Q1 2021 Roper Technologies Inc Earnings Call
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Good morning, the Roper technologies first quarter 2021 financial results Conference call will now begin today's call is being recorded all participants will be in listen only mode should you need assistance. Please signal of Congress specialists.
By pressing the star key followed by zero I would now like to turn the call the call over to Zack Moxie, Vice President Investor Relations. Please go ahead.
Good morning, and thank you all for joining us as we discuss the first quarter financial results for Roper technologies. Joining me on the call. This morning are Neil Hunn, President and Chief Executive Officer, Rob Crisci, Executive Vice President and Chief Financial Officer, Jason Conley, Vice President and Chief Accounting Officer, and General Callahan, Vice President of Finance.
Earlier. This morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call which are available through the webcast and are also available on our website now if you. Please turn to slide two.
We begin with our Safe Harbor statement during the course of today's call. We will make forward looking statements, which are subject to risks and uncertainties. As described on this page in our press release and in our SEC filings you should listen to today's call in the context of that information and now please turn to slide three today, we will discuss our results for the quarter, primarily on an adjusted non-GAAP basis.
Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website for the first quarter. The difference between our GAAP results in our adjusted results consist of the following items amortization of acquisition related intangible assets purchase accounting adjustments to acquire deferred revenue and related commission expense and lastly, a gain on sale related to them.
Of minority investment et cetera, and now if you. Please turn to slide for I'll hand, the call over to Neal after our prepared remarks, we will take questions from our telephone participants Neil.
Good morning, and thanks for joining us for this morning's call I'll start with a brief summary of this quarter's results and activities. Rob will then highlight our P&L performance and balance sheet metrics.
I'll then walk through our segment details our increased outlook for the year and are concluding comments as usual, we'll leave plenty of time to talk to your questions towards the end of next slide please.
As we turned the page five we got off to a better start than we expected business execution was strong across the portfolio. It was also broad based.
We are encouraged by seeing nice improvements across the vast majority of our software and product based end markets.
In addition, we continue to see accelerating software recurring revenue growth growing approximately 6% on an organic basis the <unk>.
Fortunately, our 2020 cohort of acquisitions led by virtue of for continued to perform very well versus our expectations.
When we put this all together, we experienced double digit growth across virtually all financial metrics revenue EBITDA and.
And cash flow.
The growth of cash flow performance of the quarter allowed us to continue our rapid deleveraging with about $500 million in debt pay down during the quarter based on this encouraging start we're increasing our outlook and guidance for the full year and with that let me turn it over to Rob to review the financial details Rob. Thanks Neal.
Everyone turning to page six and covering the Q1 financial highlights total revenue increased 13% to 153 billion, which was an all time record for any roper quarter organic revenue for the enterprise declined 1% versus last year's plus 4% pre pandemic comp EBITDA grew 20%.
Sent to 561 million EBITDA margin increased 220 basis points to 36, 7% on really great incrementals across the portfolio adjusted depths was $3.60, 18% above prior year free cash flow was 543 million up 50.
The 4% we continue to benefit from our business transformation for a more software weighted model, where working capital boost cash flow as our growth accelerates. Our results were enhanced a bit by approximately $40 million of accelerated payments that were the result of wins at our U K based clinics as the laboratory software business aided.
By our outstanding cash flow performance, we reduced our debt by approximately $500 million in the quarter more on that to follow so in summary of great start to the 'twenty 'twenty. One next slide turning to page seven and an update on our deleveraging. The charts on this page are of good preview for how we expect 2021 to look as we follow through.
On our commitment to reduce debt after our 'twenty 'twenty opportunistic capital deployment as each quarter passes by we will benefit from meaningfully improved trailing EBITDA as the performance of last year's acquisitions rolls into Roper's financials. EBITDA is then further enhanced by our accelerating organic growth.
Concurrently our strong cash conversion allows us to apply our high levels of excess free cash flow toward consistent reduction of our debt in the first quarter, we reduced our debt by approximately $500 million over the first three months of the year, our EBITDA growth combined with debt reduction enabled us to lower our net debt.
At the EBITDA ratio from 4.7 to 4.2, we expect this downward trend in leverage ratios to continue moving forward so with that I'll turn it back over to Neil to discuss our segment performance.
Thanks, Rob as we turned the page nine revenues and our application software segment were $578 million up 2% on organic basis EBITDA margins were an impressive 44, 9% in the quarter occur.
