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Roper Industries Inc. (NYSE:ROP)

Q1 2012 Earnings Call

April 23, 2012 8:30 am ET

Executives

Brian Jellison – Chairman, President, Chief Executive Officer

John Humphrey – Executive Vice President, Chief Financial Officer

Paul Soni – Vice President, Controller

Analysts

Dean Dray – Citi Investment Research

Mark Douglass – Longbow Research

Jeff Sprague – Vertical Research Partners

Alex Blanton – Clear Harbor Asset Management

Matt Summerville – Keybanc

Terry Darling – Goldman Sachs

Christopher Glynn – Oppenheimer

Richard Eastman – Robert W. Baird

Operator

The Roper Industries First Quarter 2012 Financial Results conference call will now begin. Today’s call will be recorded. I will now turn the call over to Mr. John Humphrey, Chief Financial Officer. Please go ahead.

John Humphrey

Thank you, Jake, and thank you all for joining us this morning as we discuss the results of our first quarter 2012. 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. 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 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 further detailed in our SEC filings. You should listen to today’s call in the context of all that information.

Now if you’ll please turn to Slide 3, I’ll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants. Brian?

Brian Jellison

Thanks, John. Today we’ll kind of go through the first quarter enterprise financial results and then we’ll get into the specific segment detail and the outlook for each of the four segments for the second quarter and balance of the year. We’ll update you on our established guidance for the second quarter and our full-year guidance, and then take your questions.

So next slide, please? The first quarter here was another spectacular quarter. We achieved all-time records for revenue, orders, net earnings, EBITDA, operating and free cash flow in the quarter. Total sales were up 10% and importantly organic revenue was up 8%. Our book-to-bill ratio was above 1 at a strong 1.03. Gross margins reached 55%, which is really quite remarkable, and our operating margin leverage was spectacular in the quarter. Operating margins were up 200 basis points to 24%, and our incremental operating margins were 43% in the first quarter. We closed out the quarter with 205 million in EBITDA and an EBITDA margin of 28.9%.

The diluted earnings per share were up 20% to $1.09. More importantly, the free cash flow was up 69% to 131 million in the quarter. It is an all-time record first quarter for us and a great start for 2012.

Next slide? Our first quarter income statement, you can see here that the revenue was up 10%, 8 organic, and book-to-bill at 1.03. Gross profit up another 70 basis points to 55%. Operating income was up 20%. Tax rate was a little bit higher than the first quarter of a year ago – 40 basis points higher, which cost us a penny. Still, net earnings were up 22% and you can see the DEPS line at 1.09.

Next slide? We had terrific EBITDA growth in the quarter, and if you just continue to look at our trend you can see on this chart our trailing 12-months EBITDA now is $830 million, up from 685 last year on a trailing 12-month basis and 519 million on a trailing basis at the end of Q1 2010. So we’ve added 60% to our EBITDA in just the last two years, and our EBITDA margins on a trailing basis are up 400 basis points from 25% in 2010 to 29% in 2012. People from time to time, investors ask, when are you going to have that deterioration in margin? Our plan would be never. We’re just going to continue to move up that line because of the culture and focus we have here.

Next slide? Q1 cash flow, you can see another blowout kind of a quarter here. Our cash conversion was very strong. We had 141 million in operating cash flow, which was $0.20 of every dollar of revenue. The conversion on that, 131% of net earnings. We invested about 10 million in capital in the quarter, which was 1.4% of revenue, right within our kind of 1.2 to 1.6% of revenue plans. So free cash flow was 131 million, 18% of revenue, and the conversion at 121. A remarkable performance against last year’s first quarter, where we had 78 million of free cash flow last year in the first quarter and 131 million this year in the quarter.

Next slide? Our asset velocity continues to improve. I know people keep saying it can’t be done, it won’t get better; but it does get better. If you look at the same period, inventory is now down to 7.5%, receivables actually dropped down to 14.5%, payables and accruals at 14.9, so our inventory plus receivables less payables and accruals closed out at 7.1%. If you look at the trend in 2009, it was 9.6, finally breaking below 10, and people would ask us if you could get any better, and the answer is oh yeah – you can get better. Two hundred and fifty basis points improvement over that three-year period, closing out at 7.1% - very exceptional performance.

