Roper Technologies, Inc. (ROP) Q2 2016 Earnings Report, Transcript and Summary

The Roper Technologies' Second Quarter 2016 Financial Results Conference Call will now begin. I will now turn the call over to John Humphrey, Chief Financial Officer. John Humphrey - Chief Financial Officer & Executive Vice President: Thank you, Matt, and thank you all for joining us this morning as we discuss our second quarter financial results. Earlier this morning, we issued a press release announcing our results. Press release also includes replay information for today's call. We have slides to accompany today's call, which are available through the webcast and also on our website at www.ropertech.com. If we please turn to slide two, we begin with our Safe Harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page and as further detailed in on our SEC filings. You should listen to today's call in the context of that information. Next slide. Today, we will be discussing our results for the quarter primarily on an adjusted non-GAAP basis. A full reconciliation between GAAP and adjusted measures is in our press release this morning and also as a part of this presentation on our website. For the second quarter, the difference between our GAAP results and adjusted results consist of two items. First, the $2.5 million purchase accounting adjustment to acquire deferred revenue or software acquisitions that we've made. This represents revenue that those companies would have recognized, if not for our acquisition. Second, a small inventory step up expense, related to the acquisition of RF IDeas last year in the fourth quarter. Now, if you please turn to slide four, I'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his remarks, we'll take questions from our telephone participants. Brian? Brian D. Jellison - Chairman, President & Chief Executive Officer: Thank you, John. Good morning, everybody. We'll take a quick look at sort of summary of the enterprise financial results here in the quarter, and then look at individual performance of the segments and the outlook for each segments and then turn to the guidance for the remainder of the year and go to Q&A. So, next slide is simply the introduction to the Q2 enterprise results; next slide is the explanation of those. So, orders were actually up to a record $956 million. They were up 9% in the quarter and our book-to-bill for the enterprise was 1.02. Revenue was up 5% to $934 million versus last year's first quarter. Organic revenue was down 2%. We had the divestiture that's still in our numbers through the third quarter, the ABEL divestiture, which pulls 1% away and acquisitions were up 8%. We had really terrific growth in medical and in software, and water, we'll talk more about that within those respective segments. But the oil and gas declines were actually worse than we expected. We went into the year thinking that we'd be down maybe in the high-teens to 20%. In the quarter, we were down 25%, but in the upstream areas, we were down dramatically more, 44%, 51%, 52% numbers that really were amazing for us. Those are across all businesses, so they all are directly EPS-type businesses because they don't have much in a way of non-cash amortization. The toll and traffic project delay was also a little bit of a disappointment that Saudi is rolling out their program slowly. We're on track with everything we do, but their rate of initiation of new zones has been slow. Our gross margin was another record, up 90 basis points to 61% and EBITDA was up to $314 million, 33.6% of revenue. Our DEPS number at $1.56 was disappointing from our perspective, because it did hit the low end of the range, but in a quarter where we had record orders or record sales, record backlog and record EBITDA and operating profit, we've just came up a little light on the revenue side from the oil and gas and project delays, each of which probably cost us $6 million to $7 million of revenue and that's why we were at $1.56 million at the low range instead of being up at the higher end of $1.61. Our operating cash flow was $170 million, which was strong in Q2. Year-to-date our operating cash flow has been $414 million which is 23% of revenue and that's a particularly pleasing number when you're going through the sort of oil and gas decline that you could still maintain these kind of ratios. Our recent acquisitions are performing well. We have an extremely strong pipeline, which is very active. We'll talk about it in a little bit. So it was a solid quarter, but we did have to adjust our outlook for the economic realities that we see in the second half of the year and we'll talk about that when we get to guidance. Next slide, here we're looking at the Q2 income statement. As you can see orders up 9%, book-to-bill: 1.02x, revenue up 5%, gross profit was up 6%, gross margin up 90 basis points. The operating income ratio is 27.4% versus last year's 28.5%, but as you can see amortization increased by $10 million and our EBITA performance, if we were reporting that way was lot better in terms of continued sustained upward trends in our ratios. The earnings before tax number was down 2% and the tax rate was a relatively big headwind in the quarter, although the tax rate is really sort of appropriate for us at 29.8%. Last year, we had an extremely unusual event in the Q2 numbers, which was $15.9 million of a good guide that came from a long-term settlement of a tax position. And that really – that $1.70 if you adjusted it for the $0.16 for that one-time benefit would have been $1.54 and this year we're at $1.56. Next slide. If we look here at the revenue bridge, I think most people find this to be quite surprising. The underlying core nature of the business is continuing to grow at double digits. Here you can see, if we looked at last year's second quarter, we printed $892 million. That included the $10 million Puerto Rico situation that we were trying to get out of because of all the reasons everybody knows, we were successful, but it's still in the number in the second quarter at $10 million. Then we have the divestiture of the Eastern German pump company for $6 million and then the oil and gas decrement in the second quarter alone was $33 million. So, those things were a $49 million headwind. If you look at the base spend at $843 million, you'll see we added $91 million to that number. So while the total revenue is up 5%, the revenue excluding the oil and gas and these things that are anniversarying, was up 11%. It's really almost identical to what happened in the first quarter or if you exclude oil and gas and Puerto Rico and the divestiture, we were also up 11%. The good news is that for the balance of the year, we think the second half will be similar, where we'll be up more than 10% excluding oil and gas, but we'll have a better organic growth, so they'll be a little less in the acquisition dollars and more in the organic growth dollars or at least until we do another acquisition. So, actually we felt the growth is pretty solid despite the headwinds. Next slide. Here, you can see that we continue with the governance process we had to make, remarkable progress in our asset-light business model. Two years ago, our inventory was at 6% of revenue and at the end of June this year, it's down to 5.1%, so a 90-basis point improvement. Receivables actually declined from 17.7% to 16.9%. So, we've got a faster receivables, and payables and accruals went up, as we'd like from 17.4% to 18.9%. So, we literally cut our working capital as a function of annualized sales in half in the last two years from 6.2% to 3.1% and that really speaks to the quality of the work that all of our independent operating people do executing our strategy. Next slide. On cash flow performance, again extremely good cash flow performance. Year-to-date, it's $414 million, which is 23% of revenue or free cash flow was 22% of revenue and our operating cash flow conversion was 132%. And note on this slide, you'll see in, two years ago our year-to-date cash flow