The Roper Technologies Third Quarter 2018 Financial Results Conference Call will now begin. For your information today's conference is being recorded. I will now turn the call over to Zack Moxcey. Please go ahead.

Good morning and thank you all for joining us as we discuss the third quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial 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 two; we begin with our Safe Harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page, and in our press release, and in our SEC filings. You should listen to today's call in the context of that information. And now please turn to slide three; today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis. Reconciliation between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the third quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets; purchase accounting adjustments to acquire deferred revenue; a onetime debt extinguishment charge; and lastly, a measurement period adjustment to 2017 provisional income tax amounts resulting from the Tax Cuts and Jobs Act. And now if you'll please turn to slide four, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Thanks, Zack and good morning everyone. Before going through today's agenda, we'd like to thank all of you who have reached out to express your support and concern for Brian, our Executive Chairman. On a personal note, I would like to thank Brian for his tremendous leadership and his long-term mentorship to me. I want to assure everyone it's business as usual here at the company which you'll see throughout today's presentation. We have a very deep and talented management team both in the field and here in Sarasota that is committed to the continued execution of our proven strategy. To that end, we recently promoted both, Rob Crisci, our CFO and John Stipancich, our General Counsel to Executive Vice President. These promotions are indicative of their past contributions to the enterprise and also their go-forward contributions to the team here at Roper. Our CIR based processes and disciplines are deeply embedded in our culture and we'll continue working to make Roper an even better company in the years to come. Now turning to today's agenda. We'll start with our Q3 enterprise results then turn to our segment performance and outlook followed by our guidance update and then we'll open up for questions. Next slide please. As we look at our Q3, 2018 enterprise highlights, it was really a fantastic quarter. Record results with revenue, EBITDA, net earnings, cash flow and virtually any financial category that you can look at. Revenue grew 13% to $1.32 billion with organic revenue growth of 9%. We saw double-digit revenue growth across all four segments, really just fantastic performance and very broad execution. Gross profit grew 14% with gross margins expanding 80 basis points to a record 63.8%. When you look at gross profit gross profit margins, it really highlights the power of our niche strategy and our team's ability to nimbly execute through the quarter. As we look at this margin, there was very little impact of tariffs or any cost push inflation that flowed through our numbers. It was really just spectacular performance across the board relative to our margins. EBITDA grew 16% to $473 million. EBITDA margins expanded 100 basis points to 35.8%. Importantly, we saw double digit EBITDA growth and margin expansion across all four segments. Earnings before taxes, grew 18% to $411 million DEPS grew 31% to $3.09 and free cash flow grew 34% to $404 million or 31% of revenue. So as we look at the quarter, we're certainly delighted with the breadth of the performance, but also like the top to bottom leverage. You can see that revenue grew 13%; gross profit grew 14%; EBITDA plus 16%; earnings before taxes 18%; DEPS 31%; free cash flow 34%; leveraged all the way from the top to the bottom, really a fantastic result. Now I'll turn it over to Rob to take us through the income statement.

Thank you, Neil. Good morning everyone. So, on the next slide, we have our Q3 income statement metrics, a little bit more detail on some of the numbers that Neil had outlined on the previous slide. On revenue, our results with a 13% overall growth and 9% organic growth, we exceeded importantly $1.3 billion in the quarter for the first time and we remain on track for double-digit revenue growth this year, our margins up, 80 basis points, our gross margins up 100 basis points, our EBITDA margin. As Neil mentioned, EBITDA margin expansion across all four of our reporting segments and 16% EBITDA growth overall. Again we like to point out that the growth this year in earnings before tax as many of you know, we are a company that benefits quite a bit from the recent tax reform, but even setting that aside, we're able to grow our earnings before tax at 18% in the quarter, a very nice results. And that if you carry that down to the DEPS line, we grew 31%. I would note on the tax rate for the quarter of 21.5%. That was a little bit better than we expected coming into the quarter. We would expect to be right around 23% for Q4 and that number is embedded in our guidance. Next slide please. The next slide is an important slide to Roper, the cash flow slide. It really was an outstanding cash flow quarter, excellent growth of 32% operating cash flow and importantly an increase of over $100 million in cash flow versus last year. On the free cash flow line, $404 million of free cash flow. As you see here $418 million of operating cash flow converts to $404 million of free cash flow, the first quarter that we've exceeded…

