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Edited Transcript of ROP earnings conference call or presentation 28-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Roper Technologies Inc Earnings Call

SARASOTA May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Roper Technologies Inc earnings conference call or presentation Friday, April 28, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian D. Jellison

Roper Technologies, Inc. - Chairman of the Board, CEO and President

* John Humphrey

Roper Technologies, Inc. - CFO and EVP

* Neil Hunn

Roper Technologies, Inc. - Group VP

* Robert Crisci

Roper Technologies, Inc. - VP of Finance and IR

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Conference Call Participants

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* Charles Stephen Tusa

JP Morgan Chase & Co, Research Division - MD

* Deane M. Dray

RBC Capital Markets, LLC, Research Division - Analyst

* John Salvatore Quealy

Canaccord Genuity Limited, Research Division - MD and Analyst

* Joseph Alfred Ritchie

Goldman Sachs Group Inc., Research Division - VP and Lead Multi-Industry Analyst

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Robert P. McCarthy

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Your Roper Technologies First Quarter 2017 Financial Results Conference Call will now begin. (Operator Instructions) As a reminder, today's call is being recorded.

And now I'd like to turn the call over to your host, Robert Crisci, Vice President of Finance and Investor Relations. Please go ahead, sir.

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Robert Crisci, Roper Technologies, Inc. - VP of Finance and IR [2]

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Thank you, Jay, and thank you all for joining us this morning as we discuss the first quarter financial results for Roper Technologies. Joining me on the call this morning are Brian Jellison, John Humphrey, Paul Soni and Neil Hunn.

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 available on our website, www.ropertech.com.

We begin -- if you please turn to Slide 2, we begin with our safe harbor statement. During the course of today's call, we'll 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.

Now please turn to Slide 3. Today, we'll be discussing our 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 first quarter, the difference between our GAAP results and adjusted results consists of the following items. A $22 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions and $2 million of related commission expense. This represents revenue and commissions that those companies would have recognized if not for our acquisition. Lastly, a $72 million pretax adjustment for amortization of acquisition-related intangible assets.

And now, if you'll please turn to Slide 4, I will turn the call over to Brian Jellison, our Chairman President and Chief Executive Officer. After his prepared remarks, we'll take questions from our telephone participants. Brian?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [3]

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Thank you, Rob. All right, good morning, everyone. We'll start by going through the first quarter enterprise results and then look at the specific segment detail for each of our 4 reporting segments and then talk about how we see the second quarter and the rest of the year and take your questions.

So if we turn to the next slide, Slide 5. We look at the Q1 enterprise results, well, fundamentally, of course, our record first quarter for everything you can think of, revenue, net earnings, EBITDA, cash flow.

Our revenue was up about 22% in the quarter to $1.108 billion and of that, 5% was organic. Really broad-based growth, which we'll talk about, in all 4 segments and specific improvement in our industrial and energy end markets.

In February, we were at an investor conference and audience question was what could go wrong or what's still difficult and I said then that there really -- we didn't see any difficulties. There were continuing headwinds of the business that were meaningful, and I'm sitting here 2 months later and I'd have to give the same answer to that question, so we see really a breakout year for Roper in 2017.

DEPS were up 17% to $2.11. EBITDA was up 18% to $362 million. Our operating cash flow was up 55% to $378 million, and you don't want to be confused about the fact that last year, that was an even lower number that would make the operating cash flow look even higher because we had an adjustment around an out-of-period tax situation with the ABEL sale recorded for quarter 4; that was a $37 million adjustment. So we're quite content with being up 55% on that adjusted operating cash flow number the year before. The $378 million, we'll talk more about that during the course of the morning.

Both Deltek and ConstructConnect came out of the box very well and have probably even more upside potential in '18 and '19 than we originally had forecast.

We had a very interesting week-long strategic conference with all of our industrial and energy business leaders last week in Sarasota. That's the first time we've had everybody together in one large meeting for a couple of years. And the amount of product vitality that, that group's put together in the last couple of years during a more difficult economic time is really refreshing and all of those folks are very, very excited about returning to a growth forward nature, so that's good news.

Next slide. If you look at the income statement, for the first quarter, you'll see that the revenue at $1.108 billion versus $906 million last year. Gross profit, up 10 basis points to 62.2%. EBITDA at 32.7% is down a little bit on a margin basis, but, of course, up 18%. And that's just Deltek and ConstructConnect and the acquisitions coming in initially with sort of looks like with less EBITDA on a margin basis.

The tax rate in the quarter was 28.2%. We had a $7 million discrete item that we were aware of that we were going to get the benefit sometime during the year, but it actually hit just right in the quarter all of it. And you can see -- the detail will tell you about what the GAAP rate was and what the amortization rate was where we'd applied 35% to the amortization.

The net earnings then were $218 million and DEPS, as you could see, was $2.11.

