how much time is spent on that in these quarterly reviews and how focused are people on the subject.

So will get continued growth in that.

We have a forecast about how deferred revenue grows and that will help us.

The other categories, inventory at (technical difficulty) percent and their receivables at 15.9% are probably about as good as you get.

And then payables at 11.5% is pretty decent.

As you get less inventory it's harder to have extended payables.

Best wishes to the new gang.

One more question here is fine.

Steve Tusa, JPMorgan.

Congrats again to the new guys.

Even though Shannon is not quite a new guy, but congrats on the new position there.

On Sunquest, can you just talk about how the rollout of the new products is coming along there?

And just a little bit of color on the organic growth there and then how you expect that you trend kind of -- any visibility you have on that picking up in 2018?

Yes, we can do that.

I think all of the acute care businesses are really doing reasonably well.

Sunquest in North America has been slower than it has been outside the US.

I think hospital consolidation, which generally helped the Sunquest brand lab portions, has been -- while there's still been consolidation they haven't decided to do anything.

So that's been slower than normal.

But even with that we are going to have positive growth for Sunquest throughout all of next year.

And again, I'd just caution everybody, you've got to look at our diagnostic connectivity business and GeneInsight and UNIConnect and CliniSys as all part of the acute care thing.

And in total they are going to be growing this mid-single-digit rate.

But Neil maybe will want to talk specifically about how we are moving ahead with UNIConnect and GeneInsight and Sunquest sole brand of activity because it's really incorporating all those.

It is and we talked a little bit about it before on the molecular genetic track, so I don't want to repeat that.

But we also see good activity and momentum internationally and then also in our community and connectivity parts of the businesses.

So, as Brian said, it's been sort of as expected for this quarter and mid-single-digit grower for us for the balance of the year and into next year.

Okay.

And any update on growth -- anything in medical?

Like you had the med device businesses that moves around next year that either slows or accelerates or is this the -- you're kind of at a good solid trend line right now given some of the puts and takes, maybe MHA, drug introductions, anything like that that's currently visible that will swing that number around at all?

Let's take the three parts.

We just talked about (inaudible) software on the alternate side, MHA software (inaudible), etc., that's a very predictable recurring revenue business.

We did lap all the one timers last year.

We don't expect them or see them recurring into next year.

So we'd expect continued mid-single-digit growth in that part of the business.

On the product side of the business it's been again a solid mid-single-digit grower for us.

There's puts and takes and the growth drivers will be a little bit different next year than this year.

But we'd expect it to continue into next year.

Mind you, we haven't done our business reviews into next year and we will sort of reserve the right to tweak and tune these but at a high level, that's what we look at.

One thing that might be worth commenting on that Brian touched on in a slide is the investments we've made in R&D and channels across the platform.

They are quite broad, they are obviously the ones in diagnostics and international in the acute care, made a number of channel investments in Strada.

There's some new categories for our SHP businesses they are entering into, continued R&D investments in Northern Digital and Verathon to drive product vitality.

And this year incrementally that R&D is up $15 million to $20 million across the platform.

And so, we are doing that to sustain or possibly increase that long-term mid-single-digit growth rate.

How far above the corporate average is medical R&D at this stage of the game for the segment?

As a percent of revenue for the segment it's high high-single-digits as a percent of revenue.

That is just R&D.

If we include engineering it's double-digits.

Okay.

Thanks a lot, guys.

Appreciate it.

Good quarter.

Joe Ritchie, Goldman Sachs.

Hey, good morning, guys, and welcome, everybody, on board as well.

So my first question, it looks like things are just really humming along, especially with the recent acquisitions that you guys have made.

And I guess if you think through those acquisitions really being SaaS-based in industries that historically haven't had a lot of tech, so whether it's legal, construction, government.

How are you thinking about potential consolidation within those spaces versus adjacencies for other SaaS-based acquisitions?

We look at both categories.

The one advantage is when you have a network or the sort of platform we have in the Deltek and ConstructConnect or MHA, you can make a small niche acquisition that doesn't have very much profitability, eliminate its cost structure, maintain the investment, get better channel access and have it be a good deal.

So you might find us doing bolt-ons that we would never do as a standalone, whereas in the old product businesses you would have perhaps done a standalone business.

So I think that profile could change a little bit.

We've never really been tied down to a particular expansion in a category.

I think where a lot of the M&A breaks down in the world is people who try to buy their distribution or try to buy their competitor and they are frankly driven by the product line nature of what it is they do and they don't look outside the box for things that are attractive.

We looked at assets in the insurance industry, we looked at assets in fintech.

There's a lot of things that we've looked at and we continue -- we just want to do the best transaction possible.

The wonderful thing about cash return as a metric is instead of looking at an EVA approach where, as long as it's greater than the cost of capital, you could sub optimize and do it.

We are looking at things that are accretive to the cash return profile.

And it gets us a lot more discipline.

