Brian Jellison - Chairman, President and CEO John Humphrey - CFO Paul Soni - VP and Controller Rob Crisci - Head, Planning and IR.

Joseph Ritchie - Goldman, Sachs & Co. Shannon O'Callaghan - UBS Deane Dray - RBC Capital Markets Jeffrey Sprague - Vertical Research Partners Inc. Christopher Glynn - Oppenheimer & Co. Inc. Richard Eastman - Robert W. Baird & Co..

The Roper Industries Fourth Quarter 2014 Financial Results Conference Call will now begin. Today’s conference is being recorded. I’ll now turn the call over to John Humphrey, Chief Financial Officer. Please go ahead, sir..

Thank you, Audra, and thank you all for joining us this morning as we discuss our fourth quarter and full-year results. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer, Paul Soni, Vice President and Controller, and Rob Crisci, who Heads our Planning and Investor Relations for us.

Earlier this morning, we issued a press release announcing our financial results. Our press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and also on our Web site at www.roperind.com. Please turn to Slide 2; we begin with our Safe Harbor statement.

During the course of today's call, we’ll be making forward-looking statements, which are subject to risks and uncertainties as described on this page and as further detailed in our filings with the SEC. You should listen to today's call in the context of all that information.

Now if you please turn to Slide 3, today we’ll be discussing our income statement results for the quarter primarily on an adjusted basis. A full reconciliation between GAAP and adjusted measures is in our press release this morning and also included as a part of this presentation which is available on our Web site.

For the fourth quarter, the difference between GAAP and adjusted consists of two discrete items. First, a purchase accounting adjustment to acquire deferred revenue and our recent software acquisitions, FoodLink and SHP, which we completed in the third quarter that totals about $1.4 million.

As a reminder, this represents revenue that absent our acquisition those businesses would have recognized. In addition, we had an inventory step-up charge for IPA for about $400,000. And now if you please turn to Slide 3, -- sorry Slide 4, I’ll turn the call over to Brian Jellison, Chairman, President, and Chief Executive Officer.

After his remarks, we'll take questions from our participants.

Brian?.

Thank you, John. Good morning, everyone. We will try to get this call finished before snowstorm. So, if we start with the Q4 enterprise financial results, we had a really terrific year with a great strong finish here in the fourth quarter. We had all-time records for incoming orders, revenue that we build, net earnings, EBITDA, cash flow.

Organic revenue in the fourth quarter was up 7%. We had pretty much broad based growth every place or operating margins in the quarter reached 30.1%, which was up 110 basis points, and the operating leverage was pretty spectacular in the quarter at 47%. We will comment about leverage going forward with our guidance.

Net earnings were up 13% to $187 million, or a $1.85 and operating cash flow was up sharply, a billion dollar run rate there to $261 million in the quarter, up 11% with free cash flow in that same kind of category. It’s very little CapEx this year, about 1% of revenue, so very strong fourth quarter. Next slide.

We look at the income statement here, you can see the orders were up to $924 million versus $900 million a year-ago, up 3%; book-to-bill was 0.98x, but so we said before sort of 0.97x to 1.03x is the normal spread. But in the fourth quarter, our book-to-bill was always very low -- relatively low because we’ve so much more year-end invoicing.

So really that book-to-bill of 0.98x is not a problem, and we finished the year at 1.0x. Revenue was up 7%. We had about 2 points of negative foreign exchange headwinds here in the fourth quarter. Gross profits stayed at remarkably high-level, here about 60%.

The operating margin as we said before had 47% leverage, and that was just strong across the board as you will see. The tax rate was 60 basis points lower than the fourth quarter of last year, which gave us about a penny and a half, so you can see the DEPS number at $1.85 versus last year’s $1.65. Next slide.

Cash flow performance in the quarter was spectacular. We had 140% operating cash flow conversion and a 136% free cash flow conversion. Our cash flow has been growing as you can see if you look at 2012 and then ’13 and ’14.

That’s an 11% CAGR on operating cash flow in the last two years, and our free cash flow was 23% of revenue, which was about same as last year’s 23% of revenue, pretty spectacular number.

We still think cash is the best major performance, and if you follow our free cash flow and you follow the continued growth, then I think you’d get a much better understanding about the quality of the Company’s businesses. Here we start the full-year enterprise results, next slide.

If you look at the full-year income statement, orders were above $3.5 billion. They were up 5%, and the book-to-bill was exactly 1.0x. Revenue was up 9% with organic up 6% for the year, which was certainly in the wheelhouse of what we established this guidance at the beginning of the year.

Gross margin for the full-year was up 70 basis points to 59.3%, and our operating margin was up 120 basis points, and for the full-year, we had operating leverage of 42%. We used to talk about -- well, I can go back to 25% to 30%, and then it was 30% to 35%.

Recently, it’s been 35% to 40%, and we’re going to suggest that forward guidance for us is going to have operating leverage at 40% or above on the next dollar revenue. Operating income was up 13%. Earnings before tax were up 16%. Tax was a headwind for us this year as we suggested it would be at the beginning of the year.

It was 29.9% versus 29% last year. That caused an $0.08 headwind in our earnings, but even with that $0.08, we still produced $6.42, up 14%, and the GAAP number of course was up 19% on earnings per share.

Next slide, in terms of EBITDA and margin, on the left hand side, you will see EBITDA has increased over the last two years by 30%, from $925 million in 2012 to $1.2 billion this year. That’s a $276 million increase. On EBITDA margins, we continue to improve margins, I think rather spectacularly.

