Earnings Call: Q4 2018

Feb 1, 2019

The Roper Technologies 4th Quarter 2018 Financial Results Conference Call will now begin. Today's call is being recorded. I will now turn the call over to Zack Moxie. Good morning, and thank you all for joining us as we discuss the 4th quarter and full year 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 Controller 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 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 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 and 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 3. Today, we will discuss our results for the Q4 year primarily on an adjusted non GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the Q4, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition related intangible assets purchase accounting adjustments to acquire deferred revenue a deferred tax benefit resulting from the held for sale classification of the Scientific Imaging businesses, a measurement period adjustment to 2017 provisional income tax amounts resulting from the Tax Cuts and Jobs Act, and lastly, a one time expense for accelerated vesting related to the passing of Brian Jellison. And now if you'll please turn to Slide 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Thanks, Zach, and good morning, everyone. Thanks for joining us on the call this morning. During today's call, we'll go through our Q4 and FY 2018 enterprise financial results. We'll then turn to our 2018 segment detail and our 2019 segment outlook. We'll then turn to our 2019 guidance and then take your questions. Next slide, please. This was really a fantastic quarter. Revenue, EBITDA, net earnings, cash flow, really any measure you can look at was a record for both the quarter and the full year. Revenue increased 12 percent to $1,380,000,000 with organic growth of 9%. Gross profit increased 13% with margin expanding 90 basis points to 63.5%. Of note, gross margins were increased in all 4 of our segments. EBITDA increased 12% to $496,000,000 and EBITDA margins expanded 30 basis points to 36%. Earnings before taxes increased 14% and DEPS increased 19% to $3.22 in the quarter. Operating cash flow increased 26 percent to $464,000,000 an astounding 34% of revenue. Free cash flow increased 27 percent to $447,032 percent of revenue, just eye popping cash flow. Before we turn to the next slide, we want to highlight a few topics. Relative to cost push inflation tariffs, the impact across our businesses in the quarter was modest and manageable, which is clear with our gross margins expanding 90 basis points to 63.5%. Pricing actions already in effect offset most of the supply chain impact, but the teams also quickly repositioned certain elements of the supply chains to minimize the tariff impact. Also during the quarter, we had the opportunity as we do every year to spend multiple hours with each of our businesses to discuss and challenge their forward strategy, discuss market trends, customer behaviors and competitive activity, talk through their enablement and execution of strategy and review the team's activities regarding talent development. So as we look back on 2018 and Q4, it was a very good quarter, a tremendous year and another proof point that our strategy works. As a reminder, we have a portfolio comprised of modest sized businesses that all have a niche orientation and market leadership position. When you combine that with an org structure that promotes close customer intimacy and nimble execution and have a widespread cultural orientation aligned on cash returns, great things can happen as they have this quarter and this year. And as we turn to the next page, I want to take a moment to thank our teams from around the world a tremendous 2018. Next page. As we look at the Q4 P and L, we'd just like to highlight the tremendous leverage from the top of the P and L all the way down to DEPS. Revenue grew organically 9%, EBITDA increased 12%, earnings before taxes increased 14% and debt grew 19%, just tremendous execution by the teams. Next page. We'll discuss our Q4 segment results starting in the upper left with our RF Technology and Software segment, which in the quarter represented 43% of our revenue. Revenue increased 18% to $590,000,000 Operating profit increased 19%, operating margins expanded to 29% in the quarter and EBITDA increased 19% to $229,000,000 which represented 38.8 percent of revenue. It's always good when your largest segment grows the fastest. The strength was across the group. We saw all our software businesses perform very well Deltek, DAT, Aderant, Seaboard, Itrade, ConstructConnect. TransCore grew as expected. Late in the quarter, we acquired a small business, Avitru, for about $90,000,000 We'll be integrating this business within our Deltek business. Davitu is a clear leader in the commercial construction specifications, content and software space. This product enables architects and engineers to select the correct and appropriate building specifications during the design process. Avitru has an exclusive partnership with the American Institute of Architects and has over 48 customers, most of which are architects and engineers. As a reminder, Deltek has a leading A and E enterprise application software franchise. 95% of Avitru's revenue is recurring and they're in the midst of a cloud migration. So this is a nice tuck in for Deltek. It allows for better channel exposure for Avitru and a broader A and E customer base for Deltek to sell into. Now turning to our Medical and Scientific Imaging segment. Revenue increased 9% in the quarter to $402,000,000 Operating profit grew 9%, operating margins were flat in the quarter and EBITDA grew 7% to $170,000,000 Similar to last quarter, it was quite strong across the board. Medical product businesses grew nicely in the quarter. Our medical application software businesses performed well and cameras in Gatan also performed well. Turning to our Industrial Technology segment. Revenue increased 8% to $223,000,000 Operating profit grew 15%, operating margins expanded 2 20 basis points and EBITDA increased 14 percent to $74,000,000 which represented 33.4 percent of revenue. Really capped off a tremendous year for this segment. Neptune continued to perform extremely well with continued market share gains and Cornell and Roper Pump saw their strength continue. And finally, our Energy Systems and Control segment, which represented just 12% of our business in the quarter grew 1% to $162,000,000 operating margins grew 11%, operating margins grew 3 20 basis points and EBITDA