The thing I think you'd say we wouldn't do is we are not interested in looking at an SAP or Oracle type of small platform that applies ubiquitously across a broad series of categories.

Basically we want our software businesses to be providing a solution for a specific type of activity, usually a singular vertical.

Yes, that makes a lot of sense, Brian.

I do appreciate the color.

I guess maybe going back to a prior question and, Rob, just focusing on the cash this quarter was better than we expected as well.

How are you guys thinking about the debt paydown for the rest of the year specifically and what kind of growth leverage are you targeting by the end of the year?

So, we certainly have the ability to pay down quite a bit more debt the rest of the year.

We would look at our cash flow guidance; it's probably giving us roughly $400 million of additional cash that we can use to pay down debt.

Now listen, there is also some acquisition opportunities out there that we certainly could look at doing as well.

So, I think we came into the year saying we would delever by $700 million or more and we are at $570 million.

And we're certainly going to still look to lower that member more throughout the rest of the second half of the year.

That makes sense.

All right, thanks, guys.

We are also focused on increasing our EBITDA.

That's correct.

So there's two sides to that formula.

Joe Giordano, Cowen and Company.

Hey, guys, good morning.

So without tipping your hand, are you talking about Neptune being -- having a great year?

You've seen a lot of activity in that market with companies coming to market.

How do you view that as -- I know Neptune, a good business on its own right but a little bit out of the -- different than what you've been evolving towards.

So how do you view that business, how it's doing versus what you're seeing in the market and appetite for those kind of businesses right now?

Well, Neptune has been probably the most important acquisition in our history.

I mean, it transformed the Company totally.

We made the biggest bet that we've ever made on that.

We deployed four times the entire EBITDA of the enterprise.

We issued equity, we did convertible debt.

So we bet the Company a Neptune in December 2003 and it's performed far in excess of what anyone ever believed it would other than us.

We still think they are the market -- they are the market leader certainly.

We are investing considerable money into software development and a variety of technologies.

I don't think people have a clue about what we are doing in those spaces.

So we remain very committed to Neptune.

We appreciate what it's done for this Company and we think it's got a great long-term future.

We're not interested in water assets generally outside the US.

Neptune has a different capability in North America.

The water meters that you look at in Europe are small and are apartment-based.

So there's some opportunity for commercial, but we are doing -- we are going to do well on a variety of areas.

And some of our newer technologies will have a little bit more global reach than the current technology has.

So we're pretty comfortable with it.

It's certainly in our view the highest valued asset globally and you wouldn't see us make another acquisition in that arena because nobody performs at our level.

Fair enough.

Do you guys care to comment on how Deltek and ConstructConnect are doing margin wise versus the overall segment average?

From an EBITDA margin they are right in the mid-30s, right where we said they would be starting out the year.

They are right on track; they're performing very well.

If anything there was -- Deltek over performed a little bit in Q2 versus what we thought they would do in Q3.

But they were able to capitalize on some of the GovCon wins a little bit sooner than we expected, but from a margin perspective right online with what we expected.

Okay, and then maybe last, is there any big lumpiness we have to think about with TransCore with some of your big projects?

And at this point you talked about New York wrapping up Saudi and then is it Houston, is that the other big one going on now?

Is there anything we just need to think about cadence wise?

That's not abnormal.

Those kind of things happen all the time.

The Saudi situation will wind down in 2018, but it will still be there.

What will actually just truncate at the end of the year would be the MTA tunnel project in New York.

But we are certainly having conversations with people about a variety of other things.

I think the last -- sort of look at a bid situation.

We have more bids out I think than any time in our history, so it's impossible to predict when they will happen.

I think a lot of people are confused about what the infrastructure situation will be with the government.

And those people that feel really bullish about that are at work aggressively and we would benefit from most projects, whether they ever come to fruition is beyond our ability to interpret.

Thanks, guys.

Jeff Sprague, Vertical Research.

Thank you, good morning, everyone.

Just a couple for me.

Just at a very high level, is there anything in the Obamacare meltdown political disarray that kind of ripples through your businesses or showing any signs of change in customer behavior in the near-term?

I don't think so.

Our businesses are really all centered around things that are -- the volume variance in the number of patients treated, things like that are not very important in the process.

It might be slowing down in this hospital consolidation in North America; maybe decisions around that are a little slower.

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

Just briefly.

When the legislation was passed a number of years ago it wasn't really a tailwind then.

So to the extent it gets restructured or wound down or whatever happens, we don't expect it, as Brian said, to have a meaningful impact.

I do think that hospitals want to know the environment which you are operating in will help their decision cycles, but other than that no impact for us.

I think at the very beginning you had this meaningful use initiative and so that did drive up the Sunquest lab piece.

But we knew that, we planned for that, kind of worked around it.

That's why we've turned it really into the acute care hospital family of activity.

And so, we feel pretty good about that.

And also just thinking about your gross margins, particularly in the software oriented businesses particularly.

