Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

B. Jellison - Chairman of the Board, Chief Executive Officer, President and Member of Executive Committee

John Humphrey - Chief Financial Officer and Vice President

Analysts

Richard Eastman - Robert W. Baird & Co. Incorporated

Terry Darling - Goldman Sachs Group Inc.

Alexander Blanton - Clear Harbor Asset Management

Wendy Caplan - SunTrust Robinson Humphrey, Inc.

Matt Summerville - KeyBanc Capital Markets Inc.

Jeffrey Sprague - Citigroup

D. Mark Douglass - Longbow Research LLC

Deane Dray - Citigroup Inc

Christopher Glynn - Oppenheimer & Co. Inc.

Roper Industries (ROP) Q1 2011 Earnings Call April 26, 2011 8:00 AM ET

Operator

Good day, everyone, and welcome to today's Roper Quarter and Year Financial Results Conference Call. Today's call is being recorded. I will now turn the call over to Mr. John Humphrey, Chief Financial Officer. Please go ahead.

John Humphrey

Thank you, Melody, and thank you all for joining us this morning as we discuss the record results for our first quarter 2011. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; and Paul Soni, Vice President and Controller.

Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. In addition, we've 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'll please turn to Slide 2. We begin with our Safe Harbor statement. During the course of today's call, we will be making forward-looking statements, 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'll please turn to Slide 3. I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we'll take questions from our participants. Brian?

B. Jellison

Thank you, John, and good morning, everyone. We'll take you first through the Q1 financial results in detail, and then we'll look at the segment performance and the outlook for Q2 and the rest of the year. I'll talk about raising our guidance and then sort of summarize the quarter and take your questions.

First slide here is the financial results. You can see we achieved a record, all-time record for Q1, in orders and sales backlog, net earnings, EBITDA and pretty much every other measurement you can imagine. The thing that was particularly gratifying was our book-to-bill ratio was 109%. Generally, we're at the sort of 97% to 103%, so to be at 109% is very encouraging for the remainder of the year.

Organic growth was really quite spectacular, we thought, with 20% order growth. And all 4 of the segments had double-digit order growth and revenue growth, which you can see organically was 16%.

Gross margins increased to 54.3%, so any fear of input costs creating any difficulty at Roper was not well founded. EBITDA margins are up 310 basis points to 27.4%. Remember with us that's mostly EBITA. There's not much depreciation here.

Our balance sheet was enhanced as we continued to pay down our revolver, and we ended the quarter with an all-time record backlog of $851 million in revenue, which is 43% higher than the backlog at the end of the first quarter of last year, up $257 million. Now we certainly, when we established our guidance for Q1, thought we would have a strong start, but this is even better than our best expectations.

Next slide. Our income statement. Here you could see the bookings at $702 million, up 24% in total and 20% organically. Net sales of $645 million, up 21% in total and 16% organically. Our gross profit went from 52.3% the first quarter of last year to 54.3% here, an increase of 200 basis points.

Our operating income was up 41%, that went from 18.8% last year to 22% this year, so that's really quite outstanding leverage. In fact, we'll talk a little bit more about our leverage on the variable contribution here for the revenue.

Our interest expense was basically flat. The tax rate was also quite similar to the prior year and that produced net earnings, up 49% to $89 million from $59.7 million last year and a diluted earnings per share number of $0.91 versus the $0.62 GAAP number from the prior year.

On the next slide. On the asset velocity, while the absolute amount -- the dollar amount of inventory receivable was up a little bit, as a function of the revenue it continues to decline. You'll see in the first quarter our inventory was 7.7% of revenue, down from 8.2%. In the prior year, our receivables were down to 16%, a pickup of 50 basis points from the 16.5% the prior year. And our payables and accruals or liabilities there actually increased to 16.1% from 15.8%. So when we total it, at the end of last year, we were 8.9% of sales, and this year it's down 130 basis points to 7.6% of revenues. So year-over-year, we see continued improvement in our asset velocity.

Next slide. We ended the quarter with a really strong balance sheet. Cash was $261 million. We paid down the revolver, so there's quite a bit of the revolver left. When you take the revolver and the cash together, we wind up with $813 million of available liquidity. And of course, we'll have very strong cash in Q2 and throughout the rest of the year.

Our net debt is down to $980 million, and you can see that gives us a net debt-to-EBITDA ratio on a trailing basis of only 1.4x, and our EBITDA will continue to expand rapidly throughout the year on a trailing basis. Our EBITDA-to-interest coverage is already at 10.2x. So these ratios are extremely strong and they really enhance our liquidity and our ability to use the balance sheet in the quarters ahead.

Next slide. Here we're going to look at the individual segment performance and the outlook.

Next slide. Order strength, as you can see, was really spectacular. Industrial Technology was up 30%, RF Technology was up 30%, Energy Systems & Controls 16% and Medical & Scientific up 15%. The book-to-bill ratios were very strong all the way across, anywhere from 118% in Industrial down to 103% in Medical & Imaging. We had double-digit organic growth in all 4 segments for revenue as well.

Next slide. If you look at RF Technology, you can see that orders reached $217 million in the quarter, up 30% from the prior year and 18% organically. Our sales were $200 million, which was up 23% year-over-year and up more than 10% organically. Our gross margin expanded to 51.4%, which was up 170 basis points, and our operating margin was up 270 basis points. We finished the quarter with an EBITDA margin of 30.7%, which was up 450 basis points from the first quarter of 2010. So you see very strong EBITDA performance with our iTrade business contributing a substantial amount of noncash amortization to the EBITDA measure here.

