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Edited Transcript of ROP earnings conference call or presentation 25-Apr-19 12:30pm GMT

Q1 2019 Roper Technologies Inc Earnings Call

SARASOTA Jul 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Roper Technologies Inc earnings conference call or presentation Thursday, April 25, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Laurence Neil Hunn

Roper Technologies, Inc. - President, CEO & Director

* Robert Crisci

Roper Technologies, Inc. - Executive VP & CFO

* Zack Moxcey

Roper Technologies, Inc. - VP of IR

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Conference Call Participants

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* Alexander M. Blanton

Clear Harbor Asset Management, LLC - Senior Analyst

* Charles Stephen Tusa

JP Morgan Chase & Co, Research Division - MD

* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - Analyst

* Joseph Craig Giordano

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

* Joshua Aguilar

Morningstar Inc., Research Division - Equity Analyst

* Lee Alexander Sandquist

Barclays Bank PLC, Research Division - Assistant VP

* Patrick Michael Baumann

JP Morgan Chase & Co, Research Division - Analyst

* Robert Paul McCarthy

Stephens Inc., Research Division - MD & Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Roper Technologies First Quarter 2019 Financial Results Conference Call. Today's call is being recorded.

I will now turn the call over to Zack Moxcey.

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Zack Moxcey, Roper Technologies, Inc. - VP of IR [2]

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Good morning, and thank you all for joining us as we discuss the first quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial Officer; Jason Conley, Vice President and Controller; and Shannon O'Callaghan, Vice President of Finance.

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 are also available on our website.

Now if you'll please turn to Slide 2. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements which are subject to risks and uncertainties as described on this page, in our press release and in our SEC filings. You should listen to today's call in the context of that information.

And now please turn to Slide 3. Today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the first quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, purchase accounting adjustments to acquire deferred revenue and lastly, we have adjusted our income statement to exclude the gain on sale from the divestiture of our Scientific Imaging businesses. We have also adjusted our cash flow statement to exclude the cash taxes paid as a result of the sale. GAAP requires this payment to be classified as an operating cash flow item even though it is related to the divestiture.

And now if you will please turn to Slide 4, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [3]

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Thanks, Zack, and good morning, everyone. We'll start our call today with the enterprise highlights and financial results for the quarter. We'll then turn to our segment detail and outlook followed by an update to our 2019 guidance and the establishment of our second quarter guidance. And then turn it over to questions.

Next page. We characterize the first quarter here as a strong start to the year with strong organic growth, operating leverage and cash flow as well as capital deployment. Revenue grew 7% to $1.29 billion with organic growth coming in at 6%. EBITDA improved 13% to $438 million, and margins expanded 170 basis points to 34%. Importantly, we saw margin expansion across all 4 segments, which indicates the breadth of the strength of the quarter. Free cash flow improved 15% to $312 million or 24% of revenue. It's always great to see the expansion down the P&L. Revenue grew 7%; EBITDA, 13%; free cash flow grew 15%. So the leverage expansion down the P&L is always something we'd like to see.

Also in the quarter, we announced our new segmentation, and we'll talk about that in a few slides. Importantly, we completed the sale of our Scientific Imaging businesses on February 5th. And we also completed the acquisition of Foundry earlier this month.

Certainly a good quarter. And now I'll turn it over to Rob to walk us through the P&L.

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [4]

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Thanks, Neil, and good morning, everyone.

Turning to the income statement metric page. Revenue grew 7%, 6% organically, as Neil mentioned, to $1.288 billion. We had our 3 largest segments, each grew organically between 6% and 9%. Our smallest segment, Process Technologies, grew 1%, which did exceed our expectations for the quarter. Gross margin expanded 50 basis points to 63.0% as we continue to benefit from our increased mix of high-margin software businesses. So we are very well positioned should any macro headwinds build around tariffs and material cost inflation or anything that's like that, really would have minimal impact for Roper as they have historically had very minimal impact.

EBITDA grew 13% with EBITDA margin expanding to 34.0%. We really had very high leverage in the quarter aided by a couple of items: the timing of some perpetual software license wins where revenue is recognized at the time of delivery and also some compliance payments in our GPO network business that really come in at close to 100% margins. So that impacted the leverage in the quarter, which was very strong.

Earnings before taxes grew 15%. As you can see, our tax rate was lower than expected at 9.7%. This includes a $43 million or $0.41 discrete benefit due to [foreigns'] restructuring. We've been simplifying our legal entity structure to make it easier to access and repatriate our foreign cash and as a result, we will be able to realize some net operating losses in the future. So overall, our DEPS of $3.30 was an increase of 26%. If we adjust out for the tax item, we were still at $2.89, which was a very strong quarter for Roper overall.

Moving on to the next slide. Always one of our favorites, the asset-light business model. So the networking capital position at the end of the first quarter: inventory 4.5% of revenue; receivables, 16.6%; payables, 10.8%; deferred revenue grew to 13.5%. The deferred revenue grew 19% on a year-over-year basis, ending the quarter at $694 million. So if you add that altogether, we had negative 3% of working capital really for the first quarter 3 years in a row down to 3.3%.

Foundry, our recent acquisition, which we'll talk more about shortly, has a significant negative net working capital balance that will further enhance our position and continue to expand our ability to compound cash flow moving forward. The net working capital for Roper remains a source of cash.

Next slide. On compounding cash flow, so aided by our negative net working capital, organic growth, disciplined capital employment, we continue to produce excellent cash flow results and excellent cash flow compounding. The Q1 operating cash flow was $330 million, an increase of 17% versus prior year. As Zack mentioned at the beginning of the call, this excludes the $39 million cash payment related to the Scientific Imaging divestiture completed during the quarter. Free cash flow, as Neil mentioned, grew 15%, represented 24% of revenue. So if you look at it on a TTM basis, we are nearly $1.5 billion of operating cash flow, up 30% versus prior year, really fantastic result. And that represented 28% of revenue over the previous 12 months. So certainly, we believe that cash remains the best measure of performance.

