Welcome to the Roper Technologies Fourth Quarter 2017 Financial Results conference call. We’ll now begin. Please note today’s call is being recorded. I will now turn the call over to Zack Moxcey, Vice President, Investor Relations.

Thank you, Jim, and thank you all for joining us this morning as we discuss the fourth quarter and full year financial results for Roper Technologies. Joining me on the call this morning are Brian Jellison, Chairman, President and Chief Executive Officer; Rob Crisci, Vice President and Chief Financial Officer; Neil Hunn, Executive Vice President, Jason Conley, Vice President and Controller; and Shannon O’Callaghan, Vice President of Finance. 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 are also available on our website. Now if you’ll please turn to Slide 2, 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 our SEC’s filings. You should listen to today’s call in the context of that information. Now please turn to Slide 3. Today we will discuss our results for the fourth quarter and year primarily on an adjusted non-GAAP basis. A full reconciliation between GAAP and adjusted measures is on our press release and also included as part of this presentation on our website. For the fourth quarter, the difference between our GAAP results and adjusted results consists of the following items on a pre-tax basis: a $215 million one-time net gain resulting from the Tax Cuts and Jobs Act; a $73 million adjustment for amortization of acquisition-related intangible assets, and lastly an $8 million purchase accounting adjustment to acquired deferred revenue relating to software acquisitions and $1 million of related commission expense. This represents revenue and commissions that those companies would have recognized if not for our acquisition. Now if you’ll please turn to Slide 4, I’ll hand the call over to Brian. After his prepared remarks, we will take questions from our telephone participants. Brian?

Thank you, Zack, and good morning everybody. We have four categories here - we’ll look at the Q4 and full-year 2017 financial results, and we’ll look at the 2017 segment detail and how it sets us up for our 2018 segment outlook. You’ll see throughout the discussion, once we get into the segments, that the segments have really changed pretty dramatically over the last several years. They’ve become much more diverse, which creates some opportunity for us that we’re going to try to exploit here shortly. In 2018, we’ll show you the enterprise guidance for the year and then take your questions. Next slide. If we look at the quarter, it really was a terrific quarter. We had record results on revenue, net earnings, EBITDA and cash flow, cash conversion was spectacular, revenue was up 21%. We had organic 5% growth in the fourth quarter, which was similar to what we enjoyed throughout the year and what we’re likely to see next year as well. Gross margin was up 30 basis points in the quarter to 62.6%. This is keeping us comfortably ahead of any cost push inflation. There certainly is some of that, that you can see, but we think we have that well in hand. Our debts were up 23% to 270, and I’m sure this will be one of those quarters that will be fascinating to read the headlines because good old GAAP, of course, incorporates the $215 million tax benefit one-time for the fourth quarter, so in GAAP we did 427. As always, we like the adjusted earnings because it paints a much more clear picture, and in fact we did 270 on adjusted earnings. EBITDA was up 21% to $441 million in the quarter. Our operating cash flow was remarkable - it was up 36%.…

[Operator instructions] We’ll take our first question from Deane Dray from RBC Capital Markets.

Thank you, good morning everyone.

Hey, good morning Deane.

Congrats to Neil in his new role at COO. First question, maybe take us through the dynamics in the fourth quarter in RF technology - it came in lighter both top line and earnings versus our expectations. I know there were some puts and takes in the quarter and you had called out last quarter there was some pull-in into the third quarter for Deltek - I don’t know if that was a factor, or if this was that stub from a year ago. But could you take us through that for starters, please?

Rob is chomping at the bit.

Hi Deane, good morning. Yes, so it was right in line with our model on EBITDA. We actually were a little bit above our internal guidance model on EBITDA for the segment. We were a little light on revenue - I think we guided to low single digits and it came in minus-1, just because of the difficult MTA comp versus last year and timing on some of the TransCore projects. But it really was in line with our model, so I think, not to speak for the analysts, but it seems like the analysts may have missed the fact that we did have this $35 million or so of revenue last year, and it seems like people weren’t taking that into account when they were doing their RF estimate for Q4. So from our perspective, in line, and more importantly really exceeded in terms of cash flow. The cash flow performance in the quarter was better than we expected, again driven by the new acquisitions, Deltek and ConstructConnect, and really good performance there. So from our viewpoint, it was a solid quarter in RF.

