Please standby. The Roper Industries Third Quarter 2014 Financial Results Conference Call will now begin. This call is being recorded. I will now turn the call over to John Humphrey, Chief Financial Officer.

Thank you, Kayla, and thank you all for joining us this morning as we discuss the results of our record third quarter. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer, Paul Soni, Vice President and Controller, and Rob Crisci, who Heads our Planning and Investor Relations for us. Earlier this morning, we issued a press release announcing our financial results. Our press release also includes replay information for today's call. In addition, we have prepared slides to accompany today's call, which are available through the webcast and also on our website at www.roperind.com. Next slide, we begin with our Safe Harbor statement. During the course of today's call, we will 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'll please turn to slide three, 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 and on our website. For the third quarter the difference between GAAP and adjusted results consists of two discrete items. First, a purchase accounting adjustment to acquire deferred revenue and our recent software acquisitions, FoodLink and SHP and that totals about $950,000. That's an adjustment to both revenue and operating profit. As a reminder this represents revenue that absent our acquisition those businesses would have recognized. In addition we also had an inventory related step-up charge for IPA for about $400,000. And now if you'll please turn the slide, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer and after his prepared remarks, we'll take questions from our telephone participants. Brian?

Good morning, everyone. If we look at this first slide here on a summary to the third quarter. At the enterprise level we had record third quarter results in all of the categories. All time record on orders and backlog, revenue, net earnings, EBITDA. One of the things that was particularly encouraging about the quarter as we've really didn't have any significant headwinds in any one of our segments. I remember last year we had difficulty with Zetec and from time to time there may be something. This quarter around we really didn't have anything at the segment level. We did have better geographic results on a broader base than we would have expected while the US was certainly up. Every place was up except for Brazil and some portions of the Middle East. Our revenue in total was up 6% with organic revenue up 4% and again, kind of broad based results, all of the segments were up. Our gross margin was up 70 basis points on the adjusted non-GAAP number to 59.4%, a little better on a GAAP basis and operating margin was up 60 basis points to 27.9%. Leverage in the quarter was 39% in keeping with our guidance of 35% or more. Net earnings were up 10% to $156 million represented $1.55. Of course the GAAP basis compared to the prior year was higher than that of 13%. Our operating cash flow was $226 million, which was a cash conversion of cash to net earnings of 145%. So it was a terrific quarter for us pretty much across the board and certainly provides a lot more assurance about us reporting our record 2014 full year. Next slide. If we look at the income statement in the quarter, orders were up 6% to $893 million. Revenue was…

Okay. Kayla, so if you can start the Q&A portion of our call this morning we'd appreciate that.

Thank you. (Operator Instructions) We'll go first to Richard Eastman with Robert W. Baird.

Yes, good morning, Brian, John, and Rob.

Good morning.

Just for starters, could we just maybe talk a little bit to Brian about the geographic growth. You kind of touched on it in the materials analysis business. But just kind of suggested that maybe overall Europe was stronger than expected. Just maybe kind of comment on maybe what businesses in Europe surprised you positively?

Well, we had pretty deep growth everywhere in the quarter. I mean, nothing spectacular, but the only places we were down was Brazil where we expected to be and some of the things in the Middle East which are really slow just because of the political environment and decision making, but our positions are good and solid. Everywhere else grew. So Asia was up double-digits, Europe was up 3%, Canada despite some last minute currency pressure was still up in the low single digits and the US was up a little over 5%. So you know about 65% of revenue is still domestic if you will and about 35% outside North America used to be closer to 40, but as Sunquest and MHA are essentially US businesses. So that affects the thing. But the core underlying businesses are doing well globally, really other than Japan don't have any softness anywhere in Asia. Europe's industrial activity was where we were kind of pleasantly surprised. We did particularly well in Germany and given the things that you're seeing about Germany that was – and we felt good about that and orders were strong there, and then medical did particularly well in Europe against its normal outcome.

And just from the M&A pipeline, in the M&A pipeline, what – are you seeing a lot of opportunities that are non-medical, the scientific?

Well, we see a lot and pursue a lot of things that are SaaS based or licensed software that we look at and those fall into very different categories. I mean, one of the things we're doing now would look more like an extension of Inovonics, which is our security business that has some very unique technology of the pendants if you look at the product fall and can't get our pendant lines of activities that we have that we don't talk a lot about. So there are sometimes things in that arena that we look at. In the industrial arena, we still really haven't seen anything that would fit our cash return on investment methodology. We're getting very strong GAAP based EPS performance out of fluid handling and when we look at other people stuff we just don't see people that have our margins. Our EBITDA margins in that segment are above 30% and most of the stuff we see comes in with gross margins at 30 and EBITDA margins at 16 and it depends on other people increasing demand to create any real leverage in the business.