In 2012, our EBITDA was 30.8%, and people were saying, oh boy, you’re going to have to revert to the mean now. You will be back down with everybody else in the 20s. Well of course, quite to the contrary, that’s just wrong.

We were 32.8% last year, and 33.8% this year, and that’s all about our governance system and the quality of our businesses, record EBITDA performance. Next slide. Here again, you see a tribute to the governance model, what we have and the field execution.

Our asset-like business model inventory now running 5.1%, receivables at 16.1%, and the way we look at the working capital number, you can see it’s dropped from 7% two years ago when people thought that was an unbelievably good number to now 5% at the end of this year, so our guys continue to understand how to execute our asset-like business model.

Next slide. If we look at the strong financial position and the balance sheet of the Company, it’s certainly a powerful balance sheet with a lot of powder that we’ve intended to use. You can see that cash has gone up to $610 million, a lot of that’s not in the U.S., but our cash and undrawn revolver gives us a $2.1 billion capacity.

The trailing 12-months EBITDA now has gone up to $1.2 billion, so our gross debt number at $2.2 billion is 1.8x our EBITDA, and we’re going to be quite comfortable if it’s at least a turn higher.

We will discuss our activity that’s going to be occurring in the first quarter and throughout the year later, but we still believe we’re going to deploy about $8 billion over the next five years in transactions. Next slide. We will get into the specific detail now on the segment.

If we look first at the revenue growth by segment last year, you’ll see in the left hand side, on our organic basis, energy was up 5%, industrial technology with half of which is Neptune was up 7%, our Radio Frequency was up 5%, and Medical was up 8%.

If we look at the total revenue, growth by segments you’ll see Medical was up 16% as the acquisitions added to the organic number. Next slide.

Here we look at the overall segment performance on a dollar value and EBITDA basis, so that you can get some better clarity on the fact that RF and medical represents about two thirds of our total EBITDA progression and its well over half of our revenue now.

So the original sort of Energy business is the smallest segment we have at $692 million, still outstanding performance with $226 million of EBITDA in the large section. First time that we’ve ever had $1 billion segment in Roper, so you now have Medical with 1,082 million in revenue pretty good solid standalone entity with $472 million in EBITDA.

Next slide. If you look at the oil and gas component of the Company, that the legacy of the Company was oil and gas, and up until through 2007, it was a pretty big portion of the overall Company. Today it’s a very, very small portion. Our upstream represents 5%; our Medical, RF and Software Water markets were 86% of the Company.

And the downstream, midstream which is actually going to have modest growth this year is about 9%. Now with the slides showing you in addition to the breakout here, our upstream business is about 5% of revenue. Some of that’s in the Energy sector, and some is in the Industrial Technology sector where Roper Pump resides.

We have even though the market we think will be down 20%, perhaps even a little bit more, where we’ve a benefit in that Roper Pump has these technologies that we launched and the new facility to get a broader categories of those into the marketplace quickly in Houston a year-ago.

Well, those shipments didn’t really start to occur until the second half of the year in any level. So we’ve an easy comp with the first half of 2015 and those products in which we’re gaining share, so that will mitigate what normally would have been a deeper decline in upstream.

In our Field Service and Retrofit activity in midstream is actually continuing to move up a little bit and then we have the refinery instrumentation businesses in the field service associated with that also which will have modest growth.

One of the things we did in December is we had all of our oil and gas people in for a couple of day meeting where we did a focused review to recast what they had originally submitted for 2015 projections, we had them bridge the risk by customer and by category, by product line.

We reviewed the contingency plans and the triggers that they had in place. These guys are world class and nimble execution as they need to do stuff. They’ve made a few changes already and are monitoring activity routinely. In fact, Friday we had a dust up on exactly where we were January to date.

I have to say that, the momentum is actually as good as it was in the fourth quarter. We really aren’t seeing anything related to product follow up at all.

It’s above our expectation through the first three weeks of January, which doesn’t necessarily mean anything, but there has not been any early indicator yet other than project delays and what you hear from other people who aren’t really determining their CapEx plans for later, but most of our products are not going into CapEx driven activity.

The guidance that we’ve established and we’ll talk about reflects the up-to-date business expectations of all of our oil and gas people of January 23 and as I say the product activity hasn’t slowed.

The other thing I think is I’ve read some of the commentary about the Company is people thinking that there are some way to ascertain something that happened in 2008 or 2009 for our Company, and I guess we just fail to do a good enough job to remind people who we’re.

If you look at 2008, we added CBORD in February and then later in the year we added Horizon and Getloaded and Techlog [ph], three software companies, and those weren’t in full-year for ’08.

And then if you look at our acquisition, since ’08 where people are doing comparisons, we’ve added United Toll, which is a software system that’s driving so much of our growth in TransCore, the iTradeNetwork, Verathon, Northern Digital Medical, Ascention Medical, Managed Healthcare Associates, Sunquest, Strategic Healthcare Programs last year, Innovative Product Achievements last year, FoodLink and now Strata Decision Technology, all these are either medical or software companies that created over a $1 billion in revenue, that’s in our numbers today that wasn’t there in 2007.

So to say there are some Quid Pro Quo [ph] on this just the life and the reality of who we’re and what we’ve become. Next slide. Here we look at the Energy Systems and Controls sector. We can tell you that there is about $125 million of revenue upstream out of our total Energy Systems and Controls business.

You can see in the fourth quarter their operating profit was up 11%. Their OP margin reached 36.1% of 280 basis points and EBITDA for Energy in the fourth quarter was 39%. Organic revenue was up 4%. We had very significant strength really in these -- some of the businesses that people think are going backward, so which -- as far its now or not.

