Roper Industries, Inc. Q1 2008 Earnings Call Transcript

| About: Roper Technologies, (ROP)

Roper Industries Inc (NYSE:ROP)

Q1 FY08 Earnings Call

April 25, 2008, 10:00 AM ET

Executives

John Humphrey - VP and CFO

Brian D. Jellison - Chairman, President and CEO

Paul J. Soni - VP and Controller

Analysts

Wendy B. Caplan - Wachovia Securities

Shannon O’Callaghan - Lehman Brothers

Michael A. Schneider - Robert W. Baird

Alexander M. Blanton - Ingalls & Snyder

Deane Dray - Goldman Sachs

Jeffrey T. Sprague - Citigroup Investment Research

Operator

Good day everyone and welcome to the Roper Industries First Quarter Financial Results Conference Call. This conference is being recorded.

At this time I would like to turn the conference over to your moderator for today, Mr. John Humphrey. Please go ahead, sir.

John Humphrey - Vice President and Chief Financial Officer

Thank you, Anthony and thank you all for joining us this morning. As we discuss the results of first quarter performance. Joining me this morning is Brian Jellison, Chairman and Chief Executive Officer and Paul Soni, Vice President and Controller.

Yesterday afternoon, we issued a press release announcing our first quarter financial results. The press release also includes telephonic replay information for today’s call. We have also prepared slides to accompany today’s call, which are available through the webcast and are also available on our website at www.roperind.com.

Now, if you please turn to slide two; you will once again see our Safe Harbor statement. I want to remind you that today’s call includes forward-looking statements, which are subject to risks and uncertainties as described on this page. Additional information about specific risks are included in our SEC filings. You should listen to today’s call in the context of all that information.

And now, if you please turn to slide number three. I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants. Brian?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Thank you, John and good morning everyone. Well, the next slide you can see just an overview of what we will talk about today and then get into Q&A. We give you a little discussion around the enterprise in total and then talk about first quarter results for the enterprise and the individual segments. We are going to update our guidance, talk about kind of driving forces that we see throughout the rest of 2008 and then summarize what we have done today.

So, next slide. If we look at first quarter it was an all time record for us in the first quarter for virtually every financial metric we have with the highest level of orders, sales, net earnings, EBITDA, cash flow, operating cash flow, and diluted earnings per share. Our sales and orders were both up 13% in total, 10% of that was internal growth in both categories hardly benefited by 3 points of foreign exchange.

The backlog in the quarter went up from $520 million last year to $519 million that $17 million increase in backlog in the quarter, means we should have a strong second quarter. EBITDA in the quarter was $134 million and EBITDA margins went up again by 50 basis points to 24.6%, which is an exceptionally strong way to begin the year. Our net earnings were up 24% to $64 million up from $51 a year ago and the diluted earnings per share number was $0.68 up from $0.56 last year.

Operating cash flow in the quarter was $72 million, up from $57 million last year, a 25% increase. So, as first quarters go this was a very strong start for Roper.

Next, in the first quarter we have made two acquisitions, the large one CBORD, which we discussed in our yearend conference call on February. CBORD has been with us in the quarter for five weeks. It is a leading supplier of cards and integrated security solutions for both education and healthcare. We talked extensively about it in the call and I have been reviewing it, as we have done investor conferences in the quarter. It’s a particularly good match for us, because it touches on a variety of markets that helps us expand our opportunities with our existing businesses, very synergistic with radio frequency. We will talk about that when we are in the segment.

For us, we were delighted because they were in the process of changing their financial system at the time of the acquisition and all of that has been completed and the financial integration is really ahead of schedule. TechPro is a small company that we acquired in the last week and a half of March. It is a company that’s making test instruments and software for really the process industry.

It’s in Akron, in Ohio where our Alpha business is, both of these are part of the Dynisco sensor technology that we acquired back in the December of ‘06. Dynisco is off to a good start with us and TechPro was a natural second bolt-on for that family of products. As you can see we invested $370 million in the first quarter and the fruit of that you will start to see in the second quarter.

Next slide. Now we want to talk about the specifics of our first quarter for the enterprise. The income statement here next slide, you can see net sales went up from $478 million last year to $543 million this year. That’s a 13% increase. Gross profit actually increased, you can see from 49.8 to 50.9 demonstrating, I think the value of our products and services, the customers and market, where a lot of people are complaining about pricing. You can see we haven’t had to make much in the way of sacrifices.

Income from operations went from 19.4% last year at $93 million up to $99 million this year, a 50 basis point improvement. And income from ops did a little better than quarter of the sales. Interest rates about flat to the prior year, our tax rate flat to the prior year. There are some people, who seem to think our tax rate is not 35%. I don’t know why? We said, we forecast, 35%, that’s our number that would expect on average throughput the year.

Our net earnings, is $64 million up $13 million from $51 million. That’s an increase of $24 million, but of course CATZ took a penny out of our reported number. We would have been $0.69 without the creep in CATZ, which held us back to 68 over 56, that was strong start.

