Roper Technologies, Inc.

Good morning, and thank you all for joining us as we discuss the fourth quarter and full year financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer, Jason Conley, incoming Executive Vice President and Chief Financial Officer, Rob Cresci, Executive Vice President and Chief Financial Officer, Brandon Cross, incoming Vice President and Principal 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've 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 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. And now please turn to page three. Unless otherwise noted, we will discuss our results and guidance on an adjusted, non-GAAP, and continuing operations basis. For the fourth 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, a legal charge related to the settlement of the Baral v. Verathon patent litigation matter, the case related to the sale of certain Verathon products from 2004 through 2016. There are no future financial obligations for Verathon related to this matter. Next, transaction-related expenses for completed acquisitions. And lastly, we have adjusted our cash flow statement to exclude the cash taxes paid related to our divestiture activity. GAAP requires these payments to be classified as operating cash flow items, even though they are related to 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 page four, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants.

Neil? Thanks, Zach, and good morning, everyone. As we turn to page four, we'll walk through our usual year-end agenda, highlights for the most recent quarter and full year, followed by color commentary for each of our segments, and then the initiation of our 2023 guidance. Let's go ahead and get started. Next slide, please. As we turn to page five, the main takeaways for today's call are, first, we delivered another great year of strategic, operational, and financial progress. To this end, we concluded our multi-year divestiture program, which was centered on improving the quality of remaining portfolio, namely emphasizing less cyclical, more asset-light, and higher growth businesses. In addition, we successfully deployed $4.3 billion towards market-leading and application-specific software businesses. More on this later, but we also continue to have substantial M&A firepower well north of $4 billion. Organically, we grew just shy of 10% for the year, while simultaneously improving the underlying quality of the enterprise. During the course of the year, our businesses did a terrific job of innovating and capturing share. Which leads us to our second main takeaway for today's call. that we're well positioned for another solid year of performance in 2023. Our higher quality, less cyclical, and more highly recurring nature of our portfolio will serve us well during 2023. Now, as I hand the call over to our incoming CFO, Jason Connolly, let me take a moment and thank Rob Cresci for all he's done for Roper and for me. Rob has been a significant contributor to our success and an important member of our executive team with meaningful insights and contributions across a variety of topics, including our most recent portfolio repositioning. We're excited to welcome Jason to his new role. Many of you know Jason, but those of you who do not, Jason has been with Roper for 16 years. He started in corporate IR and FP&A, then the operating CFO at MHA, one of our businesses, and most recently serving as Roper's chief accounting officer. Since his return to corporate, he has been a member of our capital allocation team and has attended every board meeting. The team and I are excited to partner with Jason for the next leg of our evolution. So with that, looking forward to the partnership, Jason, and thank you, Rob, for all of you done to make Roper better than when you joined. Jason, let me turn the call over to you so you can walk through the fourth quarter in the full year financial summary. Jason.

Hey, thanks Neil. I am very excited and incredibly grateful for the opportunity to work with you and the team in this new role. And of course, thanks Rob for your awesome partnership and mentorship over the years. It's been just a great experience working together. So first I'd like to introduce Brandon Cross as our new principal accounting officer. Brandon joined Roper about five years ago, progressing to our assistant controller and more recently has led and transformed our audit services function. He has significant M&A and integration experience, so this is a natural and well-earned promotion for him. Brandon, I look forward to working together in your new role.

Thanks, Jason.

