Roper Technologies Inc (ROP) — Q4 2018 Earnings Call Transcript

Good morning, and thank you all for joining us as we discuss the fourth quarter and full year 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 will 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, 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 3. Today, we will discuss our results for the fourth quarter and year, primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the 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 acquired deferred revenue; a deferred tax benefit resulting from the held-for-sale classification of the Scientific Imaging businesses; a measurement period adjustment to 2017 provisional income tax amounts resulting from the Tax Cuts and Jobs Act; and lastly a one-time expense for accelerated vesting related to the passing of Brian Jellison. And now if you'll please turn to slide 4, I will hand the call over to Neil. After our prepared remarks we will take questions from our telephone participants.

Thanks, Zack, and good morning, everyone. Thanks for joining us on the call this morning. During today's call we'll go through our Q4 and FY 2018 enterprise financial results. We'll then turn to our 2018 segment detail and our 2019 segment outlook. We'll then turn to our 2019 guidance and then take your questions. Next slide please. This is really a fantastic quarter. Revenue, EBITDA, net earnings, cash flow really any measure you can look at was a record for both the quarter and the full year. Revenue increased 12% to $1.38 billion with organic growth of 9%. Gross profit increased 13% with margin expanding 90 basis points to 63.5%. Of note, gross margins were increased in all four of our segments. EBITDA increased 12% to $496 million and EBITDA margins expanded 30 basis points to 36%. Earnings before taxes increased 14% and DEPS increased 19% to $3.22 in the quarter. Operating cash flow increased 26% to $464 million, an astounding 34% of revenue. Free cash flow increased 27% to $447 million, 32% of revenue just eye-popping cash flow. Before we turn to the next slide we want to highlight a few topics. Relative to cost-push inflation tariffs, the impact across our businesses in the quarter was modest and manageable, which is clear with our gross margins expanding 90 basis points to 63.5%. Pricing actions already in effect offset most of the supply chain impact, but the teams also quickly repositioned certain elements of the supply chains to minimize the tariff impact. Also, during the quarter, we had the opportunity, as we do every year, to spend multiple hours with each of our businesses to discuss and challenge their forward strategy; discuss market trends, customer behaviors and competitive activity; talk through their enablement and execution of strategy; and review the teams' activities regarding talent development. So as we look back on 2018 and Q4, it was a very good quarter, a tremendous year and another proof point that our strategy works. As a reminder, we have a portfolio comprised of modest-sized businesses that all have a niche orientation and market leadership position. When you combine that with an organization structure that promotes close customer agency and nimble execution and have a widespread cultural orientation aligned on cash returns, great things can happen as they have this quarter and this year. And as we turn to the next page, I want to take a moment to thank our teams around the world for a tremendous 2018. Next page. As we look at the Q4 P&L, we would just like to highlight the tremendous leverage from the top of the P&L all the way down to DEPS. Revenue grew organically 9%, EBITDA increased 12%, earnings before taxes increased 40% and DEPS grew 19%, just tremendous execution by the teams. Next page. We'll discuss our Q4 segment results starting in the upper left with our RF Technology & Software segment which in the quarter represented 43% of our revenue. Revenue increased 18% to $590 million. Operating profit increased 19%. Operating margins expanded to 29% in the quarter. And EBITDA increased 19% to $229 million, which represented 38.8% of revenue. It's always good, when your largest segment grows the fastest. The strength was across the group. We saw all our software businesses perform very well, Deltek, DAT, Aderant, CBORD, iTrade, ConstructConnect. TransCore grew as expected. Late in the quarter, we acquired a small business, Avitru, for about $90 million. We'll be integrating this business within our Deltek business. Avitru is a clear leader in the commercial construction specifications, content and software space. This product enables architects and engineers to select the correct and appropriate building specifications during the design process. Avitru has an exclusive partnership with the American Institute of Architects and has over 48 customers, most of which are architects and engineers. As a reminder, Deltek has a leading A&E enterprise application software franchise. 95% of Avitru’s revenue is recurring and they're in the midst of a cloud migration. So this is a nice tuck-in for Deltek. It allows for better channel exposure for Avitru and a broader A&E customer base for Deltek to sell into. Now turning to our Medical & Scientific Imaging segment. Revenue increased 9% in the quarter to $402 million, operating profit grew 9%, operating margins were flat in the quarter and EBITDA grew 7% to $170 million. Similar to last quarter, it was quite strong across the board. Medical product businesses grew nicely in the quarter. Our medical application software businesses performed well and cameras and Gatan also performed well. Turning to our Industrial Technology segment. Revenue increased 8% to $223 million. Operating profit grew 15%, operating margin expanded 220 basis points and EBITDA increased 14% to $74 million which represented 33.4% of revenue, really capped off a tremendous year for this segment. Neptune continued to perform extremely with continued market share gains and Cornell and Roper Pump saw their strength continue. And finally, our Energy Systems & Controls segment, which represented just 12% of our business in the quarter, grew 1% to $162 million, operating margins grew 11%, operating margins grew 320 basis points and EBITDA grew 9% to $61 million, which represented 37.7% of revenue. As we highlighted last quarter, we expected a bit slower seasonal Q4 ramp across these businesses. Given the volatility of oil late in the quarter, the Q4 seasonal ramp was a touch slower than anticipated, but the teams did a fantastic job managing margins in the quarter. So a year ago, when we presented this slide we talked about our need to consider rethinking our segments. Throughout the year, we've done work on this and are close to finalizing our approach, which we expect to do so within the first quarter. As a reminder, this exercise is solely focused on how we re-segment our business, not how we operate our enterprise. Now I'll turn it to Rob to discuss our P&L, our cash flow and our balance sheet.

