Roper Industries Earnings Call Nuggets: Organic Revenue Growth and Expanded EBITDA Margins

Roper Industries, Inc. (NYSE:ROP) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Organic Revenue Growth

Deane Dray – Citi Investment Research: On the Medical side, you were flat on organic revenue growth. Did you see pull in from some of the year-end business getting pulled in maybe related to the pending tax increase or any budget flush?

Brian D. Jellison – Chairman, President and CEO: No, we really didn’t see that at all, and most of our stuff is kind of going direct, so it’s not like a distributor pull in with standard products that some other people might have.

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Deane Dray – Citi Investment Research: Then, Brian, when you talk about the acquisition, capacity approaching $2.5 billion for the Medical side, are you more apt to pursue adjacencies, new products, new platforms in SaaS, like you’ve done in Sunquest or would you be looking more on the device side like Verathon and Northern Digital where you can drop a product line into your sales force.

Brian D. Jellison – Chairman, President and CEO: Well, we would and are doing both. You just never know what you’re able to negotiate in terms of what’s the best use of fund. So, we’re always really looking at the asset velocity of things, so the software businesses that have easier hurdle because they always have less assets if the product businesses are such that we think they are well positioned and have great defense mechanisms we’re not opposed to adding to that. As a general rule, there are certainly some product transactions we are looking at now, but most of the things we’re looking at are related to software and service opportunities.

Deane Dray – Citi Investment Research: Just one last one, if I could, on the Neptune customer loss. Give us some perspective, was this on pricing, is it a market share shift and you said that there would be some impact in the next couple of quarters?

Brian D. Jellison – Chairman, President and CEO: It’s a very large customer who has decided that they want to go to take the risk associated with the composite years. So, we don’t think it says anything other than to try something else. We had a long-term contract with them that we had a change in management and we will see how it works out, it will have an effect on the first half of this year from revenue, viewpoint I don’t think it is indicative of anything. In fact, we were up nearly 20% distributor sales in the fourth quarter. So, we can’t see it. We wind out being flat because we got one large customer that’s down. And John, I don’t know if you want to add anything to Deane’s question around the customer situation? I think it is a one-off thing that sort of supply chain people make a decision instead of operating people. I know the operating people aren’t happy about it.

John Humphrey – EVP and CFO: And it’s one of those things that – I mean, it is important in terms of Neptune, but ones it gets to the Roper level it really kind of gets kind of not as material for sure. It will be an impact for the first quarter, first half. Operator Matt Summerville, KeyBanc.

Matt Summerville – KeyBanc: Just a couple questions. Brian, can you talk a little bit about, later in the fourth quarter and into the first quarter, the kind of order dynamics, you’re seeing in your shorter cycle businesses, like Dynisco and you mentioned Struers equipment sales down, has that trend changed?

Brian D. Jellison – Chairman, President and CEO: Well, I’d say, what’s important about the fourth quarter, is, we have three businesses Dynisco, which is always supplying things which frequently have to do with capacity utilization. Struers, which is somewhat similar to that in terms of their consumables, and then our core AMOT business and those three were leading indicators for us in Q4 of 2008 when you went into the ’09 downturn. So, we’re looking at those things weekly. In the fourth quarter, they did better than the concerned level you would have had, so we haven’t really seen anything in those businesses yet that would indicate that there was any forward indicator. In fact, December shipments were stronger for the businesses than October and November, which resulted in us having a little bit more receivables at the end of the year than we would have liked to have had, but it’s the year-end stuff that happens frequently. I don’t think there’s anything that makes us nervous. In the case of the equipment, it wasn’t core equipment that we provided out of Struers for cutting technology. We have a line of hardness testers that we sell and they were off in the fourth quarter and fortunately they were lower margin products, so it wasn’t overly material, but it’s something we’re keeping our eye on.

Matt Summerville – KeyBanc: Then just one follow-up. Can you just talk about what you’re seeing out of Sunquest in terms of pro forma organic revenue growth versus kind of your expectation going into the deal?

John Humphrey – EVP and CFO: They continue to do extremely well. We’re seeing high single-digit organic growth out of that business and we would expect to see that continue into 2013 also.

Expanded EBITDA Margins

Mark Douglass – Longbow Research: Looking at your expectations of expanded EBITDA margins in 2013, can you help breakdown a little bit, how much you expect in gross margin improvement versus operating expense growth? It seems like a lot – I think certainly some is going to come from Sunquest but (indiscernible) break that down that would be helpful?

John Humphrey – EVP and CFO: We really need to follow-up with you on that. We do expect to see gross margin expansion along with operating margin expansion, both because our faster growing businesses are also our margin businesses, on the software side as well as on Medical and the impact from Sunquest. So, probably not quite as much on gross margin as we’re expecting on EBITDA margin, but both of them we expect to be up in ’13.

Mark Douglass – Longbow Research: Then on Neptune again, Brian, it still been a pretty strong couple of years, is there any ramp down in sales and projects outside of the significant one that you lost. What are the expectations for the industry – with Neptune relative to the industry in 2013 and do you expect more people to go maybe even shift to the composite?

Brian D. Jellison – Chairman, President and CEO: Well, I think, as far as the situation as you kind of get – we would get a disproportionate amount of new meters associated with housing starts. So, as housing starts are picking up so are our sales through distribution in the U.S. water market. So, we expect pretty decent growth there certainly high single digits maybe more and so other people to have lower shares than we do are likely to get some corresponding benefit in their business, so I think it is a generally favorable – or more favorable market than it has been for replacement water meters and for just installs for (indiscernible). When it comes to the rest of the world, that’s an entirely different story, and our products really don’t play in any – I think other than high pressure water market. Composite meters know these had great success with those over time. We don’t see any shift to that at all, except (as people who have) come in who don’t know the industry, don’t know the products and think everything is uniform because they are staffed people they can do things that will be proven to be on the stake later. So, we are not really bothered by. That’s not the first time we lost the customer and we get them back a little bit later when they realize that that value is more important than price.

A Closer Look: Roper Industries Earnings Cheat Sheet>>