Q4 2019 Earnings Call
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Okay.
Did you Roper technologies fourth quarter 2019 financial results conference call will now begin.
Today's conference is being recorded I'll now turn the call over just like Moxi.
Good morning. Thank you all for joining up can you discuss the fourth quarter and full year financial hurdles for rubber technology. Joining me on the call. This morning are Johan President and Chief Executive Officer Rock Creek, Chief Executive Vice President and Chief Financial Officer, You can call Me, Vice President Controller General Callahan, Vice President or fight.
Earlier. This morning, we issued a press release announcing our financial results. The culture. We've also includes replay information for today's call.
We are prepared slides to accompany todays call, which are available through the webcast and are also available on our website.
Now if you'll please turn to slide to you.
We began with our safe Harbor statements. During the course of today's call will make forward looking statements, which are subject to risks and uncertainties. As described on this page in our press release and in RCC filings, you should listen to today's call in the contacted that information.
Now please turn to slide three today, we will discuss our results for the quarter in year, primarily on an adjusted non-GAAP basis reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix. It this presentation on our website.
For the fourth quarter the difference between our GAAP results in adjusted results consistent the following item.
Amortization of acquisition related intangible asset purchase accounting adjustments required deferred revenue and lastly, a gain on sale related to the divestiture or be town and now you're please turn to slide four I'll hand, the call over to heal after our prepared remarks, we'll take questions from a telephone participants Neil.
Thanks, and good morning, everyone as usual, we'll start with our fourth quarter consolidated highlights.
Well, then turn to discuss our Q4 results on a segment basis.
I'll, then turn the call over to Rob to review, our full year financial results.
Well walk us through the full year details next year's outlook College segment by segment basis.
Our consolidated full year in Q1 2040 guidance.
I'll conclude with a brief summary, part are turning the call over to your question.
Next slide please.
Moreover, was a very solid core revenue grew 1% organically and came in at 1.4 billion with positive organic growth in three or four segments and this was largely based on the strength of our software franchises, our medical product in our product businesses and that too.
That's a partial offsets it that's growth we did see our short cycle industrial and upstream oil and gas businesses declined as expected in the core.
However margin performance for the quarter was really fantastic.
Gross margins grew 60 basis points, 64.1% and EBITDA grew 4% for 518 million, which represented an EBITDA margin of 37%.
Records for Rupert.
Also in the quarter, that's grew 5% and our free cash flow of 453 million was 32% revenue that's free cash flow of 32% revenue for the core.
This margin performance in the face of sorts like one industrial and oil and gas headwinds, it's a perfect proof point regarding brokers business small.
One that is comprised of niche oriented businesses with highly variable cost structures that have a line management teams and incentive systems that enable nimble and swift execution based on the prevailing market conditions.
Performance across the enterprise excellent this year.
I would like to thank each of our business leaders and all of our employees worldwide for another record performance for rope. Thank you.
Also and importantly, we successfully completed the divestiture of good chance in October of last year.
In combination with the sale of the camera business is earlier in the year and this year is 2.4 billion or capital deployment. Our portfolio has been meaningfully improve to continue our long term cash flow compound.
Also during the fourth quarter, we spent time with each of our businesses and person discussing their long range strategy and focusing on work each business place, how they will compete and win and discussing market trends customer behaviors and competitive activity.
Then we talk to each businesses enablement and execution of strategy and conclude with a discussion regarding each of our business is activities regarding talent development.
We're all encouraged by these plan reviews, and our business is orientation towards investing in both product and channel opportunity to drive sustained long term and see or I accretive growth.
Next slide please.
Turning to our fourth quarter personnel, we saw revenues increased to 1.4 billion, which was a 2% increase and 1% on organic basis.
Engine on the prior slide gross margins expanded 60 basis points to 64.1% and EBITDA margins grew 100 basis points to a record 37.0% and the poor.
Finally, our debts grew 5% all in all a very solid core.
Next slide please.
As we turn to our fourth quarter segment results I'll start with our application software segment.
Revenues for this segment were 411 million or plus 2% on organic basis EBITDA came in at 164 million or 48.0% margin.
We continue to see strength across the group of application software companies, especially at Aderant data innovations and strep.
Deltic also had a strong quarter highlighted by continued double digit actually high teens HCV bookings growth.
Revenues for Deltak right touched light of our expectations due to a few larger Gulf Con prospect.
Deltics staff I Clark imply solution and a handful of perpetual opportunity sliding into 2020.
As we reported for several quarters Deltics growth, it's quite balanced across their dotcom and professional services market and the business continues to perform exceptionally well versus the competition.
The segment EBITDA margin performance for this quarter, what stunning improving 190 basis points, great job by the genes.
Now turning to our network segment, we saw fourth quarter revenues increased to 431 million or an increase of 3% on an organic basis.
Importantly, our software businesses and this segment grew organically, 6% in the quarter and the growth was quite broad base.
As a partial offset we saw transport revenue declined a bit based on project timing associated with it you non New York City projects.
For the quarter, we saw segment EBITDA margins increased 80 basis points to 45.5%.
For a measurement and analytical solutions segment revenues increased 1% organically to 388 million.
Growth in this segment was driven with continued gains at Neptune and broadly across our medical product businesses.
That you did a nice job clearing the majority of the backlog associated with their newer residential static water meter and our medical products businesses continue to compete and win in the marketplace.
Relative to our short cycle industrial businesses, they modestly declined in the quarter, but managed margins extremely well.
And finally, as we turn to our process technology segment. We saw this segment declined 6% on organic basis with revenues of 170 million.
Margin performance was quite a stronger EBITDA margins coming in at 38.7%.