Next slide? Balance sheet is pretty strong here. Cash – if we look at a year ago, we had 261 million in cash and we closed out this quarter with 452 million of cash. We had drawn a little bit against our revolver, which had 750 million of capacity this time a year ago. Now, our undrawn revolver is just that – we don’t have anything drawn against it, so you take that cash and the undrawn revolver and you get a little over 1.2 billion. Our trailing 12-months EBITDA is now up to 830 million, quite a substantial increase over the trailing EBITDA at this point in 2011, so it of course has a very dramatic positive effect on all of our credit stats. Our gross debt is less than it was a year ago, and our shareholder equity has increased by $450 million in the year from 2.882 billion to 3.332 billion, which then brings down the gross debt to cap number from 30% to 24.4, and gives us a gross debt to EBITDA line at 1.3. You can kind of do the math on the net debt to EBITDA line and you’ll come up with quite a remarkable number.

Segment details here on the next slide – really, all of the segments had extraordinary performance. They all had double digit growth in operating profit. Next slide – we’ll start with the RF segment. Revenue was up 2% but operating profit was up 12%. Operating margin was 24.6% for RF, up 220 basis points, and they finished the quarter with a gross margin of 52%. They had very strong leverage in higher margin areas, obviously, when revenue is up 2 but OP is up 12%. We certainly had a headwind on that revenue line because the Gaz de France project, which was in 2011, was substantial in Q1 and quite substantial in Q2, was completed last year so we don’t have anything other than administrative revenue associated with that now, which makes comps for RF a little bit difficult the first couple quarters of this year.

We continued to have expansion in both the security and cashless payment systems that we have for higher education. That drove substantial growth in the software platform, and then our SAS-based solution networks have added subscribers both in our freight systems area and in our food service areas, and our European expansion continued. Our toll and traffic service business was led by electronic tolling conversion we’re doing in Puerto Rico that adds to our growth and offsets the sort of weakness in other areas around transportation.

For the rest of 2012, we have fighting us, particularly in Q2, the Gaz de France project which is completed. That takes some revenue away, makes for a difficult comp. Our pole project activity in last year’s second quarter was a record in the last three years and quite disproportionate to the rest of the year, so that’s a difficult comp. That said, we’ll still perform better because of the strength of the rest of the businesses in the RF segment. We expect to have continued growth in software and SAS network businesses, particularly in the campus area and the growth of subscribers in our networks.

Next slide? Industrial technology – here you can see revenue was up double digits at 15%. Operating profit was up 25%, and our OP margins really are spectacular at 29.5% OP. Compare that to most people’s gross margins – it’s really quite a remarkable achievement – 29.5% OP, up 230 basis points. Our gross margins in this segment were 51%.

In the quarter, fluid handling was very strong once again as we continue to gain share in the oil and gas industry with the shale activity that’s going on. We have a variety of new products that are going into our agricultural applications around irrigation, and those are doing very well; and then we’ve had some pumping activity we do in the transport and industrial arena which was quite strong in the quarter as well. The Toronto water meter project is kind of moving ahead as planned, which gave us some growth in the first quarter, and then the U.S. municipal market in Q1 was relatively strong for Neptune. We had significant increase in our material analysis equipment and consumables business in Denmark as industrial production around the world continues to expand. That business continues to have double digit growth. And the margins in the quarter, as I said, really were remarkable. It’s an all-time record OP margin for us, which is coming from capturing the leverage off of the growth.

For the remainder of the year in 2012, the segment backlog is quite strong and that supports continued growth, even if orders were to moderate. The industrial and shale end market remain quite favorable to us, and these outstanding margins that we captured in the first quarter, we believe that the things we’ve done to get better margins are sustainable and will continue throughout 2012 at these higher levels.

Next slide? The medical and scientific imaging segment, here you’ve got revenue growth, again double digit at 12%, OP growth at 24%, operating margin up 250 basis points to 26.6%. We were benefited by having Northern Digital in the first quarter, which delivered exactly what we expected out of them on the revenue side and even better margins. We’ve had a very, very strong first quarter with Gatan in the electron microscopy arena. Those end markets are pretty good and we’ve recently introduced some products there in the last 15 months which are continuing to grow and add to Gatan’s strength.

