ROP
#Thank you, Deanna.
And thank you all for joining us this morning as we discuss our fourth-quarter financial results.
Joining me this morning is <UNK> <UNK>, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller; and Rob Crisci, Vice President of Planning and Investor Relations.
Earlier this morning we issued a press release announcing our financial results.
The press release also includes replay information for today's call.
We have prepared slides to accompany today's call, which are available through the webcast and also on our website.
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 that information.
Next slide ---+ today we will be discussing our income statement results for the quarter primarily on an adjusted non-GAAP basis.
A full reconciliation between GAAP and adjusted measures is in our press release this morning and also included as a part of this presentation on our website.
For the fourth quarter, the difference between our GAAP results and adjusted results consists of three items.
First, we completed the divestiture of ABEL Pumps during the fourth quarter, resulting in a pre-tax book gain of $70.9 million.
This was partially offset by an impairment charge of $9.5 million relating to an imaging investment we made in 2007.
Second, a $4 million purchase accounting adjustment to acquired deferred revenue relating to software acquisitions made in 2015.
This represents revenue that those companies would have recognized if not for our acquisition.
Finally, we have a $2.6 million inventory step-up expense relating to the acquisition of RF IDeas.
Now, if you'll please turn to slide 4, I'll turn the call over to <UNK> <UNK>, Chairman, President and Chief Executive Officer.
And, after his remarks, we will take questions from our telephone participants.
<UNK>.
Thank you, <UNK>.
Good morning, everybody.
We\
I think so.
Deanna, we're ready for the Q&A portion of our call.
In industrial, Roper Pump is almost exclusively oriented around upstream oil and gas.
It's not a huge business but it has a big drawback when you have the change in fracking.
It's primarily a US business.
Its oil and gas component was down 30% in 2015 from 2014, and we expect it will be down another 30% in 2016 from 2015.
But it's still a fairly small number.
It's about a $20 million revenue drag that we're modeling into 2016.
None of the other businesses in industrial technology have anything to do with oil and gas.
They are instrument companies, or over half is the Neptune water meter business, which is going to grow next year.
So, it's just that one isolated.
And there's no midstream and downstream activity, really, in industrial.
When you get into energy, much bigger total dollars of what you're talking about.
About 60% of the segment is oil and gas but only some of it is upstream.
Primarily the upstream portion, or a couple of very small businesses ---+ Viatran and [DAS], a little bit of AMOT ---+ and then quite a lot of Compressor Controls.
Compressor Controls has been living off of a great project backlog.
Their service work, we expect, could be a record this year in 2016.
But we think their project work will drop really dramatically.
It could drop $30 million, $40 million.
The midstream and downstream activity for the year has been really decent all the way along.
The only drag has been the currency.
But then in the fourth quarter we didn't get as much of a seasonal uptick in those downstream businesses as we normally do, so mostly testing businesses.
That bodes for slight deterioration probably in 2016.
The rest of the energy businesses, the $40 million, are really mostly test and measurement businesses.
And then we're up really sharply at Zetec, so that helps offset that.
That's why we're saying 15% for energy, but it's 30% for the upstream portion of industrial.
It's certainly going to be very solid growth in 2016.
It's about a $10 million divot each quarter for the Toronto project as it fell off.
There's a little bit of revenue we're still getting out of Toronto for last minute adjustments but it's not very meaningful.
It's just domestic growth in commercial water meters and new wins in projects.
We are having share gains that are really obvious to us when we look at the data.
And we're going to have further share gains in 2016 that we're confident enough of based on all of our contacts with our bid process.
Shannon, the Toronto project really completed substantially in the first quarter of 2015.
So it was still in that $10 million comp range in the fourth quarter against the fourth quarter of 2014.
And then we'll have a little bit of a headwind in the first quarter on a year-over-year basis.
But then after that it's going to be more normalized.
So it's not an acceleration that we're looking for; it's really some headwinds that start to go away.
If you talk to our salesmen they will tell you it was massive pricing.
But there's no pricing pressure.
