John Humphrey - CFO Brian Jellison - Chairman, President and CEO.

Deane Dray - RBC Capital Markets John Quealy - Canaccord Genuity Scott Davis - Barclays Shannon O'Callaghan - UBS Joe Ritchie - Goldman Sachs Steve Tusa - JPMorgan Richard Eastman - Robert W. Baird Christopher Glynn - Oppenheimer & Co. Inc..

Ladies and gentlemen, the Roper Technologies' Second Quarter 2015 financial results conference call will now begin. I'll now turn the call over to John Humphrey, Chief Financial Officer..

Thank you, Orlando, and thank you all for joining us this morning as we discuss our second quarter results. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer, Paul Soni, Vice President and Controller, and Rob Crisci, Vice President of Planning and Investor Relations.

Earlier this morning, we issued a press release announcing our financial results. Press release also includes replay information for today's call. We have slides to accompany today's call, which are available through webcast, and also available on our website at www.ropertech.com. Please turn to Slide 2. We'll 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 SEC filings. You should listen to today's call in the context of that information. Now if you please turn to Slide 3.

Today, we will 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 in the appendix.

For the second quarter, the difference between GAAP and adjusted, consists of purchase accounting adjustment to acquired deferred revenue and our recent software acquisitions including Data Innovations, SHP, SoftWriters, Foodlink and Strata for about $2.5 million.

As a reminder, this represents revenue that absent our acquisitions, those businesses would have recognized. And now if you please turn the slide, I’ll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants.

Brian?.

Thank you, John, We'll start off going through our second quarter enterprise financial results and then look at the detailed activity within the four segments and the outlook for the rest of 2015 and then questions and answers from the audience, so next slide.

As you can see here a summary of the second quarter we achieved all time second quarter records for orders for revenue, for net earnings, for EBITDA both nominally and a percentage basis and cash flow and margins were really quite outstanding. Revenue was up 1% to $892 million. Organic was flat, but the FX headwinds were 3% in the quarter.

We had 13% growth in medical and 4% in RF and we'll talk more about those two areas. Sort of mid single digit organic growth going forward and then additional benefits from acquisitions. We had declines in industrial of 9% and energy 12%.

A lot of that is foreign exchanges you'll see, but our oil and gas arena was down a little over 20% in the second quarter, which was about on par little bit worse than we had expected and we don't really see any improvement in that for the balance of the year. It might get slightly worse.

Gross margins, despite the end market headwinds were up 100 basis points and reached 60.1%. Our operating margins were up 60 basis points to hit 28.5%, which is truly outstanding margin improvement in this environment.

Net earnings were up 10% to $173 million and that's represented $1.70 and of course we cover -- it is always about $40 million of non-cash amortization in there. Free cash flow was up 24% to $162 million. So these really are record results despite the foreign exchange headwind and the end market difficulty.

Next slide; here we look at the quarter two income statement. You can see book-to-bill was 0.99 and without it being in each of the segments, it was sort of 101 to 0.98 or something. So orders were quite consistent with revenue. Revenue was as we said affected by 3% on FX little bit up 1% overall. Gross profit up 100 basis point, operating margin 60.

You can see an effect to benefit had that we had planned throughout the year on a state tax matter, which has been resolved as we expected. We thought it might have occurred at a later point in time. It's impossible to know when it hit this quarter.

So it lowered out tax rate from the 30.4% of last year to 25.7% this year and that certainly helped the net earnings being up by 10%. Next slide, here we look at the continuing compounding nature of how we grow cash flow. So in the second quarter, our operating cash flow as $173 million which was a 23% increase over last year's second quarter results.

Our free cash flow was $162 million, a 24% increase over last year and for the first half of the year now, we've delivered $412 million in free cash flow, which represents a little over 23% of revenue and gives us a cash conversion ratio of 126%.

And when you think about the compounding nature of us being able to reinvest our cash and transactions, it gives us still more cash. You can look at 2013 in the first half, we had $311 million and just in the two year period, we're up 39% and half one to $433 million.

So we still think that cash measurement is far in a way the most important thing for people to look at when you're looking at the quality of the company's performance. Next slide, our asset-like business model continues to improve. Our working capital was a function of our second quarter annualized net sales at 4%.

Two years ago, that number was 7.5% and people would consistently ask us how you could possibly keep it at 7.5% and we chose not to. We got it better, firstly cut it in half.

So very nice reductions in inventory from 6.3% of revenue two years ago to 5.5% now and that's at a time when there were some considerable destocking in the oil and gas arena which certainly didn't help us sort of inventories.

In receivables, they dropped from 19.7% to 16.6% and at the beginning of the quarter given difficulties, a lot of energy went into reinforcing our disciplined processes around receivables because as you know in periods like this you can have some sloppy activity around getting paid.

