Mirion Technologies, Inc.

Good day, and welcome to the Merion Technologies first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please also note this event is being recorded. And I would now like to turn the conference over to Alex Gaddy, Vice President of Finance and Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining Merion's first quarter 2022 earnings call. A reminder that comments made during this presentation will include forward-looking statements, and actual results may differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in our annual report on Form 10-K, and quarterly reports on Form 10Q that we file from time to time with the SEC under the caption Risk Factors and in Marion's other filings with the SEC. Quarterly references within today's discussion are related to the first quarter ended March 31st, 2022. The comments made during this call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the appendix of this presentation, accompanying this conference call, which can be found on Merion's IR website at ir.merion.com. Joining me on the call today are Larry Kingsley, Chairman of the Board, Tom Logan, Founding Chief Executive Officer, and Brian Schoffer, Chief Financial Officer. Now I'll turn it over to our Chairman of the Board, Larry Kingsley. Larry?

Thank you, Alex, and good morning, everyone. We appreciate your continued interest in Myriad and are excited to share our current assessment of the company's performance and outlook. This morning, we announced our earnings results for the first quarter of 2022 and have provided an update to our expectations for the rest of the year. We will also share our view of how this dynamic environment impacts the short and long-term growth prospects for the business. I want to begin by highlighting some of the key trends that I'd like you to take away from this call. First, the operating environment remained challenging and in some respects deteriorated during the first quarter. The conflict in Ukraine, the supply chain issues specific to our bill of materials posed significant challenges for our business, which we expect to continue. However, all things considered, Tom and I are proud of the team for taking the new variety of challenges head on and delivering a solid quarter of results. I believe that the team has positioned the company for success in the coming quarters. Second, demand remains robust for Merion's diverse set of products and services. As Tom and Brian will highlight in more detail later in the call, Merion's order volume remains strong across both the industrial and medical segments. Finally, I want to express how well positioned Merion is to deliver growth during the remainder of 2022. The company's various end markets actually look stronger now than they did a year ago or even a quarter ago. Merriam maintains a leadership position in many of its product categories and is well positioned to outgrow its end markets. The team has a sturdy grip on the business. They're controlling what they can control and they're responding well to what they cannot. There was a lot of noise in the first quarter and there will likely continue to be some challenges in the short term. However, the business is poised to deliver strong results consistent with how we have described our performance expectations for the company. It's important to remind you that Marion has a long history of delivering positive results in uncertain operating environments. And I'll turn the call over to Tom Logan, Marion's CEO.