Next slide, we would look here at the top line performance. Sales and orders we said are both up the same percentage. Orders of course exceeded sales and we had some benefit from really the strength of the Euro, little bit in the Canadian dollar, but some offsetting negatives on the cost side in the Canadian dollar.

Nest slide; EBITDA, you can see we continue to grow EBITDA nicely. Our EBITDA in the quarter went from 115 to 134. I would like to remind us, that over the last trailing 12 month period, you can see a more reflective story of how we grow and we will continue to grow EBITDA. In the 12 month period ending first quarter of 2006, our EBITDA was at $352 million. It went up $97 million during ‘06. So, it ended the first quarter of ‘07 at $449 million trailing, and this year that’s added another $98 million of EBITDA coming from 449, up to 547 on a trailing basis and that doesn’t have the benefit of the pro forma, what we would have from CBORD added to it. So, our trailing 12 months EBITDA is up 55% in the last two years.

Next slide. Cash performance in the quarter was really spectacular. Once again our asset velocity initiatives continue to bare fruit, you can see inventory drop from 9.7% of sales at the end of the first quarter a year ago, to 8.8% of sales this quarter. Our receivables are just slightly higher part of that’s the growth in the international activity and very strong quarter out of energy with longer international receivables.

Payables and accruals were flat, so the net number comes down from 12.3 in the first quarter of last year for net working capital to 11.6 this year. And our operating cash flow increased by 25% from $57 million to 72 to come out with 72 in the first quarter at the start of the year, when Q1 were usually be a most negative quarter on operating cash flow was particularly strong.

Next slide. Here if we look at the balance sheet, the financial capacity of the company. I think, it’s actually a stunning achievement because in the last 12 months we have invested $415 million in transactions with CBORD of course staying the biggest. At the end of the first quarter of last year our cash was $80 million, today our cash is $151 million.

Our net debt has only gone up from 976 to 1.65 billion. Our shareholder equity is up well over $300 million. Our net debt to cap is actually lower today than it was at the first quarter a year ago, where it was 38.8 and today it’s 36.3. Our net debt to EBIDTA is lower than it was a year ago. It’s now 1.9 times versus 2.2 and that gives us substantial room to continue our acquisition program. And our EBIDTA interest coverage is higher 10.7 times versus 9.4 a year ago.

Next Slide. When we get into the individual segment performance and we will start here next with industrial technology. The performance of industrial technology was spectacular. This is a business that had no acquisitions, so all of this was pure organic growth. Orders were up 14% in the quarter and sales were up 12%. We had strength in virtually every business. We only had one product line that didn’t register an increase year-over-year and that was a very small business.

The quarter for Neptune set an all time record, not just a first quarter record for Neptune, but an all time record for any quarter in the history of the company on both orders and sales. So, for people, who were worried about the residential crunch, I would say that we have found the way to weather that storm pretty nicely.

Growth in Mexico was particularly helpful in the quarter. We have a project going on in Mexico City, which is an interesting one for us. Niche Fluid Business these of really all of our field and fluid product businesses are performing at a high level. We have opportunities for pump in the energy segment.

We have a Cornell driving really well with agricultural and wastewater projects and we have Abel driving well with mining projects in Europe and developing nations. And then lastly we have had a return to a build out for cold storage facilities particularly internationally, where our Hansen business has grown nicely in the quarter. All of those drivers, we think will continue in the next several months if not throughput the year.

Operating margins reached a pretty spectacular number. This is not EBITDA; this is just pure operating margin, up 140 basis points to 26.1%. The things we continue to do in ongoing operational excellence drive a lot this activity is does the leverage from the increased volume. And this goes into the headwind, so rising copper prices and cost push inflation for energy to run our facilities. So, I think the people on this segment really have done an incredibly great job.

Next slide. Here we look at Scientific and Industrial Imaging. That is a little complicated story in the quarter because we have exited the Motion Imaging business. We exited with a minority position and so we can’t really put it in discontinued Ops. The reality is that, the sales were up 5% and orders were up 1%, but the fact that Motion Imaging is in the numbers from the prior year and not in the numbers this year, that had a negative 3% drag on the comparison on sales and a 2% drag on orders. So the segment, if we could have excluded that, it would be sales up 8% and orders up 3%.

Internal sales were 6%, and internal orders were up 1%. We have a small acquisition we had last year called JLT, which added a little bit to the revenue. Our key drivers in the quarter, the favorable situation is our CIVCO, Medtec and FMI business continue to do very well in the medical space. They are growing at a double-digit rate. But the government research funding, both here in the US and some degree in Japan has continues to ride softness in the scientific camera business.

And Microimaging, which is really a combination of powerful Gatan and Photometrics and QImaging enterprises and media software is rolling out a large number of new products, which have just hit the market this month and those things we think we will drive additional growth throughout the year, but actually the investment and launch of those pull down margins a little bit in the quarter.

On the operating margin line, you can see we are at 20.8% above the 20% that we one of at a minimum level on imaging. So that was encouraging is up by 80 basis points from our yearend quarter. Medical did very well on an operating leverage, but the Life Science investments that we made in the Microimaging application arena partially offset the operating gains, we got from our medical platform. We expect margins in Q2 will be better than they were in Q1 and then in the second half of the year we will have some easy comps since we get rid off the problems associated with that.