I see. Okay, very good. Well, thank you and congrats. Nice quarter.

Thank you.

We'll take our next question from Christopher Glynn with Oppenheimer.

Thanks, good morning.

Good morning.

As we look into next year, it seems like you have some nice momentum carrying through with tolling projects and the medical SaaS businesses, then there's some concern of the oil & gas markets idea, that spending might be hitting a plateau. You gave some color Brian, but maybe you could just give a deeper diagnosis of that market?

Yeah, I think the thing that was encouraging about the third quarter was CCC was basically up 20% in orders and that's an area that you would be concerned about two factors. One, geopolitical risk with Russian sanctions and anybody serving anything going into those markets and then price elasticity around Brent and WTI crude or are you worried then about rig counts being less growth even than they were. Well, it turns out you know, all of our stuff is productivity related and so it's aftermarket activity or it's improving throughput. We had a very strong Cornell pump business growth with dewatering pumps. Well, if your productivity and if you read almost anything you'll see that things like Eagle Ford, their productivity is up 20%. Well that measures throughput and they need our dewatering activity for that throughput increase. So it's less dependent on new rig counts and more dependent on throughput. Price elasticity again it’s really about usually other people’s consumption of energy and their production process. So they are still interested and that going down. So we really haven't seen any early indicators either in an industrial or an energy platform that would cause us to be concerned at this point about 2015. I think that particularly with Europe up somewhat in the quarter, that we just don't see an area of softness.

That sounds good. And then just another area of the portfolio, since you had the new investment there for iTrade. Can you kind of update us on what you're seeing for adoption and penetration trends, market share for that platform?

You know, iTrade continues to perform really well particularly in the US and their order management system. That's been the – and that was really the main reason that we acquired iTrade was because of the – what we thought were favorable trends in order management being able to more seamlessly connect the supply chain for fresh and perishable goods and the grocery chain and that is continuing to prove out to be the case. We've really refocused that business more on the US market and they kind of started to go outside the US and I think they got a little over their skis in terms of capability to deliver while they still had a – quite a bit of addressable market here in the US. So they are growing very nicely in the US, outside the US not quite as much and we really think that the Foodlink acquisition and the capabilities beyond the supplier side, all the way back to the farm and the organic farmer side will really help extend the offerings that iTrade is going to be able to have. So we're encouraged by the progress there.

Thanks, John.

Yeah.

We'll go next to Jeff Sprague with Vertical Research Partners.

Thank you. Good morning, gentlemen.

Good morning.

Just on the deals that you closed in the third quarter, could you just give us a little bit more color on the acquired revenues or the acquired EBITDA, how to think about the multiples, how to think about kind of an accretion profile into 2015?

Sure. So we invested about $300 million in these three acquisitions between FoodLink, IPA, and SHP, and in total, we expect them to deliver in the high $20 million range in our first year of ownership. So we paid about 11 time, a little bit less 11 – little bit less than 11 times first year EBITDA and given the profile for these types of businesses, extremely asset light, high amount of recurring revenue, software type of margin profile, we think that we paid a fair price, but a very good price. So we're encouraged about that. In terms of revenue, and these are going to have I think after the amortization charges it will probably be similar to the Roper margin profile. So I think you're looking at somewhere in the $75 million range for first year revenue.

Okay. Great. Thank you.

And we also have a cash and tax benefit that accretes…

Yeah, there's a modest cash tax benefit included in that $300 million, maybe $10 million or so.

Okay. Great. And on the other side, Brian, this has been raised on prior calls, right, and you've got some really good assets and selling incomes with dilution and things like that. But you know I've heard a little bit of chatter. I don't know how real it is, but maybe on the pump side you guys might be looking to shed something there. How should we think about the other side of kind of managing the portfolio and to your point, some of the stuff is going for high multiples and it's not maybe great assets, you've got some very good assets that perhaps will touch a very solid multiple in this consolidating environment that we're seeing?