I just want to reassert that Deltek and ConstructConnect outperformed in the fourth quarter versus our model. It solely centers on the intelligent traffic system side of project management at TransCore.

Got it, and then how about just the--expand more on the tax reform impact. Rob, can you just kind of take us through the details of how you work through the implications for Roper’s tax position for 2018 and beyond? What swings you from 21 to 23 - we had been modeling 23, and what might be the dynamic in the first quarter that would be taking you lower than that?

Yes, sure. So like every other company out there, there was a lot of work done, and I commend our tax department - they’ve been working long hours all the month of January to really get all this work done in time for the earnings call and, of course, the 10-K coming up. So yes, I think as Brian mentioned, we’re probably--we had to give a point estimate, it’s probably around 22% is our long-term, right? We wanted to give a range because there are some moving parts, and so it’s always difficult when you’re under a new law here to make sure you get everything ironed out, but I think that we’re pretty comfortable with that 22% number over the long term. As far as Q1, there are some discrete items, particularly around the deductions for compensation that would drive Q1 a little lower, as Brian mentioned probably a little under 20%. But you know, on a full-year long term, certainly if you want to put 22 in the model, it’s probably a fine number.

Got it. Then if I can sneak one more question in, maybe hear from Neil, just broad brush - you may be early in the process, but what might we be seeing in the way of a re-segmentation? It sounds like that’s one of the first orders of business for you.

I’ll give him a second to respond, but the thing is that most of the businesses report to either Neil or myself, so if you look at the way we’re structured in RF, one of our key leaders is Tracy Marks that’s over the ITS business. Another really key leader is Mike Corkery, who is over Deltek. It’s our largest business. If you put the two largest revenue businesses really are the TransCore piece and the Deltek piece, they have, as you might guess, absolutely nothing to do with each other, so we have got this segment and there is a whole lot of other things that are a products piece, some of those report to Paul Soni, others report to Claude Pumilia, and what we’ve found over the last year is we’ve done some pretty significant talent upgrades, because as we’re interviewing people, shockingly most people would like to know who they’re going to report to and which businesses they have responsibility for, and we would be embarrassed if--you know, when we try to explain how the labyrinth works. So I’d like to have some time here with Neil looking at how I’ve kind of viewed the company since 2016. You know, we have products that are divided really into a couple of large categories, and those subcategories are precision technology, fluid handling, medical products and RF products. On the other side, we have our software businesses, and they really have kind of four subcategories. You have our healthcare software business, you have our alternate site business, you have our application software business, and you have our project management business. We’ve tried to maintain the same segment reporting for probably a little longer than we should. This won’t really have an effect on how the 50 P&Ls in the company work, but it will have an effect on how Neil and I are looking at forward structure and long-term executive leadership positions. So inside that, then, it’s all yours.

Yes, the only thing I would add, Deane, is this is about how we organize ourselves, not how we operate the businesses. I’d just leave it there and look forward to unveiling more of that as Brian and I work through it in the next few quarters.

Great, thank you.

Moving on, we’ll take our next question from Christopher Glynn from Oppenheimer.

Thanks, good morning. Good to see the free cash flow conversion remains best in class after the switch to adjusted net income. Relative to the 121% this year, is that a good proxy for how the cash flow versus the A&I is structured?

Yes, so I would say long term, excellent year in 2017. If I had to give you a 2018, we’d probably be 120% conversation on OCF, maybe 115% on free cash flow is sort of a framework. I think the 2017 performance was exceptional and we might be able to do that again, but we’ll certainly always be running at 120% OCF conversion to the new adjusted net earnings, so I’m always trying to clarify. We don’t really report cash EPS, we reported adjusted EPS, and our cash is quite a bit higher than that.

Right, great. Thanks Rob. Brian, since you brought it up, even though you downplayed it, how would you comment on the timeline around ultimate succession?

Who knows, three to five years? I think--I have an obligation to notify the board two years in advance, and I haven’t done it, so this is not about succession. What this is, is an opportunity for Neil, who’s worked at a yeoman way with everybody on our strategic planning process, where he and I just spend much more time together as we’re developing what we’re doing, so I used to--I think we were, like, 78, and I think the board was recently upping the retirement age to 80, so I’ll be here for some time. I expect to be here during the deployment of the next $7 billion - I’ll leave it at that.

Great, thanks.

Moving on, we’ll take our next question from Robert McCarthy from Stifel.