Next slide. Here we are looking at the radio frequency technology segment. Orders were up 17%, sales were up 13% and to understand how good the internal order growth of 10% is, you would want to go back and remember that in the period of year ago, we had the benefit of the growth associated with Middle Eastern project, which was coming online for the first time. The reality is that our revenue associated with that will be similar to what it was a last year, but it’s not in the baseline number a year ago.

So half of last year’s first quarter internal growth came from the Middle Eastern project virtually, where this year none of it comes from that and yes we have got the same growth rate in the first quarter of this year essentially as we did last year. So, this is very strong internal growth out of this family of businesses and sales as you can see were also up. The key drivers here were excellent performance at John Simler in the ITS team. We were awarded a complicated and very sophisticated lane project in San Diego that people will be reading more about in the future.

The Florida Open Road Tolling projects are moving ahead at a faster pace than expected and will help us have a strong second quarter. We had a number of wins in major projects around violation processing and customer service in the road design area. And then a very, very significant long-term multiple win in the Ohio Turnpike, which was not booked in the first quarter, will start to come our way throughout the year.

Our Wireless Sensor sales in Inovonics continued to grow nicely, largely driven by our senior care applications and then CBORD, which only had five weeks of activity, as you might expect those first five weeks couldn’t be as strong as all the rest of the activity, if the seller wasn’t a stupid seller, but we have had a phenomenal beginning. CBORD was able to win Clemson University with about 17,000 students. That’s just been announced and that new product scenario will not only help us in growth throughout this year, but gives a long-term recurring revenue stream as Clemson gets build out.

On the operating margin note, you can see it was 19.4%. That was really 20 basis points lower than I think the year ago number. That number will go up nicely in the second quarter and that was really because we had a disproportionate mix of tolling and traffic project work and what’s encouraging is actually positive is that the quality of the operating earnings we are getting out of those projects is substantially higher than they would have been two or three years ago. The CBORD margin improvement, which will be helpful it will start to kick in the second quarter.

Next slide. If you look at Energy Systems and Controls another just spectacular quarter, sales up 23%, orders up 19%, internal growth here of 14% and 10%, very broad based across the segment. We only had one product line in that area that was go to flat to the prior year, everything was up nicely, double-digits as you can see.

Zetec continues to perform exceptionally well with the Steam Generation Inspection technology we launched and the adoption of that around the world. And our Compressor Controls has did very well both in the Middle East and Africa in the quarter on a variety of Turbomachinery Control projects that are underway. And then we had in our Protective Technology arena for shutoff valves and pressure sensors, a very strong international growth and we see that continuing throughout the year.

Operating margins were up 290 basis points in the quarter, 22% operating margins. New products that we were able to introduce in a variety of these businesses came in with higher gross margins than the products that they replaced and we captured of course the volume leverage associated with more revenue as well. We made a small bolt-on acquisition with the less than $10 million in the last week and a half of March. TechPro is a company, which is very similar to Alpha Technologies. Their primary focus has been on rubber and plastics industries on a global basis.

They have got Alpha, a very nice installed base, lot of equipment, lot of software, lot of recurring revenue from people adding new applications. It’s a very synergistic for that business.

New slide. If you look at guidance update for the company as a whole, next slide, you can see we raised the guidance essentially equivalent with what happened in Q1, we have expected return between 65 and 67 we earned, 68 we added the $0.03 to the bottom line of our projection raising the full year from 3.10 to 3.13 and the penny did the top line from 3.20 to 3.21.

We established second quarter guidance at $0.77 to $0.79, which is up from $0.66 last year and we have raised our EBITDA from $600 million to $605 million that would be adding another substantial amount of EBITDA to the company. Net earnings will be above $296 million and operating cash flows likely to exceed $385 million or more.

Next slide. If you look at something that I think its important for people to reflect on, we get the question about…how would we think about Roper in a kind of 2008 and 2009 period given what happened in 2000 and 2002 period in the basic industrial world. So once again, why we can’t think about, who we are and what we are today. Two-thirds of our first quarter revenue came from companies that we acquired since the middle of 2001, that’s two-thirds and that would be true with profitability.

Today, where company whose sell why and share of activity is related to Water Metering and Usage Information to Radio Frequency Technology Applications and Solutions. The information around Freight Matching and Logistics for productivity, Protective Technologies for Sensors and Warnings Indicators and Shut-Off Technologies for peoples in a wide variety of industries. We have with CBORD the entry into a different form of Healthcare applications and Education markets. We have growth with CBORD and transport and several of the other businesses, now long-term contracts that are involved in annual renewals and subscription growth. We have a much deeper penetration in the international arena than we have ever had in Roper before it was a one horse … one-trick pony really with Gazprom.

Today we have got, as we said last year, were 41% of revenue internationally and the international activity, we think is quite strong for us throughout the year as we built much better networks and access to global markets. We have high gross margins throughout the company, not dedicated in only a couple of spaces. We are no longer dependent on two businesses, that were really largely driving, the variance that occurred in Roper in the 1998 to 2000 period. We have a very strong balance sheet. We accessed debt markets in a way that’s useful for us instead of having constraints around the company and the way it was financed previously.