In the first quarter of 2011, we had very strong tag sales for both Florida, Oklahoma and Dubai. In fact our Amtech business was up over 40%. A significant growth in our Gas Automated Meter Reading business with the Gaz de France project and quite substantial increase in the U.K., our Water Network Metering and Monitoring business as those were up well in excess of 40% as well. And in CBORD, we had an expanded subscriber base. We won in another major university in Miami, a university in Ohio, a big security win there, displacing a longtime occupant in that role.

In Q2, what we'd see is that the Gaz de France AMR project ought to continue at similar levels to Q1. We'll have a very strong seasonal Q2 because CBORD winds up with their annual renewals following into the second quarter, so we should see double-digit growth there.

Our Houston METRO project appears to be on schedule, and we ought to see what we have in our forecast for the second quarter. And iTrade has won a very, very significant opportunity to launch a system for a major European food retailer that we can't yet announce, but the launch is underway and the integration will begin within the year.

It's very encouraging for us to see the direction at RF Technology because last year in 2010's first quarter, our organic revenue was down 12%, the second quarter it was down 7%, third quarter it was down 1%, the fourth quarter it was up 6%. So we're out of the gate here with more than a 10% organic gain here in the first quarter, and we expect the balance of the year is going to give us double-digit growth throughout the next 3 quarters. Q2 a little lighter, Q3 much stronger and Q4 similar to this quarter.

Next slide. In Industrial Technology, just absolutely spectacular performance here. Our orders were up 30% to $201 million. Of course, that's all organic. Our sales were up 26%, aided by about 60 basis points of FX, so you could round organic down to 25%. Gross margins were at 50.4%, so they've continued to expand, and their operating margin was up 370 basis points to 27.2%. EBITDA in Industrial Technology finished the quarter at 30.6%.

Virtually, everyone there had a very strong quarter. Our Fluid Handling businesses that deal with gas and exploration with the new products we've launched in the last year and half just are having extraordinary performance. These businesses are nearly up 50%. The Material Testing business we have as we can to get better capacity utilization around the country is growing very rapidly.

And we actually had double-digit growth in our U.S. business in Neptune and then still more growth as a result of Canada continuing to ship in the Mexico City order we announced in the fourth quarter. So Neptune had a very strong Q1, and we expect that to continue.

In Q2, the backlog at our Fluid Handling businesses that are offering Cornell Pump will assure double-digit growth in the second quarter. The Toronto project installation phase is going to actually ramp up in Q2, although because there's a lot of labor in that it comes in at the expected lower margins that we have there.

End markets remain very strong in all these Industrial categories, and the operating leverage that we get is continuing to drive margin performance. You can really see just how effective we are when you look at the spot price for copper. In the first quarter last year, it was $3.55. Spot price this year is $4.30 and yet our margins expanded across the board whether they're gross margins, operating margins or EBITDA margins.

Next slide. The Energy Systems & Control segment. It continues to perform well. Here, orders were up 16%, all organic. Sales up 23%. Gross margin expanded quite a bit from up 350 basis points to 54.1%. And the operating profit margin increased 450 basis point. You might remember we were somewhat disappointed in Q1 2010 with the operating margin. Got that corrected in the second quarter, and this shows the kind of firm, disciplined approach to what we needed to do after that first quarter of last year. And that certainly supports this 450 basis point improvement in OP. EBITDA margins here were about 26%.

Again you can say exactly the same thing, the same words that apply to Industrial Technology: broad-based strength across all businesses and end markets. Everything here is really doing exceptionally well. Very dramatic growth in our Diesel Engine Surge Protection business. We almost called it explosive growth, but thought that might scare people. That business is up nearly 40% this year. Industrial end market growth continues to drive our Sensors business as capacity utilization back in the latex and rubber industry looks very good and then equipment sales to measure the output of those things were up sharply. And all of our Energy Lab Equipment businesses are doing okay as we've finally got a little bit improvement in both refining and petrochem markets.

In the second quarter, the end market dynamics we think will continue to be strong. Our backlog is really quite substantial in our Compressor Control business, which will start to drive better Vs here in Q2 and particularly in the second half of the year. And the margin expansion we think will continue to be driven just by the operating leverage as sales increase throughout the year.

Next slide. Here's the Medical & Imaging segment. Orders were up 15%. Tiny bit of FX there, so organic it was 14%. Sales were up 12%. The gross margins here, 62.8%, up 330 basis points. And our OP was up to 24.1%. EBITDA in this segment is 29.1%, so EBITDA margins increased by 110 basis points.

We've done quite a bit of investing in the first quarter in our Verathon business. We're launching 2 new products, 1 is called Velaport [ph] and that has had us incur some growth expense in Q1 and that will continue a little bit into Q2 as we launch all that collateral literature and the various programs and held a sales meeting in Q1 to kick that product off along with some other things we're doing as well.

Medical remains strong on consumables, double-digit growth in all these businesses in our kidney dialysis application for our Dosage Delivery Pump business continued to be a double-digit grower. Very significant order growth in our high-end imaging cameras and filtering technology. It was the growth star of the quarter as we looked at the filters for electron microscopy being up very dramatically.

