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spk10: Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. I would now like to turn the call over to Zach Moxie, Vice President, Investor Relations. Please go ahead.
spk05: Good morning, and thank you all for joining us as we discuss the third quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer, Rob Cresci, 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 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 two. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements which are subject to risks and uncertainties as described on this page, in our press release, and in our SEC filings. You should listen to today's call in the context of that information. And now, please turn to slide three. Today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis. During and subsequent to the third quarter, Roper signed definitive agreements to divest its Transcor, ZTEC, and Civco radiotherapy businesses. Results for these businesses are reported as discontinued operations for all periods presented. Unless otherwise noted, the numbers shown in this presentation are on a continuing operations basis. For the third quarter, the difference between our GAAP results and adjusted results consists of the following items. Amortization of acquisition-related intangible assets, purchase accounting adjustments to commission expense, and lastly, income tax restructuring associated with our pending divestitures. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now, if you'll please turn to slide four, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants.
spk01: Neil? Thanks, Zach, and good morning, everyone. Thanks for joining us. We're looking forward to sharing with you the details of our solid quarter performance, as well as summarizing the acceleration of our portfolio transformation. As we look at the sequence of our call this morning, we'll start with our quarterly highlights and our recent divestiture activity. I'll then turn the call over to Rob, who will share the details of our financial performance and our bridge to continued operations. I'll then walk everyone through our segment by segment performance and our outlook for the balance of the year. As usual, we'll leave plenty of time to talk through all of your questions towards the end. Next slide, please. As we turn to page five, this was another quarter of solid operational and excellent financial performance. On a continuing ops basis, we grew revenue, EBITDA, and debts north of 20% in a quarter. It's important to highlight and characterize the underlying strength of these results. Revenue on an organic basis grew 12% in the quarter. End market and customer demand was very strong across our portfolio. within both our software and product businesses. Importantly, our software segments were strong operationally with 10% growth in one segment and 17% in the other. Our software businesses' recurring revenue grew low double digits in the quarter, highlighting the underlying strength, stability, and increasing quality of our revenue base. To remind everyone, about 80% of our software revenues are recurring in nature. It's also worth noting that our 2020 acquisition cohort led by Vertifor continues to perform very well. As it relates to our product businesses, like most other companies, we're experiencing supply chain and logistical challenges, but the businesses nevertheless performed very well during the third quarter. As mentioned, customer demand was very strong throughout the quarter and backlogs are up over 50% versus last year. Given this strong operational performance, we continued our disciplined deleveraging of our balance sheet with net debt at 3.5 times trailing EBITDA. Also, we are improving the outlook for the year, which we will detail later in the call. Earlier this morning, we announced two new additions to our board of directors, Irene Estevez and Tom Joyce. The addition of Irene and Tom to our board is part of our long-term board refreshment process, Both are tremendous additions to our board. Finally, we've been active over the last few months working to accelerate the transformation of our portfolio through the announced divestiture of three businesses. Let's turn to the next slide, page six, to walk through those details and highlights. Next slide, please. During the last several weeks, we entered into definitive agreements to divest three of our businesses. Transcor, Z-Tech, and Civco Radiotherapy, the last of which we announced this morning. We agreed to divest Transcor to ST Engineering for $2.68 billion. In our view, this is the right time and the right buyer for Transcor, given their forward strategy and growth outlook. Taken together, we are divesting these three businesses for $3.15 billion, or about 20 times this year's EBITDA. Following the completion of these deals, ROPR will be improved. We will have a higher quality portfolio characterized by having higher proportions of recurring revenue, a higher organic growth profile, and be significantly more asset light. Finally, we are and will be very active in deploying these after-tax proceeds. Together with our internally generated cash flow, we will have about $5 billion of available M&A firepower to deploy between now and the end of 2022, none of which is included in our current financial outlook. Our enterprise will be even further enhanced once we complete this activity. Before I turn it over to Rob, I wanted to take a moment and highlight Roper's ability to govern, build, and improve businesses over the long term. As part of these transactions, we are retaining our DAT and LoadLink network software businesses, which were purchased together with Transcor in 2004, and we are retaining our Civco Medical Solutions business. Given we do not usually get clean bookends to transaction activity, this provides a unique opportunity to talk about the business building that occurs within Roper. Specifically, just after the acquisition of Transcor, we established DAT and LoanLink as standalone businesses with independent strategies and management teams who operated within Roper's governance and incentive system. Over the course of the last 15 years, these businesses have consolidated freight networks, continuously innovated their product solutions, built go-to-market capability, and grown revenues high single digits on a compounded organic basis. Similarly, The retained Civco Medical Solutions business has grown high single digits on an organic basis over the last 15 years as well. During this period of time, Civco Medical Solutions has continually innovated their product solutions, including their recent gel-free ultrasound products, and fundamentally restructured their go-to-market strategy. At Roper, we buy great businesses and provide an environment and incentive system where they get even better over a long arc of time. Now let me turn over to Rob to walk through the details of our financial performance.