This quarter segment performance was expected as we saw pressure in our upstream business is also expected DCC posted continued gains in the quarter.
With that I'll now turn the call over to our CFO to walk you through our consolidated annual results.
Thanks, Neil Good morning, everyone. So turning to page eight and looking at our full year income statement performance.
Full year organic growth for 2019 was 3% which was at the low end of our initial organic guidance against difficult comp of 8% organic growth in 2018 total revenue growth was also a 3% we had a one point FX headwind and also the impacted the acquisition as well as the Divesture of I'd scientific imaging businesses.
Looking at hand and year, our two segments that are primarily software application software network software and system. Both finished in line with our initial guidance with mid single digit organic growth for the year for our largest product segment measurement analytical solutions or medical products businesses and Neptune had another very strong year of organic growth, while we did have some.
Declines in our short cycle industrial businesses, which lowered the overall organic growth the segment to 2% for 2019 Lastly, our smallest segment profit technologies declined 4% organically for the year in line with our initial guidance and that was primarily due to the weakness in upstream oil and gas as you had expected as Neal mentioned for the fourth.
When we really had outstanding margin execution by our business leaders throughout 2019, driving very strong operating leverage while we're continuing to invest for future growth. If you look at the margins gross margin for the year up 70 basis points, 63.9% EBITDA margin increased 110 basis points up to a record 35 point.
8% and that you're up 7% EBITDA growth for the year, our tax rate was lower in 2019 at about 19% Ziad all that up we had double digit adjusted EPS growth of 10% up to $13.05 for the year, they're really overall, a very strong year for over.
Next slide.
So looking at our full year cash flow performance as Neal mentioned in the fourth quarter do we did have 453 million a free cash flow, which is a very strong 32% of revenue on a full year basis, we exceeded 1.5 billion, which was a 5% increase over prior year and a you know it's worth noting.
Many of you are probably on our call in January 2017, just three years ago. When we proudly announced we had exceeded 1 billion in cash flow for the first time well now only three years later Weve eclipsed 1.5 billion for the first time. So at Roper cast does remain the best measure performance.
Next slide.
Speaking of cash is the best measure performance. The next lot as a look at our multiyear EBITDA growth and cash flow compounding. The if you look at appeared from 2016 to 29th mean, both EBITDA and free cash flow compound at a very strong 14%.
So we think about cash conversion a metric we like to track internally here, but that to free cash flow. This means, especially relevant as investors have been moving away from PE toward metrics closer to cast such a DVD even though.
However for many companies EBITDA does not consistently convert to free cash flow at high levels for Roper It absolutely does.
For this period 2016 to 2019, while our free cash flow conversion to adjusted net earnings has been consistently well above 100% ranging from a higher and 5% or 120% free cash flow to EBITDA has also been very consistent between 73% and 76%. This is driven mainly by our asset light business model.
Well with our low capital need a negative working capital does we look forward our working capital position will continue to become more negative interest. The on the next slide and that will further increase our ability to convert EBITDA to free cash flow at very high levels next slide.
So turning to the asset light business model slide maybe our favorite slide aided by the contained divestiture. We completed in the corner. We ended the year at negative 5.3% net working capital as a percentage of revenue. This record result actually includes receivables as you can see close to 18 per.
That was quite honestly little bit higher than we would normally like the driven largely by the timing of collections person transcore projects and some product revenue. They came in late in the quarter. So we certainly expect those people to be collected year.
Early in 2020 and that number should improve moving forward, but you know with an equal number slightly higher that negative 5.3% represent an 800 basis point improvement over the past three years really tremendous performance in terms of working capital and of course, the big driver that is our deferred revenue.
Deferred revenue increased nearly $350 million over this period driven by organic growth in our software businesses as well as a reason software acquisitions that come in at very attractive working capital levels.
In summary from a working capital perspective.
A record negative, 5%, we exit the year better positioned than ever before for future cash flow coming.
Next slide.
So looking at the balance sheet you look at our full year results. If I look at December 19, compared to December 18, net debt to actually down $12 million now the same time period GTM EBITDA is up 119 million and we end the year with our gross debt to EBITDA at 2.7 times their net debt.
EBITDA at 2.4 times largely due to the proceeds from our successful gets hand divestiture. We ended the year with a total cash down $710 billion with approximately 400 million in the U.S. NAPW and on broad now 200 million of that cash will go toward paying the good tan taxes due in April but if you.
Look at the cash balance if you look at our revolver, which is now 2.5 billion dollar revolver fully undrawn very attractive capital market conditions, which we took advantage of.
And certainly that would have the capability as we move forward.
Access the capital market, we are incredibly well positioned to take advantage of a very high quality pipeline of acquisition opportunities in 20, Twond, So with that I'll turn it back over to Neal to review, our 2019 segment performance and 2020 hour.
Thanks, Rob, let's turn to the full year 2019 highlights for our application software segment.
For the year revenue came in at 1.589 billion, which represented an increase of 4% on organic basis, and EBITDA was 636 million an increase of 10% versus the prior year and EBITDA margins were 40.0% Deltic turned in a great year revenue.
Increased mid single digits on organic basis, and this growth was balanced across those markets Duff commented professional services as well as across or perpetual and SAS offerings.
Also during the year Deltex product and solution portfolio was meaningfully enhance.
On organic basis, the company released and I talk compliant golf concept offering and started gaining meaningful traction with its vantage point product the company's Newark professional services SAS ERP solution.
Additionally, this organic innovation Deltic Onboarded and integrated two acquisitions computer east and a beat your vote targeted to meaningfully enhance our architectural engineering and construction hopper.
