Earnings Call: Q2 2018

Jul 26, 2018

The Rubber Technologies Second Quarter 2018 Financial Results Conference Call will now begin. I will now turn the call over to Mr. Zack Moxie, the Vice President of Investor Relations. Thank you, Britney, and thank you all for joining us this morning as we discuss the Q2 financial results for Roper Technologies. Joining me on the call this morning are Brian Jellison, Chairman, President and Chief Executive Officer Rob Crisci, Chief Financial Officer Neil Hahn, Chief Operating Officer Jason Conley, Vice President and Controller and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we discussed 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 quarter primarily on an adjusted non GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the Q2, 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 expense resulting from the held for sale classification of Gatan and lastly, a measurement period adjustment to 2017 provisional income tax amounts resulting from the Tax Cuts and Jobs Act. And now if you'll please turn to Slide 4, I will hand the call over to Brian. After his prepared remarks, we will take questions from our telephone participants. Brian? Good morning, everybody. So Slide 4 gives you the overview of what we'll go through today, the Q2 2018 Enterprise results, a detailed look at the segment and the outlook for each segment, the quarter 3 and full year guidance, and then we'll open it up for questions. So next slide, Slide 5, the Q2 enterprise highlights. We had, as you know by now, record 2nd quarter results, all time for revenue, net earnings, EBITDA, cash flow and a host of other things. Revenue was up 13% to $1,300,000,000 and organic revenue was up 9%. The additional good news, it was very broad based across all four segments really. Gross margin was up 40 basis points to 63.1%. So that demonstrates again we're not seeing very much pressure on either price or cost issues that you're hearing about from many other multi industry people. EBITDA is up 14% to $449,000,000 and EBITDA margin is 34.6%. The DEPS number is up 29% to 2.89%. Operating cash flow was up 50 5% in the quarter to $266,000,000 And importantly, we deployed $1,100,000,000 to acquire Power Plant and entered into an agreement to divest Gatan for $925,000,000 The timing at Gatan, we had hoped, would sort of demonstrate really as a trade out of power plan for Gatan. But the Gatan timing has got regulatory things that happen. So it may not really close until the end of the year. Really an outstanding quarter, very strong growth, margin expansion pretty much across the board and record cash flow. Next slide. If we look at the income statement, you can see that revenue reached nearly 1,300,000,000 dollars Gross profit was up by 40 basis points from 62.7% to 63.1%. EBITDA was up to 34.6%, so about 30 basis points of improvement there. Earnings before tax, which is the number we want to have in here because a lot of the earnings reports are really talking about this year versus last year without adjusting for the tax benefit. So earnings before tax is up 17%. Treatment. If you get to the DEPS number where you see the benefit of the tax Tax rate was 23.1% versus 31% the year before. So you can see that the Tax Act is certainly working for us. Next slide. On compounding cash flow, you can see that we delivered 266,000,000 dollars in the quarter, up from $172,000,000 last year. Our operating cash flow almost all turns into free cash flow because we have so little CapEx. So you can see free cash flow here of $250,000,000 And our trailing 12 months operating cash flow was $1,230,000,000 which represented 25% of revenue. So we're still on track for a very solid record cash performance in 2018. Next slide. If you look at the asset light business model that we've put in place, you can continue to see a really important facet, which is that negative net working capital number has now really become a sustainable thing. So that sustainability is quite substantial. If you look at the chart here, you'll see deferred revenue has grown in just 2 years from $281,000,000 in 2016 to $627,000,000 at the end of this quarter. So that's a $346,000,000 increase in deferred revenue in 2 years. Inventory is down to 4.3% of sales. And I always like to look at it not only just over this last 3 year period, but what was it 5 years ago. Well, 5 years ago, our inventory was 6.3% of revenue and now it's 4.3 percent. Receivables were 19.7 percent of revenue and now they're 16.4 percent of revenue. Payables and accruals were 11.3 percent of revenue and now they're 10.9%. Deferred revenue was 6.7 percent of revenue at the end of the Q2 in 2013. Now it's 11.7 percent of revenue. So when you add inventory and receivables, subtract payables and accruals and deferred revenue, were negative at 1.9% of sales. 