spk12: Thanks, Neil. Good morning, everyone. Turning to page seven. On this page, we will review some Q3 financial metrics on a basis that includes the discontinued operations in order to compare our Q3 results to our previous guidance on an apple-to-apples basis. Including the businesses now classified as discontinued operations, we generated $1.621 billion of revenue and $602 million of EBITDA. Total DEFs was $3.91, which exceeded our Q3 DEFs guidance of $380 to $384. Free cash flow for the quarter was $431 million, down 2% versus prior year. Year-to-date free cash flow is now up 29% through three quarters. Now turning to page eight. Here we will review some of the key income statement metrics on a continuing operations basis. Revenue increased 22% to $1.463 billion. Q2 organic revenue increased 12% with strong growth across all four reporting segments, led by 17% organic growth in our network software segment. EBITDA increased 21% to $558 million. Net earnings grew 24% to $384 million, and debts also grew 24% to $3.60. Next slide. Turning to page nine. This slide will update you on the latest installment in our successful deleveraging story. Year to date, we have reduced our net debt by nearly $1.3 billion, and our total debt reduction is now $1.8 billion, since completing the last of the 2020 acquisitions approximately one year ago. We continue to benefit from our excellent cash conversion, as the nearly $2.3 billion of total EBITDA we generated over the last four quarters has converted to $1.94 billion of free cash flow, representing EBITDA to free cash flow conversion of 85%. At the end of September, our net debt to EBITDA has decreased to 3.5%. We are on track to be near three times by the end of 2021 and therefore well positioned to return to capital deployment even before accounting for the divestitures. The proceeds from the divestitures further amplify our capacity with $5 billion plus available for deployment through 2022, as Neil highlighted earlier. Next slide. Moving now to page 10. A quick look here at how the divestitures meaningfully improve our working capital position moving forward. This page repeats the working capital numbers we showed last October and adds a Q321 column that shows the enterprise including the removal of the three businesses being divested. We are now at negative 12% net working capital to revenue compared to negative 6% in the same quarter last year and negative 3% back in Q3 2019. Divesting Transcore reduces our net working capital by approximately $200 million with the majority coming out of our unbilled receivables balance. This structurally lower net working capital positions us very well for continued high cash conversion moving forward. So with that, I'll turn it back over to Neil to cover the segments.
spk01: Thanks, Rob. Let's turn to page 12 and walk through our application software segment. Revenues in this segment were $603 million, up 10% on an organic basis. EBITDA margins were 44.4% in the quarter. Across this segment, we saw organic recurring revenue, which is a touch north of 75% of the revenue for this segment, increase approximately 10%. This recurring revenue strength is based on strong customer retention, continued migration to our SaaS delivery models, cross-selling activity, and new customer ads. Across this group of companies, the financial strength was broad. To highlight a few businesses, Dell Tech, our enterprise software business that serves the U.S. federal contractor, architect, engineering, and other services and markets, had another good quarter. During the quarter, demand was particularly strong in enterprise GovCon and construction and markets. Importantly during the quarter, Dell Tech also had success at the top in the market with their cloud or SaaS solutions. VertiFOR, Our agency management cloud software business focused on P&C insurance agencies also had a nice quarter with very strong new bookings and nice expansion activity in some of their largest customers. Adderant, our legal software business, continues its momentum and market share gains. As we talked about last quarter, Adderant is gaining momentum for their SaaS solutions, this quarter setting a record for SaaS bookings activity. Consistent with the theme of this segment, Power Plan was strong as well, both in terms of new bookings and adds to their recurring revenue base. It's nice to see Power Plan's refocused strategy start to pay dividends. As it relates to our healthcare IT businesses, Strata, Data Innovations, and Klinisys were rock solid in the quarter. For Strata, their recurring subscription-based software solutions continue to perform well and grow nicely. Strata's integration of EPSI is on track and nearly complete. The customer base continues to demonstrate excitement for this combination. Finally, Clintus continues to gain market share in the UK lab market and has been established as one of the four strategic IT partners for the NHS. As we turn to the outlook for the fourth quarter, we expect organic recurring, excuse me, we expect organic revenue growth to be similar to that of the third quarter as recurring revenue growth rates are expected to remain strong. A solid quarter here for sure. And with that, let's turn to the next slide. Turning to page 13, the financial performance for this segment, as well as the next two, MAS and PT, are shown on a continuing ops basis. Revenues in our network segment were $343 million, up 17% on an organic basis, and EBITDA margins remained very strong at 51.6% in the quarter. The software businesses in this segment are now greater than 90% of the segment's revenue. Our NSS software growth was broad-based and driven by organic recurring revenue growth of approximately 17%. At the business level, our freight match businesses both in the U.S. and Canada continue to be solid growers. As a reminder, our freight match networks are critical and necessary elements to help organize and transact the trucking, shipping, spot markets. Strength in our businesses have been on both sides of the network, brokers and carriers, with continued strength in the quarter on the carrier side of the network. In addition, These businesses had improving revenue per customer ARPU as the value of the network continues to increase with higher levels of network activity. Foundry, our media and entertainment software business which enables the combination of live action and computer generated graphics to be combined into a single frame demonstrated continued recovery and growth in the quarter. Worth pointing out is Foundry's continued commitment to product innovation and the recent release of their AI-enabled Nuke features that allow for more automated workflow steps within the video