That's just silly.
That's not the issue at all.
It's just pure ---+ the biggest component, of course, is currency.
Then from a unit situation, it's the project work at Compressor Controls this year, and it's really easy to detail that out.
Those numbers are pretty good.
Last year, we actually said when we initiated guidance, we thought upstream would be down about 20%.
You correctly challenged us about ---+ CapEx is down 30%, might it not be down 30%.
And we said, it could be down more than 20% but we thought ---+ we had a particular arrangement around surface drilling, which is new technology, which has rapidly gained share, and it was doing that at the time and we thought that would continue in the second quarter.
But in the second quarter they basically stopped all ordering and consumed all inventory they could and that hurt us a little bit.
And then in the fourth quarter, we didn't get any seasonal bounce ---+ well, we did, but not as much as you normally would.
So, we're very comfortable around guiding down $20 million on oil and gas and industrial and around $50 million in energy.
I think that's quite correct.
And then there will still be a little bit more drag on a nominal number basis with currency.
But it's definitely not pricing.
The guys have been pretty correct all year long except for that Q2 situation at Roper Pump where our supply agreement got suspended for that quarter.
The segment book to bill was like 0.88 for energy in the fourth quarter.
And it was 0.97 for industrial.
On the industrial side, that 0.97 is typical for a fourth quarter, but it's definitely lighter.
You asked about visibility also.
For the product businesses, particularly around upstream and even on the mid- and downstream, those are generally going to be book and shipped inside of a relatively short window, two months or so.
Where we do have better visibility, and why we're talking more about this, is on the Compressor Controls side, because it's more of a project business.
And that's where we saw an order shortfall in the fourth quarter leading to that 0.9 book to bill area, and why we're expecting that to be a tough year for the project-based business because we have good visibility in that area.
It's certainly possible.
We talk about it quite a lot and there are a lot of different avenues for achieving that.
It could be spun off as an independent entity where people would be able to make a one-for-one decision about whether they wanted to be in that space as an investor.
It could be put together with another business in some kind of merger.
Again, it's not something we would likely sell because the tax [leakage in the] sale is just pretty prohibitive.
And the businesses are very good.
The oil and gas businesses ---+ when we put the whole thing together, they have an EBITDA margin of 34%.
And they don't take a lot of assets.
They are very cash accretive to our number.
And for those people who like EPS, they give us terrific EPS, but there's no amortization.
But you're right.
It's something we're always going to look at.
And certainly there have been more than one phone call inbound about people who'd like to do something.
But selling them is not the best thing for our investors.
Finding a tax-free alternative to that would be more attractive.
It's a whole lot more of what we know than what we hope.
We don't really have very many businesses, only one or two, that have any tie to something that's a larger macro end-market.
The markets that we serve are so niche that they end up being more driven by our activity around new products or new software releases rather than a hope for some macroeconomic recovery.
We're not really expecting any of that.
That's not something we try to forecast.
It really doesn't drive very many of our businesses.
But it's not as simple as orders in hand, because we really don't have orders in hand for products or for activity that's going to ship in the third quarter or fourth quarter.
So we're not a project type of E&C business like that.
But it's really around things that we know that we're going to be able to introduce to the niche markets that we serve; and uptake and new products growth in those areas.
In terms of acquisition.
The bid-ask spread is wide.
It's always wide.
But we were able to deploy $1.8 billion last year and we've already got $0.25 billion done now.
We don't anticipate any difficulty at all.
I do think that the notes out today are interesting.
There weren't any IPOs in January.
If you were a seller of private equity, you might continue to say whatever you think somebody is going to listen to, but the reality is, their net costs are going up and their exit strategies are diminishing.
And we remain the best mid-market acquirer of assets on the face of the earth.
So we're not going to have any difficulty finding high-quality businesses at rational prices.
You know what.
We always look at it as the cash return we can get out of an investment.
What happens is, it's usually difficult for an industrial asset to have the kind of cash returns that we are going to demand.
But whenever we see them we're willing to make investments in those.
