Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead, Mr. Moxcey.
Good morning, and thank you all for joining us. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer, Rob Crisci, Executive Vice President and Chief Financial Officer, Jason Conley, Vice President and Chief Accounting Officer, and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing that we have agreed to sell a majority stake in Roper's 16 industrial businesses to CD&R. The press release also includes replay information for today's call. We have prepared a 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 page two. We begin with our safe harbor statement.
During the course of today's call, we will make forward-looking statements which are subject to risks and uncertainties as described on this page, in our press release, and in our SEC filings. You should listen to today's call in the context of that information. Now, if you'll please turn to page three, I will turn the call over to Neil. After his prepared remarks, we will take questions from our telephone participants. Neil?
Hey, thanks, Zack, and good morning, everyone. Thanks for joining us on short notice. This morning, we are so excited to announce that we've reached an agreement to sell a majority stake in our 16 Industrial and Process Technology Businesses to private equity firm Clayton, Dubilier & Rice. The specific businesses are referenced on the right-hand side of this page. Importantly, this marks the final step in our multi-year strategy to meaningfully reduce the cyclicality and asset intensity of our portfolio. Roper will be receiving approximately $2.6 billion in cash proceeds at closing and will retain a 49% stake in the newly created entity. Once completed, this transaction will meaningfully improve the quality of our portfolio and create additional M&A firepower for our enterprise.
Before we turn to the next page, I wanna take a moment to compliment and thank the leadership teams from each of these businesses. You've done an amazing job of building your business, investing for long-term organic growth, and building great teams. We're excited for you as this next chapter unfolds. Let's turn to the next slide and walk through the transactional details. As you turn to page four, let's go through the details. As you see, we are selling a majority stake in these 16 businesses to our new partner, CD&R. We will receive approximately $2.6 billion in cash proceeds at closing and retain a 49% stake in the new standalone entity. We're excited and honored to partner with CD&R. CD&R has a strong track record of partnering with corporations, standing up new enterprises the right way, and creating tremendous shareholder value.
John Stroup, a CD&R operating advisor, will be the inaugural CEO of the newly formed entity. Many of you have good history with John, given his strong value creation runs at both Danaher and Belden. In addition, Roper will have a meaningful role on the board of directors for the new entity. CD&R shares our belief in the strength in niche market leadership and greatly values our company's customer intimacy. CD&R's views towards value creation are completely aligned with ours, rooted in continued organic growth investments, which will be complemented by a newly created M&A capability. Because of these factors, we're excited about our ability to generate significant additional cash proceeds as we monetize our minority stake down the road. As it relates to these businesses, starting in the second quarter, they'll be excluded from guidance and reported in discontinued operations.
We expect to close the transaction by the end of 2022. Now turn with us to page five. As we turn to page five, we highlight that the quality of our portfolio, once the transaction is closed, will be significantly improved across several dimensions. First, we will be meaningfully less cyclical, with 75% of our portfolio being software and the balance being medical and water products. Second, we'll have higher levels of recurring revenue, with 80% of our software revenue being recurring in nature. Also, a large percentage of our product revenue is re-occurring in nature, such as Neptune's replacement demand and our medical product consumables. Third, we'll be even more asset light, given a vastly improved working capital profile, one that generates significant cash as we grow.
Finally, and worth noting, we'll have over $7 billion of M&A firepower to help further improve the quality and scale of our enterprise. Exciting indeed. Next page, please. Turning to page six, we highlight the impact of our portfolio transformational strategy. As you'll note, in 2018, prior to our divestiture activity, nearly 40% of our portfolio was either cyclical or project-oriented. After today's transaction closes, we'll have exited these businesses entirely. Again, Roper is now 75% software and 25% medical and water products, a much higher quality and higher value portfolio of businesses. Next slide, please. As we turn to page seven, we highlight for you both the higher organic growth rate and the less cyclical nature of our go-forward revenue base.
Importantly, we continue to work with each of our businesses to even further improve the organic growth profile of our enterprise. As you turn to page eight, we show you the progression of our asset-light transformation punctuated by the go-forward business having - 18% net working capital as a percentage of revenue. This asset-light business model enables us to generate tremendous cash conversion as our businesses grow in scale. Please turn to page nine. On this page, you will see the high-level financial profile for our go-forward enterprise. For 2022, revenues at the midpoint of our guidance range, which we've updated during the Q1 call, is approximately $5.2 billion. In addition, our go-forward enterprise will have EBITDA of roughly $2.1 billion and have EBITDA margins of approximately 40%. An impressive financial profile for sure.
