Your Roper Technologies First Quarter 2017 Financial Results Conference Call will now begin. All lines will be in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's call is being recorded. And now, I'd like to turn the call over to your host, Robert Crisci, Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Jay, and thank you all for joining us this morning as we discuss the first quarter financial results for Roper Technologies. Joining me on the call this morning are Brian Jellison, John Humphrey, Paul Soni and Neil Hunn. 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 and also are available on our website, www.ropertech.com. If you'll please turn to Slide 2, we begin with our Safe Harbor statement. During the course of today's call, we'll 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, please turn to Slide 3. Today, we'll 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 website. For the first quarter, the difference between our GAAP results and adjusted results consists of the following items. A $22 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions and $2 million of related commission expense. This represents revenue and commission that those companies would have recognized, if not for our acquisition. Lastly, a $72 million pre-tax adjustment for amortization of acquisition-related intangible assets. And now, if you please turn to Slide 4, I will turn the call over to Brian Jellison, our Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants. Brian?

Thank you, Rob. Good morning, everyone. We will start by going through the first quarter enterprise results and then look at the specific segment detail for each of our 4 reporting segments and then talk about how we see the second quarter and the rest of the year and take your questions. So if we turn to the next Slide, Slide 5. We look at the Q1 enterprise results fundamentally, of course, our record first quarter for everything you can think of, revenue, net earnings, EBITDA, cash flow. Our revenue was up about 22% in the quarter to $1.108 billion and of that 5% was organic. Really broad-based growth, which we'll talk about in all 4 segments and specific improvements in our industrial and energy end markets. In February, we were at an investor conference and audience question, whether what could go wrong or what's still difficult and I said then, that there really – we didn't see any difficulties, there are continuing headwinds of the business that were meaningful, and I'm sitting here two months later and I have to get the same answer to that question, and we see really a breakout here for Roper in 2017. The DEPS were up 17% to $2.11. EBITDA was up 18% to $362 million. Our operating cash flow was up 55% to $378 million, and you don't want to be confused about the fact that last year, there was an even lower number that would make the operating cash flow look even higher because we had an adjustment around an out-of-period tax situation with the ABEL sale and record the fourth quarter, that was a $37 million adjustment. So we're quite content with being up 55% on that adjusted operating cash flow number the year before. The $378 million, we'll talk…

[Operator Instructions] We’ll go for to Deane Dray with RBC Capital Markets.

Thank you. Good morning everyone.

Hey good morning Deane.

I just want to start off with a congratulations to John on his retirement announcement, and I do remember when John joined as the rookie CFO, and you've come a long way and congrats and enjoy your retirement.

Thank you Deane. I appreciate that.

And just maybe to start off and, Brian, I know you sized the energy piece, but it was such a headwind for the company for the past year, and it's nice seeing that snapback. Maybe give us some color on how you expect to see these, especially the upstream businesses, come back here and maybe touch on Roper Pumps. I know it's a small piece, but it really was a ground zero with the fall off in fracking and you've built new capacity in Houston. And what's your expectations on the recovery there?

Well, it was up double digits in the quarter on the revenue side and up like 40% on the profit, maybe a little more, very high leverage. Orders continue to be pretty strong for that business. One of the reasons we had everybody together in all the product businesses last week was to sort of make sure we're ahead of what's going to happen for the balance of the year and next year and beyond, make sure we're smart about looking at – we kind of look at the whole product family as being responsive to the customers pulling stuff other than us pushing stuff to them. So we're kind of big process review, talking about cost push inflation, capacity utilization, risk of supplier interruptions, material cost escalations, and those kinds of things. I think that the broker enjoys a unique position if you got an expansion of fracking. And they could be up sharply. But you're right that they were off so much. We tried a couple of years ago to articulate the mix between upstream, midstream and downstream by taking apart a wide variety of businesses when we kind of. But it's almost better to just say here's the six or seven businesses that are primarily in that area. Roper Pump gets reported in industrial and really is an energy asset. I mean it could be up 40% this year, but it's very nice incrementally, but it's not – won't be overly meaningful. I mean, that's a business that used to be $100 million, it went down to $40 million. And it was up 30%, it will be a $52 million business so half of what it was in 2014 but a dramatic improvement.