So our diesel engine shut off safety systems was up in the high teens and so was vibration monitoring. Field service growth continued, but we did see project activity declining at CCC or postponement. So that’s something that we will be watching carefully throughout 2015.

As we look at guidance establishing for next year, we look at upstream declining, which is about 20% of the revenue in the segment. And then we think the midstream and downstream, we will have very modest growth and that represents about 40% of the total segment.

And then the non oil and gas businesses are another 40% of the Energy Systems Control -- and Controls segment. So when we net it all together with declines in the upstream, modest growth in the non oil and gas arena of the segment, we think we will come in flat to modest organic growth for the year. Next slide. Here we look at Industrial Technology.

In Industrial Technology we have about $75 million of upstream revenue in the entire segment, and oil and gas sort of split a little bit between the upstream, not much downstream in the segment, maybe another $25 million at the most.

Here you can see that organic growth was 13% in the fourth quarter broad-based throughout the different businesses in the segment. Our Ropers -- Roper Pump had all-time performance records.

We continue to win new customers with the newer technology and the product investments that we made over the last two years have really driven substantial revenue growth, and certainly help us as we get the end market follow-up and net activity. We had growth at Neptune driven by strength in the U.S market.

We are starting to see that Toronto project wind down and we will talk about that here in the guidance. We have double-digit growth in Material Analysis and the OP margins in our industrial segment, in the fourth quarter, you can see we’re 31.4%, up 190 basis points and EBITDA hit $74.3 million at 33.8% of the revenue.

So in guiding in 2015, we think Roper Pump share gains will support flat revenue for them in total despite equity steep decline in the market. Neptune we think will continue to grow in the U.S. The Toronto project completion is expected in the first half of next year.

You can never put your finger exactly on that, but they’ve been moving at a faster pace than they originally suggested.

We’ve had continued -- we expect continued growth in Material Analysis, although you got some currency issues with Danish krone and then we’ve got the modes organic growth we’re saying in the segment in whole, only because the Toronto RF project completion should occur sometime in the year and that could really create about a $25 million to $30 million divot [ph] in the segment on revenue, which is the bad news.

But the good news is we’ve got another RF product that’s going to offset all of that and then some that we will talk about as we look at the Radio Frequency Technology segment next. So next slide. So here we go into RF Technology. We will just talk about the good news here.

We were awarded a substantial contract for Riyadh, Saudi Arabia, Traffic Management System. This will be using our TransSuite Software Transportation Management System. This is totally different than trolling now. This is the stoplight transactions in Midtown Manhattan.

There's a lot of installation management in this project, which of course is lower margin work. It’s a five-year contract to support it post close. We do expect it will completely offset the Toronto wind down Neptune, even though both our RF business is one happens to report in industrial now and one in RF.

So now we look at segment as a whole, you can see that revenue was up just slightly. Toll and Traffic Infiniti Lane Project Execution remain very strong with favorable variances, both in Texas and Florida. We had terrific subscriber growth in our Freight Matching businesses, DAT and get loaded.

And iTrade strength in the U.S was pretty good, but unfortunately offset by the U.K. weakness and problems in the U.K. with that business. Technolog declined, another U.K. based software business in the utility industry, but bid activity was pretty strong and Technolog tends to be a little bit up and down kind of business and should be up again in 2015.

So then if we look at the -- in addition to that OP margin at 28.4%, EBITDA for the segment was $82.4 million at 34.3% and RF now represents 26% of the enterprises EBITDA.

In addition to the Saudi contract that was awarded, we do expect additional scope in the foreseeable future around this, because the Riyadh of course a very important city that only one in many. TransCore’s backlog and quote activity is going to support segment growth for 2015.

And the Toll Tag growth that we’ve enjoyed recently is going to continue, particularly, in Florida and Texas where people continue to migrate to our very small stiffer tag as opposed to the plastic boxes that so many people in New England still use. Software and SaaS businesses are going to continue to grow mid single-digits, very high margins.

They draw up a lot of cash that allow us to make reinvestments in their own businesses or by bolt-on things for them. And the segment we think at the end of the year will have the single-digit organically. So next let’s look at Medical. I think this will be the last time in a call that we will be able to contain Medical on one slide.

As you can see we worked very hard to try to achieve that and pretty much made it, but I don't think all that's going on there everything we know about will allow us to do that ever again. So prepare yourself for two slides in 2015. So here we are with a very strong fourth quarter, up 12% revenue.

OP was up 15%, operating margins 35.5% aren’t the real story here. The real story here is EBITDA. We delivered $126.3 million in the fourth quarter in EBITDA, which was 43.9% EBITDA margin.

Really the way you have to think about the segment now is that its medical products in one leg get software and service in another leg and then the residual life science imaging component that we have in there. Organic revenue in the fourth quarter was up 9%. We had double-digit growth at MHA with share gains and favorable end markets which continue.

Sunquest growth continued; we had some customer implementation that customers delayed into 2015 that we thought was interesting, which is fine with us. New products at Verathon really drove spectacular growth in the fourth quarter at Verathon and we like to think that’s going to continue throughout 2015.

Our imaging family improved somewhat with Gatan had a strong quarter, which really led that growth. And Gatan has shifted much more emphasis around life science.

It used to be kind of split between physical science and life science, but with the new technologies we’ve introduced in the exceptions of the K2 camera technology and filters, more and more life science is coming our way. And the last bullet point here SHP, which is strategic healthcare programs, and IPA, Innovative Products performed really well.