And then if we take our inventory at 5.5% receivables at 16.6% and we subtract the payables of 18.1%, you can see our total net working capital there is 4%. Next slide, if we look at the overall financial position of the company, our cash increased from a year ago at $679 million versus $565 million.

Our undrawn revolver and the cash together give us almost a $1.9 billion in powder. The reality is we can easily increase that because of our debt ratios. You can see our trailing 12 months EBITDA is now up to a $1.232 billion and while our gross debt to EBITDA is 2 or net debt EBITDA is only 1.5.

We have deployed $1 billion in acquisitions in the last 12 months and we have a very active pipeline, now we did announce one acquisition we will talk about when we get to the RF Segment, but there are others that were far along and working on. Next slide, here we’ll discuss the individual nature of our segments.

So the next slide, if we look at the four segments here you can see the second quarter revenue in the blue chart and the green chart being the second quarter EBITDA. And so now you have really RF and medical representing little over 70% of the total EBITDA that Roper is generating and they do that at very high EBITDA margins.

Our energy EBITDA and industrial tech if you put the two together, the $100 million of EBITDA and $331 million in revenue, so even in a more difficult end market with FX pressures, we created EBITDA margins in the second quarter of 30%.

The nice thing about the 70% EBITDA from RF and Medical is those businesses are continuing to grown mid single digits organically and they give us higher leverage on the next dollar of revenue than our energy and industrial businesses do. Next slide, we look specifically at energy systems.

It was down 12% on revenue versus last year's second quarter but five points of that was due to foreign exchange and seven points on organic. Deleveraging here was very well managed. You see the operating profit margin in the quarter was 26%. Gross margins remained above 55% and we deleveraged at only about a 34% ratio.

So once again, they've been able to take their variable cost structure, immediately adjust it.

The oil and gas markets were weaker than we expected, particularly in those areas directly related to fracking, our debt business, the diesel engine shut-off valve business was down 50% and when we get to industrial you’ll see Roper Pump had some difficult things as well.

The other markets, some of which were industrial that we report in energy all were satisfactory, generally flat a little bit of improvement in one place or another.

The business executed terrifically well in the segment in the quarter they took some additional cost actions about a $1 million in restructuring, which is included in our results, we’re not excluding it. This demonstrates the benefit of having very few fixed assets.

So we never have to work around absorption issues like others do and we get a very quick payback on variable costs take outs. We've cut about 150 employees in our oil and gas space between energy and a little bit in Roper and Cornell Pump. For the second half of the year we don’t really see any kind of forecast improvement in oil and gas markets.

This is kind of a mixed bag. If you listen to various people, I guess if we were going to say, would it get better or worse, we’d be planning that they're getting worse and not better, but we expect them to be pretty much the way they were in the second quarter.

We expect to get some modest growth in other served markets that these business have that are not in the oil and gas arena and we think that the FX headwinds are unfortunately going to continue to persists much as they did in the second quarter.

We think we'll have high single digit organic decline for the rest of the year, but then gives us really easy comps for 2016. Next slide, if we look at industrial, industrial continues to perform incredibly on a margin basis. Their gross margins in the quarter were over 50%. Our operating margins were over 28%.

They were down 9% on revenue, but 5% of that is foreign exchange and the rest of it is virtually a fact that our Toronto project and Canada with Neptune is winding down and they did very little in the second quarter. In fact, it was down $8 million in the second quarter versus last year. So the rest of the business actually performed fine.

It would have been flat to modestly up. Our oil and gas markets again were weaker than expected. Roper Pumps saw some destocking activity in their surface pumps. So their revenue was down close to 80%, but the realign business was up twice as much as it had been the year before.

So those products continue to be consumed in the ongoing activity of that technology that we've introduced. Rental markets were slow controllers as it relates to the upstream oil and gas was of course not good at all. Our Material Analysis business stores had just a very, very fine quarter. They were up more than double-digits organic growth.

On a constant currency basis, it was up incredibly and still more than 10% even adjusted for currency. As our Neptune project sort of, it appears to us as virtually complete. We're only being asked to do odds and ins now. So that was a negative headwind of $8 million in the quarter.

The rest of Neptune fortunately was continuing to grow and it looks to us like must be continuing to gain share. In the second half of the year, we don't really see any improvements as we've said around oil and gas markets. I don't think they get worse here. Likely they get a little bit of favorable increase.

Roper accomplished a little slower than the rest of our businesses to react. So we've now cut about 40 people in flow control where the end markets have required that. So we think we'll get a little bit better deleverage performance out of them in the second half of the year than we got in the second quarter.

Our Material Analysis business showed no signs of their weakening in any way. It's continuing to do really very well. Neptune in continuing to grow in the U.S. market. The Toronto project headwind in the second half for us is going to be about $20 million. It's about $30 million for the full year and that's the thing to happen.