Thanks, Neil. Good morning, everyone, and thanks for waking up an hour earlier than normal to hear our call. So, on page 8, I'll go over the full year income statement. As Neil mentioned, it was an excellent 2018. We grew revenue 11%, which is more than $500 million for the year. The majority of the growth was organic, with full year organic growth of 8% and 9% organic in each of the last three quarters. At Roper, as you know, we pride ourselves in the ability to grow both organically and through our consistent deployment of capital. And in 2018, we really benefited from both, with the robust organic growth and positive contributions from PowerPlan and our other acquisitions. Our margins also expanded for the year. Gross margin, up 60 basis points. EBITDA margin, up 30 basis points for overall EBITDA growth of 13%, exceeding $1.8 billion for the first time, so we had very nice leverage on the growth. Earnings before taxes grew 15% for the year. As you will recall, from a year ago Q4 call, we talked about the many benefits from tax reform for Roper. And that certainly did play out, as you see our full year tax rate declined from 28.9% to 21.5%. So adding up all those numbers, we grew our DEPS for the year 25%. Next slide. At Roper, we always believe that cash is the best measure of performance. And in Q4, we grew our free cash flow, as Neil mentioned, 27% to $447 million. And on a full year basis, we grew our operating cash flow 16% and our free cash flow 17% to a record of $1.37 billion, which represents 26% of revenue. As you can see on the chart on the right, if you look at the last years of free cash flow, we compounded 19% which is very consistent with our long-term track record of double-digit cash flow compounding, and we feel really good about our ability to continue to do that in the future. Next slide. So turning to the first of our two balance sheet slides. Driven by our asset-light business model, we ended the fourth quarter with working capital to revenue of minus 3%, completing our second consecutive year of negative net working capital. As you can see on the chart on the right, our deferred revenue continued to increase, aided by seasonal software billing as we continued to grow our recurring revenue. So I thought I'd take a few short moments and sort of talk about why we think negative working capital is so important. So if you assume a $500 million increase in revenue, which was similar to Roper's 2018 growth, a multi-industry company with a higher working capital level, let's say, 10% of revenue, would actually consume $50 million of cash on their balance sheet in order to grow that $500 million in revenue. To contrast for the same amount of growth, not only does Roper not consume cash on the balance sheet, we actually generate $15 million of incremental cash due to our negative net working capital. So we really view the asset-light model as very, very valuable and it accelerates our ability to compound cash in the future. And we certainly expect to remain negative and become more negative over time. Next slide. So this slide is our balance sheet slide. Looking at our strong financial position and comparing where we were at the year-end 2017 to where we are at the year-end of 2018. And we think it's very notable that we reduced our gross debt during the year by a little over $200 million while at the same time we increased our EBITDA by $200 million. So ending the year, our gross debt-to-EBITDA is down to 2.7 times. Our net debt-to-EBITDA is down to 2.5 times. So it's really a testament to Roper's ability to consistently and quickly generate cash and free cash flow that we can reduce leverage in a year where we deployed $1.3 billion in high-quality exciting software acquisitions. So if you look at our balance sheet ending the year, we are very well-positioned to deploy capital and take advantage of our attractive pipeline of acquisition opportunities moving forward through 2019. So with that, I will turn it back to Neil to go over the rest of the presentation.

