Q2 2022 Roper Technologies Inc Earnings Call

[music].

Good morning, So Rob protect all of this conference call will now begin today's call is being recorded and all participants will be in listen only mode.

If you need assistance. Please signal a conference specialist by pressing the star key and zero.

You may get in line to ask a question by pressing Star then one on your Touchtone phone Press Star then two withdraw your quote request and now I'd like to turn the call over to Zack Boxy, Vice President Investor Relations. Please go ahead.

Good morning, and thank you all for joining us as we discuss the second 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 Shannon O'callaghan, Vice President of Finance earlier.

Earlier. This morning, we issued a press release announcing our financial results. The press release also includes replay information for todays call. We 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 page 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 page three.

Today, we will discuss our results for the quarter, primarily on an adjusted non-GAAP basis.

During the quarter rubber announced an agreement to sell a majority stake in our industrial 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 second quarter the difference between our GAAP results and adjusted results consists of the following items amortization.

Amortization of acquisition related intangible assets purchase accounting adjustments to commission expense income tax restructuring expense associated with the pending sale of our industrial businesses and lastly, we have adjusted our cash flow statement to exclude the cash taxes paid related to our 2021 divestitures GAAP requires these payments to be classified as operating cash flow.

Items, even though they are related to the divestitures.

Reconciliations can be found in our press release and in the appendix of this presentation on our website and now if you. Please turn to page four I'll hand, the call over to Neal after our prepared remarks, we will take questions from our telephone participants Neil.

Thanks, Zack and good morning, everyone. Thanks for joining us. This morning, we'll start by reviewing our second quarter highlights and financial results. Then I'll review our segment detail and our increased outlook for the year then get to your questions next slide please.

As we turn to page five the main takeaways for today's call are first we had another great quarter of operational and financial performance and we are increasing our outlook for the year.

Second during the quarter, we entered into an agreement to divest a majority stake of our industrial businesses and third we have north of $7 billion of available M&A firepower.

Looking at the second quarter, we continued to be pleased with the quality of execution across our enterprise.

This quarter is characterized by having very strong order activity and solid organic growth of 11%.

A particular importance our growth was quite broad based across our three segments.

Consistent with our commentary during the last several quarters not only did we grow nicely within the quarter, but the quality of the underlying businesses also improved as we saw our software recurring revenue base grow 12%.

What are the Ganic basis.

In addition to our strong software growth our product businesses performed very well in the quarter experiencing very high levels of demand and record levels of backlog.

Once we complete the divestiture of the majority interest of our industrial businesses, but quality of our portfolio will be significantly improved across several dimensions.

First we will be meaningfully less cyclical with about 75% of our portfolio being software and the balance being medical and water products.

Second we will have higher levels of recurring revenue with 80% of our software revenue being recurring in nature.

Also a large percentage of our product revenue is reoccurring in nature, such as naphtha as replacement demand and our medical product consumables.

And third we will be even more asset light given the vastly improved working capital profile, one that generate significant increasing amount of cash as we continue to grow.

And finally with the closing of our industrial divestiture, which we anticipate anticipate will occur later this year, we'll have north of 7 billion of M&A capacity.

We are very active in the M&A market, but also remained super patient and highly disciplined to ensure optimal deployment of our available capital.

We are confident in our ability to deploy this capital wisely, which in turn will further improve both the quality and scale of our enterprise.

We are proud of our operating team for their execution, a very solid quarter.

Now, let me turn the call to Rob will walk through our financial summary, Rob.

Thanks, Neil Good morning, everyone turning to page six here, we want to briefly cover our Q2 performance compared to our guidance, including the industrial business is now reported as part of discontinued operations due to the pending sale.

On that apples to apples basis, our Q2 depths of $3 95 compares quite favorably to our guidance of $3 80 to 384 and 11 set beat at the high end of our guidance a very strong quarter next slide turning to page seven and covering Q2 financial highlights here.

We will review some of the key financial metrics on a continuing operations basis, which is our reporting basis for earnings and guidance moving forward total revenue increased 10% to 131 billion organic revenue increased 11% with strength across each of our three reporting segments application software.

Grew 7% organically as our two largest businesses deltec inverter for continued to perform very well networked software grew 15% led by continued exceptional performance at our freight matching businesses. Finally, our new technology enabled products segment grew 13% organically.

Aided by an excellent quarter from Neptune.

EBITDA margin was 39, 3%, resulting in EBITDA, increasing 10% to $515 million depth on a continuing ops basis was $3 43, 16% higher than last year net working capital is now negative 17% of Q2 annualized revenue as of.