Good morning everyone. Congratulations on a strong end of the year and a constructive guide for ’18. I think I had just two questions. Back on the expiration of the segments, and I think I know the answer to this and it might be a high decibel answer from Brian nevertheless, you guys were pretty clear that this is about how you organize, not about how you run the underlying businesses. But you are a collection of businesses, of high quality businesses that you’ve acquired over time with entrepreneurs or hard-charging execs in those roles, and is this going to lead to potentially some consolidation of those roles or new faces? In other words, do you think of this change of how you’re operating from maybe more of a feudal system with some guidance above to more centralized management of the businesses?

I don’t see anything around centralized management. You’d have to probably educate me about the feudal concept. We don’t have any serfs, and you’re right to describe our people the way you do. We actually sent a note out this morning to the people, and the note says, this probably will have nothing to do with any of your independent businesses. I don’t think it will have much. We’ve never found consolidating things and internal synergies are really that great. We do think a focus on long-term growth is pretty important, and I think that there are processes that we’ve been putting in place around strategic deployment and strategy that Neil can be really gifted at working with all of our people with. So I’m sort of hoping for maybe a little bit better long-term sustainable organic growth power with this, but it doesn’t change anything for individual businesses. It’s not--it’s just better to have all the operating people ultimately reporting to one person. Then I think long term when you think about succession, I mean, knowing Neil as well as I do and our culture, my guess is that at some point, Neil will say that that role doesn’t need to exist anymore. So it’s just a nice transition opportunity for us to get everybody on the same page. Neil, you may want to add to that?

The only thing I’d add is this business has been built over a long time with a system that’s about the niche orientation, the resource allocation decisions being made at the field, the field operators being held accountable to results, and I don’t see any of that changing for a very, very long time, if ever. I mean, it works for us and it will continue to work.

Thanks for that helpful clarification, because obviously that’s been the secret to your existing and continuing success. A related question to that is do you anticipate the output of this analysis or this process that you’re putting together, could this lead potentially to perhaps identifying businesses that are non-core and perhaps would be better served as a separate entity? I mean, obviously this is the old chestnut of the break-up of Roper or a spin of certain more cyclically or capital-intensive businesses of Roper.

Well, we’ve talked about that, not at great--the company is not going to break up, period, end of discussion. We might divest some things or we might spin some minor thing. Actually, what’s happened is tax reform makes portfolio adjustment way more attractive when you think about divestments, so as you know, these businesses have been around forever so they have almost no tax basis, so whatever you sell them for, if you’re paying 35%, it’s just hopeless; but if you’re only paying 21%, it might be a little less hopeless depending on what you’re using with the cash you get out of that business. So there’s probably a little--I’d say there’s a modest uptick in our willingness to divest something than we would have had three years ago and further. Most all of our businesses, if they aren’t software related, they still have firmware in their products and they’re communicating. There are only a small number of our businesses that are not like that, and so--but we will take a hard look at those businesses and what’s the optimum use of them.

If I can sneak just one more in real quick, you’ve made a comment about obviously perhaps an increased focus on U.S. M&A from the standpoint of the ability to redeploy capital here - I think it was a comment on one of the slides, but could you comment on that, and then just comment--I mean, you look at what basically software has done for you in terms of creating a better, more fertile opportunity set of M&A, because you’ve basically been able to find businesses that are around information domain management and then automate them through software or have a subscription business - you know, basically the SaaS model. Has there been any changes in technology in the last five years that creates even more fertile ground for more opportunity for a different kind of software business, and comment on the relative appetite of businesses perhaps in the U.S.

Well, the technology is not the driving force there. The driving force is that you have, say, 20 or 25% of your cash that you’re generating each year is offshore, and you can’t repatriate it without a big penalty. Instead of having 100% of your cash flow generation being able to go to deployment activity, you only have 75%. So now we have 100% and we’re not constrained. A lot of the software niches that we buy are U.S.-centric businesses as opposed to global businesses, and so having 100% of your cash available to deploy on those U.S. niche businesses is very likely to lead to us buying more U.S. niche businesses that will get hooked up with Deltek and ConstructConnect and Aderant. That’s the reason we’re sort of raising what we expect to deploy on capital. Now you know, it could be the next acquisition we announce will be a German company, but we’re live on four things now and they’re all software-related, and most of them are U.S.-centric.

Thus endeth the lesson.

There you go.