5 years ago, it was 8%. So we've had a shift of 10 percentage points of total revenue in net working capital, which is why we were so committed to continuing the transformation of the company. And it's going to improve further actually when we get complete the trade out of Gatan for power plant. So next slide. Here you've got the segment detail and outlook. Next slide. If we look here at the 4 segments, you can see the gross margin and EBITDA margin of each of the 4 segments, which all of them are really best in class numbers. So I know people there's a lot been said about price, cost, tariffs. None of those are going to have any effect on us. We've got very nimble execution in the field. We went through our quarterly report process with everybody. And the nimbleness of the execution they demonstrated in there around any supply chain issues was really spectacular. We have such an incredible benefit because our cost of goods are so low compared to the typical multi industry company. I mean, you see all these gross margins, but when you add it all up, our cost of goods sold represents about 36.9% of revenue. So you just don't have the same pressure that somebody who's got gross margins of 38% and cost of goods sold 62% has. Our energy business is down to 13% of total revenue. Industrial Tech, which a lot of that is Neptune, is 18% of revenue. So the more cyclical items in here certainly have performed phenomenally in the Q2, but we don't see a lot of risk around that turning around over the course of the year. And RF and software is running 42% of revenue with medical at 29%. So it's still well over 2 thirds of the company's businesses. Next slide, here's Slide 11. So this is the first segment slide, starting with the largest at RF Technology in the quarter. They did $539,000,000 in revenue, which was 13% from the prior year. Operating profit was up 19% from the prior year. Operating margin was 29.6%, but in here you've got a lot of non cash amortization that goes into the operating profit margin. So looking at the EBITDA margin, you could see how fantastic the RF segment is. It's a 39.3 percent EBITDA margin. If you look at the Q2 highlights for the businesses, organically, we're up about 7%. Deltek had really a very, very good quarter, solid growth, very good execution in both their enterprise and small business platforms across both key areas of GovCon and professional services. And you want to remember that the professional services market we talk about isn't us doing services, it's professional services software for other people who are doing professional services. We had large wins in the quarter, some of which we're not allowed to talk about, but eventually they'll be known. That we've really had both an increase in the number of seats for the software and net new customers. So a very strong quarter for Deltek. Our freight matching business also had phenomenal results. We had significant adds in net subscribers. And the market for the spot market is exceptional right now, and we're certainly benefiting from that and expect to have that trend continue. Seaboard actually grew in its food and nutrition management software business on these healthcare campus type environments where they get multiple facilities. And that was a nice turnaround for us. Toll and traffic grew low single digits, but did a very good job in terms of project execution. So they didn't they had favorable variances. And then we had double digit growth from the customer service centers that we have and we're winning more and more business in that area. There's a lot more visibility today on the part of these people that are going out and soliciting work on customer service centers because some of the competitors have had significant challenges recently. And the competitive advantage of using TransCore has never been more apparent. Just recently, the Governor of New York was talking about the incredible success of the cashless tolling project that we managed last year and into this year, which came in both below budget and on time. And if you look at a lot of the other projects people talk about completed an acquisition and onboarded Power Plant. Probably the easiest onboarding process we've ever had because of the nature of the work that Power Plant does, they're very much on top of all the data. And it just made their conformance to our modeling very easy. It's certainly an industry leading niche application software business that we'll talk a little bit more about here on the next slide. ConstructConnect continued to build muscle and expand into what we want to do with it. It's a great network business. We want to have it broaden out to more software, so it can serve larger clients with larger projects. And that's on track for where we expect it to be. In the second half of the year, you can see we're seeing sort of 4% to 6% organic growth for the segment. About 25% of the segment remains in the tolling and back office administration activity, but the other 75% are our businesses and software. We had strong growth in cash performance out of the software businesses in the second half. Toll and traffic will be low single digits in the Q3 only because it's got a tough comp with Saudi and the New York projects in Q3 that give us about a $9,000,000 headwind, but we expect it to improve organically in the Q4 with the timing of the technology piece of the business, the tags and collection technology shipping. All right, next slide. Here, this Slide 12 is the PowerPlan acquisition. PowerPlan is a leading provider of software and solutions for asset centric businesses. We like to talk about the business and the diligence process that you got to what somebody thinks is a telephone pole, but there's