Result of our higher quality portfolio Q2, adjusted free cash flow was $252 million, which was 19% below prior year, but still represented a 17% three year CAGR versus 2019.

Notably like many technology companies, our cash flow was negatively impacted by the section 174, R&D capitalization change that took effect for 2022, we paid $49 million in Q2 related to section 174, and we expect to pay an additional $50 million for section 174 in the.

Second half importantly, this tax law change only impacts the timing of when the taxes are due and not the overall amount of tax owed or our tax rate.

Additionally, in the quarter, we made tax payments related to the gains on the 2021 divestitures of transport <unk> ZIP code radiotherapy per our normal convention those payments have been adjusted out of our cash flow. Finally, we are very pleased to announce the completion of our new five year $3 5 billion revolving credit.

<unk>, we are grateful for our bank group and their continued support and as I personally like to thank Shannon O'callahan sitting next to me for the excellent work in leading the process for Roper.

So in summary, with a $3 billion cash balance our new revolver in place and the future proceeds from the closing of our industrial sale. Later this year, we are very well positioned for meaningful capital deployment, so with that I'll turn it back over to Neil.

Thanks, Rob Congrats to you and your team for upsizing and extending our revolver, especially in these market conditions as.

As we turn to page nine we summarize for you. Our go forward portfolio of 26 businesses right across three segments application software network software and tech enabled products.

In the 8-K issued a few weeks ago, we provided historical annual and quarterly financial disclosures on this segmented basis.

Also for the first time, we are breaking down our revenues by type.

As you see 61% of our total revenue and 82% of our software revenues are recurring or reoccurring in nature seven.

74% of our total revenues are software related.

For several quarters, we've communicated how the quality of our revenue stream continues to improve.

You can see at this point well illustrated here are 11% organic growth is underpinned by 12% growth in our software recurring revenue base.

Further you can see the breadth of the growth growth in software and products.

Our strategy for nearly two decades now has been to improve the quality of our enterprise and this is clearly reflected on this page we cannot be more excited for our future.

Let's turn to page 10, and walked through the <unk> highlights our application software segment.

Revenues here were $627 million up 7% on organic basis, and EBITDA margins were 43, 1%.

Across the segment, we saw recurring revenue, which is about 75% of the revenue for this segment increased 8% in the quarter.

This recurring revenue growth is enabled by strong customer retention and continued migration to our SaaS delivery models.

Across this group of companies the financial strength was quite broad.

As we highlight a few businesses, we'll start with Deltec.

And the Delta team posted another great quarter of strength across all end market serves with particular strength in their construction contractor and markets and.

In addition, delta continues to gain momentum driving adoption to their cloud based product offerings.

<unk> had an excellent quarter, which was highlighted by strong <unk> bookings.

Bookings activity and revenue growth also during the quarter, we completed the acquisition of MGA systems. This tuck in acquisition enhances <unk> ability to compete and win in the managed general agents segment of the property and casualty insurance ecosystem.

<unk> and data innovations continued to exhibit strong demand and operational strength clinics.

<unk> continued its market share gains in the U K.

<unk> continues to demonstrate product market fit by gaining share of wallet across large health systems and the VA.

Our strategy continues to be Super solid for us the acquisition of EPS side has been exceedingly strong Australia has successfully lifted and shifted many EPS by customers to the strat that cloud based offering at.

At the same time strategy continues to improve the legacy EPS Si product release and support capability.

We remain committed to meeting the E&P, EPS Si and strata customers, where they are.

Finally, <unk> continues to be a solid performer for roper extending their share gains in the large loss space.

<unk> continues to see an acceleration of SaaS bookings activity driving substantial increases in our recurring revenue base.

Looking to the outlook for the second half of 2022 in this segment, we expect to see mid single digit growth for the balance of the year driven by continued <unk>.

Our momentum.

Turning to page 11.

Revenues in the quarter for our network software segment were $343 million up 15% on an organic basis and EBITDA margins were strong at 52%.

The 15% organic growth in this segment is underpinned by 19% growth in recurring revenue.

As we dig into business specific performance, our U S and Canadian freight matching businesses continues to be exceptional.

The market conditions, while slowing a touch on the carrier side of the network continue to be favorable.

During the recent surge in transportation volumes the market share of the ecosystem represented by the spot market increased as it became easier to transact volumes in the spot market compared to the contracted market.

We believe this is a secular trend.

We'll benefit from over a multiyear arc.

In addition, <unk> continues to do a nice job of increasing revenue per user by both adding features and improving value capture.

Finally over a longer arc planning horizon, our freight matching businesses continued to be well positioned to enable the further digitization of the spot freight market.