Our medical expansion internationally continued in the quarter, gave us some growth as well. And then this margin performance that we’ve gotten from the operating leverage here in medical really was terrific, and it offset what otherwise would have been a tough first quarter because North American research funding has been quite soft and the life science area around our photonics camera businesses was weak. For the second quarter, we’ll have some continuing weakness around those North American research markets. We don’t see that picking up, but it may get better than it was in the first quarter.

We expect to continue to grow the medical business. We’re experiencing an increase in consumables as we think we’re gaining share, and the end markets are favorable in each of the product categories that we participate. Northern Digital in the second half of the year will become organic for us, and that will help our organic growth profile. And Gatan’s backlog, which is quite heavy and we’d like to see shipments improve in Q2, but they certainly are going to improve strongly in the second half of the year. It gives us confidence for the full year as a whole. Gross margins, I guess I could say, were a modest 65% in medical and imaging in the quarter.

Next slide? Energy systems and controls up – whoops! Same old story, isn’t it? Revenue up 15%, operating profit up 23%, OP margins 24%. You know, energy systems Q1 OP margins are usually the worst of the year, but these are pretty good at 24%, but will improve, I’ve been assured. In the first quarter, our compressor controls business continued to grow nicely with projects in both LNG and upstream activities. The oil and gas markets continue to be very favorable to us in our diesel engine safety shutoff systems and in the valves that we provide, both to oil and gas and marine. Very good instrument sales for the petrochem and refining markets, and we acquired a small but important company called Cambridge Viscosity, which gets us online Internet capacity around measuring data. I’ll ask John to talk a little bit about this small acquisition.

John Humphrey

Sure. We recently completed the Cambridge acquisition, just within the last month of the quarter so it didn’t contribute an awful lot. You can see it on the cash flow statement, kind of the range that we paid there. But what this really provides is viscosity measurement for fluids, both in the oil area but also in the petrochemical, so it adds additional technology to our existing set of businesses there. And so Cambridge will be able to kind of come into an existing sales channel, but also provides additional online work, so outside of the laboratory into the process. So it’s a nice fit both for us as well as for Cambridge and additional technology, and they’ll be able to benefit from our expanded reach and we’ll be able to benefit from their technology. So I think that’s going to be a nice acquisition for us that will start to contribute in the second quarter and beyond.

Brian Jellison

Okay, thank you. We’re going to have for the rest of the year double-digit growth, we believe, in energy. We’ve got record backlog at the moment. We have continuing strength in incoming orders and we’ve got favorable industrial end markets for our one business that kind of fits to the industrial area, our Dynisco business. We expect that that should continue to be okay throughout the year. We’ve got great operating leverage in the remainder of the year, and the execution and focus of everybody in this business is quite strong.

Next slide? This will be our introduction into our 2012 guidance. I’ll talk a little bit about the quarter and then the full year, and of course we’ve raised our guidance.

Next slide? For the full year, we’ve raised the guidance to 4.75, which is an $0.08 increase on the bottom end and to 4.91, which is an increase on the high end as well. And in the second quarter, we’ll have some headwinds and a little bit of confusing data. Last year we reported, as you can see on this slide, a $1.03 excluding a $0.05 re-measurement gain for foreign currency that we had, and that’s the way we treated that throughout the year on a GAAP basis. In some reporting services, you’ll see $1.08 which includes the $0.05 re-measurement gain, but our baseline is $1.03. The second quarter last year was extraordinary compared to the rest of the year, and so it was $1.03 and the second quarter in 2010 was $0.74. So our guidance for the second quarter of this year is $1.11 to $1.15. At the midpoint of that, it’s still double-digit growth over last year. We do have some comparative headwinds around the Gaz de France contract, which was large last year, that we had this North American research softness and we have some toll shipment timing things that occurred last year. It was the best quarter for the TransCore business in three years in the second quarter last year. On a full-year basis, of course, a modest growth trend, and that we expect will continue this year but we won’t have the outsized second quarter.

That said, we still look for quite strong results in the second quarter and much stronger results for the second half and the full year. We’ve raised our operating cash flow projection. We had said it could be 650 million. We’re now saying it ought to be between that and 675 million for the full year.