grew 9% to $61,000,000 which represented 37.7 percent of revenue. As we highlighted last quarter, we expected a bit slower seasonal Q4 ramp across these businesses. Given the volatility of oil late in the quarter, the Q4 seasonal ramp was a touch slower than anticipated, but the teams did a fantastic job managing margins in the quarter. So a year ago, when we presented this slide, we talked about our need to consider rethinking our segments. Throughout the year, we've done work on this and are close to finalizing our approach, which we expect to do so within the Q1. As a reminder, this exercise is solely focused on how we resegment our business, not how we operate our enterprise. Now, I'll turn it to Rob to discuss our P and L, our cash flow and our balance sheet. Rob? Thanks, Neil. Good morning, everyone, and thanks for waking up an hour earlier than normal to hear our call. So on Page 8, I'll go over the full year income statement. As Neil mentioned, it was an excellent 2018. We grew revenue 11%, which is more than $500,000,000 for the year. The majority of the growth was organic with full year organic growth of 8% 9% organic in each of the last three quarters. At Roper, as you know, we pride ourselves in the ability to grow both organically and through our consistent deployment of capital. And in 2018, we really benefited from both with the robust organic growth and positive contributions from PowerPlan and our other acquisitions. Margins also expanded for the year, gross margin up 60 basis points, EBITDA margin up 30 basis points for overall EBITDA growth of 13%, exceeding $1,800,000,000 for the first time. So we had very nice leverage on the growth. Earnings before taxes grew 15% for the year. As you will recall from a year ago Q4 call, we talked about the many benefits from tax reform for Roper and that certainly did play out as you see our full year tax rate decline from 28.9% to 21.5%. So adding up all those numbers, we grew our DEPS for the year 25%. Next slide. At Roper, we always believe that cash is the best measure of performance. And in Q4, we grew our free cash flow, as Neil mentioned, flow, we compounded 19%, which is very consistent with our long term track record of double digit cash flow compounding and we feel really good about our ability to continue to do that in the future. Next slide. So turning to the first of our 2 balance sheet slides. Driven by our asset light business model, we ended the 4th quarter with working capital to revenue of minus 3%, completing our 2nd consecutive year of negative net working capital. As you can see on the chart on the right, our deferred revenue continued to increase aided by seasonal software billing as we continue to grow our recurring revenue. So we thought I'd take a few short moments and sort of talk about why we think negative working capital is so important. So if you assume a $500,000,000 increase in revenue, which was similar to Roper's 2018 growth, A multi industry company with a higher working capital level, let's say 10% of revenue, would actually consume $50,000,000 of cash on their balance sheet in order to grow that $500,000,000 in revenue. The contrast for the same amount of growth, not only does Roper not consume cash on the balance sheet, we actually generate $15,000,000 of incremental cash due to our negative net working capital. So we really view the asset light model as very, very valuable and it accelerates our ability to compound cash in the future and we certainly expect to remain negative and comparing where we were at the year end 2017 to where we are in the year end of 2018. And we think it's very notable that we reduced our gross debt during the year by a little over $200,000,000 while at the same time, we increased our EBITDA by $200,000,000 So ending the year, our gross debt to EBITDA is down to 2.7 times. Our net debt to EBITDA is down to 2.5 times. So it's really a testament to Roper's ability to consistently and quickly generate cash and free cash flow that we can reduce leverage in a year where we deployed $1,300,000,000 in high quality exciting software acquisition. So if you look at our balance sheet ending the year, we are very well positioned to deploy capital and take advantage of our attractive pipeline of acquisition opportunities moving forward through 2019. So with that, I will turn it back to Neil to go over the rest of the presentation. Thanks, Rob. If everybody can turn to RF Technology and Software Slide 13. We'll go through and recap this segment and the next three segments for the review of 2018. You can see in the upper left, the segment really had fantastic financial performance in the year, revenue plus 13%, operating profit plus 17%, core margins expanding and EBITDA growing 16%, really a fantastic year. Importantly, the segment organic growth was 6%, but inside of that, our software businesses grew organically 8%. As we start with Deltek and remind you, Deltek is our application software business focused on the government contracting and professional services firm market space. They grew high single digit revenue with tremendous cash performance in the year. We break it apart on the GovCon side of the Deltek business, the scale benefits that we have continued. There are market share gains across both the enterprise or the large side of the government contracting space as well as the small and medium sized business. On the professional services for Deltek, the year was highlighted by the launch of VantagePoint, and we'll talk through this in a minute about the importance of that, and then we saw early traction in niche professional services end markets, specifically consulting and accounting firms. Across both businesses, Deltek is in a SaaS migration and for this and many of our software businesses, the SaaS migration is a growth driver. Turning to our Freight Match business, which is our full truckload spot market network business, just a record year from this enterprise based on network expansion and favorable end market conditions. The network expanded due to net subscriber adds, but importantly, the vitality of the network also was increased by the ARPU or the revenue per unit increasing for two reasons. 