had been $353 million and last year we printed $433 million, but $20 million of that was a onetime payment by Puerto Rico, as we got out of that situation with Puerto Rico. So, it's real money, but it was a onetime event. So, you take the $20 million, you're looking at $413 million and this year's $414 million, our cash performance will be even stronger in the second half, but still conversion is great. Next slide. From a balance sheet performance perspective, we continue to be very well positioned. You can see that, we've got a completely undrawn revolver of $1.850 billion at the moment, up from $1.185 billion last year. So, if you look at the cash and undrawn revolver, you're getting about $2.5 billion. Our trailing 12 months EBITDA is $1.267 billion so our net debt number to EBITDA is running about 1.9 times. And that's after in that 12-month period, we've invested $1.450 billion. So, after $1.45 billion we still have a $1.9 billion debt-to-EBITDA number. So, ample liquidity we've got a very active pipeline. And really most of the numerous acquisitions that we're involved with now in late stages are application software companies and it's likely we'll be doing something soon. Next slide. Here, we'll look at the individual detail, and the outlook for each one of the segments. Next slide, all four segments continued to perform remarkably well. When you look at the kind of fall off in oil and gas that affects the Energy business, and to a lesser degree the Industrial Technology because Roper Pump is sitting in there. Here these two are clipping along with Energy at 26% EBITDA to revenue, and actually sequentially up from the first quarter, and Industrial Technology at 31%. So, those remain remarkable performance numbers. RF/software business at 38%, Medical at 43% as you can see in the Enterprise as a whole running at 37% without the corporate expense. Next slide. So, we'll take the largest segment first, which is Medical. Here you can see that revenue was up 12%. That came from eight points of acquisition and four points overall organic revenue, although imaging pulled that down by a point. So Medical organic in the quarter was 5% which is the 10th consecutive quarter that our Medical organic revenue has been mid-single digits or better and we certainly don't see that slowing. Growth was really led by the adoption of new products in three of our Medical product companies and software businesses as well. We had strong adoption of our Alternate Site Healthcare Solutions businesses where SHP and SoftWriters were growing at a very high rate and our internal software within MHA did well as well. Our new product launches at Sunquest, which would be very important for 2017 and hopefully important yet as the year winds down are launched and on schedule. We've got the sales pipeline which is growing, growing really rapidly and we have a couple of large people that we're talking to but you would expect to begin to see that affect the second half results favorably which you'll see below. In the second half, we think that the organic growth in Medical is going to be in the sort of 6% to 9% range. The product growth that we have in the core products is going to continue, we think that trend. The alternate site growth strengthens here because we are getting some real push out of SHP and SoftWriters becoming organic rather than just acquisitions. And then we actually have some favorable comps that will benefit MHA as the year unfolds. The laboratory software orders are going to increase on the adoption of many new products and while there are literally over 15 different things, that are being launched there are four core large launches around analytics and diagnostic communities and integrated pathologies and clinical content that we think will drive the future of Sunquest. Our imaging businesses are going to benefit in the second half as the cryo-EM technology emergence is getting better understood by people, and sort of our phones are ringing off the hook. They have a strong backlog going into the second half and their product releases are on schedule. Importantly, and here when you look at the operating profit margin, you see 33.7% which is down from the prior year, couple of reasons for that. The newer acquisitions have a lot of amortization. In fact, the second quarter number at 33.7% for OP, when you add back the non-cash amortization of 7.9%, you wind up at 41.6% or the every dollar of revenue contributing. And on an EBITDA basis it's nearly 43%. So, a good mix between Medical products and software and service, and then imaging should do better in the second half. Next slide. In the RF segment, which is really now increasingly a split between RF and software, you can see revenue was up 14%, acquisitions were up 18%, organic was down 4% but the organic revenue on our software and SaaS business segment was up 9%. Our toll and traffic had very strong orders but our revenue declined because of the Puerto Rico contract which finally anniversaried in the second quarter. So, that's a $10 million headwind that goes away. And then the Riyadh project is moving much more slowly. It could easily be $20 million less than what we were told earlier in the year, which is part of the reason for our guide down on the earnings profile. It's still going to continue to happen. The contribution margin we're getting as it rolls out is fine, it's just that it's moving more slowly. And it's not the only thing going into Saudi Arabia these days, it's moving very slow. We had very strong segment book-to-bill here at 1.09. Orders were up 26% with organic orders being up 9%. Again, lots of amortization in this segment. So you see an OP margin of 31.5%, which is up 20 basis points. But when you add back the amortization, which is 5.8% of revenue and the segment and you see the EBITA number is $37.3 million, the EBITDA number is $38.1 million, up 190 basis points from the second quarter of last year. We see at the bottom here in terms of forecasting revenue for the balance of the earnings, the segment organic revenue, we think will be up 5% to 7%. Toll and traffic will improve in the second half. We've gotten strong orders in Q2. The execution of those should be pretty favorable. And we have a big pipeline of opportunity. What has caused us to slow down the guidance for the balance of the year is that decision-making process around that has been slower than normal whether that's related to an election situation with people wondering about kind of ensuring their commitments, it's something that's not clear. Our software and SaaS businesses continue to grow at high-single digits with incredible cash returns that earns other investments and acquisitions. And then RF IDeas business and our On Center acquisitions from last year will go to organic in the fourth quarter, which is why you'll see this bigger mix of organic in the second half of the year and less on acquisitions than you did in the first two quarters. Next slide. On the Industrial Technology segment, here you can see that orders declined, well actually orders were up 3%, but the organic growth's declined by 1%, the divestiture was 3%. The organic, if you exclude oil and gas and Industrial was up 4%. The problem with this segment was simply that the upstream was worse than expected for Roper Pump and we'd expected a big down, but it was down 44%. It's a little bigger than we had anticipated. The good news is that it does appear that that's the bottom of the situation and of course Roper's Pumps' impact for the segment has dramatically deescalated as their revenue has dropped so much over the last two years. Neptune on the other hand is doing extremely well. They had double-digit growth in the second quarter on both orders and revenue. They continue to gain share in the marketplace despite people read about other people that are trying to sell their businesses. Neptune will continue to have record performance. The material analysis portion of the business, sort of test and measurement had