We bought a pure product company in RF IDeas this year, which is just a world-class business with terrific leadership, very high margins.
Relatively light assets, but they are certainly making stuff and they are selling stuff.
So, it depends on the quality of what it is we see.
But we would never buy something at a public market deep discount.
Let's say some energy business dropped 30%.
We wouldn't buy something because it dropped 30%.
We would only buy something because its forward cash returns were extremely attractive.
Generally, as a rule, people over-pay for low-quality assets under the theory they are going to find some way to make them better.
We'll leave the buying of distressed assets to others.
We want to buy businesses that have consistent growth and recurring revenue and light asset models.
And we haven't seen anything, other than RF IDeas, in the last two years in the industrial segment that qualifies for that.
It's a good question; but, sorry, I have to dissect it.
Remember that in the medical and software we have a huge amount of recurring revenue.
So the recurring revenue ---+ it's not going to grow by a high number.
So when we say mid to high single digits, that has to be something that takes the whole segment into consideration.
The product portion and the new software sales have to be higher than that in order to get the whole segment up to mid single digits.
I don't think that there's any ---+ certainly, Sunquest in the second half of the year should have outsized growth to what it's had throughout 2015 because we've had the meaningful use improvement in 2014 and beginning of 2015 that is a comparative drag, and that will go away as 2016 matures.
I don't think there's really any particular driver in the medical software.
In the software businesses in the RF component there are some drivers that have had escalating growth.
I don't know, <UNK>, if you want to add anything.
No, I don't think so.
I think it really will be ---+ we expect 2016 to be led by more higher, probably a higher V on the medical products side, with some continued new product introductions.
We introduced some things at Verathon in the latter part of 2015, so those start to really ramp up.
We have other new products that are being introduced to the market, as well, as well as continued growth around some image-guided surgery applications that Northern Digital continues to just perform phenomenally well on.
And, as <UNK> mentioned, on the software and services side, that's a mid single-digit grower, anyway, because of the huge amount of recurring revenue.
And that's what we expect, particularly in the latter part of 2016.
We're not expecting a whole lot of recovery at all in the imaging world.
I think that's expected to be flat to maybe up a little bit.
Conversion ---+ you mean like leverage.
You'll have to come up to your own.
We expect that to be in 40% to 50% range.
It is certainly true that, on things that are relatively large in a potential acquisition, maybe there will be less competition for those assets as the year unfolds than there have been in the last three years.
I notice on some of the large things that we looked at, if they get bought by private equity, it isn't one fund.
It's three guys going together.
But debt staples are still out there.
We're looking at a deal Friday that has a 6.5 times debt staple on it.
As long as debt staples are that high ---+ we wouldn't use it, because private equity is going to use that, right.
They can put in 4 turns of EBITDA and you're still at 10.5 times EBITDA.
The kind of businesses that we acquire, if they were public they tend to trade at 25 times enterprise value to EBITDA or more.
I know it's hard for people to follow that, because they're looking at traditional multi-industry stuff, multiples that are dramatically less.
So we're going to continue to look at these things that are worth a great deal from an arbitrage perspective in a public market versus what we have to pay for them.
And those tend to crowd out the lesser-quality businesses where people pay 8, 9, 10 times for something that's worth 10.
We tend to pay 11 and 12 times for something that's worth 25.
That's really how we get all of this alpha performance consistently over a long period of time, and that's going to continue.
Now, last year, we did something that I wouldn't have forecast, which is, we did six or seven deals to get to $2 billion.
We would have rather done a $1.5 billion deal and a $500 million deal.
But the small deals were unbelievably compelling and they are all growing double digits, so it was a good thing to do.
We are still seeing a lot of those kind of opportunities.
So as the year unfolds it will be a battle between saving our powder for a really large transaction or going ahead and investing early on things that are somewhat modest.
At the end of the day for our shareholders, the results about the same.
It's just it's easier for us to do a large deal than five small deals.
It should be an easy year for us to deploy capita;, it's very favorable.
