Roper Technologies' (ROP) CEO Brian Jellison on Q4 2015 Results - Earnings Call Transcript

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Roper Technologies, Inc. (NYSE:ROP)

Q4 2015 Results Earnings Conference Call

February 01, 2016 08:30 AM ET

Executives

John Humphrey - Chief Financial Officer

Brian Jellison - Chairman, President and CEO

Analysts

Shannon O’Callaghan - UBS

Deane Dray - RBC Capital Markets

Joe Giordano - Cowen & Company

Richard Eastman - Robert W. Baird

Robert McCarthy - Stifel

Christopher Glynn - Oppenheimer

Operator

Good day and welcome to the Roper Technologies’ Fourth Quarter 2015 Financial Results Conference Call. Today’s call is begin recorded.

I will now turn the call over to John Humphrey, Chief Financial Officer. Please go ahead, sir.

John Humphrey

Thank you, Diana. And thank you all for joining us this morning, as we discuss our fourth quarter financial results. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller; and Rob Crisci, Vice President of Planning and Investor Relations.

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 on our website.

Now, if you turn to slide two, 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 further detailed in our SEC filings. You should listen to today’s call in the context of that information.

Next slide: Today, we will be discussing our income statement 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 three items: First, we completed the divestiture of Abel Pumps during the fourth quarter, resulting in a pre-tax book gain of $70.9 million; this was partially offset by an impairment charge of $9.5 million relating to an imaging investment we made in 2007. Second, a $4 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions made in 2015. This represents revenue that those companies would have recognized if not for our acquisition. Finally, we have a $2.6 million inventory step-up expense relating to the acquisition of RF Ideas.

Now, if you please turn to slide four, I’ll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. And after his remarks, we will take questions from our telephone participants. Brian?

Brian Jellison

Thank you, John. Good morning everyone. So, we’ll start off here with our Q4 results. They were flat to last year; we talk a little bit about that. At $948 million, it’s exactly the same number as last year, but there is a lot of activity to get you there. We had another 2 points of FX headwind in the quarter and then the acquisitions net of the Abel divestiture offset the organic shortfall in Energy primarily.

The industrial and energy markets declined in the fourth quarter and really had less seasonal adjustment favorably in the fourth quarter than normally, and we’ll talk about that when we get to that segment. But we had very strong growth in Medical and the RF segments. Our gross margins continued to escalate; they were up 190 basis points in the quarter to 61.8%. Our EBITDA margin also hit 35.9%, that’s the EBITDA margin, not the gross margin. And EBITDA was up another 2% to $341 million, which is sort of an annualized run rate of $1,364 million. Our free cash flow was up to $261 million and is 140% cash conversion. And we also issued 5 and 10-year bond, which totaled $900 million in the month of December and deployed over $700 million in the quarter and some very attractive acquisitions. So, we enjoyed both, good execution in the quarter and terrific disciplined capital deployment.

Next slide: If we look at the income statement in the quarter, you can see that while the orders and the revenue were exactly the same as a year ago, no two businesses would have been the same. So, this was a case of watching the ducks on the pond, but a whole lot of paddling going on underneath it.

The book-to- bill at 0.98 is actually pretty good for a fourth quarter. Just to give you some sense of history, in 2011, our book-to- bill in the fourth quarter was 0.94; in 2012, it was 0.95; and in 2013, it was a flat 1 or 1.01; and ‘14 was 0.98; and this year was 0.98. So from a historical perspective, it’s about what we would expect to see.

Our gross profit, as we said, was up 59.9% to 61.8%. And operating income, the margin was 30.1% and that absorbed 70 basis points of higher non-cash amortizations as acquisitions came in. The interest expense was up $5 million due to the bond issuance and a little bit more drawn at the revolver during the quarter. Net earnings were down 1% from a $187 million to $186 million, which you could see just from the interest.

Next slide: Here we shift into the full year enterprise results, so next slide. On the enterprise results, the whole point of the year really was our ability to demonstrate nimble execution in the field and then deploy capital in really a top acquisition market with great transactions. So, if you look at the records, everything once again was a record. We had the most orders, the highest revenue, the best margins, the highest net earnings, and the best EBITDA and cash flow of any year in our history. The growth was led by Medical and RF. We had continued margin improvement through the year. The gross margin was up a 140 basis points on a year to 60.7, and the operating margin was up 80 basis points to 29% operating profit margin, and of course EBITDA was higher.

A very strong cash flow, we were up 11% in cash flow for the year, and that was 26% of revenue. Our cash flow was also up 11%. And our cash conversion on a free cash flow basis was 132%. We deployed a $1.8 billion in acquisitions in 2015 with almost entirely a focus on software and medical technologies. All of our acquisitions are really very high margin businesses; they are all asset light; they’re very specific leaders in niche markets; and they have high recurring revenue and strong management teams at each one of these companies that we acquired. And on our recent acquisitions have been growing in excess of 10% a year which gives us as they become organic rather acquisitions, a benefit to our organic notes.