So next slide. If we look at the cash flow side, this is sort of nothing short of spectacular. We had an exceptional first quarter, although I would remind everybody that in the chart, you can see $888 million trailing 12 months at the end of quarter 1 of '15, going up to $913 million and now, $1.135 billion.

In the first quarter, we don't have any tax payments, so it's always a little bit better. Then the second quarter, you wind up sort of with a double tax payment and then normal in the third and fourth. Our free cash flow in the quarter was $360 million, once again, just hardly any CapEx here. And we were able to reduce the debt in the first quarter by $370 million. So taking that down by $700 million, it'll be a very easy task for us. Our debt-to-EBITDA at the end of the quarter, using the definition that is in the debt arrangement, it was 3.7x, and that actually gives us plenty of cushion in terms of what we said. So we're ahead of schedule using their definitions.

We've always said that cash is the best measure of performance, and I think that will really be brought home throughout the year as you watch what happens to our balance sheet and our cash.

Next slide. In terms of our asset-light business model, which has been a long journey for us, finally in this quarter, for the first time, you'll see it's actually a negative working capital position. So as we grow now, we throw off cash instead of consuming cash, which is a rare business model that can get put into place.

In the end of the first quarter, you can see every metric on this page was better than it has been previously. So inventory is down to 4.4% of sales; receivables are only 16%. So you look at that at 20.4%. But if you look at payables that are at 11.5% and then you look at deferred revenue skyrocketing to 11.8%, you got a negative 23.3% against the positive 20.4% and boom, there it is, a negative investment of 2.9%.

If you go back on that journey, 5 years ago in the first quarter of '12, our inventory was 7.5%, now it's 7.4%. Our receivables were 16.9% and now, they're 16%. Our payables were 11.2% and now they're 11.5% and our deferred revenue was 3.3%, today, it's 11.8%, and that has changed us from being 10% positive on working capital to a negative number of 2.9%. And, of course, the amount of cash that, that throws off for us and our ability to deploy the cash is unprecedented at any time in Roper's history.

You can see the deferred revenue nominal number at the bottom in the last 2 years has increased from $237 million to $514 million. So if you want to look at just one metric about really the reinvention of the company, it's right here on this slide.

Next slide. When we get into the segment detail, and I should have included this, the medical segment's at 72% gross margin; the RF segment at 61% gross margin; Industrial's at 51%; and Energy's at 57%, which leaves us with an enterprise gross margin above 62%.

Next slide. So here, if we start with Energy Systems. You'll see it had organic growth of 7%, and we had 1 business that was down, which we expected, which was our Compressor Control business that will take a while longer to recover. If we excluded Compressor Controls, we actually were up organically 9% in the quarter in our Energy segment.

All the oil and gas markets improved a bit. We wound up with sort of mid-single-digit growth. Terrific leverage in the business as you can see. The operating margins are up 380 basis points and operating profit is up 25% on a revenue variance of plus 5%.

Really, basically, an improved outlook for the balance of the year. We don't really see any net negative businesses for the rest of the year, maybe a slight pullback at CCC.

And then when you think about the mix in Energy Systems, it's about 1/3 of that business is industrial and 2/3 are energy. So even though the revenue's $125 million, it really represents a little over $80 million that's directly associated with energy.

So if we look at Industrial Technology, you can see here, that business was up by 8% organically. We had a little FX in there. And then you can see operating profit was up 15%, with revenue up 7%, so very strong leverage. OP margin up 190 basis points. Imagine that, an OP number of 29.2% for an industrial family of businesses. And inside that number, it's about 10% of that $183 million is really energy-related, so if you take the sort of $18 million for energy out of Industrial and the $80 plus million out of Energy, you wind up with about $100 million of total revenue that's energy related for the company. So it's around 8%, to maybe 8.5% of total enterprise revenue. And while it'll grow this year, you want to remember, it's a modest part of the enterprise.

So in Industrial, we had kind of a high single -- mid-single digits, maybe low single-digit growth at Neptune and [term in] was low high-end cycle stuff 6%, 7%. Material analysis was up dramatically in the quarter, double-digit growth there; and our upstream oil and gas businesses were up double digit, with outstanding leverage. We actually don't see any of the businesses in Industrial being down for the balance of the year, so all that gives us a kind of positive performance.

And these things are sort of sorting themselves out to a situation where we probably think about 3 families within these 2 sectors of precision instruments, water businesses and energy businesses, and we'll talk more about that I think as the year goes forward.

Next slide. So the next segment we talk about is Medical & Scientific Imaging. Really, this is the health care technology family of businesses. If you look at the mix of these, you can see organic revenue is up 5% for the sector as a whole.

The Acute Care Software businesses, which include all of our connectivity business and laboratory businesses and the new genetic testing and workflow businesses with GeneInsight and Unit Connect as a family, internationally, we were up like 7%, sort of flat on the U.S. side and then up quite a bit on the diagnostic connectivity side and up substantially on decision technology business, though, which is Strata.