Thanks, Rob. Turning to RF Technology & Software, slide 13, we'll recap this segment along with the next three for the 2018 review. In the upper left, we see that this segment performed exceptionally well financially throughout the year. Revenue increased by 13%, operating profit rose by 17%, core margins expanded, and EBITDA grew by 16%. Overall, it was a remarkable year. Importantly, the segment achieved an organic growth rate of 6%, with our software businesses growing organically by 8%. To start with Deltek, our applications software business focused on government contracting and professional services, they experienced high single-digit revenue growth and impressive cash performance this year. When analyzing the GovCon side of Deltek, we continued to realize scale benefits. Market share gains were observed across both the large and small to medium-sized government contracting sectors. On the professional services side, the year was marked by the launch of VantagePoint, which I will discuss shortly regarding its importance. We also observed early traction in niche professional services markets, particularly within consulting and accounting firms. Deltek is undergoing a SaaS migration, and this transition acts as a growth driver for us as well as for many of our software businesses. Now looking at our Freight Match business, which is our full truckload spot market network, it achieved record performance this year, driven by network expansion and favorable market conditions. The network grew due to new subscriber additions, and notably, the vitality of the network improved, supported by an increase in revenue per user driven by better pricing strategies and the introduction of a few smaller products that we were able to cross-sell to our customers. Moving to Aderant, our law firm application software business, Deane and her team demonstrated outstanding success by gaining market share from our primary competitor, achieving double-digit growth. Our iTrade business, which focuses on perishable food supply chain software and networking, also grew in the mid-single digits with strong margin expansion. The team there has done an excellent job enhancing product features and improving technology. We expect significant achievements from that team in the future. ConstructConnect's preconstruction network strengthened this year, and they notably expanded their solution offerings. TransCore showed strength in its back-office services and software operations, as well as tolling project execution. Their back-office software and services proved to be quite distinct from the competition, delivering high recurring revenues and better CRI performance. Additionally, we acquired PowerPlan in the second quarter, adding another high-quality niche application software business, which aligns well with our company’s mission. The onboarding of this team into our corporate culture went smoothly, and they have started off strongly. Reflecting on 2018, it was an excellent year for innovation that we believe will provide momentum heading into 2019 and beyond. Key highlights include Deltek's launch of VantagePoint, a SaaS product that opens new niche markets for Deltek in areas like consulting and accounting, while also paving the way for eventual consolidation of several platforms into a unified tech stack. This advancement allows for increased features in their products, greater cross-selling opportunities, and improved internal efficiencies. Aderant commenced the year with essentially one offering for large law and concluded it with three recurring revenue SaaS offerings in addition to their core products. Through organic development, Aderant launched a mid and small law SaaS practice management ERP solution and integrated two small bolt-on acquisitions—one focused on law firm knowledge management and the other on billing preparation and management. Combined, these three new offerings are contributing to the creation of a substantial SaaS recurring revenue business within Aderant. Lastly, I want to emphasize ConstructConnect. Their team executed the product strategy and roadmap impressively throughout the year, developing and launching the first truly integrated construction planning solution for take-off and estimating in the market. This achievement is central to Roper's strategies and innovation, making it a very successful year in that regard. Now looking ahead to our expectations for 2019, we anticipate this segment to achieve organic growth of 4% to 6% this year, with somewhat stronger growth from our software assets and slightly less from TransCore. Next, our Medical & Scientific Imaging segment contributed 29% of Roper's revenue in 2018, achieving an 8% revenue increase for the year. Operating profit grew by 7%, and while operating margins contracted by 30 basis points, this was modestly better than our expectations at the start of the year. EBITDA grew by 5%, with important organic growth recorded at 7% throughout the year. We noted strong performance in niche medical application software. Strata Decision had an exceptional year, earning the number one spot for the fifth consecutive year in KLAS for their category. For those unfamiliar, KLAS is an organization akin to Consumer Reports that rates healthcare IT vendors, and once again, Strata took the top position. They also attracted many new clients, notably the Cleveland Clinic and MD Anderson. CliniSys also performed well, and we expect this momentum from CliniSys to continue. To remind everyone, CliniSys is our European laboratory information management business, boasting a win rate of 70% on their bids. As laboratory consolidations occur across Europe, our extensive footprint positions us to benefit significantly as the European laboratory landscape continues to consolidate. As we turn to growth in our alternate site, this was primarily driven by our long-term care and home health solutions, SoftWriters and SHP. Our U.S. Lab business declined as anticipated. We saw substantial growth from our niche medical product businesses, specifically CIVCO, Northern Digital, and IPA, with Verathon achieving double-digit growth owing to strong demand for our new BladderScan technology and recurring revenue growth from GlideScope Consumables. Importantly, Verathon reached a significant milestone this year, where recurring revenue from consumables surpassed that of instrument sales. We expect this positive momentum to continue. Gatan's contribution to revenue was also impressive, particularly with their next-generation cryo-EM products. I want to extend my gratitude to Sander and Ed for their excellent execution throughout the year in product development and ability to meet customer commitments, even with the pending sale to Thermo at play. At the end of the year, we announced plans to divest our imaging businesses in two phases. As many of you know, we have a pending sale of Gatan to Thermo, which we expect to finalize in the second half of the year once the U.K. regulatory review is concluded. We also disclosed the sale of our remaining camera businesses to Teledyne for $225 million, anticipated to close in