Larry, thank you, and good morning to everyone. I'd like to begin my remarks by saying, firstly, thank you to all of my Marion colleagues across the globe for your hard work navigating the challenging operating environment throughout the first quarter. As Larry mentioned, our company faced multiple challenges to start the year, including the ongoing supply chain effects from the COVID pandemic, accelerating cost inflation, and certainly most recently, the Ukraine conflict. These factors have had a negative impact on our short-term performance, but I believe that the inherent resilience of our business model positions us well for the road ahead. While this quarter's performance fell short of our year-ago quarter, I can tell you that I'm extremely encouraged by the favorable evolution of our end markets, which is evidenced by strong order performance in the quarter. In fact, core orders grew approximately 19% year-over-year in the quarter, adjusted for the impacts of foreign exchange. Before I take you through the financial highlights, let me first dive a bit deeper into the market trends that we're currently seeing. First, the outlook on nuclear power has improved since our last call in February. The two most important factors defining the health of the commercial nuclear power industry are government support and the price of natural gas. Both of these factors have markedly, and I believe permanently, improved over the last few months. From a political standpoint, the Ukraine conflict has heightened the importance for energy independence in Europe. This has caused a number of nuclear states to enhance their commitments to nuclear power generation. Examples include Belgium, which has announced that it will life-extend its operating plants by a decade. The UK announced eight new nuclear projects, underpinning Boris Johnson's objective of increasing the percentage of UK electrical generation derived from nuclear power from 16 to 25%. France announced six new EPR projects, and we expect to see sustained or accelerating new build activity in Bulgaria, Turkey, Hungary, Poland, the Czech Republic, and elsewhere. Outside of Europe, a majority of Japanese citizens now favor nuclear power for the first time since Fukushima, and the presidential election result in South Korea will likely result in a significant acceleration of nuclear new-build activity there. Finally, in the U.S., we have seen hundreds of millions of dollars of state-level subsidies to existing nuclear power plants now supplemented by $6 billion in subsidies from the federal government as a component of the recent infrastructure bill. This political support is so striking that even California is reconsidering the shutdown of its last nuclear power station at Diablo Canyon. Looking now at natural gas pricing, even before the Ukraine conflict, prices had more than doubled year over year. We expect the new constraints on Russian export gas will put a floor under that, both in Europe as well as in the US, where marginal economics will favor greater LNG shipments into Europe. All of this means that the confidence and the profitability of the global nuclear industry is better than it has been at any time in my nearly two decades as CEO of this company. We believe that this, in turn, will likely lead to an increase in capital and operating budgets as operators seek to run plants at higher capacity factors and contemplate more life extensions. If true, this should have a direct and positive effect on the recurring revenue stream we enjoy from the install base, as well as the scope of new build activity we expect to support within our five-year planning horizon. Let's turn now to the defense segment, which represents about 8% of our revenue. The Ukraine conflict has spawned enhanced military and civil defense concerns around the possibility of a nuclear or radiological incident in the region. As a consequence, NATO members and their neighbors are increasing their related military and homeland security spending with both speed and focus. Today, MirAN provides products and solutions to 19 of the NATO Armed Forces through a variety of applications, including militarized dosimeters and survey meters. We expect to see accelerating demand for this green gear over the balance of our planning horizon. More broadly, European civil defense agencies have a heightened interest in the food safety environmental monitoring, and in vivo assay solutions we have historically deployed in the wake of events such as Chernobyl and Fukushima. We are standing at the ready to help meet the needs driven by elevated environmental risk in the region. Pivoting now to our medical end markets, we've seen healthy demand and orders as evidenced by the backlog progression. As I've mentioned before, we expect digitization to play a critical role in our growth story as we launch new and connected products. I'm extremely excited with our most recently announced new products, SunCheck and SunScan, which add to our industry-leading radiation therapy quality assurance portfolio. The team is also making great progress on our third-generation InstaDose platform, which is scheduled for release in 2023. While our end markets are healthy and our order book is strong, the lingering effects from COVID-19 on the supply chain continue to impact the predictability of our delivery windows to customers. While Brian will take you through the details on the quarter later in the call, I wanted to note this remains an issue. The most acute areas of pressure in the quarter accrued from logistics and sub-assembly availability. I'm impressed by our team's ability to find rapid solutions to these light-breaking issues, but we've not yet seen the end of it. We expect supply chain disruptions to extend into the second quarter and we'll reevaluate progress and provide another update on our Q2 call in August. Given the current state of geopolitical dynamics and out of an abundance of caution, we have removed all remaining Russian-related revenue from our projections and guidance. This includes the news of the termination of the Honeykivi nuclear power contract between a Finnish consortium and affiliates of Rosatom that was announced on Monday. The remaining projects affiliated with Rosatom in our backlog, primarily in China and Hungary, have not been terminated, and we continue to operate in compliance with the terms of the underlying contracts. The updated guidance that we provided today reflects this decision and ongoing supply chain dynamics offset by new opportunities in our defense and core nuclear power markets. We are confident in our ability to achieve the revised targets, understanding that any incremental revenue occurring from Rosatom projects would be accretive to our revised guidance. Turning now to slide four to discuss our first quarter results. As expected, the first quarter was a tough comparison. To remind you, we saw 14% organic growth from Q1 2020 to Q1 2021. When compared to the first quarter of 2021, organic revenue declined by 4.2%, with medical growing by seven-tenths of a percent and industrial declining by 6.6%. On a two-year stacked basis, we delivered organic revenue growth of 10%. Performance was highlighted by strong growth in nuclear medicine and dosimetry, but was more than offset by impacts from supply chain disruptions across the business and project delays stemming from the Ukraine conflict. As Brian and I discussed on our last call, we've been very active with pricing actions to offset inflationary pressures. We began to see early signs of price materializing in the first quarter, but we expect to see our net price-cost relationship improve throughout the year. Finally, we remain focused on delivering our inorganic growth target of 5 to 10 points. We have a strong M&A pipeline and are currently evaluating a number of compelling opportunities. We look forward to providing everyone with updates as opportunities evolve. As I turn the call over to Brian, I'd like to close by reiterating that we believe Merion is well-positioned to weather the challenging operating environment, just as we have done in numerous prior cycles. Our markets are vibrant, backlog is strong, and we intend to successfully navigate through these short-term hurdles. With that, I'll turn the call now over to our Chief Financial Officer, Brian Schoffer.