When you look at that business and then compare it to the -- along with the alternate site healthcare business, it was up kind of mid-single digits as well. We had a decent quarter out of MHA's GPO business; and then SHP and SoftWriters continue to be very much faster growing than other components in the area. Those 2 businesses, the Acute Care Software, which is like a half a dozen units and the alternate site healthcare, which is really 3 units and sort of run more like 5, they represent half of the total revenue for this segment.

And then we have medical products, and that's about 35% of the segment's revenue. And the medical products, they were also up, everything sort of up mid-single digits when you add it together. But clearly, the big outperformer there is our Northern Digital business, which is moving into a number of activities that are beyond medical with the unique business that we have developed there, and that remains quite an exciting opportunity for us over the next several years.

Imaging was actually up in the quarter. Gatan's life science technology we're getting more and more adoption on the cryo-EM. And Imaging represents about 15% of the segment, if you're trying to understand what's going on here.

Operating margin was terrific at 34.4%, it's down 30 basis points only because we're continuing to invest at a fast clip in our genetic testing and workflow analysis. We have 2 revenue generators that won't be producing much profit for a little while longer in GeneInsight, Unit Connect, but they are very important pathways to the future for us around what we're achieving.

In the rest of the year, Q2 through Q4, would be sort of similar to this quarter: broad-based medical growth, we think will continue, still at least at this sort of 5% level. Hopefully, we continue to get the market adoption of the new technologies with imaging. We don't see anything slowing that down. So overall for the segment, I think we'd wind up with this mid-single-digit organic growth.

Next slide. On RF Technologies, far and away the largest segment now, $451 million in revenue, up 60%, largely driven by ConstructConnect and Deltek joining the company here for the entire first quarter.

Organic revenue was 4%, a little bit of FX here. In terms of talking about the Deltek and ConstructConnect, we could sort of have a full individual slide on them.

Our governance model's in place and working well inside these businesses. We've had Mike Corkery who runs Deltek and Dave Conway who runs ConstructConnect out talking to some of our investors. People getting exposed to just how great those businesses are. As we spend more time with them together, they're finding more opportunities for working together to accelerate growth. And I think neither of the businesses independently thought might be there, so they seem to be quite encouraged about that.

Deltek's looking at a much larger GovCon opportunity as a result of the various things you see going at government these days, and they have a very large opportunity for adding paying customers to people that from time to time have subscribed to that software.

They also were very successful in launching their professional service that's first stage. We have a -- sort of 3-stage of rollout and the first one was launched on time and is up and running.

When you look at the rest of the software businesses, that's a wide variety of things, from freight matching, to iTradeNet or CBORD, Horizon, On Center, Aderant legal software and the like. They were all up around mid-single digits as well, and they are, of course, incredible cash contributors.

On the toll and traffic side, it was kind of a bifurcated quarter, with the intelligent transportation systems side was up double digits. But most of that's driven by the Transsuite software platform we have and projects that we've talked about before, Riyadh and the New York area. Those don't carry much in the way of tax. And so we saw deterioration in tag revenue in the first quarter, which we actually had expected but nonetheless, it's a big negative. It was down 36% in the quarter, and it carries much higher margin. So where you look over here on the OP margin, and you can see it's 24.1%, the core being down 210 basis points was specifically Amtech tag shipments softness.

And we won't see that getting massively better throughout the year. It's still a very lumpy business with agency timings, and it'll be a very high-quality business. But we put the 2 together, we wound up with kind of low single-digit growth in the tolling activity.

For the balance of the year, you can see we think that software businesses continue to grow with strong margins and really, outstanding cash performance.

We think that the segment as a whole should be up 60%, but certainly, a lot of that, most of that is coming from Deltek and ConstructConnect acquisitions.

And overall, we'll get a kind of mid-single-digit organic growth out of the segment because the tag shipments are going to drag down the overall number. But we could get some infrastructure tolling, but we're not -- we're holding our breath on whatever is going to happen with the government in that respect. But if you did get an infrastructure bill, it certainly could improve our outlook from being low single digits to a better number.

And then we thought it would be useful, you can see a pie chart here, to try to have everybody clearly understand the mix of what's going on in the segment now. So while we call it RF Technology and software, you'll see 65% of the revenue in the segment is coming from software. And that doesn't even count the toll and traffic software, which we just leave inside that because there's back-office software and there's Transsuite, so it would take it up to an even larger number.

The tolling thing is about 25% of revenue, but a portion of that is really Amtech RF products that go along with the other RF products [that are buying], so Technolog and Amtech's [Royale Business] and [Teletrance] and things like that. So the product, physical products, are about 10% and tolling is around 25% and software is around 65% and, of course, growing.

Next slide. We get to guidance and I've got to turn the page here to Slide 14. So on the guidance, we're raising the full year guidance from $8.82 to $8.98 on the low-end and the high-end from $9.22 to $9.28, gives an $0.11 increase at the midpoint to $9.13.