Next slide. So moving to the strong financial position in the balance sheet slide. We ended the first quarter with our gross debt of $4.5 billion, net debt of $4.1 billion against TTM EBITDA now approaching $1.9 billion. So our gross debt-to-EBITDA of 2.4x and our net debt-to-EBITDA down all the way to 2.2x at the end of the quarter. Subsequent to the end of the quarter, we did close and fund the Foundry acquisition where we really used a combination of cash and debt. So if we adjust for the Foundry acquisition, we are still down to 2.4x net debt. Furthermore, the Gatan divestiture would bring an additional $700 million of cash. When that is closed, we're assuming the end of the second quarter in the guidance. And so that would further decrease our leverage position.

So in summary, we remain very well positioned to continue to deploy capital moving forward towards our pipeline of high-quality acquisition target.

So with that, I'll turn it back to Neil to review the segments.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [5]

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Thanks, Rob. If we can turn now to Page 11 where we're summarizing our new segments. Earlier in the quarter, we did announce the new segments. To remind everyone, our resegmentation process was not a portfolio or a business review. Also, the resegmentation does not have anything to do with how we run or operate our governance model but rather how we summarize the activities of our 45 businesses in a manner that is more easily understood by investors and is more consistent with our strategy.

So to this end, we chose to resegment based on a business model construct versus end market. As you know, as we deploy capital, we are not constrained by end markets as we are in pursuit of acquiring the best business models available, the essence of our cash return on investment-led strategy. Hence, it makes the most sense to organize in this manner.

Starting with Application Software. This is the first of our 2 software segments. This segment has businesses that are delivering software applications to customers. You can see the businesses included in the segment, Aderant, Deltek, PowerPlan, Strata, to name a few. Perhaps the easiest to understand is Aderant. Aderant delivers enterprise Application Software to law firms. These customers will run their business on Aderant software. This segment represented 28% of our 2018 revenues, has gross margins of 67% and EBITDA margins of 40%.

Now turning to our Network, Software & Systems segment. This is our second software segment. These businesses are ones that have a network component to their business model. Think of situations where the customers derive benefit not only from our software but also being part of a broader network. An example of a network business is DAT. DAT is our two-sided network that matches thousands of brokers and tens of thousands of carriers into full truckload spot freight market. This segment represented 26% of our 2018 revenues, has gross margins of 68% and EBITDA margins of 43%.

On the bottom left is our Measurement & Analytical Solutions segment. Think of this segment as one of our 2-product segments that is diversified in terms of end markets and has quite stable long-term growth. This segment has our medical product portfolio as well as our industrial test and measurement type businesses. The segment represented 33% of our 2018 revenues, had gross margins of 59% and EBITDA margins of 33%.

And finally, on the bottom right is our Process Technologies segment, by far, our smallest segment and our second product segment. This segment has 10 businesses that are largely indexed to the oil and gas end market. While this segment represents only 13% of our revenues last year, they have incredible business model: 56% gross margins and 36% EBITDA margins. Clearly, they are still a collection of assets in the space.

Turning to the next page, Application Software. Revenue in the quarter, which represented 30% of our first quarter results was $382 million, an increase of 7% organically. EBITDA was $149 million, which grew 23% versus the prior year and represented a 39% margin.

We saw a continued strong performance at Deltek. They turned in high single-digit revenue growth with great operating leverage and multiple enterprise or large customer wins in the quarter. Importantly, we saw continued double-digit growth in their SaaS and subscription revenue stream based on acquiring net new customers and having successful conversions from on-premise to SaaS. One thing we may not talk enough about with Deltek is really the balance and durability of their growth drivers. There are many growth drivers for this business. They attack the small and medium-size businesses as well as large enterprise businesses. They have the government contracting business, there are product lines as well as they serve the professional services market. They have North American focus and a European and rest of the world focus. They certainly have an on-premise capability and a SaaS capability. So the businesses has had a great run of growth and it's not leveraged to one or a small number of growth vectors. It's really tied to a large breadth of opportunity. So a great job by the team at Deltek.

We also saw in the quarter outstanding growth at Strata, which was led by strength in its Hospital Decision Support SaaS bookings. We don't talk a lot about Strata. Just to remind you what they do is this is a core solution used by hospitals and health systems, in particular, the CFO's office, to model the changing nature of hospitals' economics. Over the last several years, hospitals have had to be more risk bearing in terms of the care they deliver and as a result, they need to more intimately understand the connections between their cost structure, their risk-based revenue contracts and Strata sells software that provides visibility to that for hospital CFO's and their financial staffs. So great job by Dan and John and the entire team at Strata for the growth they turned in.

We also continue to see share gains in large law coupled with a very successful attach rate of the new SaaS billing product at Aderant. Great job with the continuation of the execution there.

PowerPlan is focused on building pipeline in their core product offerings following a very strong lease accounting software demand over the past several quarters.

And finally, we'll highlight CBORD's growth in their food and nutrition software sales to their health care end market. As we turn to the outlook for the balance of the year, we see 4% to 6% organic growth in this segment. The second quarter EBITDA margins we see coming in similar to that of the first quarter as we expect a greater mix of SaaS versus perpetual in the second quarter as compared to last year. This is particularly driven by our strategy of pacing our SaaS conversions at the pace that our customers desire. So the results in some will vary quarter-to-quarter or have some fluctuations quarter-to-quarter based on the mix between SaaS and on-premise. For instance, Deltek had very strong perpetual in the second quarter of last year and the first quarter of this year.

