The Roper Industries' First Quarter 2014 Financial Results Conference Call will now begin. All participants are in a listen-only mode. Today's conference is being record. I will now turn the call over to John Humphrey, Chief Financial Officer. Please go ahead.

Thank you and thank you all for joining us this morning as we discuss the results of our first quarter. Joining me this morning is Brian Jellison, Chairman, President and Chief Executive Officer; Paul Soni, Vice President and Controller; and Rob Crisci, who heads our Planning and Investor Relations for us. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and also on our website at www.roperind.com. Next slide. So we begin with our Safe Harbor statement. During the course of today's call, we will be making forward-looking statements, which are subject to risks and uncertainties as described on this page and as further detailed on our SEC filings. You should listen to today's call in the context of that information. Now if you'll please turn to Slide 3, today we will be discussing our income statement results for the quarter primarily on a GAAP basis. Prior period results are presented on an adjusted basis for comparison purposes. A full reconciliation between GAAP and adjusted measures is in our press release this morning and also included as a part of this presentation, which is available on our website. Now if you'll please turn to slide, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants. Brian?

Thank you, John. Good morning, everyone. So we'll go through the first quarter enterprise financial results first and then we'll take a look at the detail around each of our four segments and the outlook for those four segments for the second quarter and the full year as a total, and then what our Q2 guidance is. As you know, we're raising our guidance here for the full year. And then have a Q&A session. So next slide. Here we'll look at the summary of the enterprise financial results. We had once again all-time records for orders and backlog. And revenue, net earnings, EBITDA, cash flow, everything at an all-time record level, really terrific quarter. Revenue was up 13% with organic revenue up 7% and the book-to-bill was above 1 at 1.01. If you look at GAAP to non-GAAP numbers, they actually came at about the same at 13% revenue up. Gross margin was up 120 basis points to 58.6%. I hope you're shocked to see our gross margin. And there's some reversion to a mean of those industrial companies that people look at. But we're not really an industrial company anymore and our 58.6% gross margin is in fact up 120 basis points. If you looked at GAAP to GAAP, it would have been up 140 basis points. Our EBITDA was up 19% to $274 million and our EBITDA margin was up 180 basis points to 32.8%. If you looked at GAAP to GAAP, it would have been up 21%. Our earnings before tax, which is a really important number this time around, are up 24% to $205 million. You may remember that a lot of people, ourselves included, in the first quarter of 2013 benefited from the expenders in the tax program and double-dip benefit on R&D tax…

(Operator Instructions) We'll have our first question from Deane Dray, Citi Research.

Solid operating performance across the board whether you look at topline, incrementals or cash. On the look-forward, Brian, you mentioned the $1.7 billion was what you've invested in the last 12 months. You can do that or better in the next 12 months. Maybe some color on the pipeline and maybe address the challenges of how you positioned against private equity bidders.

So It was $1.07 billion, not $1.70 billion. So we did $1 billion-and-change and $50 million-and-change for Advanced Sensors. So we did $1 billion deal in total, $1.07 billion. We'd expect to do at least that much over the next 12 months. In terms of what's going on with private equity, basically the debt staples from the banks remain extraordinarily high frequently. There are seven times debt to EBITDA, almost always some number close to that. And their ability to refinance is exceptionally high. So that puts a lot of pressure around prices paid for assets. We've said for a while that gross premium on the tails of those kind of assets are pretty risky, but they're pretty low cost. So those guys are going to continue to stand in rapid rate, paying a lot of money for the things that they're doing. The kind of businesses that we acquire from (inaudible) aren't really expected by that so much, because when they're exiting particular investment cycle and and sell the business any way, if the business fits in our categories and meets our standards and the management team, it is something that we think works with us, we still have the competitive advantage of being able to deploy capital to buy those assets. So we actually are seeing as much now as we ever have seen in terms of attractive and available things. We don't have a timetable for when our next capital deployment would be, but we're active on a lot of different things. And I'm sure within next 12 months, you'd find us deploying more capital than we did in the prior year.