record orders in the second quarter, which is very encouraging as their revenue had been down sort of high-single digits. So, that bodes well for the second half. If you look at the second half, we think that the overall organic revenue in the business will be flat because we don't see any improvement in the upstream markets. Although, there's a declining impact in the segment as the underlying base business at Roper Pump is getting very small. Neptune and instrumentation will be able to offset any of the declines we have in oil and gas. And finally in the fourth quarter the divestiture will anniversary and go away. Next slide; here we look at the Energy Systems and Controls segment. You can see that revenue there was down 15% and it's really a tale of two different businesses, the test and measurement business which was okay, and then the oil and gas businesses which were off. So, oil and gas was down 25% in the segment, and that really doesn't quite tell the story either because our petroleum analyzer business excluded a small portion of upstream and has – was really flat with actually improved profit contribution. But compressor controls, which is a high margin business was down by more than a third in revenue and de-levered at a quite high rate. We do feel that, from here, it's no longer is negative on a comparison basis as we started to see of course, some softness throughout the year. We did have sequential margin improvement. You can see the OP margin came in at 22.5% and this segment has some amortization which brought it to 25.8% and EBITDA a little higher. The OP margin in the first quarter was 20.4%, so we ticked up 210 basis points of sequential margin improvement. In the second half of the year, we think that the organic revenue in Energy is likely to be down between 7% and 10%, which is really driven by the continued lack of improvement in any of those oil and gas businesses. We do have an easier comp in the fourth quarter in those oil and gas businesses. They're normal. So there maybe some optimism there and a fourth quarter seasonal increase, we assume will be similar to what it was last year, which was not very good and that could be a positive surprise. The industrial test and measurement businesses will continue to improve. They're doing pretty well now, certainly in a low-to-mid single-digits growth mode and the margins there are going to continue to improve. And so that's quite good and the orders book-to-bill in the segment's about 1, so this seems to be pretty well under control. And we're into the guidance here, next slide, the outlook for the year, we took the full year down to $6.57 to $6.71, which gives you a mid-point, I guess of $6.64, which is certainly lower than what we had before. It's being driven by the more severe downturn in oil and gas. We thought maybe we'd be down in the neighborhood of $75 million in oil and gas for the year, but it – we're going to be down more like $100 million, so that's a $25 million revenue hit. And then the project push-outs in tolling were another sort of $20 million, $25 million. And then there's currency that we didn't have, Brexit and other factors and currency is another $10 million. So there's about $60 million revenue hit there and you can assume that comes in at close to 50% on a contribution basis. And then the rest is really just recognition of a somewhat lower global growth environment, so we think that takes a point or maybe two points off of the organic growth versus what we expected when we initiated guidance at the very beginning of the year. We did a very through bottoms up review for guidance this time with all of our senior operating people involved, and really kind of rebuilding what everybody had to assure ourselves that we were very comfortable with whatever the guidance we're going to put in place. We really could have some things that will become favorable for us. The factors that brought it down, oil and gas, severity, project delays and tolling, global growth challenges, maybe there's a little optimism there, but we're not ready to embed any of that in our guidance. In terms of an upside, certainly the toll projects could accelerate. I think the people had a clear view of what's going to happen with the election. They might have a better idea about whether they think they're going to be personally benefited or not economically from policy. The product launches that we have could ramp faster than we have in our guidance, so it'd be nice but you know, you never know. And then our capital deployment, which we certainly expect to have more of will augment growth as the year unfolds, but it's not in our guidance numbers. We look at kind of forward revenue and EBITDA leverage, and the EBITDA leverage is riding (24:45) a little better than a third of new revenue. So even with the deleverage we got from oil and gas, we're still having overall net positive EBITDA leverage on new revenue. And if we, what else we've got, the sort of organic growth is 2% to 4% with revenue growth of 7% to 9% for the second half. If we did a bridge, like we did at the beginning of the presentation, you'd see it would show similar results with the revenue being up by 10% or more excluding oil and gas. Second half tax rates are probably around 30% and then in the third quarter, we're looking at $1.59 to $1.63. Next slide, here if we look at the summary of what happened in the quarter, you can see for us, we normally we'd talk about the fact that we had record orders and backlog, record sales and operating profit and EBITDA, all of which is good. The margins are good, but we hit the lower end of the guidance, so we just didn't feel like leading what was kind of record results when we were a little bit disappointed on the actual EPS number. Orders, as we said were an all-time record and up 9% with the backlog at $1.14 billion and a book-to-bill well above $1 billion. So, we're well positioned to continue to have a stronger second half. We get rid of the $10 million-a-quarter drag from Puerto Rico beginning now, here in the third quarter and we get rid of the drag on the divestiture of ABEL in the fourth quarter, so little bit of a drag in Q3. Revenue being up 5%, we were able to do that because we had sort of high-single-digit, low-double-digit growth between medical, software and water, which allowed us to survive greater than 40% reduction in our upstream oil and gas businesses. Gross margin at 61%, we feel very good about that. The EBITDA margin is fine, likely to improve in the second half a little bit. Operating cash flow is the same thing, 132% conversion and $414 million. It will be stronger, as it always is in the second half. So, we're quite comfortable with where we are on the operating cash flow. Back in 2014, our oil and gas business was a little above $500 million and 14% of the company. And in 2015 that had dropped to around $400 million and about 11.5% of the company. And today, we think it will finish the year out at around $300 million, which will be less than 8% of the company and the upstream portion is going to be less than 2% (27:29) of the company, with the midstream being around 6%. So the worst is behind us for this kind of change and we're looking forward to that. We've got a very active pipeline. We're open on quite a few deals. We said at the beginning of the year, we'd expect to deploy $1 billion, but $275 million awarded thus far. And it's not going to be difficult to find a way to deploying that level of activity. We still have a great opportunity to continue to compound results. It really continues to drive our strategy. So, we've got our underlying core businesses doing relatively well on a growth perspective. It's just that the oil and gas and unique situation with Puerto Rico which was a win for us, even though it shows up negatively in the first half revenue, keeps us all of our strategies alive and we're very comfortable with our ability to compound results from here out. So, with that, we'll open it up to questions.