February. A few notable innovations from our medical group include advancements from Verathon and SHP, both of which should support our growth moving into 2019 and beyond. Looking back, we celebrated Verathon's tenth anniversary under Roper's ownership, and it’s encouraging to see their strong product vitality. First, our new BladderScan product, powered by AI algorithms, is now established as the top option for bladder volume measurement in terms of accuracy and reliability. We focus on upgrading our leading global market share for this new platform while expanding sales into new facilities and care settings. Next, Verathon has made significant advances in their GlideScope product line, launching a redesigned cart-based system featuring upgraded optics and display technologies, and enhancing overall workflow. Additionally, the team introduced a handheld version of GlideScope this past year. Most recently, Verathon launched a new product category—a single-use bronchoscope named GlideScope BFlex. There is a growing market trend towards single-use products due to cleaning issues, and Verathon intends to leverage their extensive global GlideScope monitor base to facilitate integration of the new BFlex, which is still in the early stages but we are cautiously optimistic. Another significant innovation in our software sector is SHP. They successfully developed a new product aimed at hospitals. SHP benchmarks a significant proportion of U.S. home health encounters nightly. When a hospital discharges patients, they send them to either long-term care or home care settings, and if those patients return to the hospital, the hospital does not receive reimbursement for follow-on care. To assist hospitals with this risk, SHP created a discharge planning tool that helps direct discharges to either home health or managed care during recovery. Our 2019 outlook projects growth for this segment between 4% to 6% organically. Next, our Industrial Technology Group, which accounted for 17% of Roper’s revenue in 2018, grew by 15%, reaching $900 million. Operating profit increased by 21%, and operating margins expanded by 160 basis points, with EBITDA growing by 19% to finish at $301 million for the year. The organic growth rate for this segment was 14%. Neptune experienced double-digit growth with continued market share gains driven by their customer-focused innovations. Cornell and Roper Pump also had a remarkable year, achieving significant share gains. Moving on to our Energy Systems & Controls segment, which constituted 12% of our revenue in 2018, it grew by 9% to $600 million this year. Operating profit rose by 20% and operating margins improved by 270 basis points, with EBITDA reaching $197 million, or 17% of revenue. This segment achieved an organic growth rate of 7% with robust performance in upstream applications, which experienced double-digit growth. CCC returned to growth due to new construction projects, and we observed broad-based growth in our industrial markets. For our outlook regarding both segments, we anticipate low single-digit growth in our industrial segment, driven largely by ongoing performance from Neptune, albeit slightly moderated by upstream oil and gas applications. We expect the Energy Systems & Controls segment to be flat to slightly decline in 2019, especially considering that we are facing challenging comparisons in the first half of the year. It’s worth noting that oil and gas represents less than 10% of our overall revenue, with upstream making up about one-third of that. These sectors have experienced two exceptionally strong years, and while they do not represent major portions of our portfolio, they certainly align with cyclicality. Our field leaders are generally optimistic and encouraged by January’s results, but we believe it’s wise to take a cautious approach in 2019 amidst heightened macro uncertainties. Should oil prices stabilize or constraints on takeaway capacity be lifted, our forecasts may prove conservative. Now, let’s move on to our 2019 guidance. We are optimistic about the business's positioning for a robust 2019. We are setting our full-year adjusted DEPS guidance at $12 to $12.40. Organic revenue growth is foreseen to be between 3% and 5%. Our guidance models assume a tax rate of approximately 22%, although there are potential tax planning strategies that may reduce this rate in the first half, but those are outside our current guidance scope. Notably, this annual guidance accounts for a $0.25 headwind impact from the pending divestitures in imaging, net of interest. We are establishing our Q1 adjusted DEPS guidance at $2.74 to $2.80, excluding the impacts of any future acquisitions or divestitures. Specifically, our model anticipates the Gatan divestiture to Thermo closing in the second half of the year; however, it is included in our guidance through the end of the second quarter, so Gatan will be accounted for six months in this model. Additionally, we expect the divestiture of our remaining scientific imaging camera businesses to Teledyne to close this month. Looking back at our year, 2018 proved to be exceptional. Our diversified niche market strategy consistently yielded strong results. We recorded 8% organic revenue growth that was broadly distributed across all four segments. Gross margins improved by 60 basis points, while EBITDA margins increased by 30 basis points. Free cash flow rose by 17% to $1.37 billion or 26% of revenue. We are very well-positioned for substantial success in 2019. Our CRI discipline, niche market leadership, innovation, and high recurring revenues will ensure consistent and long-term cash flow growth. Earlier today, we announced the addition of Satish Maripuri to our executive team. He will lead group efforts within several of our software businesses. Satish has a proven history of building and growing various software businesses, and importantly, he understands Roper's model and approach deeply. He has spent recent months familiarizing himself with Roper and is now beginning to engage with several of our software sectors. We're thrilled to welcome Satish aboard. Regarding our capital deployment, we are eager for 2019. Our balance sheet is perfectly positioned for significant capital deployment this year, and the high-quality assets we have seen in recent months are promising; our acquisition pipeline is quite robust. Our CRI orientation and M&A processes help identify the most suitable businesses. Now, as we open the floor for questions, we’d like to remind you that our core objective is simple: we compound cash flow by managing a portfolio of operating businesses with market-leading positions in niche industries. We offer business leaders Socratic coaching regarding optimal strategies, operations, innovation, and talent development. We incentivize our management team based on growth and cultivate an environment of mutual trust and transparency. Finally, we apply our excess free cash flow to acquire businesses that deliver better cash returns than our current portfolio companies. These straightforward principles lead to impactful results. Now, let’s proceed to questions.