Pretty much all the businesses are pretty good, as you say. I mean, we have only just a few product lines that are things that we wish were not part of the portfolio, but there are only a few of those. I think we do get bids from time-to-time from people about certain assets every once in awhile, we pursue then as a rule. It's hard to ever see those divestitures come to fruition because the after tax contribution is not a shareholder friendly result, right. So, if we were going to divest anything we'd want to assure ourselves that the cash from the disposition had an immediate and great home, I'm sure that there are some assets we own that, you know, would perform as well as they do with us in another place or if you have an asset that has maybe growth characteristics, but it's a very dilutive cash return profile and somebody else wants to invest in it and has a lot of synergies with it and we can get a fair price for it then we're certainly not above disposing of some of those kind of things. And I think a lot of people – our acquisition activity is just very intense and pricing is pretty high. So there are people who call us about possible divestures who wouldn't have called in the past as they are finding how much these things are really worth and they can't find anything else and ours are so much better. So it's certainly possible that you could see some portfolio adjustment in the next year.

Thank you. I was wondering if I could just slip one more in. Could you elaborate on what you said about security projects and I think you said K-12 in colleges [ph] are you seeing some cyclical let up there or is it is just kind of the programmatic nature of some of those projects, just kind of the state of those markets?

Yeah. It's really at CBORD & Horizon where CBORD in particular we had the one car technology that does everything on the campus or healthcare environment and they had some particularly big transactions the last large one I think was Northeastern University up there. That sort of cycling out and the university and healthcare campus activity decisions are really slow. So quotations are there. And what happens on the projects is there is some throughput of other people’s security hardware in addition to our systems. And so if you don't get that, which we didn't have in the third quarter much of, it brings down the revenue, but actually we had better operating results because the software portion and the license maintenance activity is at much higher margins. So what we were just trying to reflect is it didn't look like revenue was really strong, but actually the OP was quite strong.

Okay. Thank you.

And at the end of the day I mean, just to elaborate on that a little bit, at the end of the day CBORD is a software business. I mean, we do sell-through hardware in order to facilitate some of the security applications, but fundamentally, we look at the software and the maintenance revenue and the new license revenue out of that business as the ongoing health and growth of that business and with the lumpy projects around security that we'll add on top of that. And as Brian said we're very encouraged by the nice growth in the maintenance revenue which is really their installed base and the annuity that comes along with everything they are providing for those customers.

Okay. Thanks.

We'll go next to Joe Ritchie with Goldman Sachs.

Hi. Good morning, everyone and nice quarter.

Thank you.

Thank you. Good morning, Joe.

My first question is this one, I'm trying to square your comments on energy, our energy team today came out with a price deck, a WTI price deck of sub 80 for next year and Brian you mentioned in your prepared comments that large projects continue to get deferred. But the bookings were really strong in compressor controls and frankly across the rest of your business. So, I'm just trying to just better understand the resiliency of compressor controls, Roper Pump, Cornell, and perhaps maybe if you could set the context how much of your business is aftermarket versus OE related that would be helpful?

Well, let me address the second one first and I'm basically going to address it by saying we're going have to get back to you and we don't really think of it as OE and aftermarket as much as looking at our total exposure to oil & gas knowing that most of our applications are around throughput and efficiency and quality, whether it be in the refinery side for instrumentation that are measuring quality or throughput inefficiency like our compressor controls business. We'd have a few modest applications that are more on the upstream side, but they are on the upstream production side, things like diesel engine, shut off valves, and dewatering pumps, because there's quite a bit of water that's used even on the production side in addition to the exploration side. Very little of what we have I mean, is just kind of thinking through it. Very little goes to OEMs per se other then of course knowing you have drilling people who are doing drilling applications or production applications that I guess could be qualified as an OEM, but it's not really an OEM the way I think of it in terms of larger automotive type markets. It doesn't feel like that to me as we go through all of our businesses. And then as far as the outlook on crude oil prices, I mean, we really don't see an awful lot of that. Most of the areas where we've seen delays or at least slower decision making for some of those large projects, I think they are more geopolitical in nature rather than price of oil in nature. Brazil has been slower to make decisions around some of those things. Some areas of the Middle East not quite as fast on making some investments as what we might have expected. But it doesn't change the fact that energy is still doing extremely well. Our total oil and gas related businesses, I don't have it at my finger tips, but they were clearly up in the quarter and up on a year-to-date basis despite seeing the oil price start to come down. So, it's something that we're keeping an eye on. We definitely benefit by having very lien, very nimble organizations that could act quickly, but at this point, we still see more opportunities than we see on the risk side.

Okay. That's helpful color, John. And maybe one follow-up. Brian, you mentioned earlier you talked about a $1 billion to a $1.5 billion in deals over the next 12 months. Clearly interest rates have moved lower again, valuations look more reasonable. Are you seeing any greater competition at this point and maybe you could just try to compare it versus what you've seen over the next – over last 6 to 12 months?