So these projects there aren’t those big ones that happen very often and they're working on a few, but the core U.S. business will have positive growth this year. So we think we'll have mid single digit organic decline for the segment.

Next slide, carefully look at the RF business, you'll see we had revenue of $256 million, which represented organic growth of 6%. Actually the organic growth would have been little better. You can see in that topline, FX is down 1% and divestiture is 1%.

You might remember in the first quarter we sold our Black Diamond rugged mobile business and that was a little over a $4 million drag on revenue in the second quarter for us. We had terrific results in our toll and traffic business and growth continues to expand. We got multiple projects for upgrades that are in quotation now.

We probably really never had a better forward-looking opportunity than we do today with toll and traffic. The Riyadh traffic project started up in the second quarter and already has resulted in several change orders and extensions that we think will benefit us particularly in '16 and perhaps yet this year.

We had double-digit growth in our tag sales for tolling. The software subscriber additions continue to grow nicely in our freight matching business. We have three of those. One in the East. One in the West and one in Canada.

The strength in our RF product line businesses were excellent, particularly pendants for Senior Care, Submetering for apartment multifamily housing and the UK Water Application business along did well as a result as well. For the second half, we still have that little Black Diamond headwind in the second half.

It will be several million dollars if it doesn’t repeat, but on the other hand didn't contribute any positive income. So it doesn’t have any effect on that. We've got backlog and proposal activity in toll and traffic as I said at all time high with lots of long term opportunities there.

We don't see any pullback in our subscriber growth and our software businesses whether they're licensed for SaaS and we acquired On Center Software, which is in the Woodlands in Houston, Texas. Very nice business, well managed by Cecilia Padilla. It's really again a business that has higher EBITDA margins than Roper's base business.

It's been growing at very solid double-digit revenue, but we actually think it's been underinvested and to support even faster growth and that business only just closed on Monday. So we're just getting started talking with them about how to enhance their growth profile.

We think we'll get mid single digit organic growth for the segment at our end, but total revenue including acquisitions would be a little better. Next slide, here if we look at Medical Solutions, you can see once again you got a little story about us pruning businesses. We got rid, really exited our rugged mobile product line.

That's in addition to the Black Diamond rugged mobile business, which was a little military app. This was a $5 million drag in the second quarter and that's another $7 million drag for the balance of the year. So right thing to do, this was the time to do it. It wasn’t contributing any income.

The technology portion that we want, we've embedded inside our m-tech business. So that's really important for us. Organic revenue shows up at 2%, but if you adjust it for the rugged mobile discontinuance, organic revenue would have been higher.

FX was a 3% headwind in the quarter for medical, but overall you can see revenue grew at 13% even with those issues and operating profit was up 18% and operating margin, that's not EBITDA, operating margin was 36.6%. We had very strong performance out of Managed Healthcare Associates. They continue to gain share.

Of course they have very favorable market conditions as aging continues in the population, but just terrific results. Double-digit growth in our Medical Device Businesses, Verathon was very strong, Northern Digital very strong, and our CIVCO multi-mobility business was very strong.

Sunquest, recurring revenue growth was as expected was quite good, but we did have lower license and service sales in the quarter because of the meaningful use pig through the python that occurred in 2014. So sort of a hopeless comp, but that will change pretty quickly as you'll see.

Q1 acquisitions all three of them, the Strata business, the SoftWriters business and the Data Innovations performed very well and in fact the three together were above expectations and I mentioned that we exited the rugged mobile product line final.

In the second half of the year you can see that we expect MHA to continue to benefit from the market conditions and their ability to execute against that and we see additional medical products out of Verathon as they launch several things in Europe that are new to the continent and Northern Digital expands in its sphere business.

The Scientific Imaging businesses is basically flat. Sometimes they look worse than they are because they've had that rugged mobile business in it for quite a long time and for that long, that gives us a little bit of headway for variable performance in the future.

We think we'll get mid single digit organic growth out of this segment, but of course much higher total revenue growth and then Sunquest has got a very nice opportunity that mostly benefits us in 2016, but a lot of software module upgrades now that meaningfully used processes subside with hospitals, the same people that were involved in those both at the hospital and at our level are able to look at enhanced growth as they do product upgrade, software upgrades for various applications within the hospital.

Thanks a lot. Here we get to the guidance nature of what we think for the balance of the year, next slide. For the full year we were at or establishing guidance at $6.61 to $6.75 or midpoint of $6.68.

Previously we were at $6.75 to $6.95 and the midpoint of $6.85 and we really decided to take that down because we thought we have organic growth of at least 3%, but it looks to us like it's more like 1% to 2% because of the depth of how much the oil and gas upstream markets really come down.

