The Roper Technologies' Third Quarter 2016 Financial Results Conference Call will now begin. Today's conference is being recorded. I will now turn the call over to Rob Crisci, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Audra, and thank you all for joining us this morning as we discuss the third quarter financial results for Roper Technologies. Joining me on the call this morning are Brian Jellison, Chairman, President and Chief Executive Officer; John Humphrey, Executive Vice President and Chief Financial Officer, and Paul Soni, our Vice President and Controller. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call which are available through the webcast or also available on our Web site. Now if you will please turn to slide two. We begin with our Safe Harbor statements. 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 on our SEC filings. You should listen to today's call in the context of that information. And now please turn to Slide 3. 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 included as a part of this presentation on our Web site. For the third quarter, the difference between our GAAP results and adjusted results consists of two items. First, a $2.2 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions. This represents revenue that those companies would have recognized, if not for our acquisition. Second, $0.9 million debt extinguishment charge related to the replacement of our former credit facility with a new $2.5 billion facility that closed in the quarter. And now, if you will please turn to Slide 4, I'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we'll take questions from our telephone participants. Brian?

Thank you, Rob, and good morning, everybody. We will start here with the Q3 enterprise results, so next Slide. We had a record for just about everything again in the third quarter. Our orders were an all-time record at $929 million, and by the way if we had booked the MTA order couple of days earlier but it wasn’t quite ready to go, we would have been -- we would have had our first $1 billion order quarter in our history. Revenue was strong. Net earnings were, of course, a record EBITDA cash flow. Revenue was up 7% to $947 million, which gave us 2 points of organic growth despite the headwinds in oil and gas. FX costs us 1 point, and then acquisitions and divestitures netted out plus 6% because this was still the last quarter without all the divestment in. Growth was led by both the medical and RF technologies, software businesses and certainly Neptune. We had an outstanding quarter, you will see in a minute. Declines in oil and gas were basically about what we thought. We thought they would be sort of down 20% or so and they were. Gross margins were up 60 basis points to 61.3 and EBITDA was up 8% to $328 million. Our net earnings reached $169 million, which gave us a DEPS earnings per share number of $1.65 ahead of our guidance. Free cash flow was up 40%, really an astonishing quarter, where free cash flow was up 11% year-to-date but up 40% in the third quarter. And then our ConstructConnect acquisition, which we are announcing today, and which will close this week is another terrific business for us. It's a SaaS network business for the pre-construction industry, and we will detail that later in the call this morning, and it…

[Operator Instructions] We will go first to Deane Dray at RBC Capital.

This is Andrew Krill on for Deane. I want to start off on ConstructConnect, this is the second meaningful deal you guys have done recently in Software-as-a-Service after Aderant. So I am just wondering if you could talk about market share within construction, and if there are any unique barriers to entry versus peers for the business.

Well, this is John Humphrey. So as far as barriers, I mean the barrier of course for a networks business is the strength and size of the network, and the ability for all of the different users to be able to transact business and grow their own businesses by utilizing the ConstructConnect network and software solutions. And I think it goes to the size of the network. When Brian talked about 800,000 users and 55 million invitations to bid every year encompassing almost 400,000 different commercial construction projects. I mean the size of the network and the combination that ConstructConnect has been able to put together between their different brands of iSqft, Bidclerk and Construct Data, and really turn that into a single integrated platform and that’s truly unique inside the industry. So from a competitive position. I think for most of those customers, the way that variable to grow their business and to bid on more projects and to win more, is through connection to the ConstructConnect network. And so that’s really the strength of that in the competitive position. There are a couple of competitors out there that also provide, particularly on the construction data side, but on the network and the integrated data, we really don’t think there is anyone of size there.

Okay. It is very helpful. And then just as a quick follow-up. Do you have any sense of potential accretion and then I guess kind of where you guys that EBITDA margin could eventually go versus the sort of 33% or so you are expecting next year. Thank you.

Well, we still have a lot of work to do. I mean we are going to close on the transaction but it is worth thinking about it as probably somewhere in the $0.10 to $0.15 accretive for next year. We will be able to update you on that of course as we finalize the purchase accounting. And the margin profile here is also very good, right.. We are talking about something that’s already in the mid-30% EBITDA margin. And so as it continues to grow, it will grow with high incremental margins. And so that’s how we see the margin progression over time as this network continues to get bigger.