Thank you. Good morning, everyone.

Good morning, Deane.

Hey. You guys are throwing off my biorhythms at such an early hour this morning.

Thank you for waking up early.

Yes, sir. Hey. Just to start it off, and I wasn't planning on doing this, but I just feel it's important to recognize the passing of Brian. In my career, I've never called anyone a financial genius, but I think Brian was. And it just struck me that his legacy, his business model – that is the Roper business model, talent development, all of that lives on. And I think you're seeing it in these numbers today, and I just want to take a moment to say that.

We appreciate you saying that and agree with what you said.

Terrific. All right. So business at hand just was interesting that with Deltek's exposure there wasn't any issue you didn't cite any issue with the government shutdown with all the projects. Do you see any effect there across your businesses?

So – let’s sort of bifurcate it. With what we saw, nothing obviously in last year and we look forward into this year. In the first part of January, at the top-end of the enterprise side with GovCon it's completely business as usual. As you can imagine, they have gigantic teams and staffs and they can flow their staffs to where the work is. On the very, very bottom-end, the mom-and-pop, we saw a little bit of a slowdown in booking activities. It's very, very small part of Deltek, but Deltek is highly confident that rebounds based on their experience from sequestration. All of that business was captured and then following couple of months. And so it was – we view it as a push, if anything and certainly not lost business. So, in the grand scheme of things, very limited impact on the Deltek business relative to the government shutdown.

Got it. That's good to hear. And then, Neil, you gave a bit of a tease about the re-segmentation. This has been talked about for more than a year and it makes all kind of sense. Now, I'm not expecting you to disclose any real specifics here, but just conceptually how does this – will it look like in terms of putting alike businesses into similar segments like consolidating energy? Where do you think the benefits that come from this, please?

Yeah. I appreciate that. So just – every time we get asked about the re-segmentation, we just want to make sure everybody understands, it's just how we organize the businesses for reporting out to investors. It's not how we operate the business. It's not changing any of the business model characteristics. It's just for communication to our investors and shareholders. To that end, the design principles are quite simple and straightforward. We want there not to be segments based on end market orientation, as our strategy is not end market-oriented. We'll put like business models in segments and that will certainly have a segment structure that supports our long-term multi-industry view of our strategy, as well as having a combination of products and software. But the confusion of having multiple types of products and energy across two different segments, that will all likely be streamlined and cleaned up in a new segment reporting structure.

All good to hear. Thank you.

Thank you.

Hi, good morning.

Good morning.

Just – and I'll echo Deane's comments on Brian, of course. In terms of the guidance on organic sales, you just grew 9% in the fourth quarter organically. Big step down in the guide, so about 4% at the midpoint in Q1. Maybe just talk a little bit about the segments, obviously, leading that how steep a drop-off you're expecting in industrial and energy. And maybe any comments around the cadence of order intake in those two businesses in the recent months, as you said, amidst the oil price volatility.

Sure. Good morning. This is Rob. So, I think, in the two largest segments RF and medical, very consistent. I mean, these are mid-single digit organic growth segments for the most part if you go back last year and we expect much of the same for 2019. I think you're right. I think for the industrial and energy segments, we do see a little bit lower growth than we saw last year clearly. And I think, Neil mentioned a few reasons for that earlier. Neil, you can probably expand.

Sure. If you look across the aggregate of our industrial and energy segments and outlook, basically, you see Neptune and CCC up for the year. We see our upstream assets down. And everything else in aggregate, the bucket of everything else, is flattish across 2019. As I mentioned, the field is generally pretty upbeat and our January activities were modestly strong. And our approach on guidance is we all saw the volatility in December in oil prices in that market. We saw a slight, ever so slight impact on some of the Q4 seasonal shipments that we talked about earlier. We also have a difficult first-half comp across our energy businesses in particular. So we've modeled Q1 down with only modest improvements in the balance of the year. But importantly, if the takeaway capacity, the 3 million barrels that's scheduled to come online comes online, or oil prices stay where they are or increase, then there could be positive levers in our model here specifically to the upstream assets that we modeled down for the balance of the year.

Thank you. And then, just my second follow-up around the medical business, maybe just give us some updates on what you expect from the U.S. lab business in 2019? And also just to confirm the delay on the sale of Gatan, that in no way I assume affects your capital deployment given how strong the balance sheet is?

I'll address the Gatan question first. No, it doesn't affect us at all. We are very active and the balance sheet that Rob discussed shows we are considering any impact from the divestiture of Gatan. We plan to be quite proactive as opportunities arise. Regarding Sunquest, we anticipate a decline in 2019, though it will be less significant than in 2018. This aligns with the outlook we provided about a year ago regarding the next few years for Sunquest.