We said at the beginning the Europe steam was about 5% of the business last year and about 14% for oil and gas in total. Now oil and gas is down to 12% as you might expect as the rest of the business is curling and the upstream portion will continue to decline as a function of total revenue.

We’ll get mid single digit growth out of Medical and RF organically, but we'll get additional revenue because of the acquisitions that we already have and others that are possible going to occur. In oil and gas, we think that’s going to continue to be weak. We think it’s going to look much like the second quarter.

So we don’t see much of a recovery in any of those end markets. Our tax rate for the year we said at the beginning there, we thought it would be about 30.5%. We still think it will be about 30.5%.

The discrete item that we had in the second quarter around state sales tax was something we expected to have and it was in our guidance for the full year, but it did move forward in the second quarter. Full year operating cash flow we're saying should be $925 million. In addition to our net earnings we have about $160 million of non-cash amortization.

Our Q3 earnings, which will be just purely the net earnings with debt numbers 153 to 157. Pressures for the year that we have to keep overcoming that we’ve done are largely led by foreign exchange and then quite a bit from oil and gas there that Toronto headwind and then some modest changes in imaging and industrial.

Had a pretty strong June compared to April and May. So we’re a little bit encouraged in that respect. Next slide, here if we look at the second quarter summary, once again we have to really complement our operating people who acted very nimbly in terms of what was happening in the upstream oil and gas segment.

Their ability to change variable costs is always just world-class and really terrific execution. In the meantime, we wound up with record quarters and revenue with net earnings and EBITDA for the quarter. And revenue certainly was hurt by the headwinds of FX, but notwithstanding that, we powered through in a very favorable way.

Acquisitions were up 4% and offset the headwinds and Medical and RF were up so much, they offset the decline in industrial and energy, which was led by that oil and gas problem. Gross margins actually increased in the quarter, which was pretty amazing.

If you're starting out at 59.1% and you can still improve gross margins in a quarter that’s organically flat that says a lot about the quality of the operating people we have in place. Our operating margins were up 28.5% and EBITDA margins at 33.9%. Net earnings we’ve covered before. Free cash flow up 24% in the quarter.

The first acquisition that we've announced that would have been in the quarter didn't get done and 25 July, was on center and we’ve got an active pipeline and we would expect to close some additional transactions before the end of the year and in reflection we just see the quarter as being very pleased given the FX and selective end market difficulty in terms of how we performed.

So with that, I think we're ready to open it up for questions John..

So Orlando, we’ll start the Q&A portion of the call..

Okay. Thank you. We’ll now go to our question-and-answer portion of the call. [Operator Instructions] We’ll take our first question from Deane Dray with RBC Capital Markets..

Thank you. Good morning, everyone. I was hoping to get some additional color on the energy businesses broadly. In the first quarter you were thinking the whole market that you address would be down 35% and -- but your businesses might be down 20% or little bit more that obviously has worsened.

So what are you assuming now for the balance of the year on the energy exposed? And then what are you thinking the market dose in those businesses as well..

So Deane, the way we characterize that, so we thought that the oil and gas market broadly I think we said maybe down 30%. It’s down at least that and probably a little bit more. It’s actually worse than what we expect.

When you rig counts particularly down 50% year-over-year, that’s worse than we what expect it and so we saw that really impact those businesses that are in the oil and gas market that have any exposure to upstream.

If we got something -- if I got something wrong, what I got wrong was there is a little bit of follow-on effect to some more of the downstream and midstream markets a pullback on capital spending on their exposure on the upstream side. And so what we're expecting as we go forward is really no improvement.

Even though we've seen little hints of improvement in the oil and gas market, that's not what our guidance is based on. At this point, we're expecting it to remain flat to where it ended the quarter..

And just to clarify, I know you've focused on the upstream exposure, you just mentioned mid and downstream, is that still the bulk of the exposure at 3% mid, 6% downstream and what's the expectations on those businesses?.

Yes, the exposure is as you described, so about 5% upstream and 9% mid and downstream and what we're expecting there is for that to be down kind of in the mid single digits..

Got it. And just last one….

While just to be able to clear, in the second quarter because it's already down, it's not 14% of our revenue, it's more or the upstream was about 4% of our revenue and then mid to downstream was a little less than 8%. So it's more like 12% on a go-forward basis..

Got it. And just last one on the oil side, the expectation that Roper Pumps might be able to outperform on the ability to gain share, has that played out or is just the aftermarket on shell is….

It was down as spectacular. They more than doubled their revenue on realign products in the second quarter, which is what we were hoping.

So that was a huge bonus, but what we got that we weren’t expecting, the degree of is surface pump, the revenue was down 79% and we had not expected people would shut that off entirely and they virtually -- orders were down 91%.

So what that is even though it is not a lot of stocking, it just people weren’t going to use everything they had and end of life before they did other things.