compositing process. Our businesses that focus in and around the U.S. long-term care markets, MHA, FHP, and SoftRiders, did particularly well in the quarter. iTrade Network, our perishable food supply chain network business, had a nice quarter as Booking's growth was very strong and demonstrates a solid recovery in their end markets. Finally, we saw growth across the two product businesses within this segment, RF Ideas and Endovonix, with particular strength in their healthcare end markets. As we look to the fourth quarter outlook, we expect to see low double-digit growth in this segment, again, on a continuing ops basis. Please turn to the next slide. As we turn to page 14, revenue in our MAS segment were $392 million, up 9% on an organic basis. Organic growth in this segment, excluding Verathon, was again north of 20%. Notably, this is the last quarter for the very difficult Verathon COVID comp, and we expect Verathon to return to growth in Q4. EBITDA margins for this segment were 32.4% in the quarter. The EBITDA margins in this segment were consistent with our expectations, but lower than prior year due to Verathon's extraordinary prior to your quarter and the cost impacts of certain businesses navigating their supply chain challenges. Again, these results are on a continuing ops basis. Before getting into business specific details, across this segment, demand can be characterized as being very strong. The demand was across all businesses and across both capital and consumable products. Product backlogs are up over 50% as compared to a year ago. our businesses, each of which were impacted by supply chain challenges navigated through the quarter. As it relates to individual business performance, Verathon, coming off unprecedented demand for their intubation family of products a year ago, is roughly 40 percent larger today versus 2019. The momentum within this business continues given the larger installed base of intubation capital equipment, which enables recurring consumable pull-through volumes. In addition, Verathon is experiencing impressive growth within their Brachioscope product family and sustained growth across their bladder scan ultrasound franchise. Our other medical product businesses accelerated nicely in the quarter with particular strength at NDI and Civco Medical Solutions. Strong demand at Neptune continued in the quarter. Neptune's end markets continue to open up and improve, but have not fully recovered, especially in the Northeast U.S. and Canada. Demand across our industrial businesses was robust as well, and performance was strong, but somewhat impacted by supply chain challenges. For the fourth quarter, we expect low double-digit organic growth for this segment. This is based on continued encouraging market conditions, both in medical and industrial markets, and easing prior year comps for Verathon. Now let's turn to our final segment, Process Tech. As we turn to page 15, revenues in our Process Tech segment were $124 million, up 16% on an organic basis. EBITDA margins were 31.6% in the quarter. These results are also reported on a continuing ops basis. The short story here is we're seeing improving in-market conditions across virtually every one of our businesses in this segment and strong demand. Both orders and backlog were up approximately 50% in the quarter versus a year ago. Recovery in our upstream oil and gas businesses accelerated in the quarter. Cornell continues to perform well for us. This is partially based on market conditions, but also based on Cornell's product innovation, as they're seeing very nice demand pickup for their IoT-connected pumping solutions. Similar to that of our MAS industrial businesses, the businesses in this segment are being impacted by supply chain challenges, but continue to navigate through these issues. As we turn to the outlook for the fourth quarter, we expect high teens organic growth based on improving market conditions. Now, please turn to page 17, where I'll highlight our increased outlook for 2021. Based on strong year-to-date performance and expected continued momentum, we're establishing full-year 2021 guidance on a continuing ops basis of 1408 to 1412. As you read down this table, you will note that the full-year depth impact for the businesses being divested is $1.18. If you combine this with our newly established continuing ops guidance, You will note we are raising our full year outlook on an apples to apples basis by 26 cents on the low end and 10 cents on the high end. As it relates to the fourth quarter, we're establishing again on a continuing off basis guidance in the range of 362 and 366. Now let's turn to our summary and get to your questions. As we turn to page 18 in our closing summary, our third quarter was a solid quarter from both an operational and financial perspective. Simultaneously, we undertook significant work to further the transformation of our business portfolio. Revenue EBITDA and debts grew 20% plus. Organic revenue was up 12%. Across our enterprise, end market and customer brand was strong in terms of software, product capital items, and consumables. Throughout the quarter, our product businesses navigated through the market-based supply chain challenges. Given all of this, we're able to increase on an apples-to-apples basis our outlook for the full year. We also continue to deleverage our balance sheet by $1.8 billion since the 2020 acquisitions, with net leverage now coming in at 3.5 times trailing EBITDA. As it relates to the strategic governance of our enterprise, we're excited to be announcing the addition of Irene and Tom as new members of our board of directors. As part of our long-term board refreshment strategy, these two new directors will complement our existing directors and help enable ROPR to continue our track record of long-term cash flow compounding. Over the last decade, we have worked to enhance the quality of our portfolio. To this end, recently, we took actions to meaningfully improve the quality of our portfolio by agreeing to divest Transcor, ZTECH, and Civco Radiotherapy. Once complete, ROPR will be a better version of ROPR. We'll have higher proportions of recurring revenue, higher organic growth prospects, and be significantly more asset light. In addition, we expect to have roughly $5 billion of capital available to deploy between now and the end of 2022. And as it relates to our M&A pipeline, it is and always has been characterized as having many high-quality opportunities. So we're clear. We are 100% back on offense when it comes to our capital deployment portion of our strategy and have fully resumed our usual process-oriented and disciplined M&A activities. And with that, let's open it up to your questions.