Thanks Rob. Now let's turn to our segment detail outlook. We can turn to our RF & Software segment. In the quarter, we saw revenue of $563 million, an increase of 14% for the quarter. Organically, revenue grew 4%. Importantly, the Software business wherein the segment grew organically 6% and toll and traffic this was in line with our expectations. Operating profit grew 16% to $168 million. Operating margin has expanded to 29.8. EBITDA grew 17% to $226 million, which represents a 40.1% EBITDA margin. In the quarter, we saw continued strong performance at Deltek across its government contracting and its professional services end market in terms of its software execution. It's nice to see that continued benefit of our relative market share advantage and our superior product offering in the government contracting space leading continued share gains. Also Deltek's professional services software offerings continued with its positive momentum with our new product Vantage Point. Finally, with Deltek they continue to see strength with the SaaS migration strategy driving increases in its recurring revenue. We also saw in the quarter outstanding growth at our Freight Matching business due to network expansions with increase in net subscriber adds and favorable end market conditions. With our Freight Match business both sides of the network scaled quite nicely in the quarter and this is a business where the size of the network and the scale of the network matters quite a bit, so we're seeing increasing returns of scale in this business. We saw double digit add rate growth aided by share gains. We talked in the past about the share gains in the large loss space and we continue to see those in the quarter. Also we saw good traction with our new SaaS offering targeted at the mid-law space. PowerPlan our…

Thank you [Operator Instructions] Our first question comes from Deane Dray of RBC Capital Markets. Please go ahead.

Thank you. Good morning everyone.

Good morning, Deane.

Hey. This is our first opportunity Neil to congratulate you on taking the helm and also congrats to Rob on his promotion. And I like that closing comments reaffirming what's unique about the Roper business model, so that was all good to hear. So my first question is since it's such a big focus area across the industrials and you kind of downplayed the issue in your opening comments, but can you talk about any areas of input cost challenges that are unique to Roper? And we heard the tariffs are non-factor, but there have to be some input cost pressures and maybe some indirect tariff pressures as well. But how would you describe that?

Yes. So it's Neil. I'll take a shot at this and then Rob can add any color. Let's talk about tariffs first and we can really talk about tariffs and the inflation together. So it's important to note that none of our businesses compete on scale, right? We have these. These are very small nimbly-oriented businesses that compete based on how quickly they can answer customers' needs. As you know our businesses are not gigantic, so as a result the supply chains are very nimble. And the management teams ability to execute through a tariff issue with either slightly rebalancing the supply chain or working through our pricing increase or pricing policy offset that we saw it the quarter. We saw that carrying into Q4 and into the next year. It's really a very, very small impact in Q3 and Q4. And the same can be said for input cost. If you look at our gross margins, there's just very little material that goes into what we do. And so what is there it's very minimal and that's our view. There's not much of an impact.

Great. And then if we - could you comment more on the funnel as it stands today potential size and timing? And in your response, you talked about what those market volatility at downdraft typically due to bid-ask spreads. My experience has been sellers get awfully sticky with their memories of where there are multiple straight at higher, but what's your expectations here?

Yes so the funnel as we talked about is quite robust, but candidly is always robust. We just see a tremendous number of opportunities and we are oftentimes just betting through the opportunities and there might be an attractive opportunity we pass on because we think there's something that's more attractive that's going to come into future. So we continue to be very disciplined, but then that discipline is only outmatched by our patience to do what's right for the long term relative to the M&A funnel. But as it sits right now, it's quite robust and the teams are working hard to mature that. So it's always difficult to time or predict the timing of deals because we're just going to do what's right in the long term for shareholders. Relative to sizing, Rob talked about the strength of our balance sheet. We've talked in the past about $7 billion over a four-year period. That's just the way the math works out, but we've never - we don't feel or never have felt pressure or budget to try allocate capital or deploy capital in any specific small window of time and that remains consistent. Relative to the - if you will the valuations between private and public companies, it's something that we'll watch carefully. I do think its public companies get mark-to-market every day private companies don't. There typically is a little bit of a lag to the extent there is a long term de-rating of public companies that does take a quarter or two, perhaps a little bit longer for private companies to sort of realize that's where the market is. But at the same time these funds are always raising money and they have to return money to capital and so that oftentimes offsets that stickiness if you will. So it's not something that we view as any sort of material challenge to us to deploy capital going forward.