In the second quarter of 2011, we see Medical continuing to grow at double digits as we get continuing adoption rates for GlideScope and Velaport [ph]. No new products have been launched within this year. And the Scientific Imaging has a really quite substantial backlog that will support a strong Q2.

The Japanese supply risks have proven to be less difficult than what we feared on certain high-end chips that are made very specifically for us. We've kind of dealt with all those issues and feel quite good about it. The only thing for Japan is that a substantial portion of our Camera business goes into the Japanese market. It represents a disproportionate share compared to the rest of Roper.

Our total sales into Japan are in the neighborhood of 3% of revenues, so it's not something that's overly difficult for us that could depress revenue growth for the camera portion of the business in the next quarter or 2. But then that will just fill the backlog. It will be good news for us later.

Next slide. Here, as we look at the guidance, we're going to raise the guidance.

Next slide. We were at $3.82 to $4.02 when we went into the year. We've raised the base by $0.15 and the top end by $0.10 to take us to $3.97 to $4.12. The midpoint of that is more than a 20% increase over last year's $3.34 on a GAAP basis. And in the second quarter, we're at $0.95 to $1.00, which is quite a sharp increase over last year's Q2 performance.

Basically, the sales we expect to have, kind of mid-teens organic growth in the second quarter and the second half of the year. Probably in the kind of high single digit, 8% to 10% or 11%, so the full year will be double-digit organic growth.

I guess the next slide would be the -- well, we're still reaffirming that cash flow would be in excess of $550 million, so that -- you can imagine the next 3 quarters will be quite substantial in terms of operating cash flow will generate.

In quarter 1 summary, the next slide. All-time record there in Q1 for order sales backlog, net earnings and EBITDA. Gross margin demonstrated that we didn't have any difficulty with input costs at 54.3%. Operating margin is up 320 basis points to 22%. That's leverage of 37%, by the way, on the OP line. And our EBITDA margin is up 310 basis points to 27.4%. It gives us a leverage of 43%. At 43% leverage, of course, benefits from iTrade with its amortization.

Organic growth was 20% on orders and 16% on sales. The $851 million backlog -- boy, I can remember when our total sales for the year were $500 million. So being up 43% over the prior year gives us a flood of optimism for the rest.

Most importantly, is everything really performed well. If you look around, you can only find 2 or 3 things, which are quite small in their scope that aren't really doing exceptionally well. So we raised our guidance up to $3.97 to $4.12 and certainly our position for another record year at Roper.

And with that, let's open it up to questions, John.

John Humphrey

Okay, Melody, we're ready for the Q&A part of the call.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to Jeff Sprague with Vertical Research Partners.

Jeffrey Sprague - Citigroup

Just a couple of questions. Brian, the tone of your press release sounds a little bit more optimistic on kind of the availability of deals or maybe reasonable properties at reasonable prices. Could you elaborate on that a little bit, and kind of talk about the pipeline?

B. Jellison

Well, I would say that there are a lot of opportunities. There are fewer that are reasonable. But there are quite a lot that are relatively reasonable. So we're pretty encouraged by the transactions we have and the people we're talking with on this. In the same venue, somebody called me last night from Europe about a transaction that people think we should be interested in, which we never would be, but bragging that they were going to get a debt staple of 6 3/4 on this transaction. So I mean the frothiness and lack of discipline around debt being applied to sales processes is pretty much back to the status it's ever been. So you do want to be careful about what it is you're doing. But we have more than enough really outstanding opportunity to execute over the next 12 months. So we're very encouraged. I would say that the things that we're doing, we like as much as the transactions we've done recently with United Toll and with iTrade and with Verathon, so I think there's exciting days ahead.

Jeffrey Sprague - Citigroup

And to go to iTrade, if you wouldn't mind, you said you couldn't elaborate too much on this possible European project, or it sounds like it's not possible. It sounds like you've booked it. Could you just speak a little bit to -- is the scope of that job different than what they've done before? Really, the essence of my question is as you've brought iTrade into the portfolio, are you finding ways to coordinate with some of the capabilities elsewhere in RF? And even if it doesn't apply to this particular deal, maybe you could give us a little color on that.

B. Jellison

Well, those are kind of 2 totally different things. So let's first, just on this European thing. We just aren't at liberty to name a name, but it would have such a compelling name that you're thinking of it domestically. It'll be like saying well I got Kroger or I got Wal-Mart or something like that. It's a very, very large significant pan-European opportunity. And it will take us a couple of years to do everything we're going to be able to do with them and a lot to build that opportunity and then later analytic opportunity with that. So we're really excited about that. It's 1 of the things we were really hoping we'd able to bring into the wheelhouse. And we have -- we're making some growth investments in that because we have to increase our server space. We have to have specific things in Europe for these people to access. In terms of other opportunities within Roper, we have opportunities both in freight matching and in CBORD around menu planning and nutrition information, which we continue to work on. We've had some -- they're not cross-selling, they're technology-sharing opportunities for applications. And we've had important household names in the food industry. And just recently in Miami, Florida extensive program, and we're going to continue to do that throughout the year. So yes, I think we will see some -- I think most of the sales will accrete to iTrade, but some may accrete to other things within the "software as a service" platform we're building within RF.

