Roper Technologies, Inc.
Q1 2009 Earnings Call Transcript

Published: 26 Apr 2009

[Operator:]

Roper First Quarter 2009 Financial Results Conference Call will now begin. I will now turn the call over to John Humphrey, Chief Financial Officer.

[John Humphrey:]

Thank you, Anthony, and thank you all for joining us this morning as we discuss the results of our 2009 first quarter. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer for the company, and Paul Soni, Vice President and Controller. Yesterday afternoon, 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 available on our website at www.roperind.com. Now if you will turn to slide two, we start with our Safe Harbor statement. We will be making forward-looking statements during today’s call, which are subject to risks, and uncertainties as described on this page and as detailed in our SEC filings. You should listen to today’s call in the context of that information. And, now if you please turn to slide three, I'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our participants. Brian?

[Brian Jellison:]

Thank you, John. Just a word here, we will try to move a little bit quickly this morning. I know that a number of our analysts have a competing call here at 10

[Operator:]

Thank you. We will now go to our question-and-answer session portion of the call. (Operator instructions). We will take our first question from Christopher Glynn at Oppenheimer.

[Christopher Glynn:]

Thanks, good morning.

[Brian Jellison:]

Good morning Chris.

[Christopher Glynn:]

So in the press release you mentioned that the orders and quote activity picked up in March nearly, I was just wondering if that is largely on normal seasonality or little muted seasonality relative to a normal year?

[Brian Jellison:]

Well, one of the things that has been odd in the last three quarters is that every quarter has started of sort of okay not spectacularly in the first month. In the second month, it has been exceptionally weak, and then in the third month, it has been pretty good, and on balanced should come out okay. We're seeing a little more sustained rhythm here since the end of February so we feel a little bit, a little bit better. March was up high single digits from the January February average across the board.

[Christopher Glynn:]

Okay. And just related to normal seasonality, could you relate it to that at all?

[Brian Jellison:]

No. Especially not on orders. I mean orders are not a wonderful indicator in terms of activity here because we only book orders that are going to be shipped within 12 months and frequently the lead times on things that confuse the issues. So I don't know, John, if you want to add anything to that.

[John Humphrey:]

Yes, that's true. Actually our order rate really doesn't vary dramatically in most normal circumstances. The big surprise was a little bit with February being as weak as it was and that is why as we looked at much, we didn't just say, okay, it was up dramatically from February, so we feel great. We also kind of looked at the January February run rate and also against the last five months run rates. So we've looked at this a number of different ways and deconstructed it, and as a result do feel good that the second quarter is going to see some sequential improvement.

[Christopher Glynn:]

Sounds good. Thanks.

[John Humphrey:]

All right.

[Operator:]

We will take our next question from Mike Schneider at Robert W. Baird.

[Mike Schneider:]

Good morning guys.

[Brian Jellison:]

Good morning Mike.

[Mike Schneider:]

Maybe first we can just approach Neptune, can you give us a sense of what the quoting activity is, and you mentioned it is sequentially. Are there awards still occurring at this point, or do you see municipalities still sitting on at least a bid and say collect, and things being pushed out in terms of deployment. And then also just a follow up on Chris' question about orders specifically for AMR projects. You said they are sequentially stronger, did you book something since quarter and?

[Brian Jellison:]

John, do you want to comment on that or?

[John Humphrey:]

Sure. In terms of the deployment, the deployments that have already been won, and so orders already received, are kind of rolling out as expected. I want to get to that point of course all the activity is lined up and the municipality generally has their work schedules and they are continuing to roll that out without very much change at all. Clearly the decision-making process has been slower than it was one or two years ago as many of the municipalities are going through their own sets of confusion regarding what their funding and tax basis are but also whether anything is going to be flowing from maybe a federal government level. But all of that noise in the system has made the decision-making a little bit slower. I mean we are actually not in a position to be able to talk about anything that we may have won recently. As you know, Mike, with your close contacts, those folks don't like it when theirs suppliers talk about any orders before they roll out those.

