Q3 2021 Roper Technologies Inc Earnings Call
Good morning, the Roper Technologies' conference call will now begin.
Today's call is being recorded.
Participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
I would now like to turn the call over to Zach Moxie, Vice President Investor Relations. Please go ahead.
Good morning, and thank you all for joining us as we discuss.
Order 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 Shannon O'callaghan, Vice President of Finance earlier. This morning, we issued a press release announcing our financial results. The press release also includes replay.
The third 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'll 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.
During and subsequent to the third quarter Roper signed definitive agreements to divest its transport the tact and Simco radiotherapy businesses.
Results for these businesses are reported as discontinued operations for all periods presented unless otherwise noted the numbers shown in this presentation are on a continuing operations basis.
For the third quarter the difference between our GAAP results and adjusted results consists of the following items.
Amortization of acquisition related intangible assets purchase accounting.
It's to commission expense and lastly income tax restructuring associated with our pending divestitures reconciliations.
The reconciliations can be found in our press release and in the appendix of this presentation on our website.
And now if you'll please turn to slide four I will hand, the call over to Neal after our prepared remarks, we will take questions from our telephone participants Neil.
Zack and good morning, everyone. Thanks for joining us.
We're looking forward to sharing with you the details of our solid quarter performance as well as summarizing the acceleration of our portfolio transformation.
As we look at the sequence of our call. This morning will start with our quarterly highlights and our recent divestiture activity.
I'll then turn the call.
<unk>, Rob who will share the details of our financial performance and our bridge to continued operations.
I'll, then walk everyone through our segment by segment performance and our outlook for the balance of the year.
As usual, we'll leave plenty of time to talk to you all of your questions towards yet.
Next slide please.
Call over turn to page five this was another quarter of solid operational and excellent financial performance.
On a continuing ops basis, we grew revenue EBITDA and depths north of 20% in the quarter.
It is important to highlight and characterize the underlying strength of these results.
Revenue on.
As we panic basis grew 12% in the quarter.
And the market and customer demand was very strong across our portfolio within both our software and product businesses.
Shortly our software segments were strong operationally with 10% growth in one segment and 17% in the other.
Our.
And in our gear business is recurring revenue grew low double digits in the quarter, highlighting the underlying strength stability and increasing quality of our revenue base to remind everyone about 80% of our software revenues are recurring in nature.
It's also worth noting that our 2020 acquisition cohort led by <unk>.
Our soft tenuous to perform very well.
As it relates to our product businesses like most other companies, we are experiencing supply chain and logistical challenges, but the business is nevertheless performed very well during the third quarter.
As mentioned customer demand was very strong throughout the quarter and backlog.
<unk> are up over 50% versus last year.
Given this strong operational performance, we continued our disciplined deleveraging of our balance sheet with net debt at three five times trailing EBITDA.
Also we are improving the outlook for the year, which we will detail later on the call.
Backlog earlier this morning, we announced two new additions to our board of directors, Irina <unk> and Tom Joyce. The addition of Irene and Tom to our board as part of our long term board refreshment process.
Our tremendous additions to our board.
Finally, we've been active over the last few months working to access.
The transformation of our portfolio through the announced divestiture of three businesses, let's turn to the next slide page six to walk through those details and highlights.
Next slide please.
During the last several weeks, we entered into definitive agreements to divest three of our businesses.
Solar and score Z Tech and Sip Sip co radiotherapy, the last of which we announced this morning.
We agreed to divest trans core to S. T engineering for $2 68 billion in.
In our view this is the right time and the right buyer for Trans core given their forward strategy and growth outlook.
Look taken together we are divesting. These three businesses for 315 billion or about 20 times This year's EBITDA.
Following the completion of these deals Roper will be improved.
We will have a higher quality portfolio characterized by having higher proportion of recurring revenue.
A <unk>.
For Gannett growth profile and be significantly more asset light.
Finally, we are and we'll be very active in deploying these after tax proceeds.
Together with our internally generated cash flow, we will have about <unk> 5 billion of available M&A firepower to deploy.
Higher between now and the end of 2022, none of which is included in our current financial outlook.
Our enterprise will be even further enhanced once we complete this activity.
Before I turn it over to Rob I wanted to take a moment and highlight <unk> ability to govern build and improve businesses over.
But in term.
As part of these transactions, we are retaining our <unk> and load link network software businesses, which are purchased together with trans core in 2004, and we're retaining our SIFCO medical solutions business.
Given we do not usually get clean book ins to transaction activity.
<unk> provides a unique opportunity to talk about the business buildings that occurs within Roper.
Specifically just after the acquisition of Trans core we established <unk> in loan linked as Standalone businesses with independent strategies. The management teams, who operated within brokerage governance and incentive system.