They’re certainly on track with what we thought at the time we acquire them and probably have better forward growth than we might have guessed. As we think about 2015, I think we have to start with the context of understanding that MHA and Sunquest are really truly transformational for Roper.

They’re more transformational today than Neptune and TransCore were in the early point of the audit. They’ve really great focused opportunities to build on each one of those businesses, Sunquest and MHA, including acquisitions that the number of acquisitions we can make as much broader than anything we’ve ever had.

One disappointment around Neptune is it's done exceedingly well, but we haven't been able to acquire things, because its competitors are less than exciting and most of the people we see in this space were not the kind of companies we’d want to own. Thank goodness Neptune has outperformed all those over these years.

TransCore we’ve been able to build out somewhat through acquisition, but mostly it's been organic growth. But Sunquest and MHA are different story. MHA is capturing new opportunities, its benefiting from favorable demographics.

Its acquisition and strategic healthcare programs was really the first addition that we’ve the MHA in the third quarter of 2014. We expect another one is going to happen yet within this quarter.

Sunquest had this moderating growth for 2015 because of the meaningful use upgrades that have been driving such high-level growth in the recent past, but our investments in eternal development of things we’re doing with partners that we aren’t really able to talk about yet and the opportunities that they’ve in front of them are really exciting.

We are likely to announce another important acquisition here soon that relates to Sunquest. So both MHA and Sunquest I think you will see continued acquisitions building those very large platforms down the road. The Medical device businesses are on a pretty solid growth path for 2015.

We think that Verathon’s going to continue to have its market share gains and product replacements going on. And then we just last week announced our first deal of the year won’t be the last. And that's Strategic Decision Technology which is a company run by Dan Michelson in Chicago. It’s a very exciting company with a new product.

It’s a small company of kind of low -- just turn past $30 million of revenue, but they’ve been growing at 20% in the last three years and now with an infusion of capital from us, they’re going to able to continue to raise that growth spectrum.

They have a new phenomenal product, which is so important for the country around by cost containment, cost improvement for hospitals.

Their StrataJazz platform has been running at number of hospitals in a variety of ways, but the new programs that Dan and his team are going to be offering that came out of a project that they did for Northwestern Hospital -- University is really spectacular.

In total, then for the segment we think we will have mid to high single-digit organic growth for the segment by the end of the year and I commit to you that we won’t crowd the slide. We will just do two in the future. Okay, now 2015 guidance.

Here if we turn to page, so a full-year guidance we established at $6.70 to $6.94 and -- but we put a good deal of energy into looking at this. The organic revenue growth for next year we think will be around 3% to 5% and that’s after completing adjusting for the newer macroeconomic trends that people have seen since December 30th to now.

Operating profit leverage we can probably say will be above 40%, and that's pretty good by anybody standards. Our foreign exchange rates going to hurt us. All of our guidance is still predicated on the year-end numbers. We think that's going to cost us about $0.10, which is inside these numbers.

If the dollar continues to strengthen even more, you’d have a little bit more risk. It could be as high as twice that number if today’s rates lasted for the entire year, it got worse. The tax rate we think will come in around 30% to 31%. That’s about a nickel headwind into the comparative earnings at the midpoint.

So it could be a little higher if the tax rate got higher last year. If you remember, it was 29.9%, so we’re hoping it will be around 30%, but it could certainly go up to 31%. The guidance of $6.70 to $6.94 gives you a mid point of $6.82 is excluded in the future acquisitions that will occur or any divestitures.

And the full operating cash flow we’re establishing at the beginning of the year would exceed $900 million of operating cash flow for 2015 with our normally strong cash conversion. First quarter we established DEPS at a $1.47 to $1.53.

It includes Strata, but it excludes any other acquisitions that will happen in the first quarter or any divestitures that could occur. Next slide. So here we look at the 2014 summary and 2015 prospects. So Q4 we had record performance, very strong finish to a terrific year.

For the full-year, we achieved record results in all these categories, orders, revenue, net earnings, EBITDA and cash flow. Revenue was up 9% with organic up 6%.

Very significant financial achievements, sort of threshold level activity where you see operating profit exceeded $1 billion in the Company for the first time, margin at 28.2%, 42% operating profit leverage. The EBITDA exceeded $1.2 billion for the first time and EBITDA margin got all the way up to 33.8%.

Free cash flow was 23% of revenue and we expanded our Medical and Software platforms with three acquisitions of Strategic Healthcare, Innovative Products and FoodLink.

And these three deals which were smaller than the things we’ve done recently are really a precursor or some of the types of outstanding businesses you’re going to see us continuing to add in Medical and Software where they’ve higher growth characteristics that tend to be somewhat smaller revenue businesses, and there are a lot of these that we’re involved with as we speak.

In 2015, we expect to have record performance of Roper despite the fears around macroeconomics. We are going to deploy over $1 billion. We are very confident of and the year could easily be more than that. The first deal Strata we talk about a little bit, but it’s not going to be the only deal in the first quarter, that’s likely.

I think it’s important as we close out the call and get ready for the Q&A here that, we are really well positioned in 2015, because the company really, the emergence as a technology platforms and our ability to deploy capital are slightly more important than many of the macroeconomic considerations in markets that so many people talk about.

So, we’re looking forward to a great year in 2015, and with that we would like to open it up to Q&A..

Thank you. We will now go to our question-and-answer portion of the call. [Operator Instructions] We’ll go first to Joe Ritchie at Goldman Sachs..

Hi. Good morning everyone..

Hi. Good morning, Joe..

So, I guess, I’ll be bracing myself for the -- the second slide on Medical and Scientific Imaging coming next quarter. But the, the first question I have for you guys ….