Not included in these numbers, and worth noting, is the scale and quality of the enterprise that'll be further aided as we deploy our $7+ billion of M&A firepower. As we turn to the final two slides, we remind everyone that our strategy is the same. We compound cash flow by acquiring and growing niche market-leading technology businesses. This is what we've done for over 20 years and will continue to do. In addition, as highlighted on page 11, our value creation and governance model remains unchanged. We operate a portfolio of market-leading businesses in defensible niches. Each of our businesses has high levels of recurring revenue, strong margins, and competes based on customer intimacy, which yields highly resilient organic growth rates. We operate a highly decentralized operational structure that focuses on long-term business building. Our culture sets a very high bar for performance and focuses on continually improving.
We're all paid to grow, which reinforces our culture of transparency, nimbleness, and humility. Finally, we redeploy the vast majority of our capital to acquire the next great business. We do this with a centralized corporate resource team in a highly disciplined and analytical manner. This strategy, unchanged, delivers compounded and long-term shareholder value. Now let's turn to our final page 12, and get to your questions. To summarize, today, we are excited to announce the final step of our divestiture strategy, which has been focused on reducing the cyclicality and the asset intensity of our portfolio. Our go-forward portfolio is a higher organic growth rate profile, which has meaningfully less cyclicality, is higher quality given the higher levels of recurring revenue, and meaningfully more asset light. Roper will be even further benefited as we deploy our $7 billion plus of available M&A firepower.
Finally, we'll receive additional cash proceeds down the road as we exit our minority interest in a newly created entity, which will further help our shareholder value compounding to continue. As we turn to your questions, we're super proud of the work our leaders and employees for these 16 businesses and excited for what the future holds. With that, let's open up to your questions.
Thank you. We will now go to our question-and-answer portion of the call. We request that our callers limit their question to one main question and one follow-up. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touchtone telephone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Again, we request that callers limit their question to one main question and one follow-up. The first question today comes from Allison Poliniak with Wells Fargo. Please go ahead.
Hi, good morning.
Good morning.
Neil, you had mentioned, you know, in the last part of your remarks, you know, consistent Roper strategy, and I know CRI has been a big lens which you view future acquisitions. Does that approach get altered in any way, just given the asset, like, the, you know, certainty of the current business model at this point? Just any thoughts there?
No. The concept of cash return on investment, or CRI, is how do you build a business that grows faster at higher margins with less asset intensity, is what the core principles of CRI teaches us through our investment strategy and our operating discipline. No, it's core and bedrock to what Roper is about.
You know, you certainly, you're keeping some product businesses there. You mentioned the recurring revenue way. I'm assuming they're less project-oriented. Expand on why you're keeping those businesses versus divesting them as well. What keeps them in Roper too?
Yeah. As we think about the guiding principles of what we're trying to do, right? It wasn't to eliminate product businesses. It was to eliminate cyclicality and asset intensity, and along with that, with TransCore, sort of the project orientation. As we did that, we applied those guiding principles to the portfolio. It was very clear. The software businesses are in, the medical product businesses are in, the RF Tech businesses are in, Neptune is in, and then the businesses that we've communicated over the last three years, we decided to go a different direction.
Understood. I'll pass it along.
Thank you.
Thank you.
The next question comes from Julian Mitchell with Barclays. Please go ahead.
Thanks and congratulations. Maybe just a first question around a couple of the sort of financial points. One would be, are we thinking it's around just over $2 billion in net proceeds that you'll get up front? Then also as we think about the sort of minority interest and the go-forward entity, just clarify maybe, you know, how much debt is being put on that new entity, please.
Yeah. It'll be $2.6 billion, of course, of proceeds up front on an after-tax basis. You know, we chose this structure 'cause it's an attractive structure, so you know, we'd expect well over $2 billion of after-tax proceeds up front. Yes, it'll be a levered entity. I think it's you know, 6x-7x debt on the new entity. We're you know, we're certainly excited about the prospects for that and the proceeds we'll get down the road on a future exit off of our 49%.
Thanks very much. Then just the quick follow-up. Wondering if you could give any color on the sort of free cash flow margin of what's left, you know, looking at those numbers on slide nine or the sort of EBITDA conversion into free cash at the remain co.
Yeah. You know, it's been very strong, and it should be, you know, as we move forward, even stronger based on the working capital, right? If you see on that slide, now our net working capital is negative 18%, so that's a boost to cash conversion. You know, I think as we look forward, we're even better positioned. As you know, we convert our EBITDA to free cash flow consistently at a very high level.
Okay. Thank you.
Thanks.
Thank you.
The next question comes from Joe Giordano with Cowen. Please go ahead.
Hey. Good morning, guys. This is Giordano. I kind of like on the line with like Allison's initial question, like something like Neptune, clearly good business, but why does that fit now with the new kinda go forward portfolio? Or is this something that you have to evaluate independently?
