Zack Moxcey - Roper Technologies, Inc. Brian D. Jellison - Roper Technologies, Inc. Robert Crisci - Roper Technologies, Inc. Laurence Neil Hunn - Roper Technologies, Inc..

Deane Dray - RBC Capital Markets LLC Charles Stephen Tusa - JPMorgan Securities LLC Christopher Glynn - Oppenheimer & Co. Inc. Joe Ritchie - Goldman Sachs & Co. LLC Joseph Giordano - Cowen & Co. LLC Julian Mitchell - Barclays Capital, Inc..

The Roper Technologies Second Quarter 2018 Financial Results Conference Call will now begin. I will now turn the call over to Mr. Zack Moxcey, the Vice President of Investor Relations..

amortization of acquisition-related intangible assets; purchase accounting adjustments to acquire deferred revenue; a deferred tax expense resulting from the held for sale classification of Gatan; and lastly, a measurement period adjustment to 2017 provisional income tax amount resulting from the Tax Cuts and Jobs Act.

And now if you'll please turn to slide 4, I'll hand the call over to Brian. After his prepared remarks, we will take questions from our telephone participants.

Brian?.

so strong cash flow, Gatan checked the box; asset-light, not so much, quite a few assets there for a Roper-type company; excellent management team, probably best-in-class really; niche market leader, absolutely, it couldn't get more nichey than Gatan; deep domain experience, many of the world's experts really are PhDs that are inside our Gatan business; high recurring revenue, no, almost no recurring revenue; multiple growth opportunities, well they're all focused around this emerging cryo-EM technology which is wonderful but it doesn't have multiple platforms, and it's certainly more cyclical.

So, the trading out of PowerPlan and Gatan is very strategic for us. Next slide. On Medical & Scientific Imaging here you can see revenue was up 7%, EBITDA margins came in at 41.5%, very strong growth and execution in the niche medical software businesses, the smaller ones which are Strata Decision Technology, Data Innovations, SHP, and SoftWriters.

And all of those really performed very well and even Sunquest U.S. lab business was on target, (18:29) was down but it was where we expected it to be. So that was actually encouraging. We had good market adoption of Verathon's new BladderScan technology which is kind of a breakthrough technology.

And then the GlideScope consumables we introduced a while back have been growing quite substantially. Double-digit growth for the automated surgical scrub and linen technology business we have which they would say was a scrub excellent quarter.

So, these guys are – you probably couldn't find a more passionate leadership team than the people at IPA in Atlanta, and that business is doing exceptionally well. Very strong revenue contribution from the backlog in Scientific Imaging as it's starting to shift, so that certainly helped.

Notwithstanding that, we're still going ahead with the sale of Gatan, which we expect to close before the end of the year. It's already cleared the U.S. requirements but it's still got things going on where people are looking at it in Europe.

High single-digit organic growth in the third quarter and then probably tapers down to mid-single digit growth in the fourth. The Medical businesses will grow single-digit, but we'll get some additional spike out of the Gatan and cryo-EM growth here in the second half of the year. We expect a strong Q3 results in Imaging because of that backlog.

Next slide, which will be slide 14. So Industrial Technology really is just spectacular. It's the only thing you could say. Revenue was up 20%. Operating profit was up 27%. Operating profit margins – these are manufacturing companies, folks – operating profit margins, 32%. EBITDA 33.8%, up 140 basis points. Organic growth, up 18%.

Another revenue quarter for Neptune, which had double-digit growth again, really driven by customer-focused innovation. We're just winning an awful lot where people see, hey, if I continue with Neptune and move into more collective technology I can still keep my installed base; I don't have to rip everything out and replace it.

So Neptune continues to perform exceptionally well. We've had meaningful share gains with our Cornell Pump business. It's had a great year, but it had certainly a very, very spectacular quarter.

One of the things Cornell has benefited is dramatically increased market share with the rental companies, and that demand was really strong from an order perspective early in the year. We think that'll kind of taper out some in the fourth quarter in terms of shipments, but the orders we expect to be very strong as the rental fleets get replenished.

Roper Pump had very nimble execution in the quarter, so they had outsized growth. But when the whole place grows by 20%, there's really nobody you'd sort of single out to say they disappointed anybody, because they certainly – nobody disappointed, as everybody did spectacularly well.

