John Humphrey - Chief Financial Officer Brian Jellison - Chairman, President and CEO.

Shannon O’Callaghan - UBS Deane Dray - RBC Capital Markets Joe Giordano - Cowen & Company Richard Eastman - Robert W. Baird Robert McCarthy - Stifel Christopher Glynn - Oppenheimer.

Good day and welcome to the Roper Technologies’ Fourth Quarter 2015 Financial Results Conference Call. Today’s call is begin recorded. I will now turn the call over to John Humphrey, Chief Financial Officer. Please go ahead, sir..

First, we completed the divestiture of Abel Pumps during the fourth quarter, resulting in a pre-tax book gain of $70.9 million; this was partially offset by an impairment charge of $9.5 million relating to an imaging investment we made in 2007.

Second, a $4 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions made in 2015. This represents revenue that those companies would have recognized if not for our acquisition. Finally, we have a $2.6 million inventory step-up expense relating to the acquisition of RF Ideas.

Now, if you please turn to slide four, I’ll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. And after his remarks, we will take questions from our telephone participants.

Brian?.

As we look at 2015 summary and then the outlook for the year, we delivered record annual results for orders and revenue and margin and net earnings, EBITDA and cash flow in ‘15 and that was despite probably the biggest headwind period we had with so much coming from currency and oil and gas.

Our operating cash flow was up 11%, free cash flow also up 11%. We had terrific margin improvement with gross margins up 140 basis points to 60.7%. EBITDA margin is up 80 basis points to 34.6%. And free cash flow at $893 million represented 25% of every dollar of our revenue and 132% cash conversion versus the DEPS number.

We deployed $1.8 billion in really attractive acquisitions and we increased our dividend by 20%. As we go into this year, we expect to deliver record performance in ‘16 with that revenue growth we mentioned just the slide before, 8% to 10%; operating cash flow around $1 billion.

We think we’ll deploy well over $1 billion in acquisitions that can easily be higher than that. And we’ve already closed our first one with CliniSys for about $250 million in January. We’ve got a very attractive pipeline. We are looking at a transaction on Friday and another one on Monday.

And so, there is just a great deal of activity going on, probably the most that we have ever seen in terms of pipeline. We continue to compound cash, increased shareholder value last year, you got a lot of alpha [ph] off us in 2015. And we’re just going to think we can continue to increase our cash as we look at 2016.

So with that John, I think we are ready for questions..

I think so. So Diana, we are ready for the Q&A portion of our call..

Thank you. [Operator instruction] Now, we will take our first question from Shannon O’Callaghan of UBS..

Brain, just on the assumptions on the oil and gas of the down 30 for Industrial Tech, and down 15 for Energy, maybe just explain a little bit more the differences between those two decline rates, and then some of the other businesses around the oil and gas stuff within the energy segment that you have a better outlook for..

Well, in industrial, basically Roper Pump is almost exclusively oriented around upstream oil and gas. So, it’s not a huge business but it has a big, big drawback when you have change in tracking and it’s primarily U.S. business.

So, if oil and gas component was down 30% in ‘15 from ‘14 and we expect it will be down another 30% in ‘16 ‘15, but it’s still fairly small number. So, it’s about $20 million revenue drag that we’re modeling into ‘16. None of the other businesses in Industrial Technology have anything to do with oil and gas.

They’re instrument companies or over half is the Neptune and water meter business which is going to grow next year. So, it’s just that one isolated. And there is no midstream and downstream activity really in Industrial.

When you get into Energy much, much bigger total dollars of what you are talking about, about 60% of the segment is oil and gas, but only some of it is upstream, primarily upstream portion or couple of very small businesses, Viatran and little bit of Amont [ph] and then quite a lot of Compressor Controls.

So, Compressor Controls has been living off of a great project backlog. Their service work we expect could be a record this year in 2016, but we think their project work will drop really dramatically, it could drop $30 million to $40 million.

And the midstream and downstream activity for the year has been really decent all the way along; the only drag has been the currency. But then in the fourth quarter, we didn’t get as much of a seasonal uptick in those downstream businesses as we normally do, so mostly testing businesses. So that bodes for slight deterioration, probably in ‘16.

The rest of the Energy businesses, the 40% are really mostly test and measurement kind of businesses and then were up really sharply at Zetec. So that helps offset -- that’s we are saying 15% for Energy but it’s 30% for the upstream portion of Industrial..

