M&A Announcement

Aug 13, 2020

Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. All participants will be in listen only mode. I would now like to turn the call over to Zack Moxie, Vice President of Investor Relations. Please go ahead. Good morning, and thank you all for joining us as we discuss our acquisition of VertiFor. 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 Controller and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our definitive agreement to acquire Vertivor. The press release also includes replay information for today's call. We have prepared a short presentation to accompany today's call, which is available through the webcast and is also available on our website. Now if you'll please turn to slide 2. 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. Now if you please turn to Slide 3, I'll turn the call over to Neil. After his prepared remarks, we'll take questions from our telephone participants. Neil? Thanks, Zach, and good morning, everybody. Thanks for joining us. We want to spend a few minutes talking to you about our announcement this morning, the acquisition of Vertivor. Briefly, Vertivor is a leading provider of SaaS solutions targeted to the United States property and casualty insurance market. We're buying the business for $5,350,000,000 from Bain Capital and Vista Equity. We expect the deal to close later this quarter and be immediately cash accretive. For calendar 2021, Virtafor will have approximately $590,000,000 of revenue and $290,000,000 of EBITDA. We'll finance this transaction with a combination of cash on hand, the use of our revolving credit facility and a new bond issuance. To this end, we remain steadfastly committed to maintaining our solid investment grade ratings and have fully previewed this transaction with both Moody's and S and P. Once closed, VERTI-four's results are reported in our application software segment. Not surprisingly, VERIPORT meets all of our acquisition criteria. To name a few, the business has a tremendous margin profile and cash flow characteristics. As usual for us, the business is very asset light and has negative working capital. This is really just an amazing business model. The management team is excellent, importantly one that is deeply committed to executing Vertivore's strategy and continuing to build the business for the long term. We've enjoyed getting to know Amy and her leadership team during the diligence process and look forward to welcoming them to the Roper family. Relative to their market, Vertivore is a clear leader in their niche, which is software for the property and casualty insurance industry in the U. S. And as such, the business has tremendous levels of very deep domain knowledge and they are super intimate with their customers. And finally, and relative to growth, this business has very high levels of recurring revenue, a touch north of 90% and multiple, multiple growth drivers. We like this business for many reasons, but the durability of their growth and the diversification of their growth drivers are towards the top of our list. So this is just another perfect fit relative to our capital deployment and corporate strategy. Let's go ahead and turn to the next page and discuss what Virtafor does. Virtafor is a business that delivers cloud based software to the property and casualty insurance industry, principally in the United States. Vertifor's focus is straightforward to simplify, automate and drive productivity across the complex and highly regulated processes in the P and C space. Today, the business serves over 20,000 independent P and C agencies, 1,000 insurance carriers and touches over $140,000,000,000 of premiums per year. For simplicity, this business can be broken into 3 components: agency products, carrier products and benchmarking and analytical solutions. Specific to the agency products, Vertifor enables the business processes for the independent P and C agent, by far the largest distribution engine for these insurance products. Vertifor provides the core agency management software solution. They are the system of record, if you will, for these agencies. These products are the solutions that agencies run their business on from customer acquisition and management to policy applications and renewals to their core financial and accounting functions. In addition to the core AMS, Vertivore provides several best of breed point solutions for the independent agencies, such as tools that enable the clients the digital client experience for their agents, how the agents interact with their customers digitally, to solutions that enable more efficient and automated connectivity with their carriers and products that help manage the agents' health benefits book of business. On the other side are their carrier solutions, solutions that are all best of breed point solutions. A couple of examples here include the tools needed to ensure producer or agent compliance. As you likely know, this industry is highly regulated at the state level and all agents have to be credentialed and one of VertiForce products is used by carriers in over 20 states to manage producer compliance and certification. Another example is the automation of compensation and commission management into the distribution channel, essentially the automation of the way carriers pay agents and the recruitment and onboarding of those agents. And finally, what sits at the intersection of both product groups is a tremendous amount of data. So VERTAVOR creates benchmarks and analytics sold back to both the carriers and the agencies so they can better understand and analyze their book