Jeffrey Sprague - Citigroup

And just 1 other if I could, and I'll pass it on. Neptune did sound like it was very strong and you cited U.S. Is that some fresh penetration in places, or is that business becoming mature enough now that you're seeing some replacement activity? Just a little color there, please.

B. Jellison

Well, it was up about 20% in the U.S., so we thought we would just kind of comment on that because other people were wondering about people gaining share at our expense. It never happened. Isn't going to happen. And all you got to do is look at the other people in Q1 and look at us. So this is the best premier business in the world than what it does. I would say the markets are fairly mature, certainly held back dramatically by the lack of housing starts. My goodness, if we had any housing starts, you'd think how much more organic growth we would get back in that business. It's just well positioned with the right sort of hybrid ability to deal with fixed network, so we're mobile in any form of integration and migration. There's another thing that's emerging that people haven't paid enough attention to and that is that we have the only U.S. lead-free water meter. Period. End of discussion. If anybody ever reinforces buy American or says I want lead-free water meters, which is a mandated requirement in the coming years, we're the sole sourceability to do that. Somebody is making lead-free and lead in the same factory in Mexico, I hardly think it would qualify as buying American lead-free-only water meter. So we're very proud of Neptune. It's a wonderful management team. They're very dedicated. They're working a lot on forward technologies. And you know, we may make further investments in that space to help them.

Jeffrey Sprague - Citigroup

Thank you very much, guys.

Operator

We'll hear next from Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer & Co. Inc.

Thanks. Brian, just wondering on the Imaging trends. The Verathon seemed to be in a pretty strong ramp throughout last year. Just wondering if those initial product lines are more approaching run rate? And if you could add any color on what the commercial opportunity might look like for some of the new product launches there.

B. Jellison

Yes, let me ask John to talk to that. I guess John really focused on Verathon here.

John Humphrey

Sure, yes. I'll go ahead and speak to that. The adoption rates, particularly for GlideScope continues to be very strong, with a lot of product enhancements and other things that we're doing there to make it a more mobile, so more people are able to have access to that in a hospital setting. So continued product refinements or continuing the adoption rate on the GlideScope side. And then on the BladderScan side, continuing to take that core technology of the ultrasound and be able to make that applied in other areas. That's what we've done with AortaScan. That's what we're going to do with Velaport [ph] also in order to make it easier to basically have an IV needle inserted into someone's arm when the vein may be very difficult to find or difficult to see. So taking that same basic technology and making new products and new applications out of it is 1 of the things that Gerald and the team are just fabulous at being able to do out there at Verathon. And we continue to see lots of opportunities for that going forward. And in addition, don't forget we did acquire a product line called Heartscape about this time last year, and we expect that to have some product introductions into the marketplace late in 2011, and that'll also add to growth in 2012. So we're excited about what we see, and the investments that we're making in Verathon will pay off.

Christopher Glynn - Oppenheimer & Co. Inc.

Thanks, it's really helpful. And then in the RF mix of the businesses, just looking if RF -- the tolling orders are really kind of a dam breaking, maybe a lot of pent-up demand and projects coming through. We have a mix impact on operating margins this year and also the double-digits growth guidance, was that organic?

B. Jellison

Oh, yes, yes, yes. All of that guides we're talking about was organic. The situation in Q1, we had a good mix because we had tag shipments to Dubai and Florida and Oklahoma and that'll continue somewhat in the second quarter. But unfortunately, the tag shipments are always lumpy. We can't do much about those. And so within the next 3 quarters, there'll be different results based on the mix of just the normal service work we do and product shipments. Since there's a huge variance there both from a gross margin basis and a cash contribution.

Christopher Glynn - Oppenheimer & Co. Inc.

Thanks a lot.

Operator

We'll go next to Deane Dray with Citi.

Deane Dray - Citigroup Inc

Thank you. Brian, I'd be interested in hearing your comments about some of the competitor actions in your space very recently and love to hear your comments about how that is either an opportunity or a threat or not meaningful. And the 2, I'd like you to comment on, if you could, the first would be the joint venture between 2 of your competitors in the tolling space, Sirit, and the new owner of Mark IV KTC. And the other would be the development at Blackboard, which is in a space with you. I think there's always misperceptions about what the actual overlap is. But if anything, it's a validation that this is an attractive space, considering they put themselves up for sale. But where's the overlap? Where's the adjacencies within Blackboard? Thank you.