Across the segment, we saw organic recurring revenue, which is about 75 per cent of the revenue for the segment increased approximately 6%.
This recurring revenue strength is based on strong customer retention and continued migration to our SaaS delivery models of.
Note this quarter should be the last quarter of nonrecurring revenue declines as we come across the COVID-19 comp from last year.
From a business unit perspective, Deltak continued its long string of great performance as we expected <unk> recurring revenue grew nicely of particular importance <unk> increase to their perpetual revenue during the quarter coming off of a decently strong quarter a year ago.
Also encouraging was the nature of the bookings activity, which was broad based across our architecture engineering creative and government contracting and markets for reference the professional services end markets tied the AUC and creative had been slow since the onset of COVID-19.
Also classes, our European lab software business, just crushed it during the quarter as Rob mentioned Glynis had exceptionally strong cash flow as the gain tremendous market share within the clinical lab consolidation occurring within the United Kingdom.
<unk> has approximately 85% market share in the U K and is now recognized as one of for critical IP vendors for the entire National Health service, just outstanding execution by the <unk> team and congrats.
We also saw thawing in the higher education market that seaboard serves certainly encouraging.
Finally, our 2020 cohort of acquisitions continues to perform very well.
Specific to Virtu for we continue to be encouraged by their customers comfort in having roper as the long term owner for the business also Amy and her team have done a great job transitioning to Roper and our governance model.
As we turn to the outlook for the balance of the year, we expect high single digit organic growth for the segment.
This is based on the expectation for sustained levels of recurring revenue growth and the resumption of nonrecurring revenue growth.
As it relates specifically to the second quarter, we expect our growth to be a touch below high single digits due to our global lab software group coming off across a challenging comp from a year ago as they are instrumental standing up COVID-19 testing on a global basis.
Solid and encouraging quarter for sure and with that let's turn to our next slide please.
Turning to page 10 revenue in our network segment were 440 million flat versus last year of down 3% on organic basis EBITDA margins were 49% in the quarter our software businesses in the segment about 65% of the revenues were up 4% on an organic basis.
This revenue was broad based among our software businesses and driven by organic recurring revenue growth of approximately 6%.
Recurring revenue growth is underpinned by strong customer retention Rick.
<unk> revenues are also benefited by increasing network participation.
At the business level, our freight match businesses, both in the U S and Canada continued to be solid grower for us as a reminder, our freight match networks are critical and necessary elements to help organize and transact the trucking shipping spot markets strength in our businesses has been on both sides of the network broke.
<unk> and carriers.
We also continued to see nice organic gave that construct connect as their network enables commercial construction planning and bidding to occur any more efficient and transparent manner.
Lastly, as it relates to our network software businesses, we saw improved end market activity, especially in the middle market for foundry, our media and entertainment Compositing software business.
Our non software businesses in the segment were down 13% for the quarter, a touch better than we anticipated.
<unk>, New York Project work continues and is tracking well.
Scores tag volumes declined versus the year ago based on lower traffic volumes across the U S.
Turning to the outlook for the balance of the year, we expect to see high single digit organic revenue growth for the segment with consistent high single digit growth throughout through the balance of the year for our network software businesses.
As it relates specifically to the second quarter, we anticipate our segment organic growth to be a touch below HST given transport should be stronger in the second half versus next quarter based on timing of project execution and tag shipments.
All in all of solid outlook for the balance of the year. Please turn to the next slide.
As we turned the page 11 revenues in our <unk> segment were $381 million up 2% on an organic basis EBITDA margins were 34, 8% in the quarter.
As usual in the segment, we will profile of the three macro parts medical products Neptune and our industrial businesses to start our medical product businesses performed very well this quarter.
<unk> continued its strength based on consistent factors glide scope unit placements and recurring consumables pull through and continued momentum and share gains with our single use bronchoscope product offerings.
It was also encouraging to see is the growth in our bladder scan product line. We believe this was based on a broader base trend of hospitals resuming some normal level of clinical capital spending we saw similar strength in our other medical product businesses as well for instance, northern digital had their best Q1 <unk>.
Bookings quarter in history, this trend bodes well for the balance of the year.