So before we turn to the next slide, last quarter, we talked generically about our SaaS -- or cloud migration strategy, the long-term benefits that will be enjoyed by our customers and the positive implications for our business model. To briefly summarize, first and importantly, we asked our businesses to move at the pace of our customers versus forcing the conversion on our timetable. Time and time again, this has proven to be the winning strategy. In several cases, we've been the benefactor of competitors' decisions to force the timetable as their customers have migrated to our solution.

Next, we believe the SaaS deployment model has many inherent benefits for the customer: easier enablement of upgrades and new features, lower cost of total ownership, elimination of technical operations and a single throat to choke, to name a few. Relative to our business model, the cloud transition greatly enhances the ability to sell and deploy add-on products, deploy new features more broadly and at a faster pace, drive increased back office and tech stack efficiency, improve cash return investment, all while being a net growth driver. Also, let's not forget that all our software solutions are very specific built-for-purpose solutions targeted at solving very specific customer pain points, the essence of our niche strategy.

All of our software businesses are in some phase of their cloud migration, again, paced by our customers interest in moving to the cloud. One example -- a good example of our cloud migration experience to be highlighted with Deltek. Deltek launched its cloud offering in 2011 over 8 years ago. Over this period, they deployed over 10,000 customers to their cloud offering. Importantly, during Roper's ownership, we've invested significantly north of 15% of revenue in R&D, much of which has been centered on user experience, building and launching new products such as VantagePoint and the continual migration of our tech stack to the cloud. By pacing at their clients desire to move to the cloud, Deltek has been quite successful at keeping a very modern code base and tech stack while building new products and delivering new product features. All of this has resulted in consistent high single-digit organic growth, an increase in recurring revenue to be approximately 70% and the continuation of very high customer retention rate.

Next slide, please. Network Software & Systems revenue in the quarter represented 27% of Roper's revenue and was $346 million, which indicated a 9% increase organically. EBITDA was $150 million and represented a 43.3% margin. In the quarter, we saw just excellent growth at DAT from continued net subscriber adds and increased revenue per customer. It's important to note that this network has value to its constituents in different macro economic environments. Regardless, the value is very strong whether the trucking and shipping market is running hot, there's value to the participants or if it cooled off a little bit as we saw in the second quarter, it still has tremendous value as shippers and carriers are trying to match networks for the loads. So we saw a very nice growth in the quarter at the DAT business.

We also saw strong performance at MHA for market share gains and vendor contract compliance. To remind you, MHA is our network that connects thousands of health care providers to hundreds of vendors in the marketplace in a procurement network. And so it's great to see the strong performance in MHA.

iTrade grew based on strong renewal activity and net subscriber additions. And late in the first quarter, iTrade announced a block chain initiative with the goal to increase safety, sustainability and visibility of the food supply chain. Using block chain or a decentralized ledger, iTrade will more easily enable interested parties to gain access to the relevant data. iTrade will leverage its network of over 5,000 growers, retailers, distributors, restaurant operators and logistics providers in building the network. Importantly, most of the data needed for this farm to fork traceability block chain already exists natively within the iTrade application. The iTrade block chain is designed for interoperability, using the same industry standards utilized by IBM Food Trust and others. This is a great example of the leadership position that many of our businesses take within their industry niche.

We saw double-digit growth from RF IDeas in a secure print and identity management solution. This is business we acquired a number of years ago. It's really a fantastic business. What they do is think of the security badge you have to get into your building from a physical perspective. RF IDeas makes an integrated reader that reads the hundreds of protocols for those security badges, and the readers use a nonsecurity situation. So imagine secure print. The printer companies and OEMs embed a reader in the printers, and then you can go use any of these security protocols to then credential you to have a secure print. Or in the health care setting, think about secure sign-on for doctors and nurses relative to the electronic medical records. Instead of having to type their name and password in, they can use their credential. It allows them to see more patients. So the company has done a great job at working with -- scores of OEMs embed their technology into their end application. And we've seen great growth over several quarters at RF IDeas.

We'll return to TransCore. They had, again, excellent execution in the back office software and services, and they always do a great job with the tolling project execution. And we saw low single-digit growth in that business.

And as we mentioned earlier, we completed the acquisition of Foundry last week. That business is a network. We'll describe that here shortly. It will be housed in our network Software & Systems segment.

So as we turn to the outlook for the 2Q to 4Q, we see 4% to 6% organic growth for the segment for the balance of the year. We also see Q2 '19 EBITDA margins to be similar to that of Q1. And before we turn to the next slide, and it's specific to a targeted TransCore pursuit, we'll be honored if we were to be selected to be the technology and implementation partner for the Manhattan congestion pricing initiative. While still in procurement, TransCore has deployed its very best team and look forward to working with the authority if given the opportunity.

Next slide. The Foundry acquisition. Boy, this is just a great acquisition for us, and it meets all of our criteria. Starting, it has tremendous cash flow characteristics and negative net working capital, so it checks the box clearly and unambiguously from a cash return point of view. The management team that we met is really stellar. Oftentimes when you're meeting a management team, they have a -- they have 6 people or so you're meeting during the process, and you like the majority of them but there's always 1 or 2 that you're not so sure about. In this case, the entire team was just fantastic from top to bottom. We're excited to work with them.

In a minute, we'll talk about, in detail, the niche orientation they have and the clear leadership position they have in that niche, but they are clearly the standard in what they do. And as a result, they have super deep domain experience, high recurring revenues given their long tenure in what they do, and then multiple opportunities to grow. The purchase price is $410 million, and we view it to be immediately cash accretive. For the first 12 months of ownership, we expect there to be about $75 million of revenue come in roughly at 40% EBITDA margins, so it would be about $25 million of unleveraged free cash flow. And we view this as a high single-digit organic grower.