If you'll indulge me, I'll riff on Roper for a few seconds. I've been blessed to help guide and execute our evolution from Roper Industries to Roper Technologies, which has been underpinned by our North Star belief that cash is the best measure of performance. And as we enter 2023, our best years are ahead of us. We have a family of market-leading businesses with durable growth drivers and terrific free cash flow margins. Further, the leadership teams and talent processes at our businesses are the best in the company's history. And finally, we have significant capacity to execute our proven and disciplined M&A strategy that I've been a part of for many years. I anticipate being quite active on the road this year, so for those on the call, I look forward to either meeting you or reconnecting in the coming months. All right, let's get into the financials. Turning to slide six, we'll do a quick review of our Q4 performance. We capped off a solid year of growth with revenue of over $1.4 billion, which was 14% higher over prior year. Organic growth was 7% with strength across the portfolio, which was enhanced by 10% software recurring revenue growth. Acquisitions added eight points of growth led by our frontline business that closed in early October. and currency was a two-point headwind. EBITDA of $592 million was up 17% over the prior year. We experienced strong operating leverage across the enterprise and improving gross margins in our TEP segment to finish out the year. Debts came in at $3.92, which was 17% against prior year and 18 cents above the midpoint of our guidance range. Next, we'll look at free cash flow. Free cash flow of $457 million was down 8% over the prior year. Excluding the Section 174 impact, we were down 3%. And factoring out a $30 million VertiFOR tax benefit in 2021 that doesn't repeat, we're up about 3% to 4% in the quarter. Taking a broader view, you can see we compounded cash 11% over a four-year period, despite the Section 174 headwind. and we're well positioned for double-digit cash flow compounding going forward. Turning to slide seven, we'll now do a quick overview of our Q4 segment results, as Neil will unpack more detail on the full year a bit later. We had a nice finish to a great year across the three segments. For application software, revenue was up 22% to $740 million, with organic growth of 7%. EBITDA margin increased to 45.6% in the quarter. We had strong SAS bookings growth and overall solid net retention throughout the year, which is just naturally rolling through recurring revenue in the quarter. Growth was broad-based across the segment, aside from some delayed decision-making in the large government contracting space within Dell Tech. On margin, we had lower incentive-based SG&A and employee medical costs, so some favorability in the quarter. If you look at the full-year margin of 44%, that's about where we would expect to be over a longer horizon. Our network software segment grew nicely in the quarter, with revenue up 9% to $350 million, and EBITDA also up 9% to $189 million, or 54% of revenue. Growth was led by our freight matching businesses, which continued driving higher ARPU from premium offerings to offset moderating carrier activity as we expected. Tech-enabled products revenue was $340 million and grew 5% organically in the quarter. Demand remained strong, and we had some orders that didn't get delivered toward the end of the quarter, which will benefit Q1. EBITDA grew 7% to $119 million, resulting in EBITDA margin of 34.9% or 100 basis points over prior year, with strong operating leverage as the price-cost dynamic was neutralized in the quarter. Turning to the full year 2022 performance on slide 8. Revenue was 11% higher than prior year to $5.4 billion with 9% organic growth. EBITDA was 12% better to nearly $2.2 billion with EBITDA margin coming in at 40.4%. Debts of $14.28 was 15% over prior year and reflected strong P&L leverage against the 11% revenue growth. Notably, compared to our 2018 pre-divestiture financial profile, Our revenue is about $175 million higher, while EBITDA is nearly $365 million higher. So through a combination of organic growth and capital deployment, we've grown, despite divesting, about 40% of our 2018 revenue. And most importantly, the composition of our portfolio today positions us for higher and more durable growth going forward. Pre-cash flow came in at about $1.5 billion, so down 7% versus prior year. It's a bit of the same situation as our fourth quarter with both the 2022 headwinds of Section 174 of nearly $100 million and the non-repeat of the 2021 VertiFOR tax benefit of $117 million. If we normalize for those items, free cash flow grew about 8%. We've had a bit of an inventory build within our tech segment as supply has become more available. This is not a new normal, and we certainly expect that to improve in 2023. If we kind of take this up to a multi-year view, you can see we've compounded cash at 15% over a four-year period. And as we look forward, the impact from Section 174 will be fairly neutral, and we expect to convert plus or minus 80% of EBITDA to free cash flow. So we're clearly well-positioned for double-digit growth. Turning to Slide 9, let's take a look at our financial positions. We certainly had a lot going on in Q4. On November 22nd, we completed the majority sale of our industrial businesses, which are now operating under the name Indicor, and received $2.6 billion in upfront proceeds. Also in the quarter, we paid $270 million, representing all taxes due related to the majority sale. So this yielded us net proceeds of over $2.3 billion, a very good outcome here indeed. Related to our stake in Indicor, this is now appearing as an equity investment on our balance sheet. we will be updating the fair value of the equity investment each quarter going forward. To provide a clearer picture of our continuing operations, we will provide a non-GAAP adjustment for this fair value accounting and any tax expense related to this investment. So just looking at our balance sheet, even after our $3.7 billion frontline acquisition, which was completed in October, our net debt to EBITDA ratio stands up 2.7 times. So our solid leverage profile, coupled with strong free cash flow generation, in an undrawn revolver of $3.5 billion, gives us $4 billion plus of M&A capacity. Clearly, we are very well positioned for disciplined capital deployment in 2023. And with that, I will turn the call back over to Neil to go through our segment details. Neil?