of business. With that, let's turn to our final slide. So when we look at this business, we're attracted by many things. First, they're a clear leader in a very niche end market. This market, the P and C insurance market is super resilient. In addition to being resilient, this industry is marked by having high levels of complexity and regulation, all things that serve as meaningful barriers to entry and provide tremendous incumbent advantage. Next, what Vertifor does is mission critical for the agencies. Their agency customers cannot run their business without Vertivore. In addition, Vertivore's point solutions for both the agencies and carriers provide tremendous incremental value. Importantly, this business has a very long track record of solid mid single digit organic growth. We love the durability of this growth engine as discussed. There are many growth drivers here from new logos to new products to cross selling to up selling to modest price increases across 2 different customer segments, the agents and the carriers. This business has 90 plus percent recurring revenue and very strong margins. And though we diligence our customer base, we are impressed with the diversity of the customer base as well as their loyalty and commitment to Vertivor. And finally, the team is super strong here. They have a tremendous track record over the last 4 or 5 years at VertiCore and are excited about having a permanent home for the business, a home that is laser focused on long term durable organic growth, a home where Vertifor's customers can rest assured we will continue to invest for the long term. It's for these reasons we're excited about this capital deployment opportunity. And with that, let's turn it over to your questions. We will now go to our question and answer portion of the call. And our first question will come from Deane Dray of RBC. Please go ahead. Thank you. Good morning, everyone. Hey, Deane. Good morning. Are you in Nantucket? Yes, sir. So what I'd love to start with is that this is an adjacency to iPipeline, which is life insurance. So you guys have done some adjacent purchases like in TransCore, as I recall. But just the dynamics of having 2 different businesses within insurance. It sounds like you'll still run them independently, but are there any synergies between the 2? And do the regulators see these as completely separate markets? Yes. So they are very and distinct separate markets. The distribution of the carriers are for the most part different. I think there's a handful of carriers that write both property and casualty and life, but for the most part, the insurance writers, if you will, are different. The distribution channels are different. The channel economics are different. Life insurance you sell once. P and C you have to sell virtually every year. So the industry dynamics are very different. We just to confirm for everybody, we'll run Virtafor NI Pipeline as independent businesses. There's no plans at all to integrate them in any way in the short term or long run. That said, there certainly probably are some best practices that can be shared across What is relatively mature in the life insurance space is the automated connectivity between the agencies and the carriers. That's less mature in the P and C space. And so there's certainly some best practices that can likely be shared there, but these are fundamentally different end markets. And then it's important to note also, Dean, and it's a subtlety, iPipeline is in our network segment for the reasons that we talked about when we did that deal. The vast majority of that business is about connecting all the parties in the life insurance space, if you will. VERTIFOR is going to be in our application segment because the core of what VERTIFOR does is sell this ERP like solution for the agencies. All right. That distinction is really helpful. Thanks for that color. And then the follow-up question is, look, this is one of the larger deals that Roper has done and the largest you've done, Neil. What are the considerations about the pipeline, no pun of the might you consider equity to as partial funding for this deal? All right. So we'll try to hit all of those. So for funding for deal, no, there's not going to be use of equity in any shape, way, shape or form. We're very confident in our funding sources as we talked about cash revolver and some new bonds and we've discussed that process and strategy with the rating agencies. Relative to the pipeline, this is sort of like Back to the Future a little bit with Deltek. We did Deltek. We told investors and the rating agencies and our bond investors that we delever over the course of 12 to 18 months, that's what we're going to do here. There were a few small number of little bolt ons sort of in that deleveraging period after Deltek. That could be the case here, but we're committed to deleveraging here over the next bit of time. That's real helpful and congrats to everyone. Thanks. Thank you. Thanks, Deane. Our next question comes from Julian Mitchell of Barclays. Please go ahead. Hi, good morning and congratulations. Maybe just my first question around the figures you laid out on Page 3 on the sales and EBITDA. So the margins look very, very high at Vertifor, 49%, 50% or so. Just wondered if you could explain how the margins have trended in recent years in the business? And whether those numbers you lay out for 2021 include anything in the way of sales or cost synergies? Yes. So there's no sales or cost synergies at all in the model because there's nothing that we can integrate it into that would drive either one of those lines. To your first