Foundry is a great niche software business that enjoys several network benefits, and we're excited to have them join the Roper family. But first, what do they do? Foundry software is used to composite or combine visual effects, animation and 3D content in the media entertainment and digital design industry. So what does this mean? My way of example, and if you're a Game of Thrones fan and no spoilers here, the compositing or combining of all the period scenes with computer-generated dragons with live-action fire with a computer-generated legions of soldiers is enabled and completed by Foundry Software Solutions. With its 20 years of history, Foundry has become the standard for compositing in the media entertainment industry.

In digital design, Foundry addresses the gap in the market for artist-friendly 3D software use and design. With Foundry software, their clients are able to create photo-ready designs of new product concepts that massively reduce new product development time tables with significantly lower supply chain risk. Foundry's customers range from Pixar to Mercedes to New Balance. Importantly, the business has over 30,000 customers and has deeply embedded global ecosystem or network of evangelists. The vast majority of computer graphic arts students are trained in college on Foundry's applications. They learn to composite using Foundry. Given the increase in computer-generated visual effects in virtually all media productions, the supply chain has developed in such a manner that Foundry is the communication standard for the outsourcing of visual effects. Foundry, again, is the standard tool used across the media entertainment industry use for compositing. In fact, Foundry has been used on every VFX Oscar award-winning film for the past decade. We believe Roper's long-term ownership and investment model will help extend Foundry's network effects and industry-leading position. Foundry is another great net software business for Roper.

Next slide, and turning to our Measurement & Analytical solution segment. The revenue is represented 31% of our aggregate revenue across the enterprise in the quarter and were $402 million, an increase of 6% organically. EBITDA came in at $128 million and represented a 31.9% margin.

We'll start, as we always do, with highlighting Neptune's continued high single-digit growth from their continued share gains driven by their customer-focused innovation. No weather impact there.

Verathon had very solid execution of its new product launch for its next-generation GlideScope systems. It's off to a good start from the launch perspective, but it's still early. And we'll watch closely as how it unfolds for the balance of the year.

We had a record quarter in Northern Digital, driven by optical measurement systems and consumables growth. From time to time, we talk about Northern Digital, but just to remind you, this is our measurement science business that has 2 core technologies, electromagnetics and optical, that's used principally in health care applications and embedded in OEM solutions. And they measure with great precision where the tip of a surgeon instrument might be in brain surgery or where the tip of a catheter might be in the cardiac procedure and many others, so it's just a fantastic business. They are clearly the world's best at what they do and as we see it in the financial results and consistent. So really a great job by Dave and team up in Canada for doing a great job not just this quarter but over a long period of time.

CIVCO Medical Solutions had very broad-based growth driven by channel investments that we made over the course of last year, so it's great to see that business get even more intimate with the customers and see the results financially.

Struers growth came from sales of equipment and consumables to multiple industrial end markets. And to remind you, Struers is our industrial materials prep and analysis business.

Gatan saw double-digit growth from delivery of its next-generation cryo-EM backlog. And as I mentioned at the onset of the call, we completed the divestiture of our Scientific Imaging businesses, but we did so a bit earlier than expected. It actually provided between $0.02 and a $0.03 headwind or impact versus what we thought would happen simply based on closing that transaction a bit earlier than we thought.

As we turn to the outlook, we see segment revenues plus 4% to 6% organically for the balance of the year. However, for the second quarter, we expect low single-digit growth due to the timing of Gatan shipments pushing out of the second quarter. This is a $0.05 DEPS negative impact as compared to our expectation from a quarter ago. Finally, we continue to assume Gatan sale to Thermo will close at the end of the second quarter.

Next slide. Process Technologies, which represented 12% of our revenue in the quarter. Revenue was a $158 million or an increase of 1% organic, and EBITDA was $53 million or a margin of 33.5%, just spectacular business this year.

Cornell grew double digits from great performance in its industrial end markets, and we saw particular strength in its aftermarket activity. As we have highlighted in the past quarters, CCC grew, in this quarter, high single digits from execution against new LNG construction projects. Currently, there's 11 projects slated for construction around the globe. We're spec'd for 10 of them and have a chance to be spec'd in the final one. So we believe they'll be a series of quarters here of strong performance at CCC.

We saw declines, as expected, from our upstream oil and gas businesses due principally to prior comps in the prior period. So upstream oil and gas in this segment is about 25% of the segment.

Based on this quarter's slightly better performance versus our expectations and our quarterly views with our businesses, we are modestly increasing our outlook to be down 1% to 3% organically for the balance of the year versus down 1% to 5% for the whole year. We expect the second quarter to be roughly sequentially flattish to that of the first quarter. This equates to the second quarter being down high single digits, which is consistent with our initial outlook and due principally to a plus-20% comp from a year ago. Again, we see flattish revenue sequentially. For the second half, we see the business roughly flat on a year-over-year basis based on easing comps. So we remain cautious in our outlook here. If planned take away capacity comes online as expected and/or energy prices remain higher, then there may be some second half upside. We'll have to wait and see.

Now let's turn to our guidance. We continue to be positioned for a strong 2019. And as such, we're raising our full year 2019 guidance. Adjusted DEPS is now $12.70 to $13 where previously it was $12 to $12.40. This includes the Foundry acquisition which closed on April 18. The guidance continues to assume the June 30th Gatan close. We're also improving our organic growth outlook to be 4% to 5% where previously it was 3% to 5%. Our tax rate, we assume, is approximately 22% for the balance of the year. Also, we're establishing our second quarter 2019 guidance with adjusted DEPS in the range of $3 to $3.04.