So the good news about the use of realign facility is they performed as expected, actually better than expected and it continues to gain share, but it's not big enough to offset the core flow control piece, it's down so much..

Understood. Thank you..

Welcome..

Our next question comes from John Quealy with Canaccord Genuity..

Good morning. Thanks very much.

First, for on-center, can you give us a little bit on the metrics multiple, it's SaaS versus perpetual license, a little bit there, thanks?.

They have a lot of license and maintenance and they've introduced the SaaS model, so people are shifting over some to the SaaS model, but a lot of the things that they do have to do with bids and estimation and actual architectural moving of walls and things that's just phenomenal what their system is able to do.

That's a business that's going to be a little less than $30 million of revenue with a little less than 50% EBITDA and it's positive leverage going forward. It's quite high and the growth rate is double-digit. So you can figure it out from there..

Perfect. Thanks.

And then the future acquisition pipeline, can you talk about with oil being severely depressed, have multiples come in, thanks?.

I wouldn't say that we've been following the multiples for acquisitions in the oil space for quite some time. It's been a decade since we've made any acquisition in that segment. I think Dynisco was the last one we made and it was in 2006. And despite whatever multiples might be doing in that space, that's really not where our focus has been.

We continue to remain focused on higher technology areas, things that have exposure to in the markets that are cyclical like medical and other areas where we have a niche software or network type of business that we're looking at and that continues to be the types of things that we're looking for or some type of proprietary technology that benefits an existing area.

That continues to be our focus area rather than trying to bottom feet in something like oil and gas..

And our next question comes from Scott Davis with Barclays..

Hi. Good morning, guys..

Hi. Good morning, Scott..

Brian, I am curious to hear kind of your view of the world, the last time we had your energy in industrial business is down this much, we were following into a pretty big recession, not far after that, do you look at this time as having risk profile or at least similar characteristics what you've seen in the past when the world was about ready to fall part or is this too isolated to just the commodity itself, oil?.

No, no, no.

We're debating -- we could have gotten more granular in our remarks, but just I think it's so instructive about how good our business model is, if you go back and you look at how the segments were in the second quarter of '09 and compared to the second quarter of '09 to the second quarter of '08 and then you looked at the comparison of the second quarter of '15 to the second quarter of '17 to see kind of the rates of change, you would be astonished at how much better all these are.

The thing that is amazing in the second quarter of '09, our industrial tech business, which is largely Neptune and flow control, it had $32.5 million of operating profit on a reported basis and that was on a $136 million of revenue. So its margin, it was 23.8% in OP at a time when people were concerned the world was ending.

This time this reduction, our OP and industrial is $52.2 million, not $32.5 and our revenue is $186 million, not $136 million. So we have now OP margins of 28% in industrial in the quarter versus 23.8% in the second quarter of '09 and it's nothing like the second quarter of '09 in terms of the rate of de-escalation.

Second quarter of '09 over '08, our sales in the flow control segment were down 25.5%, OP was 31.7%. There wasn't a lot of currency issues either.

This time our revenue is down 9%, not 25% and our OP was down 13%, not 32% and if you look at the energy segment, the energy segment in the second quarter of '09, it had $23 million or OP our $105 in revenue. So it had OP margins of 22%. This time it's got $37.7 million in OP on $145 million in revenue.

So the margins are 26%, up 400 basis points from the second quarter of '09. The sales trend in '09 versus '08 was down 27%, this time it's 12% and half of that is FX and OP was down 35% this time it's down 15%.

So entirely different and then it's always for us painful because people ask these reader cost questions about these two businesses, which represent less than 30% of our EBITDA. Roper, let's go to medical. Medical in the second quarter of '90 we had $12.4 million of OP on $76 million of revenue 16.3%.

This quarter medical had $109 million in OP, eight times, nine times the number on $302 million in revenue and it wasn’t down, it was up 12% on sales and it was up 16% on OP. Our margin in medical was 36.1% versus last year's second quarter of 16.3%. Our challenge is simply to continue to grow these things as well as we can.

In our RF segment in 2009, our second quarter had $39 million of OP on $187 million in revenue. So our margin profile was 21.1%. Today RF had $79.9 million double OP and it had $255.6 million in revenue. So sales were up 4%, they were really up more than organically and the OP was up dramatically. So you're looking at margins of 31.3% versus 21.1%.

In total Roper, in the second quarter when people thought the business was ending had $96 million of OP on $505 million in revenue 19%. This quarter had $252 million in OP on $890 million in revenue $28.3 million. So we were up 930 basis points quarter-over-quarter in the as reported GAAP OP number. So yet there is a sharp reduction.

Yes, we got rid of 150 people. Yes, the investment in that restructuring will turn cash positive in the fourth quarter and no, we're not really worried about it..