Thanks, Jason, and well done. Let's turn to page 11 and walk through our 2022 highlights for application software segment. Revenues here were $2.64 billion, up 7% on an organic basis, and EBITDA margins were 44.1%. Performance across this segment was just solid in 2022. VertiFOR, our software business that tech-enables property and casualty insurance agencies, accelerated their growth, led by continued strength in their enterprise class segment. In addition, the two VertiFOR Bolton acquisitions are strategically on point, integrated, and performing well. As we've been discussing, SaaS migrations have been a key theme for us over the past few years, and 2022 was no different. Both Adder and Dell Tech continued their SaaS migration momentum, and both grew nicely based on solid customer ads and strong retention. Dell Tech was particularly strong in their private sector and markets, but as Jason mentioned, Dell Tech did see some slower decision-making specific to new bookings in the enterprise segment for their GovCon solutions. At our upcoming March 21st Investor Day, you'll get an opportunity to hear directly from the leaders at Vertifor, Dell Tech, and Adirondack about how they're competing and consistently winning in the market. As it relates to Power Plan, we liked what we saw last year. Power Plan was strong given their refocused and narrowed strategy combined with a highly aligned team. As a result, Power Plan crossed a meaningful milestone, launching a SaaS solution for their flagship product, Tax-Fixed Assets. Congrats to the team for a great 2022 and looking forward to more great things in 2023. 2022 is a very good year for application healthcare IT businesses as well. Strata's combination with EPSI has just been great. The integration is complete. And the number of EPSI to strategize conversions and upsell, cross-sell are both meaningfully ahead of our deal expectations. Klinasys and data innovations continue to win in the marketplace. The internal combination of Klinasys and SunQuest has rejuvenated and energized their high-performance culture, which is enabling the business to more effectively compete and win in the marketplace. Data Innovations continues to gain share and evolve to become the de facto standard as it relates to lab middleware. Finally, frontline, our cornerstone 2022 acquisition is off to a solid start. We look forward to sharing the strategic and financial success of this business in the quarters and years to come. I'd like to reiterate with what we started with. Performance here strategically, operationally, and financially was just great in 2022. Very proud of the team and the performance. Congrats and thanks. Looking to the outlook for 2023, we expect to see organic growth in the mid single-digit area based on our market positions and growth in recurring revenue. Turning to page 12. Revenues in 2022 for our network software segment were $1.38 billion, up 13% on an organic basis and EBITDA margins were strong at 53.3%. As we dig into business specific performance, our US and Canadian freight matching businesses were great in 2022. Their exceptional growth is based on many factors, certainly favorable market conditions, but also continued product and network innovations, as well as terrific product and package designs that drove increased value for the network participants. iPipeline and iTree Network were stellar performers throughout 2022 and benefited from having strong renewal and expansion activity. iPipeline, like that of PowerPlan, is benefiting from having a narrowed and more focused strategy, namely tech-enabling the life insurance and annuity distribution network. Moving to Foundry, which had another great year as part of Roper. Foundry continues to be the market-leading software in post-production media entertainment. During 2022, Foundry's product innovations were impressive with several new features focused on ML-based automation. Starting in 2023, Foundry's flagship product Nuke will begin its subscription transition, so looking forward for solid progress on that front. Growth in our businesses that focus on alternate site healthcare was led by SHP and Softwriters And importantly, retention rates across SHP, SoftRiders, and MHA remain extremely high. Broadly, the performance across this segment was great. Congrats to the teams for this terrific year of financial performance. Turning to the outlook for 2023, we expect to see mid-single-digit organic growth for this segment based on broad and sustained growth across the group and a normalization of market conditions for freight and logistics applications. As we turn to page 13, revenues in 2022 for our tech-enabled product segment were $1.35 billion, up 10% on an organic basis. EBITDA margins for this segment were 35.4% for the year. As expected, EBITDA margins expanded in the second half of the year as pricing and supply chain improvements flowed through. Let's start with Neptune, our water meter and technology product business. This past year was just terrific, with very strong growth based on strong marketing conditions, strong share gains, and strong adoption of their static ultrasonic meter technology. In addition, Neptune launched their cellular connectivity solution and did a fantastic job migrating a large chunk of their customer base to their newest data management solution. Spectacular job, Neptune. Congrats, Don, to you and your team. Northern Digital, which is our precision measurement tech company, continued to see terrific demand for their optical and EM solutions. NDI benefits from having a strategy that is laser-focused on healthcare applications and an R&D capability that is unmatched in the industry. NDI's core tech is using countless life-saving procedures on a daily basis across the globe. Verathon turned in another solid year performance in 2022 as well. The growth is based on momentum across their video innovation and single-use Broncos Go product lines. As you saw in the press release, we did take the opportunity to clean up a legacy patent dispute. Make no mistake, the innovation capability at Verathon is nothing short of exceptional, and we cannot be more confident about their most recent product launches and the new concepts in their development pipelines. As it relates to the single-use bronch space, we hope to see Verathon capture the number one market position in North America in 2023. Our outlook for the year in this segment is in the high single-digit area, and it's based on continued strength and backlog at Neptune, as well as continued growth across our medical product businesses. Specific to the first quarter, we do have easier comps versus a year ago. Now, please turn to page 15, and let's review our 2023 and Q1 guidance. For 2023, we're initiating our depth guidance to be in the range of 1590 and 1620. Underpinning this guidance is expected organic growth of 5 to 6 percent and a tax rate in the 21 to 22 percent area. Specific to the first quarter, we're establishing our depth guidance to be in the 380 to 384 range. Now, please turn with us to our final page, page 16. As we turn to this page, we want to leave you with the same key points with which we started. First, 2022 was a year of great accomplishment for our teams and our enterprise. We grew revenue 11%, 9% on an organic basis, and we did this while continuing to increase the underlying quality of a revenue base. In fact, we delivered double digit increases in our software organic recurring revenue during 2022. EBITDA grew 12%, and our EBITDA margins expanded 20 basis points to 40.4%. Also, we successfully concluded our multi-year divestiture program and deployed $4.3 billion against our long-standing capital deployment strategy, headlined by frontline education. The second key takeaway is that we're well-positioned for double-digit cash flow compounding in 2023 based on our organic revenue growth outlook, contributions from our 2022 acquisition cohort, and having well north of $4 billion of M&A capacity. To this end, we continue to be very active in the M&A markets, but as you saw during 2022, and as always, we will remain super patient and highly disciplined to ensure optimal deployment of our available capital. Finally, and perhaps the most important, the new higher quality Roper portfolio is becoming increasingly more evident and we've never been more excited about the future of enterprise. As we open it up to your questions, we'd like to take this opportunity to remind everyone that we're hosting an Investor Day on Tuesday, March 21st in New York. We look forward to seeing many of you there. So with that, let's open it 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 touch-tone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then the digit two. Once again, we request that all callers limit their questions to one main question and one follow-up. Today's first question comes from Dean Dre at RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Good morning, Dean. Hey, just start with best wishes to Rob. I remember when he was starting as a rookie investor relations professional, and just wish him all the best. So thank you.