Turn to the Q1 summary. Again, a great start. Our diversified portfolio of business delivered another excellent quarter, record first quarter results. We saw organic revenue grow 6%, EBITDA grew 13% and importantly, margins expanded in all 4 of our segments, so very broad execution. Free cash flow grew 15% to $312 million, which represented 24% of revenue. So great to see the leverage down the P&L. Again, organic revenue plus 6%, EBITDA plus 13% and free cash flow of plus 15%.

It always starts with our CRI discipline, and we believe our proven business model provides a very scalable platform for continued growth. To this end, following our announcement of Satish Maripuri last quarter, we are delighted to share that Harold Flynn recently joined the Roper leadership team. Harold will focus his efforts on providing group leadership to a number of our product businesses. Harold is a very seasoned executive with experience at IDEXX Laboratories, Abbot and Zimmer. The combination of Jeff Paulson, Chris Krieps and Harold will provide leadership to our portfolio of product companies. Like Satish, Harold deeply understands Roper, our model, our approach. We're very excited to welcome Harold to our leadership team.

Now turning to capital deployment. We are excited to have closed the Foundry transaction earlier this month. As we described earlier, we view this to be a near-perfect fit against our niche strategy and our network strategy and are excited to welcome Craig, Martin, Jody and the entire Foundry team to the Roper family.

Setting Foundry aside, we continue to be excited about our capital deployment prospects in 2019. As Rob mentioned, our balance sheet remains super well positioned for a strong capital deployment for the balance of the year. The number of very high-quality assets we've seen in the last several months continues to be encouraging, and our pipeline is quite full. Importantly, our CRI orientation and M&A process help us identify the very best businesses to acquire.

Now as we turn to questions, we want to remind everyone that what we do is very simple. We compound cash flow by running a portfolio of operating businesses that have market-leading positions in niche industries. We provide the business leaders with Socratic coaching about what great looks like relative to strategy, operations, innovation and talent development. We incent our management teams based on growth. We have a culture of mutual trust and transparency and finally, we take our excess free cash flow and deploy it to buy businesses that have better cash returns than our existing company. These simple ideas deliver powerful results.

We'll now turn it over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Deane Dray with RBC Capital Markets.

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

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I wanted -- just to start off with a comment that we appreciate all the hard work that went into that the resegmentation. And as promised, this recasting just makes a lot of sense since it's easier to see and explain the portfolio, so thank you for all -- getting that to the finish line.

And on Foundry, just your comments this morning. Just to let you know, you had me at Game of Thrones, so that actually worked for us. So first question is on Deltek. And it was interesting that you recently had a big database software cloud provider actually call out Deltek as an opportunity for them. Our experience is has been with good businesses with attractive margins. It can attract new competitors, but what do you make of this? And maybe some comments about the moat that Deltek has? And how you expect this to play out?

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [3]

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Yes. I appreciate the question. We read the same comments. There's a series of companies that were listed, so we'll talk specifically about Deltek. I can't comment at all about the other companies that were listed. And we certainly highlighted a number of those when we went through the -- our SaaS strategy with Deltek. But I think -- perhaps the most important thing to start with is that not just Deltek but all of our businesses are in niches and have very specific built-for-purpose software aimed at a specific user. And so if you think about Deltek, government contracting, right? it is a -- we are the ax in that space from a software perspective. Virtually every large enterprise uses our software because of -- it does what it does so well, you don't have to customize it or tweak it or tune it. It's both on-premise and in the cloud. And then you have a considerable amount of R&D resources that are just 100% focused on making that product better.

Same thing can be said for the professional services end market. Deltek does not attack professional services broadly. They attack architects, they attack engineering firms, they attack marketing services firms, accounting firms, so very targeted. And the way those businesses run their business are not just generic to professional services. And so you buy our software out of the box, and a normal marketing services firm can actually deploy without any customizations at all in any way, shape or form where the larger places, you have to go through a SI layer and do sort of customizations, then you have to worry about upgradability of those and whatnot. So the core of what we do is preferred by our customers and that seen time and time again with win the rates is an excess of 50% when you go head to head for net new opportunities against the larger players. And then from a code-based, tech stack cloud strategy, I think we're as current as anybody can be in that business.

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

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That's all really helpful. Appreciate it. And then just as a follow-up, can you clarify what the drivers are on the boost to the low end of organic revenue growth for the year.

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [5]

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Yes. Sure. Good morning. This is Rob. I think overall, we certainly had some outperformance in the first quarter. And I think if we look at all of our segments, we see, sort of, at least as good as originally planned or a little bit better. I think specifically in the Process Technologies segment, which is the smallest segment, we upped our outlook there where we're not seeing sort of a downside as bad as we thought coming in. And so we're just up the bottom of the range a little bit. I'd say, overall, a little bit of outperformance everywhere and a little bit of a better outlook everywhere.

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Operator [6]

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And we'll take our next question from Christopher Glynn with Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [7]

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So some of the businesses you acquire are -- lots of them always interesting to think about the network effect. Clearly, Foundry seems prohibitive of competitive risk. I'm wondering particularly with the network segment if any of these stronger results are kind of kicking into a higher gear, potentially you're accelerating a network effect breakout. And I'll anchor the question around MHA, and iTrade maybe suggest that dynamic.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [8]

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So I'll start broadly, and then try to get specific to iTrade and MHA. So I would not characterize that -- It's like this breakout of networks, right? I -- Yes, we've seen that consistently at DAT. It's truly a two-sided network where both sides incrementally gain more value as the size of network improves. ConstructConnect, iTrade, for example, is what we'll call one-sided networks where we need sort of the anchor tenants. In ConstructConnect, which is the general contractors, and then -- In iTrade, the retailers to be in the network. And then it drives supply chain efficiency through. So we've seen just good solid execution across those businesses. So it's not -- it has a network effect but it's not one where -- it's driven because of the execution of the software and the sales and the distribution capabilities of the business.