And then within Industrial in terms of getting from organic declines to starting to grow there again, what is the Toronto comp impact; what was it in 4Q; what is it in 1Q? And then what’s driving that double-digit Neptune growth; I mean is that kind of a sustainable rate or what’s the….

It’s certainly going to be very solid growth in 2016. It’s about $10 million dividend [ph] each quarter for the Toronto project as it’s fell off. There is a little bit of revenue we are still getting out of Toronto for last minute adjustments but it’s not very meaningful. It’s just domestic growth in commercial water meters and new wins in projects.

We are going to have some -- I mean we are having share gains that are really obvious to us when we look at the data and we are going to have further share gains in 2016 that we are confident of based on all of our contacts and with our bid process..

Yes. Shannon, Toronto project really completed substantially in the first quarter of 2015. So, it’s still kind of in that $10 million comp range in the fourth quarter against the fourth of ‘14 and it will have a little bit of a headwind in the first quarter on a year-over-year basis. But then after that it’s going to be more normalized.

So it’s not an acceleration that we’re looking for; it’s really some headwinds that start to go away..

Thank you. We’ll take our next question from Deane Dray of RBC Capital Markets..

I’d like to go back on to the oil exposures for Industrial and Energy, and just talk about if you could your visibility in the businesses, specifically around orders in the quarter. And then on the organic assume declines; maybe discuss what volume versus pricing.

There is a lot of supplier squeezing that’s going on in the sector and wouldn’t be surprised to see if you’re seeing some pricing pressure as well..

Well, if you talk of ourselves, I’ll tell you it’s massive pricing, but there is no pricing pressure. That’s not the issue at all, just pure -- the biggest component of course is currency, but then from a unit situation, it’s the project work at Compressor Controls this year. It’s really easy to detail that out. So, those numbers are pretty good.

Last year, we actually said when we initiated guidance, we thought upstream would be down about 20%.

You correctly challenged us about CapEx is down 30, might it not be down 30, and we said well it could be down more than 20, but we thought we had a particular arrangement around surface drilling, which is new technology, which has rapidly gained share and it was doing that at the time and we thought that would continue in the second quarter.

But in the second quarter, they basically stopped all ordering and consumed all inventory they could and that hurt us a little bit. And then in the fourth quarter, we didn’t get any seasonal bounce -- well we did, but not as much as normally would.

So, we’re very comfortable around guiding down 20 million on oil and gas, and industrial and around 50 million in energy. I think that’s quite correct. And then, there would still be a little bit more drag on a nominal number basis with currency, but it’s definitely not pricing.

And the guys have been pretty correct, all year along except for that Q2 situation Roper Pump where our supply agreement got suspended for that quarter..

What were orders in the quarter for both?.

The segment book-to-bill was like 0.88 for energy in the fourth quarter..

And it was 0.97 for industrial. So on the industrial side that 0.97 is the kind of typical for a fourth quarter, but it’s definitely wider. So you asked about visibility also.

So for the products businesses, particularly around upstream and even on the mid – downstream, those are generally going to be book and ship inside of a relatively short window, two months or so.

Where we do have better visibility and where we’re talking more about this is on the Compressor Controls, right because it’s more of a project business and that’s where we saw an order shortfall in the fourth quarter leading to that 0.9 book-to-bill area, and why we’re expecting that to be a tough year for the project based business, because we have good visibility in that area..

Brian, your referenced back in the second quarter some of our expectations that upstream could be worse. Just to kind of give you a data point, we had launch on Friday with the CEO of Schlumberger and their expectations is upstream could be down 35%. So, we’re in that right neighborhood.

And just last question for me would be these businesses, so we talk about Roper Pumps or Compressor Controls; these are legacy Roper Industries businesses and certainly not something that you would be looking to invest in today.

Now, in the teeth of the oil pressures here, certainly not a time to talk about divesting, but would there be an opportunity at some point to separate the Roper Industry legacy businesses from Roper Technologies, where you’re focusing today?.

It’s certainly possible; we talk about it quite a lot. And there are a lot of different avenues for achieving that.

It could be spun off as an independent entity where people would be able to make kind of one-for-one decision about whether they wanted to be in that space as an investor and it could be put together with another business and some kind of merger.

Again, it’s not something we would likely sell, because the tax [indiscernible] sale is just pretty prohibitive. And the businesses are very good. I mean the oil and gas businesses, we put the whole thing together, and they have an EBITDA margin of 34%. And they don’t take a lot of assets; they are very, very cash accretive to our number.

And for those people who like EPS, they give us terrific EPS, because there is no amortization. But you’re right. I mean it’s something we’re always going to look at.