We think we're continuing to have double-digit growth in the third quarter and then mid-single digit growth in the fourth quarter only because the comps get more challenging. Very strong leverage that we'd get out of these businesses, which you can see in the numbers. The Energy segment is a similar kind of story. Organic was up double-digit at 12%.

The upstream application businesses – AMOT, Metrix, DES, (22:37) and Viatran – were very strong. And then importantly, our Compressor Controls business, after being down and then sort of getting to the point of being flat, actually returned to growth in the quarter, and that's a much more long cycle business.

So that's encouraging that that'll be coming up while maybe some other businesses would moderate. The Industrial end markets are pretty strong in every category that we're in. So we still see Q3 with double-digit organic growth. And then Q4, similar to Industrial Technology, with kind of mid-single digit growth, strong leverage.

Energy segment was up 16% on revenue and 28% on operating profit, so that's just a proof of the strong leverage. You can see EBITDA margins were 30.5% for the segment. So pretty spectacular. Next slide. As we look at updating the guidance and we go to slide 16, the guidance update.

We're raising the full-year guidance from $11.40 to $11.56 as a range – or we're creating it there at $11.40 to $11.56, that's up from $11.08 to $11.32. So at the midpoint it's up $0.28. Organic revenue growth we're now raising to 7% for the second half of the year. Previously we'd said 4% to 6%.

And third quarter guidance we established at $2.89 to $2.95. Next slide. If you look at the summary then of this very, very good quarter, you can see that the niche market strategy and our ability to execute in a nimble way continues to deliver outstanding results.

We had record results as we've covered throughout the talk, 9% organic revenue, everybody grew, gross margins up at 63.1%, demonstrates that we really aren't seeing these price cost issues or supply chain things from foreign tariffs.

Earnings before tax were up 17% and the diluted earnings per share – adjusted diluted earnings per share were up 29% to $2.89. Operating cash flow was up 55%. The asset-light diversified technology transformation that we've been doing for several years now continues.

The PowerPlan acquisition sort of shows exactly the kind of assets that we'll be acquiring. The agreement to divest Gatan strengths our balance sheet and gives us several-hundred-million dollars of additional capital to deploy, along with the repatriated money that's coming in. So the balance sheet is still in great shape.

We continue to see a lot of attractive acquisition opportunities, and the pipeline's pretty significant. So, we're looking at both large deals and some bolt-on things that we're fully – we've got our teams fully deployed on the acquisition side of opportunity.

Our cash return on investment discipline continues to prove that that's the best way to create shareholder value over the long period of time and compounding cash is what people should be looking at. So, we had an outstanding quarter, we've got great momentum, and let's open it up for questions. Hello? We're ready for questions..

Thank you. We will now go to our question-and-answer portion of the call. Our first question comes from Deane Dray with RBC Capital Markets..

Everyone..

Hey, good morning..

Good morning..

Hey, I appreciate the fact you preempted all the price costs and tariff discussions because that's been tying up a lot of these conference calls.

Maybe the first question would be some clarification on the 2018 guidance whether that includes PowerPlan accretion, and could you size that for us please?.

Yeah, sure. Good morning, Deane. It's Rob. So, PowerPlan probably adds $0.12 to $0.13 to the second half, so that's included in the guide. We also if you look at the second half have a little bit of additional FX headwinds. We've included in there, probably $0.05 or $0.06.

And a little bit higher interest cost on the fact that our revolver costs have gone up as the short-term LIBOR rates have gone up. So, that's all included in that second-half guide..

And what about PowerPlan's accretion to free cash flow? Sometimes you give that data point as well..

Sure. So I think when we made the announcement we said it was about a $60 million addition to cash flow on a first 12 month basis. So, that's without the financing costs.

And so again here is where you – do you apply the cash from PowerPlan to that, do you apply interest rate, so we – as you know, sort of the corporate balance sheet is separate from the individual acquisition. So, the company will deliver $60 million, less the financing costs, however you want to apply that..

Got it. And then just as a follow-up, some context on the Gatan divestiture. And, Brian, you and I have had discussions over the years about your willingness to part with this asset, and you're refrain always was, if someone wants to pay us the multiple that we need or would expect and looks like you got it at 18 times.