I just want to add to the understanding that these acquisitions have a lot of non-cash amortization. So on a GAAP DEPS basis, people are looking at expensing that amortization and depressing what otherwise looks like earnings per share. Reality is, it will be very cash accretive. But on a GAAP DEPS basis it may only add $0.10 or $0.15. I think you get paid as a shareholder for monitoring what's happening to the quality of the cash earnings. The cash earnings of ConstructConnect will be great.

And we will move next to Robert McCarthy at Stifel.

I guess, first, just talking about the -- again, congratulations at a very strong cash generation quarter. These questions will relate obviously to DEPS. But in terms of the medical cadence for the fourth quarter and energy, could you just expand on your comments about what kind of brought the guide down for the fourth quarter.

I think two things in terms of the DEPS. It's just our view of that is that we are not going to get much in the way of seasonality. When we look to the orders that came in the third quarter, we get a lot of footprints and we call them booked and so they are booked with a quarter, shipped within the next quarter. And we didn’t see any uptick that would give us a reason to think we would have normalized Q4 seasonality, but we could be wrong about that, that would be upside that could happen to us. So, I think it's more than any one item and then we have been ready to go on a couple of projects that we expect and we are ready to [indiscernible]. Okay.

Energy is not particularly surprising but the medical cadence. Could you just expand upon that because I think your expectation was kind of high-single-digit growth as kind of an exit rate for fourth quarter?

Yes. Rob, I think you are right about that. And once again, it goes back to what Brian was talking about. When we look at the product orders, and I am talking specifically around medical products. Well, we expected that kind of last time we talked, that’s exited closer to the 10% growth rate, that’s existing closer to the 5% growth rate, and that combined with the timing of imaging orders and deliveries. So all the life science things that Brian talked about earlier, those are actually very sophisticated instruments and cameras and filters. They aren't as kind of the -- it's not like just machining and creating a pump. So the process in order to be able to turn that from order to delivery can easily be 60, 90, 120 days depending on yield and throughput, particularly from suppliers around some of the centers. And so as we look at the deliveries and the delivery schedule, particularly on the imaging product side and also on the medical product side, that’s where we see a slight difference from what we would have thought before, but we still see this segment exiting at the mid-single-digit rate, very consistent with where it has been over the past 2.5 years.

Okay. So you see no underlying deterioration in the core organic growth rate of that segment?

No, we do not.

No, no.

Okay. And then in terms of the M&A pipeline, obviously you have transacted on a very interesting deal this quarter. But I mean what's the state of play in terms of how you look over the next, kind of 12 to 18 months in terms of capacities of these deals and the environment to get deals done. Because it has been, in the main, kind of a difficult environment to get deals done.

Yes. You know if you go back to January '15, in that 21-month period we have deployed $2.7 billion in capital. I mean in the next 21 month period or much sooner I would think that that kind of run rates are impossible. You know we have got hundreds of millions or billions of dollars of capital to be able to put to work and getting the new $2.5 billion revolver which is [on ] [ph] done, was a big deal because it's given us some flexibility around how much we can deploy at anyone point in time and that’s very helpful. So there are a number of small deals that we are engaged with at the moment and a couple of larger transactions which would be even bigger than ConstructConnect that we are involved with, we think are very attractive. So you never know, in terms of your word, cadence, how that will happen. But I would be very very surprised if we didn’t deploy that capital in the next 12 months.

The final question is just around, you have heard this many times, but would you consider doing something akin to what some of your competitors have done, simply not competitors but public comps, in terms of perhaps just shifting to EPS excluding amortization.

Well, there's a lot of smiling in the room because that’s the proper way to measure us. I guess we are not interested in stepping on the SEC. Those people that are doing that, they can continue to do it for a longer period of time and if the SEC doesn’t say anything about it, that’s a smart thing to do, because it's the proper way to measure the business. It's just not the way GAAP measures the earnings. So we had $50 million of amortization in the third quarter and what do we have, 101 million or 102 million of shares, you can do the math. I am apparently now allowed to say what that math generates. EBITA, earnings per share for the company will be and are spectacular.

Brian, you would have banging my head against the wall for that for about 15 years and I am a slow learner. So I will leave it there.

We will move to our next question from Joe Giordano at Cowen and Company.

Do you get the sense that given where rates are and when you are looking at deals, are you having to stretch a little bit more in terms of multiple because competitors who are looking at the same assets are able to kind of do some funny math with rates being here in terms of returns?