Aderant had a stellar year. This time last year, we talked about product innovation and address specifically about three newer SaaS products based on the market traction of these products, especially there he billing and mid last SAP solutions and combined with ATERAS continued ability to take share in the law.
George lost base pattern posted double digit organic growth in the year.
Also in the fourth quarter, we acquired Belfield systems for Aderant, which enhances their SAP solutions targeting the front office of law firms, specifically focused on professional service automation compliance and time keeping.
As we turn to power plant, we saw double digit increases and their recurring revenues in the year.
These recurring revenue increases were offset by expected declines in their service revenue, which were largely tied to lease accounting product implementations soul and delivered throughout 2018.
Strata continues to be a star within Rover, having tremendous organic growth gains this year again.
To remind everyone strata is our SaaS software business that helps hospitals have better visibility through their financial operations, both costing and revenue.
Strata solutions better enable hospital executives to plan and run their hospital operation.
Also in the quarter try to launch new products, new beta product called stratosphere today about 25% of U.S. hospitals operational and financial data runs through Stratus products Stratosphere is designed to normalize this dataset and provide stratus customers with AI enhance and.
Sites into the data and content across various customer cohorts.
It's very early days this product, but the team is very excited to partner with our customers to fully develop the products potential.
Within our lapse offer business Sunquest, our us focused business continued to face the same competitive headwinds throughout the year, which we expect to persist into 2020.
However, much of this headwind was mitigated by continued organic gains that data innovations and credit.
Finally, before turning to the segments 2020 outlook, we wanted to highlight the seaboard had a great year very strong organic growth and even better cash performance.
That's where the outlook for this segment, we expect to see mid single digit organic revenue growth with broad based growth contributions across the segment, it's worth noting deltex momentum entering this year based on their recent double digit bookings increases next slide please.
For the year revenue for our network software and systems segment came in at 1.539 billion, which represented an increase of 5% on an organic basis and EBITDA was 681 million increase of 17% first prior year and EBITDA margins were amazing 44.
0.3%.
During 2019, we successfully completed the acquisition of foundry and I pipeline.
While still early both are off to a great start and have very solid growth contributions plan for 2020.
Both management teams have welcomed the roper approach and are excited to be part of our enterprise.
On organic basis, the AC had a truly amazing year.
The growth has been multifaceted with meaningful contributions coming from expanses to their core freight matching network and growth and our rate data offerings.
Hey, Jay had a great year as well there growth was a function of continued competitive strength and mir 100% customer retention combined with adding several new contracted pharmaceutical products to their portfolio.
In addition to a very solid financial year, the company executed a president succession, and a near perfect manner.
Construction next had a good year as well much of 2019 was focused on launching their new integrated SaaS solution, which they did quite well.
Construction that has seen increased ARPU or revenue per user from new customers. As these contractors are seeing more value and the integrated bid management and project estimating solution.
Hi trade was fantastic in 2019.
Rod and her team did a tremendous job driving very strong renewals, adding several new customers and positioning the product portfolio for continued long term network expansion.
Finally, transcore is year was highlighted by their high profile and large contract win with a New York City congestion pricing infrastructure projects.
As we turn to the outlook for next year for this year, we see mid teens organic growth for this segment.
Within this outlook, we see mid single digit plus organic growth for our networks software businesses and very strong organic growth for transcore on the back of the New York City congestion pricing project.
For the first quarter of this year, we expect to see mid single digit organic growth for the segment.
Excluding transcore, we expect low single digit growth for the first quarter, given a very challenging Q1 comp for MHC.
Specific to Transcore now that the New York City project details are coming more into view, we expect the majority of Transcore us growth to occur in Q2 through Q4, though the timing of project revenues will be difficult to forecast with precision given that we're in the early stages of this large New York City project.
Next slide please.
For the year revenue for our measurement and analytical solutions segment came in at 1.596 billion, which represented an increase of 2% on organic basis.
EBITDA was 541 million a decrease of 4% versus the prior year, but EBITDA grew 2% excluding divestitures.
EBITDA margins were 33.9%.
For the year, we saw strong execution across our medical product businesses. In total this group grew high single digits organically for the year.
Within the medical products businesses, India I was the star for 2019.
This business grew double digits on the back of very strong adoption of both their electromagnetic and optical precision measurement and guidance solution.
Marathon growth in 2019 was driven by meaningful and successful product launch of a single use bronchoscope and new product extensions across the full glides steel product family both of which we introduced on this call a year ago.
In addition, 29 seen as the year that is marked by marathons re occurring consumables revenue is becoming larger and their capital based product revenues for these reasons. This business is very well positioned for continued strong growth in 2020 and for many years after.
Finally in the medical products group Cisco grew nicely again based on market adoption of their ultrasound guidance and infection control products.
Neptune for the year grew mid single digits.
Importantly, Neptune saw nice increases in the residential static ultrasonic water meter products.
In addition, net to made very nice gains that are innovation lab relative to the larger gauge commercial and industrial static meters.
We continue to feel very good about how Neptune is positioned to compete and win in the marketplace.
Turning to our shorter cycle and industrial businesses. These businesses performed very well in 2019 amid challenging end market conditions.
As we all know the market conditions changed meaningfully in the second quarter of the year.
While these businesses did decline a bit in the year. There early recognition of the changing market conditions and their corresponding expense management was well executed.
No and of importance, we did see some moderation of their declines in the most recent quarter.
Also during the year, we successfully exited our scientific imaging and get hand businesses and generated 1.2 billion a pretax proceeds.
As we turn to 2020, we see this segment growing mid single digit organically based on continued strength in our medical products and Neptune franchises. We further expect to see continued industrial declines in the first half and return to modest growth in the second half largely based on easing to wage costs net.