And certainly there have been more than one phone call in-bound about people who like to do something, but selling them is not the best thing for our investors, finding tax free alternative to that would be more attractive..

Thank you. We’ll take our next question from Joe Giordano at Cowen & Company..

So, what I’ve been trying to get with everyone’s guidance is kind of separate how much is the progression throughout the year is, anticipating a market upturn like an underlying market upturn and how much is specific to the company as cadence of revenue that’s already in hand, orders that you already have in hand.

So, how do you separate your expectations with better second half versus what you know and what you are hoping?.

It’s a whole lot more of what we know and what we hope. We don’t really have very many businesses, only one or two that have any tide at something that’s kind of a larger macro in the markets. The markets that we serve are so niche.

They end up being more driven by our activity around new products or new software releases rather than hope for some macroeconomic recovery. We are not really expecting any of that; that’s not something that we try to forecast. It really doesn’t drive many of our businesses.

But it’s not as simple as orders in hand because we really don’t have orders in hand for products or for activity that’s going to jump in the third quarter or fourth quarter. So, we’re not a projects type of E&C business like that.

But it’s really around things that we know that we’re going to able to introduce to the niche markets that we serve and again new products growth in those areas..

And then as you look at your pipeline into 2016, what have you seen in terms I guess across the various sectors that you play in, and in terms of bid ask spreads and how they are moderating or how they are moving, which areas are looking increasingly more attractive or increasingly less so in terms of valuation?.

In terms of acquisitions?.

Yes..

The bid ask spread is wide, it’s always wide. We were able to deploy $1.8 billion last year and we’ve already got a quarter of $1 billion done now. So, we don’t anticipate any difficulty at all. I do think that the notes out today are interesting. So, there weren’t any IPOs in January.

So, if you were a seller of private equity, you might continue to say whatever you think somebody is going to listen to. But the reality is their debt costs are going up and their active strategies are diminishing. We remain the best mid market acquirer of assets on the face of the earth.

So, we are not going to have any difficulty in finding high quality businesses at rational prices..

At what point does it -- do you start looking -- you guys are ahead of getting away from some of these energy industrial type of applications into where you are with your medical businesses? At what point do you start to look opportunistically a little bit more aggressively at some of these sectors that have been down a little bit more?.

What we always look at is the cash return we can get out of an investment. And so what happens is it’s hugely difficult for an industrial asset to have the kind of cash returns that we are going to demand. But whenever we see them, we are willing to make investments in those.

We bought a pure product company in RF Ideas this year which is just a world class business with terrific leadership, very high margins, relatively light assets but they are certainly making stuff and they are selling stuff. So, it depends on the quality of what it is we see. But we would never buy something at a public market deep discount.

Let’s say some energy business dropped 30%, we wouldn’t buy something because it dropped 30%; we would only buy something because its forward cash returns were extremely attractive. And as generally as a rule, people overpay for low quality assets under the theory that they are going to find some way to make it better.

So, we’ll leave the buying of distressed assets to others. We want to buy businesses that have consistent growth and recurring revenue and light assets models. And we haven’t seen any other than RF Ideas. We haven’t seen anything in the last two years in the Industrial segment that qualifies for that..

Thank you. We’ll take our next question from Richard Eastman of Robert W. Baird..

Brian, could you just speak for a minute or two to the medical segment in general? Again, given the ‘16 guidance, mid single-digit growth and the core order growth of 7% in the fourth quarter, it looks little attractive.

Is there anything in the mix to be alert for in ‘16 between medical products and software and imaging when you are talking about mid single-digit growth either of those or any of those kind a leading core growth and could give us an upward bias on the margin line for medical?.

It’s a good question. Sorry, I have to dissect it. Remember that in the medical and software, we have a huge amount of recurring revenue, right? So, the recurring revenue, it’s not going to grow by a higher number. So, when we say mid to high single-digit that has to be something that takes a whole segment into consideration.

So, the product portion in the new software sales have to be higher than that in order to get the whole segment up to mid single-digits.

I don’t think that there is any -- certainly Sunquest in the second half of the year should have outsized growth to what it had throughout 2015 because we had the meaningful use improvement in ‘14 and the beginning of ‘15 that is a comparative drag and that will go away as ‘16 matures.

I don’t think there is really any particular driver we -- in the medical software -- in the software businesses and RF component, there some drivers that have had escalating growth. I don’t know John, if you want to add anything..