That won't be very important in that second slide that term, Scientific Imaging. Think about medical and software, Joe..

Fair enough. So, I thought, look, good quarter, good year. Brian, I know that your company has undergone a significant transformation since the 2008, 2009 timeframe where we had energy prices implode. But a lot of the acquisitions, that have occurred -- has occurred outside of energy, and the question I have is really on the energy portfolio.

And how has that evolved really since 2008, 2009 where you just see some pretty significant organic growth declines during that timeframe.

I’m just trying to get a sense for how the portfolio there has evolved? How you expect to have a more resilient earning stream in energy during this downturn that we’ve seen?.

Well, certainly, a big part of what happens in energy is our [Verathon] technology, which has been very important for the continuous operation of what's going on with fracking. It doesn’t require new wells. It doesn’t require rig count or anything else, and we didn’t have that technology in 2008, that’s only just appeared really in 2013 and ’14.

So, that’s like an additional business that wasn’t there previously. We also acquired a software control company called the United Controls for CCC that offers various things that we didn’t have out of CCC in terms of dealing with different types of gas turbine engine technologies on a retrofit basis and that’s useful.

We had online software that we added to our PAC business, Cambridge Viscosity and Trinity Software for CCC. So, we’ve got some things that continue to grow and aren’t related to rate counts and upstream activity. So that’s good. I would say though, there are businesses that are in oil & gas are spectacularly great businesses.

They have EBITDA margins that are consistent with the overall enterprise EBITDA margins; and it’s pretty much or best in class activity. Thank goodness, the vast majority of their activity is not upstream. Well over 60% of those businesses are downstream and midstream, and so that helps a lot..

The other thing I would say, Joe is that, also who wants to learn from the successes that we had and what did occur in these businesses during 2009. Well 2009 was really a demand shock. It wasn’t that price went down, and therefore everything else went down. The price went down because everything else went down.

All right, so let’s understand that we don’t see an enormous decline, so therefore the large installed base that we have around compressor controls and instrumentation for PAC, which really serves the midstream and downstream markets, those will continue because those are more throughput driven, and we don’t see the 15% kind of immediate demand of shock across not only that segment, but the entire world that we saw in 2009.

So, we want to make sure that we are very nimble in the way that we act, and particularly on the upstream side where it’s always a little more cyclical than the rest of the oil stream market..

Okay, that’s -- now that’s helpful color guys. And I guess, just maybe one follow-up here. You talked about, historically your incremental margins being in that 35% to 40% range, but here you continue to do 40 plus. As you head into 2015, your growth rate is going to slightly slower than ’14, at least that’s what you’re projecting today.

And you had some headwinds in that RFX business in 2014, and so I’m just trying to get a sense for your confidence in that 40 plus percent incremental, and how are you guys thinking about that across the different parts of your portfolio?.

So, I mean a little north of that number in medical, given the underlying margin structure, and the amount of software that we have not only there but also in RF.

When we look at Industrial and Energy, that’s where we’re probably a little more comfortable in the 35% to 45% range, right a little bit wider variation there, because not as much of it is the consistently high margin that we see across the other two. But in terms of confidence going into 2015, we have a lot of confidence around that.

I would demonstrate in our ability to have that type of leverage not only around 2014, but also in previous years, and with the contingent mix towards more technology, I think that’s a reasonable expectation for you..

Yes, I think you’ve got to remember in 2015 that most of the incremental revenue, which will result in the operating profit leverage is going to come from RF and from medical. We’re not going to have a lot of incremental revenue in energy and industrial in 2015.

So, I wouldn’t worry so much about the -- what that ratio is, because its -- it maybe a very high number on a very small base..

Yes, that’s a fair point. I’ll get back in queue guys. Thank you..

We’ll move next to Shannon O'Callaghan at UBS..

Good morning, guys..

Hi. Good morning, Shannon..

Good morning, Shannon..

Welcome back..

Yes, thanks. Good to be back. Hey, maybe to start with medical. Brian, you sound very optimistic there.

Just curious, how much of that is related to just where Roper has evolved to in the M&A opportunities you’re seeing versus how much you actually see the overall medical market getting better out there?.

Well, we got a lot of different businesses here, right. So, if we look at our medical products businesses, those things are getting driven not so much by demography, but by product technology that we continue to introduce and they are high margin businesses. We do a lot of reinvestment in them, and they really have market leading technology.

So, they are not really driven by some aggregate number about demography or a medical market. Then if you get to our Sunquest and MHA, our businesses which are software and software like, they are -- they have a lot of demography benefits. I mean, there’s going to be more testing, not less testing. There is going to be more needs for post acute care.

There’s going to be more activity around Hospice and nursing homes and skilled nursing facilities, and all those things that MHA does so well. We’re certainly going to bowl on some acquisition this year for MHA, and you’ll see we’ll just reinforce all those things in a big way. So, they are creating markets more so than anything else.

I mean, these guys really are the leaders in that market place. People do read across on us with somebody, well they read across for Sunquest, if you look at Cerner. So look, they’re doing well, we’re doing well, epic is doing well, the space is doing well.

If you look then at the life science business, that business, it can has sort of preemptive technology related to filtering and camera technology for life science, things that you’re looking at, molecular biology. So, it’s a great space. It’s going to do well. The other ones which are very small really are less medical.

They’re really more about nanotechnology and development in the physical sciences. So, that has less derived demand than the others do..

Okay, great. Now that helps a lot here, thanks. And then, I’m just -- obviously a lot more volatile world here so far in 2015. How do you think that’s impacting the M&A world? You obviously sound very optimistic that’s related or unrelated to the volatility.