spk10: We will now go to our question and answer portion of the call. We request that our callers limit their questions to one main question and one follow-up. If you'd like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then the digit two. Again, we request that callers limit their questions to one main question and one follow-up. Our first question is from Dean Dre from RBC Capital Markets. Please go ahead.
spk08: Thank you. Good morning, everyone.
spk01: Hey, good morning, Dean.
spk08: Good morning, Dean. Hey, look. When I look at free cash flow, organic revenue growth, recurring revenue, everything checks the boxes. And there's a lot of moving parts this quarter. I really appreciate all the reconciliation of previous guidance versus revised with the divestiture. So just set that aside. And the first question I want to ask is for Neil to help put in context these recent portfolio moves. And I don't want to parse your words, but the slide says accelerating a portfolio transformation. You're not saying optimize. You're not trimming at the edges, but you are making some sizable moves here in a cluster. And it just begs the question, what is the strategic transformation? Is it more just making ROPR a better ROPR, or is there a more sizable change in portfolio composition coming and what the timing might be? Thanks. We'll start there.
spk01: Yeah, thanks, Dean. So, hey, it's all about Roper being a better version of ourself. You know, our strategy, as you know, and most people listening know, for the last 20 years has been fundamentally based on improving the quality of our enterprise. You know, historically, that's been characterized as being more asset light. More recently, it's not just that, but increasing mix towards recurring revenue, increasing mix towards higher, slightly higher organic growth businesses. So that strategy has been in place and will remain in place. Nothing's changed there relative to these three transactions. It's really a result, these three are a result of really two different decisions. ZTech was really an opportunistic situation with a strategic buyer who offered a compelling price and it was just made sense. in our view, for our shareholders to let that go to that buyer and reduce a little bit of cyclicality and exposure to those e-tech in markets. As it relates to CIVCO radiotherapy and Transcor, those were, while they're independent decisions, they're a result of a single process, which was sort of our new and revised sort of deep strategic review of all the businesses. We do this with each business on a rolling sort of three-year basis. The Civco radiotherapy and Transcor reviews were, you know, late last year, early this year. And we just felt given their future growth prospects, which are interesting and likely robust, but also capital intensive. In both cases, we're going to just be suboptimized with us as an owner. You overlay that where the valuation will get for the businesses, you know, the three together roughly 20 times this year just made sense from all vectors for us.
spk08: Is there just a circle back for the timing and just like what's ahead? How far down the road are you on this optimization? Are there other bigger pieces coming? What kind of timing should we expect?
spk01: Yeah, I think the, again, it's, I wouldn't, I would call it, you know, the acceleration of the transformation. Transformation has been slow and evolutionary over 20 years as we've gone from 40% cyclical to now 10% or 15% cyclical, going from more asset-intensive to less asset-intensive, gone from products to software. I mean, this has been an evolutionary approach, and we expect that to continue.
spk08: Good. Well, I really appreciate the specifics you provided. Each one of these divestitures makes sense. You're getting good valuation for them, so kudos to you guys. And then the second question, and this feels more like something I would ask at an analyst day, but just it jumped off the page here on your board additions today, adding Tom Joyce from Danaher, Irene from CFO of Time Water. I presented to your board last November. I've got an appreciation for how high-powered the group already is and how hands-on they are. Talk about the partnership with the board, the dynamics, especially at this stage of the evolution of the portfolio and where the priorities for the board are at this time.
