ROP
#Good morning, <UNK>.
Terribly disappointed.
We got 4 inches of sunshine this morning here in Florida, so, sorry.
I think that just because it is historically a little light in the first quarter, and then it's really strong in the second quarter and the rest of the year.
So I think organic is ---+ Q1 and Q4 would be 3% to 4%, and Q2 and Q3 would be 4% to 5% or 6% or something like that.
So for the year we're at 3% to 5% with maybe a little hope for upside.
Our focus will be to continue to compound the cash.
So the more we can grow in the software and network businesses, the happier we are because they just inherently are going to throw off more cash that we can reinvest for further compounding in the future than the products businesses.
But our products businesses are about half of the EBITDA.
Now, a chunk of that, a notable chunk of that is our medical products businesses.
And then you have got the instrumentation businesses and you have got the oil and gas-related stuff.
We may enjoy a little bit of a cyclical spike on oil and gas, but it won't materially affect the balance of the Company's EBITDA profile.
Our businesses ---+ as I said, you look at the OP alone in the fourth quarter, between energy and industrial, it is 30.5%.
So we love the businesses.
They are positive cash; they do not have much amortization in them.
But moving the needle on compounding cash will come from software and networks.
We will let <UNK> comment on that.
Good morning, <UNK>.
So the short answer is we're not expecting much headwind at all, just like we did not expect much tailwind when it came in.
The majority of what we do is not procedure or patient driven; it is more elements that help the totality of the healthcare system do what they do.
And so if we had a lot of things that were consumed in a procedure, then we would have then benefited and we might have some headwinds, but that is not the nature of what we do.
Good morning.
So let's deal with the border tax side first.
There is not much there.
We do have some assembly operations in Mexico that we get subcomponents from, for one, two of our businesses, but it is not a lot.
Most of our international businesses are selling globally, and our domestic businesses don't export ---+ they're really not domestic businesses, they're global businesses.
The locus might be here in the US, but they have manufacturing operations outside the US and they could ship from any of them.
So I don't think the border tax would be a lot; if we did a back-of-the-napkin assessment about that would be, probably 75% to 80% of our operating profit would be generated in the United States.
So if we are telling you about a 30% blended tax rate, the US tax rate, of course, it's 35% and above.
So you can do the math on our net earnings number, and look at 80% of it, and then take a 20% reduction of that or a 10% reduction or whatever you think, and then add back the increased costs to the border tax.
And net-net, it would be quite a material increase in our cash.
<UNK>, of course, there is no proposal yet.
As soon as we see a proposal, we can give you a much better answer.
But the elements of exactly whatever tax change, all of this is headlines in the newspaper so far.
Well, I think that all of our professional services businesses, including these last two acquisitions, ConstructConnect and Deltek, would be dramatically benefited by the number of seats and the number of users that would want to get access to those technologies.
Particularly at Deltek with the Costpoint technology, which is ubiquitous for people that supply the government; that would be very helpful.
In the tolling area, it is interesting, there's actually ---+ we've gone through this huge technology transformation to our sticker tags away from what other people get stuck with, with the plastic box from Austria, and that had a huge rollout in all of the big tolling states.
So that is behind us, that rollout.
So you just have the maintenance.
The maintenance is huge, the number of reorders.
We're always amazed where all these tags go.
So it is good, but the project growth and infrastructure could well be in our TransSuite software and traffic management arena.
That is really what the Saudi project is.
And the electronic tolling project in New York for instance does not have ---+ it is all electronic, so there's no tags.
So it would definitely help us, particularly in revenue.
It will probably not help us as much as it would have historically in the margin where people are also using the tags.
But it would be favorable to us.
Then I think if you get ---+ you've got the various elements that appear to be going through that would get us back into production around shale.
We came down $265 million in two years in Energy and Industrial; we won't go back up $265 million but we won't be going down.
We might go up more than we think.
So that is a little bit of a question mark for us.
Well, I think you just have the situation around ---+ you have got all of the interest cost in Q1 for Deltek, and its contribution doesn't come in as much until Q2 and beyond.
So it's timing.
But in reality, first-quarter guidance is about 22% of the full-year guidance, and that is not that unusual.
Q1 ---+ it would be rare if Q1 was 25% of the full year.
I think it is just an out-of-the-box situation.
Q2 will be critical for us.
Good morning, <UNK>.
A few years ago, people would remember, I said, we already know the next $5 billion we want to deploy.
It's just a question of when it happens.
So we have done that all.
We've really got these things.
The good news is we still know where the next $5 billion of deployment needs to be and who they are and when they're ready to be assimilated.
I think if you look at 2017, 2018, and 2019, I would think we would deploy about $4 billion, just not much of it in 2017.
We want to pay back existing debt to EBITDA unless there's some other source of cash that comes up that we have not talked about.
We are looking to pay down that debt level by $700 million or more.
That still gives us room for bolt-ons this year, and then much larger acquisitions in 2018 and 2019 as the compounding cash is coming up, and we self-generate the ability to do $1.5 billion a year.
We just want to get our debt holders comfortable as this year unfolds.
Fortunately, we look at it differently than the hypothesis there from our perch.
If we're looking at M&A as a category of activity, the big unknown question is, is interest going to be deductible in some kind of change in US tax.
So if interest is not going to be deductible, you can imagine what an effect that has on private equity as they are thinking about what multiples they are going to put to work.