Well, I wish it were funny math but it isn't funny math. The difference is, we don't like to go above like four times debt to EBITDA, and those guys are willing to take [that staples] [ph] and banks put on things in non-bank entities, but [on times] [ph] at eight times EBITDA, right. So, they don't deploy much more equity in a transaction that we do, we just don't want to have seven or eight times debt to EBITDA. We are going to remain investment grade and to do that you want to be around four times debt to EBITDA coming back to 3 or 3.5 or something. So you know we are very disciplined about wanting to and guaranteeing ourselves to maintain investment grade status. The prices that people are paying for things are really bifurcated. Oddly enough, the industrial assets are trading at really more than they're worth in a normalized interest environment in the M&A world, because they don't have a lot of EBITDA even though they all require a lot of capital spending to maintain that EBITDA. So those multiples are interestingly high. Then the asset light business trade at a premium to that but the arbitrage for us on the asset light businesses is more favorable than those people that are buying the more capital intensive businesses. So something like ConstructConnect, it will be a long-term compounder of investment for us which is great as opposed to the guys that are buying the capital intensive businesses thinking that, gee, you know, it looks like I'm paying a lot but there is the nature of their cyclical activity and when there is this higher number, this will happen. We will leave that field to everybody else. It is not where we're going.

Thank you. I just wanted to touch on Neptune as well. I mean the results this quarter, obviously very, very strong. There's this story out there, that has been out there for a while, fair or not, about a lack of investment. You talk about $50 million of M&A. Can you just talk about your positioning there on the highest technology type products, like on the AMI development and how you're capitalizing on your installed base? I mean the numbers speak for themselves but this has kind of been out there for a while and I guess, maybe give you guys a chance to address that.

Yes. I think $50 million was what we have done in R&D, not M&A.

Sorry if I misspoke. Yes.

In the last three years we have put $50 million of work there. We are also opening a new software development center for Neptune that will really help us and a lot of things we're doing. So we're not going to provide a lot of information about what we're doing but I can just suggest you that we have the best reading technology that’s available and has the highest integrity results. We have an enormous installed base and maybe people forget that the way our 900 product works, we can upgrade that, the AMI status. And there is a lot of ways to collect the technology but if you have got the right core unit that can use multiple ways of gathering the data, you will be a little bit ahead of the game. So we are able to do upgrades for people in the AMI arena that they always, if they ever migrated to it, they do that and we have won a lot of those. Over $30 million of that just in the third quarter. You saw other things. Mobile activity, you see Verizon picking us as the person that they are working with development on mobile technology. So there's a lot of different things going on and we are not going to provide more information than we have around that but Neptune will have record performance in 2016. So if anybody thought it didn't have some kind of long term reason for performing well, explain to me why they are growing so much.

Fair enough. And last if I could, John, you talked last quarter about, we were talking about Sunquest, some small hospitals, they were taking maybe [indiscernible] and you said that made sense for that size of a customer and your core being large hospitals. Can you just talk about how that went through 3Q? Is that kind of stabilized and then the customer base that you focused on, you remain to be -- the capture rate there is being consistent.

Yes. It has been consistent. And you are absolutely right, in fact Brian talked about the order intake, right. So remember that fully two-thirds, if not more, of Sunquest revenue is recurring revenue in terms of maintenance on installed software that's already been out there. And so when we look at the order intake, it's a much smaller piece of their total revenue buy. But when they look at their order intake which is about the new Lab 8.0, it's about the new blood bank solution, it's the new outreach solution. So the nurses can start the testing process right at the bedside and be able to start that data flow and workflow to the lab right from the bedside. So all of those upgrades are driving that order intake to be a record level for the third quarter. It is true that on the lower end, the smaller hospitals and integrated solution can make economic sense for them, but the competitive environment and the solution that Sunquest delivers is, it continues to be very good and our competitive position continues to be very strong, particularly in those larger hospitals.

And we will go next to Brian Gesuale at Raymond James.

I am wondering if you could expand a little bit on Sunquest. You talked about record orders. Maybe just the richness of this product upgrade cycle that we have seen and maybe give us a little bit of a preface as what we might expect in 2017.

I think it's early to talk about 2017. We actually have a review coming up with Sunquest in about a month. So we will be talking about not only 2017 but importantly 2018 and 2019, and the plans that they have around the investments there. So one is what I was kind of just mentioning in terms of the continued on the upgrade side around Lab 8.0 and the new blood bank solution. But also wouldn’t ignore the investments that we have made around genetic testing and the workflows associated with that. So you really have the blood side which is the core lab, high volume testing environment that every hospital has to have. And I think of the other side, which is the anatomic technology and the emerging genetic workflows around genetic testing. That’s where we have made important investments with the acquisition of GeneInsight and continued R&D around to be able to make that workflow as efficient and as quick with getting information back to the doctor as timely as happens today on the blood side. And so for all those reasons, I think the Sunquest and our entire platform of hospital software solutions, which of course includes Data Innovations and CliniSys, and GeneInsight and a variety of other things, all of those businesses really deliver those software solutions to hospitals. I think there future looks very bright as a result of the investments that we continue to make there.

