Ladies and gentlemen, the Roper Technologies First Quarter 2018 Financial Results Conference Call will now begin. Today's conference is being recorded. I will now turn the call over to Zack Moxcey, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Abby, 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, Chairman, President and Chief Executive Officer; Rob Crisci, Vice President and Chief Financial Officer; Neil Hunn, Executive Vice President and Chief Operating Officer; 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 is further detailed in 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 discuss 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 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 on a pretax basis, a $74 million adjustment for amortization of acquisition-related intangible assets and a $2 million purchase accounting adjustment to acquire deferred revenue relating to software acquisition. This represents revenue that those companies would have recognized if not for our acquisition. And 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?

Thanks, Zack. Good morning, everybody. We'll go through the first quarter, look at the segment detail, talk about the rest of the year and then take your questions. So next slide. We had a record quarter of virtually every kind of metric you can think about. Revenue was up 9% to $1.2 billion and organic growth was up 6%. It was broad-based across all the segments, they all grew mid-single digits or greater. Gross margin was up, again, 30 basis points to 62.5%. We'll talk a little bit about that later because in an environment where people are starting to worry about cost push, inflation or price cost issues, it's sometimes forgotten that the 62.5% means something really important, that our cost of goods sold is only 37.5%. And in an environment where people worry about material, if you only got a cost of goods sold ratio of 37%, it looks a lot better than those guys that have gross margins of 38%, meaning cost of goods sold of 62%. Earnings before taxes were up 10% to $332 million. We put that in as a distinct reference so you can see what was unrelated to the Tax Act versus what's related to Tax Act. So the 10% up is earnings before tax. The DEPS earnings, which includes the sort of trifecta around the Tax Act for us, were up 24% to $2.61. The operating cash flow was $282 million, which is 23% of revenue. We'll talk a little bit about that number. It's terrific at 23% of revenue, a little lower than last year for a specific reason. We reduced the debt by $535 million in the quarter, and since the end of 2016, we've taken $1.6 billion off of our gross debt number. So it was really a great…

Right. Both QuoteSoft and PlanSwift are in the preconstruction planning space and focus on automating the takeoffs and estimation activities of contractors. Both enhance the ConstructConnect network and product platform, where it's more comprehensive in ConstructConnect's pursuit to be embedded in the daily workflows of contractors relative to their preconstruction activities. QuoteSoft focuses on the HVAC and plumbing trades. PlanSwift focuses on other trades such as flooring, drywall, windows, et cetera. Thank you, Brian.

Okay. Aderant also had spectacular quarter. They were up double digits with significant gains with large law firms. So we continue to feel good about Aderant, but they certainly are outperforming this year. On our Freight Matching business, that growth has really been driven by a combination of solid markets, but substantial improvement in retention and net subscriber adds here. We just launched another app on expanding the ability to track loads, which we think will drive additional growth in the second half of the year. And then lastly, our RF IDeas unit in Chicago is doing exceptionally well with the privacy concerns. Their technology really allows identification of individual people in a wide variety of access areas, around access control and access to storerooms and supplies. So that business is really terrific. For the rest of the year in terms of Q2 to Q4, we think we'll have about mid-single-digit growth in the software businesses with their outsized margins and cash performance. The toll and traffic is harder to predict. We think we'll get modest growth there, but it actually could be outsized, but it's just, it's hard to predict. In total, we think the segment will grow around 4% to 5% and continue to have the terrific margins that we see here. Next slide. If you look at Medical & Scientific Imaging, $366 million in revenue, it was up 5%. Did a little bit better on the revenue side than we expected, and we had some particularly good breakthrough situations. We've had an accelerating rate of adoption at Strata with the financial decision support cloud software we have. And importantly, Kaiser, which is one of the largest entities in the country, Kaiser Permanente, adopted the national cost accounting program technology that's supported here by Strata. To get the…

[Operator Instructions]. And we will take our first question from Richard Eastman with Robert W. Baird.

Just a couple things, Brian. The core growth outlook for '18 kind of bumped up by this -- by a point-or-so. And when I kind of sift through the commentary on the platforms, is it safe to assume that the industrial tech platform has a bit more momentum maybe than planned earlier in the year? Is that primarily where the core growth outlook has bumped up?

I wouldn't say that. It was a little stronger in the first quarter than we expected because some of the businesses are industrial. Certainly, Neptune was spectacular, belies to everything everybody else says about these spaces. Felt better about that. There isn't anything that's soft, so we're talking about the rest of the year at high single digits, not at 15%. But yes, I think that's good. Actually, maybe more encouraged by medical in some respects because two good things happened. You -- the level of reduction in the U.S. lab business was what we expected. It wasn't higher than we expected, It was manageable, and we offset it with growth in other portions of our overall lab business. So that was encouraging. It gives us a little better feeling for the year. And I think just the general attitude of everybody when you challenge them about their forecast, the way we run the company, we don't use budgets, but we don't tell people, we use finances. Drill down exactly in Q1 what you were this quarter versus one year ago and why that's going to sequentially change and what's going to happen. The answers to all those questions around where the orders are coming from, where the growth was coming from were all very mature and very well thought out reasons, hence, builds a little confidence for us and so we've raised the organic growth by one point.