Thank you, Dean.

Appreciate it. It's been a great decade. It's fabulous. And then, Jason, I think you've been on every one of our callbacks recently. for the 16 years. So you're absolutely, we know exactly who you are and your experience. And so congrats on the new role.

Thanks, Dean. Appreciate it.

All right. So for a question, maybe we can start with a bit of a macro economic sensitivity because typically you don't see much of this within ROPR, but just since you called out the Dell tech delayed decision-making, Neil, is there any change in the pace of, like, new customer ads or the migration, new logos, anything that you would point to that, you know, perhaps there is some economic sensitivity reading through in that kind of the pace of business?

Yeah, I think if I take it at the highest level, you know, we've been 8% to 10% organic the last couple of years. Obviously, we're guiding, you know, a little bit below that for 2023. So I think you see it. in our guidance model reading through as a general matter. If you take the software businesses, our retention rates will stay very high. We expect that to the intimacy and the criticality of our applications. So retention rates will be very high. But as our customers, I mean, across all these end markets, I mean, if there's macroeconomic sort of headwinds or slowdown, then they're going to be affected to some degree. So we'd expect customer expansion activity, maybe a little bit of net new to be slowed a little bit. The software businesses will be great. They'll grow for sure, but a little bit slower. From an in-market perspective, you know, we're in a number of in-markets that are generally macro insensitive. There's a little bit, obviously, in our transportation business of VAT that we call down on the call. That'll be a little bit slower, but there's some hedges inside the portfolio. Construct Connect should be good in a slower economic environment. And also our medical product businesses, as staffing levels in hospitals gets a little bit easier, patient volume should come back and that should help those businesses. And then from a product, Neptune's got a gigantic amount of backlog, which will carry them through much of this year. So We feel pretty well set up. It doesn't mean that we're completely insensitive to macro, but relatively insensitive.

That's real helpful. And then let's just switch over to free cash flow. And maybe I'll be accused of quibbling. The 161 free cash flow conversion is still elite, but it did lag your five-year average. And I know there's some dynamics here, and you touched on them in the remarks, the Section 174. and the comparison from the tax benefit last year. Anything that on the working capital side or maybe the frontline contribution, because they're on a different school year, so maybe more of a third quarter collection, but is there any change in the seasonal tilt on free cash flow conversion?

Yeah, Dean, good question. I think you're spot on. So we typically convert From an EBITDA-free cash flow, we'll be in the 90s typically, and Section 174, if we adjust for that, we're in the 80s. And so you're right. Frontline has a very seasonal sort of cash collection cadence. So their third quarter is when all the renewals and upsells happen. So most of their cash comes in the third quarter. So in the fourth, you won't see that converting to cash from EBITDA. So that's exactly what you saw. So we're looking forward to next year, and especially in the third quarter, be a little bit more weighted than normal.

That's great. That's exactly what we're looking for. Thanks. Thanks, Dean.

And our next question today comes from Scott Davis at Milius Research. Please go ahead.

Hey, good morning, guys. Morning, Scott. Congrats, Rob, and good luck, Jason, et cetera. Wish you guys well. Et cetera. Good luck. You know, Jason, good luck. You get to work a few more years with Neil. Good luck. I can say that, I guess. But anyways, I don't want to climb into minutiae here, but I know there's no one particular asset that moves the needle in a huge way. But can we walk back and talk a little bit about PowerPlan? I mean, you mentioned the narrow or product focus, I think I heard you say, which I didn't really understand what that meant. And the cloud rollout, again, how relevant is that to the business? But maybe if we just go back and you can explain to us again what kind of drives PowerPlan. I'll just leave it there and leave it open-ended.