[Brian Jellison:]

I think what is important though just, Mike, I want to add, the investors then are saying, what is happening. When we say stronger sequentially, what is going to happen here is, we've had kind of the big trough negative is now behind us with Neptune and without revealing very strong statistics we would expect any negative Vs we have now to be contained in the high single digits to maybe 10% level of the balance of the year, because to the degree there is de-stocking in Roper it would come really from Neptune. That has clearly occurred in the distribution channel and so guys who would buy X tend to buy half of X because they can get immediate turnaround from Neptune in a matter of days. And so our ability to flex in the short run has made things a bit more sweet. We had an in-depth review of that with them and let's say that they are down substantially more than 10% in the first quarter and aren't going to be substantially down more than that for the rest of the year.

[Mike Schneider:]

So there is sequentially stronger comment for Neptune specifically is related more so towards the distribution side rather than the project deployments?

[Brian Jellison:]

Well, normalized activity, I think what – the thing – and we certainly didn't miss it, I just think normally new housing starts don't have squat [ph] to do with this business because it is all the installed base. When you take away sort of a million new housing starts with the kind of share we have and you figure that somewhere between $50 and $100 per unit, that has been a problem. But we think that that has now finished nesting its way through the system, and so that is why we – I mean we are more than confident about Q2's improvement in Neptune.

[Mike Schneider:]

Okay, thank you, and impressive performance on the margins guys. Thank you.

[Brian Jellison:]

Thank you.

[Operator:]

We will take our next question from Matt Summerville at Keybanc.

[Matt Summerville:]

Just two quick ones here is I think, Brian, in your prepared remarks, you mentioned that you are feeling better about the Zetec's performance in energy in the back half of 2009. I guess in the latter half of 2008, you start to see those projects pushed out, I guess, how much from a regulatory standpoint, because that would give us the confidence that they won't get pushed further into 2010?

[Brian Jellison:]

Yes, absolutely. And furthermore the naval activity that we have had right virtually nothing of is truly back and those commitments are usually very firm and they really give us a spike up in the second half.

[Matt Summerville:]

And then just I may have missed it if you talked about it, with PAC, Antek and Dynisco also sticking with energy, what are your sequential expectations there? I guess have you seen customer utilization rates improve and shutdowns become less in magnitude as we sit here right now?

[Brian Jellison:]

I would say that we haven't seen any improvement. We would be worried that you are going to – I don't think we think we're getting any order improvement although we think that we should. We've got a pretty strong challenge to our leadership team. Actually at PAC, we have brought in a new president, and he has been on board now for three or four weeks. He is a Dutch guy, speaks French, speaks German, he's just been around trying to kind of redress our focus on who we are and what we're doing. I think candidly PAC has seen some opportunities in industrial arena, try to go after them, those have produced nothing of real consequence. So we feel quite good about his breadth of experience, comes out of a large company, was running a private company in Australia, very much a global guy, exceptionally strong person that we think will do a better job than what we have had in the recent past. And so we're kind of counting on him. And we know the people there are looking forward to Jerome's [ph] expertise and activity and already have stepped up to the place somewhat. So part of it is just our own effectiveness that we think is going to be better and the fact we know our margins are going to be better. And it is not even a challenge to know that our margins are going to be better.

[Matt Summerville:]

And then just sticking with energy with CCC I guess, what have you seen in that business that is yielding the better performance relative to some of your other energy businesses, and I guess similar to your comments you made with the businesses I just asked about I guess how do you feel about the second half of the year in CCC and visibility there because that tends to be a little more project oriented?

[Brian Jellison:]

Yes. In CCC, we expect a very strong Q2 order flow. They have usually strong Q2 seasonality anyway. Lead times at CCC are much longer than most of our businesses, more like the tolling and traffic businesses, where you might be six months, nine months out. They have a high degree of confidence at the start of a quarter as to what they're going to do. We pretty well know that bookings in Q2 would be better than Q1. I think that everything they're doing related to the turbine control technology is attractive. On the other hand, as you get to the fourth quarter with them, we worry a bit about the power generation side of those businesses. We have got a great leader there, who has certainly done a wonderful job in getting people focused on rightsizing here if they have any challenges down the road. They are going to have a solid year, I mean close to a record Q1. So we feel okay about that.

[Matt Summerville:]

Thanks Brian.

[Brian Jellison:]

Yes.

[Operator:]

And we will go next to Alex Blanton at Ingalls & Snyder.

[Alex Blanton:]

Hi, good morning.

[Brian Jellison:]

Good morning Alex.