Slide please.
For the year revenue for our process technology segment came in at 653 million, which was a 4% organic decline for the year.
EBITDA was 238 million a decrease of 4% versus the prior year and EBITDA margins were 36.4%.
Our upstream oil and gas businesses declined high single digits in the year due to the deteriorating market conditions that we've discussed throughout the year.
However, our CPC business continues to perform well based on the competitive strength and winning virtually all of the new LNG construction projects.
In addition, CCC strategy of increasing their intimacy with our core customers is yielding nice system replacement opportunities.
Cornell executed at a very high level throughout the year. They saw very strong growth across virtually all of their end markets with particular strength in their AD market offerings.
In addition, Cornell saw strength across their aftermarket parts business for much of the year.
These strengths were offset by declines in their rental markets all in all another solid year for Cornell.
Finally, we saw EBITDA margins expand across this segment. These businesses increased margins in the face of very uncertain and declining market conditions.
This is possible given the very high variable cost nature of the businesses, which provide our business leaders the ability to take cost out extremely fast what's weakening market conditions are observed there was no better example of nimble execution than this.
Also entered this end, we discussed our path and CCC had new president Onboarded in 2019.
Each of these new teams performed exactly as we would've hoped swiftly nimbly and lift conviction.
As we looked at 2020, we see this segment declining mid single digits based on the continued assumption of upstream oil and gas market difficulties, however cost do ease and the second half.
Next slide please.
Now turning to our 2020 full year guidance, we are establishing our 2020 full year adjusted Deps guidance in the range of 13 30, the 13 60 with organic revenue growth in the range of 6% to 7%.
It's organic revenue growth range includes the impact of transport growth associated with their New York City congestion pricing project, excluding transcore organic growth for the enterprise is expected to be into 3% to 4% range.
For the full year, we expect our tax rate to be approximately 22%.
For Q1, we expect adjusted EPS to be in the range of to 94 in $3 per share.
Remind everyone last year's Q1 at a 41 cents tax benefit further and as discussed earlier, we expect the majority of Transource growth to occur in Q2 through Q4.
Next slide please.
As we look back on 2019 were very pleased with our results and our strategic process.
We continue to see strengthen our niche market strategy and governance model that promotes nimble local execution.
EBITDA for the year increased 7% to 1.93 billion and EBITDA margins increased 110 basis points that 35.8%.
Adjusted debt increased 10% to $13.05 per share free cash flow increase the 1.44 billion and wasn't astounding 27% of revenue.
Specific to our portfolio of businesses, we meaningfully improved our business mix, we deployed 2.4 billion towards software acquisitions led by foundry and I pipeline.
He also exited our imaging and get 10 businesses.
Finally, I'm very pleased with the improvements we made across the enterprise relative to talent I feel fantastic about the team in Sarasota. In addition to the existing team during the year, we Onboarded to group executive strategic inherent this team is executing at a very high level and I'm excited for the future.
Also there are meaningful improvements across our business units in terms of the talent offense, they're deployed.
We're playing the long game and I fully expect our talent focus to pay dividends in the years the comp.
As we turn to 2020, we are super well positioned first we expect to deliver fantastic organic growth for the year that will be broad based across our software platforms Neptune medical products RF products and Transcore.
The growth and these parts of our businesses will meaningfully outpaced market weakness across our short cycle industrial and our oil and gas related businesses.
Well that to future capital deployment, we are very offensively positioned to execute our M&A strategy.
The sale of good Tan are attractive August bond issue $0 drawn or $2.5 billion revolver and a building cash balance has our balance sheet wonderfully well position.
We continue to be very active evaluating new capital deployment ideas and our pipeline is quite full with high quality opportunities.
We'll continue to be very disciplined and hold true to our seer AI based rentals and we are optimistic for successful year capital deployment.
Now let me turn your question I want to remind everyone that what we do is very simple lead compound cash flow by operating a portfolio of businesses that have leading positions in niche markets that have the proven ability to generate increasing cash flow as our businesses expands.
We provide our business leaders with Socratic searching about what great looks like relative driving long term fear I accretive growth with particular emphasis focused on strategy operations innovation and talent development.
Our business leaders understand that success in our culture, it's based on their ability to compete and win per talent and to compete and win for customers that in turn allow us to compete for and when shareholders. So this and we incent our mid teens based on growth and based on these factors and perhaps most importantly, we have a culture.
That is rooted in the principles of mutual trust and transparency and finally, we take the excess free cash flow that is generated by our businesses and deploy it to buy businesses that have better cash returns and our existing company that interns help accelerate our cash flow compounding. It is the simple ideas that deliver.
FFO results.
We appreciate your time this morning, now, let's turn the call over to your question.
Thank you.
We will now go to the question and answer portion of the call if you'd like to ask a question you may do so by pressing the star T. While the by the digit one on your Touchtone telephone.
We ask that our callers limit their questions to one main question and one follow up.
Your first question will come from Deane Dray with RBC capital markets.
Thank you good morning, everyone.
Hey, good morning.
Hey, because the New York City congestion totaling project is such a high profile installation for you all.
Be interested in hearing some more color on how this installation compares to the others that you've done and let's say London in Stockholm, just from a sense of degree of difficulty.
Of the installation is there any like new software new camera systems.
Or is it basically similar to what you've done and these other successful installations.
Sure. So let me let me be first start by saying the congestion pricing infrastructure and those are two cities is not us. So those are not our projects that said the technology that's being used in the New York City project is for the most part the exact same technology is the news at any of our larger tolling.