We have a very disciplined acquisition process its produced one set of victories after another and most of our businesses in really strong secular growth markets. And the applications that we have in those markets, really dominate the company’s end-market behavior. So, we don’t see how you can look at 2000-2002 view of Roper and whatever happened to Roper immediately thereafter and draw much a conclusion about what would happen going forward.

It’s a very, very different company, much more secular in nature. We have said consistently, we expect to grow 1.5 to 2 times GDP and out perform that in every instance and then we said we ought to really grow at 5% or 6% or perhaps more in a no-growth environment. And here we are growing at 10%, albeit 3 points is coming from currency. So, 7% in no growth environment. So, we think the company’s end-market activity and strategies are really paying dividends now.

Next slide: Here if you look at the conference call summary, what we think we reviewed here today is that, the first quarter was a historical record for us, for the first quarter. Every financial metrics; order, sales, earnings, EBITDA, cash flow and diluted earnings per share were records. Order strength was virtually across the board. We had only about two businesses that were flat and one was down, very strong growth.

International sales growth continues to build momentum and it gives us a lot of confidence in the balance of 2008. Our Neptune orders and sales established new records for this quarter, which really gives us a lot of breathing room for the second quarter and beyond. TransCore’s growth has been maintained despite the fact that we have an exceptionally difficult comparison because of the Middle Eastern project, which added about, 1 to 1.5 points of total growth last year for Roper and half of the first quarter growth for Radio Frequency.

Energy Systems’ growth is expected to continue throughout the year, in fact it could accelerate in the second quarter. CBORD is off to a very good start. The Clemson University Award is a very substantial win at the expense of a publicly traded company and a very large publicly traded company that was trying to keep this as a project, where we displaced two people that had been market leaders in the past in those category.

The financial integration that we done here is ahead of schedule, and the business development, which has resulted in a lot different meetings in Colorado, in the New Mexico and globally around Inovonics of TransCore is very good. The channel access opportunity for us is good because we have a lot of parking control door openers that provide a real benefit for CBORD to get into university and multi-campus facilities that they wouldn’t had on their own and then we get more products to distribute through the CBORD channel.

Our backlog at a record $590 million means we will have a very strong second quarter. We know we are going to have better margins in the second quarter, that we reported in the first and the pipeline for transaction is a quite good we have a lot of things that we think are very interesting and CBORD and TechPro really only represent I think the first two applications for 2008.

So, we think we are poised now to continue to have very strong performance throughout the year and with that we would like to open it to Q&A.

Question and Answer

Operator

(Operator Instructions)

We’ll take our first question from Wendy Caplan at Wachovia Securities.

Wendy B. Caplan - Wachovia Securities

Thank you. Good morning.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Good morning.

Wendy B. Caplan - Wachovia Securities

Brian, when you were talking about the RF technology segment, you didn’t talk about Freight Matching this morning. Can you talk about how that this is going and since you’re expecting some nice margin improvement Q2 versus Q1 in that segment. Can you kind of walk us through where we were here in the tollway CBORD at first quarter? Tollway CBORD in Freight Matching and where you think will be in Q2 on a margin basis or profit…some relative trends?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Well, it’s certainly a Freight Matching. We were very proud last year that we see some fall off in the activity just because of what was happening in trucking. We didn’t really see that, in fact we expanded the suite of offerings people can buy and we were getting enough new subscription value that would offset, whatever shortfall we had in the number of drivers subscribing, that trends continued, Freight Matching is still fine. Our Logistics business is good. In fact we’re looking at some things in that space that are somewhat interesting. We don’t really see a follow off. The growth in that space may not be as robust as it was two years ago, but it’s still fully satisfactory.

When you look at the tolling side of things, we’re going to have a strong second quarter in that area because of projects that Florida is expediting and moving up and some new winds we’ve had. The mix in the first quarter of road applications if you will, was slanted more to design and construction activity helping people with engineering oriented kind of applications and those are always little less good than the product sales. So, Q2 will be benefited by that.

The amount of money that we continue to invest in the design for the Black Diamond launch of products there and Radio Frequency and it won’t really produce sales probably until the third quarter. So, that pulls us down. So, we actually we had a fairly strong number here at 19.4 and it will go up nicely in the second quarter. So, we’re not really seeing anything pulling back, I think what perhaps people want to reflect on and it’s hard to put everything out in press release, but that internal growth in RF is really quite good because its as good as last year and half of last year’s reason for growth, couldn’t reappear because of the Middle Eastern project.

Wendy B. Caplan - Wachovia Securities

Thank you very much, Brian.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Okay.

Operator

We’ll take our next question from Shannon O’Callaghan at Lehman Brothers.

Shannon O’Callaghan - Lehman Brothers

Good morning.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Good morning.