But is this all a good or a bad thing in terms of what you think you can get done out there?.

Well, the M&A world hasn’t changed very much. When you think about the world in which we participate which is really primarily acquiring companies from private equity. So, we’re not out shopping around for public companies if you see a distorted value or something. We tend to think public company’s acquisitions are problematic for the most part.

I mean, it could happen, but it’s not where we’re looking. So, the only good new development in the M&A front is that, there’s a lot more pressure on the banks to limit their debt to EBITDA staples to six times or five times. And most of the last several years, debt staples have been seven or seven and a half, mezzanine coming on top of it.

So private equity could put in three year four turns of other peoples money and use debt at extremely high leverage ratios, and be very definitive in the acquisition market. So, pretty much our competitors for -- when we think about who our competitors are and this is a capital deployment company at its core.

We look at all the large private equity guys. We love them, because they own a lot of stuff we want to acquire. But we’re not willing to go up to four or five or six time’s debt to EBITDA, and they start at six or seven time’s debt to EBITDA. So it’s still a tough market for us..

Okay, great. Thanks a lot guys..

We’ll go next to Deane Dray at RBC Capital Markets..

Thank you. Good morning, everyone..

Good morning..

We appreciate the additional color on the -- and disclosures on the oil & gas business because obviously there’s still a lot of scrutiny there.

And then recognizing this is 5% of your business on the upstream side, can you provide some more color on the assumption on the 20% market down? Because if you look at the CapEx sensitivity where oil is, you could push that to 35% down, 40% down, but a lot of that hinges on CapEx and the fall off in customer CapEx, and you said several times that you’re not so leveraged to customer CapEx.

So maybe expand on that, how much is aftermarket? The retrofit and field service part of your business, and so, how do you, I’m sure that leads you to that down 20% as your assumption.

So, maybe just walk through how you’re seeing that play out?.

John and I are looking at each other fighting to see who wants to answer this very fair question. I mean, unfortunately there’s never any one answer, because we have a role up here with the revenue we’ve shared with you and 5% is upstream, and 9% is midstream and downstream.

But while the RF products and the markets we serve are so niche that they don’t lend themselves to the same macroeconomic situation that you see with other people where you could look at rig counts.

For instance, what we haven’t talked about is, how much of our business is upstream oil, and how much is upstream gas? How much is in the United States? How much is outside United States? And we’ve -- for competitive reasons don’t want to get more granular than we have, right? So, we just feel that the retrofit activity that CCC does and it already has booked and continues to do will have growth.

The upstream portion that they have are related to any new LNG projects is going to be down, and it could be down substantially beyond 20%.

But it wouldn’t defect us until the second half of the year, because the kind of things that we do on a project basis are still rolling along when one of our high growth small businesses is diesel engine shut-off valves which somebody had downstream, but its really an upstream business. That business last year was up 16%.

So, we can imagine that it could be up, so we think it’s going to be down, the reversal will be more. So, but the only fair way to answer the question is; what if CapEx and others didn’t sell off and you had a fee of 35%, our view would be -- it would be 35% in the second half of the year, but maybe 15% in the first half of the year.

So, I think those people who are writing about fears in 2016 that we’re reading everything everybody is writing. But we got no data to support any downturn yet except us being conservative and taking a 20% whack off of everything that goes into those markets.

John, do you want to add to that?.

Yes, I wouldn’t add. Mostly I think that Brian described what our views are with respect to the guidance and to the expectations for the end market. What I would -- that I would say is that, our businesses -- one of the great things about our business structure is we have people who are very close to their customers.

We have six different businesses that have some exposure to oil & gas. And so, whether it’s Russ or its Kevin or Joe, any of the guys that we know individually they are very close to their customers and can react very quickly to changes in demand.

They are not waiting for us and our assumptions about what's going to happen in the macro world to set their plans. These are very quick businesses to act. The asset light nature of our business means that they don’t have a lot of fixed cost that require a long lead time in order to make adjustments to their cost structure.

So, I have every confidence that these guys are very close to what's happening. We’ll be able to act quickly whether that means that the market is going to be worse than we currently expect, or it’s going to be better than we currently expect. They are not looking to us for those answers.

They get to be very close with our customers and know exactly what's going on, on a real time basis..

I think we need to also add, because we probably don’t explain this well enough is that our businesses in those spaces are not the least bit capital intensive, and these are factory driven businesses. These businesses can flex immediately and they have all kinds of flexing ability with manpower.

So, most of the other companies in these segments, they’ve got big factory operations. So, what happens in a downturn for them is absorption wipes them off the base of the year. We just don’t have anything like that. We just don’t.

If you look at the physical asset investment that we have, and add back accumulated appreciation to that number, our gross investment is very, very small even in the oil & gas arena. These are mostly test and assembly businesses. There are only a few things we do that involve machining operation.

So, a downturn to us is a lot different than a downturn to GE’s oil & gas business..

Look, that’s exactly the additional color that we were looking for on why you can set a number at 20% for that upstream piece. So, that’s exactly what we were digging at. And just as a follow-up a couple here.

Maybe you can flush out the expectations on the share gain for Roper Pump, just anything quantitative what happened in 2014 regarding market share, what the opportunity is? And then for John, with the FX pressures, we’re seeing a number of companies engaging for the first time some additional currency hedging and would that be appropriate for you guys?.

Hedging?.

So, I’ll take the second one first. No, we don’t do hedging. Our FX risk is not transactional. We have a very good balance between where we generate revenue and where our cost structure lies. So, we’re not really subject to that risk.

