Roper Technologies, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Feb 2017

[Operator:]

Good day, everyone, and welcome to the Roper Technologies Fourth Quarter 2016 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to Robert Crisci, VP of Finance and Investor Relations. Please go ahead.

[Rob Crisci:]

Thank you, Laurie, and thank you all for joining us this morning as we discuss the fourth quarter financial results for Roper Technologies. Joining me on the call this morning are Brian Jellison, Chairman, President and Chief Executive Officer; John Humphrey, Executive Vice President and Chief Financial Officer; Paul Soni, Vice President and Controller; and Neil Hunn, Group Vice President. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and also are available on our website. Now, if you'll please turn to slide two. We begin with our Safe Harbor statement. During the course of today's call, we'll be making forward-looking statements which are subject to risks and uncertainties as described on this page and as further detailed in our SEC filings. You should listen to today's call in the context of that information. And now, please turn to slide three. Today, we'll be discussing our results for the quarter primarily on an adjusted non-GAAP basis. A full reconciliation between GAAP and adjusted measures is in our press release this morning and also included as a part of this presentation on our website. For the fourth quarter, the difference between our GAAP results and adjusted results consists of two items. First, a $7.2 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions. This represents revenue that those companies would have recognized, if not for our acquisition. Second, a $6.1 million adjustment for acquisition-related expenses, primarily related to the ConstructConnect and Deltek acquisitions which were completed in the quarter. And now, if you'll please turn to slide four, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants. Brian?

[Brian D. Jellison:]