Next slide: If we look at this bridge, we put together I think really help people understand about the performance in the forward nature of what we’ll do in 2016. If you look at the base revenue in 2015, it was $3,552 million and it ended the year $3,593 million but that’s not the story, being up 1%. The story is that we had organic growth in our RF segment; we had organic growth in Medical; and we had substantial acquisitions, even though we divested Abel, which was $20 million plus revenue business.

So, those three components added 7% to our trailing revenue number of last year. But we had a 3% currency headwind, almost all of which was in the Energy and Industrial segments. And that 3% brought the number down and then we had $35 million of negative organic growth in Industrial, almost all of which was in Roper and FTI which are our upstream fluid handling businesses. And then we had $72 million negative organic in Energy, the vast the majority of which was again upstream, although in the fourth quarter, we didn’t get the seasonal push that we normally would get. So, we had a little bit of fall off in the fourth quarter in the mid and downstream business. So, about 2.5% of the 3% negative organic in Industrial and Energy was related directly to oil and gas.

Also, something that gets us obscured a bit by the numbers is our organic growth in the first quarter of ‘15 was 6%, excluding oil and gas. And we actually grew 2% in the second, third and fourth quarter excluding oil and gas. So, those headwinds that we had to contend with in 2015 around oil and gas markets will be dramatically smaller in 2016 than they were this year, although there is still some real challenges. And the currency isn’t going to be $104 million; it will be probably 80% less than that negative number.

Next slide: If we look at the outstanding margins, you can see on the left hand side the gross margins in 2013, we were at 58.6, and those were raised 70 basis points in ‘14 and then raised twice that a 140 basis points this year to 60.7. And our EBITDA margins in 2013 were 32.8; they were raised 100 basis points in ‘14 to 33.8 and another 80 basis points this year to 34.6. So, the continued margin expansion just comes really from a focus on our asset light businesses, being able to reinvest for growth for and themselves and we had great leverage throughout the enterprise, as a result.

Next slide: To get to really what’s the core of our entire business model is compounding our cash flow. And this compounding you can see continues to be outstanding in a year where we really only had 1% revenue growth. Our free cash flow is up 11%; our free cash flow at $929 million is up $89 million from the $840 million. So, we had a great quarter in the fourth quarter with $269 million in cash but we had a terrific year with $893 million in cash, in our view still the best major performance. If you look at our cash guidance, you’ll see our cash guidance tells a different story than the EPS guidance.

Next slide: If you look at the financial position of the Company, here you can see cash at the end of this past year closed down at $779 million, up from $610 million a year before and up from $460 million in 2013. Now, we’ve deployed almost a third of that here in January to close the CliniSys acquisition which is a little bit over $250 million, and that happened in the month of January. We also upsized our revolver; our revolver use to be $1,500 million, our revolver is now $1,850 million, and you can see on our undrawn revolver, we have 1,670 million. So between cash and undrawn revolver is about $2.5 billion of powder there. Our trailing 12 months EBITDA 1,250 million of course will be -- that’s not a pro forma number and it will continue to get bigger as the year goes on. But even at 1,245 million, our net debt to EBITDA is only 2; at the end of ‘13, it was 1.9. So, we’ve done over a couple of billion dollars of acquisitions and only have net debt of about $500 million. So, we still have a great deal of ample liquidity to do anything we want to do in the acquisition front in 2016.

Next slide: Here we will start to look at the specific segment detail and outlook. Next slide: If we look at the four segments, the Energy segment; the Industrial; the RF; and the Medical segment, you will see that they all are -- performed phenomenally from an EBITDA and gross margin basis. So, even though you have a year where Energy and Industrial together came in at $1,333 million, which was down 12% from the prior year’s 1,519 million, they still delivered 31% EBITDA margins in both years and both were over 50% in gross margins.

In our RF and Medical space, those guys were up 11% from $2 billion roughly to $2.260 billion and of course they have even stronger margins with 36% EBITDA for RF and 45% EBITDA for Medical. And the Medical and the RF businesses are now already 70% of our total EBITDA, even though all the segments have extraordinary margins.

Next slide: So, we will start first with Medical which is our largest segment. And here you can see in the quarter we had organic revenue of plus 3%, acquisitions of plus 12% and foreign exchange a negative 3%. The SHP and IPA acquisitions from ‘14 finally went to organic, and they delivered double-digit growth for us in this quarter. We had very strong sales out of nearly double digit with new product launches that we had talked about earlier in the year continuing to gain tracking. And our Northern Digital business had an outstanding year, were up more than 10% with very strong revenue growth in the fourth quarter.

Atlas Medical which is small acquisition that we bolted into Sunquest in the fourth quarter, its integration activity is doing well and we expect that to contribute in 2016. And I’d say, we should comment on completed all-time record year is just compounding their growth and everything going well in that arena.

In 2016 the way we see the year unfolding is that we will continue to be nimble. And when I say our operating leverage for the full year in Medical was 50%, so as these grow, they contribute outsized incremental gains for us. We think we will have mid-single digit organic growth in Medical throughout ‘16 and we think that will get stronger as the year goes on. Sunquest has a number of version changes and software release updates that are rolling out in the second half that will be quite beneficial. And then Strata, Data Innovations and SoftWriters which are growing rapidly, will become organic in the second half. Verathon and Northern Digital are going to continue to grow at a relatively high rate in ‘16. And then we closed on January 7th, the CliniSys acquisition in the UK which is European hospital laboratory software provider and it will add to our acquisition sales growth in 2016.