Moving to foundry, our software business that enables live action filming and computer generated graphics to be combined in a single frame continued their recent financial strength net.

Net retention is north of 110% and <unk> grew double digits again.

Foundry success is rooted in our fast paced innovation capability and favorable long term market conditions.

I trade, our network food supply chain business, and our pipeline our life insurance SaaS business that tech enabled for quoting and underwriting processes.

Each had solid customer additions, which helped drive strong area of growth in the quarter.

Finally, our business businesses, which focus on alternate site health care, namely skilled nursing assisted living and home health grew nicely in the quarter, despite their customers' growth being constrained by staffing shortages.

Out of the execution here.

Turning to the outlook for the balance of the year, we expect to see mid single digit organic growth for this segment driven by continued recurring revenue momentum and moderating growth for our freight match businesses.

As we turn to page 12.

Revenues in our tech enabled products segment were $340 million up 13% on an organic basis, despite the very challenging supply chain environment.

EBITDA margins for this segment were 34, 9% in the quarter.

Let's start with Neptune, which had record orders revenue in quarter ending backlog for a few quarters running Neptune has been able to gain market share by being successful in keeping product lead times at industry, leading terms and releasing new products. Both in terms of cellular connectivity and static meter reading.

Technology.

As a fun fact net tune turns 50 later this quarter and next year will Mark our 20 year ownership anniversary.

A great run so far with an even better for review.

<unk> done to you and your team for building such a great company.

Verathon, northern digital and each of our medical product franchises continue to see very strong ordering activity, but were hampered by a variety of supply chain challenges during the quarter.

That said the teams are executing exceptionally well and we remain confident in our ability to execute through these challenges.

Looking over the horizon each of our medical product businesses, our benefactors of secular tailwind, namely the increased demand for single use devices and the aging of the population.

As it relates to the outlook for the balance of the year, we expect to see high single digit growth for this segment underpinned by strong demand and backlog levels, but somewhat constrained by the current supply chain challenges.

Now please turn to page 14, and lets review, our updated and increased outlook for the balance of the year.

As a reminder, last quarter, we increased our adjusted <unk> guidance to be between $15 50, and $15 75, which included <unk> 30 from our industrial businesses.

Given our agreement to divest our industrial businesses, we're removing the $2 30 from our guidance model going forward.

So on a new continuing continuing ops basis, our previous guidance equates to $13 20 to $13 45.

Based on our strong Q2, and second half visibility, we are now increasing our continuing ops guidance to be between $13 46, and $13 62.

Embedded in this guidance is full year organic growth of 8% to 9% again on a continuing ops basis.

As we look to the third quarter, we're establishing depths guidance to be in the range of $3 42, and $3 46.

Now, our concluding comments and we will get to your questions.

As we turn to page 15, we want to leave you with the same three points with which we started first we had a strong quarter performance and we are increasing the outlook for the full year.

We took strategic actions to divest a majority stake in our industrial businesses and third we have a tremendous amount of M&A firepower north of $7 billion.

As it relates to a strong start we grew revenues organically, 11%, EBITDA 10, and depth, 16% and free cash flow has grown 17% on a three year compounded basis.

We are lifting our full year organic growth in depth guidance based on the factors outlined during the call specifically strong recurring revenue growth and a record demand for our product businesses.

Finally, we have reloaded, our balance sheet and continue to have a highly active and engaged pipeline of M&A opportunities.

We have north of $7 billion of M&A available firepower.

As mentioned at the start of today's call are high levels of activity are equally matched with our patience and discipline and we remain confident in our ability to deploy this capital to further improve the quality and scale of our enterprise.

Just as we've done over the past two decades, finally, kudos to Robyn Shannon and the finance team for increasing the size in term of our $3 5 billion revolver.

I will return to your questions, let us remind everyone that our strategy is the same.

We compound cash flow by acquiring and growing niche market, leading technology businesses. This is what we've done for over 20 years and will continue to do so.

In addition, our value creation and governance model remains unchanged, we operate a portfolio of market, leading businesses and defensible niches.

Each of our businesses is high levels of recurring revenue strong margins and compete based on customer intimacy, which yields highly resilient organic growth rates.

We operate a highly decentralized operational structure that focuses on long term business building.

Our culture set a very high bar for performance and focuses on continually improving.

We're all paid to grow which reinforces our culture of transparency nimbleness and humility.

Finally, we redeploy the vast majority of our capital to acquire the next great business. When you do this with a centralized corporate resource team and a highly disciplined thoughtful and analytical manner.