Yes I would just add to that Deane. From a target side perspective as we've said in the past, most of the targets that we're going after - kind of north of call it $400 million if value up well over $1 billion. I mean that tends to be kind of the sweet spot for the sort of things that we acquire, given our size and given sort of type of businesses that we're targeting. And I think most of the things in the pipeline are going to be in that general range.

Thank you and congrats again.

We will now take our next question from Steve Tusa with JPMorgan. Please go ahead.

Hi, guys. Good morning.

Good morning.

And I just wanted to publicly say, obviously, we all appreciate Brian and how unbelievable of a run that he had with this company and that wishing you Neil the best of luck in your new role, congratulations.

Well, thank you. And I'll remind you and everybody Brian is the Executive Chairman and still involved in the business in that capacity.

Yep. So just on this deferred revenue point, I mean, how fast kind of organically does that tend to kind of grow? And could you just, I'm not clearly a software analyst. Just wanted to kind of better understand how that works and kind of the dynamics into the kind of intermediate term. What is driving that and how fast do you expect that to grow as may be kind of as a percentage of revenues or something like that?

So it would generally grow in line with the organic growth of the software company. Sometimes if you're moving through sort of a change more towards fast some of our business are, they could go up a little bit faster. There's a little bit of seasonality with that as well so a lot of the renewals you have in the fourth quarter. So probably generally assume that deferred revenue gets better in the fourth quarter and then after that going into the next year will depend in the quarter sort of when the renewal happen. Many of these businesses they're getting a full year's worth of revenue in advance and that's really what's driving deferred revenue number.

And when you acquire a company, does that - that's obviously reflected in that number? Or is there some acquisition kind of mechanics where that is I don't know defined differently or there was like a step-up or something like that. Does that number just go whatever deferred revenue they had on the balance sheet that kind of goes into your deferred revenue number? How does that work?

Yeah, so purchase accounting requires you to take a haircut on deferred revenue of what's acquired. So you'll generally have less than a sort of a normal deferred revenue on day one and then that builds up over the next year. If you've noticed that one adjustment that we make that hit the revenue line adjusted revenue not just adding that accounting-based movement on the revenue where you're actually getting all the cost from a business, but you can't recognize some of the revenue from a GAAP standpoint. So that's where you sit the haircut. You will generally see more deferred revenue growth sort of the first year of ownership than other years.

Okay. That's a great reminder. Just one last quick one. How fast did Sunquest grow in the quarter?

So Sunquest, the quarter in the Americas business continued its mid single-digits decline for the reason we talked about in the past. The global part of the business and the CliniSys piece of the IPs and the global part of Sunquest grew as we also indicated in the past couple of quarters. So the story relative to Sunquest is the same in terms of sort of rebasing the North American business and looking forward to getting with the team in the next actually - Monday, Tuesday next week in Tucson to go through their three-year strategic road map.

And will that grow in 2019 U.S. course?

I think it will continue to be down. The U.S. will continue to be down in 2019.

Okay.

But today some of our businesses - yes. Steve healthcare software group we talked about that grew low single-digit organically inclusive of both the decline.

Okay. Great. Thanks for all the color and for the accounting tutorial appreciate it.

We will now take our next question from Scott Davis from Melius Research. Please go ahead.

Hi. Good morning guys.

Hi, good morning, Scott.

A couple of questions for you. But one just to start with Neptune. I don't remember a time period where Neptune was strong. I know it's lumpy, but seems like you've got some confidence going forward. I mean, you said, you made a comment about customer networks being formed. I'd love to get a little more color on that, just not an area we spend a lot of time on. But more explicitly, why our customers picking Neptune? I mean, I understandingly the technology is offered amongst the major three players are pretty similar. So why are you guys winning in this market?