question, we're buying this business from Bain and Vista. Their thesis 4.5 years ago was to structurally work to improve the margins in this business. And the management team here, Amy, did a great job in doing that. And we spent a lot of time in our diligence making sure that this was a durable margin structure. They sort of centralized and standardized. They went from 14 to 7 offices. They went from 4 ERPs to 1. They went from 3 sales force implementations to 1. They did a nice job sort of investing go to market, investing in the products over this period of time. They added a customer for life organization. So they were able to sort of take costs out that were truly redundant and then invest where they needed to invest to drive growth and Net Promoter Score gains, if you will. And it's also it's worth noting that sort of these are the industry the margins now is what we understand to be the industry margins, right? So it's we're not an outlier in that regard. Yes, right. It's a very high gross margin business. And so therefore, you have 30, 35 points of investment still running EBITDA margins in the high 40s. So it's a very healthy business and we'll continue to invest and we'll continue to invest to accelerate organic growth moving forward. That's helpful. Thank you. And then maybe if you could just give me some context as to addressable market, the size of that for VERTA4. I think you mentioned, Neil, it's a clear market leader in the niche. So any indications of the approximate market share and who its main competitors might be? Sure. So in aggregate, the market size, if you will, is about $3,500,000,000 That's sort of annual recurring revenue to measure on that market size. It's split about 40%, 45% or so on the agency side and the balance on the carrier side. The principal competitor on the agency side is a company called Applied Systems, it's owned by a sponsor. And then the competitors on the carrier side are really small, nicheybestofbreed, or sort of nicheycompetitors. There's not single large one in any of the sort of sub verticals in which Vertivore competes. That's very helpful. Thank you. Thank you. Our next question comes from Joe Ritchie of Goldman Sachs. Please go ahead. Thanks. Good morning, guys. Good morning. Hi, Joe. Hi, Joe. Hey, Neil, just maybe just give us a little bit more on the history here. So this is a company that's traded hands now a couple of times over the past decade. Is this something that you guys have looked at in the past? Like how did this deal come to fruition? How much diligence did you guys do on it? Yes, I appreciate getting the opportunity to answer that question. So we first look at this business in the 1st part of 2016 in the process that was run when Bain and Vista bought it. We liked a lot about the business then, the characteristics of the business, the niche, the market, the durability of the market, the growth drivers, all sort of the business fundamental things. At that point in time, it was a management team that we couldn't get particularly excited about. And so we backed away as we do. That's the management team sort of driving inside of our culture is outside of cash return thresholds. The number one reason we walk away from a transaction. It's not unusual. So we stayed close to the business and then beginning it was the Q1 of last year, we went to Denver and spent time with Amy and her team to sort of get reacquainted with the business and understand sort of how that evolved. Essentially stayed close to the team over the course of last 18 months. So yes, it's been an extended getting to know this company process. And then over the last 6 or so weeks, maybe 7 or 8 weeks in the market diligence and then the diligence with the company itself, things accelerated as they do in these processes. Got it. That's helpful back color. I appreciate that. And then maybe just thinking about the growth environment for this business, it sounds like you guys are pretty enthusiastic about its prospects. I'd just be curious if you could maybe just give us a little bit more on the history. So you mentioned that the private equity partners are really focused on expanding margins. How did this company grow over the past 1 to 3 years? And if you're thinking about kind of like the growth trajectory, what's the area that you think you're most excited about? I'm going to let Rob sort of talk about the growth here in a second. I just I want to be a little more precise in our thoughts. The sponsors here, their goal was to their investment thesis was certainly to improve the margins, but do it basically drive a better operationally and efficient organization, right? I mean, so they did it the right way. I just want to underscore that. This wasn't sort of financial engineering and laying off a bunch of people. That's not what this exercise was. So we feel we've got a much more operationally efficiently run business than what we looked at in 2016. But let me have let Rob sort of talk about the growth and the prospects. Yes. It's been consistent mid single digit organic growth business really for the past decade and that's what we see moving forward that or obviously we'll work to do better than that. But very, very consistent, very resilient, holding up very well this year, right, in the COVID environment like many of our software businesses. So a really good end market and a really steady growth business. Okay. Thanks guys. Yes. Thank you. Our next question comes from Richard Eastman of Robert W. Baird. Please go ahead. Yes. Good morning and thanks for the questions and congrats. Thank you very much. Just a couple of