This strategy unchanged delivers compounded and superior long term shareholder value.

So thanks for joining us this morning, and with that let's open it up to your questions.

Yes. Thank you.

Now go to our question and answer portion of the call.

Question on our callers limit their questions to one main question and one follow up if you would like to ask a question. We do so by pressing star followed by one on your touch tone telephone.

If youre using a speakerphone please pick up your handset before pressing the keys. So I'm sorry. Your question. Please press Star then the did you too.

Real question of callers limit their questions to one main question and one follow up.

Could you give us a volatile.

While the roster.

And the first question comes from Deane Dray with RBC capital markets.

Thank you good morning, everyone.

Morning, Dean morning, and congrats on the first earnings report under the New look Roper.

Thank you. Thank you hey, if we could start I really like.

That.

New breakout on revenues on page nine.

As well as page 19 in the appendix, which shows you the same information broken out by segment. How do you expect that mix to change over the next couple of years, especially in the conversion and migration to SaaS.

Yeah, Deane, so really the in the recurring line that 54% line on page nine embedded in that line is both the <unk>.

On premise maintenance and the SaaS and so the integration will happen inside of that line.

Now what you'll see is it will as that happens we get an uplift from the on Prem maintenance to the SaaS, because you're delivering more value and so youll see sort of it's a long term multi multiyear tailwind in that line, but it happens in the conversion happens within that singular line.

Okay.

That's helpful and then.

Sure Rob.

Look we're all kind of calibrating the section 174, and the impact of I'm glad you added that one sentence that says it doesn't change the total amount. It just changed the timing the tax payments just clarify how that plays out for the course of the year and the comps for next year and then is there.

The working capital that negative 17% is that the new run rate based upon the new earnings and mix for Roper going forward and is there still upside to that.

Yeah, Yeah, yeah. So on.

On the working capital, Yes, I mean, the 17% is the run rate I think there is upside right. We expect to grow these software businesses as they continue to grow they'll generate more cash and working capital should get more negative over time.

On 174, it is it'll be a total of $100 million headwind for this year.

It's basically around $25 million a quarter we paid.

As you know we make two tax payments in the second quarter. That's why it was.

Why it was <unk> 49 in the quarter.

Yes.

Obviously theres been a lot said about this.

The law could change at some point and then we'd get that money back. So it's really it's really just you'll get the same deductions over time, but certainly now you have to wait for the deductions basically.

Okay.

Thank you and the next question comes from Christopher Glynn with Oppenheimer.

Thank you good morning.

So wanted to talk about the new segment a little bit.

Medical products talk seeing if you could break out some of the supply chain impacts on margins.

The revenue gaining aspect.

Any abnormal.

<unk> backlog, how you characterize that high let's think about it.

Yes. So the performance was very good. So we're certainly like everyone else to who sells products have some supply chain issues.

Backlog is I think double if you look where we are this year versus same time last year. So there's plenty of opportunity to continue to grow the revenue.

A little bit of margin impact, we think that gets a little bit better in the second half.

I think our business has done a great job of pushing through price and so that takes some time to start to sell the products that.

At the higher price versus cost so I think that's a little bit better over time, but everyone's managing it really really well so.

So we feel really good about our operations.

Okay.

For follow up if you look at site.

<unk> 12 with tech enabled products EBITDA margins are down about five five points Q2 this year versus.

20.

2022nd quarter, just can you talk just conceptually about that bridge what that represents.

Yes, So 2020 was an outlier because of the big Verathon quarter with when the in the heart of Covid. So that's one verathon had that just just.

<unk> strong growth as we're trying to fight the virus.

And so I think probably 19 is a little bit more normalized from a margin standpoint.

But we do think that those margins should should tick up over time.

Thank you.

And the next question comes from Scott Davis with Melius.

Hey, good morning, guys.

Good morning, Scott.

I wanted to talk a little bit about price is there.

Is there.

Imagine that with price escalators in the.

SaaS is it is there some sort of basis like CPI as it is it.

Is it half of CPI I mean can you give us just a little bit kind of how you think how price gets gets passed through and those things.

So there is prices, obviously, youre, specifically talking about software.

The way you sort of.

Our capture pricing by capturing software is a little bit different than the products. So in the software you're right for the all of that subscription and maintenance is generally tied to a CPI plus.

<unk>.

Which is so we were able to see price. The other thing Thats. Just also just naturally embedded in the software business is price I mean, it's part of the growth algorithm in each and every year the customers are used to taking price and.

And obviously with inflation interest rates higher then there'll be a little bit more price.

To that is the cost structure in the software businesses.