Shannon O’Callaghan - Lehman Brothers

Hey, Brain. So, on the comments around organic growth, obviously decelerating makes sense, but 7% still very good in this economy. Are there any pieces, either on the organic growth or margins or anything? In the past we’ve had Redlake or DAP or some kind of issue that’s kind of a drag or something you are not happy with? I mean, would you characterize, the growth in the margins… do you seeing the quarter is from, you happy with it or there’re anything that are sort of underperforming or is it just…a little bit of a slowdown because of…just obviously the nature of a flat economy?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Well, if we take that in two pieces, what I’d say on the margin side, again we would expect the margins that we had in the first quarter would be our weakest of the year. I don’t think we are going to have another quarter, where we are not well above 20% operating margins.

Also, even at 24.6 for EBITDA, I’d expect that’s our weakest EBITDA performance for the year, and that’s going to up. So, we will be much stronger in the second quarter and I think we’ll remain strong throughout the year. In terms of organic growth, when you are acquisitive the company, which we are, we separate the organic growth, everybody can understands what’s going on with sort of the same store sales, but a part of our world involves bringing in new entrants to our family. We are not doing bolt-on acquisitions. The beauty of our cash on cash model is, we were able to reinvest in some very strong assets. So, you’ll see dramatic increase in revenue in RF in the second quarter, when we actually report some meaningful numbers.

For, CBORD, be in a five weeks, it hardly anything, and we are going to have a very strong second quarter out of CBORD. I think the situation around…the only areas that we were frustrated with were the camera business such where basically the US funding is just not going very well with government related issues, in the Japanese thing isn’t marvelous either. Those businesses really need to have research funds because that’s pretty much what drive the end-market demand for them. They’re not a big part of the company, so they don’t have a huge effect when they get that, but on the other hand they drag down our growth. If we were knew those from the growth and all the rest of the businesses that 10% number or 7% number, whichever you want to use would have been certainly stronger. I don’t see that changing much just does it has…it gets a little better with these new products are coming in from Microimaging in Q2 and 3. They are expecting pretty strong up-tick orders. So, we’re curious to see how that goes will helpful and think will be pretty low in orders in the second quarter. So, maybe it’s a long list wanted to answer Shannon that I think that addresses, which you were asking.

Shannon O’Callaghan - Lehman Brothers

Yeah, that’s helpful, thanks. The other things is just on the deal environment and how you are looking for things the rest of the year, I mean of course we are starting to see more things come out of private equity you’ve mentioned in the past, you have a good relationship with private equity firms and if they’re looking to maybe de-lever and monetize some things you’re often and avenue for later. Are you seeing an increase of supply coming from private equity firms, you think its going to be an above average year?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Well, generally what we do with these peoples we talk to them all the times. So, I don’t think we saw really a shortfall in supply, but we are seeing a lot of properties and we’re having discussions about a lot of things. I think the issue is the expectation around multiples of the EBIDTA you’re acquiring or the nature of the business acquired and you’re getting a little more realism, but not as much realism as we would like in that category. So, there’re tends to still be kind of a bid/ask spread, but as the year goes on people, who want to monetize aren’t have a lot of other choices.

So, I think that’s favorable for us and all the conversations…well the conversations we’re having now are not with people who are desperate, but people who realize we’re able to get stuff done, whereas other people I talk to maybe can’t pull the trigger and get it done. When you look at our capital structure with one times, the debt to EBITDA number and we’re going to start pouring out cash in Q2 and 3. We’re going to certainly be in the driver seat for that kind of activity. So, I would expect that this will be a robust year for transactions for Roper.

Shannon O’Callaghan - Lehman Brothers

Okay. Great thanks a lot.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Okay

Operator

And your next caller is Michael Schneider at Robert W. Baird.

Michael A. Schneider - Robert W. Baird

Good morning, Brian. Good morning, John. How are you?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Hey good morning, Mike

John Humphrey - Vice President and Chief Financial Officer

Good morning.

Michael A. Schneider - Robert W. Baird

Very nice quarter and great momentum, guys. Brian, I guess the first question is just on RF and these multiple operations projects as you call. I guess this is the first time at least I recall you underscored the momentum in that business and I have been writing for a while about how large this opportunity is. What’s changed there? Is it the technology on your part or it is a change in view among your customers? Just some color would be helpful.

Brian D. Jellison - Chairman, President and Chief Executive Officer

I think two things, a little over a year ago we split the TransCore operation from its historical structure into two separate businesses. So, we have what we call commercial technology, which John Worthington is running and we have ITS, which John Simler is running. So, we’ve got a series of regional managers here in the US and broad focusing on the ITS’s activity. They are a very critical component for creating demand opportunities in the end markets, but they have a very clear focus on what they are doing and what kind of things we are interested in doing.

We are also benefiting from a huge number of privatization projects that people are analyzing and studying, and we get the benefit of maybe helping people because we are pretty neutral in the respect for which one of maybe 50, what these public private projects are, the PPP things or PQ as they call. There is an enormous amount of activity going on in that area and I think we’ve designed quite a good business model to participate in that.

Then on the commercial technology side, we’ve really allowed our R&D people to focus on a very clear pathway for product development, and complimentary products and services for people in the commercial RF space. So, I think that’s helped a lot. So, you get kind of the benefit of macroeconomics in the market place coupled with focus and clarity around what we’d expect and the margins we’d like to see in the area and the results is pretty positive first quarter and a very good remainder of year we think.