all kinds of things hanging on it. And from a tax and asset reporting requirement, you got to know how much of that pull belongs to whom. And as you might imagine, it's a tedious, tedious process. And our software and solutions make that become much more operationally efficient. It's required to meet tax strategies that people have. It mitigates the compliant risk they would otherwise have and it improves their cash flow. So it's an easy sale. It has strong competitive advantages with very high barriers to entry. I mean, the knowledge that you need to have to be able to help a client is quite substantial. They've got a great diverse customer base with a 98% retention rate on customers. The financial model is good. And as I indicated, it's going to be quite valuable for us because we're going to get a large deferred revenue balance once this thing is up and running inside our system. If you look at our acquisition criteria, which we occasionally publish, we say we wanted to have strong cash flow characteristics. This business certainly does. We want it to be asset light, meaning the net working capital would be modest, if any at all. We wanted to have an excellent management team, which this does. We wanted to be in a niche that's highly defensible. And we want to have deep domain experience, which this business requires and fortunately has. We want to have a lot of recurring revenue, and we certainly have that with this business with subscriptions and continuing long term contracts. And then we like it to have multiple growth opportunities, which this business has, both in the asset heavy industries as well as some other opportunities. Interestingly, if you sort of compare that to Gatan, which is a great business, and you go through the same criteria, so strong cash flow, Gatan, check the box. Asset light, not so much. Quite a few assets there for a Roper type company. Excellent management team that probably best in class really. Niche market leader, absolutely. You couldn't get more niche than Gatan. Deep domain experience, many of the world's experts really are PhDs that are inside our Gatan business. High recurring revenue? No. Almost no recurring revenue. Multiple growth opportunities, well, they're all focused around this emerging cryo EM technology, which is wonderful, but it doesn't have multiple technology, which is wonderful, but it doesn't have multiple platforms. And it's certainly more cyclical. So the trading out of PowerPlan and Gatan is very strategic for us. Next slide. On Medical and Scientific Imaging here, you can see revenue was up 7%, EBITDA margins came in at 41.5%. Very strong growth and execution in the niche medical software businesses, the smaller ones, which is Strata Decision Technology, Data Innovations, SHP and SoftWriters. And all of those really performed very well. And even SendQuest U. S. Lab business was on target with our exo tate was down, but it was where we expected it to be. So that was actually encouraging. We had good market adoption of Verathon's new bladder scan technology, which is kind of a breakthrough technology. And then the GlideStope consumables we introduced a while back have been growing quite substantially. Double digit growth for the automated surgical scrub and linen technology business we have, which they would say was a scrub excellent quarter. So these guys are you probably couldn't find a more passionate leadership team than the people at IPA and Atlanta, and that business is doing exceptionally well. Very strong revenue contribution from the backlog in Scientific Imaging as it's starting to ship. So that certainly helped. Notwithstanding that, we're still going ahead with the sale of Gatan, which we expect to close before the end of the year. It's already cleared the U. S. Requirements, but it's still got things going on where people are looking at it in Europe. High single digit organic growth in the 3rd quarter, and then probably tapers down to mid single digit growth in the 4th. The medical businesses will grow mid single digit, but we'll get some additional spike out of the Gatan cryo EM growth here in the second half of the year. We expect a strong Q3 imaging results in imaging because of that backlog. Next slide, which would be Slide 14. So Industrial Technology, really is just spectacular is the only thing you could say. Revenue was up 20%, operating profit was up 27 percent, operating profit margins, these are manufacturing companies, folks. Operating profit margins 32%, EBITDA 33.8%, up 140 basis points. Organic growth up 18%. Another record quarter for Neptune, which had double digit growth again, really driven by customer focused innovation. We're just winning an awful lot where people see that, hey, if I had I continue with Neptune and move into more collective technology, I can still keep my installed base. I don't have to rip everything out and replace it. So Neptune continues to perform exceptionally well. We've had meaningful share gains with our Cornell pump business. It's had a great year, but it had certainly a very, very spectacular quarter. One of the things Cornell has benefited is dramatically increased market share with the rental companies. And that demand was really strong from an order perspective early in the year. We think that will