B. Jellison

We'll only take the Blackboard. First, the blackboard really has 2 businesses. They have a business, which is like CBORD which we feel we continue to gain share against them in that space. That for them may be viewed more as a legacy business. You'd have to ask them. That's their university business. And then they have their business, which is really education software that's -- had it not be involved with the university in the same traditional teaching setting we're familiar with. We have nothing to do with them in that space. That's the largest portion of their revenue. How profitable it is, is something you'd have to talk to them about. So there's a small group of competitors like CBORD and Blackboard that are driving what's happening from an adoption viewpoint with universities. We've got a, we think, the best offering in the space. So if Blackboard in fact does transact then someone else takes it over, we wouldn't see that as anything other than what you said, which is validating the quality of the space. If you look at the kind of trading mobiles that Blackboard had even before this 35% premium jack-up, you get why sometimes we get frustrated about people thinking about us as a multi-industry company as opposed to a diversified growth company because so many of our assets today in the SaaS platform space are just undervalues [ph] are extraordinary compared to the multi-industry multiples. And we think people should focus on the quality of the assets we hold in that space. And secondary, as far as -- I mean, Sirit was a basically unprofitable or bad trading dollar business in Canada. That was acquired by Federal Signal, so we don't think of it as Sirit now. We think of it as Federal Signal, which is primarily a business selling the different municipal aspects of stuff. Sirit is kind of at the low end of technology, certainly. And then if you go over to Kapsch, which is an Austrian company publicly traded, they bought the Mark IV assets out of that transaction around Mark IV and bankruptcy and all those things that were tangential to that. We haven't seen any resurgence of anything under Federal Signal, and we certainly haven't seen any resurgence of anything other than Mark IV as just continuing the sale of product and the E-ZPass. They don't win anything new. We have been winning business in California with platforms that 1 of those people used to be involved with. It certainly doesn't -- it doesn't hurt us in anyway. We wind up with Canadians and the Austrians and once again we're the only American company. If people focused on the buy American provisions, we'd be getting even more of the business that those businesses used to enjoy. It hasn't happened yet. But we do think people ought to focus on that. We have a wide range of technologies. We can do anything that those competitors can do at the bottom end or the high end, so we're kind of a one-stop shop. I don't see that really changing.

Deane Dray - Citigroup Inc

Great. And just a follow-up for me would be on the E-ZPass. Any new development there in expectations of how long this takes to play out?

B. Jellison

I guess whatever the long side is, Deane, you take back. I mean there are people who claim that a decision would be made in August. We're encouraged to hear that. We're always wondering what kind of decision would that be. But the testing is completed on everything, I believe. And what's happened is that we enjoy is North Carolina completed their testing for all of our products and have started to take deliveries. And in North Carolina, we've got a ubiquitous solution that allows a whole lot of freedom for people using various tags that has never been in the marketplace before. So we know from a technology viewpoint we have a winning formula, and then it's just a matter of what kind of decision ever gets made by these New York and New Jersey people and the rest of the consortium which makes up the interagency group.

Deane Dray - Citigroup Inc

Great. Thank you.

Operator

We'll hear next from Mark Douglass with Longbow Research.

D. Mark Douglass - Longbow Research LLC

Brian, can you update on your initiatives to grow internationally, I'm thinking particularly in your Industrial businesses, Industrial Technology and Energy?

B. Jellison

Well, several of our businesses are not in the U.S. and the Industrial platform or Logitech business is based in Scotland and our Insurance business is based in Denmark. The vast majority of their revenue is not in the U.S. and they're growing quite substantially. Our Abel business is a German-based business, and it has showed a record Q1 order make up for that business, which is very different than the domestic U.S. Flow Control businesses we have. And then the Roper Pump business is mostly a domestic business, which is doing exceptionally well now because of directional drilling and our technology, which allows the frac-ing that you hear so much about. And then our Cornell Pump business is primarily a domestic centrifugal pump business. Occasionally we'll shift stuff to the Middle East. But for the most part, it's designed to be a North American business for North American agriculture and municipal water handling. The scale of this business is such that we would not invest a lot of money and sales outside the United States for these businesses other than things that we have just unique niche applications. So the mix of Industrial is not dissimilar outside the U.S. 40%, 50% versus in the U.S.

D. Mark Douglass - Longbow Research LLC

But you don't have any -- you don't have any large-scale plans that really take some of the Roper Pump and other things to more international setting?

B. Jellison

No. I think that people in the flows control industries have about 25x more assets than are needed around the globe. There's confident players everywhere. We've just selected markets that we have unique competency in and wouldn't be making dramatic new capital investments to make more pumps for the world.

D. Mark Douglass - Longbow Research LLC

Okay. And then on Medical & Imaging, what's the ratio now of the medical to imaging, the sales kind of breakout? And what's possible on the OP margin here, is Verathon -- they expected savings synergies already gained here and baked into the results? Or is there still some more headroom as far as operating margins?

B. Jellison

Well, actually what's happening, we're investing at a pretty fast rate, so in some ways we're compressing the operating margins intentionally for launching these new products that John spoke about earlier at Verathon. And we've been investing quite a bit in Gatan as well. So as those products are launched to become a little more mature, we'll get some margin improvement there plus we just get terrific capture on leverage. It's like we said, for the whole enterprise, our EBITDA leverage is 43%. It'd be safe to say in Verathon's case, it would be higher. So they have high gross margins in those businesses. The mix between Medical -- Medical was about 1/2, maybe a little over 1/2 now of the total segment. And Medical will continue to grow more rapidly at a double-digit rate than the imaging portion of the platforms, which are much more stable, mature research application businesses. They're going to maybe grow at mid-single digits or something, where the others are going to grow into the teens on a regular ongoing basis. So eventually, the Imaging portion of the portfolio will be much less critical.

D. Mark Douglass - Longbow Research LLC

Okay, thank you.

Operator

We'll go next to Alex Blanton with Clear Harbor Asset Management.

Alexander Blanton - Clear Harbor Asset Management

Brian, I remember when your sales were only $70 million. That was 1992. And so I'd like to point out that your sales have grown better than 20% a year. This is the 19th year of that kind of growth, which is truly outstanding. But how long do you think you can keep that going with the size of the acquisitions that you're contemplating plus the organic growth? Could you do it another 5 years?