[Alex Blanton:]

I would like you to comment on the following observations that this recession ought to be quite good for Roper in two respects and actually the worse the section turned out to be, the better for you. One is that, it is very harmful to a lot of your competitors who aren't as well run or well financed as you are, so you should be getting a lot of share in some of your businesses. And if you could give us some examples of that, it would be useful. Secondly, the prices of the companies you want to buy should be coming down quite a bit, and could you comment on that?

[Brian Jellison:]

Yes, we could. We agree they should be coming down a bit. We would like to get sellers to recognize how much more they should come down. First I have to say the first quarter didn't feel as good as you described, but we do believe everything went really well. On the customer activity, you're absolutely right. We compete in a lot of small markets where usually we are the number one player. People at the trench have great difficulty. You just saw last week the merger market and Debtwire communications perhaps on Sun Capital writing their investment in Mark IV off to zero, and the potential filing of bankruptcy for all of those assets, which would include of course the Easy Pass system in New England which is currently under bid and which we are a bidder along with them. So there are several things like that that are already in the early stages and a whole lot of other things that we are aware of that are going to come to fruition. So we would agree with you that that is good. The other thing that happened in our in-depth multi-day review with people is that because we don't have any layers here, when we talk about how our business is doing like compressor controls, it is because we are talking to Chris Krieps who runs it and his controller in the same meeting with everybody else. So there's nowhere to hide here and by the same token we are right out there with the rest of them. And what we're seeing is a lot of customer inputs about how they want to look coming out of the recession and we're hearing a lot of things around channel shifts and a lot of things around integrated nature of – if they were buying some portion, they would like to buy more of that portion going into an OEM activity, or maybe they are going to be more willing to outsource a larger portion of what they do. And coming out of the recession, I think the purchasing decisions from end-users is going to be surprisingly different than what we hear a lot of our competitors saying. So that is why we have actually increased our investment in R&D and product launches so that we don't miss the opportunities that we think we will see in 2010 and 2011.

[Alex Blanton:]

Okay, thanks. And follow question is that, there has been some comment on the Street that perhaps your guidance is somewhat unrealistic and that you will be – there has been a speculation that you will be reducing it later on in the year as a result of economy. And related to that, you said that you're not going to say that the economy bottomed in the first quarter. When do you think the economy will start to recover in terms of when you're looking ahead at your guidance, what are you assuming about the economy, or is that even a factor? And how confident do you feel in the guidance that you're giving us for the second half?

[Brian Jellison:]

Well I think in terms of level of confidence at $2.70 to $2.80, looking at the sort of $2.70 midpoint, we feel quite confident about that frankly. I think the thing that is frustrating is that the stimulus program and government activity has gotten a number of people in our end markets who say, wait a minute, wait a minute, maybe we could call this something else, and it'll be treated as a shovel ready project, and I won't have to spend my budget money on that, and that has hurt our Q1 orders in ways that people wouldn't have foreseen. We have one example. I don't want to say where it is, but it is a very important project for us. It is already previously funded, but no orders are placed. And the orders will be important because the municipality and state involved is moving stuff around here, and that's been a nuisance; I'll tell you that, that has been a nuisance. Orders wouldn't have looked as weak if some of things hadn't gotten in the way. I think we have a lot more visibility around how we think we will perform over the balance of the year than we do the general economy and I would say that we are probably more pessimistic about the general economy than a lot of people who we run into. And I think part of the reason that we took the guidance down to $2.60 to $2.80 from $2.70 was looking frankly at what everybody else was saying and looking how other people have reported and the depth of how far down their organic Vs are. We are down 10.5% and looked like the tallest midget amongst most people. So you have – we don't want to be ridiculous about that. I think people that are betting their ranch on we are going to have terrible 2009 are naïve, don't understand who we are, can't keep abreast of the fact that 36% of revenue is in RF when just two years ago was 27%. So we are a very different company and we have transformed at a pace of change that some people understand and others don't.

[Alex Blanton:]

Okay, thank you.

[Brian Jellison:]

You are welcome.

[Operator:]

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

[John Humphrey:]

Okay. Thank you, Anthony, and thank you all for joining us this morning. And as always we look forward to talking to you in the next three months.

[Operator:]

This does conclude today's presentation. Thank your everyone for their participation.