The impact that we have is the translation effect of earnings as they’re generated, whether they’re being Canadian dollars or they’re in euros or pounds. And with respect to hedging, I mean you can change the timing, but you can't change the magnitude.

Eventually unless someone has figured out a way to hedge for the next 20 years, they know what the currencies are doing do and you can hedge for a little while. But those are folks that are really more plan driven, and have much longer cycles than I think our company does.

So, as we look at the sensitivity, I think Brian has already mentioned the fact that we are expecting little bit less than 2% headwind from an FX standpoint for 2015 that translates to about a dime. So, we’ll have to see what the future holds..

And on the market share expectations?.

So Roper Pump was up about 20% in 2014 with -- frankly they were up almost double that in the second half of 2014 as production ramped up for the facility not really facility driven but the fact that where the share gains required us to go ahead and expand some capabilities there.

And so, it really doubled their growth rates towards the back half of the year. And as Brian said, it gives us a little bit of a easier comp in the first half of the year, because we do expect to maintain those share gains with the expansion of some of our Verathon product lines..

Great. Thank you..

We’ll go next to Jeff Sprague at Vertical Research..

Thank you. Good morning, gents..

Good morning..

Just a couple of things. Brian, you mentioned divestitures twice in your pitch. I was wondering, if you could just -- obviously you’re not going to identify businesses, but it sounds like you are more actively looking at that. Perhaps just a little bit more color on your thought process there..

Well, I don’t know about us looking at it more actively, but yet we certainly have had more inbound requests and we don’t even follow-up, I mean, its very rare there is anything we own that we’re interested in getting rid of, but somebody might talk us out of something.

So, I think it’s possible that you could see a divestiture within 2015, but it wouldn’t be a very meaningful -- it would be a non-strategic asset if we did sell something..

Okay.

Could you roughly size now maybe just as a percent of the segment, the three buckets in medical now?.

Three medical products, and then software [indiscernible]..

Software and life sciences. Yes..

Sure. So, medical represents about 80% of the segment, and then its split very evenly between the medical service and technology, the medical products. Now, I’m talking from a revenue perspective now. So, 80% net, so call it 40% medical technology and service, 40% medical products, and 20% imaging.

Now from a contribution to earnings the medical technology comes in higher from an EBITDA perspective, so it’s either more strong on the medical technology front..

Great. And Brian, this question also kind of comes up strategically, but it kind of tweaked me to ask it. You mentioned, Cerner as a comp TradeNet some 40 times earnings or so. We do have a -- you have a very interesting unique portfolio here that’s really not an industrial company anymore.

What's your thought process around the company in its current configuration?.

So we like the configuration. We got a great industrial and energy business that throws off a massive amount of cash that provides a wonderful annuity for us to go out and maintain an investment grade status and acquire a lot of great software and medical businesses and that’s what we’ve been doing for a long time.

When there’s a confluence of reports that you see out there, I think they fundamentally keep talking about or how are you trading as a premium to the multi industry group. It seems so high when in reality it’s beautifully low against who we actually compete against for market capital.

So, at some point in time if that doesn’t get recognized better than it does from time-to-time, there’s always flexibility in what we would do. But we’re going to keep building out our situation. Now we started from next to nothing to create a billion dollar medical and software company.

Our RF business is largely a software company, and industrial with Neptune, Neptune is not really industrial, it’s really radio frequency. It just reports over there.

So, I think you’re likely to see more internal strategic developments around these various businesses than you are seeing something that would result in selling off a big component of it or anything like that..

And then just one other really quick one, you’re at 1.8 churns and you said you’ll be comfortable to add a churn, folks call it basically 3-ish. Are you comfortable to just operate perpetually at 3 or is that kind of you flex to 3 and then you work it back down to 2 sort of thing..

Well, I think it will just depend on the quality of everything that we see. Its not -- when we model ourselves, we model very modest organic growth and kind of 2.5 times debt to EBITDA. I think when we’re below 2.5 times, we feel sort of underinvested and if we got up to 3.25, we wouldn’t be the least to concern with the quality of our cash.

I mean, last year for instance we closed out year-over-year that balance sheet up $400 million in cash and we paid for $300 million of acquisitions. And if you look at $2.2 billion of powder you got to figure another, what do we say $900 million operating cash flow this year.

So, be it $3 billion, it would be nice to get $1.5 billion to work over the next 12 to 15 months to keep our ratios where we are. So, at the moment we’re underinvested, but that’s because of our discipline, not because of the opportunity. And like I said, Strata is not going to be our only acquisition this quarter..

Great. Thank you very much..

Audra, even though we’re at 9:30, I think we have time for maybe one or two more questions..

Okay. We will go next to Christopher Glynn at Oppenheimer..

Good morning..

Good morning, Glynn..

Couple of questions within RF on TransCore and iTrade. TransCore, I think historically the international deals have been sort of one off and it sounds like now you’re alluding Brian to maybe more sustained skill opportunity, so curious about that.

And then with iTradeNetwork just if we could elaborate on what's sort of off the tracks in the UK and how FoodLink is opening up the addressable markets there for ITN?.

Well the international business TransCore is sizable and very important. I mean, there’s a lot of things we do, but they have been -- it’s not broad based. They are specific situations we’re developing a relationship with the government or developing a relationship with a particular agency, so that’s the case in Dubai.

Well, people travel in and out of Dubai marvel at simplicity all of the way that traffic moves and how easy it is to buy a tag. It’s certainly not lost on any of the other Arab countries. All of them would like to be deploying these technologies. So, the Saudi’s now have this breakthrough project in Riyadh.