Thank you, Rob. Good morning, everybody. We'll start out by reviewing how the fourth quarter was, and a few comments about how the total 2016 finished. Then a segment detail on outlook for each of the four reporting segments. We'll look at how the first quarter looks from a guidance view point and the full year, establish our cash flow guidance for the year, and then take your questions. Next slide, slide five. So, if we look at the fourth quarter, we had record results in terms of orders, revenue, net earnings, EBITDA, cash flow and a lot of other areas as well. Orders were really spectacular, up 17%. Our book-to-bill was 1.07x. For those of you who follow the company closely, we always say something like a 0.97x to 1.02x is a trend line that doesn't tell you all that much, but if you get below that or above that it tells you a lot, and this sort of rate tells you a great deal about 2017. We had organic order growth in all four segments, although I think Energy was maybe 0.1%. But it's still – that's the first time in a long time, organic orders were up 11%, now about half of that comes from the New York City tunnel project, but without that it's still very outstanding organic growth. Our revenue in the quarter was up 7% to $1.18 billion with 2% organic growth. Our gross margin was up 50 basis points to $62.3 million. We're still making some margin improvement even with extraordinarily high numbers to begin with. Our EBITDA in the quarter was up 7% to $365 million and our operating cash flow for the entire year for the first time in our history exceeded $1 billion. We completed an important bond offering in December that sort of protected us from the vagaries of what might have happened going forward. The interest rates at the time certainly saved us a good deal of money. We deployed $3.4 billion in the fourth quarter, acquiring Deltek and ConstructConnect and these are really transformational acquisitions for us, partly because of their size. But they really take us into software end markets and professional services, gives us a lot more diversification than our software which had been concentrated in supply-chain activities and medical application. So, moving greatly into professional service gives us a lot of ramp around other things we can acquire over the next several years. And it was a quarter-ago in which we hit several milestones and really some transformational things that outline how we're going to perform over the next three to five years. Next slide. If we look at the income statement, you can see pretty much all those things reflected that we just commented on orders, revenue, gross profit. The tax rate down there you can see was 29.8% versus 28.8%. So it was a 1% headwind which cost us about $0.02 to $0.03 in the quarter, notwithstanding that DEPS were $1.86 versus $1.82 last year. Next slide. Compounding cash flow is really what creates so much shareholder value for all of you over time. And, here you can see that despite the Energy headwinds, which have been ferocious for the company for the last two years, it's really remarkable that we've had 19% growth over the last two years in operating cash flow, despite a huge cash headwind in Energy. So in the fourth quarter, our conversion of operating cash flow, you can see was 142%. Our free cash flow at $259 million represented 25% of revenue. And for the full-year, our operating cash flow, which is a little over $1 billion, with 149% conversion, we continue to move up sort of cash flow to revenue. Back in 2014, it was 23.7%, and of course people are scared to death we couldn't possibly maintain it, and here in 2016 it's 26.3%. So, everybody here is very proud of the $1 billion operating cash flow for the first time. It's quite a milestone and hats off to everybody at Roper for doing that. Next slide. The asset-light business model, this will really cement a critical awareness of people about just how big a cash compounder we are and we're going to be. If you look at this slide, which we generally show you each time, people often times think it just couldn't get better. In 2014, you see that our net working capital as a function of revenue was 5%. Last year in 2015 it was 3.5%. This year it's 1.8%, cut in half, and it's important to look at the component, so you can see inventories dropped from 5.1% to 4.6% in the last two years, receivables are up 20 basis points from 16.1% to 16.3%, payables and accruals are up 80 basis points from 11.1% to 11.9%, but the big change here is deferred revenue. Deferred revenue was 5% in 2014 year-end and in the fourth quarter, we exclude acquisition. So, in December 2015, we excluded Aderant and Atlas that had some deferred revenue, and yet it was still 6.5%. This year as we close out, we exclude ConstructConnect and Deltek and store up the 7.2%. This is hugely important because if you look on our balance sheet that's attached to the income statement, you'll see that deferred revenue in 2015 was $267 million. You'll now see that deferred revenue is up to $488 million, but this is not reflected in our graph here at 7.2%. So you can imagine that that 1.8% number, which is insanely low compared to multi-industry companies, is actually going to become negative in 2017. This is why we get so much more cash to revenue than virtually anybody else. It's truly a transformational change in our cash return and to get a concept of how important this is, ten years ago we told people that our inventory was 9% of revenue, today it's 4.5%. We told people receivables were 17.4%, today they are 16.3%. We told people payables and accruals were 15%, today they are 11.9%. But now we have 7.2% of deferred revenue and as we report in the first quarter, you'll see that number escalate. So all of the acquisitions that we've been doing the last two years, $5.5 billion worth of investment, has helped to drive these incredible numbers to rates that just haven't been seen before. Next slide. Here we look at the segment detail and we'll look at each of the four segments. Next slide. We start with Energy Systems. The Energy Systems business actually had a book-to-bill of 1.02x. We had organic growth in orders in the Energy segment of 7%, so you got a little bit of improvement in the fourth quarter. Organic revenue, trailing of course is still minus 8%. Oil and gas was down about 15%, but that's actually the best negative V for a while. So headwinds have really been abating in that and this Energy segment, about two thirds of it is oil and gas related activity. The Industrial Test and Measurement portions of the business actually grew, and we had this sort of positive book-to-bill ratio around that. In 2017, we think the segment'll be sort of flat to low single-digit growth, off of the base that you see here. Then if we look at the Industrial segment, which is far less influenced by oil and gas, but nonetheless, still has Roper Pump in it, so that's a major component. Its organic orders were up 1%. The organic revenue was down 1%. Material analysis was strong in the quarter. Neptune continued to perform brilliantly. We had some sequential improvement for the first time at Roper Pump as rig counts moved up, and so Roper Pump sequentially was up about 8%. That said, that business alone in the last two years is off by $50 million of revenue and represents that drag that we've had. We think that goes away this year. If we look at the results for the segment as a whole, we think it's going to be up sort of low-single digits, because we won't get much out of the Energy portions, but we get a lot more out of the other pieces of that segment. If you combine these two when you look at it, which I was doing just in preparation here for the talk today, the combined revenue for these two was $321 million of revenue and had $98 million in OP. So it's really remarkable how great these businesses are. There are 30.5% OP to sales in markets that have been declining. So the guys who run these businesses have really performed in an outstanding way the last two years. Next slide. We look at the Medical segment. You'll see a book-to-bill here of 1.09. Organic orders were up 8%. Total orders were up 15%. Imaging revenue was down 4%, but Medical organic growth was up 5%. The way that we look at the businesses, there are really three primary areas, the Acute Care Software business, and it was up led by connectivity solutions between the lab instrumentation that we provide software for and the data gathering requirements that the hospital needs. And then, Strata's Decision Support Software continues to grow at a spectacular rate. The Alternate Site Healthcare business, which includes MHA, but very importantly includes our Software businesses, SoftWriters and SHP, the Software businesses grew well and the Long Term Care Pharmacy business grew in the fourth quarter. The medical products business, which includes a variety of physical products, its growth was led by Northern Digital, and we have technology that a rapidly increasing people of OEMs that we really sign contracts with, I can't discuss because of the proprietary nature of the product, have really interesting growth opportunities in Electromagnetic Measurement Technology area, and we're really at the forefront of that. So, there is some very important people that we've been working with, and increasingly signing those up, and prospects for that area are quite good. Scientific Imaging in the quarter was up on orders. It's about 15% of the segment these days. Book- to-bill was the strongest it's been over the long time at 1.12. In 2017, we actually believe Imaging will grow because of the cryo-EM opportunity that we have there and certain spectroscopy technology that we introduced this past year. In Medical, we just think we get sort of broad-based medical growth continues at kind of mid single digit growth that we've enjoyed for several years, and there are a series of initiatives that really we're culminating in 2016 and the early part of this year that should make our performance in a growth area, internal organic growth, brighter in 2018 and beyond than it's been in the recent past. And the Medical segment, really in the last two years, is up $283 million in revenue. So, that has largely offset the sort of drag, about $265 million drag, we had out of Energy and Industrial, and especially when you exclude the Abel disposition. Next slide. Here we would look at RF Technology. That segment will explode of course in 2017. You can see on the chart here, its book-to-bill was 1.10 in the fourth quarter. Organic orders were up 24%, a good deal of that was the New York City tunnel project, most of which got booked in the fourth quarter, and total orders are up 38%. Organic revenue was up 8%. Growth in the toll and traffic applications was strong in the quarter, and, importantly, we had a faster start to the all-electronic tolling in the New York City bridge and tunnel program than we expected. We did about $15 million in the fourth quarter, and that leaves us, the total project is about $52 million for the installation and technology purchase. So it gives us maybe $37 million for the coming year. Then there is another $20 million in maintenance that lasts for like $5 million a year for four years to get us back to the $72 million number we were talking about. So excellent start to that. We had sort of middle single-digit organic growth in our Software businesses. Freight matching did a little better than that. CBORD had a particularly strong quarter, up double digits with security deployments for universities. Aderant continued to lock in gain share in the large law office component. We completed the Deltek and ConstructConnect acquisitions, which really greatly expands our application software footprint and capabilities. It gives us some new platforms for growth in professional services. There are a lot of interesting things; end markets to explore and other things to bolt on to the business. And if you look over at this revenue graph, you see it going from $904 million to $1.224 billion. We put this 2017 chart on there, we'd have to change the whole page, because we're going to do over $1.9 billion in RF & Software in 2017. So, in 2014, it was up $47 million, and in 2015, it was up $86 million. Last year, it was up $187 million. It'll be up $650 million to $700 million or more this year. So we think we'll continue in 2017 with strong software growth, with really incredible cash performance out of this businesses. We'll continue to grow in toll and traffic projects, but a lot of this is trans-suite (17