And now I know Rob has insisted there's not a big portfolio review going on, I get that, and it doesn't look like there's any soft spots in the earnings today, but are there other cyclical businesses as you do this transformation that you might be able to exit similarly?.

Well, I think what you have to do is when we went through that list of what to look for in an acquisition, that's the same list we would look at for anything we own, right? So, the Gatan, while it's certainly the best technology available in its area and has incredible great people in it, misses on a number of our things.

Many of the other longer-term businesses don't miss on those. So, let's take a pump company, if this got substantial spare parts that sort of offsets some recurring revenue stuff. Gatan has zero spare parts. Gatan is a business that was acquired in the 1990s by Roper at a time it wanted to go into areas that were scientific, really.

We're not pursuing scientific areas; we're pursuing areas we feel we really know how to manage exceptionally well, and if there's any cyclical content we're totally on top of it. But Gatan's cyclicity can come out of the National Institutes of Health or Japanese investment, you can't do anything about that.

And it's going to an owner where they have incredible synergies that we just don't have. So, it's a very good acquisition for the people that are buying it, and it's an appropriate sale for us..

But just to put you on the spot, Brian, are there other Gatans within the portfolio that you'd consider divesting?.

We really don't have anything that's as scientific as Gatan which has no recurring revenue. If there was some business we thought was going to require additional capital investment that was unattractive, we'd certainly look at it. But we don't really don't have anything immediately for sale.

I will say this, because of the Gatan sale, there's been a whole lot of new inbound calls about various businesses because I don't think anybody believed we would ever sell anything..

Exactly. I appreciate all the color and congrats..

Thank you..

Our next question comes from Steve Tusa with JPMorgan..

Hi, guys. Good morning..

Hey, good morning..

Good morning, Steve..

The cash flow has been a little bit lumpy, maybe a touch light in first quarter but very strong here in the second quarter, a nice catch-up.

What do you expect for the year, maybe for the second half, and some of the moving parts there? You talked about the deal that's adding $60 million before on an annualized basis, but what's just high level, what to expect for the year, anything unusual?.

Yeah, Steve. I think you're right. So, we did outline last quarter, right, the lumpiness in Q1 around some onetimers, when we got paid with some of the big TransCore projects and some cash onetimers. So, you're right, we made that up in the second quarter, really nice growth, and we'd expect strong growth in Q3 and Q4.

So, when we get on the full year basis, we should be approaching double-digit growth for cash flow on a full-year basis. So, it should be pretty strong in the second half..

Okay. And then just on kind of the Industrial trends and orders, anything to call out there? It looks all pretty solid.

Anything out of the ordinary from a macro perspective on the Industrial side?.

Yes. So the book-to-bill and order performance in those segments where it matters Industrial we're actually 1.0 book-to-bill. So good orders in places like Neptune and Roper Pump, so that gives us more encouragement, as we mentioned, for continued another double-digit quarter in the third..

I think no question that the comps in Q4 are more difficult than focus (33:23), we had quite substantial growth in the fourth quarter of last year. That's why we're talking about kind of mid-single digit growth.

Also, there was an interesting facet we've had market share gains with rental fleets this year particularly at Cornell, and they ordered earlier than normally this year. So, we don't know if that will repeat itself in the fourth quarter. If it does, we might have some upside benefit there, but that's unusual.

Usually they don't start placing significant orders 'til the year is underway and they have a firm view of what they think their demand will be. So, there's some variability there but it's only to the upside, I think..

Okay. Great. Thanks a lot..

Our next question comes from Christopher Glynn with Oppenheimer..

Thanks. Good morning. Some good elaboration on PowerPlan, I wanted to go maybe a little bit further.

Any specific levers with that name under Roper's ownership particularly that stands apart from how you view the majority of your acquisitions? And in particular you had the comment about multiple growth opportunities, maybe we could build on that and if there's any thought around opportunity for pricing for value..

Well, a couple of things.

Let me just start by saying, one of the benefits that happens when we acquire any one of these companies that came out of private equity is this massive relief of their customer base saying, I've always wondered what was going to be the exit, who is it going to go to, is it somebody that's going to invest in the business for growth, is it going to pay attention to customer service and enhancements.