On MHA, this is a group purchasing organization. They've continually done a great job of retaining their customers, adding customers, adding new products to the portfolio that our providers -- health care providers can buy. And then there's what we call compliance activities, both Rob and I called it out. This is where you're just constantly monitoring and make sure that both sides of the network pay what they need to pay the network. And there's a large amount of that activity in the quarter, so it's nice to see that.

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Operator [9]

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And with JPMorgan, we'll hear from Steve Tusa.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [10]

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This is actually Pat Baumann for Steve Tusa. Quick follow up to Deane's question on the bridge on your organic raise. Can you bridge us on the EPS raise for the year as well to $0.65 at the midpoint?

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [11]

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Sure. So the $0.41 discrete tax item we mentioned, if you look at M&A, we've got around $0.07 or so net of incremental M&A. While we had the -- call it around $0.14 for Foundry, as Neil mentioned, we lost $0.02 or $0.03 from the Imaging transaction closing sooner than expected. That actually hit in the first quarter, and then there's around $0.05 for the Gatan shipments, so they're slipping to the period where we don't expect to own the business anymore. So if you net all of that together, you get $0.07. And then the remainder, $0.17 or so, that's your, sort of, just better operations, better margins and better organic growth throughout the portfolio.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [12]

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Got you. That's really helpful. And then maybe circling back to -- a lot of, obviously, commentary on Deltek given the comments from that large company. You said it was up high single digit organically in the quarter. Just wanted to kind of step back. And if you could offer some perspective on how is that business grown organically since you bought it back in 2016? I think you were kind of alluding to a high single-digit type growth rate but just wanted to confirm that. And then on...

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [13]

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No. That's right.

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [14]

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Yes, it's been high single-digit organic since we bought it, which is better than we expected. We expected mid-single.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [15]

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Yes. And I -- we highlighted that when we talked about -- the Deltek SaaS migration has resulted in that high single-digit growth since we've owned it.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [16]

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Yes. Yes. And then also just wondering have you guys done any deals there since acquiring it? Just curious what kind of deals you've done to try to bolster the business if at all.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [17]

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There's been a couple of bolt-ons. Now the high single digit we talked about is organic, right, so the growth there is not...

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [18]

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It's quite a bit higher if you include the M&A that we've done.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [19]

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Exactly.

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [20]

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We've done several acquisitions also that add to that business.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [21]

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Small tuck-ins generally characterized as products that can be sold to the existing customer base. We've talked about ConceptShare and Workbook in the past to name a couple.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [22]

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So what is the revenue base now if you don't mind sharing some color on that?

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [23]

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We don't like to give exact revenue numbers on our businesses, but I think we said it would be $550 million. The first year we owned it, it's way over $100 million on top of that $550 million.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [24]

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Okay. Great. Congrats on the results.

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Operator [25]

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Next is Julian Mitchell with Barclays.

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Lee Alexander Sandquist, Barclays Bank PLC, Research Division - Assistant VP [26]

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This is Lee Sandquist on for Julian. You highlighted double-digit SaaS growth in application software. How big is the SaaS business today? And secondly, could you just provide a little bit of color about the margin differential here versus other software models in your own portfolio?

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [27]

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So I'll take the first part of this then let Rob follow-up. So we talked about the double-digit SaaS at Deltek. I just -- I want to be clear in our commentary there, that's not a broad Roper statement. And I'll let Rob talk about the percentage of the total revenue of Roper that's software and SaaS.

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [28]

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Yes. I mean where we sit today of the software revenue is pretty evenly split from a SaaS subscription model and a license on-prem model, and that's been moving more towards SaaS and we expect that to continue. But as we sit here today, the business models are roughly the same, about even.

And then as we've talked about in the past, EBITDA -- software EBITDA for Roper is an excess of 50% at this point in time.

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Lee Alexander Sandquist, Barclays Bank PLC, Research Division - Assistant VP [29]

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Okay. And then compressor controls has put together several nice quarters in a row now. How far below peak are we? And then secondly, how large is the LNG exposure since you called it out in that business?

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [30]

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Yes. So compressor controls is historically a late-cycle business, so it just bottomed out later than the rest of the oil and gas businesses, and it has begun growing since sometime late last year. And I think it's an opportunity there with a lot of -- Neil mentioned there's a lot of LNG opportunities out there that we expect to get our fair share of. So this business is the size that is roughly 20% of our Process Technologies segment, so I think those upsides, sort of tailwind opportunities that are exciting. But again, it's a recently small part of the overall Roper portfolio and a small part of the segment.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [31]

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Yes. And I would add. It's obviously highly indexed LNG, it's what they do. But it's not just tied to new. There's a lot of retrofit brownfield activity as well that they consistently add channel capacity to identify and the capability to drive upgrades there.

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Operator [32]

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And we'll hear from Robert McCarthy with Stephens.

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Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [33]

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This is Robert McCarthy on for Robert McCarthy. One thing I wanted to catch up on in all seriousness is -- and I apologize if I missed this in your prepared remarks. What is the update you can provide with respect to Gatan and the potential divestiture there?

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [34]

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So the update is, as we talked about, it's in our guidance through the end of the second quarter. We're in, along with Thermo, we've been working through the regulatory process with the U.K. CMA. And we're hopeful that concludes here at the end of the second quarter.

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Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [35]

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Okay. So you're still confident that this can be done?

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [36]

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Certainly. There's lots of resources working on clearing the CMA objections.

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Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [37]

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Okay. And then maybe you could talk about -- I think you mentioned -- Is it Harold Flynn?

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [38]

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Yes.