Certainly, and I'd rather be in a position explaining the nature of the snapback than where we were a year ago. Just switching over to Deltek and ConstructConnect. Brian, you alluded to some potential upside versus what you had initially discussed at the time of the acquisitions; pointing to the government opportunity, adding subscribers and professional services. Can you expand on that and how you expect to see those opportunities develop and maybe quantify what the upside might be?

Yes. I think the quantification would be more in terms of forward growth rates, so maybe mid-single digits and high single digits. I'll ask Neil to talk a little bit about what they see in terms of professional services with these new launches of products and a little bit around the GovCon opportunity.

Sure, Deane. So let's do Deltek first. What we've been talking with the team there and doing our reviews this quarter, Mike Corkery said, and he's a pretty conservative guy, former CFO of the enterprise, that almost an unprecedented level of activity around building the sales pipeline in the low to mid-market side of government contracting. And so fortunately, we're well positioned there on the ERP side of GovCon work. But it is just that. It's building funnel. The funnel's got to mature. It's got to convert. It's got to get implemented before it becomes sort of well into to our financials. So it's a good position to be, and I'm certain the end-market reasons for that are obvious around Trump and infrastructure and all that. I think the subcontractor universe is getting ready for that. Relative to the product development, it's really a machine in terms of what Namita does with her team there. There's ordinary run rate development work that they do and when we bought the business, there was an internal project that had 3 phases that was above and beyond that and the first deliverable of that, Deltek for professional services, was released in the quarter on time, on schedule, on budget, but it's just it's a new category. We're a challenger in the category, and it'll be sort of what we expect that to be a slow build over a long period of time in terms of building that business for us but we have the product now to attack that market. So we're very encouraged about – we've only been with the business now for 3 or 4 months, but it's very encouraging to start. On – and that's the summary on Deltek.

Okay, that's good. So maybe we're going to think we've got another 1 point, or 1.5 points, 2 points of organic down the road of what we thought when we bought it.

The next question will come from Robert McCarthy with Stifel, Nicolaus.

Congratulations on a solid quarter; great growth. You've heard the song remains the same. And I guess, you're not a one-man band anymore, Brian, right? Given all these...

I am at this moment in time, Robert. The people just – some people don't believe it.

But I guess, since we're on the topic and, obviously, we've had a succession. And again, I will echo the comments of Deane; congratulations, John, on a wonderful career. And, Rob, best wishes going forward. Have you – is there anything you can share about the Chairman, CEO succession planning from your standpoint? And that doesn't mean you have to share with me your Fitbit of your cholesterol or your vitals, so...

Well, I'm happy to do that if I were [indiscernible]. So actually, I'm not concerned about the succession at all. I think it's wonderful. I'm not a modest owner of the stock, so I've never sold a share of stock in my life since I arrived here, so it's finally accumulated to a meaningful number. I had to get rid of options because they expire in 10 years and so as that would take the crap out of me, but anyway, it is what it is. The opportunity for us adding capital value to the enterprise is the best it's ever been in our history. The company is going kind of through its second phase of reinvention. We had a marvelous run after Neptune and TransCore. And now, we're going to have the same situation again. The things that we can deploy capital to acquire are phenomenal opportunities, much better than what we were limited to, say, 10 years ago. So all that feel is really good. I think you can see from all of the new executive moves are from internal people. I think the board and myself, would be extremely disappointed if we didn't have an internal successor, but virtually everybody was here. We went outside a year ago to bring in a General Counsel because we wanted some specific knowledge about business acuity that we thought needed to come from an outside source. But other than that, I don't see why we would need to bring outside people, but we very much value the culture and the connectivity of everything we do. On our values page, the number 1 thing we have up there is we believe that cash return on investment drives shareholder value. And we're not too interested in somebody coming in with a different paradigm that thinks that businesses trade on some other foundation because they do not. They trade on cash return. It's an ingrained principle. It's – every part of our governance process is really characterized around that. When we had our strategic meeting with our product people last week, and we showed them everything that had happened numerically from 2011 by year through 2016 and what their vitality index of strategies looked like through 2019. I just don't think people do that. And we do that in spades, and we do it with numbers, so that people can go away from here and execute. So those are strong reasons why the board would be very much interested in assuring that we have put in place all the leadership succession processes that we need to have everybody immediately available to take over all the roles.