And then just on the businesses, I know there's lots of attention about the addition of Sunquest and MHA, but the legacy Software as a Service business, CBORD, maybe you can clarify the point on hosting. So I understand access control. I understand the driving haul. I understand the credit card. But maybe you can expand on the term of hosting activity.

What CBORD is at the core a license software company with maintenance and annual fees and revenues and renewals of what we have, because of some of the other things we've done and the ability to convert many more people to a hosted service just like a typical SaaS business would be that we have in an iTrade operation or (inaudible). We continue to look at acquisitions that are in those spaces. And we think some of the budget pressure around college and universities is getting them to find it easier to do some of the work that we do for them in the cloud, where they haven't done much. And we're offering them solutions that they find easy to migrate to. So we have been encouraged by people asking us if we could do more in that arena. Switching is those businesses, it's got a really high switching cost. So it gives us a leg up relative to other people who're trying to enter that market.

And just to clarify, what percent of that CBORD base today is on a hosted basis and what are the economics?

It's still a pretty little number. It's less than 5% of their base primarily in one of their applications called NetMenu, which is really around menu planning and nutritional information and being able to kind of be the front end of starting that food supply chain through those campus locations. And as far as the economics are concerned, I mean economics are really good for CBORD whether you're going with the traditional license plus ongoing maintenance for a more SaaS-based. There's really no different than the customer acquisition cost. And so it's probably a little bit higher, but a little bit load upfront. But largely the economics are going to look very similar to the underlying economics for the CBORD business.

And our next question will come from Mark Douglas, Longbow Research.

Looking at your guidance on the organic growth, 1Q was the easiest comp and your guidance implies organic growth and continue to maintain this close to the 7% level, your comps are getting more challenged in the second half. Just dive a little bit more into what's giving the confidence in the second half, do you think that'd be that strong, do you some things in the backlog?

Sure. First of all, I know what the numbers say, but I'm not sure I would agree with the easy comp in Q1, only because Q1 last year was when we had the biggest variance associated with that loss customer (inaudible). It was not like it was artificially depressed. It just got the run rate as of last year. And we did build some momentum throughout the year. So in some cases, you're correct. But based upon yet another quarter where the book-to-bill is above 1, so we did build some backlog even with the tremendous 7% organic growth in the first quarter. It gives us the confidence. We have continued visibility, pretty good visibility within our toll and traffic area, parts of our energy in the market we have pretty good visibility on. And it's just continued momentum on execution, particularly on medical platform where we not only have the backlog associated with Sunquest and deploying new upgrades to their software customers, but also a couple of new products that are being introduced in our medical products area that we think is going to drive incremental growth there also. So it's the totality of backlog plus ongoing momentum inside of our key end markets.

Talking about the pumps market, curious what's happening in the underlying market. Are you looking at low single-digit growth, mid single, just trying to get a sense of how much of your double-digit growth is new product launch, an increased capacity versus just a product mix maybe outgrowing the market or seems like you're outgrowing the market?

Well, I think that we have three discrete pump businesses, each of the three should have a record year this year, each one for different reason. So we have Allweiler pumps in Germany, which is we don't talk a lot about, that has strong demand drivers in India. And it's kind slurry pumps and things that have to do with moving anything from a mining [ph] capacity or whatever. That business is up a little bit. Then we have our double-digit reference that we made to Roper Pumps where we've been capacity constrained in larger diameter directional drilling, things and that's what this factory solved. So as that comes, will this be taking share from other applications without naming customers would large cables, so that's kind of a guaranteed upside to us. And the underlying core business is okay as well, probably more high single-digit growth in that Roper Pumps business. And then Cornell has fluctuations around rental markets when people are looking to waste water markets and putting together platforms and if you get a little bit more activity of background fracking in gas and they are benefited by that. And it's got a big business in agricultural irrigation projects. It's pretty much a domestic business, a little bit in the Middle East. So it's growing. But I think there've been some people that are in similar spaces to Cornell. We've had pretty decent growth in the first quarter as well.

We have our next question from Jeff Sprague, Vertical Research.

Just a couple of questions. Brian, just wondering on medical margins. This is kind of two quarters in a row kind of in the 35% ballpark, extraordinarily strong. I was wondering if there's something mixed effects of something that causes the step-up to this level, or is this kind of normalized run rate we should think about going forward?

Well, if you look at those gross profit margins in those businesses and our ability to execute, that probably would answer that question. It is not going to have a lot of difficulty maintaining and improving its margins. The business is well over 75% healthcare IT and medical products now as opposed to being one very strong business like Gatan and scientific instruments and the camera businesses, which have high gross margins but have high R&D expenses, usually double-digit R&D as a function of sales for those businesses because of high price cycles. So yeah, we would expect to have very, very solid margins in the healthcare IT businesses like Sunquest and MHA.

And then just coming back around the deals, I mean what you said earlier to Deane's question pretty straightforward, but you do sound more confident. Just kind of reading some of the transcripts from the (inaudible) and everything, it sounds like you're viewing things as much more difficult maybe to get done. What else has changed? Is the complexion of what's available out of private equity changing or is there some other dynamic that raises your confidence level a little bit?

I wouldn't say that. I think that we've come close to doing a couple of larger transactions in the first part of the year that for a variety of reasons didn't occur. But yet, we're always involved in things that look pretty attractive and we're aware of things that are happening later on this year that are attractive. There are different reasons why private equity is selling assets. And it's the end of life of a fund and they've got to sell as opposed to recap, they've gone through an unusual period where the cost of debt is so low and the risks and the mezzanine pieces are so mispriced that it's easy for them to recap stuff. But they can't recap that forever. They got to cut the core and if they need the management team to stay in place, then there're only a few people around, Oh, my gosh, that are in the business of acquiring great management teams and making it better. And so that's why we're confident that we're always able to execute and capital deployment. It's just we don't have a budgeted timeframe for saying, let's do $250 million a quarter or we're going to say, no, let's do $1 billion, $1.5 billion or more a year.

We'll go next to Matt Summerville, KeyBanc.

Just a couple of questions, first on Neptune. That business is up double-digits again. Brian or John, how much of that would you say is market-related versus market share and why or why not should we expect that to continue?

Inside the quarter, I'm not sure I can make the split between market versus market share. And we continue to execute in Canada for a large Toronto project at a pretty healthy rate. So that's helpful. We generally take a little bit wider lens on the market share question. And I would not say that that has substantially changed. So I suspect most of this is going to be market-driven, but quarter-to-quarter based upon how projects are rolling out new rollouts of fixed network or mobile network implementation of the various cities, we'll move that a little bit. But we're still in the high-30% share range for Neptune. And there's one of the things that we like about that are switching costs are pretty high. We have a pretty good representation in those areas that are probably disproportionately affected by new housing starts. So that probably over time gives us a little bit of tailwind.

If you have new housing starts that are on the uptick as opposed to where they were for a couple of years, we're likely to have a disproportionate share of that because of where new housing starts are. So we have a higher share in places that require water meters because of our technology being dramatically superior to other people's performance. So if you have a hard out location and you're building in the Southeast or Southwest, we're going to have higher than our national share. So we just automatically gain at the expense of others as new housing starts are on the uptick.

And then just lastly with respect to Verathon, can you provide a little more granularity into some of the new products you're launching there and then just maybe a brief update on what you're seeing in your Dynisco business?

Sure, I'll take the second one first. I mean Dynisco is doing just fine. It's a more industrial-focused areas, as Brian was talking about inside our energy segment. It was up in a low single-digit range in the first quarter. Pretty good operating performance margins, was up a little bit. With respect to Verathon, what they're doing is really a refresh of a couple of their product lines, coming out with a titanium GlideScope. So it removes some of the plastic. It actually makes it slightly smaller for the intubation insertion, which is a big deal for the doctors and a big deal for the emergency responders. So that's small size difference is actually quite significant in terms of the success rate of being able to have a success for intubation. And then also a little bit later a redesigned BladderScan unit that has significantly higher reliability and performance and ease of use for the nurses. So it's really a refresh of the existing product lines, but with some real fundamental game changers, particularly on the GlideScope side.

Our next question comes from Steve Tusa, JPMorgan.

You actually had mentioned, I think, in mid-March, you guys were talking about some potential for weather-related disruptions, didn't seem to be the case, but maybe you could just expand on that, maybe you recouped all that in March or something like that, just kind of curious.

I think we certainly didn't expect a lot of trouble from the poor weather, but we had to run some over time, but it really worked itself out. We had a little bit more backlog at Neptune than we otherwise would have had, but there wasn't anything material about weather. It's not some big windfall would get from additional shipments in the second quarter, helped a little bit in that respect, but not much. And the costs that we had were immaterial.

And then just moving to the businesses on the traditional kind of imaging side, it sounds like you guys are a little more positive on that. I think that was hit hard by the NIH budget last year. Any updates on that business?

Yeah, we did better in Japan and had a quite robust Q1 with Japan. But most of those businesses are really non-US businesses other than NIH here. They're okay. They will perform at the lowest level of incremental change or positive organic that we have in the company that may have decent fees relative to last year being a very good year. But you have to remember that more than 75% of that business is really all healthcare. Imaging is sort of split. So you got maybe 10% or so in cameras and 10% or so or a little more than that Gatan in completely different world-class business. The cameras are the ones that really are always waiting on maybe expanding out of Japan and something from China and NIH here. So those are the ones that have the cyclical risk, not the other half, which is Gatan.

When I look out to next year, with the rate guidance now saying the Street number for next year, looks like it's, I don't know, like 5% to 7% EPS growth. There're been a lot that's moved around in your businesses and you had a couple of businesses fall off last year. Maybe there're some moving parts that I'm not accounting for, but is there something about the margins you guys are putting out, means your next year be an unusually weak margin year? I mean it seems like the organic growth is holding up in kind of the mid 5% to 7% range. So that kind of number would imply very limited margin improvement and obviously nobody is taking any kind of real incremental acquisition accretion. So is there anything kind of like unusual about the organic profile you guys put up this quarter and kind of this year that shouldn't kind of carry into the next year? The number seems very low, 5% to 7% EPS growth seems very low.

We never put any guidance around EPS growth for 2015. But we'd say we'd expect to do 1.5 to 2 times GDP, certainly have done a little bit better than that now and we might continue to do better for all of this year, could be all of the next year. I think there's a reasonable optimism at the part of our field people. We just maybe do things a little different than some people. We went through our planning process for this year in February. We don't do it in the fourth quarter, because our bonuses are an incremental change year-over-year, not planned performance. So we don't pay off budget plans. We'd be hard pressed to name a business that sees any fall off in 2015 from the planning cycle, but that's a long way away.

We'll go next to Christopher Glynn, Oppenheimer.

Wanted to extend these questions there, if you comment for the revenues, 1.5 to 2 times GDP. Is there a sort of a 1.-something to put on EPS relative to topline growth over the cycle?

Look, what we have generally wanted to guide folks, the way to think about that incremental growth is given our margin profile, we would expect that next dollar of revenue to convert to the pre-tax line at somewhere between $0.30 and $0.40, maybe a little bit higher than that in some years, but not lower than that. And so I think if you run the math using that, and this is not really a time for us to be thinking much about 2015. The detailed discussions and strategic plan reviews that we have with our businesses to be able to have a much more informed view of 2015 and beyond, but that's much later in the year.

And then on RF, I'm wondering if the linearity changed at all. You had anticipated heavy project breadth in the first half. Now it sounds like things may be spreading out a little bit more throughout the balance of the year.

We still expect RF to be strong in the first half than the second half. And we started some of these projects toward the second half of last year. But overall, of course with the balance of revenue coming from all of our segments, we still feel comfortable that the 5% to 7% for the full year is generally where all four of the segments will be, probably a little bit higher than that in medical. But the other three segments will be in that range of 5% to 7% for the full year.

We'll go next to Richard Eastman, Robert W. Baird.

Just a quick question. On the energy business, when I look in the quarter and I look at the order number, were there any timing issues there or were you comfortable with the orders in the quarter? Sequentially it looked like perhaps were there any weather impact or anything that maybe held those back a little bit in the quarter?

No, I don't think there is anything there. Energy's order flow is a little more like our (inaudible) CCC, which is a large player in it. It could be really lumpy. I mean they could get a $20 million order that didn't happen in Q1 and happens in Q2. And it doesn't mean anything. You have to look at that over a kind of 12 month trending period and a trend for them is certainly up.

And then also in IT business, the margins are good, but maybe down a little bit year-over-year. And is that piece of the business, is that where you saw a little bit of weather impact on the margins, just curious how you looked at the margins there in the quarter.

Now, that's just Roper Pumps starting up Houston. You really have all the expense at the startup, but we take that period cost and just barely getting started on shipments. So that will write itself right away as we start to ship our product.

Brian, I noticed in the proxy that Roper has petitioned for a change in its gig code. And I'm curious it wasn't mentioned to what, but are we thinking medical technology, are we thinking software?

Our primary gig code is now our application software, medical and healthcare IT, medical products and there's some analytical instrumentation, I'm not sure what that gigs code is. But because we have a lot of diversity, the two places they obviously put us into financial, almost capital markets thing, which is where I think they finally just put (inaudible). But in our case, they didn't have to put us in a conglomerate category, so we'll be with Danaher and GE and United Technology and there's like almost six people in there. But unfortunately, they're quite large. I think Carlyle might be in there, I don't know. But that's what we would expect that we would go into the industrial conglomerates, I think it's called. And we would expect that to be announced by the end of the month, I think.

We'll just say to make sure from a proxy point, we were an electronic components or something. We don't have a single business in the gigs code to which we were assigned, not a single one.

Alex Blanton, Clear Harbor Asset Management.

I wanted to ask you about what you said about the Roper Pumps facility in Houston, because that was your original business and that was originally acquired before you went public by (inaudible) 30 years ago and under continuous improvement, you're still improving it apparently. Could you tell us exactly why your customers are saying that that's a real class best-in-class facility in the world?

Because the situation is we got several products in Roper Pumps, some of which are OEM products and some which are now products for the fracking operations, where they're doing drilling. So one of the things that happened is one of the large people in the space acquired another company, Robbins & Myers. I think there are some customers who (inaudible) think they'd rather buy from maybe some other person like us. So we've been approached by people about could we do larger diameter products than we do in our Commerce, Georgia, facility, which is the founding operation of Roper back in the reference you have. And we've had difficulty doing these larger things, because you got to have a couple of cranes. You need some automation. Got to have special heat-treat situations we need to do. And we had our Alpha instruments business, which is part of Dynisco acquisition that's an instrument company that is a very knowledgeable about rubber and latex. And they came up with a way for us to have a substance that wraps the product that we're making here in a way that allows it to operate at faster speeds and in higher rates of temperature. So it's an entirely new technology for the industry. And that facility will be sole sourced on providing those larger diameter products in that arena. And as it comes online, it will gain share from people that have less effective products now. And then they get used quickly. They have a short life. And so they get realigned, so by moving to Texas, we're close to the market where people can ship back the drills that can get realigned and go back for second use applications.

The second question is about what you said about the Russian business. What are you doing in Russia? And also, Asia was up 9%. What's the biggest contribution you're getting from Asia?

Well, in Asia, there's three areas of growth for us. I mean everything grows a little bit here. But you have Japan was up this past year on technological purchases. China was up modestly. And India was up sharply somewhat with our pump businesses actually and some instrumentation businesses. So those are the three bellwethers there. In Europe, we did $125 million of revenue in the second quarter and $5 million of that was Russia. So going back to your day, so you would remember with Gazprom being the single most important entity that affected Roper most of the '90s is an irrelevant factor today. So Russia was 4% of the European activity. And how that'll do over the balance of the year with whatever is going to happen politically will be interesting, but it's nothing it used to be where if you had a problem in Russia in Roper in 1995, the business was threat.

So that seg is a little bit with Gazprom?

No, not necessarily. There are people who serve the install base. And so we have products that go into. We also have some products that still go into Russia. So it's just in the energy segment.

That will end our question-and-answer session for this call. We will now return to John Humphrey for any closing remarks.

Thank you. And once again thank you all for joining us this morning. We look forward to talking to you at the end of our second quarter. Have a good day.

That concludes today's conference. Thank you for your participation.