Increase through increasing labor wages, but it happens over a longer arc of time, and it's less spiky than what you see in the product businesses.

Naturally the punch line of that is you get a nice match up of the increase of labor cost with the pricing on the software part of our business.

And is there a difference in kind of pricing when you think about recurring versus nonrecurring.

Just kind of Dean's question I was a little confused in your answer.

And maybe just because I want to add one cup of coffee, but.

Is there a different I mean.

You mentioned, you kind of add more value and you get a little bit more but go back and talk to me okay for urology.

So I apologize if I was confusing so theres two issues, we're talking about so on price.

On software.

A well run software company Youre, taking price on both the cost of the software in a perpetual world and the maintenance on that so you move them up in tandem where you don't end up in sort of a challenging thing.

Software companies do that ends up being a bad thing as they only take price up on the maintenance and not the not the initial software our companies take them up in tandem. So they stay together. So that's the pricing point Dean's point was asking about what's the relationship between on premise maintenance, which we get paid once we deliver the perpetual software.

<unk> SaaS and the SaaS shift and so as we migrate or quote unquote lift and shift a customer from on premise to our cloud as youre doing that youre delivering more value not only of hosting the application and all of this all of the security you're also delivering the most recent version or keeping them on the most recent version so they get to take advantage of the most recent.

Features.

And you are just generally eliminating sort of the headaches of running the software for the client because of that value bundle of SaaS you are able to capture more value oftentimes two times on a recurring basis or a touch more so that's about the value proposition of moving to the cloud versus your straight question of what.

Happens in a in a price increase environment for the software and just to give you a sense, where roughly 75% subscription and 25% maintenance today. So we're still we're already largely in the cloud there is roughly $200 million of license revenue that would go away over time and convert to that subscription revenue that in.

Neil mentioned that as.

That's a long period of time driven by the customers.

And so it's a really good story I think on the recurring revenue line.

Okay. That's really helpful. Thank you for that I will pass it on good luck guys appreciate it.

Thank you.

Our next question comes from Joe Giordano with Cowen.

Hey, guys. Good morning, good morning.

Joseph.

So now you've gone through.

It keeps code change and all of this im just curious.

Neil Rob Whats your initial kind of conversations where with the new cohort of investors that you likely talk to you now and what were some of the things that maybe some initial pushback youre getting from them some things that they like and have those discussions kind of overall gone so far.

Yes, I would say the gigs code change it's not like this light switch. This happened all of a sudden every conversation we're having with you.

The buy side is a different person in fact, it's quite the opposite.

Low evolutionary sort of change here, we've been to a singular.

Software conference, where we had half a dozen conversations.

They were they were generally the same conversations we have with our legacy.

Shareholder base, which is what your business model Whats your flywheel what are the risks what's the durability.

And quite similar little bit quite little discussion, obviously on growth a little bit on the cash flow dynamics of the business a little bit of the business model mix between recurring nonrecurring, but they are the same questions really now I've just seen a lot of excitement right because I think as we said at that conference. We were at intra quarter that what were the fourth largest application software company I think in.

The S&P 500, and a lot of these analysts are just getting to know us and I think they are really excited when they look at our at our past and our future prospects. So we're excited to expand to a new shareholder right as well of course.

Also making sure that our current shareholder base is continually happy with our investment in <unk>.

So when you think about M&A.

Divestment Mike.

Is there a step change function that happened internally with cri that makes finding new companies that cleared the threshold harder.

Guessing just mathematically taking out the industrial businesses.

Makes cri higher or more negative or however, you want to look at it and then Mike maybe you could have slotted in a business that previously could have improved our debt profile a broker, but maybe now that business might not meet the thresholds is that accurate or is it just not material enough to worry about.

It's not material enough to worry about but let me let me tell you why.

<unk>.

Essentially my entire almost 11 years I've been here, we've looked at the same cohort of targets, which are wonderful.

Like software businesses.

And that's the cohort we're looking at now right. So it's just.

So it's not about becoming even more asset light once youre as asset lives. We are it's about staying as asset light as we are that's why the universe of targets is plentiful.

Okay.

Thank you and the next question comes from Allison <unk> with Wells Fargo.

Hey, good morning, Amit.

And that network software business understanding that freight matching.

Growth in sort of the moderation there could you maybe talk to the balance of the businesses in that segment in terms of the overall combined.

Mid to high single digit growth I'm, just trying to understand the impact that the freight match hat on it.

Yes.

Most of the businesses in that segment are normally sort of mid single digit organic businesses that occasionally do higher than that very rarely do lower than that and so I think as you get into the second half of the year those are sort of doing what they do and then you just have a little bit of moderation in the in the freight matching growth.