1st, because we're able to capture better pricing based on the value for the network from our customers, as well as launch a few smaller products that we can cross sell into or solution stack our customers. As we turn to Aderant, Aderant is our law firm application software business. Dean and her team did a tremendous year continuing to gain share from our primary competitor and grew double digits, fantastic job there. Itrade, which is our perishable food supply chain software and network business grew mid single digits with solid margin expansion. The team there did a nice job advancing the product features and improving the tech stack. Great job and we expect great things to come from that team going forward. ConstructConnect's pre construction network strengthened and they quite dramatically expanded their solution set. TransCore Toll and Traffic saw strength from its back office service and software offering and tolling project execution. Importantly, the back office software and service, they're proving TransCore is proving to be quite differentiated from the competition and importantly, that business comes with high recurring revenues and better CRI performance. And also in the year, we acquired PowerPlan in the 2nd quarter, another high quality niche application software business, very Roper like business and the team there did a great job onboarding into our culture and is off to a great start. Looking back over 2018, it was a great year in terms of innovation and that provide momentum as we head into 2019 and beyond. A few highlights to include. Deltek launching VantagePoint. This SaaS product opens new niche markets for Deltek, consulting, accounting, etcetera, but also over time enables a back end consolidation of several platforms into a single tech stack. This provides the ability to put more features into the product, cross sell more new products and drive back end efficiencies. Aderant entered the year with essentially one offering, large law. They exited the year with 3 SaaS recurring revenue offerings in addition to the core large law product. Organically, Aderant developed and launched a mid and small law SaaS practice management ERP solution. In addition, Aderant onboarded, integrated and started cross selling 2 small bolt on acquisitions, one focused on the law firm knowledge management space and the other focused on billing preparation and management. When combined, these three new product offerings are building a meaningful SaaS recurring revenue business within Aderant. Finally, I'll highlight ConstructConnect. This team executed its product strategy and roadmap extremely well during the year. They designed, built and launched the first truly integrated construction planning to take off an estimating solution in the market. The core to the Roper Strategy's innovation and it was a great year on that front. Now turning to our outlook for 2019, we expect this segment to grow 4% to 6% organically in the year with a bit stronger growth with our softer assets and a bit less with TransCore. Next slide. Now as we turn to our Medical and Scientific Imaging segment. This segment represented 29% of Roper's revenue in 2018. Revenue increased 8% in the year, operating profit increased 7% in the year, operating margins contracted 30 basis points, which was modestly better than we anticipated heading into the year, and EBITDA grew 5%. Importantly, segment organic growth was 7% in the year. We saw strong growth and execution in niche medical application software. Strata Decision had a tremendous year. They were just voted for the 5th year in a row to be number 1 in KLAS for their category. For those who don't know, KLAS is a consumer reports type reporting organization that ranks healthcare IT vendors. And again, Strata was number 1 for the 5th year in a row. Importantly, they also acquired many new customers, most notably the Cleveland Clinic and MD Anderson that they can add to their customer count today. Clenesis had a good year and we expect the momentum to continue with Clenesis. To remind you, Clenesis is our European laboratory information management business. They boast a 70% win rate on the projects they bid and across Europe in the various geographies, we see laboratories consolidating. Given our win rate and our large footprint, we expect to benefit over the many years as the European laboratory footprint consolidates. As we turn to our alternate site, growth there was led by our long term care and home health solutions, SoftWriters and FHP, and our U. S. Lab business declined as we expected. We saw rapid growth from our niche medical product businesses, specifically CIVCO, Northern Digital and IPA. We saw double digit growth from Verathon based on strong demand from our new bladder scan technology and recurring revenue gains from our GlideScope consumables. Importantly, Verathon reached a milestone in the GlideScope business line this year where the recurring revenue from the consumables outpaced that of instrument sales, so we expect very continued strong momentum in that business going forward. Also Gatan's revenue contribution was fantastic on the delivery of their next generation cryo EM products. Just take a minute to thank Saundra and Ed for their tremendous execution throughout the course of the year in terms of their new product development, their ability to deliver on their customer commitments, all while this pending sale to Thermo was in the back of their minds. Great job to the team there. And at this end of the year, we did announce and are in the process of divesting our imaging businesses in 2 tranches. First, as you know, we have a pending sale of Gatan to Thermo. We expect this to close in the second half of the year once the regulatory review with the UK is completed. We also announced in December the sale of our remaining camera businesses, the Teledyne, for 225,000,000. We expect this divestiture to close in February. A couple of innovations worth highlighting with our medical group center on Verathon and SHP, Both should help continue our momentum into 2019 beyond. As we look back, we celebrated Verathon's 10th year under Roper's ownership. It's very encouraging to see the high level of product vitality of Verathon. First, our new bladder scan product, which is enabled by AI based algorithms, is established as the best product in terms of bladder volume measure and accuracy and has the highest reliability performance characteristics. As we introduce this new bladder scan to the world, we are focused on upgrading our leading global market share to our new platform, as well as selling into new facilities and care settings. Next, there has been tremendous innovation in Verathon's GlideScope, our video laryngoscopy product line. Verathon recently launched a reimagined cart based system, which does a fantastic job of providing upgraded optics and display technologies, while also doing a better job with the workflow