Next slide? So if we recap here before we go to Q&A, the first quarter produced all-time records for revenue orders, net earnings, EBITDA, operating and free cash flow, spectacular gross margin at 55%, very strong cash conversion around the operating cash flow and the free cash flow, with free cash flow being up 69%. Our book-to-bill strongly above 1 at 1.03, terrific operating leverage which just speaks to the quality of our different operating teams around the world, and we’ve raised the guidance as we go into the balance of the year. We certainly expect to have record performance for 2012 as a whole, and I think with that, John, we can open it up to questions.

John Humphrey

Okay. All right, Jake, we’re ready for the Q&A session.

Question and Answer Session

Operator

Very well. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touchtone telephone. We ask that our callers limit their questions to one main question and one follow-up question. We will pause for just a moment.

And our first question will come from Dean Dray, Citi Investment Research.

Dean Dray – Citi Investment Research

Thank you. Good morning everyone. The comments on shale activity – so, we’ve seen a big ramp-up in all the fracking opportunities, and you’ve participated both in the industrial side on the pumps and on the compressor controllers, but you’re seeing some investment move away from that given low nat gas prices. Is that embedded in your guidance, and maybe you can just give us some real-time color as to what you’re seeing in that segment.

John Humphrey

Sure. Now of course, in our real time color, we’re not really on the leading edge of exploration activity. We’re more along in how they go about on the production side once they’ve ramped up there. So real time information, I think you may be able to get better color on that from someone else.

Now our activity there is both on the natural gas side as well as on the oil side, so what we have been seeing at least over the last quarter or so is some of those rigs start to move and really ramp up more on the oil side and less on the gas side as you were talking about. We still see very solid activity. Of course, as we have more pumps that are deployed, we’ll see more after-market revenue associated with that as well. And then the LNG and the other investments, in order to make sure that the transport and processing of the gas particularly, as well as on the oil side but mostly on the gas side, those investments are continuing and those are in our backlog in one of our businesses in particular. So embedded in our expectation for the rest of the year, I wouldn’t say is a ramp-up of activity; it’s kind of steady state about what we’re seeing today, and that’s our expectation based upon the backlog and the quote activity out of our businesses.

Dean Dray – Citi Investment Research

Great. And then the follow-up question over on the RF side, there’s been some speculation that TransCore’s number one U.S. competitor could be for sale. They’re in a number of interesting markets and customer relationships and so forth. Would you be boxed out from an anti-trust reason to be able to—if that asset were available, or the other side, might it be competitively at a disadvantage if it fell into a stronger competitor?

Brian Jellison

Are you suggesting that they’re a weak competitor? It would be safe to say that there are two large players in this space around hardware applications – one of those is a European company, the other is ourselves. There are a number of players in the back office administrative space, and the company you’re talking about, which is a publicly-traded company, has a very, very modest position in back office activity as part of that. So we wouldn’t view that as being anti-competitive in any way.

Dean Dray – Citi Investment Research

I’m not quite sure I understood the answer. Would there be a reason that it would make sense to be paired with TransCore?

John Humphrey

Well, as the strongest player in toll and traffic world, I think it’s always a beneficial thing for someone to want to join with TransCore. But in our future, we feel very comfortable with the set of technologies and services that we’re providing to that marketplace. We’re happy with our position, but if something else happens there, then we’ll see what that looks like.

Dean Dray – Citi Investment Research

That’s helpful. Thank you.

Operator

And now we will take a question from Mark Douglass with Longbow Research.

Mark Douglass – Longbow Research

Good morning gentlemen. Brian, you were talking about industrial tech and the very strong margin improvement there. Correct me if I’m wrong, but 1Q is typically the weakest from a volume and margin standpoint, and it looks like it’s been the highest ever. So did mix play into that to some degree? Can you flesh that out, what drove the margins, and then can you even take it to 30 exiting 2012?

Brian Jellison

Well, it’d be a great goal. When we think about weak Q1, we really only think about the energy systems business. I wouldn’t think normally about industrial necessarily being weak. There is some times based on weather that Neptune might not be very good because you’ve got winter and so forth, but that wasn’t the case this year. But I don’t—seasonal Q4 for them is difficult just because of the time of the year it is. I think as long as we get revenue growth, we’re going to continue to have favorable leverage – it’s as simple as that. We expect to have continued revenue growth, so we would expect to maintain or enhance our leverage.