Neptune as expected declined in the quarter for the same reasons discussed in each of the last three quarters, having limited access to indoor meters in the northeast United States and Canada. However, we did see some easing of these restrictions in March and Neptunes customers are beginning to increase their maintenance schedules throughout Q2.
And into the second half of the year.
Finally, our industrial business has benefited from improvements in their end market conditions.
For the balance of the year, we expect high single digit growth for the segment. This is based on broadly improving conditions, both of medical and industrial end markets and increases to access an indoor meter replacements at Neptune.
This strength will be somewhat offset by the extraordinary prior year COVID-19 demand at Verathon. We are encouraged by our expected high single digit growth for the balance of the year.
Now, let's turn to our final segment process Tech.
As we turn to page 12 revenues in our process technologies segment were $131 million down 10% on an organic basis EBIT.
EBITDA margin has hung in the 31% in the quarter.
The short story here is we're seeing improving end market conditions across virtually every one of our businesses in the segment after nearly two years of declines for.
For instance at CCC, we're seeing the resumption of previously deferred projects and demand for field services to come back online also greenfield bidding activity is back in full swing, especially on an international basis.
Cornell continues to perform well for us this is particularly partially based on market conditions, but also based on current <unk> product innovation.
Seeing very nice demand pickup for the Iot connected pumping solutions.
As we look to the outlook for the balance of the year, we see double digit organic growth based on improving end market conditions and continued easing comps.
Now please turn to page 14, where I'll highlight our increased guidance for 2021.
Based on strong Q1 performance and our increased confidence for the balance of the year, we're raising our full year adjusted depths domain of the range of $14 75, and $15 per share and organic growth to be in the 6% to 7% range of the 6% to 7% organic growth is against the 1% organic decline in <unk>.
120. This demonstrates that we have meaningfully improved on an organic basis since 2019, the compounding continues.
Our tax rate should continue to be into 'twenty, 1% to 22% range.
For the second quarter, we're establishing adjusted <unk> guidance to be between $3 61, and $3 65, and expect second quarter organic revenue growth to be in line with the full year organic growth rate now, let's turn to our summary and get to your questions.
Turning to page 15, and our closing summary, this was an encouraging start and we are raising our outlook for the year.
We performed well across virtually every financial metric with double digit increases in revenue EBITDA depths and cash flow.
EBITDA margin expanded nicely in free cash flow of grew 54% of $543 million, which enabled us to continue our rapid deleveraging in the quarter.
Importantly, we are well positioned for continued double digit compounding.
We're seeing improving conditions across virtually all of our end markets when combined with our leading market positions. We expect high single digit organic growth for the remainder of the year.
As owners or prospective owners are of protect you.
You should be encouraged by our increasing levels of recurring revenue and the stability of our recurring revenue growth.
Also our 2020 cohort of acquisitions are performing very well and for Virtu for has proven to be an excellent addition to our growing portfolio of software businesses.
We continue to focus on deleveraging our balance sheet and remain committed and focused on our long term capital deployment strategy to this and our pipeline of M&A candidates as active robust and as many high quality opportunities.
As our balance sheet becomes more offensive towards the end of this year, our active pipeline of M&A targets will enable us to resume capital deployment and our usual process oriented and disciplined manner.
In closing and as we turn to your questions. We recently announced that Amy Brinkley will become our new Board Chair effective June one.
Amy has been a tremendous board member since 2015, it will be a fantastic Board chair.
Certainly look forward to working with Amy and the full board for many years to come.
But as we turn to your questions I would like to take a moment to acknowledge and thank our outgoing board chair Bill Prezzano.
Bill it's been a Roper directors is $19 97 and has reached our mandatory board retirement age.
Served as our lead independent chair director and became board share during the CEO transition from Brian Jellison to myself.
Bill has been a wonderful board share, enabling a smooth CEO transition and the continued evolution of our strategy and business model.
On a personal note bill has been a tremendous mentor to me, which I hope will continue on an informal basis for years to come Bill. Thank you for your years of service to root for shareholders. I think the share price was around $16. When he started and thank you for helping me become a better leader and Chief Executive officer with that we'd like the.
Open it up to your questions.
Okay.
We will now go to our question and answer portion of the call. We request that our callers limit their questions to one main question and one follow up if you would like to ask a question you may do so by pressing the star key followed by the digit one on your Touchtone telephone for Ya.
Using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then the digits too.
Yeah.
Again, we request that callers limit their questions to one main question and one follow up.