[Operator:]

Thank you. We will now go to our question-and-answer portion of the call. And we'll go to Scott Davis with Barclays.

[Scott R. Davis:]

Hi. Good morning, guys.

[Brian D. Jellison:]

Hey, good morning, Scott.

[Scott R. Davis:]

And thanks for moving to cash earnings. It's what all the rest of our companies do, so it just makes a little easier for everybody, for us at least. So thanks for that. I just kind of just curious to hear, Brian, your opinion on why you think orders came snapping back in the quarter to kind of when you think about Medical and Scientific Imaging? I mean is this a bit of a post – post election people are holding off on stuff and then it came through or is there some legitimate recovery views out there, I mean just kind of curious to see how you think about that?

[Brian D. Jellison:]

I don't think it's anything related to post-election activity or people holding up because of where the orders are, right? So, you didn't have a negative dip in orders in Industrial or Energy, so that helps at the beginning, right?

[Scott R. Davis:]

Yeah.

[Brian D. Jellison:]

And then, you had an unusual situation with a large book boarded for (25

[Scott R. Davis:]

Okay.

[Brian D. Jellison:]

...I think that the improvement in Medical was pretty good. The people think about the Sunquest lab business, but it's actually the Acute Care Software business and it's doing really well, it's just that the lab business has been on the laggard for the last two years organically even though it's continued to be improve, but the ancillary things around it are growing at double-digits. So, they are getting bigger and their growth is organic and it comes in and you see stronger support. Same thing, we went through a little bit of a hiccup in MHA at the beginning of 2016, and we're constantly monitoring drug issues and pricing and what's happening with generics, and what's happening with the things we serve, which are not the big risk drug things. So, MHA is improving a bit, but the two software components that go into home health and alternate site treatment for people are performing exceptionally well. Again, these are sort of double-digit growers. So, I think that's good and then we had – generally our CBORD business does really well in Q2, and that's most of the year, but it had pretty good Q4. There is a level of optimism. Throughout our reviews that we do each business, a year ago, people were really apprehensive and nervous and you don't get that from anybody. So, I think as Rob and myself, and John and Paul put these numbers together for the year, our governance model creates what you see in the way of guidance. Maybe there will be some better euphoria throughout the year, but we're not banking on it.