Michael A. Schneider - Robert W. Baird

And Brain going forward as this business grows, is it added into margins or does it pressure the segment margins and especially vis-à-vis the tag work?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Well, when you are selling tags it’s added to margins, when you’re doing the design work, its dilutive to margins, but when we bought the company it was… the design work was pretty dilutive now its much less dilutive. So, in this quarter, where you had disproportion amount of ideas activity, we were still able to report 94 and if we didn’t have the startup expense for Black Diamond it would have been better. So, we are comfortable with that, but we would expect this to be the last quarter below 20%.

Michael A. Schneider - Robert W. Baird

Okay. And regarding Neptune and ITT just held its call and they among others are talking about just a general slowdown or delay in some municipal spending vis-à-vis water projects. I’m curious what you are hearing from the field, obviously, Neptune had a great quarter, but is that market share gains that continued project rollouts that just have been underway and can you discern if indeed there has been hesitation on installation maybe on the day to-day meter business?

Brian D. Jellison - Chairman, President and Chief Executive Officer

We are not seeing any delays, I mean as I said the first quarter we want to make sure people understood it, it wasn’t just a record first quarter. It was a record for any quarter in our history for orders. So, we’re just not seeing that, I think you remember it’s not the CapEx side of water activity. So, in fact, the Cincinnati project, which is one of the biggest ever was finished last year. So, people expected that the fourth quarter and certainly the first quarter of this year would be difficult comparisons. We heard that from everybody all the time and they are on, the difficult comparisons, but fortunately we have gifted people and they continue to deliver and we’re finding business that our people didn’t see this Mexico City project was also our finest.

And so is the project out of country that’s going on and in fact much of the leadership team of that business is not in the United States today. So, we’re not talking about where we are and what we’re doing because we don’t want anybody to know, because I think we’re in places that other people aren’t seeing and that’s to their credit. Now, we’ve been cautious about guidance in terms of what kind of stuff we’ve been have because of the common sense of everything, you read the morbidity and the comments from everybody else about these spaces are pretty to accounting and we’re just not seeing that. I think remember we’re selling water meters and automated meter reading technology that produces revenue that’s somebody is buying for 100 bucks per unit. So, the payback is pretty strong, so we’re just don’t see any kind of pullback.

Michael A. Schneider - Robert W. Baird

And just final detail, can you give us a sense of how the growth rates compared between the barometer business and then the air AMR portion of that division?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Yeah, John maybe comment.

John Humphrey - Vice President and Chief Financial Officer

Yeah, I do…Mike I think we have that, but it’s not at my fingertips. So, if okay with you I’ll follow-up with you on that.

Michael A. Schneider - Robert W. Baird

Great, thank you very much guys and congratulations

Brian D. Jellison - Chairman, President and Chief Executive Officer

Yeah.

Operator

Our next caller is Alex Blanton at Ingalls & Snyder.

Alexander M. Blanton - Ingalls & Snyder

Hi, good morning.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Good morning, Alex

Alexander M. Blanton - Ingalls & Snyder

Good quarter. I want to just ask you for clarification on the order rate. When you say net orders, what do you mean by that specifically and you mentioned a 13% order rate of which 3% was currency. That seems to be net of acquisitions. Is that what you mean?

Brian D. Jellison - Chairman, President and Chief Executive Officer

If I understand the question our total orders were up 13%, 3 points of that came from acquisitions

Alexander M. Blanton - Ingalls & Snyder

Yes

Brian D. Jellison - Chairman, President and Chief Executive Officer

3 points from currency, so the…

Alexander M. Blanton - Ingalls & Snyder

So, 3 points from acquisitions?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Yeah

Alexander M. Blanton - Ingalls & Snyder

And 3 points from currency?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Right, and 7 % organic.

Alexander M. Blanton - Ingalls & Snyder

So, 7% was organic, okay.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Right

Alexander M. Blanton - Ingalls & Snyder

That wasn’t clear to me.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Okay.

Alexander M. Blanton - Ingalls & Snyder

Secondly, you gave a lot of information about CBORD in the previous conference call, so you kind of went over it very quickly this time. Now, it was in the first quarter from five weeks is that?

Brian D. Jellison - Chairman, President and Chief Executive Officer

That’s right, five weeks.

Alexander M. Blanton - Ingalls & Snyder

And you announced three months ago that you paid 367, it was a $367 million deal.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Right.

Alexander M. Blanton - Ingalls & Snyder

Is that still the number we should use and can be subtract that form the 378 to get the amount you paid for TechPro?

Brian D. Jellison - Chairman, President and Chief Executive Officer

I think so, John you can?

John Humphrey - Vice President and Chief Financial Officer

The 367 is what we paid for CBORD, there are some additional fees as you know there always happened with these types of transactions. Unfortunately we can’t do these without attorneys, and so some of those fees get capitalized as well. I mean the total fess on this deal were in the normal range 1%, slightly over that and so the rest of that is going to be TechPro.