components of the system. In addition, the team wants a handheld version of GlideScope during the year. Finally, Verathon launched just last month a new product category, a single use bronchoscope called GlizScope B Flex. There is a very large global push by the market to use single use versus reusable products due to cleaning challenges. Verathon plans to leverage their very large global GlideScope monitor base in which the new bFlex integrates. It is very early, but we're cautiously optimistic about this new product category. Another illustration of innovation on the software side is SHP. They've done a great job creating a new product targeted towards hospitals. As a reminder, SHP benchmarks 60% of every home health encounter in the U. S. On a nightly basis. If you're a hospital discharging patients, you discharge to either long term care or the home setting. Importantly, if a patient comes back to the hospital, the hospital is not reimbursed for a follow on services. To help hospitals manage this risk, SHP created planning product to help hospitals ultimately discharge to either home health and or manage home health patients during the recovery. And as we look to our 2019 outlook, we expect this segment to grow between 4% 6% organically for the year. Next slide. Our industrial technology group, which is 17% of Roper in 2018, grew 15% to $900,000,000 Operating profit grew 21%, operating margins expanded 160 basis points and EBITDA grew 19% and finished net $301,000,000 for the year. Segment organic growth was 14%. We saw double digit growth from Neptune with continued share gains based on their customer focused innovations. We also had a great year at Cornell and Roper Pump, driven by meaningful share gains. As we look at our Energy Systems and Control segment, which is 12% of our revenue in 2018, this segment grew 19 excuse me, 9% to 600 1,000,000 during the year. Operating profit grew 20% and operating margins expanded 2 70 basis points with EBITDA finishing at 197,000,000 dollars or 17 percent of revenue. Organically, this segment grew 7% with strength in our upstream applications where we saw double digit growth. CCC returned to growth from new construction projects and we saw broad based growth in our industrial end markets. Turning to our outlook for both segments. We see low single digit in our industrial segment, which is based on continued Neptune growth, partially offset by upstream oil and gas applications. We see our Energy Systems and Control segment flat to slightly down in 2019. Of note, we see difficult comps for this segment during the first half of the year. Let me remind you that oil and gas is less than 10% of our revenue with stream being about 1 third of that. Clearly, these businesses have had 2 very strong years. They're not a large part of our portfolio, but certainly a cyclical part. Our field leaders remain generally positive and encouraged by January's results, but we think it's prudent to model these businesses somewhat cautiously in 20 19 given an environment of heightened macro uncertainties. If oil prices remain stable and or takeaway capacity constraints are cleared, our guidance for these businesses could prove conservative. Now let's turn to our 2019 guidance. We believe the business is positioned for a strong 2019. As such, we're establishing our full year adjusted DEPS guidance to be $12 to $12.40 Organic revenue is expected to be between 3% 5%. Our guidance model assumes approximate 22% tax rate, though there are tax planning strategies that may be able to lower this rate in the first half, but that is outside of our current guidance model. Importantly, this annual guidance includes Guidance excludes the impact of future acquisitions or divestitures. And specifically in our guidance model, we expect the Gatan divestiture to Thermo to close in the second half, but in our guidance model, it's in through the end of the second quarter. So Gatan is in for 6 months in our guidance model. And the pending scientific imaging camera businesses divestiture to Teledyne expected to close this month. Next slide. As we look back on our year here, it was really a fantastic 2018. Our diversified niche market strategy continues to produce very strong results. We saw 8% organic revenue growth and very broad based across all four of our segments. Gross margins increased 60 basis points and EBITDA margins increased 30 basis points. Free cash flow increased 17 percent to $1,370,000,000 or 26 percent of revenue. Importantly, we are very well positioned for a great 2019. Our CRI discipline, our niche market leadership positions, innovation and high recurring revenue drive consistent and long term cash flow compounding. Earlier this morning, we announced the addition of Satish Maripuri as a member of our executive team. Satish will focus his efforts on providing group leadership to a number of our software businesses. Satish has a long track record of building and growing a variety of software businesses. Perhaps most importantly, Satish deeply understands Roper, our model and our approach. He spent the past several months learning about Roper and is now starting to engage with several of our software businesses. So we're very excited to welcome Satish to the team. Turning to our future capital deployment, we're excited about 2019. Our balance sheet is super well positioned for a strong capital deployment year. The number of very high quality assets we've seen in the last several months is encouraging and our pipeline is quite full. Importantly, our CRI orientation and M and A processes help us identify the very best businesses. As we turn to questions, we want to remind everyone that what we do is very simple. We compound cash flow by running a portfolio of operating businesses that have market leading positions in niche industries. We provide the business leaders with Socratic coaching about what great looks like relative to strategy, operations, innovation and talent development. We incent our management teams based on growth and we have a culture of mutual trust and transparency. Finally, we take our excess free cash flow and deploy it to buy businesses that have better cash returns than our existing companies. These simple ideas deliver powerful results. Now let's open it up to questions. Thank you. We will now go to our question and answer portion of the call. We'll take our first question from Deane Dray with Royal Bank of Canada Capital Markets. Thank you. Good morning, everyone. Good morning, Deane. Hey, you guys are throwing off my biorhythms at such an