[Scott R. Davis:]

Very fair. And then did Roper Pumps actually turn positive on orders year-over-year, or is it still year-over-year negative?

[Brian D. Jellison:]

It was down, I can tell you it was actually up 8% in revenue sequentially...

[Scott R. Davis:]

Okay.

[Brian D. Jellison:]

...in the fourth quarter over the third quarter, but the – not the orders, but the revenue, so...

[John Humphrey:]

(27

[Scott R. Davis:]

Okay, okay. Well, I've got follow-up to you guys afterwards, but thank you, and good luck.

[Brian D. Jellison:]

All right.

[Operator:]

We'll go next to Shannon O'Callaghan with UBS.

[Shannon O'Callaghan:]

Good morning, guys.

[Brian D. Jellison:]

Hey, good morning, Shannon.

[Shannon O'Callaghan:]

Hey. Brian, just on the deferred revenue. One, is that, I think I haven't seen it presented that way before in your working capital slide. Is that sort of a redefinition of the metric internally too, or are you just showing it differently to us? And is that going to be the main driver of the improvement in working capital from here, receivables and payables kind of reached a natural stopping point and the deferred revenue is going to be the driver from here, maybe just some thoughts on that?

[Brian D. Jellison:]

Yeah. As far as the reporting convention, it's always been in our number. So this is not a change. We've decided to split it away from the payables and accruals line in order to show the increase in that deferred revenue side. I mean, look, there is always more opportunity on all these line items, right, whether it's receivables or inventory or payables. But I do think most of the future improvement will continue to be the growth that we see in software and we get paid in advance for that. And so that continues to build the deferred revenue balance. I anticipate that's where we'll see most of the incremental change. Of course the change in the first quarter will be substantial, because we'll be able to roll in a full quarter of deferred revenue for ConstructConnect and Deltek in addition to their revenue.

[Shannon O'Callaghan:]

Okay, thanks. And then in terms of the Medical segment, you feel like that's getting to a point where it can now grow like 5% plus on a consistent basis, or is there – is the nature of kind of the Imaging business as well as some of the pieces of the Medical businesses, is it such that we're going to kind of average the mid single-digits, but we're going to go through these periods of low-singles and high-singles? Maybe just some thoughts around the steadiness or lack thereof of the whole segment in total.

[Laurence Neil Hunn:]

Sure, Shannon. So really this is the 12th consecutive quarter that the Medical businesses have been up mid single-digits or better organically. So really the noise in the segment has been with the Imaging businesses. As we mentioned, this quarter the Imaging business is down, so the segment was only up 3%, but the core Medical businesses have been consistently mid-single-digit growers now for three years, and we certainly expect that to continue.

[Shannon O'Callaghan:]

Okay, great. Thanks, guys.

[Operator:]

We'll go next to Christopher Glynn with Oppenheimer.

[Christopher Glynn:]

Thanks, good morning.

[Brian D. Jellison:]

Good morning.

[Christopher Glynn:]

Hey. I'm just wondering on the Energy segment with I think some of (30

[Brian D. Jellison:]

No, I don't. All you can see is that the rate of decline improved. It was still down year-over-year except for those orders. So, I think we think it's going to be flat to low single-digit growth in 2017. But of the businesses we have that were involved in it, we really only see one of them that still has headwinds going into 2017, and that's our compressor control business which has – it has a lot of service content, but on the new applications, it still has to struggle quite a bit. And you had rig counts were up a little bit, so that you get a little bit of improvement at Roper Pump, but it's not – the materiality of Energy in 2017 is it won't be a headwind.

[Christopher Glynn:]

Sure. And then the corporate unallocated line looks like it had a lot of deal expenses in the first quarter. What's the outlook for that line for next year, and does the first quarter include some carryover from the heavy processes that you executed in the fourth quarter?

[John Humphrey:]

I don't expect there would be any carryover. Remember, we did adjust out the substantial by acquisition expenses in the fourth quarter for both Deltek and ConstructConnect. And so what you see there as far as the variance on a year-over-year basis is, frankly, our stock price is higher, and so our equity compensation expense is higher as a result. We expect that to be somewhere in the range of $140 million, the total for the corporate G&A line, about $140 million for 2017, reflecting the increase in equity compensation primarily.

[Christopher Glynn:]

Okay. Got it. Thanks.

[Operator:]

We'll go next to Deane Dray with RBC Capital Markets.