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

Thanks. Good morning, everyone. Brian D. Jellison - Chairman, President & Chief Executive Officer: Hey. Good morning, Deane.

Hey, Brian or John, I was hoping, you could start with bridging the guidance for third quarter and fourth quarter, just looks like the guidance cut here this morning is weighing higher obviously on the third quarter, down 12% versus consensus, but you're not as severe in the fourth quarter. And maybe is there some seasonality, is it the comps getting easier, better visibility on these product launches, but just some color there on the difference here, assumptions in the third quarter and fourth quarter? John Humphrey - Chief Financial Officer & Executive Vice President: Yeah, Deane. So, you did touch on it. So one of the things that we're expecting for this year is maybe not historically strong from a seasonality perspective but stronger than what we saw last year. And that's not just on the Energy businesses, but also on some of the other Industrial businesses that have some more seasonal activity as customers flush out some of their budgets. So we do expect that for the fourth quarter and that's why, you see slightly higher in the fourth quarter than the third quarter as we look forward to this. My answer must have left everyone dumbfounded. Are we still live on the call here?

Yes, you're still live. John Humphrey - Chief Financial Officer & Executive Vice President: Okay. Brian D. Jellison - Chairman, President & Chief Executive Officer: All right. Next question. John Humphrey - Chief Financial Officer & Executive Vice President: So next question, Matt.

We will now hear from Robert McCarthy with Stifel, Nicolaus & Company. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Deane must have dropped the mic. Good morning, everyone. How're you doing? Brian D. Jellison - Chairman, President & Chief Executive Officer: Hey. John Humphrey - Chief Financial Officer & Executive Vice President: He must have. And well, if he comes back we'll insert him back into the queue. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Okay. In any event, maybe you can talk about the Medical business in terms of maybe amplifying your comments around the product launches, the favorable compares to MHA. And then what drives to 6% organic growth versus the 9% organic growth kind of for the back half? Brian D. Jellison - Chairman, President & Chief Executive Officer: So we had – give Neil Hunn a chance – he's responsible for the Medical and software businesses there an opportunity to explain. The pipeline is growing candidly more rapidly than we could have even hoped for. And he can tell you a little bit about what these new launches at Sunquest are designed to do, so Neil with that fire away.