Next slide: Here we look at RF Technology. And RF Technology was up in the fourth quarter 4% organically and had a negative FX of a point and acquisitions and divestitures added 15%. So, their revenue was up 18%, operating profit up 30%, and the operating profit margin 31.1%. Software throughout the segment performed exceptionally well in the fourth quarter, as we returned to pretty good growth at iTrade and double-digit growth of Freight Matching. Aderant was acquired in October and it’s off to a great start with the Aderant team. And in fact some of us are working with them in terms of coordinating some of large clients, being more secure going in with Aderant in the future as opposed to the fact that they were run by private equity in the past.

Toll and traffic projects are progressing really quite well, Riyadh is doing alright, although the startups in traffic in Riyadh tend to be a more civil engineering at the beginning, before we get all the software revenue, but they’re still fine. And our Infinity Lanes that we’ve been rolling out in Florida and Texas are on schedule and contributing substantially.

We think we’ll have mid-single-digit organic growth for the year with stronger growth in the second half for RF, primarily because TransCore is finally out of an arrangement where we were providing tolling administration in Puerto Rico, and that’s been quite a challenge in last half of this past year and will be completely out of our business model this year. So, it’s a little bit dilutive to our revenue, but it’s very much accretive to our sanity as trying to get money out of Puerto Rico as you know is not an easy task. But that will put a drag on revenue in the first two quarters about 10 million bucks each quarter, but that’s revenue we’re happy to avoid.

Our operating leverage for the segment by the way in 2015 was up 56%. So, here again as we get incremental revenue and we expect to have that in 2016, you’ll see continued margin enhancement. The software businesses, we think will grow at kind of mid-single-digits, but they do have exceptional margins that allow us to use cash to reinvest in other transactions. And then the recent acquisitions that we’ve had Aderant, RF Ideas and On Center are all growing at a pretty strong rate and they have excellent cash flow performance and eventually they too will become organic.

Next slide: If we look at Industrial Technology, here in the fourth quarter, organic revenue was down 8%. It’s all pretty much all oil and gas upstream with our businesses that are related to that. To get some context about this, in 2014, the oil and gas portion of Industrial Technology was about 12% of revenue and unlike RF where it’s zero and Medical where it’s zero. And Industrial Tech was 12% ‘14, and this year that dropped down to 9% of revenue; and in our forecast for ‘16, we think it will be down about 6% of revenue in the segment. It’s almost exclusively upstream activity for surface and water pumping projects.

We also had the divestiture which came full circle with Abel with about in the low-20s of revenue that contributed nothing in the fourth quarter of this year, and of course will be out all of next year. Neptune grew really quite well double-digit growth in the U.S. in the fourth quarter. The Toronto project was still there as a headwind as we told last year, it’s closed to 10 million a quarter. But it finally sunsets in the first quarter of next year. So, Neptune’s growth in 2016 will be outsized compared to the way it has looked with the Toronto headwind in the past.

We’re forecasting continuing declines really in the upstream oil and gas. It was off about 30% for 2015 and we think it will be off another 30% in 2016, but of course it gets to be down to a smaller number. So, it’s about a $20 million headwind for the segment going into 2016. And the rest of the businesses we think will grow at kind of low-single-digit numbers, maybe a little bit better than that.

So we go to the next slide. I should say that OP leverage and Industrial for the year, it deleveraged 40%. So with gross margins about 50 and delevering at 40, we think that was pretty good performance.

Next slide: On Energy Systems & Controls, they had this continued fall off, as one would expect, particularly in the upstream arena. Their operating leveraging for 2015 though was really quite good, negative 39% and their gross margins were 58%. So, I think everybody performed quite nimbly, although in the fourth quarter Compressor Controls started to see really deep dive on their project work and hadn’t really restructured around that yet, and that activity will happen here in the first quarter. So, they contributed terrifically over the last several years but are going to have to face the reality of a major decline in project work. It’s not going to reoccur for some long period of time.

Now, in the quarter, organic growth then was off as you can see 17%, FX by 4%. Our seasonal improvement actually did occur sort of as we forecasted, just not quite as much. We were up 9% seasonally in the fourth quarter energy, but normally were up kind of 17% to 20% and occasionally 25% in the fourth quarter. So, we had thought we’d be up maybe 15% in the fourth quarter and by only coming up that kind of pulled back our revenue tad in the fourth quarter which was direct result of being little less revenue than we expected out of that. Certainly, backlogs are reduced in the segment, and that oil and gas project businesses are kind of rapidly deteriorate, although that’s not a surprise. The unbelievable growth in Zetec as both South Korea and Japan and Middle East are roaring back and in fact we are up quite dramatically in Zetec and we think that will accrete to very strong performance for Zetec in 2016. The operating margin which really speaks to the nimbleness of the operating people we have in these businesses was still 32.7%, even though the segment was down substantially in revenue.