[Deane Dray:]

Thank you. Good morning, everyone.

[Brian D. Jellison:]

Hey, good morning, Deane.

[Deane Dray:]

Hey, you guys disappointed, you're missing all the fun snowstorm in the Northeast today?

[John Humphrey:]

Terribly disappointed. We got four inches of sunshine this morning here in Florida. So...

[Deane Dray:]

All right.

[John Humphrey:]

Sorry.

[Deane Dray:]

Great job. Maybe we could talk about the first quarter. The guide looks a little bit light. Give us an update how the quarter is tracking versus the year organic, 3% to 5%, and is there anything unusual in timing? You called out Deltek seasonally weak. Is there anything else you'd highlight?

[Brian D. Jellison:]

Well, I think that just because it is historically a little light in the first quarter, and now it's really strong in the second quarter, the rest of the year. So I think organic is, Q1 and Q4 would be 3% to 4%, and Q2 and Q3 would be 4% to 5% or 6% or something like that. So, for the year, we're like 3% to 5% with maybe a little hope for upside.

[Deane Dray:]

Got it. And then, it was interesting you called out that your mix today is 50% in software and network businesses. What do you see as the optimal mix for Roper over time?

[Brian D. Jellison:]

Well, I think, our focus would be to continue to compound the cash, right. So, the more we can grow in software and network businesses, the happier we are, because they just inherently are going to throw off more cash that we can reinvest for further compounding in the future than the products businesses. But our products businesses are about half of the EBITDA. Now a chunk of that, a notable chunk of that, is our medical products businesses. And then you've got the instrumentation businesses and you've got the oil and gas related stuff. We may enjoy a little bit of a cyclical spike on oil and gas, but it won't materially affect the balance of the company's EBITDA profile. Our businesses, as I said, you just look at the OP alone in the fourth quarter between Energy and Industrial is 30.5%. So we love the businesses. They are positive cash. They don't have much amortization in them, but moving the needle on compounding cash will come from software and networks.

[Deane Dray:]

Got it. And just one last clarification. I know you're not factoring in any of the potential changes in corporate tax. But for your medical products, are you considering any uncertainty in terms of ordering with uncertainty around the repeal or changes in the Affordable Care Act in terms of the outlook for 2017?

[Brian D. Jellison:]

Yeah. I'll let Neil comment on that one.

[Laurence Neil Hunn:]

Good morning, Deane. So the short answer is, we're not expecting much headwind at all, just like we didn't expect much tailwind when it came in. Majority of what we do is not procedure or patient driven. It's more elements that help the totality of the healthcare system do what they do. And so we have a lot of things that were consumed in a procedure than we would have been benefited and might have some headwinds, but that's not the nature of what we do.

[Deane Dray:]

That's helpful. Thank you.

[Operator:]

We'll go to Steve Tusa with JPMorgan.

[Charles Stephen Tusa:]

Hey, good morning.

[Brian D. Jellison:]

Hey, good morning.

[Charles Stephen Tusa:]

On albeit the Trump stuff, I'm sure you guys have done a little bit of analysis. You got, obviously, had kind of a bunch of different subsidiaries that kind of roll up into the total. So it's hard for us to tell, but you do have a lot of U.S. related revenue. So what kind of impact would it have on your tax rate, if you did have kind of a lowering to that 15% to 20% range? And then, I think exports are like 13%ish of your revenues. Is there a material import component that offsets that? It's the first question.

[Brian D. Jellison:]

So let's deal with the border tax side first. There is not much. There we do have some assembly operations in Mexico that we get subcomponents from, for one, two of our businesses. But it's not a lot. Most of our international businesses are selling globally and our domestic businesses don't export. I mean, they're really not domestic business, they're global businesses. The locus might be here in the U.S., but they have manufacturing operations outside the U.S. So and then – and they could ship for many of them. So I don't think the border tax would be a lot. We did sort of a back of the napkin kind of assessment about that would be. Probably 75% to 80% of our operating profit will be generated in the United States. So, if we're telling you about 30% blended tax rate, the U.S. tax rate of course is 35% and above, so you can kind of do the math on our net earnings number and look at 80% of it and then take a 20% reduction of that or a 10% reduction or whatever you think and then add back the increased cost of the border tax and net-net it would be quite a material increase in our cash.

[Charles Stephen Tusa:]

Right, right.

[John Humphrey:]

And some of that (38

[Charles Stephen Tusa:]

Yeah, yeah.

[John Humphrey:]

Right. So..

[Charles Stephen Tusa:]

No. There is a lots of...