Over the course of the last 15 years. These businesses have consolidated freight networks continuously innovate their product solutions.
Built go to market capability and grown revenues high single digits on a compounded organic basis.
Similarly, the retained <unk> medical solutions.
This has grown high single digits on an organic basis over the last 15 years as well.
During this period of time, Cisco Medical solutions has continually innovated their product solutions, including the recent gel free ultrasound products and fundamentally restructured their go to market strategy.
Net roper.
<unk>, great businesses and provide an environment, an incentive system, where they get even better over the long arc of time.
Now, let me turn it over to Rob to walk through the details of our financial performance.
Thanks, Neil Good morning, everyone turning to page seven on this page we will review some Q3.
<unk> metrics on a basis that includes the discontinued operations in order to compare our Q3 results to our previous guidance on an apples to apples basis and.
Including the business is now classified as discontinued operations, we generated one $6 billion to $1 billion of revenue and.
$602 million of EBITDA total depth was $3 91.
Which exceeded our Q3 depth guidance of $3 80 to $3 84 free cash flow for the quarter was $431 million down 2% versus prior year year to date free cash flow is now up 29%.
<unk> finding three quarters now turning to page eight here, we will review some of the key income statement metrics on a continuing operations basis.
Revenue increased 22% to 146 3 billion Q2 organic revenue increased 12% with strong growth across all four reporting.
<unk> led by 17% organic growth in our network software segment.
EBITDA increased 21% to $558 million net earnings grew 24% to $384 million and depth also grew 24% to $3 60.
Next slide turning.
<unk> nine.
This slide will update you on the latest installment in our successful deleveraging story year to date, we have reduced our net debt by nearly $1 3 billion and our total debt reduction is now $1 8 billion since completing the last of the 2020 acquisitions approximately one year.
Turning to page, we continue to benefit from our excellent cash conversion as the nearly $2 3 billion of total EBITDA, we generated over the last four quarters has converted to $194 billion of free cash flow, representing EBITDA to free cash flow conversion of 85%.
At the end of September our net debt to EBITDA.
Gov has decreased to three five we are on track to be near three times by the end of 2021, and therefore, well positioned to return to capital deployment, even before accounting for the divestitures. The proceeds from the divestitures further amplify our capacity was $5 billion plus available for deployment through 2020.
EBITDA as Neil highlighted earlier next slide moving now to page 10, a quick look here at how the divestitures meaningfully improve our working capital position moving forward. This page repeat the working capital numbers. We showed last October and adds a Q3 'twenty one column that shows the enterprise, including.
<unk> the removal of the three businesses being divested we are now at negative 12% net working capital to revenue compared to negative 6% in the same quarter last year and negative 3% back in Q3, 2019, divesting Trans score reduces our net working capital by approximately $200 million.
<unk> the majority coming out of our Unbilled receivables balance this structurally lower net working capital positions us very well for continued high cash conversion moving forward, so with that I'll turn it back over to Neil to cover the segments.
Thanks, Rob, let's turn to page 12, and walk through our application software segment.
With revenues in this segment were $603 million up 10% on an organic basis EBITDA margins were 44, 4% in the quarter.
Across the segment, we saw organic recurring revenue, which is a touch north of 75% of the revenue for this segment increased approximately 10%.
Recurring revenue strength is based on strong customer retention and continued migration to our SaaS delivery models cross selling activity and new customer adds.
Across this group of companies the financial strength was broad to highlight a few businesses Deltec our enterprise software business that serves the U S federal contract.
This latter architect engineering and other services end markets had another good quarter during the quarter demand was particularly strong in enterprise Gov Con and construction end markets importantly, during the quarter <unk> also had success at the top end of the market with their cloud or SaaS solutions.
Contract vertical for our agency management cloud software business focused on P&C insurance agencies also had a nice quarter with very strong new bookings and nice expansion activity in some of their largest customers.
At <unk>, our legal software business continues its momentum and market share gains as we've talked.
Talked about last quarter at or it is gaining momentum for their SaaS solutions this quarter setting a record for SaaS bookings activity.
Consistent with the theme of this segment power plan was strong as well both in terms of new bookings and adds to the recurring revenue base.
It's nice to see power plants <unk>.
Focus strategy start to pay dividends.
As it relates to our healthcare it businesses strata data innovations and <unk> were rock solid in the quarter for strata their recurring subscription based software solutions continue to perform well and grow nicely.
Stratus integration of ETS.
Psi is on track and nearly complete.
The customer base continues to demonstrate excitement for this combination finally <unk> continues to gain market share in the UK lab market and has been established as one of the four strategic partners for the NHS.
As we turn to the outlook for the fourth.
We expect organic recurring excuse me, we expect organic revenue growth to be similar to that of the third quarter as recurring revenue growth rates are expected to remain strong.