kind of taper out some in the Q4 in terms of shipments, but the orders we expect to be very strong as the rental fleets get replenished. Roper Pump had very nimble execution in the quarter, So they had outsized growth. But when the whole place grows by 20%, there's really nobody you'd sort of single out to say they disappointed anybody because they certainly nobody disappointed as everybody did spectacularly well. We think we're continuing to have double digit growth in the Q3 and then mid single digit growth in the Q4 only because the comps get more challenging. Very strong leverage that we get out of these businesses, which you can see in the numbers. The Energy segment is a similar kind of story. Organic was up double digit at 12%. The upstream application businesses, AMOT, Metrix, DES and ViaTran were very strong. And then importantly, our compressor controls business after being down and then sort of getting to the point of being flat actually returned to growth in the quarter. And that's a much more long cycle business. So that's encouraging that that will be coming up while maybe some other businesses would moderate. The industrial end markets are pretty strong in every category that we're in. So we still see Q3 with double digit organic growth. And then Q4, similar to industrial technology with kind of mid single digit growth, strong leverage. Energy segment was up 16% on revenue and 28% on operating profit. So that's is just a proof of leverage, strong leverage. You can see EBITDA margins were 30.5% for the segment, so pretty spectacular. Next slide, as we look at updating the guidance and we go to Slide 16, the guidance update, we're raising the full year guidance from $11.40 to $11.56 as a range or creating it there at $11.40 to 11 that's up from 11.08 to 11.32. So at the midpoint, it's up 0 point 28 dollars Organic revenue growth, we're now raising to 7% for the second half of the year. Previously, we'd said 4% to 6%. Percent. And 3rd quarter guidance, we established at $2.89 to $2.95 Next slide. If you look at the summary then of this very, very good quarter, you can see that the niche market strategy and our ability to execute in a nimble way continues to deliver outstanding results. We had record results as we've covered throughout the talk, 9% organic revenue, everybody grew. Gross margins up at 63.1% demonstrates that we really aren't seeing these price cost issues or supply chain things from, foreign tariffs. Earnings before tax were up 17% and the diluted earnings per share adjusted diluted earnings per share were up 29% to $2.89 Operating cash flow was up 55%. The Asset Light Diversified Technology transformation that we've been doing for several years now continues. The Power Plant acquisition sort of shows exactly the kind of assets we'll be acquiring. The agreement to divest Gatan strengthens our balance sheet and gives us several $100,000,000 of additional capital to deploy, along with repatriated money that's coming in. So the balance sheet is still in great shape. We continue to see a lot of attractive acquisition opportunities and the pipeline is pretty significant. So we're looking at both large deals and some bolt on things. We're fully we've got our teams fully deployed on the acquisition side of opportunity. Our cash return on investment discipline continues to prove that that's the best way to create shareholder value over a long period of time and compounding cash is what people should be looking at. So we had an outstanding quarter. We got great momentum and let's open it up for questions. Hello? We're ready for questions. Thank you. We will now go to our question and answer portion of the call. Our first question comes from Deane Drang with RBC Capital Markets. Hey, I appreciate the fact you preempted all the price costs and tariff discussions because that's been tying up a lot of these conference calls. Maybe the first question would be some clarification on the 2018 guidance, whether that includes power plant accretion and could you size that for us, please? Yes, sure. Good morning, Dan. It's Rob. It does. So power plan probably adds $0.12 to $0.13 to the second half, so that's included in the guide. We also, if you look at the second half, have a little bit of additional FX headwinds. We've included in there probably $0.05 or $0.06 and a little bit higher interest cost on the fact that our revolver costs have gone up as the short term LIBOR rates have gone up. So that's all included in that second half guide. And where about Power Plans accretion to free cash flow? Sometimes you give that data point as well. Sure. So I think when we made the announcement, we said that it was about a $60,000,000 addition to cash flow on a 1st 12 month basis. That's without the financing cost. So again, here it's where you do you apply the cash from PowerPlan to that, do you apply interest rates? So we as you know, sort of the corporate balance sheet separate from the individual acquisition. So that the company will deliver $60,000,000 less the financing costs, however you want to apply that. Got it. And then just as a follow-up, some context of the Gatan divestiture. And Brian, you and I have had discussions over the years about your willingness to part with this asset. And your refrain always was