spk01: I appreciate the opportunity, any opportunity to talk about a board because it is absolutely and undeniably a strategic asset for our business. The board we highly engage with five times a year, three days each time. So it's a board that works hard. They enjoy working hard. It's a board in that amount of time that we spend. It's not just a series of presentations. There is space to have conversation, deliberation, challenge one another, and then form a point of view on the forward direction of our enterprise. Highly collaborative group, but one where people express their points of view open and freely. So it's a great environment. Also, as in governance, there's a refreshment process that goes with that. You know, the board chair that became the board chair at Brian's passing, Bill Prisano, just aged off the board. And we have a sort of that requirement to refresh the board. And we're super fortunate to have Irene and Tom join us. Irene will bring just a tremendous, she's most recently professionally as an executive at Time Warner, but a long track record in financial institutions, just a very astute and financially savvy executive, understands risk and risk management, and is also a very experienced board member at this stage in her career. Tom, this will be his first outside public company board. Everybody here listening knows Tom very well, but just the combination of what he's done in his 30-year career at Danaher, combination of business building and capital deployment leader development is, you know, core to what we are all about. And I think both will just bring tremendous new thoughts to our boardroom as we continue to evolve and build our business.
spk10: Our next question comes from Allison Polonek from Wells Fargo. Please go ahead.
spk03: Hey, good morning, guys. I just want to talk the CRI metric. Obviously, core to your M&A strategy, and I suspect going forward, but with some of that asset-intensive business coming out, elevating Roper's own CRI, I guess one is that is it more challenging in terms of pool of potential properties that you want to acquire? And just maybe any thoughts on does that CRI metric relative to Roper kind of shift going forward? Just any color there.
spk01: Yeah, cash return for us is our North Star, right? It is how we not just, you know, it just not only guides our capital deployment strategy, it guides every operational decision in the business. It defines for us, for instance, what good organic growth is versus just growth at any cost, right? It's how do you, and CRI for those that aren't intimate with it, is really just a measure of business quality. Do you have a cash flow relationship with your customer, if you will, where you're able to provide value, capture value for that, and have an underlying business model that doesn't require a lot of assets to deliver that value? That's what cash return is. It is our North Star. It will continue to be our North Star. It's core to our culture here. Allison, in terms of your question about the number of targets, you know, Mathematically, yes, the number of targets are fewer as we're looking to buy companies that have CRI that are higher than are existing, but it's not a limiter to our strategy, right? There's a vast ocean of software, informatics, data-enabled business models that are out there that we've been fishing in for the last 10 years, and it's not a practical constraint for a capital deployment strategy.
spk03: Got it. That's helpful. And then just a quick question on measurement and analytical solutions. Core without Verathon, obviously up 20% plus. But then you talked about EBITDA, some headwinds there, one being Verathon, but the other being supply chains. Is that just a headwind in terms of growth? Is it cost you can't pass through? Just any incremental color there to help me reconcile that?
spk01: I'll start and I'll pass over to Rob. And so first, I would say, you know, our businesses more broadly, like most businesses, maybe around the world, certainly this country over the last 20 years have built their supply chain for optimize on the lowest cost and less so on resiliency. You know, a nice thing that our businesses did, you know, starting a couple years ago is build some resiliency with the China sort of tariff situation. So that was a precursor that helped us a bit. For us, relative to the headwinds, yeah, growth was limited a bit, certainly across all of our product businesses. And then also the choice that our businesses made when there's an opportunity to either expedite a part or go into a spot market or an alternative source for a part and pay incrementally a bit more, they did that. And so there's a little bit of gross margin headwind, hard to notice in a macro sense, but a little bit of headwind on GP percentage and then certainly some impact On the revenue side, Rob, anything you want to add?
spk12: Yeah, just, you know, about 25% of that MAS segment are the industrial businesses. And so that's where you see some of this. And, you know, I think we mentioned earlier that, you know, backlogs up 50% so that, you know, we have great orders and that, you know, bodes well for the future. But yeah, I think what Neil said there is spot on.
spk03: Great. Thank you.
spk10: The next question is from Julian Mitchell from Barclays. Please go ahead.
spk04: Hey, good morning. This is Trish Gorman on for Julian. Just maybe following up on that last question regarding the supply chain constraints, can you just talk more about what your assumptions are kind of embedded in board guidance for when those might be?
spk12: Yeah. So we're not expecting that they're going to ease really anytime soon. So we're expecting what we saw in the third quarter, similar to what, you know, what we'll see in the fourth quarter. And then as we get in next year, we'll update that next quarter, but you know, we're continuing to build backlog. The customer relationships are great. As Neil said, we're expediting wherever we can to get products to customers. And so, you know, I think, I think long-term it's, it's a great story. Short-term it's, it's hard to say what's going to happen.
spk04: Got it. Thank you. That's helpful. And then just maybe a follow-up, kind of broader. We've been seeing industrial companies paying anywhere from 30 to 100 times EBITDA for software assets now. So, does Roper think it will have to pay this kind of price, too, or can it still buy software assets for 20 times EBITDA or less as it did with Vertifor? Thanks.