No, I don’t think so. So, I think it really will be. We expect ‘16 to be led by more higher V [ph] on the medical product side with some continued new product introductions; we introduced some things at Verathon in the latter part of ‘15 so those start to really ramp up.

We have other new products that are being introduced to the market as well, as well as continued growth around some image-guided surgery applications that Northern Digital continues to just perform phenomenally well on.

And then as Brain mentioned, in the software and services side that’s kind of a mid-single digit grower anyway because of the huge amount of recurring revenue. And that’s what we expect in the latter part of ‘16. We are not expecting a whole lot of recovery at all in the imaging world. I think that’s expected to be flat to maybe up a little bit..

And then just one last question, John, when you kind of speak to ‘16 overall, again we -- we all have our estimates as to what acquisitions completed will contribute to the EBIT line.

But on that 2% to 4% core growth, what’s just kind of a mid-point conversion rate that we should see on the 2% to 4% for the core business?.

Conversion, you mean like leverage?.

Yes, to the EBIT line?.

It’s not a come up to your own, we expect that to be somewhere in the 40% to 50% range..

Thank you. We will take our next question from Robert McCarthy of Stifel..

So, two questions, one is just kind of the old chestnut that people asked about Roper and M&A. And clearly, given the environment we are seeing, and I guess one of the cofounders of Apollo [ph] just talked about the financing markets shutting down and the sky is falling.

But in terms of just coming back to that question, is there particular types of companies that you are kind of looking at now that really lend [ph] themselves to be acquirer in these environments for really there is a crowd out of traditional private equity and really you can kind of sweep in besides just normal, is there particular vertical or end market where you are really well-positioned or well-advantaged? And does this allow for bigger deals of size or of a certain deciles and shaking out this environment?.

Well, it is certainly true that there -- on things that are relatively large in potential acquisitions, maybe there will be less competition for those assets as the year unfolds, than there have been in the last three years.

I noticed on some of the large things that we looked at, if they get bought back private equity, it isn’t one fund, it’s three guys going together. But debt staples were still out there. I mean we are looking at a deal Friday that has a six and half times debt staple.

So, as long as debt staples are that high and we wouldn’t use it, the private equity is going to use that. They can put in four turns at EBITDA and you are still 10.5 times EBITDA. So, that kind of businesses that we acquire, they were public, they tend to trade at 25 times enterprise value to EBITDA or more.

I know it’s hard for people to follow that because they’re looking at traditional multi-industry stuff but multiples are dramatically less. So, we are going to continue look at these things are with a great deal from an arbitrage perspective in a public market versus what we have to pay for them.

And those tend to crowd out the lesser quality businesses where people pay eight, nine 10 times for something that’s worth 10. And we tend to pay 11 and 12 times for something that’s worth 25 and that’s really how we get all this out for performance, consistently over a long period time and that’s going to continue.

Last year we did something that I wouldn’t have forecast which is we did six or seven deals to get the $2 billion; we would have rather done $1.5 billion deal and a $500 million deal. But the small deals were unbelievably compelling and they are all growing double digits. So, I think it was a good thing to do.

We are still seeing a lot of those kind of opportunities. So, as the year unfolds, it will be a battle between sort of saving our powder for really large transaction and we’re going ahead and investing early on things that are somewhat modest. At the end of the day for our shareholders, the result is about the same.

It’s just easier for us to do a large deal than five small deals. But it should be an easy year for us to deploy capital, very favorable..

And as a follow-up, I mean just obviously in ramping up coverage of you all again after a long dormancy. The cash return on investment kind of metric you use and kind of animates your M&A and capital redeployment strategy obviously makes a heck lot of sense. And I certainly have drunk the Kool-Aid with respect to the discipline around it.

I think the most important epiphany coming out of it is basically the strategy and the metrics are kind of completely aligned.

In another words, you don’t stretch for what is perceived as a strategic deal, because a strategic deal’s one which meets the metrics, right? So, I just the only question I have is, where do you think there are risks to the CRI discipline or maybe the businesses you’re looking at? Do you think it’s may be an assessment of the code? I know you use a third-party consultancy to kind of look at the -- kind of related intellectual property and software and association with deals, and there can be obviously risk there, can be risk of technological substitution.

Maybe you just talk about where you just level headedly think about the risks in association with your capital redeployment strategy?.

Well, let’s maybe just for a second, if we have think about risk in general, if you look at transactions, because people were asking questions about when we buy some cheap stuff. So, the cheap stuff in industrial and there is all kinds of stuff and their public stocks are going to continue to deteriorate, and you could buy them.