Appreciate the opportunity to talk about any of our businesses. It's been a while since we've been able to do a double-click on PowerPlan. So just to remind you what they do, right? So PowerPlan software and services live at the intersection of of the financial system and the asset tracking system for these large utilities, investor owned and public utilities. Edwin Power Plan software has a perfectly curated view of what the assets look like inside our customer base. When you have that perfectly curated view, and these assets are constantly being updated and changed, they're not static, right? And so that's why you have to live between these two systems. And we have this perfectly curated view of what the assets are. Then you get the most appropriate tax treatment you can, the most appropriate lease accounting, and a series of other financial benefits associated with that. We bought the business. The business was doing that, but then was also reaching outside its core customer base and the core products I just described, looking for growth opportunities. sort of in all the wrong places, if you will. And then what we did when we did our strategy work with them going back probably a year, year and a half ago, is the amount of opportunity inside the core of what they do was large enough to support their growth thesis for many years to come. So it's just refocusing back on the core. That's a common theme. We talked about that. I think you'll see that increasingly more inside of Ropers with your strategy work, right? So not getting too far away from the core and getting distracted. So that's what they've done. The first impact of that is they now have this 100% SaaS solution for their principal product tax-fixed assets that just released in Q4. And we're excited by that because as you lift and shift your customer base from from an on-premise to a cloud solution, there's a tremendous value capture opportunity, and it'll unlock some growth for the business.

Can you get pricing in the process, or is this more about retention?

No, that's the value unlock, right? So we're doing more for our customers with this, that solution, right? So we're not just hosting it. There's, there's more features. You're on the latest release. We're certainly, we know how to operate our software, the, you know, ourselves better than third parties. And so it's the efficiency and the uptime is higher. And as a result of all that, you do get price, you know, we'll see, you know, we've talked about, you know, there's roughly $900 million in, and legacy on-premise maintenance in our revenue base. And as that is lifting and shifting to the cloud over a long arc of time, that should lift and shift north of two times, right? So there's a billion dollars of growth that's latent inside the portfolio as we lift and shift that on-premise maintenance to the cloud.

Okay. I look forward to the analyst day. I'm going to pass it on. Thanks, guys. Congrats on another good year. See you in a couple days.

And our next question today comes from Julian Mitchell at Barclays. Please go ahead.

Hi, good morning. Thank you, Rob, and I look forward to working with you, Jason. So maybe my first question, just to try and home in a little bit more on the sort of macro framework in the guide, maybe specifically I think about 25% of your software revenue is is reoccurring and non-recurring, so maybe more cyclical kind of talk. Maybe just remind us sort of, you know, what the organic growth of those two in aggregate was last year and what you're dialing in for 2023 or any flavor of that. And then within network software specifically, you know, transport and freight, it's almost a quarter of the revenue. And you mentioned you're dialing in, I think normalization was your phrase. Maybe just any finer point on what that means exactly of growth this year versus last.

Yeah. So let me take, let's take those, Jason and I take those in sequence. So I'll set up what the difference between recurring and reoccurring revenue is in our base. I'll let then Jason talk about the The relative growth rate. Then we'll tackle the DAT freight question you're raising. So just to level set what everybody is, if we have a recurring revenue is subscription, contractual, recurring revenue. Reoccurring revenue is principally located at our MHA business. You know, we take a percentage of the drug and food spend that goes to the network. And so it's not technically recurring. It's highly reoccurring. So it's not, that's probably the most, one of the most stable parts of our portfolio, long-term care, healthcare, residents and buildings, consuming food, and pharmaceuticals, right? So it's highly secure, for lack of a better word. It's not transactional relative to a macroeconomic sort of situation. So I'll stop just in terms of framing recurring versus reoccurring, and let Jason take the relative growth rate question.

Yeah, sure. Glad to. So, you know, MHA, as Neil mentioned, it's really about drug purchases from the pharmacies, and they have very strong retention in those businesses, you know, from a customer standpoint. We always sort of think about the business being at the, maybe at the bottom end of the mid-single digits, maybe a little bit in low singles. And that's, you know, that's sort of what we experienced this year, and that's kind of what we're baking in for next year.

Great. Okay, now let's take to your freight and logistics around DAT specifically. So to remind you, there's this tension between a cyclical freight dynamic and a secular push or secular benefit that DAT and DAT's customers are experiencing relative to the spot market becoming a more efficient place to place freight. So there's tension between those two. From a cyclical point of view, We expected and have seen the carrier side of the network reduce a little bit. And we expect it to reduce over the course or shrink or get a little bit smaller over the course of this year. DAT grew through the 2019 freight recession. I think DAT has grown every year since 2010. So the business is talking about the rate of growth at DAT, not does it expand and contract. It tends to be much more stickier than that. As an early read, January is actually a little bit better. I mean, the number of carriers in the network is sort of flattish through January and not declining. And the people in the industry that sort of call like the freight timing and if there's going to be a freight recession actually think, There's a queuing for a large spring shipping season, mostly around that is triggered by produce. And we might start to be seeing a little bit of that bleed in, but we'll have to see how the next couple quarters play out.