Good morning. Yeah, the second half is – have strength across the board. I'll break it down by product and software. On the product side, there's new products at Verathon that continue to gain traction. On the software side, a number of – I think we've talked about before, a number of faster-growing software businesses turned organic, Strata, Data Innovations, SoftWriters, SHP. And then with the second half really at MHA, we see likely, well they are easier comps and then the market conditions around new customer adds give us an opportunity to do better in the second half than the first half. Brian D. Jellison - Chairman, President & Chief Executive Officer: But I think people are more interested with Sunquest, so let's just talk about the launch of the new – you've got four major offerings and then you've got mid-teens in terms of enhancements and upgrades at Matt's group are putting in place that we're already starting to solicit revenue. So you might explain what those things do.

Well, Sunquest, very excited about Sunquest. The reality of the Sunquest is we have worked very hard for the last 18 months on a series of new products. We've talked about those number of new products that are being brand new or material upgrades or enhancement increases being in the high-teens. We're on track for all of that. We've just come off a great user conference at Sunquest, where the customers were excited about the roadmap and what was happening. We've seen a pretty meaningful increase in the pipeline, the sales pipeline, the sales funnel activities that you'd expect to see coming behind a large number of new products. We'd like to see that pipeline convert in the second half. We expect it to convert in the second half. So, we'll see bookings momentum and then that will give us the momentum heading into 2017 for Sunquest that we've talked about in the past. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: And switching gears to M&A capital redeployment. I think the messaging maybe up until this call has been a little more muted in kind of the second quarter given where public valuations are for a lot of companies, given where the cost of funds is. Maybe can you just talk about – do you think it's a difficult environment to transact deals, just given political uncertainly, a tentatively rising stock market, with an improving valuations and public fundamentals kind of bleeding into private fundamentals? And then kind of perhaps some of your companies thinking about the alternative route for initial public offerings. Could you just talk about how you look at this environment, and how do you think Roper's going to be able to transact in this environment and what kind of cadence you guys can transact in? Brian D. Jellison - Chairman, President & Chief Executive Officer: Well, I think for us, it's kind of a perfect environment, although you're right about the pricing of assets and the expectation of sellers, is pretty high. But fortunately for us, we're not buying public companies and paying a premium for it. So, we're buying private companies that if they were public would trade at a higher value than they do trade in the private marketplace, which gives us always some beneficial arbitrage. There are as many things available in the acquisition market as I've ever seen. We have looked at billions of dollars of transactions this year, and we're directly engaged with a couple now that have a higher likelihood of closing, I think than the ones that we were looking at earlier in the year because of the quality of the business. Lot of the people that are running these private companies aren't interested in becoming public. They would much rather join our firm – at the public equity in our firm that and not have the quarterly calls and all of the things that you have to do with investors and banks. So we remain a very attractive home for people. And I think that the acquisitions we've made in the last couple of years give us a wider variety of things that we can look at. Application software has a huge number of potential verticals and there are lot of niches within them that the largest people that are, roll-up people aren't going to be interested in, so it's still a very favorable hunting ground for us. Now, the challenge I think for the multi-industry guys in buying things is they tend to not buy things that are as high a quality as what we're buying. And if you're in a marketplace where you're looking for synergies that are going to be driven by overhead absorption or business consolidation or administrative synergies or something, those businesses are trading at a disproportionately high price than where they normally would because the interest rates are so low. The highest quality businesses oddly enough, trade at a much deeper discount to public comps. People will look at Roper and, oh my gosh, look, they pay 12 times for something. Well, if you looked at the public company comp, it was trading at 25 times or 26 times. So, I think that people are focused on product-oriented, more asset intensive businesses that are trading at 12 times or 13 times because of very low interest rates and people are buying them for 12 times or 13 times or 14 times, we're not in that space. We're in a space where we're buying stuff at 12 times or 13 times or 14 times that if it were public would trade at a higher number because of our willingness and experience and how to effectuate those companies joining our public family. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: If you indulge me to one last question and I apologize at the offset to be a little impolite, but do you think this is the last guidance cut we're going to face for 2016? Brian D. Jellison - Chairman, President & Chief Executive Officer: I do. I've bet money on that. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: I'll leave it there. Maybe Deane will get back upon his seat. Brian D. Jellison - Chairman, President & Chief Executive Officer: Yes.

We will now hear from Joe Giordano with Cowen & Company. Joseph Giordano - Cowen & Co. LLC: Hey, guys. Thanks for taking my questions here. When you – I don't want to beat on Sunquest too much, you've really talked about it, but can you kind of get into a little bit more detail what these new products are actually? Like what actually are they, how are they expanding the platform and maybe talk a bit about the competitive dynamics in that market versus you guys and that bit of concern, how that's been progressing over the last maybe 12 months or something like that? Brian D. Jellison - Chairman, President & Chief Executive Officer: Yeah, it's a great question Joe. So Neil, why don't you kind of explain these four core products and then all the enhancements.