We assume it will be widely successful, and that will encourage them to put in change orders to expand it there and hopefully over the next 10 years we’ll have a much, much larger degree of penetration around the Arab peninsula.

We are very well positioned in that area to continue to grow, and if you hadn’t had the year of spring you would have seen a lot more activity than it has been able to occur.

In Europe they are pretty well served today, so I don’t think we’re going to expand much in Europe, and in Asia generally we have a lot of issues when to get around the quotation. We have few, a lot -- very specific boundaries.

One is, no Foreign Corrupt Practices Act, that some of the people who’re competing in this space don’t seem to be bothered by that. But we’re very, very conservative in that area. So, this Saudi project is a big deal.

It’s going to be pushing $100 million over the next several years, and we expect it to be $25 million or $30 million this year to offset the Toronto wind down. On the subject to iTrade; iTrade is really doing much better now in the U.S.

and FoodLink is substantially ahead of the early commitments, after just a few months I think we’ve made a number of improvements to their processes, and they’ve got good leadership from their own people and our people that are supporting them.

In the UK the pub businesses have been off quite a bit and the U.K’s had considerable difficulty with -- it’s really not iTrade, it’s an acquisition that the KKR people have done just before we bought it, but we would have never done.

And it’s always been problematic, and it’s really more about data analytics that really ought be owned by somebody that’s in the package good analytics arena, but we’re going to try to clean it up and make it a little bit better. The end markets haven’t been very favorable..

Great. Thanks for the story..

And we’ll go next to Richard Eastman at Robert W. Baird..

Hi, good morning Brian, John, Rob..

Good morning..

Brian, could you just talk for a second about Strata.

Maybe give some, could you just talk about how much you maybe paid for the business? And then also, is there a tie-in with SHP here in terms of taking their accounting software from the non-profit environment to the clinical market? And then maybe just lastly on that acquisition; it seems there is a number of these smaller healthcare software businesses owned by private equity and perhaps private equity hasn’t been able to build the scale with these businesses that they might -- you might otherwise think they could? And I’m curious under your ownership, I mean, do you -- are you more confident that you can cobble these businesses together and create some scale here?.

Well, we’re going to do a great job with the businesses, but it won't be by cobbling them together. We’re un-cobblers here. Consolidation rarely sustains growth companies. These businesses, when private equity owns them, they always own them with an eye to exit.

So, their first year, 18 months of ownership, they’re happy to make investments, but they got to stop on a dime. And they have to capitalize the leverage they get out of those investments, because they got to get rid of it in four or five year.

So it almost invariable and we acquire them, we’re acquiring something that has been under invested in for growth for 18 month or two-year period and the people can’t focus as much on their end markets, saying growth as they can when they come here, because now they can stop worrying about managing for a sale and start worrying about serving their customers and thinking clearly about where to put their resources.

That’s the reason that we’re the successful acquirer of so many of these kinds of businesses.

I’m sure that Barbara at Strategic Healthcare could have probably -- frankly gotten a larger number from somebody else that would have wiped out everything she built in Santa Barbara and absorbed it, because they would have wanted to cobble it together with something and the same thing would be true in Dan’s business in Chicago with Strata.

So Strata is going to be a platform for us even though it’s relatively small now. It's not something that gets cobble together with Sunquest or with MHA. Now we are going to make other acquisitions, some very quickly that will be very complimentary to an MHA and very complementary to Sunquest.

So there is a lot of opportunity that we didn’t have to find those kinds of things. We are always looking for great teams, great ability to grow, buying a business that’s got a little over $30 million in revenue, and to grow 20% is more interesting than buying a business at $50 million of revenue that can’t grow at all. So we are excited about that.

If you noted in Strata, that’s an LLC. So the big -- one of the big things about economics here is we get a really big tax benefit. In fact, our gross tax benefit on Strata is going to be of $40 million.

So that’s a major part of the consideration in the purchase price of the business and Strata is a business that’s going to have over $30 million of revenue and its going to have the EBITDA in our typical Roper kind of strategies and the purchase price is $140 million, but that included the $40 million plus of tax benefits..

Well, when I talk about -- again, when I look at their customer base in Strata, it would just seem that you could share and leverage kind of the customer basis that’s some of these other businesses say SHP, because I look at -- again, I look at Strata having been around for since ’96 and the $30 million revenue number at them.

So the dynamics and the economics of that business, for their customers has improved apparently over the last five years and the demand factor there?.

Yes, I think that’s true and also just the expansion that Dan and his team been able to do in terms of the product lines and the other things that helped people on the cost side. Well, what I would say is that -- look we do see opportunities for these businesses to be able to learn from each other.

I know that both Strata and SHP are very excited about the product lines that each of them have and the opportunities there to be able to learn from each other. It’s always balance for us.

We think there is incredible value in having a business focused on its niche and on its existing customers, particularly one with that has so much runway and ability to capture opportunities like Strata. But we do see the ability to have Strata work with maybe another market opportunity that MHA may have.

So we see those as future opportunities, but we never want to have someone take their eye off the ball of the current niche focus that they have. So we’re not going to try to combine anything together. We always think if we have smart people in the room together that will be able to learn something..

I got it. Okay, well thank you. Thanks for getting the question in..

Thanks, Rich..

And that will end our question-and-answer session for this call. We now return back to John Humphrey for any closing remarks. .

Okay. Thank you, Audra. Once again, everyone thanks for joining us today. We look forward to talking to you again in three months as we finish up our first quarter..

And again, that does conclude today’s conference. Thank you for your participation..