As we look at what we are talking here for 2016, you can see sort of high single-digit organic decline for the segment; oil and gas we think will be down about 15%, which will be about $50 million drag on the settlement, so about $20 million out of is Industrial and about $50 out of Energy. The project activity is going to be force Compressor Controls to do some aggressive restructuring. And I know that it’s a challenge for everybody but there is no question, the market requires us to do that. And then we think we’ll have modest growth in the rest of the areas in the industrial and nuclear arena.

Next slide: So, here is we get into the 2016 guidance. Next slide: We created another bridge for you here for 2016, so you get a sense of what’s really going on and the health of the overall business. You can see, we finished this last year ‘15 at $3,593 million. We expect revenue to be up between 8% to 10% in 2016 and we think organic revenue will be between 2% and 4% in the coming year. So, we’ll get mid single-digits organic growth out of RF and mid single-digit organic growth out of Medical. I think we’ll have a low single-digit organic growth out of Industrial whereas last year you might remember, it was negative number. And then already completed acquisitions net of the Abel divestiture are going to contribute sizeable portion of revenue in 2016. We think we’ll still have the high single-digit organic drop in Energy but that’s a big improvement over last year’s organic drop. And in foreign exchange which was a $104 million last year is probably going to be about 80% less headwind for us in 2016, so maybe something in the $20 million to $25 million arena. And that makes just as we showed you, we grew last year’s 7% until you hit the oil and gas number. Just easier comps throughout the year for us once we get past the first quarter.

Next slide: So, if we look at the 2016 guidance, you can see for the full year, we’re saying operating cash flow, we would hope would meet or exceeded $1 billion. And operating cash flow is going to have just a very limited CapEx drag for it to convert to free cash flow. This past year, I think CapEx was $36 million; we wouldn’t expect it to be any higher than that this year; so, certainly less than 1% of revenue, probably quite a bit less than 1% of revenue.

Full-year adjusted DEPS we’re saying are $6.85 to $7.15. And the key assumptions around that is we get for the full year revenue growth of 8% to 10%, organic growth of 2% to 4%, comps ease after the first quarter, and in the first quarter we’ve got a lot of headwinds. So, we’ve got revenue drag out of Puerto Rico, we’ve got oil and gas had not really hit us in the first quarter of last year, and then we had some unique revenue coming out of Roper Pump; that won’t continue, and we’ve got little higher interest cost because of the bigger drop with acquisitions but we also get benefit in earnings. But Q1 last year at 6% organic and the last three quarters had 2% organic, so we certainly don’t expect 6% organic net of oil and gas in the first quarter.

Our non-cash amortization increases by $30 million, so our non-cash amortization will be a $195 million in 2016. And if you want to use cash earnings, you can add that back to the net earnings number. Interest expense is about $25 million higher than last year to $109 million. Our tax rate is going to be somewhat similar to this past year in the 30% to 30.5% arena. And of course none of these includes any new acquisitions and we do expect to be pretty active in 2016 and add in additional high quality businesses.

In the first quarter we are going to establish guidance at $1.42 to $1.47 because of those things that we have to face in the first quarter that what were not at the end of last year. But we’ll get improvements throughout the year on those things with quite dramatic improvement in the second half, which is not based on hope but just the reality of when we know to be the case.

Next slide: As we look at 2015 summary and then the outlook for the year, we delivered record annual results for orders and revenue and margin and net earnings, EBITDA and cash flow in ‘15 and that was despite probably the biggest headwind period we had with so much coming from currency and oil and gas. Our operating cash flow was up 11%, free cash flow also up 11%.

We had terrific margin improvement with gross margins up 140 basis points to 60.7%. EBITDA margin is up 80 basis points to 34.6%. And free cash flow at $893 million represented 25% of every dollar of our revenue and 132% cash conversion versus the DEPS number. We deployed $1.8 billion in really attractive acquisitions and we increased our dividend by 20%.

As we go into this year, we expect to deliver record performance in ‘16 with that revenue growth we mentioned just the slide before, 8% to 10%; operating cash flow around $1 billion. We think we’ll deploy well over $1 billion in acquisitions that can easily be higher than that. And we’ve already closed our first one with CliniSys for about $250 million in January. We’ve got a very attractive pipeline. We are looking at a transaction on Friday and another one on Monday. And so, there is just a great deal of activity going on, probably the most that we have ever seen in terms of pipeline. We continue to compound cash, increased shareholder value last year, you got a lot of alpha [ph] off us in 2015. And we’re just going to think we can continue to increase our cash as we look at 2016.

So with that John, I think we are ready for questions.

John Humphrey

I think so. So Diana, we are ready for the Q&A portion of our call.

Question-and-Answer Session

Operator

Thank you. [Operator instruction] Now, we will take our first question from Shannon O’Callaghan of UBS.

Shannon O’Callaghan

Brain, just on the assumptions on the oil and gas of the down 30 for Industrial Tech, and down 15 for Energy, maybe just explain a little bit more the differences between those two decline rates, and then some of the other businesses around the oil and gas stuff within the energy segment that you have a better outlook for.