Thank you very much.

Yeah, just to be clear for the U.S. part of Sunquest.

Got it. Thank you.

Yes. Thank you.

Thanks. Good morning.

Good morning to you.

Good morning. Nice job. So good comments on Aderant and Deltek on the share gains and explanations there. I was also looking for an update on PowerPlan impact Roper's having, any new initiatives on pricing or sales organizations?

It's still early days with PowerPlan. They had a very busy year last year with a newer SaaS offering focused on lease accounting, which saw significant uptake due to the accounting changes. There was a considerable effort to implement everything, and they did an excellent job. We integrated them into our planning process, and their market orientation was strong. We also acquired a company that was in the midst of a SaaS transition, so they're currently engaged in upgrading their technology stack and initiating early implementations of the new recurring revenue SaaS component of their business. Although it's still in the early stages, they onboarded exceptionally well, and the team has adapted to our governance model and structure.

Okay. And then similarly for iTrade, you've had some pretty consistent growth there at least for a short bit here. Just wondering what delay of the competitive and market opportunity profiles is like and particularly outside the U.S. if that's starting to tap.

Well, iTrade is mostly a U.S. business. It's not exclusively U.S. but mostly U.S. From a competitive landscape point of view, that's one of the things we like a lot about our network businesses. It is a supply chain network that has network scale that's larger than anybody else. And so the relative market share advantage that we have in that business is quite larger over the next largest competitor, and really haven't seen a meaningful challenger in that business for several years. Again it's the network scale. And then Rhonda and her team over the last 18 or 24 months have just done a great job on the product and the features and driving even more customer loyalty and uptake. It's always had a high recurring revenue and high retention rates, but now the ability to sell more value in the product stack is encouraging.

Great. Thanks.

Thank you.

Hi, guys. Good morning.

Good morning, Steve.

Hey, Steve.

I have been up since 4 AM, went for a run, so this is piece of cake, no problem. I say move it up, let’s cut the wheat from the chaff.

Hunn didn’t run this morning, so you're a step ahead of Steve.

I'm actually joking, I actually broke my ankle on Sunday. So I am not really moving – move very much. So again, on a more somber note, our condolences obviously around Brian. I echo Deane's comments. I think he said it pretty well. So, sorry to hear about that guys.

Appreciate it.

Thank you, Steve.

I guess just the acquisition pipeline with all these kind of crosscurrents out there and with multiples coming in a bit. I mean, is this – it all, it is cycle timing it all enough to kind of change people's mentalities around deals at all or no not yet in valuations?

So, generally speaking, not generally, it's absolute. I think the fact that private valuations, you know we buy everything from private equity, lag any change in public and they also don't have the volatility of public. And so that's just an observed fact in the market. The other thing, I would say to that is valuations remain robust in the private markets. But the assets that we all come to – I think you all come to appreciate that we look for the niche orientation, the high retention rates, the mid to high single-digit growth, generally non-cyclicality high-recurring revenues. Those assets, and high cash flow low to limited CapEx, those command a higher price than your average company. And those are the type of businesses that we look for. So we continue to do that. The other thing which we always do, we do it with our Board, a few times a year as we go through models to say is it better to continue deploying through valuation environments or wait? And every time the mass says to continue deploy through because the compounding effect overwhelms any market timing you could possibly dream up. And so our strategy has been for the last five years to invest through the cycle and we'll continue to do that.

Okay. Is there – just one last one. Now that you're kind of running the show there, what's kind of the biggest challenge you see as far as maintaining this type of performance?

Well, the beauty of this business is that it's comprised of 50 businesses. And I won't go through all the things you know about their niche orientation, defensibility, the market share leading positions that we have and so. The cash flow generation side of this business is pretty stable and robust given the assets that we have in our org structure. I think there is certainly a challenge or an opportunity we have to continue to add planning rigor and strategy execution rigor and talent development rigor through that organization, through the organization which we'll continue to do. And I won't say it's a challenge, but it is certainly something that's obviously top of mind, we spend a tremendous amount of time thinking about how we deploy the capital, right? So we have process and rigor and CRI discipline that really minimize the likelihood of making mistakes. But Rob and myself and the entire team here spent a lot of time on that and continue to try to learn through our history and make sure that we do a good job relative to deploying capital going forward. So it’s how I do cash flow generation, cash flow deployment is how I think about what the job is and the challenges and opportunities associated with that.

But I would just add to that you guys you know, that's very institutionalized. I mean, everything that we are doing is consistent with what we've been doing for the last 15 years. Neil and myself obviously have been very heavily involved in all the M&A we've done in valuation and execution in the last six, seven years. So it is no change at all and what we've done in the past, and it will stay the same moving forward.

And maybe just one thing – I'm sorry, go ahead, Steve.

No, no, you go ahead.