B. Jellison

Well, I guess I think the next 5 years would be harder than the last 5 years have been. So we haven't established any multiple-year guidance for people, but I think history's a pretty good barometer of what people can do if the markets cooperate, if we get some kind of rational thinking around certain activities in the marketplace, our growth prospects are probably better than -- what we say historically, is that we ought to grow kind of 1.5x to 2x global GDP and we've been able to do a little better than that.

Alexander Blanton - Clear Harbor Asset Management

Okay. The second question is on the diesel engine surge protection that you mentioned, were up 40%, is that the AMOT business?

B. Jellison

Well, it's in the AMOT business, but we acquired 2 other companies. We acquired a company called Roda Deaco and another company called CHALWYN. CHALWYN's in the U.K. and Roda Deaco was -- basically got all this oil sands activity. Plus, you've got the explosions that people have from frankly, diesel engine surge, controlled as well they could be. We think these products should be mandatory in every diesel engine in the world. It's a slow slog to get everybody to recognize that. But once people do it, they see the efficiency of it. And then if the adoption rates continue to increase as you've had kind of a return to oil sands production activity, it's driven a lot of growth. And the contribution on these is really quite good.

Alexander Blanton - Clear Harbor Asset Management

Well, the installation of diesel engines is not growing at that rate, so it must have been the accident in the Gulf that caused people to start...

B. Jellison

No. The accident in Houston at the refinery, that was another wake-up call for people. A lot of folks think that, that was an explosion that was caused for various reasons, but not the least of which is, when you shut off the diesel engine and it continues to run, it'd be a real problem. Several times we have with AMOT, plus road diesel at CHALWYN, gives us a very unique global platform where we have the most -- we believe the best technology in the world for this and can [indiscernible].

Alexander Blanton - Clear Harbor Asset Management

So this is really a lot of retrofit going on here?

B. Jellison

Absolutely.

Alexander Blanton - Clear Harbor Asset Management

Okay, thank you.

B. Jellison

Thanks, Alex.

Operator

And next question comes from Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc Capital Markets Inc.

Couple of questions. First, Brian, given the overall size of the Toronto project and the significance of that, can you give us a little more granularity and kind of what that contributed to revenue in '10 and how that ramp looks in '11 and '12? And would you say -- I know it got delayed, but would you say relative to where you expected it to be today, is it sort of back on track in that regard?

B. Jellison

Yes. The Toronto ramp. I'm going to let John handle that because I think -- I'm not sure exactly what he said there, but if we could have you verify it.

John Humphrey

Sure. Yes. Toronto is ramping up as expected. Of course, first quarter installations are always slow as the ground is usually frozen there. And we're still in the kind of the build-out phase of the system that captures and collects and analyzes all the data. So we're really doing a couple of things there, not only the meter installation as well as the network, but also helping on the data management side. And then as we move forward through the year, we'll be ramping up as far as installations are concerned. Now remember, Toronto is the unique situation where we will be overseeing the installation in addition to selling meters. So we'll have a mixed impact, that as we're doing the installation, that actually obviously comes at lower margin than the more technology that's embedded than the meter does. And that, of course, is roughly a $200 million project that will ramp up to -- or it may end up at a kind of a run rate within the $35 million to $40 million range at its peak as we get there in 2012 and '13 and then look to have this project completed and moving into replacement and ongoing data services beyond kind of the 2014, '15 time frame.

B. Jellison

And I think, Matt, that last year in our base data it's less than $10 million, I think we've got $5 million, $6 million, $7 million. And then this year, maybe it'll be 5x that or something like that. So the real expansion is in '13 and '14. This year, we'll get some improvement in revenue less than 1% of our total growth attributed to that in the -- at the enterprise level. Not a lot.

Matt Summerville - KeyBanc Capital Markets Inc.

Got it. And then just overall, when you look across your businesses, Brian, are you concerned about municipal spending, municipal budgets or lack thereof? How do you sort of -- how do you reconcile those trends with how you're kind of guiding your businesses right now?

B. Jellison

Well, we are worried about that. We worry about that from a state and municipal spending level. We worry about it from Department of Transportation funding and the like. One of the reasons that we were really pleased with Q1, getting 20% organic growth, was that we didn't see any kind of slowness or holdbacks on the things that we've been working with people. They're -- and we've done a very deep dive in looking at how much of our spending on the water meter side is really related to municipalities versus related to the other facilities that are funded in different ways. We're actually much more optimistic about what's happening in how we distribute and go to market and create revenue. We wouldn't have anything good to say about municipal spending or state spending. But the DOTs and the people that we work with in those arenas are really outside of that list because everything we do in these spaces is revenue generation. It's not -- we don't need a budget or a muni bond to fund the activity that is going to happen with us. So the growth that we've got in Q1 and that we expect throughout the year is certainly ahead of our fears, which is really part of the reason we were willing to raise guidance as much as we did.

Matt Summerville - KeyBanc Capital Markets Inc.

And then lastly, Brian, I think 1 of your last prepared remarks talked about your incremental operating margins being somewhere in the range of 37% in the quarter, which is obviously very good. How do you feel about sustainability of that type of number given some of the mix dynamics that have come out on this call?