I don't see that. Interest rates for the M&A market haven't had any material change. I mean, if there's anything, it would be a little bit of people yelling at the banks that they are seven and eight types debt stables are a little out of control and maybe some of the European banks that have been doing that routinely should think about it. But the reality is we still see ridiculous amounts of debt financing on every transaction. We never see anything that’s less than seven times stable debt, despite what other people are saying it shouldn't be above five or six what is, it’s a lot above it. And there's a lot of private money available that's still happy to go in at sort of 5% kind of interest rates and still a lot of pick. So prices are as high as they've ever been. There's a huge amount of stuff for sale. I mean, we have gone through more conversations this year with people than we've ever done in our history and still it's just their – just a huge amount of them. I mean, we'll be out tomorrow and we'll be out Wednesday on two more where management presentations are very robust. I don't think private equity has pulled back by one penny. I think some of the strategics have sort of given up. But the kind of things we are looking at investing in are things that really want to be part of our company because of the nature in which we manage it and the governance process and the freedom and entrepreneurial people have to survive here. So we're not seeing any problem with the pipeline. We would like to make a larger acquisition than we have, but there are certainly no shortage of $2 million, $3 million, $4 million, $500 million transactions in front of us and the larger ones still such a frothy ability to issue equity that every – all the sellers who continue to talk to us haven't decided what they're going to do. But I think it's going to be easy for us to deploy quite a bit of capital here in the next 12 months in very attractive businesses.

Helpful, Brian. Thanks for taking my questions. I'll get back in queue.

Yeah.

We'll go next to Steve Tusa with JPMorgan.

Hi, good morning.

Hey good morning, Steve.

Just fourth quarter free cash flow and kind of the year number, what do you expect there for free cash flow percent net income?

Well, I think I don't know for the full year it should be 130%. I guess I'd have to see that for the fourth quarter.

Yeah, fourth quarter should be in the range of $250 million of operating cash flow and let me take 10 off for CapEx, so that's how we spend on a per quarter basis. So we'll spend $40 million of CapEx roughly this year. So that I think keeps our full year operating cash flow conversion well above 130%.

Okay. And then just for next year, these deals you did, I think you answered this in Jeff's question maybe, but it would be the accretion for next year, is like $0.10 to $0.15 the right kind of number for those deals you've closed recently do you have kind of you know, booked and locked in for next year?

No, it’s…

Just think about the way we think about it, right. So, we think about cash accretion, so on cash these are sort of very high margin businesses and they are growing rapidly and they are going contribute a good deal in cash in 2015.

Okay.

On what some up based EPS number it is, is far less critical than whether the quality of the earnings and cash that they generate is pretty good. Johns talking about them being in the high $20 plus million of EBITDA. And so you can figure that out. If you care about a GAAP base EPS number, you can do the math. But we care about their compounding cash growth and they are going contribute well in excess of $25 million of EBITDA in 2015.

So, the $0.10 to $0.15 converts at a higher rate or kind of the normal 130% rate?

On a GAAP EPS base, it's going to have a lot of…

Yeah, free cash flow, right.

Yeah, it will be in that same range. When the nature of this right of course we have non-cash amortization charges…

Sure.

And you always need to add those thing and tax effect those, but then add those back and so that gives us the natural increase in our operating cash flow well above the net earnings contribution.

Right. Okay, perfect. Thanks.

We'll go next to John Quealy with Canaccord Genuity.

Hi, good morning. First question in the Industrial business you talked about Neptune down from tough comps. Can you talk about mix of business generally? I know there's more of a technology high margin spend in this space now with flow meters and a lot of the RFs going to slightly different permutations. So if you could just comment a little bit on Neptune mix that would be great?

Sure. I mean, the general trend in the industry is clearly is to purchase meters along with the technology embedded in that. So it's not too completely different streams and oftentimes you have water utilities that will decide to upgrade a project. And so you'll have collectors, as well as devises to be able to collect that information. So you have the collectors that will gather the readings and send them back to the central office and also mobile communication devises. But as a rule, most of the revenue for Neptune is going to be the meter technology, plus the radio and embedded encoder technology. So you can gather all that information and be able to send it back to someone. And usually those are not purchased separately. And so we're having a split, I mean, still over two thirds probably closer to 75% of the new shipments for Neptune, the new revenue is the integrated meter or some integrated technology rather than just a meter that goes out that's still being direct read. And so that's where we see the market continuing to trend with the total systems purchase rather than the individual pieces.