Mark Douglass – Longbow Research

Okay, but it wasn’t a really strong mix component in there this quarter that—

Brian Jellison

No, no there wasn’t. There wasn’t any unusual activity. I will say—I mean, certainly the pump businesses, as they grow, throw off a lot of cash and very favorable incremental returns, so that’s something that has grown a lot more in the last year or two than historically it’s grown. So that supports better results in the quarter.

Mark Douglass – Longbow Research

Okay, helpful. And then can you break down your second half versus one half expectations, and maybe what you’re thinking organic growth consolidated for 2012, at least a bounded range?

Brian Jellison

Yeah, I think we could take a swipe at that. Second half organic growth should be better in our view. Our guidance at the beginning of the year was 5 to 8, and we had 8 in the first quarter. We would expect less than that in the second quarter, and that or more in the third and fourth quarters. So we’d still stay generally with this kind of up to 8% organic growth for the full year, and at the low end of that range in Q2 and at the high end of that range in Q3 and Q4.

Mark Douglass – Longbow Research

Thank you.

Operator

And now we’ll move to a question from Jeff Sprague with Vertical Research Partners.

Jeff Sprague – Vertical Research Partners

Thank you. Good morning, gents. Just a couple questions – Brian, thinking about the strength in the secular growth that has materialized in these energy and pump-related businesses, they maybe haven’t been a huge source of M&A although you did a deal in that space this quarter. But has your view about the long-term attractiveness of those businesses changed for the better? Might you be more active there over time?

Brian Jellison

Yeah, I wouldn’t rule it out, Jeff; but the reality is when we look at most of the businesses in that space are trading at relatively high valuations versus their intrinsic long-term value, and they have a lot of assets and we’re still pretty wedded to the concept of being asset-light. So I think we would prefer to buy intellectual property that we could deploy into those businesses using their existing assets. I think to find something that we could buy—we have looked at a couple of things, but in terms of how we think they should be valued on a cash flow basis, I think some people are overpaying for those flow control assets at the moment. As you know, we rarely would, I don’t believe ever, overpay for anything.

Jeff Sprague – Vertical Research Partners

And maybe on that, the bias not to overpay seems to keep the M&A activity at a relatively low level. What’s going on out there in terms of valuations and pipeline and attractiveness of assets?

Brian Jellison

You know, I think there is so much going on that it’s a classic case of you don’t want to do something that’s good when the best thing is around the corner. So in a good-better-best situation with the strength of our balance sheet we have, we’re looking for the best thing. We think we have a couple of best things identified and we’re doing a lot of work, and we’re very excited about what will happen over the next months.

Jeff Sprague – Vertical Research Partners

So we shouldn’t rule out something meaningful in 2012, it sounds like.

Brian Jellison

I wouldn’t rule it out.

Jeff Sprague – Vertical Research Partners

And then just one final one and then I’ll pass it on – Gatan, is there an issue there with them not being able to deliver relative to backlog, a production issue or something? What’s going on there? You kind of called it out—

Brian Jellison

A production issue. They always have very sophisticated sensor technology we have to buy, and it’s oftentimes only produced periodically. The orders have been pretty good, and they do have some occasional bottlenecks in Gatan, and they’re forecasting kind of treading water in Q2. We’d suggest it would be better if they swam, so I think they understand our view of that. But that’s kind of where that is. We don’t see anything but upside in Gatan for the full year, but they had a really remarkable first quarter and so they didn’t pace themselves at all. I think they have to kind of gear up here again for Q2 and maybe they’re being a little conservative, for those of you in Pleasanton who are listening.

Jeff Sprague – Vertical Research Partners

Great. Thanks, Brian.

Operator

And next we’ll hear from Alex Blanton with Clear Harbor Asset Management.

Alex Blanton – Clear Harbor Asset Management

Thanks. Good morning. I want to find out what the assumptions are behind your guidance. You’ve raised your guidance. I’m not sure I heard the exact reason for that. But what are you assuming about the economy, about Europe, about Asia and whatnot in the guidance, because my thinking is if you’re doing this well in a weak recovery, what are you going to do when the recovery accelerates?

Brian Jellison

Well, we’ll do better.

Alex Blanton – Clear Harbor Asset Management

Right, but what if it happens? What’s behind your guidance right now? You’re assuming continued weakness in the economy?