B. Jellison

Well, we're always thinking we ought to be able to capture quite a bit. You got gross margins that are above 50%, so we would tend to think that we ought to be in the 25% to 35% range on a regular ongoing basis. And really could do better than that. What's happening right now is that we're -- we've got intangible amortization associated with iTrade, which confuses the world on a -- if you only look at GAAP, you can get really confused, as we all know. iTrade's a phenomenal business. It's given us a lot more so the OP was 37%. Maybe much more importantly, the EBITDA was 43%. So I think this idea that Roper will do 25% to 30% is exceptionally conservative. So we're probably going to do 30% to 35%, and that might even be conservative.

Matt Summerville - KeyBanc Capital Markets Inc.

Thanks a lot, Brian.

B. Jellison

Okay.

Operator

We'll go next to Wendy Caplan with SunTrust Capital.

Wendy Caplan - SunTrust Robinson Humphrey, Inc.

Brian, that $700 million worth of orders in the quarter, was there anything unusual in it in terms of an especially large order or any kind of annualized orders or blanket orders or were they kind of...

B. Jellison

No. I think what was unusual was how broad based it was. I mean with -- you can't find anybody to beat up. It's just spectacular.

Wendy Caplan - SunTrust Robinson Humphrey, Inc.

Okay. And speaking of beating people up, your breakeven lowering mandate for the company, can you kind of talk about whether there's anything specific this year that we should be looking for in terms of particular projects to lower breakeven at various businesses?

B. Jellison

Well, I think all you got to do is just look at the leverage. When you get that 37% OP leverage and 43% on EBITDA leverage, it demonstrates the discipline everybody has about keeping their fixed expense really quite low and reacted creatively to whatever variable output needs they have. We haven't had to do anything to ramp up to meet the increased demand. And with a book-to-bill of 109%, we ought to be able to do pretty well on the revenue in the second quarter and the rest of the year. So when we started the year we thought, gee, we'll probably have pretty good Q1 and Q2 will be okay. It ought to trail off. We don't think that way anymore. So Q1 is really quite good, Q2 should be quite good and the rest of the year ought to be really good, but not trailing off as much as we originally thought.

John Humphrey

And Wendy, if I can just chime in on that. Remember, what we do with the breakeven analysis, it's not that we have a mandate to always lower that, but we always want to make sure that we look at our businesses and that they look at their performance in terms of what their fixed costs and their variable, so they understand what the next dollar of revenue should contribute in terms of leverage. And that when they make investment decisions, that those are conscious, thoughtful, prudent decisions to invest for growth opportunities. So we always want to make sure that we separate out the fixed costs infrastructure from the leverage on incremental growth, so our business leaders are able to make smart decisions about how to grow going forward.

Wendy Caplan - SunTrust Robinson Humphrey, Inc.

Okay. And finally, given your -- just the comments you just made, Brian, and your -- in the slides, it says expected strong start and did even better. Can you give us some sense of what were the 2 or 3 things that really impressed you in the first quarter that changed your view for the full year?

B. Jellison

I would just say the breadth of everything. Every business in Industrial, every business in Energy outperformed really our expectations and their own expectations. And so it isn't that 1 business had a blowout. I mean, certainly, our Cornell and Roper businesses had all-time record performance, which is good. But again, the scale of those is not enough to really drive the enterprise. So it's really just the breadth of things that drove the enterprise.

Wendy Caplan - SunTrust Robinson Humphrey, Inc.

Okay, thank you so much.

Operator

We'll go next to Robert W. Baird's Richard Eastman.

Richard Eastman - Robert W. Baird & Co. Incorporated

Yes. 2 quick follow-ups. I mean just on the Industrial Technology side platform, the EBIT margin, did that benefit significantly from mix in that segment? I mean, we talked about maybe Toronto ramping slowly, a little slower here in terms of meter sales. Was there any mix issue there, the Pumps and Materials business being much stronger?

John Humphrey

No. I really wouldn't say that there was a mix benefit. There was clearly no mix downside from the additional installation revenue, that we do expect at some point in the future with Neptune in Toronto ramping up. But the nice thing about these businesses is that they have similar operating characteristics and similar margins. And even on the equipment side versus the aftermarket, obviously the aftermarket parts will be a little bit higher margin, but it's not a dramatic change, it's not like an aerospace business where maybe you don't make anything on the OE and you make it all on the aftermarket. That's not all what we're seeing in Industrial. Our new equipment revenue, we love to see it because it not only generates more spare parts in the future, but it generates more cash today. So really, there's not a huge mix impact there.

Richard Eastman - Robert W. Baird & Co. Incorporated

But the pumps and material handlings piece there versus, say, Neptune, I would think the contribution margin there would have been above that total platform level.

John Humphrey

No, I wouldn't say that there's a dramatic difference.

B. Jellison

Not much. Not that dramatic, so you can read into that what you want about other data that gets...

Richard Eastman - Robert W. Baird & Co. Incorporated

Okay. And then Brian, could I -- just real quickly, has there been any uptick in interest and perhaps orders at Zetec given what happened in Japan and kind of the forced global kind of inspection requirements maybe on the nuclear industry or elsewhere outside of Japan?

B. Jellison

Great question, Rick. We haven't included anything in terms of Zetec growth at all in our pathway. We've had lengthy calls on that with people and we're doing a lot. We have volunteered a lot of resources for people to do various testing things, and we also have this robotic testing technology, which is really quite an important technology called, Robospec [ph]. But we could, we would like to believe we would see a spike in the second half on inspections in the U.S., 104 plants. When the thing initially happened and people started talking about it, we felt we might get a 25% spike in half 2, but remember, it's not a real large business. But we're not seeing that scheduled in any way, which is really sort of interesting. So I think everybody has kind of actually stopped the work and is thinking about what it is they need to do and what's the prioritization of that. And our stuff is just measuring the structural integrity of the cooling towers. So it may well be that'll have a bigger impact in 2012 then it'll have in 2011 for us.