A solid quarter here for sure and with that let's turn to the next slide.
Turning to page 13.
Fourth quarter performance for this segment as well as the next to MFS and PT are shown on a continuing ops basis.
Revenues in our network segment or $343 million up 17% on organic basis, and EBITDA margins remained very strong at 51, 6% in the quarter.
The <unk> the software businesses in this segment are now greater than 90% of the segment's revenue.
Our NSS software growth was broad based and driven by organic recurring revenue growth of approximately 17%.
At the business level, our freight match businesses, both in the U S and Canada continue.
It will be solid growers.
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 have been on both sides of the network brokers and carriers with continued strength in the quarter on the carrier side of.
The network.
In addition, these businesses had improving revenue per customer or <unk> as the value of the network continues to increase with higher levels of network activity.
Foundry, our media and entertainment software business, which enables the combination of live action and computer generated graphics to be combined.
Bind into a single frame demonstrated continued recovery and growth in the quarter worth pointing out as strategies continued commitment to product innovation and the recent release of their AI enabled new features that allow for more automated workflow steps within the video Compositing process.
Our business.
Is that focused in and around the U S long term care markets, MH, SHP and soft writers did particularly well in the quarter.
<unk> network are perishable food supply chain network business had a nice quarter as bookings growth was very strong and demonstrates a solid recovery in their end markets.
Finally, we saw growth across the two product businesses within this segment RFID is an antibiotic with particular strength and our health care end markets.
As we look to the fourth quarter outlook, we expect to see low double digit growth in this segment again on a continuing ops basis.
Please turn to the next slide.
As we turn to page 14 revenue in our EMS segment were $392 million up 9% on an organic basis organic growth in this segment, excluding verathon was again north of 20%.
Notably this is the last quarter for the very difficult Verathon COVID-19.
Comp and we expect Verathon to return to growth in Q4.
EBITDA margins for this segment were 32, 4% in the quarter. The EBITDA margins in this segment were consistent with our expectations, but lower than prior year due to the verathon as extraordinary prior year quarter and the cost impacts of certain businesses.
Does navigating their supply chain challenges again. These results are on a continuing ops basis.
Before getting into business specific details across this segment demand can be characterized as being very strong the demand was across all businesses and across both capital and consumable products product back.
Slots are up over 50% as compared to a year ago, our businesses each of which were impacted by supply chain challenges navigated through the quarter.
As it relates to individual business performance verathon coming off unprecedented demand for their intubation family of products a year ago is roughly.
Back, 40% larger today versus 2019.
The momentum within this business continues given the larger installed base of intubation capital equipment, which enables recurring consumable pull through volumes.
In addition, verathon is experiencing impressive growth when theyre bronchoscope product family.
And sustained growth across our bladder scan ultrasound franchise.
Our other medical product businesses accelerated nicely in the quarter with particular strength that MDI and Cisco medical solutions.
Strong demand at Neptune continued in the quarter Neptunes end markets continue to open.
We fully unapproved, but have not fully recovered, especially in the northeast U S and Canada.
Demand across our industrial businesses was robust as well and performance was strong but somewhat impacted by supply chain challenges.
For the fourth quarter, we expect low double digit organic growth for this segment. This is based.
Open up continued encouraging market conditions, both in medical and industrial markets and easing prior year comps for Verathon.
Now, let's turn to our final segment process Tech.
As we turn to page 15 revenues in our process Tech segment were $124 million up 16% on organic basis.
On EBITDA margins were 31, 6% in the quarter. These.
These results are also reported on a continuing ops basis.
The short story here is we are seeing improving end market conditions across virtually every one of our businesses in this segment and strong demand.
Both orders and backlog were up approximately 50%.
<unk> for the quarter versus a year ago.
Recovery in our upstream oil and gas business has accelerated in the quarter.
Cornell continues to perform well for US. This is particularly part Skus me. This is partially based on market conditions, but also based on Cornell's product innovation as they're seeing very nice demand pick up further.
Percent in Ot connected pumping solutions.
Similar to that of our industrial businesses. The businesses. In this segment are being impacted by supply chain challenges, but continue to navigate through these issues.
As we turn to the outlook for the fourth quarter, we expect high teens organic growth based on improving market conditions.
Now please turn to page 17, where I'll highlight our increased outlook for 2021.
Based on strong year to date performance and expected continued momentum we are establishing full year 2021 guidance on a continuing ops basis of $14 eight to $14 12.
As you read down this table you will note that the full year depths impacts for the business is being divested as a $1 18.
If you combine this with our newly established continuing ops guidance Youll.
You will note we are raising our full year outlook on an apples to apples basis by 26 cents in the low end and 10.
Items.
As it relates to the fourth quarter, we're establishing again on a continuing ops basis guidance in the range of $3 62, and $3 66.