Yes, it really was, Rick, broad-based. And the first quarter really look at each of the four segments, really outperformed our internal model, and that confidence then continues throughout the year as we go through our review process and talk to all the leaders.

Sure. Okay. And then just as a follow-up, when you look at the M&A pipeline, Brian, you referenced it's essentially full and there are some nice opportunities in there. Is it more target-rich in the application software area, which would fall into RF? Or is there some medical software in there? I presume it's software-dominated, but maybe you could just provide a little bit of color, maybe next layer down on what that pipeline looks like.

I think most of the things are application software network kind of things, so less likely to be medical. At the moment, the things that we're doing are not medical, but it doesn't mean there wouldn't be one. I mean, we're actually just starting to look at one, it's a smaller thing in medical. But there are a lot of application software things and there's some things that we've looked at in the past that we gave people advice about what they ought to do to make it a better company, and some of those people have taken that advice, and we're going to maybe look at them again to see how we feel about that.

We will take our next question from Joe Giordano with Cowen and Company. Okay, we will go to our next question from Deane Dray with RBC Capital Markets.

This is Jeff on for Deane. My first question is just on your toll and traffic business. Can you maybe just talk about the bid pipeline that you're seeing and maybe more broadly the penetration of cashless tolls?

I think the bid pipeline is extremely full. I think there are some people waiting around to see if there's going to be any support from an infrastructure program that the government throws out that would pay for stuff that they otherwise have to pay for themselves. We really have always driven the cashless tolling because we have the supreme technology about the ability to read various things. So we have a family of multi-protocol readers that can read a wide variety of technology. So those things really facilitate people doing adoption. So you watch the people drive through at high rates of speed and then we really have great execution capability for remotely accessing those technologies and helping people manage it. All of that is good. And then lastly, in addition to the technology where we're really preeminent, there's also just the administrative back office activity and there's a lot of bidding around that as some of the very long in the tooth administrative people that have been around for a very long time and who've not improved very much. A lot of people are looking for new players. And so when they look out for somebody that has a proven track record and has expanded rather than not expanded the technology, we kind of get the first look. So we're involved in a lot of those things as well.

Okay, great. And then just as a follow-up, do you have an update on the timing of the resegmentation of your portfolio and the initiative to streamline the internal P&Ls?

The situation around that sort of it's, what are we acquiring this year? Are we going to divest anything? Is that going to have an effect on anything? Neil spent a good deal of time in the quarter beginning to look at that, and he's spending a great deal of time the second quarter traveling around and visiting with people. So I think that will continue to progress throughout the year.

And we will take our next question from Julian Mitchell with Barclays.

This is Lee Sanquist [ph] on for Julian. In medical, you touched on the mixed headwinds from U.S. labs, but not the start up costs in Australia. Can you just update us on the cost to ramp up for the Queensland project?

Yes, it's Neil. So the project has started. It started on track. It'll be one where the timing of revenue relative to the timing of the expenses will be a little imbalanced or out of balance this year and then it corrects itself for the remaining nine years of the contract. And so it's on plan in terms of our expectations and we would continue to expect the project to progress in that order.

Understood. On the balance sheet, the delevering effort has been very impressive. Can you just provide a perspective, updated perspective on the capital deployment priorities if, in the off chance, M&A does not materialize?

I don't think there's any chance that [indiscernible] M&A does not materialize. So that's the perspective. Believe me, in a slow year, we'd look at $10 billion of opportunity, make offers. There is no way that we're not going to be having the ability to do fantastic transactions in M&A.

And we will take our next question from Joe Giordano with Cowen and Company.

Curious, like you mentioned the Aderant growth, and how early or late are you into that whole customer base being up for grabs and having to make decisions there?

Yes. I think it calls for a mid, if you will. I mean, there's -- the competitor has a forced migration coming in 3.5 or 4 years, and so customers are in the process of getting ahead of that. And so we've got several years to go. I think it's worth also noting that Aderant is not sitting around waiting for that day to come. I mean, there's a number of new products we're launching and other initiatives we're doing to be able to offset that growth dynamic four years down the road. So in the short term and in the interim, I think we're in very good shape.

Great. And then, Brian, on the portfolio, you mentioned application software probably heavy, network heavy. Is there any like kind of an obvious theme without giving away too much information from a competitive standpoint, but feel like there was an obvious medical theme for a while, an obvious infrastructure theme now. Is there something new that you're looking at or is it more fill-ins to existing kind of platforms that you have?