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Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [39]

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Yes. Maybe you could just amplify kind of what he's going to bring to the table and talk about his background, his experience and what you're really looking for? Two or 3 key things that you think that's really going to help you kind of use him to enhance the governance and kind of coaching across the platform.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [40]

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Sure. So first, what is the role of the Group Executive here, right? The role is to help coach both the company's to become great and achieve greatness and help the leaders in the businesses become great leaders, right? And we think about that across many dimensions, but 3 principal ones are how do you develop strategy? We want that to be very much outside in and focus on answering 2 questions: Where to play and how to win. We care a lot about how that strategy is executed. We want it to not be a project of the leadership team's of the companies. We want it to be process enabling and -- so that it can endure a long period of time.

Third thing is we care a lot about how our teams develop their talent, engage their talent and run a talent offense. And so the group executive layer is focused on those 3 things: strategy, strategy the deployment and talent, broadly speaking, in addition to the day to day and week to week things that come up.

So Harold, and it's not just Harold, but in the product businesses, Chris and Jeff that I mentioned, their job is to do that. And Harold's case, and I would say this is a case for all of our group people, they're very growth and process oriented. They have a strong orientation towards talent, they're super strong cultural fit. They're probably nothing more important in our vetting exercise here. We're only 50 people in this office or 55 people in Sarasota. There's only a handful of these group executives, and we need that cultural fit to be really tight, which it is with Harold. And then the thing about Harold and, again, I wouldn't isolate him, Satish is this way, and the other team as well is -- I would consider them sort of learning executives. So they're constantly learning and adapting their style and understanding what Roper is about, right? We want to Roperise them and have them take the Roper governance system out to the companies. And then certainly, to be successful here, you have to be financially savvy. That's how I characterize the role and Harold and the team that he works with.

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Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [41]

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If I can just sneak one more in since I showed up in person. Maybe you could just talk about level setting our expectations for more acquisitions in terms of firepower, opportunity set? And maybe if you could comment on the pricing of assets in the competitive environment.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [42]

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Okay. So as Rob and I both mentioned, Foundry is just the beginning. We have a very strong balance sheet. We've worked hard to get the balance sheet to be offensively positioned, which it clearly is, and so we're -- we feel great about that. The pipeline, we said it now for several quarters, it's very robust. The quality of the assets is quite high. As you know, we're always trying to buy things that are a little bit better than what we are. It's been the hallmark of our strategy for a long period of time. So relative to the pricing, with the assets we want, the things that have all the defensive characteristics and network characteristics, great management teams, the negative net working cash flow, mid- to high single-digit organic growers, low capital intensity, those assets are not inexpensive.

But in our CRI orientation, there's always value to be gained by our shareholders by deploying capital against those type of assets. So we feel very good about it. We feel very confident about our future here for that type of plan.

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [43]

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And on the balance sheet, I think we both mentioned in our comments earlier that the balance sheet is very well positioned, so in the low 2s from a net debt-to-EBITDA standpoint, we're obviously deeply committed to investment grade, but we also have TTM EBITDA approaching $2 billion. So we also have $700 million that would come in as the Gatan deal closes. So with or without that $700 million, we could easily deploy $1.5 billion or more on M&A whenever the opportunity arises.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [44]

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Yes. And from a competitive situation, I would say it's largely unchanged. If there is a super strategic that's going to bear a lot of synergies, we are not and have never been a viable competitor for that target. We're almost always the feedstock of candidate targets for us. It principally come out of private equity. And then at the finish line, we're normally competing against private equity. And so in the asset that we described where the management teams are builders and growers and are attracted to our model, we tend to compete and win at a very high clip when all the things line up.

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Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [45]

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Congrats on the quarter.

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Operator [46]

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And we'll hear from Joe Giordano with Cowen and Company.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [47]

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So I think when you announced Foundry, when you go through the financials of it, it clearly fits the profile, but I think there was at least some thought of, okay, now we're getting into Pixar and some things that we're not used to. Can you maybe just talk about how you guys conceptualize these things internally? As -- there almost seems like there is no bridge that's too far when you're looking at it strictly from a financial standpoint, but how do you get comfortable with key man risk at those individual businesses and your ability to be able to run those businesses in that kind of framework, things like that.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [48]

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Sure. So I might have misunderstood a part of that question, but I'll just -- I'll clarify so it's on the record. So it's not a bridge too far financially. So these are always...

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [49]

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No. Definitely not. It's definitely not. It's not just financial.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [50]

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Okay. Now I understand. So we'll go through our process, right. So the processes is does it meet our CRI thresholds, yes or no? This one clearly does. Then it's about does the management team, are they going to really thrive in our environment? And an easy simple way to think about that is are they fundamentally about -- intrinsically motivated about building their business? So when engaged with this team, which we are able to do a couple of times before the process started, it's very clear that this team is completely passionate about what they do. They've been doing it for a very long period of time. The technology officers in this business actually have personal awards for what they've done in this animation sort of compositing space. And so they are built-for-purpose for this business. Then we get into is it a business we like and that's -- is it in a niche? Is it a leader, network effects, all the things we've been through many, many times. And so one of the things we did as a team think through is, hey, it's meeting all these criteria, but is it -- does it do something that's sort of sexy? And do we not like it because of that? And at the end of the day, because it meet -- met all their criteria so perfectly, we're like, "Hey it's a software business at the end of the day." And what they do is they do things that you can see on HBO and other places unlike things, the other things in Roper. But it's really, at the end of the day, a pretty boring software business.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [51]

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Is there maybe -- if I ask that a different way, without naming anything specific obviously, are there examples that you could tell us of companies that have met the financial criteria? But when you guys get in the room, you're like, "Do we really even understand what's going on here at this business and maybe we're not the right owners?"