You are still relatively new in this transformation of the Company and the headline gross margins look fantastic.

But do you think about what your entitlement gross margin is there?

Where these businesses should be over time?

I would think you don't believe they are over earning.

So correct me if I'm wrong, but to what degree do you see margin upside in those businesses?

Well, I think you want to be careful.

The gross margins are really pretty good.

Medical gross margins are 72%, but then you have a higher rate of R&D and channel investment in medical and you've got higher SG&A.

Everything's getting sold direct; nothing goes through distribution.

So, the net yield is really quite high, but you don't manage those businesses like you do a product business where you're squeezing everything out.

If you look at industrial, there the gross margins are like 51%, but the SG&A is extremely low and you've got a little bit of R&D and some manufacturing overhead.

So they are just different kinds of businesses.

I think we have learned how to manage all of the things in the portfolio really quite well and that's why you see a 170 basis point improvement in our gross margins (multiple speakers).

A number of our software businesses have R&D well into the double-digits as a percent of revenue.

A company like Deltek is in the teens.

So it's really about R&D investment which you would -- certainly you can do given the high gross margin and still generate EBITDA margins in the 30%-40% plus range.

It's very standard for those businesses.

And then just lastly from me, good answer previously on Neptune.

But what do you see moving into 2018 from a project opportunity or otherwise that would give you some indication of how to think about growth next year?

For the enterprise as a whole?

We haven't really done a lot of that, but when we go through our quarterly review governance process, we kind of talk about what people see.

And I think most people have just as -- basically they see the second half of this year as quite similar to the first half of this year.

I don't think they see a trend that's really different going into 2018 than 2017.

And Neptune in particular, there aren't large projects.

We had the big -- you might recall the big Toronto project a few years ago.

It's a bunch of small projects, in general just growth in the market.

They gained share over the past couple years and they are holding that share and then they are just growing a little bit ahead of the market.

So that's very standard for Neptune.

Great, thank you guys.

Richard Eastman, Robert W. Baird.

Yes, good morning.

Just a quick follow-up there really the industrial tech business and Neptune.

When I look at the order growth, mid-teens order growth, was that pretty dispersed across the three pieces of the business there -- Neptune, materials analysis and the industrial pump business?

Because you had raised -- it appears that you raised maybe the second half growth guide, core growth guide for IT to mid- to high-single-digits.

Just what weighted towards the high-single-digit here at this point?

As you know, Neptune is about half of the segment and Neptune had record orders and good backlog for second half delivery.

So that's really the big difference.

We have a small piece in that segment that's up-stream oil and gas which has been strong, but a very, very small number and there's really no change to our outlook on those businesses, Roper Pump in particular.

It's really I would say Neptune would be the reason for the slight upgrade in organic for the segment.

I see.

And then also just a question, Brian, when you look at the acquisitions here over the last few years and your movement to the application software where you have the medical area.

Could you just maybe speak to the international growth opportunities in those newer businesses?

And does it accelerate your opportunity to grow internationally given the software penetration that you've had?

Each one is different, so you can't really make a blanket statement.

So ConstructConnect is more around a North American strategy.

Deltek is a very global business.

It's serving professional services; it doesn't matter where they are, whether they are in Europe or they're in Australasia.

It's quite large business reach for that business.

The seaboard business is really for the most part a North American business with a little bit of activity in the Middle East and English-speaking territories.

So, I would say it's not radically different than the rest of the businesses.

There are just a couple of the software businesses that really aren't focused on international opportunities.

Just in the quarter, the second quarter international, how did the geographies look relative to the core growth rate total?

So, for our Company overall US-led the growth.

US was mid-single then rest of world was up a little flattish.

Okay, great, thank you.

John Quealy, Canaccord Genuity.

Hi, thanks.

Good morning, folks.

Just to quick questions.

First in the software business, can you comment on how [Sabad's] renewals retention worked out?

And then as a side to that, on Aderant, congrats on the big wins.

Is it big enough to set up a tough comp next year or not?

It's Neil.

On the software -- I really have to go company by company on the adds and the retention rates.

There's nothing that stands out substantially outside of history.

I would comment that the ConstructConnect business is on the slides.

Recurring revenue growth has accelerated over the past several quarters, so that's a nice highlight for that business, good execution on the sales and marketing front.

On Aderant it's harder to tell.

I mean, it's a great quarter.

Seasonally the second quarter is generally strong for the business just the way the market buys.

And we'll just have to see how the pipeline builds specific to next quarter.

I would conclude on the Aderant comment that the competitive landscape is stable, our value proposition is high and nothing has changed in that regard.

So the outlook for that business for the next several years remains nice.

Great, thanks, folks.

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

I will now turn the call back to Zack Moxcey for closing remarks.

Thank you, everyone, for joining us today and we look forward to speaking with you during our next earnings call.

Ladies and gentlemen, thank you for your participation.

This does conclude today's conference.

You may now disconnect.