No. I think that there's some common themes that override that all the way, right? So we know the kind of business it's going to have, hopefully has deferred revenue, so we're paid in advance for what we do. And it's going to have high margins, it's going to have the sort of mid-single-digit growth or better often times. And it's going to be something that's niche, that's critical to the customer that's actually making the decision to deploy it. It's not going to be something that goes to some value-added reseller that's making adjustments to it. It's not going to be software that the customer itself is using to rewrite stuff. It's going to have some implementation service associated with it that we're not going to spend a huge amount of time servicing it over a long period of time. And the market, it's going to be something that the customer allows him to make more money so that his decision about what he's willing to pay for the software or network access that he's getting from us is a no-brainer for him. And so then it's really the kind of thing -- I mean, I can't describe the ones we're looking at now. But each one of those, they're not huge revenue companies of their own right but they're controlling billions of dollars of revenue. And so people really want them. And that's true of a whole lot of things. I mean, you can think about like a toll tag business, well, gee, it's a couple hundred million. Well, no, it's bringing in maybe $85 billion. Gee, it's a trade network at a grocery chain at $100-plus million of revenue. No, it's $8 billion of transactions. So the kind of things that our people do have very far reaching broad applications with lots of money involved, just it's not our revenue. And those are the kinds of networks and software applications that we're looking at right now.

Is there anything on the application side around Neptune? I feel like there's been a lot more kind of technology going through the metering channels there. Is that something that Neptune is just doing organically on their own? Or is there maybe opportunities there to add more on like the analytics kind of software side there to that business?

Well, we have some other investments and activity that help support that. But what happens at Neptune is that as we build -- everybody else kind of went with one idea and they're trying to drive one idea. And what Neptune has done is by making everything backward-compatible, when you take something that's really quite old, still allow a customer to move forward without having to change out everything, and that's an invaluable thing. Other people force dramatic change on customers, and a lot of them don't like that. So that's an important part. I mean, Rob, you may want to add to the -- of course, we've established an Atlanta technology center, it's a big deal and we're staffing that rapidly?

Yes, that's exactly right. So we have been investing organically in software in Neptune quite a while and that continues to ramp. And as Brian said, we are doing that in Atlanta. A lot of exciting things. I mean, it's such a great customer base. Our solutions really drive the ability for the customers to collect the revenue and I think there's a lot more things we can do to continue to help the customers get better over time. And we're making those investments today that we feel confident will pay off in the future.

And we will take our next question from Alex Blanton with Clear Harbor Asset Management.

I wanted to ask about what you said about compressor controls. You said that the -- I believe you said that the orders were coming in better than expected for 2019 projects, is that correct?

No, I wouldn't say, Alex, those were orders, but we're seeing a lot of activity. And so if you went back to the bigger LNG [indiscernible], $30 billion kind of projects that people knew would be out in five years. What we're seeing is a lot of smaller projects in the $1 million to $2 million arena that people are considering for 2019. But we wouldn't see an order for those until 2019 and then delivery in '19 and '20.

Okay. So indications, future orders are better than expected. What's the reason for that? Why do you...

Some of it is around exports, some of it is around people seeing an opportunity for some of the things to be profitable that they thought maybe couldn't be profitable before. How much of it is the pricing mechanisms they're seeing, it's really hard to say. Each one of those customers has got his own concept about why he's talking to us, but the important thing for us is they're talking to us. And 12 months ago or 15 months ago, we weren't having any of those conversations with anybody.

Is that partly related to the price of gas, you think?

I just don't think -- we're not going to make that call. I mean it could be. You'd have to ask each one of them, right? So these are big guys. It's certainly got to be related to their view of macroeconomics, whether that's the price of oil or a change in the ability to export or something around LNG projects or the fact that they've under invested for a very, very long time and eventually have to -- and they're beginning to start that cycle on getting back to upgrading their older areas.

Yes, well, the lower price of gas should lead to greater usage of gas, and that would help you. Second question is on the first quarter tax rate, I might have missed it, did you explain why it was only 18% versus 23% for the rest of the year?

Yes, just timing on deductions related to stock-based compensation.

Okay. And thirdly, I don't have a really good sense of where the energy segment is relative to the past peak. That business fell way down a couple years ago. And just where are we relative to the past peak?

It's still probably off by at least 40% from the peak. The one business that's actually ahead of its peak, and it's Cornell Pump, and that's because it's not much an energy business. They do a lot of club sale directly on packaging stuff. But Roper Pump, [indiscernible], Viatran, and [indiscernible] are directly upstream guys, so let's say, they're up 35%, but they were down 60.

Right. So if you're off still 40% from the peak, what's going to take to get back to that peak? And when?

Yes, so all balanced, right? We have the midstream and downstream businesses that have not bounced back similar to the upstream yet, we still have -- the reason why we're excited about these green shoots of optimism for compressor control is going out a year or two, is it still hasn't really rebounded because it's very late cycle. But again, as you know, Alex, this is a really small part of Roper now from a percent standpoint. It's very difficult for us to predict if we ever get back to those levels or not. What we can be sure that our business leaders are going to execute very well in the environment they're in as they have done, and now they're getting very good leverage as the business has grown. That's really what we ask them to do versus us making long-term macro predictions.

Right. But you've still got plenty of potential there, correct? In that segment?

Well, it's true, but it's still a very small part of the total. I mean, these businesses are never going to get back to be 15% or 20% of Roper.

Well, under 10%.

Not going to be there. They're going to be single digits of our portfolio.

Right. That's correct.

And 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.

Ladies and gentlemen, this does conclude today's call, and we thank you for your participation. You may now disconnect.