So we know Roper's going to do all of those things. So that's a home run, and it creates a much easier end market sale discussion. That's proven out a lot in a place like Aderant with our legal software. It's proven out at ConstructConnect, and it's really going to prove at PowerPlan.

Now, as far as the sort of specifics around the multiple growth vessel, I'll let Neil talk a little bit about that..

Yeah. And good morning, Chris. So, I'd first start by saying the core of what they do which is the asset and tax accounting for these very asset-intensive end markets around utilities, power generation, energy, that just by itself is still very robust and vibrant.

There's a number of new products the company is developing to continue to sell and cross-sell into that end market. Over the course of the last couple of years, they've also gone into some very close adjacent markets with some success, think oil and gas, a little bit less asset-intensive but nonetheless have similar issues.

Also, over the course of last couple of years they worked very hard at migrating their technology stack into the cloud which then enables them to do open an uplift opportunity where they migrate the existing on-premise customers to the cloud which is a net growth driver for PowerPlan like it is with Deltek.

Part of that is because you're on boarding more responsibility for the tech stack but also, to your point, that gives you the opportunity to price a little bit more for value. And then finally with this lighter-weight implementation in the cloud, they're able to go into entirely new markets; think retail manufacturing that have similar type issues.

And they're able to sell the SaaS solution to a business owner of a problem versus a technology owner inside the organization. So it's a multiple set of growth drivers, and it's been that way with this business for the last few quarters and certainly continued into the second quarter of this year..

That sounds pretty good..

(37:15) You've got an accounting change around operating leases. So it has a big effect on people's balance sheets. So you got a lot of people that have got new found interest in understanding every element of their operating lease programs, and PowerPlan's software helps them immeasurably there..

Sounds great. Thanks. Quick one on toll and traffic. How would you describe the opportunity relative to the more stark competitive differentiation you talked about for service orders? And you don't usually describe toll and traffic as just low single-digits growth as you did for the third quarter..

Well, it's a lumpy business. A lot of times it depends what the corresponding quarter a year ago was. And so it was outsized because of the start of the New York City transformation to cashless tolling. And then we had pretty big Q3 with Saudi last year. I mean, the contract stuff is, we're very selective on what we'll take in terms of a new customer.

So we're interested in customers where we're going to really improve their ability to execute, but not every customer is driven by that. So we're going to be very selective on what we take.

But we're getting double-digit growth, we think that's going to continue because all you got to do is pick up the newspaper or read about some of the horror stories of what our competitors have done to not be able to bring on anything new and wind up with millions of unpaid toll requests.

So that kind of changes the competitive advantage we have because we deliver what we say we'll do; not everybody else does..

Thank you..

Our next question comes from Joe Ritchie with Goldman Sachs..

Thanks. Good morning, guys..

Hey, good morning..

Hey, Joe..

Hey, just maybe parsing our the guide one more time. It looks like the guidance raise was primarily to beat this quarter as well as putting in PowerPlan, offset by FX. So there really isn't much of a change to the second half.

Brian, I thought your commentary around Industrial growth and where you could potentially outperform in the fourth quarter was interesting. I was wondering if you can maybe walk through the other segments and how you guys are thinking about growth in the second half of the year for each of the other segments..

Well, I think that we told you on balance it's about 7% organic growth. I think each one of those segments, I could go back and look at it..

Yeah, I think – right..

It's single digits, high single-digits. So I don't know what more you want, Joe..

Yeah, so a little bit more difficult comp in the third quarter of the RF on the tolling, as Brian mentioned. And then, a little bit more difficult comps in Q4 across some of the Industrial and Energy markets. And then we do have timing of those Imaging shipments are very heavy in Q3 so that drives that segment. So yeah.

I think we did tweak up the organic in the second half, probably 1 point versus previous guide. So there's a lot of gives and takes there to get you to the midpoint of our range..

Got it. Yeah. No, I just noticed that you guys were forecasting growth that was slightly lower in the second half versus the first half. And obviously, know the tougher comps in Industrial but just wanted to see if there were other puts and takes.

I guess my second question is, as you think about Gatan and the dilution from that business divesting into next year, can you just quantify that for us, so we have that number?.

Well, so let me just correct what you just said because actually the second half growth we have almost exactly the same as the first half growth, right around 7% organic, which was the same as the first half.