Our first question is from Christopher Glynn from Oppenheimer. Please go ahead.
Hey, Thanks, good morning, everybody.
Good morning.
So strong margins across the board I was curious in particular application software look, particularly better than expected I don't know for.
<unk> had some incremental revenue versus what you expected, but what kind of drove the apps soft margins in the quarter.
Hey, Chris Good morning.
Yes, the strength across those businesses I think Neil mentioned cleanup. This was strong sunquest had a nice quarter.
Deltak.
The perpetual license wins, there all of that stuff comes in at really high Incrementals.
And that and that drove most of the margin performance.
Okay, and then a question on acquisition philosophy of kind of highlighted financial profile and returns and characteristics of our strategic end markets.
It strikes that were for an eye pipeline two out of your three biggest deals ever both kind of serving the insurance marketplaces I'm wondering if there is.
And the.
Emerging prioritization and types of end markets.
Hey, Chris I appreciate the question and the opportunity to talk about that.
The short answer is no I mean, our M&A strategy for 20 years of centered on picking the best businesses and business models that we can identify from.
The range of opportunities in the marketplace. If you go back to really starting in 2011, you might've thought from 11% to 13, we're all about health care. It and then maybe from 14 to 17 about professional services. The ERP and then the last couple of years about insurance tech, but all of those steps are completely coincidental.
Really just evaluate the range of opportunities and pick the very best business that we can find.
Okay.
The next question is from Deane Dray from RBC capital markets. Please go ahead.
Thank you.
Good morning, everyone.
Good morning Deane.
Hey, first question is how would you characterize the software demand this quarter it.
It might be hard to parse this out but how much might of been pent up from the.
The COVID-19 shutdowns kind of a catch up versus the true recovery and resumption of growth I'm not sure you can characterize it broadly, but maybe some individual examples within the businesses. Thanks.
Yes.
I don't think theres much pent up here from our call down sort of businesses. This year. So this quarter, it's more of a more of a recovery story you know for instance, we talked about in the prepared remarks about the professional services and markets of Deltec serves architecture engineering creative agencies, starting to come back in the quarter, which is great.
To see.
<unk> for was steady as she goes there they were they were not particularly impacted by the pandemic adder of the law firms continue to proceed with their transition we did see some recovery start in the education and healthcare markets of Seaboard.
Middle market of foundry, which is great to see us.
For those production line production begins and comes out of production of the post production.
It was really just a nice.
The increasing sort of start to recovery and then anytime anybody asked the question about softer we got to talk about the recurring revenue stream.
It was around 6% growth organically across the two segments and in total which bodes well for the for the future.
That's great to hear and then just the second question since it is such a high profile project of any updates on the New York City congestion tolling I.
I saw it in the slide it says that work has continued but any update there would be helpful. Thanks, Yes.
Yes, just the at the project continues the customer continues to want us to get the project done. So you can commence the discussions on how theyre going to do the tolling in and begin to start the tolling certainly the the most macro backdrop is more favorable now with the administration in the White House and the Secretary Pete and all of the all the all of it.
That is all in a much more favorable position than it was just a quarter or two ago. So the project continues.
The next question comes from Julian Mitchell from Barclays. Please go ahead.
Hi, good morning.
Maybe my first question just to try and circle back onto the the margin aspect.
So in application software you did have a very substantial.
Margin increase.
Year on year in the first quarter you laid out some of the reasons why.
But maybe just help us understand sort of as we think about the balance of the year for that business and maybe for Roper from wide what type of incremental margin our margin trajectory, we should expect.
Because it looks as if the sort of drop through margin is maybe around 20% in the guide for the balance of the year I just wanted to sort of check how you are thinking about that.
Yes, so I'll give a crack at that on the EBITDA margin basis right. I mean, <unk> is the higher EBITDA margin business. So that you are seeing that and we talked about when we bought the business. It's a round of 50% or set of little low blow that EBITDA margin business of that helps I think on a core basis.
It's going to be relatively consistent year over year for the rest of the businesses on an EBITDA margin basis, and that's that's conversion it for.
40% to 50%.
And that's just consistent with what we see in these businesses as they grow and as you know they have great cash characteristics very negative working capital so the the cash flow growth.
Cannot can often be even faster than the EBITDA growth and so it's a great story, there and I think we will continue to continue to see.