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [52]

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All the time, right? And so we see scores of our amazing CRI businesses, and then when we start doing the work, I would say the #1 reason we walk away if it meets our financial criteria is just the management team. For one reason or another, they're not just about builders, so there's not good chemistry or worry that they're going to leave in a short period of time. And then if you're still comfortable there, if there's a product that we're worried about, could there be -- if there's -- if we view there's any sort of 0 in the Monte Carlo analysis, then we generally are walking away, right? Being long-term owners, we don't want to onboard any of that risk. So we spend a lot of time around that.

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [53]

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And if we don't yet know the industry well, we do a ton of work around the industry with outside consultants, and there's a lot, a lot of work that goes on. There's many readouts. And if anything scares us away, we just say no, and we walk away. And that happens all the time.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [54]

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That's right.

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Operator [55]

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And we'll next hear from Joshua Aguilar from Morningstar.

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Joshua Aguilar, Morningstar Inc., Research Division - Equity Analyst [56]

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We were -- So I wanted to go back a little bit to the annual contract value because I think you recently said at a conference that you've been reporting 50% higher annual contract values in ConstructConnect in just the first year and 1.5 years of ownership alone. And so some of the internal debate we had was really around was this more to -- maybe perhaps they were underpricing their product at that time? Or were you looking to the cover of the cost of the purchase sooner? Or where would you push back on the -- somebody who would insert something like that?

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [57]

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Yes. So I appreciate the question on ConstructConnect. So I think we talked about a couple of times in the past, ConstructConnect, again to set the context is our network that connects general contractors and subcontractors to building product manufacturers in its large network. And the strategy since we've owned this business since the fourth quarter of '16 has been to basically drive habitualization of the core product to the contractor community. And to do that, we had to actually build, and we've work to do this, a number of software elements that go on top of and interlink with the contents that we have. And so the increase in revenue per user at ConstructConnect are early gains of our new product launches because we just have more value to sell is what it is. So it's not the construct, like you said, that try to cover our purchase price or anything like that. It's just the continuation of the strategy and the commitment we have to the long-term ownership of the assets.

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Joshua Aguilar, Morningstar Inc., Research Division - Equity Analyst [58]

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Great. And then I guess a little bit on TransCore. You were talking about that being more of a nationally interoperable solution coming online this year. Is -- how's -- what's the progress there? And maybe you can give me a little bit of insight there if that's okay.

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [59]

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I think it's quite good. I think that's a -- that can reflect in the recent wins we've had and the tolling projects that are ongoing. It's been good execution by the team.

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Joshua Aguilar, Morningstar Inc., Research Division - Equity Analyst [60]

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And last one for me, sorry about that. In terms of just the organic growth guidance, is that just a function of the lower end of process solutions -- sorry -- Yes, process solutions just kind of moving up? Or is there something else there that I should be looking at in terms of the segments?

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [61]

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Yes. I think it's a combination of that and the combination of the outperformance in the first quarter, building that into the full year numbers. Maybe a little bit net, more good guys than bad guys if you look everywhere else. But that's the majority of it.

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Operator [62]

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We'll next hear from Alex Blanton with Clear Harbor Asset Management.

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Alexander M. Blanton, Clear Harbor Asset Management, LLC - Senior Analyst [63]

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What was the dollar amount you paid for Foundry? You could give it in pounds, but I want to know what it was in dollars.

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [64]

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Yes. If converted to $530 million or so in dollars. $535 million in dollars.

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Alexander M. Blanton, Clear Harbor Asset Management, LLC - Senior Analyst [65]

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$535 million. Okay. And on compressor controls, you mentioned that it's well below the peak. Is that right?

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [66]

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Certainly, if you look at the performance of the business over the past several years, they're just sort of on the way back up given the fact there was no new construction for several quarters, and now the new construction business is starting to come back. As Neil mentioned, they've done well in retrofits and brownfield activity and doing a great job of covering their install-base and doing a lot of great things for customers. But the new construction projects are just now starting to ramp up with LNG taking the lead.

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Alexander M. Blanton, Clear Harbor Asset Management, LLC - Senior Analyst [67]

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How much is that of the total? When that -- When you acquired that business in 1992, most -- almost all the business was retrofit because none of the OEMs were using software. People would buy the compressors using the OEM software, and then they would retrofit it with CCC. So -- But it sounds to me like that has changed and that you're getting a lot of business now with the OEMs delivering your software with their compressors. Is that the case?

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Laurence Neil Hunn, Roper Technologies, Inc. - President, CEO & Director [68]

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Yes. So Alex, I would say that the team over many years has built -- it's an incredible capability of getting into this feed and getting this getting prefeed and really speccing projects very, very, very early. It's -- as you know, it's a multiple year process to get spec'd in these new projects. It's a true core capability of that business now.

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Alexander M. Blanton, Clear Harbor Asset Management, LLC - Senior Analyst [69]

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And what percentage is pipeline? You used to do a lot of business on gas pipelines. In fact…

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [70]

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It's -- Yes. It's a pretty small percentage. I don't have the exact number, but it's pretty small.

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Alexander M. Blanton, Clear Harbor Asset Management, LLC - Senior Analyst [71]

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Because when you acquired the business, the first huge contract you got was to equip Gazprom pipeline with your stuff. So that's pretty small now in relation to the total?

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Robert Crisci, Roper Technologies, Inc. - Executive VP & CFO [72]

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Yes.

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Operator [73]

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And we'll end our question-and-answer session for this call. We now return back to Zack Moxcey for closing remarks.

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Zack Moxcey, Roper Technologies, Inc. - VP of IR [74]

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Thank you, everyone for joining us today. And we look forward to speaking with you during our next earnings call.

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Operator [75]

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This concludes today's conference. Thank you for participation, you may now disconnect.