Richard Eastman - Robert W. Baird & Co. Incorporated

Okay. And then just a last question. When I look at maybe your core growth commentary per quarter going forward, we end calendar '11 at kind of double-digit, maybe, forecast for organic growth. I think we were thinking 10% to 11%. Is there a little bit of an uptick there? And does that come from just the book-to-bill in the first quarter and some visibility into the second?

B. Jellison

You mean for the full year?

Richard Eastman - Robert W. Baird & Co. Incorporated

Yes, you kind of said mid-teens for Q2 and maybe 8% to 11% for each of Q3, Q...

B. Jellison

I think we said 9% to 11% organically as I recall. So we'll probably do better than that.

Richard Eastman - Robert W. Baird & Co. Incorporated

Okay. All right. And that's again just confidence at this point, given the book-to-bill here off the first quarter and just visibility?

B. Jellison

Yes. And take a lot of -- you don't have to be overly optimistic when you have your $57 million improvement in the backlog.

Richard Eastman - Robert W. Baird & Co. Incorporated

Understood. Okay, thank you.

B. Jellison

Melody, I think we have time for just 1 more question.

Operator

And we'll take that from Terry Darling with Goldman Sachs.

Terry Darling - Goldman Sachs Group Inc.

Thanks. Brian, we're seeing a lot of company's raise earnings guidance for the year, but leave cash flows unchanged as you have done. I'm just wondering what the message in the Roper context is there. Is it just the practical realities of the strong growth at this point of the cycle? Is it the right investment trade-off to be making? Or are you just being a little conservative there?

B. Jellison

Well, I think this point it's probably a little bit early for us to be able to forecast how the incremental growth that we're seeing and probably a little bit stronger than what we had thought, maybe 3 months ago, how that will translate into year-end working capital balances. If you kind of think about the net income impact of, say, raising $0.15 on the bottom for us, that's about $15 million of net income and $15 million of after-tax cash. But like I said, it's a little early to forecast exactly what those year-end balances will be. So we're comfortable still at $550 million or more of operating cash flow. And as we get closer to the end of the year, we'll be able to have a better view on what some of those working capital balances will look like.

Terry Darling - Goldman Sachs Group Inc.

Okay. And then, Brian, I'm wondering if you could just put a little more color on your earlier M&A comments from the standpoint of size of transactions, whether that might require some or give you an opportunity to do some equity there. And in terms of the platforms where you're seeing the better opportunities, can you provide a little bit of comment there, too?

B. Jellison

Well, I think that we can all -- there's more things to do than we would be willing to do with our capital structure always. I mean we're going to remain an investment-grade performer and so you don't want to really have much more than, say, 3x debt to EBITDA. And if you look at our trailing EBITDA, it's going to ramp up quite dramatically here in the next quarter and third quarter. So we're going to have well in excess of $1 billion capacity with our existing structure without having to issue equity. I can't imagine issuing equity. It would have to just be 1 heck of a breathtaking opportunity for us, and I just don't see that happening. I mean I wouldn't rule it out if you had some kind of nirvana opportunity. But what we -- we continue to just reinvest our cash flow. We think $500 million, $600 million a year is probably where you go when you lever it up at 3x. It could be more. We got a lot of capacity now and responses are exceptionally low. So maybe it goes up, but I wouldn't think we'd be doing some $2 billion transaction. I think we'd do $1 billion one first.

Terry Darling - Goldman Sachs Group Inc.

And your platforms where pipelines more robust, Energy, Industrial, Medical, RF across the board, any color there?

B. Jellison

Every Industrial asset in the world are for sale. So we're not overly excited with the stuff we're seeing in that space or the lack of discipline that people have in what they're paying. So we continue to think that the Software-as-a-Service arena and the medical arena remain quite attractive businesses and there's plenty of growth in those businesses in terms of an investment acquisitions, and they really crowd out most of the other investment opportunities in terms of their cash and cash returns over time. So that remains our sharp focus. Maybe there'll be some niche thing along the way that we think is particularly good. But other than that, pretty much we're focused in those 2 areas. And I would just say, Terry, I think we had $87 million of operating cash flow in the quarter. Not unusual for a Q1. So with $550 million for the full year, we're talking about generating $463 million of operating cash flow in the next 3 quarters. And that $463 million operating cash flow, it'll be quite substantial as a function of revenue for the balance of the year. And when you already got $800 million in available liquidity, and you know you're going to create another $400-plus million of free cash flow between now and the end of the year, that gives us all the powder we're going to need to make real high-quality transactions.

Terry Darling - Goldman Sachs Group Inc.

Okay, thanks very much.

Operator

And ladies and gentlemen, that does conclude today's question-and-answer session. We'll now turn the conference back over to Mr. Humphrey for any additional closing remarks.

John Humphrey

Thank you, Melody, and thank you all for joining us this morning. And we look forward to talking to you as we finish the second quarter and talk to you again in July. Thank you.

Operator

And that does conclude today's conference. We thank you all for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Roper Industries' CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts