Please standby. Roper Industries' Second Quarter 2014 Financial Results Conference Call will begin now. I will turn the call over to Mr. John Humphrey, Chief Financial Officer. Please go ahead.

Thank you, Tina, and thank you all for joining us this morning as we discuss results of our record second 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. In addition, 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, we begin with our Safe Harbor statement. During the course of today's call, we will be making forward-looking statements, which are subject to risks and uncertainties as described on this page and as further detailed in our SEC filings. You should listen to today's call in the context of that information. Now if you'll please turn to slide three, 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 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 participants. Brian?

Thanks, John. Good morning, everyone. So we open up here, if we look at our enterprise financial results for the quarter, they were once again truly outstanding. We had all time record orders, record backlog, closing out the quarter, record revenue within the quarter, record net earnings in a quarter and of course, another record for EBITDA performance. Our revenue was up 13% in the quarter on a GAAP basis but 10% on an adjusted basis, which is the way we really look at the quarter. Organic revenue was quite substantial plus 8%. For us it was very broad based, all four segments were up organically, which was nice to see, but certainly, medical and RF had blow up kind of performance on an organic basis. Our gross margins just continued to go up. It is a remarkable achievement, up 120 basis points to 59.1%, which is really why we call a Roper Technologies this days and not Roper Industries. Operating profits up 18% to $247 million in the second quarter. Our operating margins up another 180 basis points, clearly above the gross margin improvement and 120 basis points, and operating margin came in at 27.9%, which includes a lot of amortization too. Hope so you add that on top of, I know, the number is even stronger. Our DEPS in the quarter on an adjusted basis were $1.56 GAAP against last year’s adjusted number were up 19% on a GAAP basis, GAAP to GAAP were up 41%. And operating cash flow in the quarter was an additional $141 million, which was 14% better than the prior year. So we are very well-positioned to show record year in 2014 for the company along with delivering just an outstanding second quarter. Next slide, if we look at the income statement, you…

Okay, Tina, can you go and start the question-and-answer period?

Yes. Thank you. (Operator Instructions) We’ll take our first question from Matt Summerville with KeyBanc.

Good morning. Couple of questions, first, Brian, can you talk about the sustainability you see in the growth you’re experiencing in Sunquest and MHA just looking out over the next couple of years? And also sort of fold into that, what you think is going on with market share. And I obviously recognize there is a larger recurring revenue component here. So I just want to get a feel for what you think these normalize out?

Well, we’re going to expect double-digit growth for some time out of Sunquest that areas that we’re taking them into are very exciting areas. There is a lot of opportunity in the short run. You get the benefit from meaningful use requirements to take care of government regulation and in the long run, you get many new forms of testing with us having just a very unique way to capture that. So we’re very positive about the long-term prospects for Sunquest, whether it turns out to be a high single-digit grower over the next five years or modest double-digit grower or substantially more, it’s hard to say. It generates lot of cash. It gives us a lot of money to add from acquisition view point and certainly when I think about what we’ll do organically there, plus the acquisitions we’re going to make in that space, it will be one of those, if not the most exciting business we have along with MHA.

And just as a follow-up, you’ve definitely seen more incrementally upbeats on you M&A prospects looking out over the next couple of quarters. Can you talk about on the relative size of the assets you’re looking to acquire the multiples and that you might -- would be willing to pay here knowing this is a tough environment?

Well, we could but it wouldn’t be our interest to what sellers know what we might be willing to pay for anything about. So -- Matt, it’s hard to say but we said generally we like to not pay over 10 or 11 times first year EBITDA, that’s something that’s absolutely true. Yeah, sometimes, you maybe a little higher and sometimes you maybe lower but if you look at a blended basis, we think we need to be investing at a clip that’s $1 billion to $1.5 billion a year and sometimes we’re ahead of that, behind it and there will be different price values based on the kind of cash flows that we can see from businesses. But over time, we still kind of think of modeling our acquisition growth with debt-to-EBITDA, somewhere around 3 or less, could be higher from time to time and looking to have a blended acquisition first year number around 11 but it could be higher. And we’re trailing -- selling in a trailing 15 times enterprise value multiple and the people that are like us in market place, many of them are 20 to 25 times. So these are very high value to assets. But I would have to say that we’re not seeing difficulty again in what we think it will be our ability to close transactions in the next several months, having to do with pricing. I think pricings are high but rationale.

Great. That’s all I need. Thanks Brian.

We’ll take our next question from Deane Dray with Citi Research.

Thank you. Good morning everyone.

Hey, good morning Deane.

While we’re on the topic of M&A, just if you would clarify one point here Brian because definitely you’re standing little bit more positive in your ability to close deals. So what’s changed in past quarter in terms of your being more optimistic here? It didn’t sound like pricing has changed but is it the availability of assets and more active discussions but certainly you can see something has changed?

I’d like to say that we like to mix the things that we’re involved with and we feel like we’re making a lot of progress and talking to people we haven’t decided whether they’re ready to engage or not. So that all feels pretty good. Usually, when we get -- as we get further and further down the line, there is a lot of people that have an orientation. They wanted to get something done before the end of the year. So it’s getting closer than the end of the year and there is a kind of seasonality that probably shouldn’t be there that is. And the things that we’re involved with now that we really like, more diligence we do the better, we feel about them. And so those are all encouraging. And there is just a lot to say, I think that you’ve got unbelievably powerful management teams in some of these arenas. In medical arena, and some of the software arena, so we have that really give us an ability to make bolt-on things for these guys that frankly we didn’t have before we have these two big legs in-house. And so when you get back to being able to pick up some really great businesses that not each one is a $1.5 billion that we have to drive, it increases your confidence about being able to execute and deploy cash. We need to deploy cash in the next year. We’re not interested in sitting on a balance sheet with gross debt-to-EBITDA at 1.9 or net debt at 1.5. That’s in our view not acceptable.

Great. That’s helpful. And could you clarify on the RF business, you mentioned there were some poll-ins related to project effectiveness. Just kind of flash out that point, what were the businesses and can you quantify that portion that was build in?

It’s pretty much all the TransCore project businesses which John, if you want to give Dean.

Yeah. So we have a number of projects there underway in Virginia as well as in Florida. I don’t really think of them as poll-ins. It’s just that the revenue was recognized in the second quarter. We probably would have expected a little bit at the end of the third quarter. It wasn’t anything we tried to do but just because of the effectiveness of completing and getting milestones on those projects with a little more revenue to what we would have expected for the second quarter.

Would that be reflected in lower third quarter or the TransCore business or would we not see that blip?

No, there is probably not as much growth as what we would have thought three months ago. So we had a little more in second quarter, may be a little less than the third quarter but still for the year, we can -- we continue to see our total traffic business performing extremely well with a very nice growth.

That’s helpful. Thank you.

We’ll take our next question from Steve Tusa, JPMorgan.

Hi. Good morning.

Hi. Good morning, Steve.

Just on the guidance, when you tweaked up the organic growth rate for the year up to the high end and you barely budge the EPS number with your conversion rates being extremely strong at 50% or so. I would have expected maybe at least a nickel or dime with the additional revenue. I don’t think there is a change in tax rate. There is something on mix and margin, that’s going to change here in the second half?

I wouldn’t say so. I mean, what it is, is that our range of particular outcomes on the organic roadside, and we just continue to move towards the higher end of that range because the performance that we’ve been able to post in both the first and the second quarter. So we’ve been mostly done in the second quarter that won’t we expected, but the second half still looks very consistent with kind of what we’ve seen throughout the year. So we wouldn’t read too much into that.

Okay. And then I guess just on the same kind of lot of question here third quarter, I mean I think it’s been a while since your earnings were -- didn’t grow nicely from the second to third quarter, just kind of from season perspective yet. You’re kind of guiding something, that’s more flattish to even maybe down a little bit again. Is there something -- is there a specific couple of businesses? Or on the margin front but that we should be looking at to justify that?

Our test business is expected to be higher, so our taxes are expected to be higher in the third quarter than the one…

Right. Okay. So it’s just the tax dynamic, I think sales as well though. I mean, your sales are guided to be flat as well, flattish.

I think on a sequential basis, sales will be a little higher than they were in the second quarter, but not dramatically higher in the second quarter. And part of that is, what we’re saying where you’ve got some revenue recognition in the second quarter around the TransCore project so that it does in fact taken away from the third quarter when that would be there. So we look at two quarters together, our guidance is kind of about where it would have been for, although just we raised the bottom in quite a bit because it’s already in the back.

Right. Okay. That makes sense. And just one last quick on the acquisition front, I would say this is kind of the material change in what you’re saying versus what you’re saying several months ago when you really were talking about the pricing environment being very tough. And then you talked about the size of the deals, some smaller ones closing near term, larger ones next year. Why -- is it just takes a longer, the large ones longer to get done, or is that just something about how the way the M&A environment kind of unfold in cycles, where the smaller ones go first and then the larger ones? I don’t know I’m just kind of curious as to why the difference in comments around the size of the deals.

I don’t think that there is any seasonality related to the size. There is a desire for lot of people if there is a market with asset they want to get it done generally before the end of the year for lots of reasons. So there is an opportunity to close more towards the end of the year. If you look at our history over time, you see a lot of the things that happen in the last quarter of the year. In terms of the size of deals, I mean, most of the things that we’ve been looking at this year are relatively large, but we have so many more smaller things that we can tucked in to an MHA and to a Sunquest that we’ve been willing to look at those things, which frankly we would have not paid a lot of energy to that, because we would have thought that we didn’t need another $100 million business here and another $80 million business here unless we had a leadership team that can assimilate those in a very good way. So we are encouraged by that and we’ve added an awful lot of strength to those two businesses in terms of people and leadership and capability. So that probably is as much of reason why I sound the way I do about that because of our confidence in the leadership in those companies. And then at the beginning of the year there were -- there certainly were large deals that we were interested in that we thought we’re going at high-teens multiples from an adjusted EBITDA basis that our diligence wasn’t willing to buy into the adjustments. So I think there is a little bit more clarity on the part of people about what they think they are going to do for the balance of this year and what they are going to do for the balance of next year, and diligence process is coming in with the more realistic outcome than guys trying to tell you this trees are going to the moon and they are not. They are a little more realistic. And we said for long time that things like junk bonds and CCC debt and subordinated. This crazy, crazy, crazy risk factors relative to where they trade on the pricing and start to see some erosion in that finally. So that changes attitudes instantly.

Right. Great. Thanks a lot.

We will take our next question from Joe Ritchie, Goldman Sachs.

Hi, good morning, everyone.

Good morning, Joe.

So the first question I guess just talking about M&A, it does sound pretty encouraging how optimistic you are about getting the deals done. I guess, is there way you can quantify over the next 12 months how much you can get done? And clearly your balance sheet is in great shape. It seems like the pipeline is strong. And the follow-on beyond that is the focus has really been on the medical and scientific imaging, is that squarely where you are looking at today? Or are there areas across the rest of your portfolio where you are looking at due diligence as well?

Well, we look at a lot of different areas, but the reality is that the economic performance and cash on cash returns in medical and software just blow away the stuff that is generally available in energy or in any kind of core industrial business. So we’ve enjoyed great growth in our pump businesses, record level growth, but they take a lot of assets. So they don’t provide same level of cash on cash return that our software businesses do or that our medical businesses do. So we look at a lot of stuff, but the stuff that tends to get through the filter, we -- our overall company has a cash return on it, gross investment of over 100%. If you look at probably the single best multi industry guide that companies in the 40s, so we see a lot of incoming stuff, but generally if they are going to have cash returns in the 20s, they are not going to join our family. So it’s just the dynamic of the economic performance of the businesses that keeps us so active in the medical and software. And if you look at the next several quarters, over the next two years we view what expect we would -- we set for long time, we deploy $5 billion over the next four or five years, we would expect to deploy at least $1 billion to $1.5 billion every year, but it’s always lumpy about when that will happen. So I think that there are few things that we will probably do relatively quickly, and then there will be other things that we will reach in over time whether that happens in the next six months or the next 12 months is impossible to predict. And whether you do something for $100 million or you do something for a $1 billion on the timeline at which comes next is also impossible to predict because we will have offers to acquire things in which we are doing diligence, some which will be at a $100 million and others will be at a $1 billion. So we’re never in control of that dynamic.

That’s helpful color, Brian. And my follow-on question is around the drop to margins, clearly the incrementals were really strong this quarter at 46%. I think last quarter we were talking about an incremental range of 35%, 40%. So my question was, was there anything specific about the quarter that helped use the margin this quarter and how should we then think about your incremental margins moving forward. Is 35%, 40% the appropriate way to think about it or your business is really just kind of operating on all cylinders and maybe a higher range is appropriate at this time?

No, I think we think 35%, 40% is appropriate guidance for people over time. We’re always going to have mix variance second quarter on our company. It gets a lot of renewals in the software business, gets a lot of things happen in Q2. Q3 is really not as active Q4, then it gets to be really big, because all kinds of year end MRO and investments occur in the first quarter. I think our leverage was something like 37% and that was outstanding. This was extraordinary. And if it happens again, we will take it.

And just one follow-on question I guess on the margins for industrial tech. This is a margin that you call about a few things in the quarter. The operating margins have been down now for I think six quarters in a row on a year-over-year basis and things that it sounds like they are getting better at Cornell pump. Should we start to see margin expansion in this business moving forward?

I always react to that because I believe that the operating margins in the business are pretty close to the gross margin of everybody that they compete with. So thinking about the 29.5% operating margins in that business and wondering if they could get better, seems to me to be unrealistic, but we could deliver, you never know. These are the best industrial businesses known to anyone, I’m aware of. If you got anybody that’s got margins that look like these, please send us.

All right. Thanks for taking my questions.

And our next question from Chris Glynn, Oppenheimer.

Hello.

A very nice year-over-year expansion. Just wondering how to think about the dynamic there of mix versus core incremental margins? Clearly volume helped, but we talked about mix a lot with this business in the past.

I’m sorry Chris. The first part of your question we didn’t catch, so which particular segment are you referring to?

Yeah. John, this is RF and historically as the margins have moved, mix has been a big part of the discussion. So I’m just wondering if there is a way to think about core volume leverage since you did have good volumes and the margins were up nicely.

Yeah. They’re really not a good way to think about that because of the vast difference in the underlying margin structure across this segment. The software business is the incrementals, they are coming much higher, particularly for their software renewals and the expansion. Their software, if it’s installations, it’s lower, of course, on the toll and traffic side, you also have the similar dynamic in terms of whether it’s tags and readers, which because of the technology and the investment, they make they carry higher gross margins versus the service and ongoing work. So I would love to give you the rule of thumb, but I just don’t have one, so based upon the relative contribution of our toll and traffic project business versus the technology that delivered through hardware or software.

Right. Yeah. Just struck me with toll and traffic leading to growth and then near record margins, but understood there is mix within that as well.

And if I just follow up on that, it was especially strong in terms of the delivery of hardware and tags, our Amtech business, which is part of toll and traffic just had a phenomenal quarter, particularly with the continuing tag upgrade project in Florida.

Okay. And then we got some good color on the long run expectations for MHA and Sunquest. Verathon has got some things going on. Was wondering if we could get a similar commentary on Verathon Northern digital type businesses?

So hope those have very good tailwind but for different reasons. So in terms of Northern Digital and the technology that they enable for image-guided surgery, so they have just a preeminent position inside image-guided surgery for what they are able to accomplish and that’s just the continuing growth in that market and because of their dominant share, they continue to benefit from that. Verathon on the other hand is really more of introduction of new and enhanced products when going through what is just a world class sales organization. And so therefore for different reasons, we expect both of those businesses to continue to have high-single-digit growth going forward for quite a long time I think.

Great. Thanks for the color.

We’ll take our next question from Jeff Sprague with Vertical Research.

Thank you. Good morning, gentlemen.

Hey, good morning.

Good morning. Two questions, Brian, we heard you complain about your tax rate through years actually and here is the discussion about M&A and the focus on healthcare and probably one of my question is going. I mean, is there a way to do something a little bit more creative with the corporate structure, the tax structure of the company?