Brian Jellison

Well, in industrial, basically Roper Pump is almost exclusively oriented around upstream oil and gas. So, it’s not a huge business but it has a big, big drawback when you have change in tracking and it’s primarily U.S. business. So, if oil and gas component was down 30% in ‘15 from ‘14 and we expect it will be down another 30% in ‘16 ‘15, but it’s still fairly small number. So, it’s about $20 million revenue drag that we’re modeling into ‘16. None of the other businesses in Industrial Technology have anything to do with oil and gas. They’re instrument companies or over half is the Neptune and water meter business which is going to grow next year. So, it’s just that one isolated. And there is no midstream and downstream activity really in Industrial.

When you get into Energy much, much bigger total dollars of what you are talking about, about 60% of the segment is oil and gas, but only some of it is upstream, primarily upstream portion or couple of very small businesses, Viatran and little bit of Amont [ph] and then quite a lot of Compressor Controls. So, Compressor Controls has been living off of a great project backlog. Their service work we expect could be a record this year in 2016, but we think their project work will drop really dramatically, it could drop $30 million to $40 million. And the midstream and downstream activity for the year has been really decent all the way along; the only drag has been the currency. But then in the fourth quarter, we didn’t get as much of a seasonal uptick in those downstream businesses as we normally do, so mostly testing businesses. So that bodes for slight deterioration, probably in ‘16. The rest of the Energy businesses, the 40% are really mostly test and measurement kind of businesses and then were up really sharply at Zetec. So that helps offset -- that’s we are saying 15% for Energy but it’s 30% for the upstream portion of Industrial.

Shannon O’Callaghan

And then within Industrial in terms of getting from organic declines to starting to grow there again, what is the Toronto comp impact; what was it in 4Q; what is it in 1Q? And then what’s driving that double-digit Neptune growth; I mean is that kind of a sustainable rate or what’s the…

Brian Jellison

It’s certainly going to be very solid growth in 2016. It’s about $10 million dividend [ph] each quarter for the Toronto project as it’s fell off. There is a little bit of revenue we are still getting out of Toronto for last minute adjustments but it’s not very meaningful. It’s just domestic growth in commercial water meters and new wins in projects. We are going to have some -- I mean we are having share gains that are really obvious to us when we look at the data and we are going to have further share gains in 2016 that we are confident of based on all of our contacts and with our bid process.

John Humphrey

Yes. Shannon, Toronto project really completed substantially in the first quarter of 2015. So, it’s still kind of in that $10 million comp range in the fourth quarter against the fourth of ‘14 and it will have a little bit of a headwind in the first quarter on a year-over-year basis. But then after that it’s going to be more normalized. So it’s not an acceleration that we’re looking for; it’s really some headwinds that start to go away.

Operator

Thank you. We’ll take our next question from Deane Dray of RBC Capital Markets.

Deane Dray

I’d like to go back on to the oil exposures for Industrial and Energy, and just talk about if you could your visibility in the businesses, specifically around orders in the quarter. And then on the organic assume declines; maybe discuss what volume versus pricing. There is a lot of supplier squeezing that’s going on in the sector and wouldn’t be surprised to see if you’re seeing some pricing pressure as well.

Brian Jellison

Well, if you talk of ourselves, I’ll tell you it’s massive pricing, but there is no pricing pressure. That’s not the issue at all, just pure -- the biggest component of course is currency, but then from a unit situation, it’s the project work at Compressor Controls this year. It’s really easy to detail that out. So, those numbers are pretty good. Last year, we actually said when we initiated guidance, we thought upstream would be down about 20%. You correctly challenged us about CapEx is down 30, might it not be down 30, and we said well it could be down more than 20, but we thought we had a particular arrangement around surface drilling, which is new technology, which has rapidly gained share and it was doing that at the time and we thought that would continue in the second quarter. But in the second quarter, they basically stopped all ordering and consumed all inventory they could and that hurt us a little bit. And then in the fourth quarter, we didn’t get any seasonal bounce -- well we did, but not as much as normally would. So, we’re very comfortable around guiding down 20 million on oil and gas, and industrial and around 50 million in energy. I think that’s quite correct.

And then, there would still be a little bit more drag on a nominal number basis with currency, but it’s definitely not pricing. And the guys have been pretty correct, all year along except for that Q2 situation Roper Pump where our supply agreement got suspended for that quarter.

Deane Dray

What were orders in the quarter for both?

Brian Jellison

The segment book-to-bill was like 0.88 for energy in the fourth quarter.

John Humphrey

And it was 0.97 for industrial. So on the industrial side that 0.97 is the kind of typical for a fourth quarter, but it’s definitely wider. So you asked about visibility also. So for the products businesses, particularly around upstream and even on the mid – downstream, those are generally going to be book and ship inside of a relatively short window, two months or so. Where we do have better visibility and where we’re talking more about this is on the Compressor Controls, right because it’s more of a project business and that’s where we saw an order shortfall in the fourth quarter leading to that 0.9 book-to-bill area, and why we’re expecting that to be a tough year for the project based business, because we have good visibility in that area.