Margin high.
Hi within that segment.
And Julien just Neal just to underscore one thing Rob said I mean, the incremental EBITDA margins for the for the year of 40% by the she said it I just want to understand yes.
Okay.
Perfect. Thanks, very much and then.
The second question would really.
The around the.
And net what software.
How are you thinking about the leaving aside try in the score now that the sort of core piece of it.
You did have some big impacts there of network software last year from COVID-19 in sort of health care food and meet the <unk> I think you had called out before.
Maybe just clarify what pace of sort of top line acceleration youre seeing in some of those COVID-19 impacted areas.
And what kind of cyclical recovery, if you'd like and network software.
Spirit's Inc.
Yes, so the the network software businesses are strong high single digit organic for the rest of the year. That's the consistency in the recurring which we've talked about has been growing all along but then you do get a little bit of of the bounce back in some of the markets you mentioned.
Foundry and others, So I think.
I think on the right track there Neil you want add anything just the color on the three of the health care Entertainment and the.
The food so MH as the health care business that was tied to index to the patient and volumes going through the long term care skilled nursing assisted living facilities. That's normalized debt business also has added products to its pork contract portfolio. So that business is on its on its way to recovery as we speak.
Talked about foundry and the.
The prepared remarks.
Theres just tremendous content budget.
Not surprising in the marketplace and all of that content requires postproduction and we're a critical element of that post and then finally hydrate I trade is going to be one of the longer recovery cycles for us it'll be a second half of this year of the next year as their index, partially the retail food, but also partially to what I'll call institutional food, which is think about that.
As restaurants schools universities of little bit of the stadiums and thats going to come back on the longer recovery curve.
The next question.
<unk> is from Allison <unk> from Wells Fargo. Please go ahead, hi, guys. Good morning.
Just wanted to circle back on <unk> question around <unk>.
He mentioned around the reopening kind of theme in Q2 and it sounds like you are seeing some green shoots.
Just trying to reconcile for the balance of the year. It sounds like you guys are expecting I'm more of its a gradual recovery in some of those businesses any color from your customers in terms of you know are they still a little concerned about the cause of that impact or that you're thinking maybe there could be some pent up demand as the sort of exit this year any thoughts there.
Well, we got of sort of run through the portfolio Allison in that regard I think it'll be I think our comments here will be around the products businesses as opposed to the software ones.
First is.
Of the tag volumes Trans core I mean, that's going to be a probably of second half of this year recovery cycle just based on the wind. The tags were bought last year end of this year and having the customers' burn through existing inventory as traffic patterns come back on.
We talked about medical products.
We got the COVID-19 headwind for a quarter or two of Verathon, but the other businesses definitely saw.
A palpable improvement in the capital purchases of their medical equipment in the quarter and we have no sense of that was pent up of onetime we'll find out in the next quarter or two but that was not the read through from the from the conversations we've had with RF.
With our customers in fact, MDI had record bookings in the quarter.
As we go through the industrial businesses <unk>, we definitely saw an improvement across the portfolio of industrial businesses through the quarter with Stewart, having record March bookings, which shows that there is some sort of gradual improvement there to continue and then and then on the process technology businesses. There was just no.
It was I would call that very similar to what we saw at stores and industrial March got better in February in February of better than the.
In January.
Great. That's helpful and then a strong deleveraging in the quarter you talked about an active pipeline, maybe more comfort of towards the end of the year.
Any change of thinking just given the strong performance. So far you know obviously strong cash flow characteristics that you would have some comfort level of of staying slightly above your comfort range. At this point or are you still focused on getting that down on in terms of the net debt leverage.
Allison It was a great start to the deleveraging for Q1, so that certainly helped boost our ability to pay down the debt faster and we will continue to do that throughout the year and as Neil mentioned, we're making sure of the pipeline is active and there are some exciting things that we're looking at in the early stages and will be ready to deploy capital.
At some point, but for right now we're really focused on the deleveraging.
The next question is from Joe Giordano from Cowen. Please go ahead.
Hey, good morning, guys.
Hey, Joe.
Hey, Rob just on the pickup on the guide a little bit.
So revenue for the year, you're expecting 6% to seven he was kind of mid single digit plus before came in pretty good in the <unk>. Good margin and we're kind of just passing through the <unk> beat essentially maybe a tad higher than that for the full year. So.