That's very helpful. Thank you for the color. And then just within TEP, understand the recurring piece is minimal there, and it's 99% product related. Any flavor you'd give us on the sort of what you're seeing in medical versus Neptune for 2023? Any major difference in kind of visibility between the two or the growth rate expected?

So we have the most visibility we've ever had at Neptune. That's right. You know, the order volume continues to flow, the order duration, meaning the longer data orders, continues to flow. And so we feel quite comfortable and good how 2023 is shaping for Neptune. For medical products, you know, there's actually, I think we've talked about a few quarters ago, the reoccurring elements of Verathon became the largest part of the revenue stream. There's a lot of consumable pull through. find the capital equipment there. Northern Digital has a decently high amount of consumables that are pulled through that, Civco. And so it is more procedure and patient driven. And we, like I said a few minutes ago, we feel that we're decently well set up there, but it's not on our base case, right? So we saw six to 8% declines in patient volumes in the areas in which we service in 2022, all tied to hospital staffing levels. And we're cautiously optimistic that as the labor markets loosen, hospitals will be able to staff and be able to see patient volumes pick back up the prior levels. Great. Thank you. Thank you.

And our next question today comes from Steve Pusa at J.P. Morgan. Please go ahead.

Hey, guys. Good morning. Good morning. Congrats to all. Rob and Jason, I'm looking forward to working with you. Just on the free cash, you mentioned plus or minus 80% conversion to EBITDA. Obviously, the last couple of years have been a bit volatile around all these tax items. But in 21, I think you had a decent number of deferred revenue benefit on the cash flow statement. Maybe just give us a little bit of color on looking into next year with concerns around the macro, that can be a pretty big variable. I mean, are you going to be around that 80% in 23, or will you be kind of more in between what you did in 21 and 22, I think adjusted around 70%? Maybe just a bit of color on the free cash, and then I have a follow-up on Frontline.

Yeah, happy to. No, I think we're feeling very good about the 80%. You know, our deferred revenue, our renewals are really strong this quarter. And, you know, we felt good how it moved up sequentially, how it was up year over year. And just what we're hearing from our businesses, we feel good about the renewals. And then, you know, we're going to have – we expect, I think I said on the call, that we'll get some improvement on our inventory ratios next year. We had a little bit of build at the end of this year. You know, frontline will certainly help with our negative working capital profile. They're at negative 40%. Like I said, most of that will hit in the third quarter when all the renewals take place. Of course, if Section 174 gets repealed, this will be a home run year, but we're not banking on that for now.

So like something in the $1.8 billion range for free cash for next year?

I'll let you come to your mouth on that.

Okay, we will. And then just front line, revenues roughly $95 million this quarter. Is that about right?

No, they were somewhere in the 80s. We had a few days knocked off at the beginning of the quarter because we closed on the 4th.

Okay. By the way, really appreciate all the discussion on the businesses and looking forward to the investor day, learning more on this portfolio. So very helpful detail on the moving parts of all the different businesses. Thanks. Appreciate it. Look forward to seeing you.

And our next question today comes from Allison Formiak with Wells Fargo. Please go ahead.

Hey, good morning. Just want to circle back on DAT. I know you talked about it growing historically through cycles, but it's certainly been an unusual one. A lot of new entrants here. Is there any risk to the retention rate? Should that spot rate not hold in terms of stabilization if some of those new entrants can't survive? And I guess along with that, that premium offering in this type of uncertainty, does that drive maybe more increase or interest in that premium offering versus just to gain some visibility here in an uncertain market? Just any thoughts there?

Yeah, so in terms of the number, when you say new entrants, I assume you're referring to the number of new carriers that are in the network as opposed to a competitive entrant or the sort, because there really are no new competitive entrants. Relative to the carriers, yeah, I mean, it's been just a tremendous last couple of years, driven by the things we've talked about for a couple of years, which is the fluidity and the liquidity in the spot market. which is a secular tailwind and then obviously a huge boom on the on the cyclical piece. Historically, when you look at peak carriers to trough carriers through cycle, the number of carriers declines by plus or minus 10%. We've assumed that it'll decline by more than that in our guidance model because the buildup was unprecedented. We think we have this conservatively planned in our outlook, but it's unprecedented to ramp up leading up to this. We do take some early data. confidence in the carrier count in the first couple weeks of January, right? So, the fact that we're flattish versus continuing to see some declines is certainly encouraging, but it's only a handful of data points we want to see take together. In terms of the premium offering, I mean, DAT has just done a tremendous job creating product and package designs that have more value for all the network participants. It's helped drive some ARPU increases because there's more value that the participants are getting.

Different packages, different features and functionality that they've upsold. That's right.

Great. Now that's helpful. And then just in terms of the M&A pipeline, are you still under the new portfolio framework? You know, PE primarily your source of opportunities here. Have you expanded it? And I guess if you have, you know, are you looking at, I know CRI is your metric that is your foundation, but are you providing any other controls with maybe some new opportunities out there? Just any thoughts there?