The answer could be that there a lot of different things. As the topic (indiscernible) specifically today with a few other people, of course, are more and more inversions with the portion of the company or something. We’ve had a bright path to the door from people try to tell us about this, that and the other. Usually, they’re talking of businesses that are really pathetic and so the concept of doing something purely for taxes is not something we’re going to do. It needs to be a solid business. It is hard for people to find businesses like ours. It’s pretty unique to find a molding industry player, that’s got 59% gross margins and 33% EBITDA margins and has more than 20% cash to sales and find a partner with it. So we were still blessed with massive cash performance. And so as interest cost goes up for other people that are doing acquisitions, prices come down and we’re the biggest beneficiary that’s because we self fund most of everything we do and if we went out far in a billion or two and at the moment it is pretty modest. So we’re in a very, very good position, probably the best we’ve ever been in to do transactions. And if something came along that was a partial inversion with one of the businesses we wouldn’t necessarily rejected, but putting one of our great businesses with something that’s not very exciting because you might be able to save some tax in an environment that’s pretty ambiguous, is not a good strategy in our view. What we’ve said and we always say is there are to be a much better concept around corporate tax rates. And we’re having to pay a tax rate like ours when we compete in the global market is tough, but a lot of our businesses, even though 40% of the revenue is not in the United States. A lot of the best performing cash generated businesses are in the U.S. and it’s a little harder to do something with that and meet the inversion requirements that the government has. Let alone the risk of retroactivity from the March number that you’re seeing politicians trying to bring there.

Right. And then as follow-up actually on cash flow, so you have the cash tax noise in the quarter, we know it’s year-to-date, I mean, your cash taxes may have been $30 million or so, about what kind of went through on a GAAP P&L. So not a huge GAAP there. With the structural amortization benefit you have, I would have thought cash would have been a little bit better year-to-date. Is there anything else going on working capital and the comment about closing the year strong, should we expect something kind of in the 130% kind of zip code for the cash conversion rate for the year?

Yeah. I think the least that could -- we were expected to probably do a little bit better than 130%.

Thank you.

We’ll take our next question from Alex Blanton with Clear Harbor Asset Management.

Yeah. Good morning.

Hey, good morning, Alex.

Puts you on a new….

Hello.

Hello, hello.

Hello.

Mr. Blanton, please go ahead.

Hello, I got cut out. Hello.

You’re still -- Alex you’re still on. We can hear okay.

Okay. I didn’t know whether I was on it, sorry. I want to go into a little more along the line that someone was talking about the decline in earnings from second quarter. As to the reasons, I see the tax rate was 30.4% in the second quarter and that increased to 32%, it will cost you $0.04, but you’ve mentioned headwinds in TransCore and I don’t think, I heard anything more about that. And also are there any acquisition expenses connected with FoodLink?

So, any acquisition expenses that we have, were recorded in the second quarter, since we did close on that transaction on July 2. So I wouldn’t say that that’s material but we do expect to have some acquisition expenses in the third quarter, not related to FoodLink. On the other hand you did obviously pickup on the tax rate increase in Q2 to Q3 and we just had a very strong conversion as Brian mentioned for the second quarter. Some of the software renewal did happen during that timeframe, carry along with them very high margins. So we continue to see the second half, somewhere in 35% to 40% leverage on incremental growth and then so it’s very similar to what we have in the first half.

And what were the headwinds in TransCore that Brian referred to when he was talking about that segment but didn’t go into any detail on it?

So really headwinds as much is timing associated with the milestones on a project. So as we mentioned, we had very strong performance for executing on those projects in Virginia and Texas and in Florida and other places and that comes along with some revenue recognitions, profit recognitions in the second quarter. That looks a little bit better than what we would have expected for the third quarter.

Okay. Thank you.

You’re welcome Alex.

That will end our question-and-answer session for today’s call. I’ll turn the call back over to John Humphrey for closing remarks.

Thank you, Tina and thank you all for joining us this morning. And we look forward to talking to you at the end of our third quarter.

This does conclude today's conference. Thank you for your participation.