spk01: Yeah, appreciate the question. Certainly, valuations for higher-quality software businesses are high. They've been high for a while. They remain high. I think I said a couple of quarters ago, it feels like they may be stabilizing at a level. I think that still may be the case, but that level is very high. That said, Roper buys businesses that are tried and true. The competitive forces of market are observable. The market growth is observable. The forward growth outlook is diligenceable and understandable, and the growth drivers can be clearly modeled. When you get those businesses that are in small markets that are leaders that have mid to high single-digit organic growth and are 30% to 40% plus EBITDA margin businesses, those trade in that we call it circa 20 times, maybe 18, maybe 22, but they're sort of in that zone. And that's where we think that we'll continue to play and focus.
spk04: Great. Thanks.
spk10: Next question comes from Christopher Glenn from Oppenheimer. Please go ahead.
spk07: Yeah, thanks. Good morning. So, given the, you know, comment that the number of targets is not a practical constraint, I appreciate repeating that, which we've heard previously. I'm wondering if the expectation is actually to, you know, at least replace the divested earnings in EBIT in fairly short order, and can you fund ahead of receiving those proceeds in terms of your negotiations with agencies and such?
spk01: Yeah, so appreciate the question. So first, I mean, we said it in the prepared remarks. It's on the slides. It's worth mentioning. We take the proceeds from these transactions, add it to our cash flow we're generating in our current balance sheet leverage. There's about $5 billion of M&A firepower between now and the end of next year. So that's all good. The balance sheet's in good shape. Whereas we mentioned we're super active in the M&A markets. But We always have been and always will be patient and disciplined. Right. I mean, this is every deal matters. You know, we're buying these businesses with with the very long term in mind to never sell them. So you have to buy the very best asset you can find. And sometimes that takes time. So we're sort of putting out this mathematical marker of five billion. But I would not associate any specific time frame with that. It's just we're patient, disciplined, focused business. but active in the M&A markets.
spk12: And I would say we do have flexibility in terms of the timing on when that capital is deployed. I don't think you have to wait for the proceeds to come in the door. But as Neil said, we're going to be very, very disciplined, and we don't feel like we're rushing anyway.
spk07: Okay. And I just wanted to dive into the backlog up 50% plus at the MAS segment. I'm curious the play of medical versus industrial and how Verathon factors into it.
spk01: The backlog, we're up over 50% in both MAS and PT. I'll certainly turn it over to Rob here in a second, but the backlog was strong at medical products, Verathon, Northern Digital, MMI. It was strong at Neptune, and it was strong at industrial.
spk12: Yeah, it's very broad-based. It really is across all the businesses. And again, that's getting a lot of orders in and then being able to get the products out the door.
spk07: Okay, last one from me. Any estimate on the after-tax impact of the $3.15 billion?
spk12: Yeah, I think we want to wait until we get the deals closed to comment on that. I mean, there certainly will be some tax leakage, but we'd rather wait until next year we get the deals closed and then we can give you a good number. Thanks, guys.
spk10: Next question comes from Joe Giordano from Cowan. Please go ahead.
spk09: Hey, good morning, guys.
spk10: Good morning, Joe.
spk09: So does this mean that we're not going to be able to ask you guys about New York City deal?
spk01: You can ask.
spk09: You can ask.
spk01: We're under contract to not disclose a lot of details about that going forward.
spk09: I will be sadly missed. Yeah, I just want to ask on Neptune, a lot of like kind of different things being said out there in that market. Can you talk about where that business is this year? Like is that business growing this year or is it still down? How much did it decline last year? Just kind of curious to see what's really going on in that metering market right now.
spk01: Yeah, so I'll give you a little bit of color and turn it over to Rob. So for Neptune this year, we'll be like really close to 19 just from a size perspective. So it absolutely is growing this year. You know, in the very short term, we're actually, we believe it's hard to measure in the very short term, but the reports from the company, Neptune, as we picked up a little bit of market share this quarter because we were able to deliver product on a much shorter lead time than some of the people we compete with. The thing that's about the market itself, the markets are opening, but nowhere close to fully recovered, especially in Canada and less so, but certainly not open in the Northeast United States, in the U.S., Northeast. Final thing I'd say about Neptune is the strategy here is very clear and it appears to be working, if you will, having traction around the strategy on the product with the static meter product that we're introduced to the market, the way we read the data off the meter, and importantly now the software analytics that play that Neptune is developing around what do you do with all that data once you capture it off the meter in a more frequent basis. So the strategy's certainly got traction in the marketplace and the business is growing and they have record levels of backlog as we sit here at the end of the quarter.
spk09: Can you just remind me, how much of the product at Neptune are you guys manufacturing in-house and how much is contract?
spk01: It's virtually all in-house. I mean, certainly it's a supply chain and there's certain pieces that come, but between the two facilities at Neptune, it's a vertically integrated business.
spk09: Okay. And then my last question, and I promise next quarter I'll ask software questions, so this is like the first one. But on the process, Guy, is that, I mean, it's slightly less growth expectation than previous. Is that just supply chain limiting your ability to deliver, or has the market changed at all on you?