questions. There was a reference in the slides here to this being a subscription based kind of SaaS model. But can I just is there still a perpetual piece to this? And is there any conversion kind of trend here going on within the business currently? No. I mean, it's 90% like I said, a little over 90% recurring today. It's the delivery is 80 plus percent in the cloud. So there's very little conversion, if you will. What we talked about with Deltek and Aderon and PowerPlan, that conversion uplift is in the rearview mirror for this business. Okay. All right. And the revenue that you referenced for '21, that would be an adjusted revenue number? Yes. It's adjusted for the deferred, which we don't have exact number. It won't be a huge number. But yes, it will be our normal customary adjustments on the revenue. Okay. Okay. And then also within that the mid single digit growth rate that you just mentioned, is there a price component to that that you can maybe share? I mean, if we're mid single digits, is there an inflator kind of built into the subscription here that might be a point or 2? Yes. So the way to think about that is, as I said in my prepared remarks, is that there's a number of growth drivers here, right, across the three parts of their business or product set, agency carrier and their sort of data insights and benchmarks. So like any software business, there's a little bit of churn, there's a little bit of price, good guy. There's a little bit of upselling, there's a little bit of cross selling, there's a little bit of new logos in it. And you look at that across these three product verticals, there's not one of those it's like a 3 by 5 grid. There's not one of those boxes in that grid that's a predominant growth driver in this business. It's super balanced across all of that. Okay. Okay. Very good. And if you don't mind just thinking one more just from a modeling perspective, any sense right now of what maybe the blend of cash and debt would be and maybe the again is a 3% number, a decent blended number to use on the debt portion? We'd expect the total financing cost to be under 2% once we're all said and done given the market conditions that currently exist. Okay. Very good. Well, attractive. Okay. Thanks, guys. Appreciate it. Thanks. Our next question comes from Steve Tusa of JPMorgan. Please go ahead. Hey guys, good morning. Hey, good morning, Steve. Congrats. Just from a sales perspective, I think reading some of these credit reports, they talked about a little bit of choppiness in sales back maybe a year or so ago. And anything can you just maybe elaborate on what happened there? And has the sales trend for these guys been consistent over the last couple of years? I know over the last 12 years, it's been pretty consistent. But I thought I read something in some of these reports about that. No. Nothing that we've looked at through our diligent streams would suggest any of that. If anything, it's been just super steady, it's super recurring. And BJ, their Head of Sales has done a great job of sort of increasing the go to market capabilities here. So no, there hasn't been any near term recent historical choppiness on the revenue side. Okay. And then I think they've done a couple of deals. And you said mid single digit organic. Correct. How much of deals added over the last, call it, I don't know, 3 years, 4 years? They're pretty small. Their history, the long track is they do about a deal every couple of years ish. And they are all well, the recent ones have been little sort of bolt ons from a product point of view that they can push into our distribution channel. It's been pretty it's been these are small businesses. They're buying a product and then trying to grow them organically through distribution. Got it. And then one more just on leverage. Where will you be kind of pro form a at year end? Or where will this bring you to pro form a? I mean, I guess I can do the math, but Yes. We'll be somewhere in the low 4s from a leverage net debt to EBITDA standpoint. So well within solid investment grade. And as Neil mentioned, we've already gone through it with the rating agencies. So similar to where we were with Deltek. Sorry, one more. How much cash flow will this ultimately bring? I didn't see that in the slides. Yes. It's our normal conversion. So on $290,000,000 of EBITDA, dollars 220,000,000 to $25,000,000 of cash flow. Okay. Great. Thanks a lot. Our next question comes from Joe Giordano of Cowen. Please go ahead. Hey guys, good morning. Hey, good morning, Joe. Hey, just on the leadership team, I know like when you guys did foundry, it was there were some new people stepping up to new positions. Can you talk about like how that transition is happening here and like how locked up are these people are contractually locked in or how is that going to look? So you can you never contractually lock somebody in, right? I mean, it's you can provide them a wonderful incentive and a culture in which they can be excited to come to work every day, which we think we've done and do with all of our acquisitions. We spent a lot of time with Amy, the President and CEO here. She spent a lot of time with her team members individually about us. And I think we're all excited about the progress, right? So we know this team has worked very hard for 4 or 5 years to position this business for this moment to sort of capture all the opportunities and they want to see that through. So no, there's no real shake ups of the ranks there coming over? No, we're quite excited about this team coming over. So you talked about the niche that Vericor is leaders in. There are some large