No, I mean, this is the final. We're sending many messages today, and one of the clear ones is this is the end of the portfolio work that we've been embarked on over the last three and a half years. Neptune specifically, if you run through the characteristics of business model, it's remarkably asset light. I think it's got like ± $20 million in net working capital, where TransCore was a couple hundred million, right? It's highly recurring. It's not contractually recurring, but highly recurring in its orientation because of the replacement meters. It's not cyclical. The behavior is that when the economy's booming and there's housing starts, the meters go there. When it slows down, it's replacement meters, so it's principally not cyclical. Its organic profile has been robust for quite some time.
It continues to gain share year in, year out, against in the marketplace. It's a great end market. Importantly, as you think about the Neptune strategy going forward, it's a combination of the meter, the meter reading technology, but increasingly data and software about what you do with the content that comes off the meter, which plays right into core of what Roper's about.
You know, the same with the medical product businesses, right? They share all the same criteria that Neil mentioned. They're asset light. They've got a lot of recurring revenue. They've got consumables. They've got great organic growth. I mean, they fit everything that Roper looks for. They're in great niche markets. You know, that answer applies to all of our product businesses.
Cool. This might be more of like a moment in time type question, but you're selling these businesses at a good multiple, right? It's pretty similar to what you're currently trading at. You're probably gonna be redeploying into, I would assume, software businesses that have a higher multiple to acquire. Can you kinda just talk through the kind of thought process around that? Thank you.
Yeah. Sure. Sorry to talk over you there for a second. If you just think about what Roper has been about for 20 years, it's been about increasing the quality of the enterprise through our capital deployment, right? It's all been about CRI, asset light, recurring revenue. As the business portfolio is sort of pivoted in that direction, it's a more valuable enterprise, right? Through this, all this portfolio work, it is the remaining business, which will be supplemented by the $7 billion of capital deployment over time. No timetable on when that gets deployed. We're gonna do it the right patient way. It's just a meaningfully better, higher quality business that therefore is worth more on a relative basis than where we started. That's what the strategy has been.
It's unchanged and our guiding principles are that.
Cool. Just last from me. Rob, is there any opportunity to like, I mean, if a lot of M&A doesn't come up real quick, is there opportunity to kind of restructure the debt profile or anything like that with the proceeds?
Yeah, sure. You know, we won't receive these proceeds right until the end of the year. You know,
Sure
We're always expecting to deploy capital. You know, as there are opportunities on the debt side, you know, we'll certainly always look to do what's best for the shareholders.
Thanks, guys.
Thanks, Joe.
The next question comes from Jeff Sprague with Vertical Research. Please go ahead.
Hey. Thank you. Good morning. Just first back on the on the tax question or tax leakage question, Rob, a little unclear what well over $2 billion means, but, you know, I guess it's $2.2 billion. Should we expect the same amount of tax leakage on the remaining pieces as they come out? Have you structured this in a way that you're kind of deferring, you know, tax liability up front, but it's more back-end loaded?
I don't want to quantify the exact after-tax proceeds until we get the transaction closed. You know, certainly well over $2 billion and you know, and then down the road, you know, certainly there'll be again, you know, great after-tax proceeds, you know, once we exit the 49%.
Just to be clear on what you're now going to report, right? It sounds like you're taking the whole thing to disc ops, right? You're re-erasing all those earnings, but you're not giving yourself credit for the minority interest until post-close. Is that right? We're taking it all out for a couple quarters and then bringing back the 49% at the time of the close?
Yes. Yeah, that's correct. You know, I think it'll be excluded from guidance even post-close is the way we're planning to handle it, but certainly it'll be reported, you know, as required by GAAP standards.
Right. Your guidance, once you close, will include minority interest, right?
No.
No.
The concept either I'll use maybe some bad accounting terms, but we're gonna move these into discontinued ops. We're gonna guide to remain co and or go forward co, whatever, Roper without these items. Then once the transaction closes, we're reporting the minority interest. We're gonna still guide and talk to the company at the same level, the remain co level. Obviously, in the financial statements, you'll see what's happening to the minority interest, which is not marked to market, by the way, because it's a private thing. It'll just be a slug of assets sitting there till it gets monetized, so there won't be a ton of visibility.
Earnings will flow through.
A little bit earnings that flow through, but we're gonna talk to the business, and guide to it as sort of without the impact of either the discontinued ops or the minority interest.
Got it. Thank you.
You're welcome.
You're welcome.
This concludes our question and answer session. We will now return back to Zack Moxcey for any closing remarks.
Thank you everyone for joining us today. We look forward to speaking with you during our next earnings call.
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