Sure. Well, I appreciate the opportunity. So let me give you a 30 seconds on the importance of what Sunquest does for our customers. So Sunquest customers are the largest, most complicated laboratories in the United States. These are laboratories that do millions of tests a year. And what our software does is automate from start to finish the laboratory processes. So you get super high quality results at low cost to operate the labs. So what Sunquest, the new – the turn of products ready at Sunquest is to extend that capability that's been steeped in the blood side or the fluid side of the lab and extend it to the other parts of laboratory. So first is a major product that is the integration of the pathologies inside a hospital. So it integrates the blood and to the tissue, to the molecular genetics, very important product for us and for our customers as they deliver medicine inside of their institutions. The second one is a completely refreshed view about how do you collect samples at the bed side. It's mobile enabled, it's integrated into a nurse workflow, important in terms of getting the draws correct, at the right location, with the right patient and get it to the laboratory as quickly as possible. The third category of new products is helping the hospitals extend their reach into the communities, importantly in the changing reimbursement landscape in U.S. healthcare, hospitals want the laboratory samples that are in the community, meaning where the physicians that feeds patients into their hospitals, they want the blood tests that are collected and all the laboratory tests that are collected in the physicians' offices to be routed into the hospitals or laboratory not just to drive volume in laboratory but to get the clinical information. And so we have a series of tools that integrate into the electronic medical records at the physicians' offices for ordering and resulting. And then finally, the laboratory space has been vacant of any meaningful analytics about how they run the operations, how they benchmark themselves against their peers and improve the operations. So we have a large analytics release that's happening in the second half of this year. Those are four net new opportunities. As we talked about earlier, there's a series of other meaningful upgrades. We've just released a major upgrade to our core clinical policy and our core blood bank. We've seen the opportunities associated with those upgrades number in the hundreds and so we're very excited about what the teams be able to build on a product perspective at Sunquest. Joseph Giordano - Cowen & Co. LLC: Thanks for the color, it's really helpful. One, just kind of going with that, typically we see a pretty steep margin ramp in the second half for that segment overall and guessing most of us are probably in that boat right now. So, can you kind of talk us through what drives that historically, and is that something we should still think is applicable for this year? John Humphrey - Chief Financial Officer & Executive Vice President: Yeah. It really is. It's something that we're expecting as well and it's truly volume driven. So, it's a – and this segment has our highest gross margins across the enterprise with gross margins that are north of 70%. Some of our businesses here even have gross margins above that. And so, as we see incremental growth on the top side, we expect that to fall through. And so that really is what drives the margin improvement as we go throughout the year. And, that's true on not only the software-type businesses like Neil was just talking about, but, also our products businesses and particularly at Gatan and some of our imaging business where they have very high gross margins because of all the technology and all the R&D that we invest there. It does result in high gross margin. So, if the volume increases, we expect that fall-through to improve, and that results in a higher margin in the fourth quarter than what we had throughout the first part of the year. Joseph Giordano - Cowen & Co. LLC: Okay, good. And then, just last from me quick. On the order growth at RF Tech, is that driven more by TransCore, is that software related? I just want to kind of link that with your comments on who becomes president on the infrastructure side. It does seem like a lot of the road builders and those kind of guys see pretty positive outlooks right now. So, I want to see what you guys are thinking about that business in the U.S., particularly in the second half? John Humphrey - Chief Financial Officer & Executive Vice President: Well, as far as the numbers are concerned – I'll turn it over to Brian on the commentary around the business outlook. But the order quarter growth was both on the toll and traffic side where the book-to-bill ratio was very strong 1.14 I believe. But it was also on the software side. Now, a little bit of that is seasonal, is our CBORD business, in particular, which serves the college, the university market. They have a lot of their renewals and upgrades and security applications that are booked in the second quarter and then delivered or recognized as revenue throughout the year. And so a little bit of that is seasonal, but we saw a fundamental growth on the software orders as well, but the largest reason for the book-to-bill being well above 1 is the backlog that's building on the toll and traffic side. Even though we've seen delays there, we still see fundamental growth happening there in the second half. Joseph Giordano - Cowen & Co. LLC: Thanks guys.