Revenue, we've raised from 20% to 22% to 21% to 22% because we're raising organic from 3% to 5%, to 4% to 5%.

The cash flow, still looks to us like it's right at about $1.150 billion. That's around 24%, maybe even 25% of revenue, so just remains an astonishing performance. I do want to remind people that the $378 million in the first quarter as cash flow didn't have any tax payment in it and the taxes generally run around $85 million a quarter, so you'll get that double hit in Q2 and then normalized tax in 3 and 4.

Our guidance for the second quarter, we said it'd be $2.16 to $2.24. CapEx for the year is going to be sort of what it generally is, around 1.5% of revenue, maybe it'll be $65 million to $70 million, and that will include any capitalized software that's in the acquired businesses.

Our tax rate's going to be somewhere around the 30% level. And it might -- well, it could be a little bit higher than that, but it should probably be in the sort of 30%.

I think there's not much more to say there. You guys all know what the interest costs are for the balance of the year, and so you can kind of see how that operating cash flow will go by quarter to reach the $1.150 billion. More at the end of the year.

Next slide. So we look at the Q1 summary. Certainly, we had record results across everything that matters, a very broad organic growth across all 4 segments, nothing really holding us back anymore.

We've got DEPS up 17% to $2.11; EBITDA, up 18% to $362 million. We reduced the debt by $370 million in the quarter so we got really a rapid strengthening of the balance sheet, which we expected. And we still have $650 million or more outside the U.S. and so we're kind of waiting to see just what happens on repatriation; that would be a very dramatic benefit for us.

And ConstructConnect and Deltek are really performing very well and the opportunities in these businesses is very much what we thought it was, probably more.

Next slide. If you look sort of strategically about the quarter, you can see now how we're really benefiting from what we did in 2015 and 2016. So it's hunkering down. And at the time of economic challenge, we really took the time to reinvent ourselves for the second time.

First time we did this was back in 2003 and '04 when we acquired Neptune and TransCore. And really, the second time around with the acquisition of ConstructConnect and Deltek is going to give us the same kind of positive results but with even better cash compounding along the way.

Over half of the EBITDA in the enterprise now comes from software and from network businesses, and that doesn't count any of the software contributions we get out of TransCore's back office, the Transsuite business or from Compressor Controls' software; even higher if we added those in.

The deferred revenue is increasing our ability to compound cash. We now have over $0.5 billion of deferred revenue, and it's always good to use other people's money.

Net working capital is now in negative territory, so we get to generate cash as we grow instead of having to have -- be consumed by the growth in things that show up in working capital.

Our cash return on investment has been rapidly improving. The typical multi-industry guys are probably running somewhere between 20% to 40%, 45%. We're going to be running at over 200% by the end of the year. And you'll hear more about that as the year goes on.

We have newly elected officers that all take their positions on May 15. So we have 2 Executive Vice Presidents, Neil Hunn and Paul Soni. Neil is getting close to his 6th year with the company. This is -- he's now an elected officer effective May 15. His responsibilities include pretty much all of the medical segment with the exception of Imaging, and most of the new software acquisitions, so a very broad piece of the portfolio.

Paul Soni is leaving his role as Principal Accounting Officer, which he's been here for over a decade with me doing that, to take on a series of executive leadership roles, most of which will be announced a little later. It'll involve some of our specific businesses and a wide variety of the senior process, things that need to happen here.

Bob Crisci, who you know has been our Investor Relations and financial planning person, will be taking over as Chief Financial Officer in a couple of weeks and has certainly been acting like that for a couple of months.

And Jason Conley, who used to be our Investor Relations person you'd remember and financial analysis guy, went out to MHA to be their CFO and then as we acquired the software companies to expand MHA with SoftWriters and SHP, Jason was the person driving the integration and supporting the coaching of bringing those new organizations inside and he's returning back to the Sarasota headquarters from New Jersey. No taxes for Jason. And he'll be starting May 15 as our Principal Accounting Officer, which gives us a really fantastic team of well-educated and passionate and tireless people.

All these appointments came from within Roper, which we're very proud of. I think it really speaks volumes to the depth of the organization, talent we have and the strength of our leadership development process. Every one of these people has had multiyear plans in place for different exposures to different roles and different types of business, all of which supports our succession planning and positions us to have a leadership team that's very, very connected to the continuing execution of our strategy.

And with that, I think we can open up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Deane Dray with RBC Capital Markets.

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Deane M. Dray, RBC Capital Markets, LLC, Research Division - Analyst [2]

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I just want to start off with a congratulations to John on his retirement announcement, and I do remember when John joined as the rookie CFO, and you've come a long way and congrats and enjoy your retirement.

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John Humphrey, Roper Technologies, Inc. - CFO and EVP [3]

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Thank you, Deane. I appreciate that.