The poor transcriptionist missed all of that. But one thing I would mention is that it's a challenge I think about every day. As we grow, complexity can increase. It's something I spend a lot of time considering, focusing on how we can avoid that at every turn and maintain simplicity. This is one of the biggest legacies Brian left behind; what we do is straightforward, and we will continue that approach moving forward. It's always a top priority for me.

Well, it sounds like you guys have too much money to spend and that's not a bad problem to have. I think there's a lot of other companies that would like that problem. Thanks a lot.

Yeah. Thank you.

Hi. Good morning, everyone.

Good morning.

So I thought you did a nice job, Neil, of telling us about the different offerings that are now in place at both Deltek and Aderant. But can you maybe just delve into that a little bit more? What are the opportunities from those offerings? And how are you seeing that translating into growth over the next couple of years?

I will address this point by point, starting with Aderant. Over the past three to five years, and looking ahead, the large law market is expected to remain a strong growth driver for our business, and the reasons for our success will continue to apply. When considering the development of a recurring revenue model, it is important to build it on these larger foundations. Although each individual component of our recurring revenue discussed earlier at Aderant may seem small on its own, when combined with an established business, it can be quite significant. Additionally, the company is focused on enhancing its R&D efforts to create complementary products for large law firms as well as mid-sized and small law practices. This concept ties into our broader discussion about the software business, which emphasizes “solution stacking.” A substantial investment is made in acquiring a customer, with the aim of selling them one or two products initially. Once a customer is secured, it becomes considerably easier to offer them additional products, especially if those products integrate well with what they already have. This approach is not limited to Aderant or Deltek but applies to companies like ConstructConnect, DAT, or iTrade. We can certainly discuss this further offline, but this is how we view the growth strategies for these businesses.

Yeah. Fair enough. And maybe just kind of following on just staying on RF Tech for a second. Obviously, that business has evolved a lot over the last several years. And how do you think about then the cyclicality of this business? Now that you're so much more of a software-oriented business, if we were to go into a downturn. How resilient do you think this business is?

Which business are you referring to?

I was thinking about the whole segment. I mean, obviously, there's variety.

Yeah, sure. So the TransCore business which actually is a highly recurring – high recurring revenue business, I mean, yes, there are products that come in and out on any given year, but there's a huge base of recurring revenue there. But that continues to be smaller part of this segment as currently reported. Software has now become two-thirds and growing of the segment. So very, very high levels of recurring revenue. If you look at our RF Tech segment organically over the past several years, I mean, it's very, very consistent growth and that continues to tick upward over time as we've added more of these high-quality software businesses. So it's really not cyclical at all in the segment at this point in time.

All right, guys. Good to hear. And again, I wish my condolences for Brian as well.

Appreciate that. Thank you.

Good morning, everyone. Can you hear me?

Perfectly.

All right. Crystal clear. Well, obviously I echo the nice things said about Brian, and I think you guys know that. I guess the first question I would have is, obviously, you've given a lot of airtime to this re-segmentation the kind of risk the more cyclical businesses of the portfolio. At some point does it become a situation where it's better in the spin or other hands? Because I just think about your management there they're managing through this, but they are perceived as probably lower growth and more cyclical within the portfolio and they're not getting capital going forward. So how do you bridge the gap to keep them motivated, keep them incentivized, given the context that clearly you're deemphasizing the strategic importance of this collection of businesses and what's kind of the end game here?

Well, I'll start with your last statement about deemphasizing the strategic importance. I would say we're absolutely not doing that. All of our businesses, even the energy businesses are in niches, they are clear leaders. Importantly, they are tremendous cash machines, right? Their CRI performance is stunning and so these businesses are fantastic businesses. They do, obviously, have some cyclicality associated with them, but they are fantastic businesses, period, full stop. So, there's strategy at the same. We have a collection of roughly 50 businesses. They generate the cash flow and we take all the cash flow and deploy it to businesses that are better than the core. So, that's how I would summarize our feelings on that.

Yeah, I mean there is a lot of investment in these businesses. As you know, it’s like we centralize investment and did it out, these businesses generate high margins and they are encouraged and they knew that. I think Neil talked about some of the innovations in every single one of our businesses is investing to grow. And that's why they have such great performance. So they are all very, very strategic in their own way.

A great example of that is both the Cornell and Roper Pump. We've talked now all year long about the share gains that they've had in 2018. Those are directly a result of the investments we made in the channel and the product in the last down cycle. So we were there when others weren't there. And so I think our ability to sort of with the long-term horizon of owning these businesses proves to be beneficial.

Now that everyone is alert, my question about acquisitions is regarding the impressive job you've done in this area as well as in the core operations of the business. In light of Steve's earlier question, how do you maintain this performance in relation to capital deployment? Where do you see potential risks? Years ago, I asked Brian about this, and he mentioned that the risk lies in acquiring a company that doesn't align with the software or code we expect it to have, or whether it's a matter of market positioning. Capital intensity shouldn't be a concern since the businesses you acquire are unlikely to have unexpected CapEx or funding needs. Could you discuss how you manage the risks associated with CRI in the context of acquisitions? And if there is a possibility of missing the mark, where do you think that might occur in your assessments? I'm thinking critically about this.