Structure projects. It's the same core hardware is the same core software certainly there'll be some tweaks that are made in this offer for the specific applications being used by into in the sentence, but the scale of this project is not actually close to the largest that we've deployed so the team feels quite confident and the technical ability.
We do it further our customer Mtpa, it's been as a great partner and all the.
The sort of the process steps to to be able to construct in New York City have largely already been approved and so it really is just down to executing the project over the course of this year.
Got it and then just some more color on the expected progression of margin progression.
For 2020 for the project.
It's like it's starting more into the second quarter, but typically do you see lower margin.
Early in the project on the installation more upfront costs and just and then higher margin in the back quarters, just what's the expectation here the base case.
Yes, I think Thats right I think you know you're just getting started with the projects here in the first quarter.
So I think you'd assume you'd have a little bit less well, we know we have little less revenue recognition, probably a little bit lower margin as we move on throughout the year both of those will increase quite a bit.
Got it did just last one for me on Deltek could you just provide some color or contacts around the push outs on the perpetual deals.
You said it got pushed into 2020 is vis.
First quarter second quarter, and just what are some color around that customer decisions there.
Sure. So couple of things on Deltek, we talked about how their bookings on an 80 basis were quite strong all year with strength.
Ending the year in the high teens and.
In Q4, so the competing and winning in the marketplace is a remained robust throughout the year specific to the revenue recognition. It's really combination at two things here in Q4 being one is.
The company has announced its intention to release and ice are compliant version of their cost point product, which is the Gulf Khan.
RP products, which really essentially enables that products to be hosted in the cloud and deployed in soft environment. So there are couple deals signed in Q4, taking advantage of that offering and so that's a great friend for the business goes the recurring revenue will increase.
Quite meaningfully as that becomes more gains more traction.
Combined with the fact that a couple of a handful of meaningfully sized perpetual deals push and so if in a hypothetical world at the IPO our compliance SaaS product was not there are less likely these customers would have bought for petrel version and then Deltics revenue would have been right. In line is really a combination of of the socks off.
And gaining traction in a couple of deals pushing into versus second quarter next year.
Thank you.
You're welcome.
Your next question will come from Christopher Glynn with Oppenheimer.
Thank you good morning.
That's your positioning for a substantial allocation that you referenced a few times.
For this year.
Just curious look back at few with a larger ones I pipeline foundry power plant.
Management attention other key.
Metrics on on boarding and anything in particular around those recent deals that's evolving how you evaluate tradeoffs with a new opportunities and as you're kinda shopping criteria evolves over time.
So the criteria for capital deployment really has not changed that much. It's always been rooted in fighting businesses that have better cash returns in our existing over the arc of 20 years, that's gone from industrial products don't medical products. The more software. The second criteria is always having a management team that is fundamentally focused on.
Building the business.
Versus transacting and then finally businesses that share the characteristics that all 45, our businesses do right niche leadership position ability to invest.
And themselves to grow.
Hi, recurring revenues high gross margins et cetera, So those criteria have not changed at all and won't change going forward.
The recent acquisitions that you referenced certainly the ones really from Deltak Constructconnect battery power plant.
Foundry I pipeline to larger ones from 16 forward.
I have met all those criteria in the businesses are performing at or maybe modestly above our initial expectations.
Okay, and then just curious in the pipeline to more actionable end of it as you see it.
It's kind of the mix between bolt ons versus platform opportunities.
Yeah. The vast majority of our deployment will be on platform ideas occasionally, we'll do bolt ons or tuck ins as they strategically warrants in the business.
It's not a budget if you just look over arc of time about 10% of the capital deployed spend in bolt ons that it's just than a byproduct of how it's how its unfolded. It certainly not a budget or a planning number going forward, but Mike it'll be somewhere in that plus or minus ballpark.
Got it thank you.
Welcome.
Your next question will come from Robert Mccarthy with Stephens.
Hi, good morning, everyone.
The first question I have is.
Free cash flow as a percentage of sales for process technologies do you happen to have that metric and that percentage.
We don't you know, we don't the free cash flow numbers at corporate number with all the corporate interest tax et cetera. So we don't look at it in that way I would say the the business level cash flow. So if you look at sort of EBITDA to revenue subtracting their capex is pretty darn close to their EBITDA because the capex is not a big number and that from a working capital.
Perspective.
There is not huge movements there. So it's still a very high number I can't give an exact free cash flow number for that okay, but it but its screens very well in free cash flow by definition then.
Matt that net asset.
Okay. That's fair Fairpoint and then if you look at your outlook, excluding the drag from process. What do you think you would have grown this year organically.
So a process for the year was.
Minus four so you're talking 12% of the company so.
We would added volume point or just doing the math on that and 2020, probably something similar or even higher right. So.
Yeah.
Okay and then.
Moving on Transcore.
From that perspective.
Could you just remind us to level set our expectations in the out years, how you're thinking about the initial deployment revenue and then conceptually the step down from there just so we get our modeling directionally correct in the out years.
Yes, there is that 200 or so incremental revenues. This year and then there will be some recurring from the project.
Probably in that 50 to 60 million range.
Into next year and then into the next several years. So that would then leave the rest of Transcore and lot of other projects we're working on.
To pick up some of that flat, which they're working hard on already today.
Right and then last question is.
Really around M&A, obviously, I think danaher or you know announced today decent results. After a pre announcement and then I think re baseline for more even more favorable financing environment for underwriting one of the deals so clearly a pretty attractive environment, which you alluded to on a call in terms of the capital markets and debt for funding these deals.
And you talked about the mission bolt ons I mean, you look at Neptune.
Good growth great franchise, there is a sense that.