Brian Jellison

Certainly what we would see—we’ve had strength everywhere except for Europe, and Europe was positive but it was only up a couple of percent versus everything else being up double digits and Canada and Asia being up over 20%. We do just see some areas that are going to be weak. This North American research funding scenario puts a real brake on our photonics businesses in a negative way, so that kind of pares back revenue some from what we’d like to have. On the other hand, margins in those businesses are not as high, and their cash generation capability is a little less good so they don’t hurt us overall. For the year, we expect to do sort of okay. We’re going with a 30% tax rate for the year as a whole. I think if we wind up with 8% organic growth on the year, I think if it’s not best in class, I’d be surprised. So we think that’s pretty good.

Now if things picked up and became better, then obviously as the year went on we’d look at higher numbers.

Alex Blanton – Clear Harbor Asset Management

Okay, so you’ve got a conservative forecast here.

John Humphrey

Yeah, and the other thing—

Alex Blanton – Clear Harbor Asset Management

You’re not looking for much improvement in the economy.

John Humphrey

And Alex, the other thing I would say about that is remember, we’re a collection of many different niche markets, and the things that may be a little bit weaker that you may be referring to around housing or something like that, we don’t really have any exposure to speak of to new construction activity or automobile production, or some of those areas that are more broadly aligned with kind of the more cyclical aspects of GDP. So as we look at our individual niche markets, we see a number of them that I wouldn’t characterize as weak today and that we expect them to continue to perform well.

Alex Blanton – Clear Harbor Asset Management

Okay, thank you.

Operator

Matt Summerville with Keybanc will have the next question.

Matt Summerville – Keybanc

Morning. A couple questions on the medical and life sciences area – Brian, can you talk about where you’re at with some of the new products, or the new product pipeline with Verathon? A couple of the other divisions I think that you’d talked about in the last quarter as having maybe—or last quarter two as maybe having some pretty meaningful launches slated for this year.

Brian Jellison

Well, in Verathon we have a product called Heartscape which is an important product for us, and it’s launched in Europe. It’s not launched in the U.S.; we still are going through regulatory issues with that to get it launched. I think whenever it launches, it should be a very good product. We don’t have it in for much of our guidance for the balance of this year. It’s more likely to be something that could help in 2013 from the U.S. perspective, but sales have started in Europe, and in fact our leader of Verathon is on a plane as we speak right now, going over to have some meetings over there with people on the subject. So I think that’s pretty good.

We have some CIVCO and MEDtech products that are launching in the second half, and some things that they’ve been working on that we kind of know are going to beneficial in second half of the year. And then Northern Digital, we’re doing several things in Northern Digital to broaden their range of activity, which we expect to pay dividends in the second half.

Matt Summerville – Keybanc

And then as a follow-up, you mentioned in terms of the headwinds you’re encountering in the second quarter – the Gaz de France, the toll shipments being maybe unusually high last year. Are you able to ballpark or quantify, if you will, the hole in revenue that you guys are kind of comping against? Is that a $5 million headwind, a $15 million headwind? Can you frame that up a little bit for us?

Brian Jellison

I’d say 10 million or more.

John Humphrey

Yeah, I’d say a little north of 10.

Matt Summerville – Keybanc

And then are you able to quantify as well in imaging what the impact is with regards to the downward pressure in NIH and other public funding sources? Or maybe, how much of your business there do you feel is driven by public funding?

Brian Jellison

Well we want to just kind of clarify in terms of that. When we say we’re down, I’d say it’s a little over 10 million for just the tolling and the Gaz de France, which both happened to be in the RF segment, and it could be even a little higher than that on a comparable business.

John Humphrey

Right.

Brian Jellison

But imaging is a different thing and of course in a different segment. The problem with imaging is that Gatan will probably outperform enough to make up for that camera softness, but the camera softness from the funding, both in Japan and the U.S., probably a double-digit negative on their baseline. So that’s likely to be a drag in each of the second and third quarters, and that would be in the mid-millions.

Matt Summerville – Keybanc

Thanks a lot, Brian. Appreciate it.

Operator

Terry Darling with Goldman Sachs will have the next question.

Terry Darling – Goldman Sachs

Thanks. Good morning, guys. Brian, I wonder if you could help us a little bit with the Aussie LNG outlook for compressor controls. How big is that business for compressor controls today, and what kind of growth do you see over the next three or five years, given the CAPEX trajectory that everyone is looking at there?