Sure. I'll answer your question by discussing how we deploy capital. The first step for us is evaluating the performance metrics; this is analytical and objective, free from bias or interpretation. Before we proceed, we ensure that it meets our financial criteria. Many companies may stretch valuations and assume synergies that aren’t part of our performance framework, but we don't engage in that kind of financial strategy when considering acquisitions. Next, we assess whether the management team will thrive in our environment. We can determine this objectively by examining their history with various companies; if their career shows stability with multiple roles, it indicates a passion for building businesses. Finally, after confirming we like the financial performance and management team, we consider whether the business itself aligns with our interests. We look for characteristics like niche leadership, early market share advantage, recurring revenue, and high retention rates. While mistakes can still happen, our thorough process significantly reduces the likelihood. In the past, where we have faced disappointment, it was often due to slower initial growth until our strategies had time to take effect, but this hasn’t been detrimental to shareholder value, as there's considerable potential for value in our performance framework from the start.

Thank you for taking my questions. I appreciate it.

Thank you.

Yes. Good morning, Neil, Rob, Zack.

Good morning.

Again, I'll definitely second all the closing comments and nice comments about Brian. He will be missed. Just a quick question around the ES&C business as well as the IT business, the incremental margins in both in the fourth quarter just exceeded the gross margin that those two businesses generate. And I'm curious, is that a mix issue in those two segments? Or how did they deliver that amount of leverage, I guess?

Yeah. I mean, I think in the energy segment, you had 1% growth. So that's just sort of a small number since you asked. I think in the industrial businesses, look, there is – we do have high contribution margins and so as you get late in the year and you're delivering a lot of product, it's going to come through a pretty high contribution margin. So, certainly over time, it’s not going to be 100%, but certainly for a quarter, you can have pretty strong incrementals.

Okay. Okay. And just I guess this kind of plays into my second question here. Again, when I look at 2019 and I look at core guide of 3% to 5% for sales, if I add back the $0.25 that you have pulled out for Gatan and other imaging businesses I'm curious about the EBIT leverage you will be able to show for the year. Again, if I just add that back the EBIT leverage looks a lot like maybe 3% type of thing. So, I'm a little bit curious, if in your plan, assuming Gatan and imaging businesses is most of the compounding effect in EBIT going to come from M&A this year with your guide around industrial businesses? Is that kind of how your plan picks up?

Yes, sure, yes. As you know, we don't include any acquisitions in guide. So this guide is strictly based-off of organic. We've got a lot of capital that we expect to deploy as long as the right opportunities are there. And so, at the end of the year, yes, the compounding will always be a combination of our organic growth and our M&A growth. In terms of the guide, we are assuming roughly 30% to 35% leverage on the growth overall, which is pretty consistent with the kind of long-term trends. I think as Neil mentioned in our base guidance, because we are assuming some declines in some of the upstream businesses, and there's going to be a little bit of delevering there and it will hurt you, whereas the software and the medical businesses generally leverage 40%. And so if you put it all together, you get something in the 30s for our baseline midpoint guidance, which we think is sort of a prudent approach at this point in time.

I see. Yeah, yeah. And then just last question, around Gatan, is there any chance you would share kind of that revenue forecast for 2019? I mean, I understand when you're taking it out, but as the numbers would suggest that Gatan kind of decelerates off of what apparently was a really good 2018? Is that correct?

Yeah. So I don't really want to get that specific on that, given the fact that we're currently trying to get it to closed, the regulatory. But I would say that from a seasonality standpoint, it's always stronger in the second half than in the first half. So I think it is true, we're not assuming a lot of growth in 2019 versus what was a very strong 2018.

I see. Okay. Okay, very good. Thank you.

Thank you.

Hey, guys. Good morning. This is Tristan in for Joe. Thanks for taking the question. Neil, just a quick one. I was wondering if you changed anything this year in the way Roper sets its guidance, since really that was the first time you had to do this at the entire company level. I guess what I'm trying to get to is how conservative though your guidance is this year compared to the previous years.

Well, I'll give you a little bit of a process and turn over to Rob. Maybe he can add some color. So the process of setting this is the same process that we've gone through for the last four or five years. I've certainly been involved with it, but not at the helm, obviously. So the engagement with the company is going through all the plan reviews, doing the call downs in January, doing all the analytics, getting the market information. So, it's the same process. I went through earlier about the – what the posture we're taking on our oil and gas businesses relative to Q1 and the outlook. So we believe if the market, the takeaway capacity comes online or oil prices stay where they are or go up, there could be some positive levers. But other than that, it's generally the same approach. Rob, do you want to add?

Yeah. It's the exact same process we've done over the last 10 years. So we certainly view it as well-balanced.

Great. Thank you, guys.

Great. Thank you.

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