early hour this morning. Thank you for waking up early as we said. Yes, sir. Hey, just to start it off, and I wasn't planning on doing this, so I just feel it's important to recognize the passing of Brian. In my career, I've never called or thought of anyone as a financial genius, but I think Brian was. And it just struck me is his legacy, his business model that has the Roper business model, talent development, all of that lives on and I think you're seeing it in these numbers today and I just want to take a moment to say that. We appreciate you saying that and agree with what you said. Terrific. All right. So business at hand, just it was interesting that with Deltek's exposure, there wasn't any issue, didn't sound like any issue with the government shutdown with all the projects. And did you see any effect there across your businesses? So the sort of bifurcated, but what we saw nothing obviously last year and we look forward into this year in the 1st part of January. At the top end, the enterprise side of GovCon, it's completely business as usual. As you can imagine, they have gigantic teams and staffs and they can flow their staffs to where the work is. On the very, very bottom end, the mom and pop, we saw a little bit of slowdown in booking activities. It's very, very small part of Deltek, but Deltek is highly confident that rebounds based on their experience of sequestration. All of that business was captured and then following couple of months. And so it was we view it as a push, if anything, and certainly not lost business. So in the grand scheme of things, very limited impact on the Deltek business relative to the government shutdown. Got it. That's good to hear. And then Neil, you gave a bit of a tease about the re segmentation. This has been talked about for more than a year and it makes all kinds of sense. Now I'm not expecting you to disclose any real specifics here, but just conceptually, how does this will it look like in terms of putting alike businesses into similar segments like consolidating energy? When what do you think the benefits that come from this, please? Yes, I appreciate that. So just every time we get asked about the re segmentation, we just want to make sure everybody understands it's just how we organize the businesses for reporting out to our investors. It's not how we operate the business. It's not changing any of the business model characteristics. It's just for communication to our investors and shareholders. To that end, the design principles are quite simple and straightforward. We want there not to be segments based on end market orientation as our strategy is not end market oriented. We will put like business models in segments and that we'll certainly have a segment structure that supports our long term multi industry view of our strategy as well as having a combination of products and software. But the confusion of having multiple types of products and energy across 2 different segments that will all likely be streamlined and cleaned up in the new segment reporting structure. All good to hear. Thank you. Thank you. Our next question is from Julian Mitchell with Barclays. Hi, good morning. Good morning. Just and I'll echo Dean's comments on Brian, of course. In terms of the guidance on organic sales, you just grew 9% in the 4th quarter organically, big step down in the guide to about 4% at the midpoint in Q1. Maybe just talk a little bit about the segments obviously leading that, how steep a drop off you're expecting in Industrial and Energy? And maybe any comments around the cadence of order intake in those two businesses in recent months, as you said, amidst the oil price volatility? Sure. Good morning. This is Rob. So I think in the 2 largest segments, RF and Medical, very consistent. I mean these are mid single digit organic growth segments for the most part if you go back last year and we expect much of the same for 2019. I think you're right. I think for the industrial and energy segments, we do see a little bit lower growth than we saw last year clearly. And I think Neil mentioned a few reasons for that earlier, and Neil, you can probably expand. Sure. If you look across the aggregate of our industrial and energy segments and the outlook, Basically, you see Neptune and CCC up for the year. We see our upstream assets down. And everything else in aggregate, the bucket of everything else is flattish across 2019. As I mentioned, the field is generally pretty upbeat. January activities were modestly strong. And our approach on guidance is we all saw the volatility in December in oil prices in that market. We saw a slight ever so slight impact on some of the Q4 seasonal sort of shipments that we talked about earlier. We also have a difficult first half comp across our energy businesses in particular. So we've modeled Q1 down with only modest improvements in the balance of the year. But importantly, if the takeaway capacity, the 3,000,000 barrels that's scheduled to come online or comes online or the oil prices stay where they are increased, then there could be positive levers in our model here specifically to the upstream assets that we modeled down for the balance of the year. Thank you. And then just my second follow-up around the medical business. Maybe just give us some updates on what you expect from the U. S. Lab business in 2019? And also just to confirm that the delay on sale of Gatan that in no way I assume affects your capital deployment given how strong the balance sheet is? I'll take the Gatan 1 first. No, I mean it doesn't at all. I mean we're very active and have the balance sheet that Rob shared was looking through any impact of the divestiture of Gatan. So we're planning on being quite offensive to the extent that the targets present themselves. Relative to Sunquest, we expect it to be down in 2019, although less down than 2018. That's consistent with how we set the situation about this time last year about what the next couple of years look like for Sunquest. Thank you very much. Yes, just to be clear, for the U. S. Part of Sunquest. Got it. Thank you. Yes. Thank you. And next we'll hear with Oppenheimer with Christopher Glynn. Thanks. Top of the morning. Good morning to you. Good morning. Nice job. So good comments on Aderant and Deltek on the share gains and explanations there. I was also looking for an update on PowerPlan, the impact Roper is having, any new initiatives on pricing or sales organizations? Well, we just it's still pretty early days with PowerPlan. They had a very busy year last year They had a newer SaaS