Smart metering, Walt, albeit at a low rate of growth maybe the low single digits could be very sustainable for a long period of time and there is some sense the transmission distribution spending could be entering a higher level of visible spending.
Just given PG any and some of the return profile day am I.
Is it possible for you guys to think about building around that more in software is the utility and market and attractive space or or how would you think about that.
Yes, so Neptune as you know is 100% focused in the water meter business and thats, where they're going to be.
They are not going to straight to gas or electric meters and more importantly, it's really water meter in North America refresher rates are higher than the rest of world. So it's a pretty complicated device metering application, both mechanical and static ultrasonic. So the company is going to stay focus there that said the company now for.
At least three years has been investing.
And it software applications and capability because now the readers are being read more frequently and so there is more use cases theyre being developed out what you do with that data around leak detection or shut off or whatever our customers ask for.
Through this working to build the shut off as a hard case.
Leak detection as a good case for instance.
In terms of a value to the end user so they to that end. They opened in innovation center three years or so ago in Atlanta tracked better talent and they said in their existing location in more rule, Alabama. So it's been a part of the strategy and I suspect will remain part of strategy for quite some time.
I don't want to wear out my welcome. Thanks for the questions. Thank you.
Your next question will come from Steve Tusa with JP Morgan.
Hey, guys good morning.
Hey, good morning.
You mentioned, a power plant costs and solid growth and a part of its business, what ultimately power playing growth for the year.
In total.
Yes, Hi plan for the year was down a little bit we think will be up in 2020 full year in putting the first quarter, Okay, and then constructconnect as well, but that growth this year.
Yeah. It grew in in 2019 that like low single, there's a lot better.
Correct, yes listening.
And then lastly, just for day just for modeling purposes, I know you have to get on sale headwind on revenue next year I'm, what what are the what's the carryover acquisition related tailwind that we should add to.
It's kind of that organic growth outlook, so on a reported basis.
Yes, so I've got so from an EBITDA standpoint, there is about 70 million of EBITDA from the acquisitions. That's an AD and then you take about 50 of EBITDA from gets hand.
So the net around plenty of EBITDA.
And then on sales.
And then I'll say Oh, yeah on sale it.
It's going to be I don't have the exact number off the follow up with you on that but it's going to be roughly.
You have a chair.
Yes.
Yeah. It nets about the are on revenue.
<unk> zero audit zero carry our with with including could Todd.
Yes, yes, because it because the contango lower margin.
Okay, and then sorry, one last one just on first quarter organic you mentioned that there is there is some transported back and you talked about first quarter growth in that segment.
X.
X transcore.
I guess acts Transcore in the first quarter is a two to three one to two or is it not even that like meaningful on an enterprise basis.
It's not too meaningful there's some incremental revenue from transcore there in the first quarter.
It's not a big add to the first quarter and I think you know Q1 last year was that was at 6% organics, though there are really it's just a matter of comps. If you look at its offer businesses. For example, it's just it's just the comps.
Differences in before throughout the year.
Got it okay. Thanks, a lot I appreciate it.
Thanks.
Your next question will come from Richard Eastman with Baird.
Yes, good good morning, Thanks for the questions I'm just.
Could you, possibly just give me the.
Some commentary around.
Profit associated with the key a contract and then what what might be the cadence there I mean is that.
Just just an EBIT or EBITDA contribution from the contracted in visit steel.
Meaningfully.
As the revenue grows there awards just just some feel for what that could bad.
So I can get kind of both cents per share on a quarterly basis, given our revenue assumptions.
Yes, so I think as as you're aware the Transcore business margin is below the Rover average and so this business is going to be in that range.
And.
I think the margins do improve after the first quarter moving forward exactly how linear that's going to be.
It's difficult to predict as Neal mentioned, given what goes on with the project, but it certainly.
We'll get a little bit better after the first quarter, and it's probably going to be relatively consistent throughout the rest of year.
As is our best estimate as we sit here today.
So so so so we'd comes in at the Transcribers average contribution.
Correct. That's okay, that's correct and it'll be a little more probably a little more profitable in the back three quarters in the first quarter, but it's not something where its breakeven Q1, 10% Q2 and 40 in Q4, it's not anything like that.
And you did you referenced is just a couple of minutes ago I think somebody asked a similar question around so 200 million.
Well the right expectation around your one this year and then I think I think on a previous call. It was maybe 50 million to finish off the project in your two but then the other 250 of the contract essentially was years to read through seven under service contract, that's still kind of roughly the scale that's.
Correct, Yeah. So it's like what we've said 50 recurring after after 2020 goes on for five years and we would help it would go on many years after that as you get a chance to renew the the maintenance part.
Right. Okay, and then just a second follow up question around Ropers core EBITDA fantastic year from a margin perspective.
For the full full 19, the puts and takes your maybe a little bit around empty a contract as well as your commentary around.
You know a minus mid single digit growth for the process Tech piece of the business and in in 20, what might be a reasonable assumption in basis points support for targeted EBITDA margin expansion from Roper 20.
Yeah reasonable target the 50 year.
Yes, I think embedded in our initial guidance as it normally edge as an EBITDA margins will be roughly flat year over year, there's maybe a little bit of an increase but certainly the transport project is a negative.
And then some decline in those more cyclical businesses is generally a negative to your margin and the flip side that is excellent wasn't the software businesses, which is a net positive and if you add all those things together our initial guidance while has EBITDA margins about flat year over year, and we'll worked a little bit better than that core. Okay. And then if you could you remind you couldn't.
Equal more includes just.
The transportation business, we've been network software that for the freight matching business is just another tremendous year in.