Well we would beg to differ that products are similar. And I think the market share gains would demonstrate the customers are voting that way. We talked in the past. It's principally or one of the principal elements is that is the customers have been the journey of migrating from non-networks to network meters and on the network journey from mobile to fixed networks. Many, many years ago the Neptune product strategy was to allow all that to be backwards compatible. And so as the customers - and customer any region with network of meters, they sort of plan that migration over a series of years, not in big burst events and the backward compatibility has enabled this market share shift to happen because that we - the customers don't have to abandon their historical investment. So that's been a key tenet to the market share shift. And when we talked about - I talked about the mini network effect that's happening at the local customer level.

Okay. That's helpful. And then, I'll follow on a little bit on Steve's question. I mean, Sunquest, the beauty of Sunquest is you didn't pay much for it. The downside is the outlook I think when you bought it you knew it wasn't going to grow much. But in your deal model, did you have it at some point hitting a decline in growth profile? I mean, I think you pay like 12 times EBITDA which is pretty low for this type of business?

I think it was more like 10 times is what we paid for. So we as a group it's worth just reemphasizing as a group of Acute Care Software assets they are growing and we see that continuing. If you peel off what we're talking about a part of the group and a part of a business that we're talking about which is the North American Sunquest business. And so certainly in our deal model, we didn't model that it was going to go back mid-single digits. We had it flat to up lows and going back over history right we bought it there was a meaningful use, tailwind that drove sort of outsized onetime growth over the course of 12 months to 18 months then we had to lap over that. And then we're here with this pressure - competitive pressure in the North American market that we've been experiencing this year a little bit last year and we'll continue to experience in the next year.

I guess a different way to ask the question is are you on the deal model then? Do you look at it that way, even though it's been a while?

This was - there's been so many years.

Yes, we added a number of acquisitions to it which we wouldn't have added in the initial model and those all out. So, overall very good platform growth.

I think we acquired in 2000…six years.

Yes I know I know but there's a lot of noise around it obviously and a lot of skeptics and I suspected the time that was in the purchase price. But just kind of point out I was trying to get to. But anyways, I'll pass it on. Thank you, guys.

We will now take our next question from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning and congratulations to Neil and his role. In terms of my first question, just wanted to circle back to the industrial revenue growth outlook, wonder if it was just conservatism whereby you do have that steep slowdown in the core growth dialed in and may be allied to that if you can give any color on the order trends or book-to-bill rates in recent weeks?

Yes. So for the industrial segment, the mid-single-digit organic guidance for Q4 is exactly consistent with what we said three months ago when we saw how the year would play out. Neptune as we've spoken about on the call is by far the largest business in the segment and they had sort of an unusually strong Q4 from a seasonality standpoint last year. They generally - in that business seasonality for Q4 is lighter than Q3 and last year for various factors, it wasn't - there is really wasn't any sort of a sequential to down Q3 and Q4, we see more normal seasonality this year. That's a big driver of it. I'd say that the order trends across the industrial and the energy businesses which is really the only place is really can give you an insights here, I mean at Roper or given some of the software, but these businesses we do of course look at the orders on individual basis and I would say they are very supportive of mid-single-digit organic and there's certainly optimism moving forward into next year. But we feel really good about the guide. I'd say on the energy businesses from a seasonality standpoint, we're probably assuming a little bit less than normal Q4 uptick in terms of seasonality and energy businesses. We just think that's prudent, some of that certainly will have great visibility in here and so we're not assuming a little bit less than what is normal, so could be there in that, but who knows.

Makes sense. Thank you. And then just wanted to circle back to RF and PowerPlan, just remind us what kind of organic growth that business is delivering right now and whether that earnings accretion number for the second half, I think you talked about $0.12 or $0.13 last time, how you're tracking relative to that?

Yes we're on track. It's mid to high single-digit organic growth business, a little bit better coming in. It's certainly on track, so that is performing as we expected. I think the team has been a really nice job of quickly getting up to sort of the Roper processes. We had a great quarterly call with them last week and I think we feel really good about the trends of that business.

Great. Thank you.

Thank you.