Brian Jellison

John’s opening up his book.

Terry Darling – Goldman Sachs

Is he smiling while he’s doing that?

Brian Jellison

Yeah, he’s smiling. I think he’s smiling. That’s a little granular there.

Terry Darling – Goldman Sachs

Well, I just—the reason I ask, obviously it’s not a huge business for you, but it’s one of the bigger ones ex-the top couple. But the CAPEX numbers there are huge, and if you’re thinking longer term on growth for that segment, you’ve talked about double-digit for this year so there’s a confidence and a visibility there. I’m just wondering if we can think about continuing to see double-digit growth for ’13, ’14, given what you’re seeing on the shale gas infrastructure build-out but also the Aussie LNG piece.

Brian Jellison

Absolutely we would expect double-digit growth – no question about that. I mean, we’ve built a great organization there. We’ve put as much talent in there as any place in the company, and it’s got a very much broader leadership team and capability team. We have terrific people throughout that organization, and we’ve made some acquisitions there. You know, we acquired Trinity, we acquired United Controls in addition to the investments in the structure we’ve put in. I mean, they are absolutely going to do double-digit growth, and we’ve completely refurbished the headquarters operation at Des Moines, which for those people who have ever been there, it’s unbelievable. It really does look like a technology business now, and double-digit growth will be easy for them to obtain.

Terry Darling – Goldman Sachs

I don’t know if John wants to tell us what’s in his book there, but does it get big enough, and is that growth rate big enough to really give you some confidence that energy systems in total can be double-digit ’13 and beyond?

John Humphrey

’13 and beyond, I mean, I wouldn’t say that we have a view on ’13 and beyond yet. I think most of our commentary is really about ’12, and it’s true the backlog and the growth that we have seen out of energy so far in this region has clearly been above the average for the segment in total. Brian talked a little bit about the fact that we were up 22%--20% north in Asia and as well as in Canada, but also in the rest of world category which includes Australia as well as a few others – that’s also north of 20% for us. And we’ve seen at least four energy systems and controls just north of 20%, and that’s largely driven by the investments that are happening. And now, it’s still off of a relatively small base, so I don’t want to overplay this, but it does add to our backlog and add to the LNG position that we have, where I think that we’re largely seen as the best control systems provider for any type of LNG plant anywhere around the world. So the fact that they are making strong investments there at the Gorgon site as well as at others is going to continue to benefit us, we think.

Terry Darling – Goldman Sachs

Okay. And then maybe just a little bit more color on the slower growth in Europe – I think you said up a couple percent. Just trying to recall your profile there – I guess I thought you were overweight Europe relative to company average in energy and medical, so I might take the comments on funding to mean that medical was a drag and maybe even negative in Europe. One would assume energy is still running strong there. But if you just profile Europe exposures for us more broadly and just identify which businesses are really driving that slowdown.

Brian Jellison

Well, we actually grew in Europe; just we didn’t grow at the same rate as other places. So it’s not a matter of not growing, it’s just in Europe we grew at 2%, and in the quarter every other geography was double-digit growth. So we had 10% growth in the U.S. and 22% in Canada and Asia, and 13% in the rest of the world. It was just Europe up 2. So the growth remains fine, and Europe represents less than 20% of Roper – it’s in the sort of 15 to 18 category, so it’s not a major drag. Energy was up double digits but medical was very close to that. It was really the change in Europe was purely from the Gaz de France contract that we had. It was unique and was just something that occurred, and it was down sharply. If you hadn’t had that adjustment, you would have had close to double-digit growth everywhere. So that was—you know, it took some points off of our growth profile.

Terry Darling – Goldman Sachs

Okay, that’s helpful. And then lastly, Brian, the industrial markets within your pump business, are you seeing any signs of slowdown there or do you think the growth rates can continue where you’ve identified them here, which I think was up single digits?

Brian Jellison

Yeah, they were probably a little better than that. We certainly aren’t seen any fall-off in those at all.

Terry Darling – Goldman Sachs

Okay, great. Thanks very much.

Operator

And now we’ll move to the next question, and that will come from Christopher Glynn with Oppenheimer.

Christopher Glynn – Oppenheimer

Thanks, good morning. If you mentioned imaging organic growth, I didn’t catch it; but could you elaborate on that and if that outlook is a little better for the entire segment than you had earlier?