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Deane M. Dray, RBC Capital Markets, LLC, Research Division - Analyst [4]

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And just maybe to start off and, Brian, I know you sized the energy piece, but it was such a headwind for the company for the past year, and it's nice seeing that snapback. Maybe give us some color on how you expect to see these, especially the upstream businesses, come back here and maybe touch on Roper Pumps. I know it's a small piece, but it really was a ground zero with the fall off in fracking and you've built new capacity in Houston. And what's your expectations on the recovery there?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [5]

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Well, it was up double digits in the quarter on the revenue side and up like 40% on profit, maybe a little more, very high leverage. Orders continue to be pretty strong for that business. One of the reasons we had everybody together in all the product businesses last week was to sort of make sure we're ahead of what's going to happen for the balance of the year and next year and beyond, make sure we're smart about looking at -- we kind of look at the whole product family as being responsive to the customers, pulling stuff other -- than us pushing stuff to them. So we're kind of big process review, talking about cost push inflation, capacity utilization, risk of supplier interruptions, material cost escalation and those kinds of things. I think that the broker enjoys a unique position if you get an expansion of fracking. And they could be up sharply. But you're right that they were off so much. We tried a couple of years ago to articulate the mix between upstream, midstream and downstream by taking apart a wide variety of businesses and we kind of -- but it's almost better to just say here's the 6 or 7 businesses that are primarily in that area. Roper Pump gets reported in Industrial; it really is an energy asset. I mean it could be up 40% this year, but it's still very nice incrementally, but it's not -- won't be overly meaningful, right. I mean, that's a business that used to be $100 million and went down to $40 million, so -- and if it was up 30%, it'd be a $52 million business, so half of what it was in 2014 but a dramatic improvement.

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Deane M. Dray, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Certainly, and I'd rather be in a position explaining the nature of the snapback than where we were a year ago. Just switching over to Deltek and ConstructConnect. Brian, you alluded to some potential upside versus what you had initially discussed at the time of the acquisitions; pointing to the government opportunity, adding subscribers and professional services. Can you expand on that and how you expect to see those opportunities develop and maybe quantify what the upside might be?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [7]

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Yes. I think the quantification would be more in terms of forward growth rates, so maybe mid-single digits and high single digits. I'll ask Neil to talk a little bit about what they see in terms of professional services with these new launches of products and a little bit around the GovCon opportunity.

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Neil Hunn, Roper Technologies, Inc. - Group VP [8]

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Sure, Deane. So let's do Deltek first. What we've been talking with the team there and doing our reviews this quarter, Mike Corkery said, and he's a pretty conservative guy, former CFO of the enterprise, that almost an unprecedented level of activity around building the sales pipeline in the low to mid-market side of government contracting. And so fortunately, we're well positioned there on the ERP side of GovCon work. But it is just that. It's building funnel. The funnel's got to mature. It's got to convert. It's got to get implemented before it becomes sort of [well into] to our financials. So it's a good position to be, and I'm certain the end-market reasons for that are obvious around Trump and infrastructure and all that. I think the subcontractor universe is getting ready for that. Relative to the product development, it's really a machine in terms of what Namita does with her team there. There's ordinary run rate development work that they do and when we bought the business, there was an internal project that had 3 phases that was above and beyond that and the first deliverable of that, Deltek for professional services, was released in the quarter on time, on schedule, on budget, but it's just it's a new category. We're a challenger in the category, and it'll be sort of what we expect that to be a slow build over a long period of time in terms of building that business for us but we have the product now to attack that market. So we're very encouraged about -- we've only been with the business now for 3 or 4 months, but it's very encouraging to start. On -- and that's the summary on Deltek.

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [9]

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Okay, that's good. So maybe we're going to think we've got another 1 point, or 1.5 points, 2 points of organic down the road of what we thought when we bought it.

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Operator [10]

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The next question will come from Robert McCarthy with Stifel, Nicolaus.

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Robert P. McCarthy, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [11]

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Congratulations on a solid quarter; great growth. You've heard the song remains the same. And I guess, you're not a one-man band anymore, Brian, right? Given all these...

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [12]

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I am at this moment in time, Robert. The people just -- some people don't believe it.

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Robert P. McCarthy, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [13]

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But I guess, since we're on the topic and, obviously, we've had a succession. And again, I will echo the comments of Deane; congratulations, John, on a wonderful career. And, Rob, best wishes going forward. Have you -- is there anything you can share about the Chairman, CEO succession planning from your standpoint? And that doesn't mean you have to share with me your Fitbit of your cholesterol or your vitals, so...