Hey, what’s wrong with those as they can get working get disintermediated from distribution channels. They can wind up with the premium model out of Google on some bizarre thing; they wind up with Amazon selling past their competition at low-price point. So all kinds of things that happen, they desperately need absorption.

So if revenue falls off, there is nothing they can do without big restructuring charges. When we get to our space, it’s really around whether or not the people in the niche that we acquire have domain expertise, which is very hard for somebody to break into. And so, the entry barriers for their success are entirely different.

So, the risk is that we continue to assess the quality of the management teams that we acquire well and we understand whether or not there are technologies that could leapfrog what they do.

So that we spent most of our time around the people aspects of the business and then around big risks that those people don’t see that we would put kind of a different factor on.

We tend to discount their forward growth projections, because we don’t pay for synergies or forward growth, we only pay for what we think the business is going to deliver at the time of the acquisition. And that really puts a huge dampening effect on the risk that we might otherwise have. And we’ve been kind of blessed to be fortunate in that arena.

But I think our disciplines are such because we actually start with somebody’s balance sheet and then we start with what it takes to run the business. We don’t do like what a private equity people do, they’ll buy a software company and they’ll mandate an immediate 10% reduction.

One of the private equity firms out there actually goes in and does a listing up the highest pay people and they whack off the highest paid people and put new college guys and big salary reductions. And then that kind of hideous serious activity doesn’t manifest itself in the business for four or five years.

So, you have to understand what each private equity groups business model is when you’re looking at the assets they hold and you’re acquiring it and I think we knew that better than anybody..

We’ll take our next question from Christopher Glynn of Oppenheimer..

Just wondering, in medical here the product cycles in the devices seems to be coming on pretty well.

I wondered Northern Digital, Verathon, you look at hose to be able to climb for double-digit rate at some point and are the product cycles that have been notable the past few quarters, is that sort of a couple of year dynamic do you think?.

Yes, I do think so. What we’re really seeing out of Verathon is a refresh. So, it’s not a completely new product category, which actually reduces the risk for us. These are really upgrades and extensions of their existing live scope like in 2015 in BladderScan and 2016. So those are kind of a couple of year adoption rates that go on there.

Northern Digital doesn’t have to get up to double-digits; they just have to continue double-digit growth. They’ve been growing at double-digits here for couple of years, as they’re really the leader in both the optical tracking as well as the electromagnetic tracking for computer assisted surgery applications. And those continue to just expand.

Those applications just expand. And whenever there is new that an OEM customer wants to design, they always come back in Northern Digital because they’re the world leaders in that technology..

And then just if there is any room left there, so wanted to expand on Rob’s question a little bit where you had a record year last year in deal flow and talked about I think record pipeline volume or breadth.

Have you transitioned more kind of wholeheartedly to CRI and is increasingly tolerant definition of strategic part of the reason why your pipeline and your yield has kind of accelerated to somewhat unpredictable levels?.

No, no. Let’s go back and think about with -- reason I said some time ago that the Sunquest and question MHA acquisitions were more transformational than the Neptune and TransCore transformations were.

Because at Neptune we paid four times EBITDA of the enterprise in December of 2003 to acquire Neptune at what somebody probably thought was a high price for $500 million. The next year in 2004, we just paid about four times again the trailing revenue of the firm, 3.5 or something, for TransCore, 600 million.

Well, neither one of those businesses have lend themselves to adding exciting bolt-on activities to them or giving new domain experience in an area that was easily widened.

When you acquire a leading laboratory software provider in a world that’s going to have more and more laboratory instrument usage and will move to genomics in the immediate future, you have big upside ramp.

When you have MHA with senior living and nursing homes and all the things around non-acute hospitalization shifts and demography, these things just give you all kinds of opportunity. Well good heavens, we have acquired now SoftWriters for MHA which is growing at double-digits, so it’s a terrific acquisition.

We’ve been able to acquire CliniSys which we connect really with Sunquest. We acquired Data Innovations which is phenomenal company that guides all the instrumentation in the hospital into various systems and yet it’s part of Sunquest.

So, that’s why we can look at these things which are somewhat synergistic at least in the marketplace or in the information technology side of them that we couldn’t do with the industrial and energy businesses..

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

Thank you. And thank you all for joining us. I know there were a couple of folks on line for follow up questions; we will get back to you as soon as we can. Otherwise, we’ll look forward to talking t everyone in three months, at the end of the first quarter..

That will conclude today’s conference. Thank you for your participation. You may now disconnect..