We will now take our next question from Richard Eastman from Robert W. Baird. Please go ahead,

Yes, good morning. Just very quickly just to stand RF Tech. Just a couple of questions, I presume from kind of waiting out the patience here the tolling and traffic was flattish in the quarter. But you did mention a number of pipeline opportunities there. I'm curious are those opportunities are backlog? Does the backlog add to toll and traffic provide any kind of insight into possible low single-digit or mid-single-digit growth for 2019?

Yeah. So you're right in the quarter on the distinct flash and again it's in line with our expectations. And I think the pipeline as it sits today now, it's big, it's robust and we're not going to add 100% against that pipeline. But if it falls at this does historically then we would see certain low single-digit possibly a little bit better as we head into 2019 with that business.

Okay. And then just the other piece of this application software where we kind of spoken to Deltek and Aderant some like really good growth rates. But when you look at the software businesses, the app software businesses combined and you see this kind of 6% growth rate combined, what's your feeling from that from a cyclical standpoint? I know this is - there's a lot of recurring revenue in there, but again, you're selling to legal firms and Deltek sales into the government market where there's some pacing of spend. Is the 6% number for that piece of the business running may be a couple points hot relative to a cyclical growth rate for your app software businesses?

Yeah, we view this business is to be very consistent growers just very little of any cyclicality associated with them. So double-click for instance with Deltek I can certainly understand that concept that as government spending goes so is spending on the systems. But over history that's not the case because what happens to government contractors flow to where the money is and there's always money being spent. And so that's rising need for them to have the software to drive the compliance and the operations for instance. So we view these as consistent and not like a cyclical business is going forward.

Okay. Very good. Thank you.

We will now take our next question from Joseph Giordano of Cowen and Company. Please go ahead.

Yeah. Good morning guys.

Good morning.

So on RF Tech, if we just assume like for sake of argument that we stop doing M&A and the deal that you've done kind of start slowing will the normalize drop down of that segment be materially higher than what we're seeing now? I mean just feel like that subs we've added over the last couple of years the characteristics of those business are a lot different than what has been in there historically. So like how would you think about what that normalize drop down x the impact of like the upfront cost of acquisitions?

So are we talking from a leverage standpoint on the incremental go?

Yeah.

Yeah. So the software businesses generally has EBITDA margins 40% plus and the toll and traffic as you know is lower than that. So right, as these businesses ago the earnings leverage 40% plus probably a little bit better than that.

Okay. Is Neptune…

That leveraged all traffic business so better leverage as we move more towards software and less cyclicality of course and a lot more recurring revenues and better growth.

Yeah. That's the point okay. Okay. Is Neptune facing any issues currently with like sourcing of electronics environment we've heard a little bit about that on the call side from some of that occurred in that space. I'm just curious if it's anything that you guys are seeing there?

There's pockets of that as we do in our reviews really over the course of the last several quarters not unique to this quarter. I think it goes again to the nimbleness of the supply chains of these businesses to the extent there is an issue. They're really sole-sourced supply because again we are not buying things in a massive scale so we can shift production are shift the supply chain where it's needed. But we have seen as I mentioned in some pocket some component shortages, electronic component shortages.

Okay. And then just last for me kind of more of a conceptual one. Neil, how do you see just in terms of style, I know you have the core fundamental beliefs that Roper is going to remain the same and how did you go about your business, but stylistically anything that you're bringing differences to the environment there? Maybe, how you take input from people or you have a different amount of people around you. Just may be talk about, how you plan on running things versus how it's been?

Sure. I appreciate the question. I view it to be very - I mean, the strategy is the same, the structure is the same. The way we deploy capital and the process rigor around that is the same. Stylistically, Brian and I certainly are different people with modestly different styles. I think both are - have been accepted by the organization. I think me having grown up here as a group executive in the trenches across the medical businesses and the application software businesses, as I sort of look to the next several years it's trying to bring a little bit of process - a little bit more process rigor about how we - the companies in the field develop strategy, how we get very focused on how to deploy that strategy and then also how the teams build the talent and build the talent offense within their teams. So it's less stylistically, but more having just grown up in the trenches here where Brian's always been the CEO from the day he started is maybe a little bit different perspective remains which I'll look through for the next few years.

Great color. Thanks guys.

That will end our question-and-answer session for this call. We 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 call. Thank you for your participation ladies and gentlemen. You may now disconnect.