Alexander M. Blanton - Ingalls & Snyder

The rest of…

John Humphrey - Vice President and Chief Financial Officer

So, if you take the 367, add a point to it, that’s going to be about $4 million of fee and the rest of it’s going to be TechPro.

Alexander M. Blanton - Ingalls & Snyder

Okay. TechPro is really tiny?

John Humphrey - Vice President and Chief Financial Officer

Yeah, less than a million [ph].

Alexander M. Blanton - Ingalls & Snyder

Okay. Then could you just quickly go over the basics of CBORD for the benefit of people, who weren’t on the last quarters’ call to know what exactly what it is, relative size and so on, and sales?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Okay. What we’ve said is, we project CBORD to do somewhere between $8 million and $10 million of revenue a month. I know in the first 12 months of activity, it would be of course modest at the beginning, but second quarter will be at those levels at least. In the rest of the year, we expect it to run in that kind of span.

What happens with CBORD is, they should have a very big installed base they are in about 750 campuses and whole variety of hospitals 300 beds and above. And they have know that the kind of everything that what happened in the cashless area plus, all of the access for a situation. So, in a student based environment they’ll have one card in the wall, that will allows the person to get access to the dorm room access to other universities situation, paper trail or paper less trail less around what’s happening of the library and bookstore.

They can use the card as a debit card to charge against up with preset amounts. So, you don’t have this ugly thing people see or people try to get the student in and have charges it for over running the credit card. It’s not that kind of thing. They get revenue by providing all the software to handle the cash register transactions of everything that’s going on here. We’re expanding it with our parking control applications from our Amtec inside TransCore.

The hospitals situation keeps a trail with their suite of software run Nutrition Management, its actually a supply chain forecaster for food consumption. The type of things we believe, it allows a patient to where another person that’s granted a card access to various place in the hospital they can deal with the pharmacy, they can deal with new entrance, whatever it is, just a variety of things are going they’re sophisticated and instead of having some access control technology from a traditional company and enterprise software thing from another company.

The University can windup with one kind of unique spaced environment around CBORD. It’s a whole suite of things that it can do. CBORD acquired a Diebold Access Control piece for these kind of applications, a couple of years ago. And it’s a business that from prior experience I know quite a bit about it. We have a wonderful leadership team at CBORD and they’re certainly off to an exceptional start. The business is about 50% recurring revenue from the software that’s embedded. It’s not sold. It’s rented for a year at a time and they have above 95% return rate on that. And then on top at about 30 more percent of revenue comes from those installed base people expanding their suite of activity and about 20% from new products. We expect the new product portion of CBORD will grow more rapidly than it did inside the business and then lastly CBORD has very substantial gross margins. It has essentially no assets. Much of its activity is prepaid, so it’s a very, very strong cash generator.

Alexander M. Blanton - Ingalls & Snyder

Okay. That’s great and so I take it five weeks would be around $10 million in sales I think.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Well, the first quarter would be the low point. It’s less than that. You can kind of figure out the math. It’s closer to $8 million for the stub period in the quarter

Alexander M. Blanton - Ingalls & Snyder

Okay. Thank you.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Okay.

Operator

Our next caller is Deane Dray - Goldman Sachs

Deane Dray - Goldman Sachs

Thank you. Good morning.

Brian D. Jellison - Chairman, President and Chief Executive Officer

Good morning.

Deane Dray - Goldman Sachs

My first question is more of an observation. You remember last quarter you provided a slide that was actually very insightful regarding your book-to-bill and how it tends to stay towards 1.0 and with only occasional deviations from that and it worked out to the decimal point that you’re hitting 1.0. So, we’re back to mean reversion, which is pretty positive. And Brian you made the comment on the up-tick in gross margin that you’re holding price. Can you give us a sense of where you’re getting price and out of that 7% core revenue growth how much of that was price?

Brian D. Jellison - Chairman, President and Chief Executive Officer

I mean, that gosh…we do this with our field people all the time, I mean it’s a joke of course is that it’s just in the mix I mean. We have such a wide variety of businesses, gross margins could petty widely varying and it would be just very, very difficult. There is no standard products in almost all the businesses. So you windup with so many application possibilities that trying to track the absolute price is a hopeless task, but in Energy, where we had this very, very strong improvement, a lot of that is our petroleum analyzer work, in Lauda in Germany and Verson in France, lots of new products, lots of new applications just came in with higher gross margins than the things that they were replay. So, we have quite a sophisticated and diligent situation around how we look at R&D applications. And people know pricing is important, instead of too many businesses, who build up the cost and put a multiplier on it…it’s what we do here. And so people know we are going to really disappointed if we are hearing something coming in less than a 50% gross margin. And so that’s sort an underlying base. I don’t how great an answer that is, but it’s the truth.

Deane Dray - Goldman Sachs

Well, when the guys come in with their budgets for ‘08, are you looking at how much of a price they are assuming for the balance of the year or you focus on?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Well, we do two things here. We want to know what they are embedded thinking about prices and whether there is any erosion in any of the areas, and then we want to look at their direct material cost and do an exploded analysis about what’s happened on cost push inflation and whether we are get any reduction in material cost. So we do look at that. And I would say that the margin in Q1, the gross margins in Q1 were better than the plan.