Okay. I think that's clear. As a follow-up, can you give us a sense of -- you just mentioned about restructuring that was going to be my follow-up question, in terms of how much the quote “restructuring impacted the quarter” so we can get a sense of….

About a $1 million pre tax..

Okay. And going forward is that number -- do you feel like you've done what you need to do or is there more to be done..

Absolutely, I think we have done what we need to do. We'll see a little bit more that will come out in the third quarter just because of notifications and a lag and how that works. So there will be a few other people coming out in the third quarter, but all total, we think it’s going to be in neighborhood of about a 150 people out of 10,000.

So it’s not very material..

Fair enough. Okay, good luck guys. Thank you..

Shannon O'Callaghan with UBS has our next question..

Good mornings, guys..

Good mornings, Shannon..

Hey, on the industrial business, so ex Toronto it was flattish even with the surface pumps down 79%.

Can you talk about a little bit more the other pieces there that grew in the quarter and what’s driving that?.

Well the core thing was our Struers business in Denmark, which had nearly on a constant currency basis it grew nearly 20%, but it really was up sharply. We had researchers in the Germany. Struers does sell somewhat into the technology side of auto. So that’s pretty powerful for them at the moment.

And they don’t really see any shortfall in any of that activity. I think Asia is more modest and Europe is up. Actually Europe in total for the company was surprisingly strong in the quarter. On a as reported basis, it’s a down a bit, but the currency was down 20%. So if you look at the costs of currency performance it’s pretty solid..

And in fact Shannon, you're exactly correct, if you exclude the Toronto project, the industrial segment was about flat organic.

And so that also speaks to the earlier question about oh, my gosh, is this broadly going to impact all these end markets? Well no, is the short answer to that and no because what we’re seeing is not anything like what we saw last time where the decline is really only focused on those businesses that have exposure to oil and gas end markets and the other end markets that we serve in these two segments still performed pretty well..

No that’s helpful thanks and then on medical in the second half, I know you had a kind of tough comp. This quarter it was only up 2%. You got mid single digits in the second half.

Anything in particular, you mentioned a couple of things but anything in particular accelerating versus the 2Q rate?.

Acceleration is going to be around some new product introductions at Verathon and it just continued its share gains a little bit of the meaningful use upgrades. A few more of those happened in the second quarter for Sunquest and happened throughout the rest of the year.

And so we actually expect the Sunquest be to get better in the second half than it was in the second quarter, but that was largely as expected for the way the year was going to roll out..

And the software module upgrade you are talking about there as more of a '16 thing, could that be a big number?.

Time will tell..

I don't think it will be -- rounded out when we get to the '16 guidance.

So people in the hospitals just have to understand how much energy they have to devote for the meaningful use requirement for the government and for doing that we’re not doing a lot of other things and most of them have that challenge behind them And so this is our organization, so we don’t have to spend as much time in that phase, the implementation with them and we can turn our attention to demonstrating the immediate payback of upgrades to a wide variety of various things we offer..

Okay. Great. Thanks guys..

You’re welcome..

We will now hear from Joe Ritchie with Goldman, Sachs..

Thank you. Good morning, guys. So I recognize that energy is clearly a smaller piece of the puzzle today, but just want to focus on it for a second. I think last quarter you talked about some projects in compressor controls that you were looking at.

I am just curious whether this project just got deferred or whether there is some cancellations and I am also interested in hearing anything that you can tell us about the inventory levels in the channel and what you’re seeing from a pricing standpoint?.

We really don’t have any inventory levels in the channel. If you look at the energy systems business, the largest component of that is compressor controls and it's always build for a specific application for the firm oil that goes along with the software that we provide to people. It’s really a systems business.

The little bit of products and they're really related to valves that we have, which are for these diesel engine shut offs and certainly that had just come to dramatic reduction of about 50%.

So there is a little bit of inventory that they got to work off, but not a lot in pipeline because the fact we basically sells direct and a lot of these products and they have very fast turnaround. So there is not a lot of -- there really aren’t channel partners out here or stocking and reselling stuff.

The only thing that we have that gets stocked are standard Neptune water heaters and that’s through our proprietary distribution network and certainly no inventory problems there. As far as CCC is concerned, it’s really around slowness in people deciding what they're going to do. So they haven’t lost any projects.

We haven’t any projects that are canceled. There just things are relatively slow, as you would expect they would be for people to make big capital decisions right now..

Okay.

That’s helpful and Brain any color on pricing?.

Well our gross margins were up a 100 basis points. Gross margins and energy are 57%. Our gross margins in industrial are 50%. So I wouldn't say we have a lot of pricing problems..

Okay. And so what are your booking into backlog still appeared at least comparable to what you booked previously..