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [14]

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Well, I'm happy to do that if I were (inaudible). So actually, I'm not concerned about the succession at all. I think it's wonderful. I'm not a modest owner of the stock, so I've never sold a share of stock in my life since I arrived here, so it's finally accumulated to a meaningful number. I had to get rid of options because they expire in 10 years and so [as that would take the] crap out of me, but anyway, it is what it is. The opportunity for us adding capital value to the enterprise is the best it's ever been in our history. The company is going kind of through its second phase of reinvention. We had a marvelous run after Neptune and TransCore. And now, we're going to have the same situation again. The things that we can deploy capital to acquire are phenomenal opportunities, much better than what we were limited to, say, 10 years ago. So all that feel is really good. I think you can see from all of the new executive moves are from internal people. I think the board and myself, would be extremely disappointed if we didn't have an internal successor, but virtually everybody was here. We went outside a year ago to bring in a General Counsel because we wanted some specific knowledge about business acuity that we thought needed to come from an outside source. But other than that, I don't see why we would need to bring outside people, but we very much value the culture and the connectivity of everything we do. On our values page, the #1 thing we have up there is we believe that cash return on investment drives shareholder value. And we're not too interested in somebody coming in with a different paradigm that thinks that businesses trade on some other foundation because they do not. They trade on cash return. It's an ingrained principle. It's -- every part of our governance process is really characterized around that. When we had our strategic meeting with our product people last week, and we showed them everything that had happened numerically from 2011 by year through '16 and what their vitality index of strategies looked like through '19. I just don't think people do that. And we do that in spades, and we do it with numbers, so that people can go away from here and execute. So those are strong reasons why the board would be very much interested in assuring that we have put in place all the leadership succession processes that we need to have everybody immediately available to take over all the roles.

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Robert P. McCarthy, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [15]

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And as a follow-up, which I think is related, obviously, you go to Slide 8, and you see what's going on there in terms of the asset-light business model on working capital. And then you start to think about the broad-based recovery on the macro side, the strength you're seeing in recovering energy markets. It's probably a good time for valuations from a standpoint of exiting assets and also potentially contemplating separation, particularly in the context of your kind of thoughts around the second phase of the company. Could you talk about kind of the puts and takes around potential separation or how you're thinking about perhaps divesting some assets to basically refine or -- refine the overall portfolio?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [16]

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Well, it really hasn't changed at all. You have the same forces of work. So you have the product nature of the company, the old energy and the industrial base businesses have very low tax bases. So as long as it's a 35%-plus leakage on whatever you get, people would have to pay a huge premium for us to get a net yield that was re-investable at the kind of rate we'd like to have. So we think the market reasonably understands what the portfolio looks like. There's certainly people have been -- have approached us throughout the last couple of years with various reverse Morris trust concepts around some portions of the portfolio. We've talked about that sort of openly and the challenge is that people that approach us are guys that have 38% gross margins and 18% EBITDA. And you look at these businesses that have gross margins of 51% and 57%, and EBITDA margins at 30%, they marvel at them, and they can't figure out where are their synergies. Now the reason they can't is there aren't any. It would be -- you need to acquire them and drive them on a CRI perspective, and we're not doing that. So our rate of reinvestment will continue to be driven around the kind of asset-light businesses and cash returns that you get out of the software businesses that we've been acquiring. So those core product businesses simply are going to grow at a faster organic rate for a couple of years. They'll throw off more cash. That gives us an opportunity to invest that in very high return and slightly better growth businesses. So I don't think anything's changed in that respect.

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Operator [17]

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Now we'll take a question from Joe Giordano from Cowen and Company.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [18]

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I wanted to just talk about Deltek and ShortConnect (sic) [ConstructConnect]. Is there any sort of -- how can those businesses work together? Is there any sort of like go-to-market strategy to leverage the 2 offerings to the customers, in particular, or is there -- are they kind of -- I know they're independent, but is there a way to kind of leverage that together?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [19]

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Well, with -- the nature of the word and whether it's a verb or not is important. So we wouldn't force leverage putting 2 world-class businesses that developed independently together. But we're more than happy to facilitate the opportunity for the 2 businesses to look at how they can use each other customers to basically drive access to channel a customer that they wouldn't have if they weren't owned by the same company. Deltek and ConstructConnect each have massive goodwill in terms of how customers feel about them. So it is infinitely easier for a Deltek contact to a ConstructConnect customer knowing that it's part of that family. The receptivity is higher and the same thing is true, so sharing that customer opportunity is a big deal. And we allow cooperation and then kind of let the businesses -- really, Corkery and Conway, they're CEOs of their businesses. And that's true of all these large businesses, with Hawkins the CEO of Acute Care and Sicilian's the CEO of Alternate Site. So we'll let Neil maybe tell you about how these early meetings have been so fruitful.