Great. That’s helpful. Maybe just a follow-up on the M&A pipeline. It sounds robust. You certainly have a lot of dry powder. Can you maybe talk about the quality of those deals? This ConstructConnect looks very asset light, negative working capital. It appears that the quality is actually increasing as the pipeline is. Could you maybe discuss that?

Yes. You can really see that when you look at that net working capital chart where you are down 5.8, people think you could never get lower and now we are 1.9. Certainly a lot of that as you get deferred revenue and you get paid in advance for work you do and most of the things that we look at these days have those qualities. So I thought, we get to zero ultimately negative at some point but I don’t see us going up. The amount of small niche businesses that work in kind of oligopolies where customer [indiscernible] is critical and then those that have the ability to have kind of a network effect, there are most of those things out there than you might imagine. Because when you are focused on product businesses, you don’t necessarily see some of these kind of things. But all of the people that are involved in transactions and banking businesses and then private equity businesses, kind of meddle what we favor, what we look like. And so the funnel what we have of incoming opportunity is really amazing. And just incumbent on us to sort through that funnel, find the best management teams. So that’s the end market opportunities that are in favorably competitive environments. And believe me, there is more high quality things available that our balance sheet could tolerate. Fortunately, we have got a big enough balance sheet to capture some of them.

We will take our next question from Richard Eastman at Robert W. Baird.

Brian, could you just talk for a minute or two about the New York MTA contract. I think you had mentioned there sites should be performed in the fourth quarter, kind of accelerated. Given the size of that contract, are we talking about maybe $20 million to $25 million of revenue in the fourth quarter and then the balance of the sites, the other six sites, does that all fall into the first half of '17?

No. No. I think commitment in the contract is pretty specific in terms of what they've been willing to release. And it will be done by November of 2017, is what we're told. There was really even one -- remember you have got the, like ramp, right. So we've been doing some engineering work with them to assure that the overhead kiosk and everything that were being built-in, are going to be okay. So it will start slow. I don't know, maybe we could get $10 million in the fourth quarter of revenue that we have with the rest being -- whatever is it, it's about $72 million for the entire period and it will be really up to them at the pace they want us to do the installation and release of the technology.

Okay. Understood. And just then just a last question, I have, just around MHA. There is a lot of noise around drug pricing, both generic as well as branded. And then also I noticed in the Slide that you had, that there was a suggestion that the alternative site solutions business would kind of be a leader here in the fourth quarter. Can you just kind of pull all that together? Has the noise around drug pricing impacted just the revenue stream in the pasture there at MHA, and then also is this alternative site solutions business being kind of the fourth quarter leader? Is there timing there or is there contract renewals or what would drive that in the fourth quarter?

Yes. Sure. So in terms of its contribution on the growth side, it was up in the 3% or 4% in the third quarter and we expect that to be modestly better in the fourth quarter. From a drug pricing standpoint, I mean you are right, that is something that we look at. A lot of the headlines that you see around drug pricing are really targeted for our being sold to the senior population. Remember MHA is around alternate site healthcare and the largest portion of their revenue is coming from skilled nursing homes, long-term care facilities. It's not really the headline prices around EpiPen or whatever else that you might read in the Wall Street Journal. It's really for kind of the longer chronic illnesses that are being sold through the MHA contracting vehicles. So, we do look at drug pricing. It's been lower than what we would have seen in years past but still positive in 2016. We're not counting on an awful lot of drug pricing lift as we think about the future for MHA. They continue to expand in their solutions in non-drug supply chains, including food and other things around long-term care facilities and other nursing homes. So they continue to expand that. And then they also expand their software solutions around data analytics. You have seen us make a couple of acquisitions that also serve the alternate site healthcare which are not GPO but are really around software solutions that allow those members and customers to run their businesses more efficiently. That's where we look for growth. We don't really count on underlying drug price increases as something that is going to drive our performance, although it does have an impact on our revenue.

And we will go next to Alex Blanton at Clear Harbor Asset Management. Mr. Blanton, your line is open.

Audra, we will have to follow up with Alex, I think.

All right. And that will end our question-and-answer session for this call. We now return back to management for any closing remarks.

Well, thank you very much for joining us and we look forward to speaking to you again in about three months.

And that does conclude today's conference. Again, thank you for your participation.