So probably you're looking at read-across stuff from others and that’s not what we do. We have very, very specific applications. Not a lot of competition, but Denmark it's all up. We catch a cold. And that's what's happened, but doesn’t affect our -- we're not in a competitive market place where we’re overly concerned about pricing.

And in a market like this that’s end market driven, it doesn’t market what you’re pricing is. People aren’t going to buy more because the price is well run..

Okay. Fair enough. Thank you. I’ll get back in queue..

We’ll now hear from Steve Tusa with JPMorgan..

Hey, good morning..

Good morning, Steve..

On the acquisition pipeline, any sense of a change at all? Is the market gets a bit more volatile or some financial issues perhaps globally maybe some of these guys pulling back a little bit from a private equity perspective.

Any change on pricing broadly?.

They have so much new money that keeps coming from investors that they're at least not worried about pricing with other people's money. I can assure that they're just as aggressive as they've ever been and you still have lots of forms. If we look at the large banks like the JPMorgan getting told let’s watch how much on putting on debt staples here.

Let’s not get above five times and so forth. Quick then, there are all these other kind of people out here. Pension funds from unions in Canada, they got all kinds of people that are happy to supply all kinds of debt. So we still see 6.5 times debt on anything that’s really a good business. So that drives up multiple.

So multiples are still high, but on-center the perfect example of the kind of things that we do, here you've got a very well run business and a very nice markets. It's pretty niche oriented thing. Doesn’t lend itself to and Oracle or SAP coming in and trying to take it over.

It’s a business that Management wants to stay with and drive the business and they want to have a home that will invest in them. And we fit that better than private equity. So that all of these things work to our favor and then nothing like that has changed the acquisitions that we have right now are all similar to those kind of things.

So we don’t see that as a constraint..

Got you. And then just one last question. I think this is little more just like top down I was trying to kind of learn about how you guys manage these businesses since your operating model is pretty unique and a little more decentralized.

So when like am oil and gas issue or an issue like this pops up, it happened a couple of years ago as well when you had the nuclear business that fell off. Are those guys coming to you and saying late in the quarter obviously, hey, we're weaker than expected, here's our plan and you say okay, good, plan, go to it. Is there any wrangling.

Is there any top down from you guys more of a discussion where you kind of push more aggressive actions down.

I wouldn't think that's kind of the way that you guys manage because you have such great operating people, but I am just wondering how this kind of -- how this makes its way up the pipeline to you guys and then what you do if anything to kind of tweak that they're responding to end market like this, that's obviously highly unique and kind of a surprise?.

That's a great question.

We have an enormous benefit here in that each month, the second after the month ends, we know what their orders and their revenue were and we as you remember, we run this place on both economics and accounting because GAAP accounting gives you such distorted information about what's really happening with cash nature of the business.

So we know what the breakeven of the business is. Going into a quarter means what the marginal contribution will be after they've covered that on a revenue basis. So we immediately, two days after a month ends have a very good idea about what's happening to their trend and we will talk to them at the end of that month.

They’ll provide us a quadrant feedback about what's hot in the business, what's happening in terms of what they're winning or difficulty that they're having.

How the quantitative nature of the business is in the month and what they're concerned about and so that becomes more of a socratic discussion, but we're going to encourage them to take the actions that they need to take, but never harm the business.

So we always start out with do no harm and we've done it so much for so long, it's just a cultural kind of thing. Nobody would hide stuff here. It's not like your typical multi-industry company that many of our senior leaders grew up and we've all had really bad quarter to make sure you paint the plan.

So that's not how it works here and people know that..

Okay. Great. Thanks a lot..

And next we'll hear from Richard Eastman with Robert W. Baird..

Yes. Good morning..

Good morning..

Brian, just a couple question around the RF Tech piece of the business, really two things. One is on the EBIT margin there, the 31.3%, is that again, is that very influenced by the non-tolling businesses just in general, is there a mix issue there that got the profitability that high? And then secondly on….

Currently the non-tolling business, we have software businesses in there. They're high margin and the tolling services side of activity has lower margin, but the technology product side with the readers that we deploy and that it has to go along with are much higher margins.

So they come in with abundant margin that's quite good, but more like the rest of our businesses than the software businesses, which are higher. So as we have higher software, it's good, but right at the moment, you've got quite a large piece of our activity is in tolling.

So it has a big effect and they certainly\ are much more profitable today than they used to be..

Okay.

And then is the -- the deadline for this interoperability is 2016 and is that aside from Riyadh in the tolling business, are we seeing that influence or have we seen it or should it accelerate when it comes to TransCore?.

The benefit that TransCore has is we have the best technology. So we have readers that are capable of reading what are called multiple protocols. So we can read a wide variety of things. The people who are sitting in Chicago and the people on the East Coast are stuck with a proprietary very old technology there out of the Austrians.