And as a follow-up, which I think is related, obviously, you go to Slide 8, and you see what's going on there in terms of the asset-light business model on working capital. And then you start to think about the broad-based recovery on the macro side, the strength you're seeing in recovering energy markets. It's probably a good time for valuations from a standpoint of exiting assets and also potentially contemplating separation, particularly in the context of your kind of thoughts around the second phase of the company. Could you talk about kind of the puts and takes around potential separation or how you're thinking about perhaps divesting some assets to basically refine or – refine the overall portfolio?

Well, it really hasn't changed at all. You have the same forces of work. So you have the product nature of the company, the old energy and the industrial base businesses have very low tax bases. So as long as it's a 35%-plus leakage on whatever you get, people would have to pay a huge premium for us to get a net yield that was re-investable at the kind of rate we'd like to have. So we think the market reasonably understands what the portfolio looks like. There's certainly people have been – have approached us throughout the last couple of years with various reverse Morris trust concepts around some portions of the portfolio. We've talked about that sort of openly and the challenge is that people that approach us are guys that have 38% gross margins and 18% EBITDA. And you look at these businesses that have gross margins of 51% and 57%, and EBITDA margins at 30%, they marvel at them, and they can't figure out where are their synergies. Now the reason they can't is there aren't any. It would be – you need to acquire them and drive them on a CRI perspective, and we're not doing that. So our rate of reinvestment will continue to be driven around the kind of asset-light businesses and cash returns that you get out of the software businesses that we've been acquiring. So those core product businesses simply are going to grow at a faster organic rate for a couple of years. They'll throw off more cash. That gives us an opportunity to invest that in very high return and slightly better growth businesses. So I don't think anything's changed in that respect.

Now we'll take a question from Joe Giordano from Cowen and Company.

I wanted to just talk about Deltek and ConstructConnect. Is there any sort of – how can those businesses work together? Is there any sort of like go-to-market strategy to leverage the 2 offerings to the customers, in particular, or is there – are they kind of – I know they're independent, but is there a way to kind of leverage that together?

Well, with – the nature of the word and whether it's a verb or not is important. So we wouldn't force leverage putting 2 world-class businesses that developed independently together. But we're more than happy to facilitate the opportunity for the 2 businesses to look at how they can use each other customers to basically drive access to channel a customer that they wouldn't have if they weren't owned by the same company. Deltek and ConstructConnect each have massive goodwill in terms of how customers feel about them. So it is infinitely easier for a Deltek contact to a ConstructConnect customer knowing that it's part of that family. The receptivity is higher and the same thing is true, so sharing that customer opportunity is a big deal. And we allow cooperation and then kind of let the businesses – really, Corkery and Conway, they're CEOs of their businesses. And that's true of all these large businesses, with Hawkins the CEO of Acute Care and Sicilian's the CEO of Alternate Site. So we'll let Neil maybe tell you about how these early meetings have been so fruitful.

Yes. So we'll break it down both on the channel and on the product. On channel side, remember that Deltek is very – it's 40% market share globally in architecture and engineering as a vertical for professional services. They're a challenger in construction in the AC space and ConstructConnect lives in the construction space. ConstructConnect has 41,000 paying subcontractors and 850,000 subcontractors in their network. And so you can immediately see the opportunity to work together around regeneration on the product and – on the go-to-market strategy. On the product side, the core part of what ConstructConnect does is aggregate content and data that allows all the various building product manufacturers, GCs and subs, to know what projects are in the funnel. Deltek has a similar but different product that allows government contractors to know what sort of government contracting work's in the bid pipeline. So there's opportunity to sort of enrichen the data of – between both businesses and sharing content. So it's very much a tandem strategy, but it's being led organically by the 2 leaders of the business. It happened – they knew each other a little bit before when they became part of the fold within the same quarter. They immediately reached to out to each other. These meetings are occurring without intervention from the team here in Sarasota.