How would you kind of.
Argue that you are seeing anything incrementally challenging it sounds like you're.
Everything seems to be at least the plan if not a bit of bonds. So just wanted to think through the framework there.
Yes, I think Thats right I think.
It was one quarter right, we had a really nice first quarter.
And we felt it prudent to raise the guide because it certainly gives us more confidence for the rest of the year, but you know it was one quarter and this is the.
The unusual environment, where we're coming off of the sort of hopefully once the lifetime pandemic and so we're trying to be balanced in the outlook and sort of what we do with the businesses.
Yes, that's fair.
And maybe can you talk us through just like the structural differences between the lab software businesses in the U S and in Europe and.
How how businesses in each region or in the way differently positioned and why <unk> is able to do so well here.
Yes.
And the in the U S.
The.
We've talked about quite a bit the law.
<unk> was the first part of the hospital to become automated and then 20 years later due to the gut with the government stimulus there was the hospitals.
The deploy electronic medical records and then those EMR as the hospitals as a general matter.
<unk> had wanted the connectivity of the lab software to the EMR.
And Thats, how we had said sort of the competitive headwinds for four of five years at Sunquest. When you look at Europe.
That dynamic does not exist the health systems are different first of all the country driven.
There is not a the concept of a day, but emerge of an EMR landscape.
On the country by country basis, its very very different it's characterized by local providers. It's characterized by country specific providers and as result of clinicians lab software. It's not just we highlighted the U K winds of strength in this quarter, but they've just been doing a great job Pan European and.
In France, and Benelux emerging.
Of the presence in Germany.
Bought a small business last year in Spain to be able to consolidate the laboratory infrastructure across Europe. Each of the countries in their own way are going through a laboratory consolidation in a way to save money for the health system itself and we being the basically the only scaled provider that would demonstrate the demonstrable success.
At scale of being on the wind market share of meaningful clip there.
And just so I understand but what gives you confidence that sort of like integration of lab with the broader hospital systems, it's not something that's a near term threat to the business. Yes, I think it's essentially you need the way that for instance, the primary competitor.
Of the U S debt epic Epic for instance is basically doesn't have a presence in Europe and when they do it's a it's a country.
Specific presence they might be a very small country or small region of our country and it sort of isolated there given that it's a country specific.
The decision process and also there just isn't that.
Of that competitive activity just isn't there.
Yes.
Our next question comes from Blake Gendron from Wolfe Research. Please go ahead.
Thanks, Good morning for.
First question on free cash flow the conversion from EBITDA has been extreme exceedingly strong over the last several quarters.
Of the already strong margins.
How should we think about conversion moving forward through the year relative to what you accomplished in <unk> and <unk> I would imagine the recovery of non recurring software is helping the working capital profile. So really just wondering how sustainable that trend is as you know the recovery of kind of moderate through the year.
Sure. So I think so in the first quarter right. There is no federal tax payments. So that's always the high cash conversion quarter.
That normalizes more of when we make the.
Art, making federal payments in Q2.
But really as I mentioned, a little bit earlier, I mean, it's great growth from the software businesses. They have negative working capital and therefore, the cash performance is very strong the more software growth you have your drive working capital further negative it's very structural part of the model high.
High conversion is embedded in everything that we do so we expect that free cash flow conversion of continuing to get better over time as we've as we've improved the quality of our portfolio. So.
We feel good about the rest of the year and continue to have high cash conversion and in continuing that double digit cash flow compounding that we all expect to achieve.
Excellent just wanted to circle back on M&A, So plenty of puts and takes the potential U S tax <unk>.
Increases in yields moving higher I'm wondering if you could help us think about these inputs in the context of historical private software pricing of the pipeline you know some of these changes come through taxes rise.
<unk>, how would you expect asset pricing.
<unk> evolve or how has it evolved in the past I think we've discussed this before.
It being a net positive for the Robert.
Yes, we certainly ability of the imbalance thats the case so.
Well, obviously with taxes.
Down.
Rates are sort of the private prices went up a touch I think the it was 14 times 15 times for Deltak in 16 times for a power plant and that really the only difference in the market. There was the tax change. So that gives you a sense of the order of magnitude maybe of a couple of turns but it depends on what the magnitude of the tax changes relative to interest.
Rates going up we think that does greatly benefit us in the compounding model.