Yeah, you're right. We've obviously historically sourced all but in my time here, I think one meaningful deal from private equity. One was from a small founder or founder. and that has been sort of the pond in which we fish. But that's not exclusively where we have business development activities going on. We've always looked in public markets. We just haven't found anything that's been compelling from a value point of view yet. We'll continue to look there. You could see us get a little bit earlier in the cycle and try to compete a little bit more with private equity sort of a half a click earlier in the company's life cycle. So When we did the Vertifor transaction and the Frontline transaction, many of our investors said, you know, why didn't you buy it when the person you bought it from or the private equity firm you bought it from bought it? And so that's something that you could see us explore in the right situations. But still, all that being said, the predominance of what we're going to do is what we've done for the last 20 years, which is, you know, sort of lower risk, highly recurring software, application software businesses from private equity.

Great, thank you.

And our next question today comes from Brand Hewitt with Wolf Research. Please go ahead.

Hi, thank you and good morning. Good morning. You noted that your adjusted EPS calculation will include the fair value accounting and tax impact of Indicor, but why would you not include the minority interest contribution as well? Just wondering what is the logical downside to not including that? Shouldn't it be a positive and growing contribution?

Well, it's a calculation that's going to be based on many variables, right? It's mainly an accounting exercise. We don't think that it's going to – we'd rather see the outcome when we do the exit. We think that's the better reflection of what the economics are going to be. We feel really good about what that's going to look like. You know, we've worked with CD&R on a strategy there. They typically look at several multiples of return on investment, and that's what we're planning for upon exit.

Okay, great. That's helpful. And then in terms of price contribution in Q4, what did that look like? And then also how much pricing is embedded in your 2023 guidance?

So price for us, I mean, it's an important lever. to our growth algorithm, not just for 22 and 23, but all prior years and all forward years. Teasing out specifically how much is price is a very, very difficult thing across our 27 companies and rolling it up to a number that is meaningful. And so we're not going to share a specific number in that regard. I'll tell you, the pricing, the value capture that we have, given what we do, the criticality of what we do, we've always had pricing power and pricing value capture, and there's nothing different with that. You want to add anything to that, Jason? Okay. Perhaps into the next question.

Absolutely. Our next question today comes from Brendan Luckey with Alliance Bernstein. Please go ahead.

Good morning. Good morning. Good morning. Just wanted to take a quick look at macro. One other question here. Is there anything to offer any color on your exposure to construction and markets and how that's playing into your growth expectations for FY23? And I guess specifically, I'd be curious about Delta, ConstructConnect, and Neptune as well.

Yep. So appreciate the opportunity there. So let's just take it by those three. So construct connect to remind you what it is, right? So we have a near perfect database of all the construction, commercial construction projects that are in the planning phase and North across North America, the cup as a result, when it's, it has a bit of counter cyclical demand attached to it. So when there is a tremendous amount of new projects, and you're a subcontractor, general contractor, and building product manufacturer, and business is flowing from everywhere, then you don't have to look too hard for what you're going to do next. When there's fewer projects, then you subscribe to the subscription service of Construct Connect so you can identify what projects are coming down the pipe that you want to try to bid for and when. And so the Construct Connect has been a modestly good performer for us over the years. We expect it to actually have a good run here in 2023 as a result. Dell Tech does have, it's been a strategic focus of Dell Tech. Dell Tech is 60% government contracting, 40% private sector. In private sector, the smallest sliver is construction. and we sell software to large contractors, right? That's what we do. That business, in our prepared comments, we talked about how the private sector was very strong in Q4 for Dell Tech. We would expect and do anticipate some softening on the construction side for Dell Tech in 2023, and we think we have that fully covered in our guidance. And then Neptune, We believe strongly that Neptune is not a cyclical business. As you sell water meters and water meter technology to the municipalities, they tend to have a budget for meters. When there's a large residential new construction, then a higher percentage of the budget goes to install new meters. When there's fewer new starts, the budget stays the same, but they take the meters and they do the retrofits and trade-outs of the aging fleet and infrastructure. So that is a general across cycle sort of view of Neptune. But then we're further, or COVID is further buoyed by the fact we have this just unprecedented amount of backlog at Neptune for 2023. So we think that Neptune will perform well for us this year.

Very useful. Thank you.

Yep.

And our next question today comes from Rob Mason at Baird. Please go ahead.

Yes, good morning, and congrats as well to Jason and Rob. Maybe just stick on the technology-enabled product area. I think there was a mention of some products didn't ship and the quarter maybe got pushed. Just to step back, maybe update us where you think you are around supply chain just on the product side in your businesses, and then I'm curious what kind of impact those deferral shipments might have had in the fourth quarter.