So it is – now, one other point, we did have a very, very strong second quarter with Deltek, as we mentioned, some of the large shipments of new revenue or new recognition revenue on wins. And so some of that's probably a little bit bigger in Q2 than we originally would've had, expected that later in the year.

But that would be the only other kind of one-timer. In terms of the dilution, so we'll touch on that certainly next year, but right – we would hope to deploy that capital in due course. And you got to always think about if we're going to get after-tax proceeds we're going to redeploy that.

And so, that's the right time to measure the impact of a divestiture..

Got it. Thanks, guys..

Our next question comes from Joe Gordon (sic) [Giordano] (42:08) with Cowen..

Hey, guys. Good morning..

Good morning..

So I wanted to ask, on Sunquest you say it came in line and that's good that you guys kind of – I think you've ring-fenced what that business is going to do near-term.

So maybe, Neil, I was just curious as to the confidence in that – like in the future growth of that business, or how do you kind of weight that versus kind of this is the trend for the next couple of years?.

Well, I would – when we first talked about the North American challenges Sunquest versus everything else, the rest of world of the diagnostic group, we introduced that a couple of quarters ago, we characterized this being a – it's got a couple of year issue, 2018 and 2019 issue.

As we sit here today, a couple of quarters into it, I would say that continues to be the case and our belief. The international piece continues to do well. The interconnectivity or middleware piece that connects lab instrumentation to lab software continues to do well.

And the team has done a good job of framing the North American strategy and starting to put hands on keyboards around some new software we're going to develop, but that going to take time to actually get done and released. And we'd expect the general trend line to continue here into next year..

Okay. And then, on CCC, was that growth coming from new projects or is that more from maintenance work? And then I just had one last question on DAT.

And just curious if there's any like block chain implications for that business or anything that they're working on there?.

Well, there's certainly some new construction orders that are coming online for first time in a long time. A lot of the work is upgrade work, where people have been postponing various thing until they see a better market. And so, we've got a huge installed base.

So, we're getting both upgrades and just general improvements in plans, and then some new construction orders which we think will pick up more throughout the next two or three years..

And relative to your block chain question with DAT, it's just the nature of the DAT business, we're matching basically the supply and demand side of the spot trucking market in North America. It doesn't really connotate to a block chain orientation; that's more of a supply chain issue.

So we do see more of block chain activity happening, for instance, in our iTrade business around the food supply chain, but not so applicable at DAT..

Okay. Thanks, guys..

Our next question comes from Julian Mitchell with Barclays..

Thanks. Good morning.

Maybe just my first question on Medical & Scientific Imaging, how are you thinking about margins in the second half? Were you sort of thinking they should be flattish? And then what kind of operating leverage, I guess, do you think we should see looking out beyond that? And then related to that, on Medical & Scientific Imaging, pro forma for the Gatan divestment, could you just remind us what the recurring sales mix will be in this segment?.

Just so you understand something, Gatan doesn't certainly have any recurring sales, right? So, it's just pretty much all new business all the time. And we happen to be in an up cycle for Gatan because of new technology that we developed and took place (45:43) which the marketplace is accepting.

Then if you look at the segment numbers, you've got to be careful here because we've got to have the declining situation in the U.S. lab business which is exceptionally high margin. So, actually if we pulled that out and segregated it, the margins would be going up not down, because the growth is in businesses with higher margins.

It's just that when you got a business whether extraordinary margins, if it's down 2% or 5%, it's hard for the rest of it to make it up. So don't confuse yourself with the idea that there's any degradation in margin enhancement in Medical because that's wrong; it's just the fall off of the U.S. lab business at extraordinary margins..

Yeah, that's right. So, the total of the segment – we have a better – I think still down in the second half but better than it was on the first half where it was down a little over 100 basis points..

Yeah.

I mean it's all the way down to 41.5% EBITDA margins here in the quarter, right?.

So, it'll be better in the second half..

So, instead of down only slightly, I understand. And then Gatan, yes, I mean, I understand it's not recurring as you'd explained 20 minutes ago.

I guess the question was just pro forma for it therefore, how much is the recurring share of the segment going up?.

Yeah. So that segment's well over we call over 50% re-ocurring revenue and then it will go up from there, high-50s. That's the envelope, probably high-50s..

Understood. Thank you..

Sure..

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

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