[John Humphrey:]

As soon as we see a proposal, we can give you a much better answer, but the elements of exactly whatever tax change all this is headlines in the newspaper so far.

[Charles Stephen Tusa:]

Yeah, and Twitter feeds or whatever, your handles or whatever you call them. On the infrastructure side kind of same question, I guess sort of the same topic. Assuming – if they do something, I would assume that the kind of the tolling business would perhaps be exposed there with any other businesses there, they will be positively exposed to any of this infrastructure discussion that's out there. Again, there is no official proposal, but assuming they do spend on some of the roads and bridges and things like that.

[Brian D. Jellison:]

Well, I think that all of our professional services businesses, including these last two acquisitions; ConstructConnect...

[Charles Stephen Tusa:]

Right, right.

[Brian D. Jellison:]

...and Deltek could be dramatically benefited by the number of seats and the number of users that would want to get access to those technologies, particularly at Deltek with the Costpoint technology, which is ubiquitous for people that supply the government and that would be very helpful. In the tolling area, it's interesting. There is actually – we've gone through this huge technology transformation to our sticker tags away from what other people get stuck with with the plastic box from Austria. And that had a huge roll out in all of the big tolling stage. And so that's sort of behind us, that roll out, so you just have the maintenance, the maintenance is huge. The number of reorders, we're always amazed where will all these tags go. So it's good, but the project growth in infrastructure could well be in our trans-suite software and traffic management arena, that's really what the Saudi project is. And the electronic tolling project in New York, for instance, doesn't have – it's all electronic, so there is no tags on it.

[Charles Stephen Tusa:]

Right.

[Brian D. Jellison:]

So it would definitely help us, particularly in revenue, probably not help us as much as it would have historically in the margin where people are also using the tags, but that's – it would be favorable to us. And then I think if you get – you got the various elements that appear to be going through that would get us back into production around shale, we came down to $165 million in two years in Energy and Industrial. We won't go back up to $165 million, but we won't be going down, we might go up more than we think. So that's a little bit of a question mark for us.

[Charles Stephen Tusa:]

Right. One more question just on the first quarter following up to Deane's question. The 3% to 4% organic is solid. I guess their earnings number is a little bit below what I would have expected. So is there anything that kind of that you travel from the top-line to the bottom-line, whether it's acquisition charges that you know maybe people won't have in their models or mix dynamics. And anything there, corporate, that we have to keep in mind for the first quarter that stands out?

[Brian D. Jellison:]

Well, I think you just have the situation around, we got all the interest cost in Q1 for Deltek and its contribution doesn't come in as much until Q2 and beyond.

[Charles Stephen Tusa:]

Got it.

[Brian D. Jellison:]

So it's kind of tiny, right? But, in reality, first quarter guidance is about 22% of the full year guidance, and that's not that unusual. You would be aware that Q1 was 25% of the full year, right.

[Charles Stephen Tusa:]

Yes.

[Brian D. Jellison:]

So I think it's just an out of the box situation. And Q2 will be incredible for us.

[Charles Stephen Tusa:]

Yes. Okay. Well, it's helpful, you guys give, a lot of companies don't give the quarterly guidance. So it's helpful to level set people and get everybody on the same page. So I appreciate that. Thanks a lot.

[Operator:]

Our next question is from Robert McCarthy with Stifel.

[Robert McCarthy:]

Good morning, everyone.

[Brian D. Jellison:]

Hey. Good morning, Robert.

[Robert McCarthy:]

Obviously, you've just completed two very large deals, transformative debatably and you are digesting that. But maybe can you just talk about, maybe over the next three years to four years, what is your M&A outlook fire power? How are you thinking about it? How we should be thinking about it? Because, as you know, money never sleeps. And so, as good as what you've just done over the last four months, and the changes you've made to your reporting structure, clearly, investors remain focused on the continued compound nature of the company.

[Brian D. Jellison:]

So the – a few years ago, people would remember, I said we already know the next $5 billion we want to deploy, it's just a question of when it happens. So we've done that all and we've (43

[Robert McCarthy:]

Now, as you look at it, and this is a question that might be a little bit more for broader application than Roper. But, Brian, since you've been doing deals for a very long time and you historically worked at companies which maybe you had higher fixed cost assets and drove a lot of value through cost takeout. How do you look at the environment right now? If you're an acquirer and it's unclear given border adjustability and other issues, how you're going to get the cost synergies to kind of de-lever what could be ostensibly a high multiple, lower multiples? Now that's not your game anymore I understand, but I wanted to just get your view, do you think it creates a tougher cloud to your M&A environment for the standard acquirer, strategic acquirer in the Industrial space or how would you look at the M&A environment as being kind of from your perch?