Our next question comes from Joe Ritchie with Goldman Sachs. Joe Ritchie - Goldman Sachs & Co.: Thank you. Good morning guys. John Humphrey - Chief Financial Officer & Executive Vice President: Good morning Joe. Joe Ritchie - Goldman Sachs & Co.: So, my first question's on the portfolio. Brian, clearly Energy's surprised to the downside, Industrial remains weak. But – and you guys are continuing to evolve as a technology company. I'm just wondering whether any of the end-market dynamics have kind of changed your view about the portfolio, wonder if there's any potential divestitures that you guys are considering. Brian D. Jellison - Chairman, President & Chief Executive Officer: No. I'd say the answer is no. You know what, we went into the year thinking that we'd be down about $100 million on oil and gas, which comes in a little bit into Industrial, mostly into Energy. I'm sorry, thought we'd be down about $75 million, now we're going to be down $100 million. So, that $25 million extra negative situation on revenue is disappointing because it comes in at 50% or frankly 60% contribution. So, it's a big EPS number. It doesn't really diminish our cash performance by much at all. And, those businesses at the moment are just a free shot on goal for 2017 and 2018. They're on the books for well – extremely low basis. So, the only way if you were going to do something with them, you'd want to do either a straight spin or a sponsored spin or you'd want to do an RMT with somebody. It'd be safe to say that our phone's been ringing off the hook with people who want to do those kind of things. But we actually think there are substantial upside in those business, just not this year, and probably not in the first three quarters of next year. But, if they start cranking just modestly in 2018, we're going to have windfall kind of results. So, we'd prefer to hold on to them, continue to invest. The Industrial business was 26% EBITDA in the quarter for heaven sake. And, the Energy business, we got 31% in Industrial and 26% in Energy. So, I mean these are really good businesses. Most of our investors, when we talk to the long guys, their fear is, gee, if you put those someplace, how could we trust they can run them as well as you can. And, we always humbly say, well, maybe right. So, these are great businesses. They're just in a situation where if somebody's off 44% to 52%, it's incredible, but they're still able to perform at the levels they are because they're so nimble. So, I don't really see those as necessary sales. We know how to run, we know how to run them well. If they didn't have this extra $25 million headwind in the second half, our guidance reduction wouldn't have been so great. And then no one could predict what happened with what's going on in Saudi is certainly an interesting time and it's effected several of our businesses revenues in the second quarter, so. I think the underlying pieces for us is we've got some cash cow businesses that are at their absolute nadir. They're going to continue to drive a lot of performance over the years and they're a great annuity value for our investors. Joe Ritchie - Goldman Sachs & Co.: Got you. That's helpful color, Brian. Maybe switching gears, John, one quick question for you on the Medical and Scientific Imaging margins. In the first half of the year, down 250 plus basis points year-over-year. It looks like the D&A as a percentage of sales was roughly the same as last year. So I'm just wondering, were there any mix issues that impacted the first half as well beyond just the M&A? John Humphrey - Chief Financial Officer & Executive Vice President: Sure. I mean, the M&A does have an impact here, right, because we acquired CliniSys, which on an operating profit basis is below the segment average. And frankly, even on an EBITDA basis, it's below the segment average, right. Remember, the segment average here is in the low-40% EBITDA margin range. So the fact that CliniSys comes in at only in the 35%, maybe a little bit less than that EBITDA margin range even drags it down. So that is a contributor. And then the other piece is, frankly, the relative mix between – so our Medical growth so far this year. And in fact for the remainder of the year as well, although not as much in the fourth quarter has been driven more by product, Medical product sales, still terrific businesses and great margin but not the highest margin businesses inside the segment, which is really more of the software and services side. So it's more of a mix issue, but we see that mix issue actually moderating as we go throughout the year and to an earlier question that's why we see some fall through in margin expansion in the fourth quarter. Joe Ritchie - Goldman Sachs & Co.: Got it. Thanks, guys. I'll get back in queue.

Our next participant is Christopher Glynn with Oppenheimer. Christopher Glynn - Oppenheimer & Co., Inc. (Broker): Thanks. Good morning. John Humphrey - Chief Financial Officer & Executive Vice President: Morning. Christopher Glynn - Oppenheimer & Co., Inc. (Broker): If we look at the tolling and traffic timing, maybe dive into that a little bit more. I think you called out another $25 million or so second half headwind. I guess that's a mix of Riyadh and non-Riyadh pieces, but – is just a – does this project strength into the first half of in 2017, is that the best way to think about that? Brian D. Jellison - Chairman, President & Chief Executive Officer: Well, there is no question about this. John Humphrey - Chief Financial Officer & Executive Vice President: Yeah. Brian D. Jellison - Chairman, President & Chief Executive Officer: I mean, yeah that – the decision process – I mean look that decision's made, it's done, we've started, but we would have expected it to be in the thirties of millions of dollars and totally offset some of the issues with Puerto Rico. It's going to be above $10 million. How much above that is hard to say. If you'd really – they're doing a massive transit system over there. They've got lots of priorities. They're extremely happy with our performance. We're happy with the relationship. It's going to be extremely valuable over a long period of time, but in the short run, we're going to likely get at least $20 million less than we expected in the beginning of the year. And we've got somewhat less in the quarter. In this quarter and all of our numbers issues are really just around the severity of the upstream being far worse than we thought and the toll and traffic kind of stuff, if you look at the quarter is pretty significant. When you look at the year, it's easier to calibrate now. Christopher Glynn - Oppenheimer & Co., Inc. (Broker): Okay. And then the non...? Brian D. Jellison - Chairman, President & Chief Executive Officer: You know just so you understand it's true, the projects are just getting pushed out. So if we're not having them now, they'll come in, whether they come in in the fourth quarter or they come in in the first quarter, they're going to come in. Christopher Glynn - Oppenheimer & Co., Inc. (Broker): Okay. And that holds for Riyadh and non-Riyadh, correct? Brian D. Jellison - Chairman, President & Chief Executive Officer: Absolutely correct. Christopher Glynn - Oppenheimer & Co., Inc. (Broker): Okay. And then the Neptune growth was really standout. Any lumpy there or is that just broad-based rich execution? Brian D. Jellison - Chairman, President & Chief Executive Officer: Well, I think it's a combination of market share growth and all the normalized stuff and then them getting what we knew would be the lion share of new business from a customer that they didn't do much business with for the last couple of years. So, other people were talking about big revenue, we're showing big revenue. Christopher Glynn - Oppenheimer & Co., Inc. (Broker): Okay. And then, Energy Systems, you alluded to the – what's baked into the guidance is a weak 4Q seasonal ramp like last year, but you dangled positive surprise prospects in there. What's the kind of thought process behind dangling that? Brian D. Jellison - Chairman, President & Chief Executive Officer: Well, we just don't know. Last year was – normally you get – basically because people have a lot of MRO left at the end of the year, but we didn't see any benefit of that because people just shutdown. This year, all year along anybody who's in the upstream business would know that people are cannibalizing what they've got, nobody is buying anything, rental fleets are in distress. But there're an increasing number of signals that would say that the cannibalization of all the stacked horsepower business out there, at some point will turn into new orders in revenue. We just have no idea where it will be. We do expect a modest improvement in the fourth quarter of this year, versus last year and could it be even better, I don't know. Christopher Glynn - Oppenheimer & Co., Inc. (Broker): Okay. Thank you. Brian D. Jellison - Chairman, President & Chief Executive Officer: Yeah.