If you think of as interest rates go up we're competing against private equity firms, who have a levered. The acquisition model. So as interest rates go up the amount of leverage they can put on the transaction goes down and subsequently the total equity that they put into a deal goes down in multiples compress.
So with interest rates going up I think than what you see converts the of Texas.
And then in our case the majority of our acquisition proceeds come from our cash that we generate and so were relatively insensitive to interest rate or our competitors for acquisitions or so in the long arc of time, that's a good thing for us.
The next question comes from Steve Tusa from Jpmorgan. Please go ahead.
Guys good morning good.
Good morning, Steve Thanks for joining us.
Thanks for thanks for having me.
Can you just just to clarify on the answer before.
Before on kind.
Of the degree of leverage you're comfortable with before doing a new deal.
Is kind of.
The three times.
A bit of a line in the sand, there, where you would get back down to <unk>.
Below that before doing another deal or maybe just talk about kind of that three times level and.
How that kind of plays into your thoughts, yes, sure I Wouldnt say, all I understand I think once you get into the rollout of threes.
That certainly it's more reasonable.
The we spent a lot of time with the rating agencies. When we did our last couple of acquisitions I think they understand the high quality of the cash flow that we have and are incredibly high cash conversion and so it's really about how good our business model is how fast we can pay down any leverage that we put on the business I think we've demonstrated that time and time again, we can do it pretty quickly.
So once we get into the low threes on it and I think we have the ability to deploy.
Deploy capital.
Okay, Great and then and then just just lastly, when you kind of look out to next year.
Are there any.
You know youre, obviously, not going to have any deals here at least in the near term but are there any.
Moving parts of items.
From a headwinds perspective, whether it's the vertical of tax benefit.
For some of these sunquest deals around COVID-19, how do those play out for next year do they generally offset or the offset by growth.
The other businesses, maybe if there's anything mechanical the kind of happens next year that you want to call out.
Let me let me just hit a couple of things and then I think Neil wants to add all of them, but yes, youre right theres, the $100 million plus tax benefit around vertical for the we talked about that will hit throughout Q2 through Q4, we did not benefit from that in the first quarter.
And then there was about $60 million or sale of the payroll tax deferral, which is a bad guy this year for the rest of the year and that was part of the COVID-19 rules that you can defer some of those payments and theres always going be pluses and minuses in sort of that part of the world, but I'll, let neel talk about some of the growth.
Well I think it's always appreciate it in a quarter that we have here you highlight the headwinds going into next year, Steve. So we appreciate that but in the general matter a year or two out of the pandemic should be pretty good.
Okay.
The next question comes from Alex Blanton from clear Harbor asset management. Please go ahead.
Hi.
Hi, good morning congratulations.
The quarter and it looks like Youre going to have a very good year.
<unk>.
I just wanted to comment that still kind of been seven analysts in every one of them has been cut off.
Before they finished with the second question.
None of them said thank you.
And I'd like to ask the moderator to please stop doing that because of that is really not a very good way to conduct the call you need the allow dialogue with the management of.
On the second question don't cut people off before they say thank you let them finish please.
I wanted to ask about the.
The backlog of of.
<unk>.
That you mentioned that you might get back to them.
Accessing it at the end of the year.
As you start to deploy capital.
Could you just elaborate little more on.
The nature of that pipeline.
The size of the company's debt in there.
Because as you get bigger.
So obviously.
Important to find bigger and bigger companies in order to keep to.
The growth rate constant.
So could you just give us a little bit on that and.
Perhaps.
Yeah.
Characterize the kinds of markets those companies are in that Youre looking at in the pipeline.
Alex It's Neil here I appreciate the question and I appreciate your opening comments the.
Let me, let me give you a broader view to the to your question first.
Sure.
Active now with.
Our M&A pipeline is.
Is that we are and we're meeting with companies is that every company of size that we bought from 2016 forward. We've met with roughly nine to 12 months at the earliest at a minimum before buying the company. So we're establishing relationship getting of that other the management team getting to know the business.
And then sort of if you will have a have a running start when the business actually comes for sale. So we're active in the work. We're doing now is going to pay dividends 912, 18 months from now in terms of deploying capital and our ability to do that in companies that are of a high level of conviction and to your question about doing bigger and bigger deals I would beg to differ with that.