Moving on, we’ll take our next question from Joe Giordano from Cowen.

Hey guys, good morning. I just wanted to start with your comments on U.S. lab. Are we talking Sunquest specifically here, and how would you categorize that dynamic now? Is it more market-based, is it a share loss kind of situation, is it a combo, and how does this kind of change your outlook onto bolt-ons to supplement that business? I know you’ve made a few in the past, and is that less likely now?

No. The bolt-ons in the business are performing outstandingly well. Those are all double-digit growers, they’re doing exceptionally well. It’s just that the U.S. lab business is in a unique couple of year situation where people are rolling out their ERP that they have acquired over the last X-years, so you went through a period of artificial stimulation with meaningful use at the beginning when we acquired Sunquest. We knew that - that wasn’t a surprise for us, and as that disappeared, what replaced it was the rollout of various ERP projects in which Sunquest was oftentimes the niche lab provider but isn’t going to get renewed at some point in time when that ERP is put in place. That process started to hurt us two years ago and hurt us a little more last year, not going to be helpful this year or next. We already know who all those are, so we expect to [indiscernible] 5 or 6% of our install base to the ERP people. That will stop, and then I think we’ll not only continue to have some sort of modest single-digit growth but we’re likely to start selling and replacing some of the people who tried cumbersome ERP systems that are not good for the laboratory. So we’re going to go through this period where the CFO is winning at the expense of the laboratory guy, but at the end of the day, the cost to the hospital we think is minimized with our technology.

Fair enough. Then on the TransCore side, is there something that we have to think about from a structural margin perspective related to tags, and we’re seeing more of these systems go in that are camera-based where you don’t need a tag and it just flashes against your license plate. Is that a structural shift in the market that we have to think about the margin dynamics of that business a little bit differently?

Well you know, the tags are relatively high margin compared to any of the project work, but all the other technology, we still lead in all the other technology, so if you’re looking at readers and cameras, we actually use our Luminara brand cameras for a whole bunch of the things you’re talking about, and those businesses all have decent margins. It’s just that as the project business continues to grow, and it’s growing at the expense of other public companies that I really shouldn’t name, and all you have to do is read about their total malaise, but the margins associated with our project business are the worst we have. They’re best in class for TransCore - their results are spectacular, but for us they’re a drag on our margins. I don’t think that’s going to change anytime soon.

I would just add, even with the camera technology, you still need that tag. I mean, that’s the whole point, is the tag allows the agency to properly collect the funds from the user. The camera is just a back-up, and so you’re always going to have the tag.

But don’t a lot of the systems now just take a print of your license plate and mail you a bill in the mail? That’s what a lot of the ones in New York have now, right?

Absolutely some of the ones are license plate drive, but it’s still our collection technology, and oftentimes it’s our collection administration -you know, somebody gets a call for a bill payment, it’s actually our admin people masquerading as whatever the tolling authority in the area is. That’s the big administrative business we’re talking about, which continues to grow at the expense of others but is a little less exciting for us. Its growth will always diminish our gross margins.

Last from me, the delivery of imaging backlog - you know, we’ve been waiting for the cryo-EM stuff we’ve been talking about for a while. How much is that contributing to your lower margin comments for the medical segment? I figure that would be kind of good on top line but mix negative for you guys, I’d assume, right?

Yes, so those are good margin products. Their shipments are skewed towards Q2 and Q3, so in Q1 the margin performance of the medical segment is going to be lower than on a full-year basis, so it will be down more than 100 basis points because we’re not yet getting the shipments. Also, a lot of the start-up costs around Australia are hitting in the first quarter, so once you get into Q2, Q3, I would say the margins are not--it’s probably in line with the segment, it’s not really a big headwind with the mix.

Okay.

Yes, the medical segment margins are going to be 41 to 42% EBITDA, for heaven’s sake. They’re still going to be the highest in the company.

Fair enough. Thanks guys.

Moving on, we’ll take our next question from Steve Tusa from JP Morgan.

Hey guys, this is actually [indiscernible] on for Steve Tusa. Just had a few questions. I didn’t hear it mentioned, but just wondering did you guys see any impacts from or will you see any impacts from the revenue recognition accounting change ASC 606?