Yeah, let me just make it clear that. That I wouldn't accept the premise that Neptune's down. We just said that they had an all-time record quarter in the third quarter of last year, so might be down a $1 million or $1.5 million compared to the prior period. But they are going to have likely a record year this year and they are having a very strong first nine months of the year and then they are going to do okay in the fourth quarter. So let's be careful about how we phrase that compared to the competitive marketplace out there with other people who have old technology and have pretty mediocre revenue.

Yeah, I know that's fair. I'm just going off slide 12. And so lastly on my – the Medical and Scientific Imaging, I'm sorry if you mentioned this, geographic splits there, is that primarily North America or anything else internationally? Thank you.

Sure. I mean, for this segment in total, it's not at all much very dissimilar. What you have is our medical products and medical software businesses, Sunquest and MHA, as well as our Verathon and other businesses. Those are probably a little more skewed to the United States. But our Imaging businesses are more global in nature. So when you look at the segment in total it's about 70% US, 30% outside the US, but the differentiation there is that our outside the US portion is more imaging in our camera businesses rather than our medical businesses. That's still – and we're growing very nicely in medical even with US focus and still see the international opportunities still ahead of us.

Thank you.

We'll go next to Alex Blanton with Clear Harbor Asset Management.

Good morning.

Hi. Good morning, Alex.

Can you hear me?

Yeah.

I wanted to go back to this question of the $1 billion to $1.5 billion that you hope to spend in the next 12 months. How much have you spent this year? Do we have that total?

$303 million I think.

That's it for this year? So far…

Yeah, we didn't spend anything the first half of the year and we did the $303 million in the third quarter.

So that really explains why when you're looking at the growth for the year, you've got 6% to 7% forecast organic and 8% to 9% total. So you really haven't added all that much revenue this year to the total. When we talk about next year what would be, do you have any idea of the timing of that spend whether it's in the beginning of the year or the end of the year and in other words what's it going to add to revenue?

We will really never know the timing, Alex. I mean, we had the diligence that we do is very time consuming and everybody that's been through our process understands. So while we can process a lot of stuff simultaneously. We're almost always looking at least four things at any point in time and you just never know whether they get into the finish line. We don't have a budget for acquisitions and we always want to do the best thing as opposed to just doing something. So when you get to acquire something like IPA and SHP, I mean, we have one of the thought leaders in the world with probably running SHP and some phenomenal business very, very, very exciting for us to do that and we could have done a couple of other things that would have had larger revenue, but don't have the compound cash growth that we like. So it's very important for the acquired management team to be able to fit into our culture. People have a good deal of freedom, but for the same token they've got to have a thorough understanding of cash return and where we want to exploit multiple channels of distribution and how we think pricing should go and how you should invest in R&D. And candidly most people don't have those values. They just wait for cyclical markets to change. But our people have to really evolve markets and they've got to have a long-term view of what it is they're doing because they are the ones that are driving the applications in the marketplace.

You alluded to the fact that you are looking at companies who really want to join Roper as opposed to some big industrial conglomerate or whatever. But if they are owned by private equity investors, do they really have the say in who they want to be bought by?

Well some do some don't. It really depends on – when the private equity guys own the business, if the management team will not convey to a new private equity owner then the private equity guys have to behave very differently. Sometimes the management people have a desire to go through and 5 year situation where they can't invest in the future and hope for an exit that will be okay, but the kind of people that want to work here don't think that way. They've been inside private equity for awhile. They want to invest to grow their business over the long-term and we're a great home for people who want to invest and grow over the long-term.

One more follow-up. Roper Pump is ramping up in Houston. What's the capacity utilization now? In other words how much further can you ramp it?

Oh! We could double certainly from where it is today. Its got – it has some sophisticated process equipment that's running three shifts, but most of the activity is only on a one or a shift and a half basis and the people that we're providing product to are releasing more and more of their content and a lot of what they are doing in Houston is called relining of these drill bits. And so, it's not – you know, and the answer, it’s really on the exploration side that has to drive their growth as long as they're continuing to operate. These things have got to come back to be willing because they wear and that’s the Houston thing is a big relining operation.

Okay. Thank you.

Welcome.

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

Thank you, Kayla, and thank you all for joining us. We look forward to talking to you in late January when we release our fourth quarter numbers.

This concludes today’s conference. Thank you for your participation.