that someone wants to pay us the multiple that we need or we would expect and it looks like you got it at 18x. And I know Rob has insisted there's not a big portfolio review going on. I get that. It doesn't look like there's any soft spots in the earnings today. But are there other cyclical businesses as you do this transformation that you might be able to exit similarly? What when we went through that list of what we look for in an acquisition, that's the same list we would look at for anything we own, right? So the Gatan, while it's certainly the best technology available in its area and has incredibly great people in it, misses on a number of our things. Many of the other longer term businesses don't miss on those. So let's take a pump company, if it's got substantial spare parts, that sort of offsets some recurring revenue stuff. Gatan has 0 spare parts. Gatan is a business that was acquired in the 90s by Roper at a time it wanted to go into areas that were scientific really. We're not pursuing scientific areas. We're pursuing areas we feel we really know how to manage exceptionally well. And if there's any cyclical content, we're totally on top of it. But Gatan's cyclicity can come out of the National Institute of Health or the Japanese investment, you can't do anything about that. And it's going to an owner where they have incredible synergies that we just don't have. So it's a very good acquisition for the people that are buying it and it's an appropriate sale for us. But just to put you on the spot, Brian, are there other Gatans within the portfolio that you'd consider divesting? We really don't have anything that's as scientific as Gatan, which has no recurring revenue. If there was some business we thought was going to require additional capital investment that was unattractive, we'd certainly look at it. But we don't really have anything immediately for sale. I will say this, because of the Catan sale, it's been a whole lot of new inbound calls about various businesses because I don't think anybody believed we would ever sell anything. Our next question comes from Steve Tupholme with JPMorgan. The cash flow has been a little bit lumpy, maybe a touch light in Q1, but very strong here in the Q2, a nice catch up. What do you expect for the year, maybe for the second half and some of the moving parts there? You talked about the deal that's adding $60,000,000 before on an annualized basis. But what's just high level what to expect for the year? Anything unusual? Yes, Steve. I think you're right. So we did outline last quarter, right, the lumpiness in Q1 around some one timers on when we got paid with some of the big TransCore projects and some tax one timers. So you're right, we made that up in the 2nd quarter, really nice growth and we'd expect strong growth in Q3 and Q4. So when we get on a full year basis, we should be approaching double digit growth for cash flow on a full year basis. So it should be pretty strong in the second half. Okay. And then just on kind of Anything out of the ordinary from a macro perspective on the industrial side? Yes. So the book to bill and order performance in those segments where it matters, industrial, we're actually 1 of 3 book to bill. So good orders at places like Neptune and Roper Pump. So that just gives us more encouragement, as we mentioned, for continued another double digit quarter in the third. Yes. I think no question that the comps in Q4 are more difficult than because we had quite substantial growth in the Q4 last year. That's why we're talking about kind of mid single digit growth. Also, there's an interesting facet where we've had market share gains with rental fleets this year, particularly at Cornell. And they ordered earlier than normal this year. So we don't know if that will repeat itself in the Q4. If it does, we might have some upside benefit there, but that's unusual. Usually, they don't start placing significant orders until the year is underway, and they have a firm view of what they think their demand will be. So there's some variability there, but it's only to the upside, I think. Our next question comes from Christopher Glynn with Oppenheimer. Thanks. Good morning. Some good elaboration on power plant. I wanted to maybe go a little further. Any specific levers with that name under Roper's ownership, particularly that stand apart from how you view the majority of your acquisitions? And in particular, you had the comments about multiple growth opportunities. Maybe we could build on that and if there's any thought around opportunity for pricing for value. Well, a couple of things. I think let me just start by saying one of the benefits that happens when we acquire any one of these companies that came out of private equity is this massive relief of their customer base saying, I've always wondered what was going to be the exit? Who is it going to go to? Was it somebody that's going to invest in the business for growth? Is it going to pay attention to customer service and enhancements? So we know Roper is going to do all of those things. So that's a home run, and it creates a much easier end market sale discussion. That's proven out a lot in a place like Katarint with our legal software. Proven out at ConstructConnect, and it's certainly going to prove out