Deane Dray

Brian, your referenced back in the second quarter some of our expectations that upstream could be worse. Just to kind of give you a data point, we had launch on Friday with the CEO of Schlumberger and their expectations is upstream could be down 35%. So, we’re in that right neighborhood. And just last question for me would be these businesses, so we talk about Roper Pumps or Compressor Controls; these are legacy Roper Industries businesses and certainly not something that you would be looking to invest in today. Now, in the teeth of the oil pressures here, certainly not a time to talk about divesting, but would there be an opportunity at some point to separate the Roper Industry legacy businesses from Roper Technologies, where you’re focusing today?

Brian Jellison

It’s certainly possible; we talk about it quite a lot. And there are a lot of different avenues for achieving that. It could be spun off as an independent entity where people would be able to make kind of one-for-one decision about whether they wanted to be in that space as an investor and it could be put together with another business and some kind of merger. Again, it’s not something we would likely sell, because the tax [indiscernible] sale is just pretty prohibitive. And the businesses are very good. I mean the oil and gas businesses, we put the whole thing together, and they have an EBITDA margin of 34%. And they don’t take a lot of assets; they are very, very cash accretive to our number. And for those people who like EPS, they give us terrific EPS, because there is no amortization. But you’re right. I mean it’s something we’re always going to look at. And certainly there have been more than one phone call in-bound about people who like to do something, but selling them is not the best thing for our investors, finding tax free alternative to that would be more attractive.

Operator

Thank you. We’ll take our next question from Joe Giordano at Cowen & Company.

Joe Giordano

So, what I’ve been trying to get with everyone’s guidance is kind of separate how much is the progression throughout the year is, anticipating a market upturn like an underlying market upturn and how much is specific to the company as cadence of revenue that’s already in hand, orders that you already have in hand. So, how do you separate your expectations with better second half versus what you know and what you are hoping?

John Humphrey

It’s a whole lot more of what we know and what we hope. We don’t really have very many businesses, only one or two that have any tide at something that’s kind of a larger macro in the markets. The markets that we serve are so niche. They end up being more driven by our activity around new products or new software releases rather than hope for some macroeconomic recovery. We are not really expecting any of that; that’s not something that we try to forecast. It really doesn’t drive many of our businesses. But it’s not as simple as orders in hand because we really don’t have orders in hand for products or for activity that’s going to jump in the third quarter or fourth quarter. So, we’re not a projects type of E&C business like that. But it’s really around things that we know that we’re going to able to introduce to the niche markets that we serve and again new products growth in those areas.

Joe Giordano

And then as you look at your pipeline into 2016, what have you seen in terms I guess across the various sectors that you play in, and in terms of bid ask spreads and how they are moderating or how they are moving, which areas are looking increasingly more attractive or increasingly less so in terms of valuation?

John Humphrey

In terms of acquisitions?

Joe Giordano

Yes.

John Humphrey

The bid ask spread is wide, it’s always wide. We were able to deploy $1.8 billion last year and we’ve already got a quarter of $1 billion done now. So, we don’t anticipate any difficulty at all. I do think that the notes out today are interesting. So, there weren’t any IPOs in January. So, if you were a seller of private equity, you might continue to say whatever you think somebody is going to listen to. But the reality is their debt costs are going up and their active strategies are diminishing. We remain the best mid market acquirer of assets on the face of the earth. So, we are not going to have any difficulty in finding high quality businesses at rational prices.

Joe Giordano

At what point does it -- do you start looking -- you guys are ahead of getting away from some of these energy industrial type of applications into where you are with your medical businesses? At what point do you start to look opportunistically a little bit more aggressively at some of these sectors that have been down a little bit more?

John Humphrey

What we always look at is the cash return we can get out of an investment. And so what happens is it’s hugely difficult for an industrial asset to have the kind of cash returns that we are going to demand. But whenever we see them, we are willing to make investments in those. We bought a pure product company in RF Ideas this year which is just a world class business with terrific leadership, very high margins, relatively light assets but they are certainly making stuff and they are selling stuff. So, it depends on the quality of what it is we see. But we would never buy something at a public market deep discount. Let’s say some energy business dropped 30%, we wouldn’t buy something because it dropped 30%; we would only buy something because its forward cash returns were extremely attractive. And as generally as a rule, people overpay for low quality assets under the theory that they are going to find some way to make it better. So, we’ll leave the buying of distressed assets to others. We want to buy businesses that have consistent growth and recurring revenue and light assets models. And we haven’t seen any other than RF Ideas. We haven’t seen anything in the last two years in the Industrial segment that qualifies for that.

Operator

Thank you. We’ll take our next question from Richard Eastman of Robert W. Baird.

Richard Eastman

Brian, could you just speak for a minute or two to the medical segment in general? Again, given the ‘16 guidance, mid single-digit growth and the core order growth of 7% in the fourth quarter, it looks little attractive. Is there anything in the mix to be alert for in ‘16 between medical products and software and imaging when you are talking about mid single-digit growth either of those or any of those kind a leading core growth and could give us an upward bias on the margin line for medical?