And you would have to ask them how they feel about their future, but we're heavily engaged all the time with people around interoperability and ways that we can facilitate them. The higher degree of interoperability when we have the best protocol technologies to read all the different things that are already embedded should be favorable to us..

The other thing I would say on that Ric is we've also recently introduced, it's in the last year I believe, not only the multiple protocol reader that Brian talked about, but also a multi-protocol tact.

So we're actually selling tags right now to real customers and that tag can be used all across the country no matter where the driver most of these are commercial applications right now where over-the-road vehicles, trucks etcetera.

We want to be able to have that single tag that can go through all the pieces and we're at the leading forefront of the weekend of technology there..

We're fully faster than others, but also the change out coming from government sometimes is slower than they're suggesting..

Understood. Okay. And then secondly on the Medical Solutions Business, it looks like MHA had a fantastic quarter and so two questions there.

One is can you just give us a sense of I presume that your market, your favorable market conditions comment as maybe perhaps around pricing, can you give us a sense of what the double-digit growth that MHA maybe how much of that was pricing pass through? And then secondly, CBS Healthcare is buying OmniCare and some of the OmniCare drugs I believe go through MHA, the specialty Pharma and I was just curious is that an opportunity that acquisition or is that a potential threat to MHA going forward?.

We certainly don't see it as a threat. OmniCare is not out biggest customer, but just so people understand we get a percentage of things that happen in terms of the billions of dollars of stuff we're processing. The revenue that we get is just a percentage of that.

So we don't raise prices in terms of that percentage that we're getting from somebody, but if generic drugs for instance go up in price versus where they were before, then we will get a benefit from that because the activity comes out at a higher price if you have formulary drugs that get converted to generic and the price goes down, that's a decrement for us.

We have benefitted by generic Pharma pricing being higher in the last two years versus the way we modeled it at the time of the acquisition. So that has been a benefit and then you see today what is doing Teva's doing with $40 billion transaction. Generally, the things that are going on in the marketplace are favorable to us..

Okay. Okay. Very good. Thank you..

Our next question comes from Christopher Glynn with Oppenheimer..

Thanks. Good morning.

And I think you just kind of got to some of the questions I might have asked, but how are some of the RF growth strategies playing out and how should we think about the compounding opportunity as you're building out this installed base further?.

Well in the software businesses, they have very high marginal contribution rate. So as they grow, you got more cash to reinvest in other acquisitions. They really don't need to consume more cash inside them. So that helps us.

TransCore situation in RF because it's a big piece of the segment is slightly just better managed today than it used to be -- used to be on their service side of stuff, particularly almost civil engineering and the design of things at the beginning of roadway exits and what have you, they would have cost plus contracts, but they would have retention issues and I think today TransCore is about 10 times better as an operating company than it was when we acquired it.

And so they don't -- they get pretty decent margins out of that, but big revenue growth out of them on the service side doesn’t have the same margin contribution that all the rest of our RF businesses do..

And the other thing I would say there is that on the tolling traffic piece. It's not the same type of compounding that is on the software side, but because we execute so effectively, because the TransCore guys execute, they're able to win projects in adjacent areas.

Our execution around our software for the New York City traffic control system was the reason why we won the Riyadh project in addition to our proven ability to execute in the region with our toll solution for Dubai.

So those things don't always kind of have a liner relationship in terms of building on themselves, but the larger we become there, the more opportunities that we see..

Yes definitely noting a big difference in that business. And then on -- you noted the challenges on working capital improvement in times of disruptive oil and gas markets and sloppy payments and such and very complimentary deployments employees there.

What are the key enablers there? Is there a lot of customer selectivity historically or tough collections practices?.

I would say that the primary thing is that the things that we provide, customers rely upon. And so we provide the discipline for our businesses so they have the ability to say no to people. That's one of the benefits that we're able to provide for folks.

And because customers are reliant upon this specific technology or the solution that we're providing, it's not something that they can just say, look I am not going to hold payment. You guys can't ship to me anymore. That's too important to our customers.

So it's good execution in terms of the discipline, but primarily it's because of the position that we have in the end of markets that we serve..

Got it, thanks..

I would say that the other thing having worked in very large environments, if you go into typical multi-industry and you ask somebody who is responsible for receivables, you will get a different answer than you will get here because if you go and you ask somebody running one of our niche businesses, which remember may only be $80 million in revenue, who's responsible for receivables, because he is going to say [ridge Betty] [ph], and she's been here this long, and she knows that and so there's a focus level here that is just very helpful..

Thanks..

Okay. Thank you. And I think John, with that we're going to….

Yes, I think we've reached the end of our -- the end of our time. So I want to thank everyone for your participation today and we look forward to talking to you again in three months..

Ladies and gentlemen, that concludes the conference for today. We thank you for your participation..