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Neil Hunn, Roper Technologies, Inc. - Group VP [20]

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Yes. So we'll break it down both on the channel and on the product. On channel side, remember that Deltek is very -- it's 40% market share globally in architecture and engineering as a vertical for professional services. They're a challenger in construction in the AC space and ConstructConnect lives in the construction space. ConstructConnect has 41,000 paying subcontractors and 850,000 subcontractors in their network. And so you can immediately see the opportunity to work together around regeneration on the product and -- on the go-to-market strategy. On the product side, the core part of what ConstructConnect does is aggregate content and data that allows all the various building product manufacturers, GCs and subs, to know what projects are in the funnel. Deltek has a similar but different product that allows government contractors to know what sort of government contracting work's in the bid pipeline. So there's opportunity to sort of enrichen the data of -- between both businesses and sharing content. So it's very much a tandem strategy, but it's being led organically by the 2 leaders of the business. It happened -- they knew each other a little bit before when they became part of the fold within the same quarter. They immediately reached to out to each other. These meetings are occurring without intervention from the team here in Sarasota.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [21]

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That's great color there. I appreciate that. If you guys were to look at the businesses that are snapping back here a little bit after definitely easier comps because that's part of it, but if you were to maybe try to strip out seasonality and look at it on a sequential basis going forward looking at your order patterns, how do you see that? Was it -- do you look at it more of a step-up to just a higher run rate, or is it kind of -- are you seeing month-on-month continued kind of acceleration on a sequential basis more than on a year-on-year basis?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [22]

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Well, these things generally will have a stronger second quarter and fourth quarter on a seasonality basis. But when you're bouncing back from a situation that's artificially low, you could get sequential improvement all the time. We certainly will have sequential improvement second quarter over the first. So Rob, you may want to...

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Robert Crisci, Roper Technologies, Inc. - VP of Finance and IR [23]

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Yes, I think there is sequential improvement. The run rates with the Roper Pump and any of the upstream businesses, they're certainly up and that should continue throughout the year. And then, on a year-over-year basis, right, we're talking about mid-single-digit growth for each of the Industrial and Energy segment, than when we talked to you 3 months ago, we were looking more like low single digit.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [24]

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Right, right, right. Just one last like nitpick on the guys just to get a sense of where you're looking. So the full year guide, up less than the magnitude of beating 1Q. Is there just -- should we think about that as a bit of conservatism or you're kind of maybe factoring in some of this happening already and it's less of a surprise? How would you reconcile those things?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [25]

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No, I think we just think that moving up from 3% organic to 4% is a 33% increase, right? So 4% to 5% organic is pretty strong for the enterprise. I think we'll have the one organic headwind for the year is going to be that portion of toll and traffic that's related to tags is going to be off, and it could be off $20 million at least this year unless there's some resurgence in new tolling activity, which there could well be because our bid process is off the charts. So there's lots of activity, but right now, we're relying on the base, and we'll have to see. But I don't think it's conservatism. But I think you've got to remember how small this whole thing is. If you look at all of that Industrial and Energy, you're looking at something that's about 25% or 28%. So if you've got something (inaudible), it would have to be up quite substantially more than the kind of 4% mid-single digits we're talking about it for it be very material, so...

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Robert Crisci, Roper Technologies, Inc. - VP of Finance and IR [26]

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Yes, I'd just add to that. For the first quarter, the Medical and RF segments were right where we expected them to be and the outlook there for the rest of the year is just as we had it coming in for the year. So really, the only change is better environment in Industrial and Energy and rolling that forward for the year. And as Brian pointed out, that's a smaller percentage of the company than it used to be.

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Operator [27]

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And now we'll take a question from Joe Ritchie with Goldman Sachs.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP and Lead Multi-Industry Analyst [28]

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So I guess my first question, with clearly great cash generation this quarter, I guess, Brian, as I kind of think about your cash profile moving forward, I'm trying to just maybe understand how I should think about that deferred revenue number as a percentage of sales clearly getting close to 12% this quarter. How do you think about that on a more normalized basis? And how do you think about like trade working capital on a more normalized basis?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [29]

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It's normalized right now at negative 2.9%. There's nothing cyclical about that. We get more and more deferred revenue, it becomes a positive thing, right. So the more you grow, if you're paying in advance for what you do, the more deferred revenue you get. So welcome to probably the first negative working capital company in your coverage.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP and Lead Multi-Industry Analyst [30]

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That is -- you guys would be the first negative working capital company in my coverage. I guess, the -- at least at this stage of the cycle. Okay, that's helpful. I guess, my second question, and it relates to this, is if you think about your leverage, you're now down to 3.7, I think that in the conversations that we had last quarter, I think kind of a goal this year was to kind of get into like the mid-3s. It seems like you're definitely accelerating beyond that. Can you get below 3? Is the goal now to get below 3x net leverage at the end of the year?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [31]

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No, I think we don't have any goal. We have certain covenants and certain requirements, and we can't exceed 4 without mentioning it to people. And we expect to get down easily to meet all of our commitments and our covenants. So it's much more likely we would run routinely at 3x debt-to-EBITDA than we would run routinely at 3.5x debt-to-EBITDA. And if we didn't do other acquisitions, I wouldn't borrow that. That's (inaudible) we wouldn't do this year. We'd certainly be down to levels like -- and you can see we're going to have $1 billion of free cash flow. Other than increasing our dividend for the 25th time and become a dividend aristocrat, I don't think you'll see us have another deployment unless it's an acquisition.