Maybe just for a second, let's just think about risk in general when you look at transactions, because people are asking questions about, would we buy some cheap stuff.
The cheap stuff in industrial ---+ and there's all kinds of stuff and their public stocks are going to continue to deteriorate and you could buy them ---+ what's wrong with those is, they can get disintermediated from distribution channels.
They can wind up with a freemium model out at Google on some bizarre thing, or they wind up with Amazon selling past their competition at low price points.
There's all kinds of things that happen.
They desperately need absorption.
If revenue falls off there's nothing they can do without big restructuring charges.
When we get to our space, it's really around whether or not the people in the niche that we acquire have domain expertise, which is very hard for somebody to break into.
The entry barriers for their success are entirely different.
The risk is that we continue to assess the quality of the management teams that we acquire well, and we understand whether or not there are technologies that could leapfrog what they do.
We spend most of our time around the people aspects of the business, and then around maybe risks that those people don't see that we would put a different factor on.
We tend to discount their forward growth projections because we don't pay for synergies for forward growth.
We only pay for what we think the business is going to deliver at the time of the acquisition.
And that really puts a huge dampening effect on the risk that we might otherwise have.
And we've been blessed to be fortunate in that arena.
But I think our disciplines are such, we actually start with somebody's balance sheet and then we start with what it takes to run the business.
We don't do ---+ what a lot of private equity people do is, they'll buy a software company and they will mandate an immediate 10% reduction.
One of the private equity firms out there actually goes in and does a listing of the highest paid people and they whack off the highest paid people and put new college guys in at big salary reductions.
And then that kind of hideous activity doesn't manifest itself in the business for four or five years.
You have to understand what each private equity group's business model is when you're looking at the assets they hold and you're acquiring it.
And I think we can do that better than anybody.
Yes, I do think so.
What we're really seeing out of Verathon is a refresh, so it's not a completely new product category, which actually reduces the risk for us.
These are really upgrades and extensions of their existing GlideScope in 2015 and then BladderScan in 2016.
So those are a couple-year adoption rates that go on there.
Northern Digital doesn't have to get up to double digits.
They just have to continue double-digit growth.
They've been growing at double digits here for a couple years, as they are really the leader in both the optical tracking as well as the electromagnetic tracking for computer-assisted surgery applications.
And those continue to just expand, those applications just continue to expand.
Whenever there's a new one that an OEM customer wants to design, they always come back to Northern Digital because they are the world leaders in that technology.
No.
Let's go back and think about.
The reason I said some time ago that the Sunquest and MHA acquisitions were more transformational than the Neptune and TransCore transformations were is because, at Neptune, we paid 4 times EBITDA the enterprise in December of 2003 to acquire Neptune at what some people probably thought was a high price, for $500 million.
The next year, in 2004, we paid about 4 times, again, the trailing revenue of the firm, 3.5 or something, for TransCore at $600 million.
Neither one of those businesses have lend themselves to adding exciting bolt-on activities to them, or giving you domain experience in an area that was easily widened.
So, when you acquire a leading laboratory software provider in a world that's going to have more and more laboratory instrument usage, and will move to genomics in the immediate future, you have big upside ramp.
When you have MHA, with senior living and nursing homes and all of the things around non-acute hospitalization shifts in demography ---+ these things just give you all kinds of opportunity.
Good heavens, we've acquired now SoftWriters for MHA, which is growing at double digits.
It's a terrific acquisition.
We've been able to acquire CliniSys, which we can connect, really, with Sunquest.
We acquired Data Innovations, which is a phenomenal company that guides all of the instrumentation in a hospital into various systems, and yet it's part of Sunquest.
That's why we can look at these things, which are somewhat synergistic, at least in the marketplace or in the information technology side of them, that we couldn't do with the industrial and energy businesses.
Thank you.
And thank you all for joining us.
I know there were a couple of folks still on the line for follow-up questions; we'll get back to you as soon as we can.
Otherwise, we look forward to talking to everyone in three months at the end of the first quarter.