Now, let's turn to our summary, and get to your questions.
As we turn to page 18 in our closing summary, our third quarter was a solid quarter from.
From both an operational and financial perspective.
Simultaneously, we undertook significant work to further the transformation of our business portfolio.
Revenue EBITDA and depths grew 20% plus organic revenue was up 12%.
Across our enterprise end market and customer demand was.
On the wrong in terms of software product capital items and consumables.
The quarter are product businesses navigated through the market based supply chain challenges.
Given all of this we're able to increase on an apples to apples basis, our outlook for the full year.
We also continued to deleverage our balance sheet.
Was <unk>, one 8 billion since the 2020 acquisitions.
With net leverage now coming in at three five times trailing EBITDA.
As it relates to the strategic governance of our enterprise. We're excited to be announcing the addition of Irene and Tom as new members of our board of directors as part of our long term board refreshment strategy.
Two new directors will complement our existing directors and help enable roeper to continue our track record of long term cash flow compounding.
Over the last decade, we have worked to enhance the quality of our portfolio to this and recently, we took actions to meaningfully improve the quality of our portfolio by.
By agreeing to divest trans score vitek and SIFCO radiotherapy.
Once complete Roper will be a better version of Roper will have higher proportion of recurring revenue higher organic growth prospects and be significantly more asset light.
In addition, we expect to have roughly <unk> 5 billion.
E D.
Capital available to deploy as we now and the end of 2022.
And as it relates to our M&A pipeline is and always has been characterized as having many high quality opportunities. So we're clear we are 100% back on offense when it comes to our capital deployment portion of our strategy and have.
Zoomed, our usual process oriented and disciplined M&A activities and with that let's open it up to your questions.
We will now go to a question and answer portion of the call we.
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Our first question is from Deane Dray from RBC capital markets. Please go ahead.
Thank you and good morning, everyone.
Hey, good morning, Deane good morning.
Look.
Look at free cash flow organic revenue growth recurring revenue everything checks the boxes and theres a lot of moving parts. This.
I really appreciate all the reconciliation of previous guidance versus.
Revised.
With the divestitures. So yeah, just set that aside and the first question I wanted to ask is for Neil to help put in context. These recent portfolio moves and I don't want to parse your words, but.
This quarter the slides is accelerating our portfolio transformation.
Youre not saying optimize.
Trimming at the edges, but you are making some sizeable moves here and in our cluster and it just begs the question.
What is the strategic transformation is it more just making role for a better Roper.
But is there a more sizeable change in portfolio composition coming and what the timing might be.
I'll start that yes, thanks, Deane, So hey, it's all about Rover being a better version of ourselves in our strategy as you know and most people listening, though for the last 20 years has been fundamental fundamentally based on.
On the quality of our enterprise historically, that's been characterized as being more asset light or recently, it's not just that but increasing mix towards recurring revenue, increasing our mix towards higher slightly higher ganic growth businesses.
So that strategy has been in place and we will remain in place nothing has changed.
Improving our relative to the these three transactions is really a result of these three or result of really two different decisions <unk> was really an opportunistic situation with a strategic buyer who offered a compelling price and it was just made sense in our view for our shareholders.
There to let that go to that buyer and reduce a little bit of cyclicality and exposure to those high tech end markets as it relates to the SIFCO radiotherapy and trans core those were while they are independent decisions as a result of a single process, which was our sort of our new and revised sort of deep strategic review of.
All the businesses.
We do this with each business on a rolling three year basis.
The Cisco radiotherapy and Trans core reviews were late last year early this year and we just felt given their future growth prospects, which are interesting and likely a robust but also capital intensive.
In both cases, we're going to just be a sub optimize was us as an owner you overlay that where the valuations will get for the businesses. You know the three together roughly 20 times. This year. It just made sense from all vectors for us.
Is there just to circle back.
For the timing.
All in just like what's ahead.
How far down the road are you on this optimization are there other bigger pieces coming what kind of timing should we expect I think the.
Again, it's I wouldn't I would call it the acceleration of the transformation of transformation has been slow and evolution.
Illusionary over 20 years as we've gone from 40% cyclical to now 10, or 15% cyclical going from more asset intensive less asset intensive gone from products and software I mean, this has been an evolutionary approach in and we expect that to continue got it well just I.
Really appreciate the specifics you provided.
Each one of these divestitures makes sense you are getting good valuation for them. So.
Kudos to you guys.
And then the second question and this feels more like something that would ask at an analyst day, but just jumped off the page here on your board additions today.
Adding.
Tom Joyce from Danaher, Irene from CFO of time Warner.
I've presented to your board last November I've got appreciation for how high powered the group already has and how hands on they are.
Talk about the partnership with the board that dynamics, especially at this stage of the evolution of the portfolio.