Got it and then just kind of pulling on to that last the M&A question certainly the software.

Jason in terms of M&A, what about tech enabled products is there anything you guys are kind of looking at maybe clear that hurdle.

It is off the table there at this point no it's definitely not definitely not off the table. It has not been off the table. We just have an accident anything there in quite a while so if it's an asset light tech enabled product than business that is a leader in a small market. The competitive forces are stable as I sort of say all of our criteria then it's definitely something we will.

Look at.

Thank you.

Comes from Julian Mitchell with Barclays.

Hi, good morning.

Maybe just wanted to ask a couple of questions on the software business first off in terms of freight match.

Help us understand the cyclicality of that business, there's been a lot of stories about freight recessions or will be in lung in the U S.

Should we expect that business to perform in that type of macro I guess NSX is enjoying fantastic.

<unk> leverage we see the margins going up to the low fifty's.

In Q2.

What's the risk to that sort of incremental margin. If you like from some freight match rolling and then.

Any color in application software about the license business again, there was some questions after that.

Update earlier this week.

So let me take the <unk>.

One is the application software license, one and I'll, let Rob talk about the margins if thats, okay at NSS. So first on <unk>.

The tea grew through the 2019 freight recession.

But it's been it has been just spectacular last couple of years it for.

For two reasons there is certainly a cyclical tailwind has had but there's also a secular tailwind that it's enjoyed the secular tailwind endures. That's why the business is able to sort of grow through 19 and principally in summary version. The secular tailwind is that the spot freight markets are just are more liquid.

Less easier to transact in market today than it was two years three years five years ago. So you see that the spot market market share of the total freight increasing over this time, mark and Thats been a benefactor of <unk> and its customers and thats going to continue as <unk> in the market. We will continue period, but then it may accelerate.

The next five plus years as we further tech enable the brokers business model right.

As it relates to the license excuse me perpetual license activity the application software solid orders in the first the first half of the quarter.

I think we're maybe modestly different than back in <unk>.

Our price points are much much lower right I mean, our.

Then something like that so we're not these are were important and were sizable for our customers. But these are our price points I mean, a big deal for us as a $1 million to $3 million deal not multiples of that so Rob you want yes, and then on the on the margins I would I would not be concerned that margins would take a step backwards as growth were to slow there I mean these are.

These are businesses that sort of all have those structural EBITDA margins in that 50% plus range and so I would expect that to continue even if growth were to slow a little.

That's helpful. Thank you and then maybe sort of following up multiple raw this one.

Have announced to speak divestment, you've got restated numbers out there.

How should we think about any changes from here around changes in the sort of go forward run rate for things like tax rate in.

In the P&L, maybe corporate costs.

And then kind of free cash flow conversion any changes in those three metrics as we look at the sort of new go forward robust.

Yes, there shouldn't be any meaningful changes in terms of tax rate I think in terms of conversion clear.

Clearly theres a lot of noise around cash taxes. This year as we've been talking about and Thats sort of part of the price to pay and also when you do these these transactions that we think are the best thing to do for the company in the long term. So I think if you look forward to next year and beyond I mean, our free cash flow conversion should be at the levels, it's been historically and probably a little bit better because we have even more negative working capital.

<unk>.

Just better quality portfolio less cyclicality.

And so I think the cash flow conversion should get a little bit better over time.

And then corporate yeah, I mean, I think the run rate that you see now sort of continuing ops is the right is the right run rate moving forward.

Thank you and our next question comes from Steve Tusa with JP Morgan.

Hey, good morning, guys.

Good morning.

Just a question on the cash I know you guys don't guide on cash, but usually it gets on kind of an underlying the underlying basis seasonally better in the third and the sports.

Anything changed from that perspective, and any kind of color on how you'd expect it to kind of bounce back here in the third and the fourth from second quarter levels.

Lumpy in the first and second quarter.

Yes, so, yes, I think thats right.

Seasonally fourth quarter is always our best working capital quarter, because thats when youre getting a lot of the renewals in software. So we would expect working capital to be a pretty good good guy in the second half and we sort of talked about the cash tax situation and I think everything else is performing really well to generate a lot of cash.

Okay, and then on the revenue side when you think about your recurring is there.

On the accounting there and 606 do you book of percentages of those deals the.

Three year five year type of deals do you book a percentage of those upfront as part of the 606 accounting.

I know you have different businesses in there so maybe day they behave differently from an accounting perspective, but is there an element of that.

Andy.

In the revenue there.

Yes, Hi, Steve This is Jason Conley.