Brian Jellison

I don’t know; I thought we were pretty clear when we went through that.

John Humphrey

Yeah, medical and imaging were up 4% organically in the quarter.

Christopher Glynn – Oppenheimer

Okay. And then a broad one on industrial tech and energy – it’s been alluded to, but you’re establishing some pretty tough comps and a nice track record there, cyclical going your way and everything. So thinking about the longer term comps and what you can do from here, I’m wondering as you look at new products, OEM and channel expansion work that you do, are those opportunities that remain fundamentally part of the long-term outlook for industrial tech and energy systems to continue to kind of recreate your organic growth profile there?

Brian Jellison

Our industrial businesses really are not OEM for the most part. Our industrial businesses are our product solutions for direct customers. In the energy arena, we do some OEM activity, but even there it’s not super high. But our engine shutoff valves, for instance, somebody could argue that’s an OEM product going into most everybody’s diesel engine. Fortunately we don’t look at it that way; we look at it as a solution that the customer really requires and the engine manufacturer has to buy.

John Humphrey

And I do think, Chris, that you’re right – we’ve definitely benefited from the investments that we have made and continue to make in new product development and channel development for those. I mean, you’ve seen that out of our fluid handling businesses with expansion of channel activity, particularly in wastewater and agriculture areas, rental market expansion, new product applications in oil and gas for our fluid handling, as well as in our energy systems businesses. And we continue to focus on those areas where customers are really going to benefit from the technologies that we can provide and the application knowledge that we have. I don’t see that as being something that—our businesses will continue to reinvent themselves, but I don’t really think of it as reinventing. It’s just a question of expanding their solution set and becoming even more important to how customers are able to be successful. That’s what they’ve done this year, and I expect them to do that next year, just as they’ve done over the previous decades.

Christopher Glynn – Oppenheimer

Thanks. It’s very helpful.

Operator

And now we’ll move to Richard Eastman with Robert W. Baird.

Richard Eastman – Robert W. Baird

Yes, good morning. Brian, in the RF technology segment in general as we move through calendar ’12, is the—should the expectation be that there’s more, you know, service and admin revenue, less hardware, hence this margin profile can actually work from here higher, even though our sales mix and maybe sales level won’t be as great in terms of growth?

Brian Jellison

I think if I understood you right – let me sort of test that – that the service revenue is lower than the hardware revenue in terms of margins, so if hardware is diminished at the expense of services, it would hurt the margins. What you’re seeing and the reason the margins continue to grow is that our software businesses, which are in RF, are expanding and they carry much higher margins, both at the gross and operating level and the cash flow levels. So those are going to continue to push out the mix of the tolling and service processing portions of RF at a fairly rapid pace.

Richard Eastman – Robert W. Baird

Okay, so the CBORD, the freight matching, ITrade – those businesses are up nicely versus—you know, that’s where the mix is coming from rather than a hardware service mix.

Brian Jellison

Right.

John Humphrey

Yeah, particularly on the margin side, that’s for sure.

Richard Eastman – Robert W. Baird

Okay, understood. And then within industrial tech, the Neptune business, we’re kind of feeling in the marketplace there that seasonality and weather played a more substantial role this quarter. Are you comfortable that the municipal market is in fact starting to recover, or is this almost an anomaly based on weather and the seasonal pattern that we would typically see in the water metering market?

Brian Jellison

I don’t know. We’ve read some comments from others, and we wonder. I think that the weather had to help Q1 for people. We certainly don’t see a robust municipal market for anybody, and we don’t see speedy decisions occurring in municipal markets. We have a huge installed base, and so that continues unabated; but there’s no question if municipal houses were in a little better shape, or you had any new residential construction, we’d have a growth spurt.

Richard Eastman – Robert W. Baird

Okay. And John, just quick question on Toronto – is it still reasonable to assume that we can do about 40 million or bill out 40 million on Toronto this year?

John Humphrey

Yeah, that’s our prediction.

Richard Eastman – Robert W. Baird

Yes? Okay. Great, thank you much. Great quarter.

Operator

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

John Humphrey

Okay, thank you all for joining us today and we look forward to talking to you again in July as we complete our second quarter.

Operator

And ladies and gentlemen, that will conclude your conference for today. Thank you for your participation.

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