And what were the priorities for the board is and are at this time.
The opportunity any opportunity to talk about our board because it is absolutely and undeniably a strategic.
Asset for our business the board, we highly engaged with five times a year three days each time so.
<unk> worked hard.
They enjoy working hard.
Born in that amount of time that we spend it's not just a series of presentations. There is space to have conversation deliberation challenge one another and then form a point of view on the forward direction of our enterprise highly collaborative group, but one where people express.
Their points of view open and freely.
So it's a great environment also is in governance, yeah, Theres, a refreshment process that goes with that.
Board Chair that became the board chair it Brian.
Passing.
<unk>, just aged off the board and so we have a.
Sort of that requirement to refresh the board and we're super fortunate to have Irene and Tom join Us Irene.
I renal bring just a tremendous she is most recently professionally as a executive at time, Warner, but a long track record and financial institutions, just are very astute and financially savvy executive understands risk and risk management.
And it's also a very experienced board member at this stage in our career Tom This will be his first public outside public company Board.
Everybody here listening knows Tom very well, but just the combination of what he has done his 30 year career at Danaher combination of business building and capital deployment leader development.
<unk>.
Core to what we're all about and I think both will just bring tremendous new thoughts to our boardroom as we continued to evolve and build our business.
Our next question comes from Allison <unk> from Wells Fargo. Please go ahead.
Good morning, guys.
Yeah.
Just wanted to talk the Cri metric you know obviously core to your M&A strategy and I suspect going forward, but you know some of that asset intensive business coming out you know elevating Roberto and Cri I.
I guess one is that is it more challenging in terms of pool of potential properties that you want to acquire.
And just.
Any thoughts on does that CRA metric related to real pretend to ship going forward just any color there.
Yes cash return for US is our North star right. It is how we not just you don't it's just not only guides our capital deployment strategy guides.
Every operational decision and the business that defines for us.
Maybe a good organic growth versus just growth at any cost right is how do you.
Cri for those that aren't intimate with it is really just a measure of business quality do you have.
A cash flow relationship with your customer if you will we're able to provide value capture.
Value for that and have an underlying business model that doesn't require a lot of assets to deliver that value. That's what cash return is it is our north star will continue to be our North Star is just it's core to our culture here Allison in terms of your question around the number of targets.
Yes.
Mathematically, yes, it's the number of targets or fewer.
For us we're looking to buy companies that are have cri that are higher than our existing but it's not it's not a limiter to our strategy right. There is a vast ocean of software informatics data enabled business models that are out there that we've been fishing in for the last 10 years and it's not a practical practical constraint for our capital deployment strategy.
Got it that's helpful. And then just a quick question on measurement and analytical solutions.
Core without Verathon, obviously up 20% plus but then you talked about EBITDA some headwinds there one being verathon, but the other being supply chains is that just a headwind in terms of growth is it cost you can't pass through just any incremental color.
Help me reconcile that.
I'll start and I'll pass over to Rob and so first I would say our business is more broadly like most businesses maybe around the world certainly as country of over the last 20 years have built their supply chain.
For optimize on the lowest cost and less so on resiliency.
A nice thing that our businesses did.
There are a couple of years ago is build some resiliency with the China sort of tariff situations. So that was a precursor that helped us a bit for us relative to the headwinds. Yes. It was growth was limited a bit certainly across all of our product businesses.
And then also the choice that our business is made when there is an opportunity to.
Start expedite apart or go into a spot market or an alternative source for apart and pay incrementally a bit more they did that and so there's a little bit of gross margin headwind hard to notice in a macro sense, but a little bit of headwind on GP percentage and then certainly some impact on the revenue side, Rob anything you want to add about.
About <unk>.
You either.
MS segment, or the industrial businesses and so that's where you see some of this and I think we mentioned earlier that backlog is up 50%. So that we are we have great orders and that bodes well for the future, but yes, I think I think what Neil said there is spot on.
Great. Thank you.
Okay.
The next question is from Julian Mitchell from Barclays. Please go ahead.
Hey, Good morning. This is Trish Gorman on for Julian just maybe following up on that last question regarding the supply chain constraints.
Can you just talk more about what your assumptions are kind of embedded in for guidance for when those might ease.
Okay.
Yes.
Yes, so we're not expecting that they're going to he's really anytime soon so we're expecting what we saw in the third quarter similar to what we'll see in the fourth quarter and then as we get into next year, we'll update that next quarter, but we're continuing to build backlog customer relationships are great as Neil said, we're expediting wherever we can.
Because the customers and so I think I think long term, it's a great story short term, it's hard to say what's going to happen.
Got it. Thank you that's helpful. And then just maybe a follow up kind of broader.
We've been seeing industrial companies paying kind of anywhere from 30 to 100 times EBITDA for software asset count and so does Roper think it will have to pay this kind of price too.