[Brian D. Jellison:]

Well, fortunately...

[Robert McCarthy:]

Yeah.

[Brian D. Jellison:]

We look at it differently than hypothesis therein from our perch. If we look at M&A just sort of as a category of activity, the big question is, is interest going to be deductible in some kind of change in U.S. tax. So, if interest isn't going to be deductible, you can imagine what are the effects that has on private equity as we're thinking about what sort of multiples are going to put to work. So, if you're accustomed to putting seven times and eight times debt-to-EBITDA and getting a tax deduction for that, that gives you massive ability to compete with strategics. If you lose the interest deduction, your ability to compete with strategics goes down. If you remove one of the biggest acquirer of entities from the market, the strategics should have a field day. Now, that said, most of the multi industry people have very complicated import/export arrangement. So, I would imagine that they got a lot of issues with the border tax, painfully we don't. I think the M&A environment for us, as interest rates go up irrespective of whether you can deduct the interest, as interest rates go up, we're in a better position with each passing month that occurs because we have so much self-generated free cash flow. And if we do acquisitions with our own cash flow and lever of about three times debt-to-EBITDA, which is our model, we wind up with purchase powder requiring very little, if any, new debt of about $1.5 billion a year. And that's why I'm very comfortable saying I think over the next three years or a month or two beyond that we'll deploy $4 billion as it's easy for us. We're going to do it in acquiring things that are going to compound their cash. And so we keep getting more cash to reinvest as opposed to having to do big debt structures. So that'd be my best answer.

[Robert McCarthy:]

Thanks for the color. Appreciate it very much.

[Brian D. Jellison:]

Okay.

[Operator:]

We'll go to Joe Giordano with Cowen.

[Joseph Giordano:]

Hey, guys, how are you doing?

[Brian D. Jellison:]

Hey. Good morning, Joe.

[Joseph Giordano:]

Going back to TransCore, just curious, obviously, in the infrastructure package from the federal government be positive, but what are you seeing out there just in terms of things that have passed that like the state and local level already, and there is some big packages in California, Washington state looks like California DOT is set to increase their budget if they get their legislation passed. So, just curious what that forward kind of outlook is there as well?

[Brian D. Jellison:]

There is a lot of bid activity and there is a lot of sweat equity that goes into things. I mean we sell the Title 21 tags into California. I mean, I mean I would do (48

[Joseph Giordano:]

And then, shifting over to Neptune, we haven't really spoken much about that. What kind of – what do you see in commentary on just the muni sector in general and levels of spending there? I think there has been a little bit of a mix signal so far from people in that space across the last couple months. So just curious what you're seeing there.

[Brian D. Jellison:]

Well, we haven't seen any fall-off at all in Neptune. It's probably going to grow at mid single-digits in 2017, and it continues to have good cash performance. So there's a little bit of headwind for people that don't, aren't vertically integrated like we are around copper pricing. So, I think our competitors'll probably struggle more than we will. We're in good shape.

[John Humphrey:]

(49

[Joseph Giordano:]

Yeah. Absolutely. And just last one for me on M&A. You said that you already know, laid out the map of where you want to spend your next $5 billion, it's just a question of when they pop free. Now, given like where you guys are right now financially, if one of those larger ones was to pop free soon, would the leverage today preclude you from doing something like that, or would you consider equity if it was something sooner?

[Brian D. Jellison:]

I think that would just always be related to the quality of what it was that we saw. And the things that we are sort of hoping to acquire over the next three years, none of them are available today at noon, so it's not in a situation that we have to really be bothered with. But, we continue to monitor everything and have routine conversations. If you get the share price up here to what it's really worth given all this cash, a consideration, I suppose, but I wouldn't issue equity today.

[Joseph Giordano:]

Sure. Okay. Thanks, guys.

[Operator:]

We'll go to Richard Eastman with Robert W. Baird.

[Richard Eastman:]

Yes. Good morning.

[Brian D. Jellison:]

Hey.

[Richard Eastman:]

Brian, when you look at the current portfolio of businesses at Roper, how do you think about core incremental margins on the current businesses? I would think with as much software as you have, the core incremental must be – is it 45%-ish? And then it strikes me that given the Energy business is on a bounce, now, again we're not expecting that in 2017, but I remember the decrementals there have been reasonably high. So, would you look at the current business and kind of step up into that core incremental EBIT potential of 45%, and is that a fair assumption here?