A lot of the term licenses.

There is a portion of that that does get recognized upfront multiyear term licenses is very small for us.

Couple of businesses have that and then our perpetual licenses are also booked upfront as part of the 606 a portion of it.

Thank you and the next question comes from Joe Ritchie with Goldman Sachs.

Thanks, Good morning, everyone.

Hey, Joe Good morning.

Yes, maybe maybe just the first question.

On this.

New portfolio going forward, how do we think about like the right long term organic growth rate for this business over time I think we've historically kind of thought about your legacy businesses kind of like that somewhere in that 4% to 5% type organic growth rate, but I'm. Just wondering if this business is it is going to achieve.

<unk> healthier growth longer term.

So.

When we did the announced the transaction with the industrial and process businesses. We showed a chart that showed the long term growth rate than historical long term growth rate of the go forward portfolio is about 6%. So that's that's where we would expect that as the baseline and then obviously, we work everyday to try to make that better.

But right now that we would sort of say 6% of the new norm.

Okay got it that's helpful and then it gets it Paul.

This whole conversion from.

From on Prem to your SaaS business. It seems like you guys are well well on your way there I'm just curious like how much of that kind of like added <unk>.

The growth rate in recent years, and then and then that extra call. It I don't know if its.

An additional 20% to 25% that you are expected to convert yes, how do we think about that as kind of like.

An added benefit that Youll continue to see in the coming years.

It's been as we've said for a while it's been a modest growth driver and just to go through it for a minute. There is the good guy and there's a bad guy right. So the bad Guy is if you're in a year, where you are selling a perpetual deal lets say its a $1 million deal you book the vast majority of that revenue in that year.

Absent that deal converts to a subscription or SaaS deal maybe that.

Maybe thats priced at I don't know $300000, a year plus or minus so in that in year, There's a $700000 bad guy between the upfront license versus the SaaS and Thats, assuming you book the SaaS deal on January one.

So there is a little bit of bad Guy when that happens, but what is overwhelmed that for us to the slight net positive is the lifting and shifting of our large installed base of maintenance customers. So as you take the same example, if you have a cohort of customers spending $300000 year, youre going to lift and shift them into the cloud in the plus or minus six.

$100000 a year, so you get that and that nets out to be a slight good guy. We've got many years of that dynamic do you provide the gas. It's seven to 10 years of that dynamic because we're not forcing our customers to migrate we're very much in the posture of meeting our customers where they are relative to wanting to do this and that's why it will take a while to do it.

I'll just add that every business.

It's on a different sort of phase of this journey right I mean, many businesses we've had been SaaS in the very beginning and there are always 100% SaaS. Other businesses were mainly on Prem like an adder and that's really the one business. We haven't talked about we're really their customers are really starting to move to the cloud Dal Tech has been a mix over time.

Most of the rest of the businesses are really kind of already SaaS at least several businesses that we bought in the last four or five years.

Thank you next question comes from Jeff Sprague with vertical research.

Yes.

Hey, Thanks, good morning, everyone.

Hey, I guess as we're transitioning the software I'll just ask an annoying industrial question.

Just going back to the deal itself and the structure there.

With some additional detail on that 8-K, obviously that wasn't it certainly wasn't clear to me at the time the deal was announced.

And what is still not clear to me is what the backend might look like for you guys on this deal right.

<unk> $829 million for 51% of the equity and then with new debt on the on the deal 1 billion minus 50.

It looks like the enterprise value is $3 6 billion at 11% and 11 times multiples right. What do you guys have taken two six.

Fun.

It's very unclear, how we think about the back end.

Yes.

So the way that we would think about it and I'll just I'll put it through the lens of our new partner right. So by the way. The math you just went through we would say is correct right and so it was 33536 is the enterprise value upfront that 11 times. This year 13, five times last year.

That would be EBITDA more like in that 30% range. If you look over the last five years given the cyclicality.

So the amount of capital that <unk> put in is basically equal to our amount of capital is still in the business <unk> business model is to drive a three times plus money on money return over their investment horizon.

No.

If we and they are successful then you get a triple of our sub of equity right is sort of a framing of how to think that so maybe there is a couple of billion plus or minus of upside. In addition to getting liquidity on the eight or 900 million that we have there so call. It two $5 billion to $3 billion on the backend.

Underscore and capitalize if things go successful over the next five or so years.

Is that based on the premise that they actively do other things with the business for example.

Other M&A in the business and Wouldnt that dilutes, you where would you participate in kind of incremental investments in the business.

Get it ready for eventual sale.