You can still buy software assets for 20 times EBITDA or less as it did with three to four.
Yeah I appreciate the question certainly valuations for higher quality software businesses are high they've been high for a while they remain high.
It's I think I said, a couple of quarters ago. It feels like this there may be stabilizing at a level.
Sure.
I think that's still maybe the case, but that level is very high.
That said Roper buys businesses that are tried and true.
The competitive forces in the market are observable the market growth is concerned is observable.
Forward growth outlook is diligence village.
Level of the bowl and understandable on the growth drivers can be clear.
<unk> modeled when you get those businesses that are in small markets that are leaders that have mid to high single digit organic growth in our 30% to 40% plus EBITDA margin business as those trade and that we call. It circa 20 times, maybe 18, maybe 'twenty two.
Diligent, they're sort of in that zone.
And that's why we think that will continue to play in focus.
Great. Thanks.
Next question comes from Christopher Glynn from Oppenheimer. Please go ahead.
Yes, thanks, good morning.
So given the.
But that the number of targets is.
Not a practical constraints I appreciate repeating that which we've heard previously.
I'm wondering if the expectation is actually to leave.
Just replace the divested earnings and EBIT in fairly short order.
Can you under head of receiving those proceeds in terms of youre in negotiations with agencies and such.
Yes. So appreciate the question. So first when we said it in the prepared remarks is on the slides is worth mentioning we take the proceeds from these two transactions added to our cash flow were.
And beating in our current balance sheet leverage there's about $5 billion of M&A firepower between now and the end of next year. So that's all good the balance sheet is in good shape, whereas we mentioned, we're super Super active in the M&A markets, but we.
We always have been and always will be patient and disciplined right. I mean this is every deal matters.
Generally buying these businesses with with the very long term in mind to never sell them. So you have to buy the very best asked that you can find and sometimes that takes time. So I'm not we're sort of putting out this mathematical marker of 5 billion, but I would not associate any specific timeframe with that is just where the patient.
<unk> disciplined focused but active in the M&A market and I would say, we do have flexibility in terms of the timing on when that capital is deployed I don't think you have to wait for the proceeds to come in the door, but as Neil said, we're going to be very very disciplined and we don't feel like we're rush in any way.
Okay.
Just wanted to dive into the.
The backlog up 50% plus.
Emma.
EMEA segment.
Curious the play of medical versus industrial.
How verathon factors into it.
So it was the backlog were up over 50% in both MAA S&P T.
Certainly turn it over to Rob here in a second but the backlog was strong at medical products Verathon Northern digital NOI. It was strong at Neptune and was strong in industrial so it's very broad based it really is across all the businesses and again that that's getting a lot of orders in and then and then being able to get the products out the door.
Okay last one.
Any estimate on the after tax.
And impact of the $3 5 billion.
Yeah, I think we want to wait until we get the deals closed to comment on that I mean, there certainly will be some tax leakage.
But we'd rather wait until till next year, we get the deals closed and then we can give you a good number.
Thanks, guys.
For me.
Next question comes from Joe Giordano from Cowen. Please go ahead.
Hey, good morning, guys.
Good morning, Joe.
So.
Does this mean that we're not going to be able to ask you guys about New York City deal.
Okay.
You can add.
We're under we're under contract did not disclose a lot of details about that going forward.
Will be sadly missed.
Yes, I just wanted to ask on on Neptune.
A lot of like kind of.
Different things being set out.
In that market.
Can you talk about where that business.
Is this year like is that business growing this year, though down how much did it declined last year, just kind of curious to see.
What's really going on in that metering market right now yeah. So I'll give you a little bit of color and turn it over to Rob So for Neptune This year will be like.
Out there and really close to 19, just from a size perspective, but absolutely is growing this year.
In the very short term, we're actually we believe it's hard to measure in the very short term, but the reports from the company Neptune as we picked up a little bit of market share this quarter, because we were able to deliver product.
On a much shorter lead time than some of the people we compete.
Rick.
The thing about the market itself the markets are opening but nowhere close to fully recovered, especially in Canada and less so but certainly not opened in the northeast United States and the U S. Northeast final thing I'd say about Neptune is the strategy.
With her is I mean.
It was very clear and it appears to be working if you will having traction around the strategy on the product with the static meter products that were introduced to the market. The way we read the data off the meter and importantly, now the software and analytics that play that Neptune is developing.
Here, we do with all that data once you captured off the meter at a more frequent basis. So the strategy is certainly got traction in the marketplace and the business is growing and they have record levels of backlog as we sit here at the end of the quarter.
Can you just remind me how much of the product that <unk> you guys manufacturing in house and how much is contract.
Actually.
And around what in house I mean, certainly there's it's a supply chain and there are certain pieces that come but between the two facilities in Neptune.