offering around lease accounting. So that had tremendous uptake given the accounting changes. So that little bit of a pig through the Python in terms of getting all those implemented and they did a very good job in that. We ran them through our planning process. I thought their end market orientation was good. They're also we bought the company that was in the mid innings of a SaaS transition. So they're quite busy in terms of upgrading their tech stack and just getting the first early implementations on the new tech stack with the recurring revenue SaaS part of that business. So early days, but as we mentioned, they onboarded fantastically well and team has acclimatized well to our governance model and our structure. Okay. And then similarly for Itrade, you've had some pretty consistent growth there, at least for a short bit here. Just wondering what the lay of the competitive and market opportunity profiles is like and particularly outside the U. S. If that's starting to tap? Well, Itrade is mostly a U. S. Business. It's not exclusively U. S, but mostly U. S. From a network businesses. It is a supply chain network that has network scale that's larger than anybody else. And so the relative market share advantage that we have in that business is quite large over our next largest competitor and really haven't seen a meaningful challenger in that business for several years. Again, it's the network scale and then Rhonda and her team over the last 18 or 24 months have just done a great job on the product and the features and driving even more customer loyalty and uptake. It's always had a high recurring revenues and high retention rates, but now the ability to sell more value in the product stack is encouraging. We'll next hear with Steve Tusa with JPMorgan. Hey guys, good morning. Good morning, Steve. Hey, Steve. I've been up since 4 am, went for a run, so this is piece cake. No problem. I say move it up, Let's cut the wheat from the chaff. Sharon didn't run this morning, so you're a step ahead of Sharon. Impressive. I'm actually joking. I actually broke my ankle on Sunday, so I'm not really moving very much. So again, on a more somber note, our condolences obviously around Brian. I echo Dean's comments. I think you said it pretty well. So sorry to hear about that guys. Appreciate it. Thank you. Thank you, Steve. I guess just the acquisition pipeline, with all these kind of crosscurrents out there and with multiples coming in a bit, I mean, is this at all is this cycle timing at all enough to kind of change people's mentalities around deals at all or no, not yet in valuations? So generally speaking, not generally, it's absolute. I think a fact that private valuations, we buy everything from private equity, lag any change in public and they also don't have the volatility of public. And so that's just an observed fact in the market. The other thing I would say to that is valuations remain robust in the private markets, but the assets that we will all come to, I think you all come to appreciate and we look for the niche orientation, the high retention rates, the mid to high single digit growth, the generally non cyclicality, high recurring revenues, those assets and high cash flow, low to limited CapEx, those command a higher price than your average company and those are the type of businesses that we look for. So we'll continue to do that. The other thing which we always do, we do it with our Board a few times a year as we go through models to say is it better to continue deploying through valuation environments or wait and every time the mass says to continue to deploy through because the compounding effect overwhelms any market timing you could possibly dream up. And so our strategy has been for the last 5 years to invest through the cycle and we'll continue to do that. Okay. Is there just one last one. Now that you're kind of running the show there, what's kind of the biggest challenge you see as far as maintaining this type of performance? Well, the beauty of this business is that it's comprised of 50 businesses and I won't go through all the things you know about their niche orientation, defensibility, the market share leading positions that we have. And so the cash flow generation side of this business is pretty stable and robust given the assets that we have in our org structure. I think there is certainly a challenge or an opportunity we have to continue to add planning rigor and strategy execution rigor and talent development rigor through that organization, through the organization which we'll continue to do. And I won't say it's a challenge, but it is certainly something that is obviously top of mind. We spend a tremendous amount of time thinking about is how we deploy the capital, right? So we have process and rigor and CRI discipline that really minimize the likelihood of making a mistake. But Rob and myself and the entire team here spent a lot of time on that and continue to try to learn through our history and make sure that we do a good job relative to deploying capital going forward. So it's cash flow generation, cash flow deployment is how I think about what the job is and the challenges and opportunities associated with it. And I would just add to that. So you guys know that's very institutionalized. I mean, everything that we are doing is consistent with what we've been doing for the last 15 years. And Neil and myself have obviously been very heavily involved in all of the M and A we've done in valuation and execution in the last 6, 7 years. So it is no change at all in what we've done in the past and it will stay the same moving forward. And maybe just one thing. I'm sorry, go ahead, Steve. No, no, you go ahead. Yes. So the poor transcriptionists will love that. But the one thing I'd say is that it's a challenge I just wake up every day thinking about. As we get bigger, the concept that complexity can creep in is certainly something that I spend a lot of time thinking about and how at every turn we can avoid that and really keep this thing simple, which is one of probably the single largest thing that Brian left for the legacy is what we do is just very simple and we'll continue to do that going forward and that's very top of mind. Well, it sounds like you guys have too much money to spend and that's not a bad problem to have. I think there's a lot of other companies that would like that problem. Thanks a lot. Yes. Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Hi, good morning, everyone. Good morning. So I thought you did a nice job, Neil, of telling us about the different offerings that are now in place at both Deltek and Aderant. But can you maybe just delve into that a little bit more? What are the opportunities from those offerings? And how are you seeing that translate into growth over the next couple of years? Well, I'll take them one at a time, maybe start with Aderant. The last 4, 3 or 4, 5 years and the next several years, the large law market will continue to be a viable growth driver for the business. And all the legacy reasons why we've won, we think will continue. So as you think about building a recurring revenue business, you build it on top of that larger piece. And so while each individual piece of the recurring revenue piece that we talked about with Addern earlier, by itself is small. When you stack it on top of an existing business, it can become pretty meaningful. And importantly, it extends your the company is also working in its R and D pipeline to add to build bolt on products that you can sell into large law and the mid and small law size practices. So it's just a concept of which we talk broadly about with our software business is about solutions stacking. So you spend a lot of money acquiring a customer and hopefully selling them 1 or 2 products. And then as you certainly once you have the customer, it's much easier to sell them additional products, especially if they're fully integrated in with the existing products that they have. And so that's a strategy specific, not specific to Adern or Deltek, but ConstructConnect or DAT or Itrade. And so we can certainly spend more time offline about it, but that's the way we think about growing the product strategies of these businesses. Fair enough. And maybe just kind of following on and staying on RF Tech for a second. Obviously, that business has evolved a lot over the last several years. And how do you think about then the cyclicality of this business now that you're so much more of a software oriented business if we were to go into a downturn? How resilient do you think this business is? Which business are you referring to? I was thinking about the whole segment. I mean, obviously, there's a variety The RF segment. Yes, the RF segment. Yes, sure. So the TransCore business, which actually is a highly recurring a high recurring revenue business, I mean, yes, there are projects that come in and out on any given year, but there is a huge base of recurring revenue there. But that continues to be a smaller part of this segment as currently reported. Software has now become 2 thirds and growing of the segment. So very, very high levels of recurring revenue. If you look at our RF Tech segment organically over the past several years, I mean, it's very, very consistent growth and that continues to sort of tick upward over time as we've added more of these high quality software businesses. So it's really not cyclical at all in this segment at this point in time. All right, guys, good to hear. And again, wish my condolences for Brian as well. Appreciate that. Thank you. We'll now hear from Robert McCarthy with Stephens. Good morning, everyone. Can you hear me? Perfectly. All right. Crystal clear. Well, obviously, I echo the nice things said about Brian. And I think you guys know that. I guess the first question I would have is obviously you've given a lot of airtime to this re segmentation, the kind of risk at the more cyclical businesses of the portfolio. At some point, does it just become a situation where it's better in a spin or other hands? Because I just think about your management there, they're managing through this, but they are perceived as probably lower growth, more cyclical within the portfolio, and they're not getting capital going forward. So how do you bridge the gap to keep them motivated, keep them incentivized, given the context that clearly you're deemphasizing the strategic importance of these collection of businesses and what's kind of the end game here? Well, I'll start with your last statement about deemphasizing the strategic importance. I would say we're absolutely not doing that. All of our businesses, even the energy businesses are in niches, they're clear leaders. Importantly, they are tremendous cash machines, right. Their CRI performance is stunning. And so these businesses are fantastic businesses. They do obviously have some cyclicality with them, but they're fantastic businesses, period, full stop. So our strategy is the same. We have the collection of roughly 50 businesses. They generate the cash flow and we take all the cash flow and deploy it to businesses that are better than the core. So that's how I would summarize our feelings on that. Yes. And I would just add, I mean, there is a lot of investment in these businesses. As you know, it's not like we centralize investment and divvy it out. These businesses generate high margins and they are encouraged and they do. And I think Neil talked about some of the innovations in every single one of our businesses is investing to grow and that's why they have such great performance. So they are all very, very strategic in their own way. A great example of that is both at Cornell and Roper Pump. We've talked now all year long about the share gains that they've had in 2018. Those are directly a result of the investments we made in the channel and the product in the last down cycle. So we were there when others weren't there. And so I think our ability to sort of with the long term Verizon voting these businesses proves to be beneficial. Well, now that everybody is awake, I guess the question I have about acquisitions is, listen, you guys have done a great job in acquisitions. That's clear and great job in terms of the core operations of the business. But where to I think Steve's question earlier, I mean, how do you keep this performance up in the context of capital deployment? Where do you think the risk is? I asked Brian this years ago and he said really the risk is in if we buy a company that does not have quite the software or the code that we think it has? Or is it a question of market position? It wouldn't be a question of capital intensity because the nature of the businesses you buy are not going to have surprises with respect to what their CapEx or funding needs are. But could you just talk about kind of ring sensing the risks around Cry through the lens where you look at acquisitions and if you are going to miss, where is it going to be in your relative assessment, just thinking self critically? Sure. So I'll just I'll answer your question through the lens of how we deploy capital, right? So the