Brian Jellison

It’s a good question. Sorry, I have to dissect it. Remember that in the medical and software, we have a huge amount of recurring revenue, right? So, the recurring revenue, it’s not going to grow by a higher number. So, when we say mid to high single-digit that has to be something that takes a whole segment into consideration. So, the product portion in the new software sales have to be higher than that in order to get the whole segment up to mid single-digits. I don’t think that there is any -- certainly Sunquest in the second half of the year should have outsized growth to what it had throughout 2015 because we had the meaningful use improvement in ‘14 and the beginning of ‘15 that is a comparative drag and that will go away as ‘16 matures. I don’t think there is really any particular driver we -- in the medical software -- in the software businesses and RF component, there some drivers that have had escalating growth. I don’t know John, if you want to add anything.

John Humphrey

No, I don’t think so. So, I think it really will be. We expect ‘16 to be led by more higher V [ph] on the medical product side with some continued new product introductions; we introduced some things at Verathon in the latter part of ‘15 so those start to really ramp up. We have other new products that are being introduced to the market as well, as well as continued growth around some image-guided surgery applications that Northern Digital continues to just perform phenomenally well on. And then as Brain mentioned, in the software and services side that’s kind of a mid-single digit grower anyway because of the huge amount of recurring revenue. And that’s what we expect in the latter part of ‘16. We are not expecting a whole lot of recovery at all in the imaging world. I think that’s expected to be flat to maybe up a little bit.

Richard Eastman

And then just one last question, John, when you kind of speak to ‘16 overall, again we -- we all have our estimates as to what acquisitions completed will contribute to the EBIT line. But on that 2% to 4% core growth, what’s just kind of a mid-point conversion rate that we should see on the 2% to 4% for the core business?

John Humphrey

Conversion, you mean like leverage?

Richard Eastman

Yes, to the EBIT line?

John Humphrey

It’s not a come up to your own, we expect that to be somewhere in the 40% to 50% range.

Operator

Thank you. We will take our next question from Robert McCarthy of Stifel.

Robert McCarthy

So, two questions, one is just kind of the old chestnut that people asked about Roper and M&A. And clearly, given the environment we are seeing, and I guess one of the cofounders of Apollo [ph] just talked about the financing markets shutting down and the sky is falling. But in terms of just coming back to that question, is there particular types of companies that you are kind of looking at now that really lend [ph] themselves to be acquirer in these environments for really there is a crowd out of traditional private equity and really you can kind of sweep in besides just normal, is there particular vertical or end market where you are really well-positioned or well-advantaged? And does this allow for bigger deals of size or of a certain deciles and shaking out this environment?

Brian Jellison

Well, it is certainly true that there -- on things that are relatively large in potential acquisitions, maybe there will be less competition for those assets as the year unfolds, than there have been in the last three years. I noticed on some of the large things that we looked at, if they get bought back private equity, it isn’t one fund, it’s three guys going together. But debt staples were still out there. I mean we are looking at a deal Friday that has a six and half times debt staple. So, as long as debt staples are that high and we wouldn’t use it, the private equity is going to use that. They can put in four turns at EBITDA and you are still 10.5 times EBITDA. So, that kind of businesses that we acquire, they were public, they tend to trade at 25 times enterprise value to EBITDA or more. I know it’s hard for people to follow that because they’re looking at traditional multi-industry stuff but multiples are dramatically less.

So, we are going to continue look at these things are with a great deal from an arbitrage perspective in a public market versus what we have to pay for them. And those tend to crowd out the lesser quality businesses where people pay eight, nine 10 times for something that’s worth 10. And we tend to pay 11 and 12 times for something that’s worth 25 and that’s really how we get all this out for performance, consistently over a long period time and that’s going to continue.

Last year we did something that I wouldn’t have forecast which is we did six or seven deals to get the $2 billion; we would have rather done $1.5 billion deal and a $500 million deal. But the small deals were unbelievably compelling and they are all growing double digits. So, I think it was a good thing to do. We are still seeing a lot of those kind of opportunities. So, as the year unfolds, it will be a battle between sort of saving our powder for really large transaction and we’re going ahead and investing early on things that are somewhat modest. At the end of the day for our shareholders, the result is about the same. It’s just easier for us to do a large deal than five small deals. But it should be an easy year for us to deploy capital, very favorable.

Robert McCarthy

And as a follow-up, I mean just obviously in ramping up coverage of you all again after a long dormancy. The cash return on investment kind of metric you use and kind of animates your M&A and capital redeployment strategy obviously makes a heck lot of sense. And I certainly have drunk the Kool-Aid with respect to the discipline around it. I think the most important epiphany coming out of it is basically the strategy and the metrics are kind of completely aligned. In another words, you don’t stretch for what is perceived as a strategic deal, because a strategic deal’s one which meets the metrics, right? So, I just the only question I have is, where do you think there are risks to the CRI discipline or maybe the businesses you’re looking at? Do you think it’s may be an assessment of the code? I know you use a third-party consultancy to kind of look at the -- kind of related intellectual property and software and association with deals, and there can be obviously risk there, can be risk of technological substitution. Maybe you just talk about where you just level headedly think about the risks in association with your capital redeployment strategy?