Next we will hear from Richard Eastman with Robert W. Baird. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Yes, good morning. Brian D. Jellison - Chairman, President & Chief Executive Officer: Hey, good morning. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Brian or John, could you just speak for a second, the order number that you've put up there, what was the core order number in the quarter? John Humphrey - Chief Financial Officer & Executive Vice President: Organically, orders were up 2%. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Plus 2%, okay. And then, the assumption would be that that's pretty much driven by Med-Scientific is that reasonable core order? John Humphrey - Chief Financial Officer & Executive Vice President: So the core – so the organic orders, I wanted to give that to you by segment. So, in the Medical segment it was plus 2%. In RF it was plus 9%. It was plus 2% in Industrial and minus 11% in Energy. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Energy, okay. All right, I see. Okay. And then, also within the Med-Scientific piece of the business, could you just maybe sift through the core revenue growth, local currency was plus 4%. How did the Medical products do versus the software and SaaS business? Is it – I was just trying to pick up on the cadence there. The software and SaaS business effectively much better in the second half, how was it relative to the 4% core growth this quarter? John Humphrey - Chief Financial Officer & Executive Vice President: Yeah. So, the Medical products was up, I know it was in the 9% or 10% range, with the medical, software and services up I think 1%. And so, as we go throughout the year, that relative mix probably changes a little bit out if it goes to 8.2% or if it goes to 7.3%, but it's in that range. Maybe even it stays at 8% then the medical, software and services comes up a little bit. But that's the relative contribution right there. There's also little bit of what we were talking about with the margin impact and the outlook for the rest of the year. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): I understand. Okay. And then, just one last question for Brian. You had mentioned earlier in the M&A pipeline, it was full, the application software businesses. There were a lot of those prospects in there. Is there anything that Roper could do in that application software area that would have more scale? We've seen good success with Sunquest and MHA, and tucking in some related businesses at Sunquest, at CliniSys and GeneInsight and Atlas. And I'm curious, do we stay on that path with the – more of the bolt-ons to Sunquest and MHA or is there something in there with some scale that we could pull in? Brian D. Jellison - Chairman, President & Chief Executive Officer: So, it's a really good question. The answer is yes and yes. So, one of the incredible things about Sunquest and MHA is their platform status. So, if they allow us to do these incredibly attractive small acquisitions that we wouldn't do on our own. I mean, things like SoftWriters and Strata, and they're just really amazing. I mean, these are very high growth businesses and hopefully, we'll continue like that even though they're on a small base. If you look at the last large transaction was Aderant. There are a lot of things that are sort of the size of Aderant. And Aderant also offers us an opportunity for some bolt-on acquisitions to kind of grow its platform status. I would hope that the next acquisition we have is more like that where it's meaningful, it's something that we know how to do. People would be confident that we're already doing those kind of things. So that is likely what the next thing would be. Now, that said, this year we've looked at a number of very large transactions, and... Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Okay. Brian D. Jellison - Chairman, President & Chief Executive Officer: ...those are always an interest. We're incredibly conservative and careful around those. But I would be disappointed in the next two years or three years if we didn't do a quite large transaction. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): So, are there opportunities or targets in the pipeline that are not Medical-Scientific? I know Aderant was an exception there. But I'm thinking, anything literally it's a bad word these days, but something on the Industrial side that would be more software or SaaS, is there any of those opportunities in the pipeline? Brian D. Jellison - Chairman, President & Chief Executive Officer: Well, there aren't a lot of Industrial situations. There are a few, but there are a lot of things that are not medical, that are vertical, just like Aderant is certainly not a Medical business. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Yes. Brian D. Jellison - Chairman, President & Chief Executive Officer: Some of the other acquisitions we've made are not Medical at all. I think that you're likely to see some acquisitions that are not Medical at all, that's why we're kind of suggesting... Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Okay. Brian D. Jellison - Chairman, President & Chief Executive Officer: ...there's a lot of attractive application software businesses that are immediately in front of us. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Okay. Brian D. Jellison - Chairman, President & Chief Executive Officer: And there are project management businesses that are out there. Quite a few of those that are very interesting, some which are sort of horizontal opportunities and others that are small vertical. So... Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Okay. Brian D. Jellison - Chairman, President & Chief Executive Officer: We have enough internal intellectual capital to handle a large acquisition that would not be in the Medical space. Richard Eastman - Robert W. Baird & Co., Inc. (Broker): Okay. Very good. Thank you. Brian D. Jellison - Chairman, President & Chief Executive Officer: Welcome.

That will end our question-and-answer session for this call. We now return back to John Humphrey for any closing remarks. John Humphrey - Chief Financial Officer & Executive Vice President: Thank you, Matt and thank you all this morning. And we look forward to talking to you again in October.

That concludes today's conference. Thank you for your participation. You may now disconnect.