You know tough fairly tough trucking industry I guess, if you will is it's kind of counter cyclical businesses things could get tough in the trucking industry. You know, we're looking to the to optimize our assets there by by matching freed can you just maybe explain.
With that business, a little bit and then maybe with the prospects are for 20.
Sure I'll uptick I'll take that one rig so first the 80, let's define what their what they are its full truckload spot market North America freight match right. So it is.
A niche industry in others, there's captive there's contracted in the spot markets.
What we have observed here over the last really two or three years would be 80 is their network strength right. It's a there relative market share as you know three ish versus our competitor rights or network is three times size or next largest competitor that network strength.
Has proven to play well when when the trucking markets are Super Hot and when they weekend. So step back from that why is that right. So if you're a if you're a carrier and it is a very hot market. The carrier is going to want to be very selective in Iraq, maybe they're going from Kansas City, Chicago and they want to go right back the Kansas City.
So they're going to be a network participant to be able to select specifically, what they want to see.
Active participation and then Conversely, the brokers are looking for the capacity when things a light up the truckers are looking for work right through become less selective and so the value proposition of participating in the network.
On both sides of the network in both market conditions tends to be quite robust.
Okay and outlook for 20, I mean, do we kind of sustained the current growth rate or do you settle down but just.
It seems around the fringes, there's more competition in that space, but you guys have maneuvered quite well there.
Yes, there is there really is that more competition in the and the freight matching space that said the company has done so well for for a number of years, we do expect the growth to moderate a bit in 2020, just based on the activity in the market.
Anything driving that that said, we expected this business a moderate for last few years as well and they've.
Excellent.
Okay.
Good thank you.
Yes.
Your next question will come from Julian Mitchell with Barclays.
Thanks at all.
Maybe just trying to keep my questions a little briefly maybe starting with them the softer as a service model you spent some time in the prepared remarks discussing that.
Just one that would that strength in Q4, what's the overall scanner that you'll SAS business now within Roper.
And relating to the profitability on that.
I think in Q2 you'd had to.
The fastest kind of mix.
It had knowledge engine application software.
Q4, it seems like SAS did very well again, maybe.
Contributing positively to the margin mix, so maybe help us understand the margin dynamics as that SAS share sales expense.
Yes, so we're still about even in between the das revenue and the traditional on Prem a license maintenance revenue within our software businesses and from a margin perspective, there really isn't that large of a difference in terms of EBITDA margin between those two business models for our business is it.
Where are the belt, where the variability happens as Neal mentioned is when you get a new license winning a quarter all that revenues recognized immediately if you get and use that way in a quarter that revenues recognized over the next 12 months and beyond so thats the only give us from a margin standpoint, there isn't a lot of changes in the two model, yeah, I think that twoq.
Point, you're referencing is deltek had two very large perpetual deals in Twoq, you have 18, which drove outside margin that very specific so very hard comp coming over into Q1 9, if my memory. So correct.
Thank you and then maybe Neil you mentioned talent development in your prepared remarks, maybe expand a little bit what you're hoping to see from those group executive roles.
Yeah.
And also I think it a bit more of a push on organic growth is underway at Roper.
In that context, maybe just.
If you did highlight what the R&D spending was in 2019 I know, we'll see in Mackay that maybe how you see the cadence of R&D developing.
Sure.
All right. These are short questions Julian I'd hate to hear along one so I'll try to try to hit the talent the group the organic in the R&D. So.
I'll hit the organic first so we said that it's a it's it's my intention objective to position the company for 40 to my businesses to execute our organic growth strategy, that's been a little bit better in the past that said this is going to take time, because we want to do it structurally we want to do it the play.
In the long game and importantly, we're going to only do it to the extent seer I accretive and so this is going to take a long time.
And success by the way as measured by you know 50, or 100 basis points more of organic growth not doubling their organic growth profile. Because these businesses are built.
For defensibility, yet, we havent met a rubber businesses optimizes organic growth algorithm and so we believe there is long term emphasize long term.
Potential there.
That we're going to do that through the group executive engaging with our teams principally on three things how to develop strategy how to execute dredging how to run a town offense.
And so we can spend more time later sort of unpacking that because it's a passion of ours here to do that.
But we believe sort of the right strategy with the right strategic enablement with putting the right field right team on the field will yield great results for our shareholders over a long time.
Civic to your because your R&D spend and 20 2020 for the software businesses, but basically both software segments.
Got it we're planning on 70 or 80 basis points more spend in R&D. So when you multiply that through its 20 or $25 million of incremental spend and R&D off relative to revenue.
And that sort of spread across where the best opportunities are each one of the businesses and that we'd expect that pace, the and I don't I can't tell you that exact number basis points each year, but expect that number to continue to increase over time as it and thats really doesn't softer businesses and that is embedded in everything Rob mentioned earlier about margins being flat.
For the year and margins.
Thank you talked about so.
That's a that's my view on your question and happy to follow up as needed later.
Great. Thank you.
Yes.
Your next question will come from Joe Ritchie with Goldman Sachs.
Thanks, Good morning, everyone.
More joining me.
Neil you mentioned he mentioned the headwinds in Sunquest continuing into 2020 can you just elaborate a little bit more on whether what kind of impact it's gonna have to 2020, and specifically, whether what you're doing to mitigate some of that within sunquest.
Yes, so the headwinds that headwind as the same headwind the businesses experienced for quite some time as it is a big as unfortunately like slow motion and Tectonically playing out because our customers when they make a decision to leave three years ago. It takes them three years to leave and so there.
No new information, it's just taking this time to play out.
The mitigating factors, we've decided as we continued to invest in the products of this business right. So we've invested in internationalization of the product we are investing and the molecular genetic capabilities, we're investing in the integration.