That's great color there. I appreciate that. If you guys were to look at the businesses that are snapping back here a little bit after definitely easier comps because that's part of it, but if you were to maybe try to strip out seasonality and look at it on a sequential basis going forward looking at your order patterns, how do you see that? Was it – do you look at it more of a step-up to just a higher run rate, or is it kind of – are you seeing month-on-month continued kind of acceleration on a sequential basis more than on a year-on-year basis?

Well, these things generally will have a stronger second quarter and fourth quarter on a seasonality basis. But when you're bouncing back from a situation that's artificially low, you could get sequential improvement all the time. We certainly will have sequential improvement second quarter over the first. So Rob, you may want to...

Yes, I think there is sequential improvement. The run rates with the Roper Pump and any of the upstream businesses, they're certainly up and that should continue throughout the year. And then, on a year-over-year basis, right, we're talking about mid-single-digit growth for each of the Industrial and Energy segment, than when we talked to you 3 months ago, we were looking more like low single digit.

Right, right, right. Just one last like nitpick on the guys just to get a sense of where you're looking. So the full year guide, up less than the magnitude of beating 1Q. Is there just – should we think about that as a bit of conservatism or you're kind of maybe factoring in some of this happening already and it's less of a surprise? How would you reconcile those things?

No, I think we just think that moving up from 3% organic to 4% is a 33% increase, right? So 4% to 5% organic is pretty strong for the enterprise. I think we'll have the one organic headwind for the year is going to be that portion of toll and traffic that's related to tags is going to be off, and it could be off $20 million at least this year unless there's some resurgence in new tolling activity, which there could well be because our bid process is off the charts. So there's lots of activity, but right now, we're relying on the base, and we'll have to see. But I don't think it's conservatism. But I think you've got to remember how small this whole thing is. If you look at all of that Industrial and Energy, you're looking at something that's about 25% or 28%. So if you've got something, it would have to be up quite substantially more than the kind of 4% mid-single digits we're talking about it for it be very material, so...

Yes, I'd just add to that. For the first quarter, the Medical and RF segments were right where we expected them to be and the outlook there for the rest of the year is just as we had it coming in for the year. So really, the only change is better environment in Industrial and Energy and rolling that forward for the year. And as Brian pointed out, that's a smaller percentage of the company than it used to be.

And now we'll take a question from Joe Ritchie with Goldman Sachs.

So I guess my first question, with clearly great cash generation this quarter, I guess, Brian, as I kind of think about your cash profile moving forward, I'm trying to just maybe understand how I should think about that deferred revenue number as a percentage of sales clearly getting close to 12% this quarter. How do you think about that on a more normalized basis? And how do you think about like trade working capital on a more normalized basis?

It's normalized right now at negative 2.9%. There's nothing cyclical about that. We get more and more deferred revenue, it becomes a positive thing, right. So the more you grow, if you're paying in advance for what you do, the more deferred revenue you get. So welcome to probably the first negative working capital company in your coverage.

That is – you guys would be the first negative working capital company in my coverage. I guess, the – at least at this stage of the cycle. Okay, that's helpful. I guess, my second question, and it relates to this, is if you think about your leverage, you're now down to 3.7, I think that in the conversations that we had last quarter, I think kind of a goal this year was to kind of get into like the mid-3s. It seems like you're definitely accelerating beyond that. Can you get below 3? Is the goal now to get below 3x net leverage at the end of the year?

No, I think we don't have any goal. We have certain covenants and certain requirements, and we can't exceed 4 without mentioning it to people. And we expect to get down easily to meet all of our commitments and our covenants. So it's much more likely we would run routinely at 3x debt-to-EBITDA than we would run routinely at 3.5x debt-to-EBITDA. And if we didn't do other acquisitions, I wouldn't borrow that. That's we wouldn't do this year. We'd certainly be down to levels like – and you can see we're going to have $1 billion of free cash flow. Other than increasing our dividend for the 25th time and become a dividend aristocrat, I don't think you'll see us have another deployment unless it's an acquisition.