Deane Dray - Goldman Sachs

Good, and then impression in your follow-up comments on your point that regarding the petroleum analyzers, we’ve went to some tradeshows, where you’ve got your equipment, the gas chromatography applications for oil and gas. Just give us a sense of where that business is today? What your leverages to the whole oil and gas cycle and where do you want to take the business?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Well, we bought a company a little over year ago called AC Controls in Europe and that gave us a better access to this field of activity. And so we’ve been building that technology into some of our other brands and what we call packets, its really in four different brands, but we had simulated under one division. That business is performed this just kind of 15 plus percent growth arena for quite a while now.

A couple of years ago the business was more dependent on self regulation for instrumentation sales that cycle of activities long gone. And so we’ve got a lot of applications that are going well, I would say that a lot of our growth in the future two or three years from now, is going to be in beverage and food service. Because we have split the business and with the product management function today, so our gas chromatography is one aspect of what we are going to do, but certainly not be only towards at work.

Deane Dray - Goldman Sachs

Can we say beverage and food is that on food quality and safety?

Brian D. Jellison - Chairman, President and Chief Executive Officer

Yes, in process, the bottling industry, there are a lot of things that we can do in there about what’s happening in the contents of what’s in a container.

Deane Dray - Goldman Sachs

And should that we expect that would be bolt-on or will you grow…

Brian D. Jellison - Chairman, President and Chief Executive Officer

Its new product design that we have underway that we’re launching at a slow pace. So, we want to know more and more about what we’re doing, but its existing intellectual capital, we can deploy in these new markets.

Deane Dray - Goldman Sachs

Sure, thank you.

John Humphrey - Vice President and Chief Financial Officer

Operator, we have time for one more question.

Operator

All right, our next question is from Jeff Sprague at Citigroup Investment Research.

Jeffrey T. Sprague - Citigroup Investment Research

Thank you. I made it under the wire.

John Humphrey - Vice President and Chief Financial Officer

Okay. Well, it is better than being cut off in mid sentence last time.

Jeffrey T. Sprague - Citigroup Investment Research

We covered a lot of ground, just a couple of things Brian or John. How do you feel about your ability to use leverage in this set of capital markets, in terms of, turns on your EBITDA, would you take it up to three years or so if the right set of opportunities presented themselves or…

Brian D. Jellison - Chairman, President and Chief Executive Officer

Well, it have to be pretty exiting opportunities, but I think we’re more likely to be in the 2.5 times to in 3 quarters times, but remember we generate a lot of cash. So if you think about our capacity here we are ending the quarter at 1.9 times, so you’re say 60 bps or more below or it you’d be. We got trailing EBIDTA 550 and you don’t have any pro forma number that’s released in there on CBORD. So, even if you looked at our guidance number for the year 605, you got a quite a lot of capacity there and then we reinvest that with the same kind of multiple. So, if we get $500 million or $600 million of transactions between now and the end of the year, we still have a very strong investment grade debt situation. So, I don’t see that as a difficult prospect for us.

Jeffrey T. Sprague - Citigroup Investment Research

Right and then you hit Neptune quite a bit with Mike’s question, but can you give us a little bit of the sense of US growth versus the new opportunities non-US that you are…

Brian D. Jellison - Chairman, President and Chief Executive Officer

I think it was about a third non-US, two-thirds US growth.

Jeffrey T. Sprague - Citigroup Investment Research

And then, just finally, a lot of pressure on guys like GE Healthcare on procedures dropping off. You are not seeing any of that in your patient positioning businesses?

Brian D. Jellison - Chairman, President and Chief Executive Officer

You know what happened, we saw that in the fourth quarter because of confusion around what was being reimbursed, but our stuff is middle-level technology. What we are doing is, the reimbursement confusion is lifted from our services in the space. So, we had very strong order inflow in the first quarter, and we have quite a bit of international business in that arena, which is different than CMS scheduled reimbursement in the US.

So there was some noise and it’s behind us and when we had our quarterly review with the medical guys, we were all extremely impressed at their enthusiasm and comfort level because they were worried in the fourth quarter of last year about all its noise in the market place. So, I think it is probably a problem for GE, but it’s not a problem for us.

Jeffrey T. Sprague - Citigroup Investment Research

Right, thanks a lot.

John Humphrey - Vice President and Chief Financial Officer

We got two minutes.

Operator

That will end our question-and-answer session for this call. I will now turn the call back over to Mr. Humphrey for closing remarks.

John Humphrey - Vice President and Chief Financial Officer

Okay. Thank you, Anthony. And thank you all for joining us today. I do know there were two or three folks, who were still in the queue in terms of questions. I am sorry I have to cut this off at 11:00 o’clock. I will be available this afternoon for any follow-up questions you might have and as always we look forward to talking to you again in three months.

Paul J. Soni - Vice President and Controller

Thank you.

Operator

This does conclude today’s presentation. We thank everyone for their participation. You may disconnect your lines at anytime

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