at Power Plant. Now as far as the sort of specifics around the volatile growth path, I'll let Neil talk a little bit about that. Yes, and good morning, Chris. So I'd first start by saying the core of what they do, which is the asset and tax accounting for these very asset intensive end markets around utilities, power generation, energy, that just by itself is still very robust and vibrant. There's a number of new products the company is developing and to continue to sell and cross sell into that end market. Over the course of the last couple of years, they've also gone into some very close adjacent markets with some success. I think oil and gas, a little bit less asset intensive, but nonetheless have the similar issues. Also, over the course of the last couple of years, they've worked very hard at migrating their technology stack into the cloud, which then enables them to do open an uplift opportunity where they migrate the existing on premise customers to the cloud, which is a net growth driver for PowerPlan like it is with Deltek. Part of that is because you're onboarding more responsibility for the tech stack, but also to your point that gives you an opportunity to price a little bit more for value. And then finally, with this lighter weight implementation in the cloud, they're able to go into entirely new markets, think retail manufacturing that have similar type issues and they're able to sell the SaaS solution to a business owner of a problem versus the technology owner inside the organization. So it's a multiple set of growth drivers and it's been that way with this business for the last few quarters and certainly continued into the Q2 of this year. Well, that sounds pretty good. You got an accounting change around operating leases. So it has a big effect on people's balance sheet. So you get a lot of people who've got new found interest in understanding every element of their operating lease programs and power plant software helps them immeasurably there. Sounds great. Thanks. Quick one on toll and traffic. How would you describe the opportunity relative to the more star competitive differentiation you talked about for service orders? And you don't usually describe toll and traffic as just low single digits growth as you did for the Q3. Well, it's a lumpy business. A lot of times, it depends what the corresponding quarter a year ago was. And so it was outsized because of the start of the New York City transformation to cashless tolling. And then, we had pretty big Q3 with Saudi last year. The contract stuff is we're very selective on what we'll take in terms of a new customer. So we're interested in customers where we're going to really improve their ability to execute, but not every customer is driven by that. So we're going to be very selective on what we take, but we're getting double digit growth. We think that's going to continue because all you got to do is pick up the newspaper or read about some of the horror stories of what our competitors have done to not be able to bring on anything new and wind up with millions of unpaid toll requests. So that kind of changes the competitive advantage we have because we deliver what we say we'll do, not everybody else does. Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Hey, just maybe parsing out the guide one more time. It looks like the guidance raise was primarily the beat this quarter as well as putting in power plant offset by FX. So there really isn't much of a change to the second half. Brian, I thought your commentary around industrial growth and where you could potentially outperform in the 4th quarter was interesting. I was wondering if you can maybe walk through the other segments and how you guys are thinking about growth in the second half of the year for each of the other segments? Well, I think we told you on balance, it's about 7% organic growth. I think each one of those segments, Liza, could go back and look at it. Yes, I think It's single digits, high single digits. So I don't know what more you want, Joe. Yes. So a little bit more difficult comp in the Q3 on the RF, on the tolling, as Brian mentioned, and then a little bit more difficult comps than Q4 across some of the industrial and energy markets. And then we do have timing of those imaging shipments are very heavy in Q3, so that drives that segment. So yes, I think we did tweak up the organic in the second half, probably a point versus previous guide. So there are a lot of gives and takes there to get you to the midpoint of our range. Got it. Yes. Now I just noticed that you guys were forecasting growth that was slightly lower in the second half versus the first half. And obviously, know the tougher comps in industrial, but just wanted to see if there were other puts and takes. I guess my second question is as you think about Gatan and the dilution from that business divesting into next year, can you just quantify that for us that we have that number? Well, so let me just correct what you just said, because actually the second half growth we have almost exactly the same as the first half growth. It's right around 7% organic, which was the same as the first half. So it is. Now one other point, we did have a very, very strong second quarter with Deltek. We mentioned some of the large shipments