It's a vertically integrated business.
And then my last question and I promised next quarter I'll ask software question.
But the process got it.
All it is that I mean, it's slightly less.
Growth expectation than previous is that just supply chain limiting your ability to deliver or has the market changed at all and you know 100% supply chain related across all the businesses and incrementally the market's more favorable we talked about the backlogs, but obviously you know the us frac market is more.
While energy prices more favorable the project work.
At CCC is going well so yeah, that's all supply chain related.
Okay awesome. Thanks, guys. Thank you.
The next question comes from Jeff Sprague from vertical research. Please go ahead.
Hey, good morning, guys, it's Andrew.
Favorable I'll show on for Jeff how are you.
Good morning.
Yes.
Andrew are you there.
Hey, sorry about that I was on mute. So just firstly you said virtu for was strong in the quarter really good bookings there are you able to quantify that.
Andrew on a sales basis.
Yes.
It's right on track with the.
The numbers that we laid out last year when we when we acquired the business, they're doing very very well.
At the time of the acquisition, we said it was a mid single digit organic grower and it's that's where it is.
Awesome.
Good color.
Growth.
And the other thing I was kind of thinking about measurement and analytical solutions was up 9% organic 20% organic excluding verathon.
We talked a little bit about the growth there and I know revenues significantly above 2019 levels how.
How do we think.
About the growth going into 2022.
Yes.
We'll guide 2022.
And beginning January February when we announce earnings so I think the trends are very very good and all of those businesses, we talked about the movement in marathon.
To these.
To the equipment that has been critical to the Covid fight and now it has become more common and so that leads to consumables and so I think it's a great long term growth story at marathon all those businesses.
But we'll wait till next year to give yet.
Numbers on that.
I would add is we're going to we're going to carry on.
Very high backlog.
Going into next year Theres momentum in demand, we will see to the extent that it's going to we expect that to carry through for the full year, but it will certainly start strong.
Great. Thanks for the color I'll pass the baton on.
Yes.
Our next question comes from Alexander Blanton from clear Harbor asset management. Please.
Backlog hi, good morning.
Morning.
Yeah very interesting quarter.
I wanted to ask about the organic growth.
Yes.
12% average in.
10% for application, 17% for net were 13%.
9%.
Go ahead instrument 16.
16% for processes are numbers that are way above.
Historical rates.
Organic growth for this company.
<unk>.
Its really stunning.
And one comment that I had from our group. This morning was well last year was.
Sure.
So that really won't.
We will continue could you comment on that how much of that growth is just due to a depressed base if any.
<unk>.
Do you expect these kinds of things to continue.
Organic growth rates.
Yes.
Depressed. So these businesses when we acquire them I think we're we're pretty consistent there mid single digit organic growth businesses, sometimes they're high we work hard to get them from mid to high I think if you look at the double digit certainly last year was down low single digits and now we're up double digits and so if you take the sort of the two year run rate year in that mid.
Single digit organic which I think is the natural run rate for those businesses, which we're always looking to accelerate.
Yes, well mid to high single digit as is somewhat above what.
Volker.
Did for many many years, which was more like.
Mid single digits.
Hi Fi.
So there is a there was a pick up.
Yes, Alex.
Anthony I would say a couple of things there I mean, we certainly we're going to carry momentum from this year into next year. So if you just look across the portfolio I think next year.
We haven't done the guidance, yet it'll probably be a little.
The 100 than trend trend that trend sort of mid single digits over a long arc of time next year might be a touch better than that we'll see when we do our guidance next year, but what we're trying to do from an order for three years now as CEO, we've been trying to increase the organic growth rate of this business of the portfolio.
Through a very structured.
Process oriented.
Little bit Bay that focus on strategy and the execution of our strategy and really building.
World Class teams and team effectiveness, and we're sorry to see that sort of work in pockets of the organization Thats a bit more mature. So the final story chapter hasn't been written on that story for US yet it's got another several years to play out, but certainly encouraged by the early signs.
Anthony.
Second question is on the.
I'll go for acquisitions you mentioned.
Robust pipeline in the.
In your release in your earnings release, which was unusually I don't usually comment on the pipeline in that.
Location.
But give us a little more color on that what kind of timing can we look forward should we look for acquisitions right away in the next year or is it going to be later on and so forth.
So I'll give you a very generic answer on the timing which is.
It's the pipeline.
It always has a lot of deals in the pipe, we're able to because of our approach.
So that pipeline, where it's high quality and we're spending our time on sort of high impact things, but you know the deal business. You can have a deal where you think youre the winter until youre not at the finish line and so the timing is always a little.
All subject to a handshake if you will between the buyer and the seller, it's not I just don't want to wait thing.
And so we're going to be very patient and very disciplined and we don't feel any sense of urgency.