spk01: No, 100% supply chain related across all the businesses, and incrementally the market's more favorable overall. You know, we talked about the backlogs, but obviously you know that the U.S. frack market is more favorable, energy price is more favorable, the project work at CCC is going well. So, yeah, it's all supply chain related.
spk09: Okay, awesome. Thanks, guys.
spk10: Thank you. The next question comes from Jeff Sprague from Vertical Research. Please go ahead.
spk11: Hey, good morning, guys. It's Andrew Slosh on for Jeff. How are you?
spk01: Hey, Andrew, good morning.
spk05: Good morning.
spk01: Andrew, are you there?
spk11: Hey, sorry about that. I was on mute. So just firstly, you know, you said Vertifor was strong in the quarter and really good bookings there. Are you able to quantify the growth on a sales basis?
spk12: Yeah, it's right on track with the numbers that we laid out last year when we acquired the business. They're doing very, very well.
spk01: Yeah, and at the time of the acquisition, I said it was a mid-single-digit organic grower, and that's where it is.
spk11: Awesome. No, that's great color. You know, and the other thing I was kind of thinking about, so measurement and analytical solutions was up 9% organic, 20% organic, excluding Verathon. We talked a little bit about, you know, the growth there and I know revenues significantly above 2019 levels. You know, how do we think about the growth, you know, going into 2022?
spk12: Yeah, you know, we will guide 2022. you know, in beginning January, February when we announced earnings. So I think the trends are very, very good in all those businesses. We talked about the movement at Verathon to these, you know, to the equipment that has been critical to the COVID fight and now it's become more common. And so that leads to consumables. And so I think it's a great long-term growth story at Verathon, all those businesses. But we'll wait till next year to give you that. numbers on that.
spk01: The only thing I'd add is we're going to carry a very high backlog going into next year. There's momentum and demand. We'll see to the extent. We expect it to carry through for the full year, but it'll certainly start strong.
spk11: Great. Thanks for the color.
spk10: I'll pass the baton on. Thanks. Our next question comes from Alexander Blanton from Clear Harbor Asset Management. Please go ahead.
spk00: Hi. Good morning.
spk10: Good morning, Alexander.
spk00: Yeah, very interesting quarter. I wanted to ask about the organic growth. 12% average and 10% for application, 17% for network, 9% for measurement, 16% for process. These are numbers that are way above historical rates of organic growth for this company. And it's really stunning. And one comment that I had from our group this morning was, well, last year was depressed, so that really won't continue. Could you comment on that? How much of that growth is just due to a depressed base, if any? And do you expect these kinds of things to continue, these organic growth rates?
spk12: Yeah. So, you know, these businesses, when we acquire them, I think we're – pretty consistent. They're mid-single-digit organic growth businesses. Sometimes they're high. We work hard to get them from mid to high. I think if you look at the double-digit, you know, certainly last year was down low single-digits, and now we're up double-digits. And so if you take the sort of the two-year run rate, you're in that mid to high single-digit organic, which I think is the natural run rate for those businesses, which we're always looking to accelerate.
spk00: Yeah, well, mid to high single-digit is somewhat above what Roper did for many, many years, which was more like the mid-single digits, not the high. So there was a pickup.
spk01: Yeah, Alex, it's Neil. I mean, I would say a couple of things there. I mean, we certainly, we're going to carry momentum from this year into next year. So if you just look across the portfolio, I think next year, we haven't done the guidance yet. It'll probably be a little bit better than trend. Trend's sort of mid-single digits over a long arc of time. Next year might be a touch better than that. We'll see when we do our guidance next year. But what we're trying to do for three years now as CEO, we've been trying to increase the organic growth rate of this business, of the portfolio. through a very structured process-oriented way that focuses on strategy, the execution of that strategy, and really building world-class teams and team effectiveness. And we're starting to see that sort of work in pockets of our organization that's a bit more mature. So the final story, that chapter hasn't been written on that story for us yet. It's got another, you know, several years to play out, but certainly encouraged by the early signs.
spk00: Yeah. Second question is on the... I'll look for acquisitions. You mentioned a very robust pipeline in your earnings release, which was unusual. You don't usually comment on the pipeline in that location. Give us a little more color on that. What kind of timing can we look for? Should we look for acquisitions right away in the next year or is it going to be later on and so forth?
spk01: So I'll give you a very generic answer on the timing, which is, you know, it's the pipeline always has a lot of deals in it. The pipe, we're able to, because of our approach, you know, filter that pipeline where it's high quality and we're spending our time on sort of high impact things. But you know the deal business. You can have a deal where you think you're the winner until you're not at the finish line. And so the timing is always a little bit subject to a handshake, if you will, between the buyer and the seller. It's not just a one-way thing. And so we're going to be very patient and very disciplined, and we don't feel any sense of urgency whatsoever. to get this $5 billion deployed just for the sake of getting it deployed. We're going to do it in the way we've done for the last 20 years. And so it's hard to handicap the specific timing of when anything would happen, but we're going to be busy at work trying to get it done.