Brian Jellison

Well, let’s maybe just for a second, if we have think about risk in general, if you look at transactions, because people were asking questions about when we buy some cheap stuff. So, the cheap stuff in industrial and there is all kinds of stuff and their public stocks are going to continue to deteriorate, and you could buy them. Hey, what’s wrong with those as they can get working get disintermediated from distribution channels. They can wind up with the premium model out of Google on some bizarre thing; they wind up with Amazon selling past their competition at low-price point. So all kinds of things that happen, they desperately need absorption. So if revenue falls off, there is nothing they can do without big restructuring charges.

When we get to our space, it’s really around whether or not the people in the niche that we acquire have domain expertise, which is very hard for somebody to break into. And so, the entry barriers for their success are entirely different. So, the risk is that we continue to assess the quality of the management teams that we acquire well and we understand whether or not there are technologies that could leapfrog what they do. So that we spent most of our time around the people aspects of the business and then around big risks that those people don’t see that we would put kind of a different factor on. We tend to discount their forward growth projections, because we don’t pay for synergies or forward growth, we only pay for what we think the business is going to deliver at the time of the acquisition. And that really puts a huge dampening effect on the risk that we might otherwise have. And we’ve been kind of blessed to be fortunate in that arena. But I think our disciplines are such because we actually start with somebody’s balance sheet and then we start with what it takes to run the business. We don’t do like what a private equity people do, they’ll buy a software company and they’ll mandate an immediate 10% reduction. One of the private equity firms out there actually goes in and does a listing up the highest pay people and they whack off the highest paid people and put new college guys and big salary reductions. And then that kind of hideous serious activity doesn’t manifest itself in the business for four or five years. So, you have to understand what each private equity groups business model is when you’re looking at the assets they hold and you’re acquiring it and I think we knew that better than anybody.

Operator

We’ll take our next question from Christopher Glynn of Oppenheimer.

Christopher Glynn

Just wondering, in medical here the product cycles in the devices seems to be coming on pretty well. I wondered Northern Digital, Verathon, you look at hose to be able to climb for double-digit rate at some point and are the product cycles that have been notable the past few quarters, is that sort of a couple of year dynamic do you think?

Brian Jellison

Yes, I do think so. What we’re really seeing out of Verathon is a refresh. So, it’s not a completely new product category, which actually reduces the risk for us. These are really upgrades and extensions of their existing live scope like in 2015 in BladderScan and 2016. So those are kind of a couple of year adoption rates that go on there. Northern Digital doesn’t have to get up to double-digits; they just have to continue double-digit growth. They’ve been growing at double-digits here for couple of years, as they’re really the leader in both the optical tracking as well as the electromagnetic tracking for computer assisted surgery applications. And those continue to just expand. Those applications just expand. And whenever there is new that an OEM customer wants to design, they always come back in Northern Digital because they’re the world leaders in that technology.

Christopher Glynn

And then just if there is any room left there, so wanted to expand on Rob’s question a little bit where you had a record year last year in deal flow and talked about I think record pipeline volume or breadth. Have you transitioned more kind of wholeheartedly to CRI and is increasingly tolerant definition of strategic part of the reason why your pipeline and your yield has kind of accelerated to somewhat unpredictable levels?

Brian Jellison

No, no. Let’s go back and think about with -- reason I said some time ago that the Sunquest and question MHA acquisitions were more transformational than the Neptune and TransCore transformations were. Because at Neptune we paid four times EBITDA of the enterprise in December of 2003 to acquire Neptune at what somebody probably thought was a high price for $500 million. The next year in 2004, we just paid about four times again the trailing revenue of the firm, 3.5 or something, for TransCore, 600 million. Well, neither one of those businesses have lend themselves to adding exciting bolt-on activities to them or giving new domain experience in an area that was easily widened. When you acquire a leading laboratory software provider in a world that’s going to have more and more laboratory instrument usage and will move to genomics in the immediate future, you have big upside ramp. When you have MHA with senior living and nursing homes and all the things around non-acute hospitalization shifts and demography, these things just give you all kinds of opportunity. Well good heavens, we have acquired now SoftWriters for MHA which is growing at double-digits, so it’s a terrific acquisition. We’ve been able to acquire CliniSys which we connect really with Sunquest. We acquired Data Innovations which is phenomenal company that guides all the instrumentation in the hospital into various systems and yet it’s part of Sunquest.

So, that’s why we can look at these things which are somewhat synergistic at least in the marketplace or in the information technology side of them that we couldn’t do with the industrial and energy businesses.

Operator

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

John Humphrey

Thank you. And thank you all for joining us. I know there were a couple of folks on line for follow up questions; we will get back to you as soon as we can. Otherwise, we’ll look forward to talking t everyone in three months, at the end of the first quarter.

Operator

That will conclude today’s conference. Thank you for your participation. You may now disconnect.

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