So if you are accustomed to putting 7 and 8 times debt to EBITDA and getting a tax deduction for that, that gives you massive ability to compete with strategics.
If you lose the interest deduction, your ability to compete with strategics goes down.
If you remove one of the biggest acquirer of entities from the market, the strategics should have a field day.
That said, most of the multi-industry people have very complicated import/export arrangements.
So I would imagine that they've got a lot of issues with the border tax; thankfully we don't.
I think the M&A environment for us, as interest rates go up, irrespective of whether you can deduct the interest, as interest rates go up we are in a better position with each passing month that occurs because we have so much self-generated free cash flow.
If we do acquisitions with our own cash flow, and lever them about 3 times debt to EBITDA, which is our model, we wind up with purchase powder requiring very little if any new debt of about $1.5 billion a year.
And that's why I'm very comfortable saying I think over the next three years or a month or two beyond that, we will deploy $4 billion; it's easy for us.
We're going to do it in acquiring things that are going to compound their cash.
We just keep getting more cash to reinvest as opposed to having to do big debt structures.
So that would be my best answer.
Good morning, <UNK>.
There is a lot of bid activity, and there's a lot of the sweat equity that goes into things.
We sell the Title 21 tags into California.
We do the Bay Bridge; we have various other traffic projects that are currently under quote.
But I would not say that we have seen ---+ and we've seen a big increase in the last two years in terms of quotations and project opportunities.
But we have not seen something in the last two months that's a big deal.
I think that you'd want to be careful that if you look at total transportation spending, the tolling and traffic side is not a big percentage of that total.
But nonetheless, if it goes up, there is more money available.
We'll get more growth than we have now.
We have not seen any falloff at all at Neptune.
It's probably going to grow at mid-single digits in 2017, and it continues to have good cash performance.
So there is a little bit of headwind for people that are not vertically integrated like we are around copper pricing.
So I think our competitors will probably struggle more than we will, but we are in good shape.
Also remember that water utilities are generally self contained in terms of, they charge for water, and they use that revenue in order to basically maintain the system.
And so it has generally not been subject to the larger swings in municipal budget spending.
It is generally its own little P&L inside the municipal world.
I think that would just always be related to the quality of what it was that we saw.
And the things that we are hoping to acquire over the next three years, none of them are available today at noon.
So it is not a situation that we have to really be bothered with.
But we continue to monitor everything, and have routine conversations.
If you get the share price up here to what it is really worth, given all this cash, be a consideration I suppose.
But I would not issue equity today.
So, I think that the way to think about this is it depends on where it comes from.
You are absolutely right.
To the extent that we have more growth from the software businesses, that will come in at 50%, maybe even above that.
Across the Enterprise, I think what you will see is that we will have somewhere between 35% and 50% to 55% incrementals, depending on where it comes from.
And I would say that the decrementals that we saw on the Energy side, they might be high relative to others but they were actually low relative to our gross margin.
So we still delevered at a rate below our gross margins.
We were able to take the cost out ahead of just what the decline of revenue would have resulted in.
So I actually think that we did a nice job, and I think our businesses did a nice job on the decremental side there, even though it's a probably higher number than most other companies.
But that is a margin discussion rather than a performance discussion.
No.
We do not have standard products.
We are an application-oriented company.
So you do not call up and order the same thing you bought last year.
You might have recurring revenue.
There may be some built-in maintenance fees associated with that, or if it's SaaS, there may be some annual escalation.
But we are not a product company with standard products.
Even the products that we have are pretty unique products.
So they do not tend to have a standard pricelist that people can work off of.
There is a few exceptions to that, but not many.
And the other thing that ---+ what we do look at with respect to price, is really what is the value capture that we are able to get inside the niche markets and applications that we have.
If you just look at the Industrial Technology segment by itself, the gross profit margin I think is the thing to look at when you think about value and price and cost and things like that.
Our Industrial Technology business is actually a 50.6% gross margin in 2016, up 80 basis points from where it was in 2015.
Energy Systems and controls, still clicking along at 57% gross profit margin.
So, folks who try to say price as a discrete measure, just follow their gross margin and see if any of that price really shows up there.
That is how we think about it, rather than having standard pricelists and what a nominal price change might be advertised at.
The proof is in the gross profit margin.
I think what you will see us do is move to a segment profit description, which would add back the non-cash purchase accounting-related amortization in order to be able to have the same comparability for all of the same reasons at the total.
So of course, Deltek is not included in our organic results or forecast for 2017; that will all be acquisition related.
On an apples-to-apples basis, of course, you always have to take what their prior results were with a little bit of grain of salt.
But we expect that to be a mid-single-digit grower.
I think they are reporting something a little bit higher than that, but we expect mid-single-digit organic growth on a long-term basis out of that acquisition.
No, we'd expect the market is smart enough, and we believe it is, to give the value for us for Neptune being worth more than any of the other water companies.
It's imputed in our price.
There could be other businesses we have that are different, but Neptune is very different.
We're going to move it increasingly into technology and all kinds of exciting things going on there which we're not going to talk about openly until it is too late for people to respond.
But I will say, when you look at some of the deeper product businesses, the legacy product businesses, or some of the instrumentation businesses, you could see something happen there, but people would have to basically pay our tax.
So if tax burden goes down to the acquirer, then, hey, maybe they're more interested, I don't know.
Thank you again, everyone, for joining us, and we look forward to speaking to you in a few months.