spk10: Our next question comes from Rob Mason from Baird. Please go ahead.
spk06: Yes, good morning. Thanks for the question. I just wanted to speak on the software businesses a minute. The growth was very good to see across both application software and network. And Neil, sprinkled throughout your commentary was frequently the strength around SaaS bookings. And I know you have several businesses where you have SaaS conversions underway. Just given the overall strength, typically you start to – there's a little bit of headwind as you're converting some of those on-prem businesses over to subscription. I'm just curious what is that headwind and buried in the growth that you're putting up?
spk01: Appreciate, Rob, the opportunity to talk about this. Just to level set everybody, the vast majority of the revenue on the network side of our business is already in the cloud and or recurring. It's 90-plus percent. So the vast, vast majority of the cloud conversions, Rob, what you're talking about, shows up in our application software segment and is centered at Dell Tech, Adderant, PowerPlan, a little bit at Seaport. As you mentioned, when you convert, you know, the punchline of all this is as we convert, we believe it's a modest net growth driver, not a headwind. The reason it's a growth driver is you have two competing factors. One is the bad guy you're referring to, the J-curve, When you, instead of selling a perpetual deal, you sell a recurring revenue deal. In the year of that deal, that's a bad guy, right? Because instead of getting 100% of the revenue, when you ship the perpetual license, you get some small percentage of that, depending on what month the subscription's booked. However, what counters that is when you have these large installed base of customers that are paying annual maintenance on their historical perpetual, we're actively lifting and shifting those customers to the cloud. And when you do that, because what you're doing for them carries more value, right? You're on the current release, you're managing the infrastructure, you're managing cybersecurity, you're managing, there's a greater value proposition, you're able to charge a higher recurring revenue base. And so the uplift on the recurring revenue overwhelms the negative headwind on that upfront sale, and that becomes a modest net growth driver for us. Happy to talk about that offline in more detail if you'd like.
spk06: Is there a timeframe that you're thinking about where these conversions largely complete themselves for the existing businesses?
spk01: It's going to be, it's elongated. In our case, companies can make a decision. They can either, like some companies do, just force it. Like we're taking you to the cloud this year and it becomes the company's perspective. In our case, we're allowing our customers to pace that. So our customers are the ones who are saying, I'm ready to go to cloud and we're going to meet them where they are. So in that case, it's going to be an elongated period of time. You know, certainly five-plus years, it might be as long as 10, so it's going to be a slow throttle to get fully cloud-enabled.
spk06: How do you think about balancing, I guess, internal investment to support both sides of that?
spk01: Yeah, so it's – The way that the architecture of, as our companies have become more cloud-enabled, the architecture allows them with a service orientation to make one investment and deploy it to both platforms. So it's not really an either-or, it's an and. I see. I see.
spk06: Thanks for the color. Appreciate it.
spk10: Our pleasure. The next question comes from Steve Tusa from J.P. Morgan. Please go ahead.
spk02: Hey guys, good morning.
spk01: Morning, Steve. Thanks for joining.
spk02: Yeah. On the organic, you guys didn't provide an update to the 7% plus. I know like there's some noise around disc ops and continuing ops. What is that number now for the year? I mean, I could kind of add up all the segments, but again, there's a lot of noise in the numbers, just, you know, moving stuff around. So just an update to that 7% plus now on the continuing ops for the year.
spk12: Total co? Yeah. So I think on a continuing ops basis for the year, it'd be eight on an apples, apples basis. The seven is unchanged. Okay.
spk02: Got it. So, so then, so then why next year, if you kind of have some supply constraints and stuff kind of pushing revenue into next year and this ridiculously, you know, strong backlog, what, why would that slow next year? I mean, is there any particular reason why that would slow?
spk12: There, I mean, I think we'll guide next year in January and, you know, after we do all of our business reviews, but it, I don't see a reason why there should be a challenge.
spk02: Okay. And then, and then just one last one, just on margins. Um, what, what do you expect kind of this year for this continuing ops kind of roughly EBITDA margin range? Um, and then in particular for ANS total company and then ANS EBITDA margins just for a baseline for next year.
spk12: So I think the total company margins are, you know, we sort of just gave you Q3, Q4 is similar. And, you know, and like I said, we'll guide next year after we do all of our reviews. Okay.
spk02: And then ANS, any comments there?
spk12: You mean application software?
spk02: Yeah. Yeah. The ANS margin, just where you're going to end up for the year in the fourth quarter.
spk12: Yeah. I mean, I think, you know, generally similar to the third quarter.
spk02: Okay. Great. Thanks a lot. Thanks, Steve.
spk10: This concludes our question and answer session. We will now return back to Zach Moxey for any closing remarks.
spk05: Thank you, everyone, for joining us today, and we look forward to speaking with you during our next earnings call.
spk10: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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