Okay, fair enough. And if I could maybe sneak in one more, and I know it's a smaller piece of your business today, but both Industrial and the Energy pieces of your business saw incredibly good incremental margins this quarter. And I know that you guys have kind of growth rates staying mid-single digits. So should we be expecting like pretty elevated incremental margins then throughout the rest of the year in both those businesses?

Yes, I think for those 2 segments, as you grow, we would expect really strong leverage, similar to what you saw in the first quarter because of where they are after the cost reductions over the past couple of years. On the way back up, we would expect pretty strong leverage.

We'll now move to our next question, and that will come from Steve Tusa with JP Morgan.

John, congratulations, again.

Thanks.

So I didn't see the orders in the presentation. What were organic orders up in the quarter?

I don't know. All the data's in there. Book to bill is 1.01…

Organic orders for the company, plus 3.

Yes.

Plus 3?

And Industrial and Energy is where we – is where the orders number really matters and it was up 1.06 in Industrial and 1.01 in Energy. It's a less useful metric.

Book-to-bill.

Yes, book-to-bill. It's a less useful metric for the Medical and RF side.

Right, okay, okay, but up 3 in orders, that's great. And then, is it normal for you guys to – kind of going back to McCarthy's question, is it normal for you guys to have, like, 2 specific segments for one of these kind of enterprise meetings? I mean I'm just – I've never heard of a company that says let's invite these 2 specific segments for kind of that type of company-wide meeting. I mean, have you guys done that before? Have you done that with other segments where you just kind of like cherry pick a couple of the segments out of the portfolio to meet together?

No, no, we bring together people together that have great connectivity. So all of our Energy and Industrial people have similar kinds of challenges that we monitor and provide guidance to and measure. We have a separate strategic planning session with our medical companies. That was conducted in December when they're all together in the same place for a week. So we do those things in logical ways. There's no sense bringing a company together that's writing code for software with a pump manufacturer.

Right, right. It's kind of like industrial analysts covering a software company. That was a joke. So is this kind of a precursor to maybe collapsing the reporting on those 2 segments?

No, I don't – I wouldn't do read much in to those things. I think what would you see is for a couple years, I said we – it would be helpful for us, and we're trying to do that in this quarter again, to get really good clarity around. So how much energy exposure do you have in Energy and Industrial because they're not really clean segments. The Energy segment is about 2/3 energy and 1/3 industrial; and the Industrial segment's like 10% to 12% energy and 88% industrial. And so that's our fault, and it confuses people and we'll try to make that – I think we've made it quite clear this morning, but you'll continue to see clarity come in that area.

And now we'll hear from John Quealy with Canaccord Genuity.

My congratulations to everybody on the promotions. Just one question for me. Broadly speaking, can you talk across the platform on the hardware businesses, price and volume trends? And then on the software businesses, sub-ads or retention rates.

One of the great things about the company is we don't really have any standard products. There are just a few areas like residential, water meters, that they don't have the intelligent controls on them. So we're all an application company. It's very difficult for somebody to say what's the price yield because you don't have a SKU that you're following, and you can look at the SKU by channel. So you can always best measure it by looking at the gross margin in the enterprise, right. So pricing power comes from the quality of the product or service or technology you're applying and our gross margins continue to go up all the time. And so that is a pretty effective productivity measurement of whether or not you're getting the pricing opportunity that's available. You won't find Roper unilaterally raising prices like perhaps some private equity group might do for a short-term gain. We're going to have our pricing match the reality of sort of free market that we operate in over a long period of time. So as a rule, I would say we got some modest pricing in everything we do versus the prior year.

And that will end our question-and-answer session. We'll return back to Robert Crisci for closing remarks.

Excellent. Well, thanks, everyone, for joining us, and we look forward to speaking to you in 3 more months.

And with that, ladies and gentlemen, that does conclude your call for today. We do thank you for your participation, and you may now disconnect.