Of the fluid tissue and genetic and molecular labs.
And that continues and will continue.
And so it's we just have to let this one competitive headwind play itself out over the course of of the next year.
Okay got it and then just a real quick line on comp you, either and I pipeline or the growth expected for 2020, it's supposed to be similar to the organic growth for the rest of the segment.
Yeah, well, yeah, I think I think when we announce I pipeline, we felt really good about that being a high single digit organic grower and nothing has changed to to our opinion on that.
And copies.
Yes, that's that's a small smaller out onto deltak.
And it probably mid single digit organic or maybe better.
Okay. Thanks, guys.
Thanks.
Next question will come from Jeff Sprague with vertical research.
Thank you good morning, I promise I will be brief.
Just on Transcore.
Back to that I, just want to understand how the cash flow actually works on the on the project.
Would you expect to receive ratable cash flow that you're doing the work or would this be a very backend loaded and maybe even kind of a 2021.
Kind of cash event for the business.
That sounds like the same questions. We asked our management team during this.
During this project run out so we do have deal that they could we do feel the cash supposed to be pretty pretty well aligned with our with our earnings on the project. We worked hard with that we have a great partner, that's working with us to make sure that that happens and so Oh, we do feel good about the cash coming in sort of in line with the EBITDA now.
Certainly you can see some some payments in 2021 you know after the project is ended so we'll see what happens, but we're working hard to make sure. The cash comes in on time.
And just on Neptune is there anything programatic going on in 2020.
Big localities or anything that's driving the business or it's just kind of more steady as she goes kind of penetration push.
Steady as she goes you know thats in strategies than actually focused on the medium and smaller newest validated thats what their strength has been and we'll continue to be.
Great. Thank you.
Yup.
Next question will come from Joe Giordano with Cowen.
Yes, good morning.
Turning to learning.
Just on Transcore, what's the risk that deal leads into 21 that the deployment actually takes longer or they get started late.
It's already sorry, sorry, sorry, yes, so the hey, it's a big project, it's got some complexity associated with it. So it certainly has possibility. It sounds like leads into 2021 best said moving very clear our customer has told us the infrastructure needs to be ready by December 30, Onest of 2020.
And that's the project plan.
Thats a resources being deployed because that will then turn to enable the mtpa to decide when and how they want to introduce the tolling. So our product part of the project is is to be completed by the end of the into the year for our customers demand.
Okay Fair enough and then how should we think about absent forward M&A that I'm sure you'll do but if we just put that out how do we think about the forward margin opportunity at application and network like how how much of that drag on margins or the current and new relatively new business in there and just how should we think about the Florida opportunity to expand from already pretty high less.
Yes.
Yeah, So I wouldn't I wouldn't view, the new businesses as a drag at all I mean, they're all generally in line with the margin.
You know EBITDA margins right, yes, I'm always speaking turns of EBITDA margins and Shannon is correct right. So am I correct me that the analysts think in terms of LP allotted time, but from an EBITDA margin perspective.
Very consistent and there's no reason why they should go backwards as Neal mentioned I mean, we're always spending a lot in R&D were growing R&D and you. It's easy to do that when you have visited the come in at high contribution margin Theres plenty of dollars to invest in R&D and talent in people and everything and that's really how these businesses grow so were continuing to do that so I wouldn't see.
Any sort of a margin headwind for these businesses anytime into the future.
How should we think about them expanding.
Like just normal kind of just capturing an incremental on growth there yeah anything incremental and the growth right. I mean, when you have EBITDA margin in that 40% range that that's a very healthy software business that continually invest to grow. So you know I think that if it expands grow.
Right, but it's really about growing more at at current margins.
Fair enough thanks, guys.
Yes.
Your next question will come from Robert Mccarthy with Stephens.
Okay.
Hi, my questions have been answered thank you.
You're welcome.
And your next question will come from Steve Tusa with JP Morgan.
Hey, guys, sorry, just to just a quick follow up on anything moving around on a like cash conversion I know that you know with the Transcore deal coming through maybe it's a bit of a different cash profile early on and anything or any dynamics. There. After they were up for a cash conversion or cash margin in 2000.
Right.
Yes. Thank you for the question I was I was preparing for I'm glad you got back on an asset yes, we definitely feel free.
Somebody somebody told me and I just wanted to ask about aside are usually ask follow ups that debt, but take out.
You saved with right Yeah, I think if you look at our overall guide.
Free cash flow should grow double digits based on our guide in 2020, and then obviously to do acquisitions that should be a further accretive to that.
So that's that's sort of how we see as of today. So no there's no headwinds on on cash flow.
Yes, your free cash we this year a little bit less than that if it were what is the is there anything unique a you know kind of year to year that they try it's an acceleration of that.
Yeah, so well what bounces around right. So if you're looking at conversion to adjusted net earnings with bounces around the most tax payments and cash tax versus GAAP tax and so thats been a headwind. The last couple of years with a lot more cash tax payments and also as I mentioned in the and the pre.
In the scripted comments around Transcore didnt have a very good cash year around some projects.
Last year, and then some of the product businesses weren't great. So I think as we sit on weren't capital standpoint, I think that we've got some additional room to improve and says and that will be beneficial to cash flow next year and beyond everything else is very structural from a from a high cash conversion standpoint.
Okay, great. Thanks, a lot I appreciate it.
Thank you. Thank you.
That will end our question and answer session for this call. We now returned back to management for closing remarks.
Thank you everyone for joining us today, we look forward to speaking with you during our next earnings call.
That does conclude our call for today. Thank you for your participation you may now disconnect.
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