Yes, so the we're totally aligned two questions in there right. So the implied is around the growth thesis of the company. So we're completely aligned with our partner on the growth thesis that centers on continuing to invest in the organic growth that we've been doing with these businesses for the last four or so years, and then building a sort of capital deployment.

<unk> flywheel repeatable flywheel.

There is not without getting into the details of how the company is going to execute that because its still very much being formed but at the highest level.

This is a one is a cash generative asset right. So the goal for all of US is to run a levered asset and use that leverage and the cash generation as the primary source of funding. So you don't have a dilutive effect. If there is a transaction where CJR.

<unk> is going to kick in equity then we have the option to consider that.

It will make that a deal by deal sort of decision. We think it's in the best interests of our shareholders.

So, yes, there could be a little bit of dilution, but that dilution sort of somewhat factored into the math that I gave you before.

Thank you and the next question is from Rob Mason with Baird.

Yes. Good morning, just first a technical question around the guidance. So the core growth guidance for the year is eight to nine.

Did that change versus where it would have been on an apples to apples basis.

Three months ago.

I would say slightly higher maybe like half a percent or so but I mean, we I think we were seven to nine at our last guide in the businesses, we divested were slightly higher.

Does go away and we've raised to eight to nine so I think thats a little bit of a net raise but not not by law would you where would you slot that increase.

Within the segments of the three segments now.

So I'd say the biggest business that has a better outlook as Neptune.

They're just doing incredibly well as we said in the prepared remarks and in their second half given their backlog given their ability to execute and deliver to their customers. It looks really really strong. So that's really the one I think thats gotten.

Quite a bit better.

I'd say, it's about the same as we added three months ago.

Thank you and the next question comes from Alex Blanton with clear Harbor asset management.

Hi, good morning.

Sure.

Yes, I just wanted to look at this $2 30.

Matt.

What was that in the first quarter.

Yes, it's about 50 in the first quarter and what 52 cents in the second quarter and then what is your guidance for that for the third quarter.

So we're not guiding it by quarter right because it's in disc ops, but it's $2 30 for the full year. So generally the fourth quarter is the is the best quarter for those businesses given the cyclicality in the oil and gas markets.

Yeah, well, let's say it was I was trying to.

Work out what the.

Total would have been with that in there for the rest of the year by quarter.

But I guess I can I.

I can do it with what you just said.

Okay.

I'd like to talk about the future.

And the future is acquisitions of course.

How does that look now what's the pipeline like how.

How far are you along in in.

Putting to work is $7 billion, what are you working on what kinds of things you're working on just give us some color on that because I think that that really is.

What.

It is going to.

Give investors confidence.

I appreciate the question and opportunity to address it so it's been it's been a very.

Above average level of activity really for this year.

Obviously, we've not posted or anything of size just a couple of small tuck ins.

We're being while we have $7 billion were continued to be just.

Ridiculously selective as we've always been we run this sort of.

Our criteria, we stay committed to the criteria. There is a lot of analytics, there's a tremendous amount of discipline and a ton of patients and the reason we have that posture is we're making decisions to put companies in the portfolio, which we view as a forever thing and so every deal matters everyone's got to be right and everyone's got to meet the criteria and so but we're super.

Busy and we will continue.

To sort of keep this posture.

And so growth will grow the quality and the scale of the enterprise, but there is no timetable on that we're just going to we're going to do the right deal at the time of which as it presents itself.

Do you think that you'll be able to do some this year.

Sure.

We would like to be able we would like to do it but again theres no timetable. There is no clock ticking in the back of mine or this team our board's head about we have to get X dollars deployed by X date. So I think that leads to a bad decision, making but it's an active market. So the odds are we'll get something done this year, but.

We will just have to see how.

We're very active working on a lot of different projects like with like we always are so we're certainly very active.

And just characterize the pipeline.

How many businesses.

Alright available compared with the past and.

What are the prices like compared with the past and so on.

Yes, so I mentioned that.

We don't we never want to quantify the number of deals either by number or dollar size and our pipeline. We think it's for us it's.

Sufficient or not and so it's clearly sufficient I had said at the beginning of your question, it's been an above average level of activity.

For this year.

Evaluation say, it's high quality assets are still highly priced.

That's.

A bit of the reason why we're being patient.

And we will just we believe that market comes to us over time, and so we'll remain patient for the right. The right company with the right characteristics at the right price.

Okay. Thank you.

Yeah.

Thank you and this concludes our question and answer session.

I'd now like to turn the call back over to Zach Barclays for any closing remarks.

Thank you everyone for joining us today, we look forward to speaking with you during our next earnings call.

Thank you.

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