Let me just set it up and I'll hand it over to Jason. So in, in TEP, you know, we talk obviously about Neptune. We talk about metal medical products. There's also a small cohort of RF product businesses, um, and avonics and, uh, and RF ideas. The, uh, fourth quarter was particularly brutal, um, supply chain wise on those RF product businesses. Um, and so, uh, with that, I'll give it to Jason to sort of talk through, uh, anything you'd like to.

Yeah, it wasn't significant. It was probably in the 5 to 10 million range, and it was across a number of businesses. So I think we expect the first quarter for TEP to be up a little bit more than the rest of the year because of that and because of some of the easier comps, so maybe low double digits in the first quarter, but that's sort of the range. So, yeah, a lot of this is in the rear view. Of course, things do pop up here and there, but we're not hearing as much sort of meaningful impact in the quarters. Sure.

Sure. And as a general matter, we're not the only ones that, but supply chain is generally, as Jason has said, improving and there's essentially, you know, the chip shortage and chip issues. There's more of a glut globally is just, but we're not, you're not just hearing that from us. We do think this off the supply chain issues abate over 23. Sure.

Sure. And Neil, you've made several references to Neptune through the call and you know, and share gains and, and the strength in your backlog. And that tends to be a business where share doesn't move around. that dramatically. I'm just, you know, could you expound a little bit just on how, you know, what's going on there, what you've done, whether it relates to ultrasonic adoption or the introduction of cellular, or is it a broader effort at Neptune that's driving that?

Yeah, Neptune has been just a steady and consistent share gainer the whole time I've been here, right? I mean, for a decade. And the reasons for that are many fold, but they have a product orientation that starts with they never want to strand their existing customers with technology. So, for instance, this goes back to the prior iteration of communication software, but the proprietary protocols between mobile and fixed point. a rural municipality and you can have one fixed point, roaming points, and still have some manual reads and the master data management software package in Neptune can ingest all that data and you don't strand a customer having to pick one piece of technology for the totality of what they have to do. So it comes from a product orientation that starts with flexibility. The second thing is the products are just particularly well thought out for the long arc of what the customer wants to do. For instance, on the large commercial meters for ultrasonic, you have to be able to read high flow and low flow equally accurate. Our products do that. So think about a big hotel application, you know, a trickle that happened at three in the morning versus the high flow and everybody takes their showers in the morning. Our ultrasonic meter will perfectly read the low flow and the high flow and the competitive products have to tend to be focused on one or the other for the precision. More so for that application, when the battery that drives the ultrasonic technology needs to be replaced. In our case, it's essentially a drop-in battery. The competitors, you have to cut the meter out and replace the meter. So it's seemingly small things like that that help drive market share gains over a long arc of time. Final thing I would say, in 2022, it was particularly beneficial for us because we had product availability throughout the totality of the year. And so some of our competitors were quoting year-plus lead times. I think our lead times went from like 8 to 12 weeks. And so just some accounts that we typically have not had any presence in, they need meters, we can deliver meters. All of a sudden you have presence and the opportunity to compete in that account. So that's helped gain some market share in the relative short term.

Great, great. That's very helpful.

Thank you. Our pleasure.

And our next question today comes from Alex Blanton at Clear Harbor Asset Management. Please go ahead.

Thank you. Good morning. Good morning. First, I just want to say that I think your format for the slide presentation this time is probably the best ever. And I think you should stick with it. It's really a great presentation.

Noted.

Now, I Most of my questions have been answered, but something came up from one of the other participants regarding the business that accumulates commercial construction plans.

Yes.

And Barry Sternlich, who's the CEO of Starwood, was on CNBC yesterday saying that In his business and across the board, really in commercial construction, as interest rates have gone up, people will complete the projects they have but hold off on starting new ones. And so that's why he's looking for a big drop in commercial construction in the second half of this year because new projects are sliding. Do you see that in your statistics?

So that's interesting. So I can ask Zach, Construct Connect publishes, I'm looking at that quarterly, quarterly the macro of what they're seeing from a construction planning point of view. And I can have Zach forward that to you. I've not read the most, personally, I've not read the most recent report yet. So I don't want to comment on its contents, but we can send that to you.

Okay, thank you, because it would seem that if new construction projects are not being put into implementation, it would show up in those numbers, wouldn't it?

So here's the counter-psychical nature of that. And so if you have several hundred thousand construction workers, construction, small subcontracting firms, ConstructConnect has tens of thousands of customers. So as those hundreds of thousands are looking for work, it only takes a small percentage of that cohort to become a customer of ours to exhibit counter-cyclical growth behavior, which is what's happened in every prior slowdown in the history that we've been able to observe with ConstructConnect.

Okay, so you're really talking about your business and market share rather than the overall business. trend of that market.

Correct.

Yeah. Okay. Thank you. Yeah. Thank you.

And ladies and gentlemen, this concludes our question and answer session. We will now return back to Zach Moxley for any closing remarks.

Thank you everyone for joining us today. And we hope to see you all at our investor day on March 21st in New York.