A little bit when you look at our model over the next seven years, we have to deploy somewhere on a run rate basis, two to $2 $5 billion of year based on our cash flow and the leverage profile that we just talked about.
And in doing so when youre looking at the types of businesses that we look to buy.
Small market vertically focused leading.
Software type of software type business models.
The sweet spot and that is going to be somewhere in the <unk>.
752, 1 billion of half range and so we're talking about doing a couple ish deals a year and then we'll always do a small number of tuck ins or bolt ons to the existing portfolio. So I think we can.
For the next seven years on a per year basis, we don't have to do bigger and bigger deals to keep the growth rate at the sustained them.
Double digit rate.
Would you say that these companies are.
The margins and the cash flow of the EBITDA and so on.
Such that the.
That you can.
Keep increasing.
Those are.
Those are the metrics like EBITDA margin.
Operating margin.
Gross margin.
You have done for many many years.
By buying companies that have.
Margin centenary above the corporate.
Average can you keep doing that.
I think so the answer to that is yes, Alex so it's really about.
The target of the businesses that we target businesses that have higher organic growth in Roper has historically businesses that have very good margins often better than roper at least at the same level now that we've improved ours over over many many years and then we buy those businesses as they grow we hope we hope we believe we can make them better they accelerate growth they generate more cash than you.
This compounding effect and so it's really the same strategy that I appreciate you've followed us for a long time, we've had for for over a decade now and it's the good news is as you get more and more into software and these types of opportunities, we find more and more companies that fit that model that will allow us to continue to improve all of those metrics for many many more years to come.
Right well this has been the the company strategy since I started following a 1992 when you went public.
Yes.
It's been of Great alright. Thank you very much. Thank you. Thank you Alex.
Next question comes from Richard Eastman from Robert W. Baird. Please go ahead.
Yes good.
Good morning, and thank you.
Hi, Richard.
Yes, good morning.
A question or two around the application software business and when we look at the lab software business as part of the in aggregate of around <unk> and Sunquest.
You spoke of nicely about <unk> share gains in Europe, and the and the rationale for that could you just talk a little bit of maybe characterize the U S business around the sunquest.
As sunquest share stabilized and maybe post COVID-19, what does the recovery environment look like for Sunquest domestically.
So sunquest.
I mean, there of benefit and let's also let me back up let's not say mentioned two companies <unk> and Sunquest. We ought to include a third of which is data innovations, which is the middleware business they've there theyre very global business, but they are domiciled in the U S. But specific to your question about Sunquest the U S Laboratory business.
They were benefited last year and in this quarter with the COVID-19 tailwind standing up.
The COVID-19 testing.
They continue to invest in there and their public health.
Offering and their molecular offering.
The leadership team's done a nice job on that so that's good news the unfortunate part of the of that news as it just delayed the bottoming of this business, which we thought was going to be this year ish. If it werent for COVID-19 now, it's going to be pushed out a year or two before that business sort of gets to all of the known attrition and then as baselines from which it can grow from.
Okay.
Much of that lab software business now is is domestic when you put those three businesses together clinics to suncor Sunquest and day to innovation, how much is domestic versus international is it of I'm going to let Rob take a take a look at us we might have to get back yes, I'd like to circle back.
It's approaching probably 50 50.
Given the growth in the clinic. This business. The fact, the di business is very global and the Sunquest businesses, mostly U S. So as the group, it's probably about half I understand and then just for just a follow up question around measurement analytical and the process businesses could you just talk about pricing. There I know you usually allow your gms to to price according to.
Margin targets and things, but can you talk about price and how proactive.
<unk> been able to be on the on the M&A business as well as M&A as in measurement and analytical and the processing.
Yes, I think the characteristics of these businesses is the ballroom for businesses as they price based on the value is created.
Example, there is in our handset business, where they have a couple of innovations and theyre in the refrigeration valve business product line with coatings and some some sensors to allow us to identify clearly win when it's been triggered.
Very low cost increase the bill of materials that massive increase of value. So we've seen very nice price increases on situations like that on a like for like basis. It's of the businesses are agile they've been very good at being able to push through.
Any increase to the bill of materials because of the supply chain and otherwise taking normal price.
Okay, Alright, well. Thank you. Thank you.
This concludes our question and answer session. We will now turn return back to Zack Moxie for any closing remarks.
Thank you everyone for joining us today, we look forward to speaking with you during the next earnings call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
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