of new revenue or new recognition of revenue on wins. So some of that's probably a little bit bigger in Q2 than we originally would have had expected that later in the year, but that would be the only other kind of on timer. In terms of the dilution, so we'll touch on that certainly next year, but right, we would hope to deploy that capital in due course and you got to always think about if we're going to get after tax proceeds, we're going to redeploy that. And so that's the right time to measure the impact of a divestiture. Got it. Thanks, guys. Your next question comes from Joe Gordon with Cowen. Hey guys, good morning. Good morning. So I wanted to ask on Sunquest. You say it came in, in line, but that's good that you guys kind of I think you've ring fenced what that business is going to do near term. Maybe Neil, I'm just curious as to the confidence in that like in the future growth of that business or how do you kind of weigh that versus kind of this is the trend for the next couple of years? Well, when we first talked about the North American challenges at Sunquest versus everything else, the rest of the world of the diagnostic group, we introduced that a couple of quarters ago. We characterized it as being a couple of year issue, 2018 2019 issue. As we sit here today, a couple of quarters into it, I would say that continues to be the case and our belief. The international piece continues to do well. The interconnectivity or middleware piece to connect lab instrumentation to lab software continues to do well. And the team has done a good job of framing the North American strategy and starting to put hands on keyboards around new software we're going to develop, but that takes time to actually get done, released, and we'd expect the general trend line to continue here into next year. Okay. And then on CCC, was that growth coming from new projects or is that more from maintenance work? And then I just had one last question on DAT and just curious if there's any like blockchain implications for that business or anything they're working on there? Well, there's certainly some new construction orders that are coming online for the first time in a long time. But a lot of the work is upgrade work where people have been postponing various things until they see a better market. And so we've got a huge installed base. So we're getting both upgrades and just general improvements in plants and then some new construction orders, which we think will pick up more throughout the next 2 or 3 years. And relative to your blockchain question with DAT, it's just the nature of the DAT business where we're matching basically the supply demand side of the spot trucking market in North America, it doesn't really connotate to a blockchain orientation. That's more of a supply chain issue. So we do see more of blockchain activity happening, for instance, in our Itrade business around the food supply chain, but not so applicable at DAT. Okay. Thanks, guys. Our next question comes from Julian Mitchell with Barclays. Thanks. Good morning. Maybe just my first question on Medical and Scientific Imaging. How are you thinking about margins in the second half? Are we sort of thinking they should be flattish? And then what kind of operating leverage, I guess, do you think we should see looking out beyond that? And then related to that on Medical and Scientific Imaging, pro form a for the Gatan divestment, Could you just remind us what the recurring sales mix will be in the segment? Well, just so you understand something, Japan doesn't really have any recurring sales, right? So there is it's just pretty much all new business all the time. And we happen to be in an up cycle for Gatan because of new technology that we've developed in the place which the marketplace is accepting. Then if you look at the segment numbers, you got to be careful here because we've got the declining situation in the U. S. Lab business, which is exceptionally high margin. So actually if we pulled that out and segregated it, the margins would be going up, not down because the growth is in businesses with higher margins. It's just that when you've got a business with extraordinary margins, if it's down 2% or 5%, it's hard for the rest of it to make it up. So don't confuse yourself with the idea that there's any degradation in margin enhancement in medical because that's wrong. It's just the fall off of the U. S. Lab business at extraordinary margins. Yes, that's right. So the total of the segment would we have a better I think still down in the second half, but better than it was in the first half where it was down a little over 100 basis points. Yes, I mean, it's all the way down to 41.5 percent EBITDA margins here in the quarter, right? So it'll be better in the second half. So sort of down only slightly, I understand. And then Gatan, yes, I mean, I understand it's not recurring as you'd explained 20 minutes ago. I guess the question was just pro form a for it, therefore, how much is the recurring share of the segment going up? So yes, so that segment is well over, we call it, over 50% reoccurring revenue and it will go up from there, high 50s. If I'm back to the envelope, probably high 50s. Understood. Thank you. Sure. 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.