Yes, thanks for asking. We are of course adopting that this year, but the impact is less than we probably would have originally estimated before we did all the work. It will be a $15 million or so impact to deferred revenue on the balance sheet as of January 1 of this year, but then the revenue recognized under the new standard will actually make up that number during ’18, so on a net basis we don’t see it having any impact to our earnings, so it’s going to be something that will of course flow through our GAAP earnings but not something that we feel necessary to call out for any sort of an adjustment, because there really isn’t going to be much of a net impact. But that’s the reason [indiscernible] going through every single one of our companies. Revenue recognition is really a project that’s been going on here the last six months-plus, led by Jason Conley and the accounting department, so we feel very good about that .

Got it, cool. Thanks for the clarification. Then for the other segments outside medical, can you give a sense of the operating leverage targets? Is 40% a good ballpark to think about year-over-year, operating margin leverage?

The enterprise probably comes in in the 30%-plus leverage category with medical’s leverage being less and then industrial and energy, you’d expect 40% leverage plus in those. In RF, it’s kind of a--I mean, it will have high leverage, it’s just what the revenue is, is tough to pick because of TransCore, so probably more like 35 in RF.

Got it, that’s helpful. Lastly for me, do you have a sense of timing or likely timing around when we’re going to learn about some decisions around the segment restructuring?

Oh, it could take a year - who knows? We’ve been talking about this since 2016, and there’s a lot of moving parts plus we have acquisitions that will be going on. But part of it is just finding a better way to nest the acquisitions into segments that make a lot of clarity, right?

Yes, okay, got it. Thanks a lot, guys.

Moving on, we’ll take our next question from Jeff Sprague from Vertical Research.

Thank you, good morning everyone. Just two quick ones from me. Brian, is it inconceivable that you could do some M&A in industrial or energy when we think about the technology overlap and infiltration that we’re starting to see into industrial markets?

It’s not inconceivable. I mean, we’re looking at one, sort of a--to the degree we ever did one, we’re involved with one that’s pretty attractive. I don’t know that we’d get home on it, but if it was less around a mechanical product--I’d say we wouldn’t do it with a mechanical product. It would have to be something that had an algorithm associated with data collection, and there are an increasing number of those. So yes, I wouldn’t rule it out, it’s just unfortunately, Jeff, most of those come with more asset intensity than we like because--you know, if the need a factory as opposed to an assembly operation, then we probably wouldn’t do it.

Great, and then just back again to the re-seg, not to minimize the complexity and the work you want to do, but it sounds like you have been thinking about it for a long time and you guys are pretty sharp guys, I would think you’ve got a pretty good sense of what you really want to do. I’m not sure what I’m missing on why it would take a year to figure all this out. Is there something more--

It’s a lot of people things, you know? We’ve got a lot of--we have spectacular people. The recent addition of--you know, you look at Aderant, we’ve got a terrific lady that’s running that, Deane Price. We’ve got Mike Corkery has terrific capacity - I’m sure he could be running our company. You’ve got Dave Conway, a lot of capacity, so it’s really a whole lot of it is around where are we investing in human capital.

Right, makes sense. Thank you.

Moving on, we’ll take our next question from Richard Eastman from Baird.

Hi, good morning. Could I just double back for a minute to the medical scientific? I’m just curious, Neil, perhaps could you just define how much of medical scientific, or in particular the medical software, acute care software is international versus U.S.? Perhaps just as a follow-on, speak to the investment that is going into the business - is it going in to make the software more appropriate for the international market? Where is the investment going that you speak to?

Of the acute care software grouping, it’s maybe 40% international, 60% U.S. The way that we think about the investment, as we’ve talked a couple times on this call, there is an investment in 2018 in the start-up in Queensland in Australia, so we’ve talked about that. In the U.S. market, it’s less about incremental new investments - we feel we have the right amount of R&D. It’s more about how you orient that and program the R&D dollars for the new products, and also how we--we have changed the way we attack the U.S. channel. We’ve realigned people, we’ve realigned the way they’re going to the market, we’ve added a few new managers in the business to think about that. So it’s more about reorienting what we’re doing in the U.S., so it’s not about incremental new investment there.

Okay, and is any of that stepped up investment going to med products, or have we already funded that given some of the new products sent out to market on the BladderScan side?

There is in the medical products group, there is a fair amount of--there is a little bit of product investment year-over-year and there is a fair amount of channel investment across three or four of our businesses there that’s occurring in 2018. That’s a discrete item there.

Okay, thank you.

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

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

That will conclude today’s conference. We do thank you for your participation. You may now disconnect.