companies that do, I guess, big insurance applications that may be outside of this niche. And how does that the risk of those SAP type companies like can they move into something like this or how deep is that moat around the niche that you're in? We think it's a pretty deep moat, lots of barriers to entry in a very well served market, right? And so it's also the workflows for an agency are completely different than the workflows of making something or it's just completely different from a software configuration point of view, right? Think about what the business is of an independent agent. So yes, there's none of those sort of household name SAP Oracle, they don't exist in this market for lots of reasons, not the least of which is the regulations that you have to operate in. And then last from me, a quick one. Mike, what's the typical length of the contract? Is it are they normally like 1 year annual contracts that kind of just pricing changes each year? They're anywhere between 1 3 years. I think the average is a little bit north of 2, but this is really about the relationship they have with their customers from a value point of view, less about like a contractual one. And that's a philosophy at Roper by the way, which is we let the value do the talking more than we try to let the contractual terms do the talking relative to our customer relationships. Great. Thanks guys. Congrats. Thank you. Thanks, Joe. Our next question comes from Alex Blanton of Clear Harbor Asset Management. Please go ahead. Hi, good morning. Hey, good morning, Alex. A couple of numbers. The size of the bond issue that you're contemplating? Yes. It's going to again, we haven't announced the bond deal. So but it roughly, if you do the math, dollars 2,500,000,000 to $3,000,000,000 sort of size. $2,500,000,000 to $3,000,000,000 of bonds? Correct. Yes. Yes. So you're keeping you're not going to use all of your revolver because that's Well, we have the revolver we've got we have a maturity a $600,000,000 maturity at the end of the year, right, that we have to contemplate for and then a small acquisition that we announced last week that we expect to close towards the end of the year, 1st part of next year that reserving some of that revolver for. We also have cash on hand, as you know, Alex, that we can apply to this. We have about $1,500,000 in cash on hand. Yes, yes, right. Okay. The small acquisition, how big is that? $360,000,000 $365,000,000 $65,000,000 Did you put out anything on that release or anything? It came through our it's a company called EPSI. We're buying it from Allscripts and Allscripts and Strata put a release out. We're integrating with our Strata business. Allscripts put out a release? Yes. In our Strata. Strata, yes. As did our business Strata. Correct Strata. And that transaction is under it's going through the regulatory process and we don't expect it to close until later this year. Close later. Okay. The CapEx on this business as a percent of sales? Very asset light software business, right? So CapEx as a percent of sales, I mean, is what $10,000,000 or so of CapEx a year and then there's some capitalized software in there as well, in the sort of $10,000,000 to $15,000,000 range. $10,000,000 to $15,000,000 in addition to the $10,000,000 Correct. Okay. Do you have any competitive action against Verisk? We're aware of Verisk. Verisk is not a meaningful competitor in these niches. Okay. If you take the $3,500,000,000 you divide $590,000,000 in revenue, that's 17%. Is that the way to look at it? I'm sorry, what was the first number? Well, dollars 3,500,000,000 you said it's $3,500,000,000 market. Okay. Market share. Yes. Go ahead, Neil. No. So you can do that math, right? But it's a little more nuance in that. They have higher market share on the agency side and they have lower market share on the carrier side. The agency side is a little bit slower growth and the carrier side is a little bit faster growth as you'd expect with those market dynamics. Right. So are you the largest? Is this the largest? On the agency side, it's a duopoly essentially with Applied Systems. We're about the same size. And on the carrier side, it's very wide open competitive from because it's a lot of small bolt on niche competitors. So very fragmented. I see. So because 17% is not exactly a big share of this market. A lot of white space here. On the growth side, do you expect that the bulk of the growth will come from expansion of the market or expansion of your market share? Well, a little bit of both here. You definitely have a growing market, right? There is insurance premiums grow low to mid single digits, agents grow low single digits. So you definitely have market growth. And then you have a fair amount of market penetration growth, right? So this is the $3,500,000,000 is the market opportunity that's not fully served. And so you're certainly capturing more of the available market and then there'll be a little bit of market share gain as well. Okay. And finally, a foreign business? This is mostly U. S. It's the 97% in the United States. But is there an opportunity outside the U. S. Or is it too different? I think it's meaningfully different. The distribution of insurance products outside the U. S. Is very different. But hey, there was a slide in their management presentation about a long range opportunity, but it's nowhere in our models at all. Yes. Okay. All right. Thank you. Thanks, Alex. Thanks, Alex. 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 today and we look forward to speaking with you during our next earnings call. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.