first step in that approach for us is, do we like the CRI performance, yes or no. That is analytical, objective and is not subject to any bias or interpretation. So before we engage or do any work, we know that it fits our financial criteria. I think most companies, they're stretching or they stretch the valuations and assume synergies, that's not anywhere in our CRI math. And so we don't sort of romance ourselves in to the financial strategy of an acquisition is straight CRI math. 2nd is do will we think that management team will thrive in our environment. And we can spend more time about this later, but essentially is are they do they love building businesses, yes or no. You can actually somewhat objectively determine that based on if they've been running that business across multiple owners, you look back at the leadership CVs and see if they've had 3 jobs in their career versus 20, you get a sense that they love building businesses or not. And then 3rd, so after we know we like the financial performance, we know we have a management team that will thrive, but then is it a business that we Is it a niche leadership position or low market share advantage, recurring revenue, high retention rates, etcetera? So it's not certainly far from impossible to make a mistake, but the rigor of the process really makes it hard to do so. And so the punch line of that where we have been disappointed in the past is would be summarized and maybe they were a little slower to grow early until our strategy prod tool sort of have time to take effect. But it's far from value destructive from our shareholders because there's so much arbitrage value in the CRI map from the onset. And from Baird, we'll now hear from Richard Eastman. Yes. Good morning, Neil, Rob, Zach. Good morning. Again, I'll definitely second all the pleasant comments and nice comments about Brian. He'll be missed. Just a quick question around the ES and C business as well as the IT business. The incremental margins in both in the Q4 just exceeded the gross margin that those two businesses generate. And I'm curious, is that a mix issue in those two segments? Or how did they deliver that amount of leverage, I guess? Yes. I mean, I think in the energy segment, you had 1% growth. So that's just a sort of a small number situation. Situation. I think in the industrial businesses, look, there's we do have high contribution margins. And so as you get late in the year and you're delivering a lot of product, it's going to come through a pretty high contribution margin. So certainly over time, it's not going to be 100%. But certainly for a quarter, you can have pretty strong incrementals. Okay. Okay. And just I guess this kind of plays into my second question here again. When I look at 2019 and I look at this core guide of 3% to 5% for sales, if I add back the $0.25 that you have pulled out for Gatan and the other imaging businesses, I'm curious about the EBIT leverage you'll be able to show for the year. Again, if I just add that back, the EBIT leverage looks a lot like maybe 3% type of thing. So I'm a little bit curious if in your plan, assuming the Gatan and the Imaging businesses, is most of the compounding effect in EBIT going to come from M and A this year with your guide around the industrial businesses? Is that kind of how your plan kicks in? Sure. Yes. As you know, we don't include any acquisitions in the guide. So this guide is strictly based off of organic. We've got a lot of capital that we expect to deploy as long as the right opportunities are there. And so at the end of the year, yes, the compounding will always be a combination of our organic growth and our M and A growth. In terms of the guide, we are assuming roughly 30% to 35% leverage on the growth overall, which is pretty consistent with kind of long term trends. I think as Neil mentioned in our base guidance, because we are assuming some declines in some of the upstream businesses and there's going to be a little bit of delevering there that hurts you, whereas the software and the medical businesses generally lever at 40%. And so if you put it all together, you get something in the 30s for our baseline midpoint guidance, which we think is sort of a prudent approach at this point in time. I see. Yes, yes. And then just last question around Gatan, is there any chance you would share kind of that revenue forecast for 2019? I mean, I understand when you're taking it out, but the numbers would suggest that Gatan kind of decelerates off of what apparently was a really good 2018. Is that correct? Yes. So I don't really want to get specific on that given the fact that we're currently trying to get it closed through regulatory. But I would say that from a seasonality standpoint, it's always stronger in the second half than it the first half. So I think it is true, we're not assuming a lot of growth in 2019 versus what was a very strong 2018. Okay, very good. Thank you. Thank you. Our next question comes from Joe Giordano of Cowen. Hey guys, good morning. This is Tristan in for Joe. Thanks for taking the question. Neil, just a quick one. I was wondering if you changed anything this year in the way Roper sets its guidance since really that was the first time you had to do this at the entire company level? I guess what I'm trying to get to is how conservative though your guidance is this year compared to the previous years? Well, I'll give you a little bit of a process and turn it over to Rob, maybe he can add some color. So the process of setting this is the same process that we've gone through for the last 4 or 5 years. I've certainly been involved with it, but not at the helm, obviously. So the engagement with the company is going through all the plan reviews, doing the call downs in January, doing all the analytics, getting the market information. So it's the same process. I went through earlier about what the posture we're taking on our oil and gas businesses relative to Q1, the outlook. So we believe if the market, the takeaway capacity comes online or oil prices stay where they are or go up, there could be some positive levers. But other than that, it's generally the same approach. Rob, do you want to add? Yes. It's the exact same process we've done for the last 10 years. And so we certainly view it as well balanced. Great. Thank you, guys. Great. Thank you. That will end our question and answer session for this call. We now return back to Zack Moxie for closing remarks. Thank you everyone for joining us today and we look forward to speaking with you during our next earnings call.