[John Humphrey:]

So, I think the way to think about this is it depends on where it comes from, Rick. I mean, you're absolutely right. To the extent that we have more growth from the software businesses, that will come in at 50%, maybe even above that. Across the enterprise, I think what you will see is that we'll have somewhere between 35% and 50% to 55% incrementals depending on where it comes from. And I would say that the decrementals that we saw on the Energy side, they may be (52

[Richard Eastman:]

But that's – maybe that's the point, that obviously taking the cost out on the way down, kind of managing the decremental does potentially give you more upside as you lever off of that cost base. Is pricing – and again, I would think in the current portfolio, do you have a price capture number for 2016 and has that...

[John Humphrey:]

No.

[Richard Eastman:]

Okay. Has your pricing flexibility, though, improved with this portfolio as well?

[Brian D. Jellison:]

No. We don't have standard products, right? We're an application oriented company, so you don't call up and order the same thing you bought last year. You might have recurring revenue, there may be some built-in maintenance fees associated with batter and SaaS. There may be some annual escalation. But, we're not a product company with standard products. Even the products that we have are pretty unique products and so they don't tend to have a standard price list that people can work off of. There is a few exceptions to that, but not many.

[John Humphrey:]

And the other thing that with – and what we do look up with respect to price is really what's the value capture that we're able to get inside the niche markets and applications that we have. If you just look at the Industrial Technology segment by itself, the gross profit margin I think is the thing to look at when you think about value and price and cost and things like that. And our Industrial Technology business is actually a 50.6% gross margin in 2016, up 80 basis points from where it was in 2015. Energy Systems & Controls still clicking along at 57% gross profit margin. So, I mean folks who try to say price as a discrete measure, just follow their gross margin and see if any of that price really shows up there, that's how we think about it rather than having standard price list and what a nominal price change might be advertised at. The proof is in the gross profit margin.

[Richard Eastman:]

Okay. And then, John, just one last question. As we move forward into 2017 here with really more of a cash earnings number, is it the intent to report EBITA by segment or will we continue to report a GAAP profit by segment and then add the amortization kind of consolidated?

[John Humphrey:]

I think what you'll see us do is move to a segment profit description, which would add back the non-cash purchase accounting related amortization in order to be able to have the same comparability for all the same reasons at the total.

[Richard Eastman:]

Okay. Okay. Thank you.

[Operator:]

And we'll go to John Quealy with Canaccord.

[John Salvatore Quealy:]

Hey, good morning. Thanks for squeezing me in. First question on Deltek. In that, RF & Software guidance, would Deltek be right in line with that mid single-digit organic growth or perhaps are they a little bit more in the cash flow side, so perhaps a little bit less organic growth, but better cash flow margins vis-à-vis its peers in that segment?

[John Humphrey:]

Yeah. So, of course, Deltek is not included in our organic results or forecast for 2017, that will all be acquisition-related. On an apples-to-apples basis, for sure we have to take what their prior results were in the – with a little bit of grayness of salt. But, we expect that we are a mid single-digit grower. I think they're reporting something a little bit higher than that, but we expect mid single-digit organic growth on a long-term basis out of that acquisition.

[John Salvatore Quealy:]

Okay. Great. And then, quickly, lastly much more speculative question, but if the tax structure changes, and I know you guys are loathed to sell major assets, given low tax basis. But, would you consider given the right tax regime, letting go some bigger assets perhaps on the fixed cost side? I'm thinking Neptune, for example, as a core asset given the market seems to be giving these types of water companies good multiples. Would you consider selling a bigger asset if the cash return would look more promising? Thanks, guys.

[Brian D. Jellison:]

No. We'd expect the market is smart enough, we believe it is to get the value for us – for Neptune being worth more than any of the other water companies, it's imputed in our price. There could be other businesses we have that are different. Neptune is very different. We're going to move that increasingly into technology and all kinds of exciting things going on there, which we're not going to talk about openly until it's too late for people to respond. But, I will say, when you look at some of the deeper product businesses, the legacy product businesses or some of the instrumentation businesses, you can see something happen there, but people would have to basically pay our tax. So, if the tax burden goes down to the acquirer then, hey, maybe there are more areas, I don't know.

[John Salvatore Quealy:]

Perfect. Thank you, guys.

[Operator:]

That will end our question-and-answer session for this call. We now return back to Robert Crisci for closing remarks.

[Rob Crisci:]

Well, thank you again everyone for joining us and we look forward to speaking to you in a few months.

[Operator:]

That will conclude today's conference. Thank you for your participation.