To get this $5 billion deploy just fair to say, if you're getting a deployed we're going to do it and the way we've done for the last 20 years and so it's hard to handicap the.
The specific timing of when anything would happen, but we're going to be busy at work trying to get it done.
Our next question comes from Rob Mason from Baird. Please go ahead.
Yes. Good morning, Thanks for the question.
I just wanted to speak on the software business just a minute.
The growth was very good to see across both application software and network and Neil sprinkled throughout your commentary.
Frequently the strength around SaaS bookings.
I know you have several businesses, where you have SaaS conversions underway. So.
Just given the.
A minute strength typically you start just theres, a little bit of headwind as you're converting some of those on Prem business just over to subscription I'm just curious what that what does that headwind and buried in in the <unk>.
Growth that youre, putting up <unk>.
Appreciate Robert the opportunity to talk about this.
Just to level set everybody.
Overall, the vast majority of the revenue on the network side of our business is already in the cloud <unk> recurring it's 90 plus percent. So the vast vast majority of the cloud conversions, Rob what youre talking about shows up in our application software segment and is centered at Deltec Aderans power plan.
<unk> little bit of seaport.
As you mentioned when you convert.
But the punch line of all of this is as we convert we believe it's a modest net growth driver not a headwind. The reason it's a growth driver as you have two competing factors. One is the bad guy you're referring to the J curve when you instead of selling a perpetual deal.
Bodies, all our recurring revenue deal and the year of that deal that's a bad guy right because instead of getting 100% of revenue when you ship. The perpetual license you get some small percentage of that depending on what month the subscriptions booked.
However, what counters that is when you have these large installed base of customers that are paying annual maintenance.
Since other historical perpetual we're actively lifting and shifting those customers to the cloud when you do that because what you're doing for them carries more value right. You are on the current release or managing the infrastructure managing cyber security.
You are managing your theres, a greater value proposition youre able to charge a higher recurring.
You have a new base and so the uplift on the recurring.
Overwhelms the negative headwind on the upfront sale and that becomes a modest net growth driver for us happy to talk about that offline in more detail if you'd like.
Yes.
Is there a is there a timeframe that youre thinking about where these conversions largely complete.
<unk> themselves for the existing businesses.
It's going to be it's elongated our case and our case companies are can make a decision they can either.
Like some companies do just force it like worth taking you to the cloud this year.
And it becomes.
The company's perspective in our case for allowing our.
Customers the pace of that so our customers are the one who are saying I'm ready to go to cloud and when we're going to meet them, where they are so in that case, it's going to be an elongated period of time.
Certainly five plus years it might be as long as 10, so it's going to be a slow throttle to get fully cloud enabled how.
How do you think about balancing I guess internal investment.
To support both sides of that.
Yes, so it's.
The way that the.
The way that the architecture of our companies have become more cloud enabled architecture allows them with the service orientation to make investment one investment and deploy it to both platforms. So it is not.
Not really an either or it's in hand.
Okay.
Thanks for the color I appreciate it.
Sure.
The next question comes from Steve Tusa from Jpmorgan. Please go ahead.
Hey, guys good morning good.
Morning, Steve Thanks for joining.
Yes.
On the organic you guys.
It didn't provide an update to the 7% plus I know, there's some noise around disc ops and continuing ops, what what is that number now for the year I mean, I I can kind of add up all the segments, but again, there's a lot of noise in the numbers just moving stuff around so just an update to that 7%.
Now on the continuing ops.
For the year total car yeah. So I think on a continuing ops basis for the year it'd be eight on an apples to apples basis. The seven is unchanged. Okay got it. So so then so then why next year. If you kind of have some supply constraints and stuff kind of pushing revenue into next year and just ridiculously strong.
Wrong backlog, what why would that slow next year I mean is there any particular reason why that would slow.
There are I mean, I think we'll guide next year in January and you know after we do all of our business reviews, but I.
I don't see a reason why.
There should be a challenge.
Okay, and then and then just one last one just on margins.
Central on what what do you expect kind of this year for this continuing ops kind of roughly EBITDA margin range and then in particular for a N S.
Total company and then a N S EBITA margins just for a baseline for next year.
So I think the total company.
Gins are you know we sort of just gave you Q3 and Q4 is similar and you know and like I said, We'll guide next year. After we do all of our reviews.
Okay, and then a N S.
Any comment there.
Okay.
You mean application software.
Yeah, Yeah. The a N S margin, just where are you going to end up for the year in the fourth quarter.
Marta I mean, I think you know generally similar to the third quarter.
Okay, great. Thanks, a lot.
Steve.
This concludes our question and answer session. We will now return back to Zack Moxie for any closing remarks.
Thank you everyone for joining us.
And we look forward to speaking with you during our next earnings call.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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