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Joseph Alfred Ritchie, Goldman Sachs Group Inc., Research Division - VP and Lead Multi-Industry Analyst [32]

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Okay, fair enough. And if I could maybe sneak in one more, and I know it's a smaller piece of your business today, but both Industrial and the Energy pieces of your business saw incredibly good incremental margins this quarter. And I know that you guys have kind of growth rates staying mid-single digits. So should we be expecting like pretty elevated incremental margins then throughout the rest of the year in both those businesses?

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Robert Crisci, Roper Technologies, Inc. - VP of Finance and IR [33]

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Yes, I think for those 2 segments, as you grow, we would expect really strong leverage, similar to what you saw in the first quarter because of where they are after the cost reductions over the past couple of years. On the way back up, we would expect pretty strong leverage.

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Operator [34]

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We'll now move to our next question, and that will come from Steve Tusa with JP Morgan.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [35]

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John, congratulations, again.

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John Humphrey, Roper Technologies, Inc. - CFO and EVP [36]

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Thanks.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [37]

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So I didn't see the orders in the presentation. What were organic orders up in the quarter?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [38]

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I don't know. All the data's in there. Book to bill is 1.01…

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Robert Crisci, Roper Technologies, Inc. - VP of Finance and IR [39]

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Organic orders for the company, plus 3.

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [40]

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Yes.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [41]

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Plus 3?

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Robert Crisci, Roper Technologies, Inc. - VP of Finance and IR [42]

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And Industrial and Energy is where we -- is where the orders number really matters and it was up 1.06 in Industrial and 1.01 in Energy. It's a less useful metric.

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [43]

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Book-to-bill.

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Robert Crisci, Roper Technologies, Inc. - VP of Finance and IR [44]

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Yes, book-to-bill. It's a less useful metric for the Medical and RF side.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [45]

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Right, okay, okay, but up 3 in orders, that's great. And then, is it normal for you guys to -- kind of going back to McCarthy's question, is it normal for you guys to have, like, 2 specific segments for one of these kind of enterprise meetings? I mean I'm just -- I've never heard of a company that says let's invite these 2 specific segments for kind of that type of company-wide meeting. I mean, have you guys done that before? Have you done that with other segments where you just kind of like cherry pick a couple of the segments out of the portfolio to meet together?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [46]

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No, no, we bring together people together that have great connectivity. So all of our Energy and Industrial people have similar kinds of challenges that we monitor and provide guidance to and measure. We have a separate strategic planning session with our medical companies. That was conducted in December when they're all together in the same place for a week. So we do those things in logical ways. There's no sense bringing a company together that's writing code for software with a pump manufacturer.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [47]

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Right, right. It's kind of like industrial analysts covering a software company. That was a joke. So is this kind of a precursor to maybe collapsing the reporting on those 2 segments?

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [48]

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No, I don't -- I wouldn't do read much in to those things. I think what would you see is for a couple years, I said we -- it would be helpful for us, and we're trying to do that in this quarter again, to get really good clarity around. So how much energy exposure do you have in Energy and Industrial because they're not really clean segments. The Energy segment is about 2/3 energy and 1/3 industrial; and the Industrial segment's like 10% to 12% energy and 88% industrial. And so that's our fault, and it confuses people and we'll try to make that -- I think we've made it quite clear this morning, but you'll continue to see clarity come in that area.

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Operator [49]

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And now we'll hear from John Quealy with Canaccord Genuity.

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John Salvatore Quealy, Canaccord Genuity Limited, Research Division - MD and Analyst [50]

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My congratulations to everybody on the promotions. Just one question for me. Broadly speaking, can you talk across the platform on the hardware businesses, price and volume trends? And then on the software businesses, sub-ads or retention rates.

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Brian D. Jellison, Roper Technologies, Inc. - Chairman of the Board, CEO and President [51]

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One of the great things about the company is we don't really have any standard products. There are just a few areas like residential, water meters, that they don't have the intelligent controls on them. So we're all an application company. It's very difficult for somebody to say what's the price yield because you don't have a SKU that you're following, and you can look at the SKU by channel. So you can always best measure it by looking at the gross margin in the enterprise, right. So pricing power comes from the quality of the product or service or technology you're applying and our gross margins continue to go up all the time. And so that is a pretty effective productivity measurement of whether or not you're getting the pricing opportunity that's available. You won't find Roper unilaterally raising prices like perhaps some private equity group might do for a short-term gain. We're going to have our pricing match the reality of sort of free market that we operate in over a long period of time. So as a rule, I would say we got some modest pricing in everything we do versus the prior year.

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Operator [52]

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And that will end our question-and-answer session. We'll return back to Robert Crisci for closing remarks.

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Robert Crisci, Roper Technologies, Inc. - VP of Finance and IR [53]

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Excellent. Well, thanks, everyone, for joining us, and we look forward to speaking to you in 3 more months.

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Operator [54]

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And with that, ladies and gentlemen, that does conclude your call for today. We do thank you for your participation, and you may now disconnect.