Thanks, Tom, and good morning, everyone. To get started, let's turn to slide five as I walk you through our first quarter financial results in more detail. As Tom mentioned, our total company revenue was down 4.3%, and adjusted EBITDA declined by 12.5%, when compared to the first calendar quarter of 2021. On an organic basis, our revenue was down 4.2%. Our total revenue in the quarter was $163.2 million, with adjusted EBITDA totaling $34.9 million. As a reminder, approximately $3 million of public company costs are included in this quarter's results versus a year ago. Normalizing for these incremental public company requirements, our EBITDA decline would be in line with revenue performance. Adjusted EBITDA margin contracted by 200 basis points to 21.4% on lower volumes and incremental public company costs. Excluding the public company costs, adjusted EBITDA margin would have been flat year over year. Adjusted gross margin was up 10 basis points compared to the same period last year, finishing at 50.6% for the first quarter. With lower volumes, I am pleased with the adjusted gross margin performance as cost initiatives and better mix showed improvement year over year in the quarter. Adjusted EPS for the quarter was 10 cents, slightly better than expectations on lower taxes. Moving on to slide six and seven, let's look at our quarterly financial performance by segment. Starting on slide six with the medical segment, adjusted revenue was up 7.7% and organic adjusted revenue increased by 70 basis points. Organic growth in this segment was supported by strength in nuclear medicine and dosimetry, but was offset by supply chain challenges within radiation therapy. The supply chain negatively impacted organic growth in the quarter by approximately 5%. Adjusted EBITDA margin for the medical segment was 30.9%, a 50 basis point decline from the same period last year, driven by both volume impacts and investments in our European Service Center in radiation therapy. Next, looking at the industrial segment on slide seven, we reported a quarter-over-quarter decline in adjusted revenue of 10.1%. with organic revenue declining 6.6% from the same period last year. On a two-year stack basis, organic revenue was up 9%. Revenue performance is reflective of the difficult Q1 2021 comparison coupled with the previously mentioned macro issues. These factors negatively impacted organic growth in the quarter by approximately 8%. Adjusted EBITDA where the industrial segment was down 8.5% compared to the same period last year, while adjusted EBITDA margin increased 40 basis points to 27%. I'm pleased with the adjusted EBITDA margin performance despite lower volumes, reflecting good cost discipline. Moving on to slide 8 to highlight our leverage and liquidity profile and free cash flow performance. As of March 31st, we had $84 million of cash on hand and $166 million of available liquidity. During the first quarter, we generated $10 million of adjusted free cash flow, which was a slight improvement compared to the $9.8 million from the same period in 2021. Cash non-operating expenses were $7.3 million, which is expected to be the highest quarter in 2022, excluding any incremental deal-related expenses. Finally, I want to walk you through the updates we made to our full-year 2022 guidance. Turning to slide 9, you can see our updated expectations for 2022. As Tom noted earlier, the actions taken remove approximately $8 million in revenue for the second quarter. For the full year, reported adjusted revenue growth guidance is now 3.5 to 5.5%, down from our original expectation of 5.5 to 7.5%. This is reflective of us delivering organic growth of 4 to 6%, which is down from the 5 to 7% we guided to previously. Again, this is all excluding, this is excluding all remaining Russian related projects, representing nearly 4% of our top line expectations for the full year. Foreign exchange considerations are now expected to negatively impact reported revenues by approximately 2.5% for the full year. we are still expecting CIRS to deliver 2% inorganic growth in 2022. Our adjusted EBITDA target range for 2022 has now shifted to $170 million to $180 million from our original $175 million to $185 million expectations. The updated EBITDA guidance is reflective of the removal of $14 million of Russian-related EBITDA and $1 million of negative foreign exchange impacts being partially offset by 10 million in new defense and nuclear power opportunities. Our adjusted EBITDA margin expectation remains between 24 and 25 percent. Our adjusted EPS outlook for the year is now between 44 and 49 cents per share, and adjusted free cash flow is expected between 75 and 95 million dollars. We feel strongly about our current financial position and believe that we are well positioned to execute on our future growth and improvement initiatives. I'll now turn things back to Tom for some closing remarks.

Brian, thank you. I'd like to highlight a few key takeaways before we open the lineup for questions. First quarter was dominated by a challenging operating environment, but we believe there are many positives to take away from it, including our robust core order growth of 19% in the quarter, which signals strong future growth. Supportive conditions in both our industrial and medical end markets, especially in nuclear power. And finally, the team's ability to successfully navigate a challenging operating environment despite continued supply chain instability. Thank you all again for the time today. And with that, I'll pass it back to Alex Gant.

Thanks, Tom. That concludes our formal comments for today. We will now open things up for Q&A. I'll turn it back over to the operator to get things started.

We'll now begin the question and answer session. To join the question queue, press star, then 1. If you'd like to remove yourself from the question queue, press star, then 2. And if you're using a speakerphone, you may need to pick up your handset before pressing any keys. We will start with our first question. That comes from Chris Moore with CJS Securities. Please go ahead.

Good morning, guys. Thanks for taking a few questions. Maybe we'll just start on the supply chain on the medical side. So it sounds like the challenges are shifting a little bit more towards radiation therapy than nuclear medicine. Is that correct?

Yeah, Chris, this is Tom. The way I would characterize our business overall is that we are a low-volume, high-mix business, and that's reflected broadly in our supply chain. And this is both a blessing and a curse. It's a blessing in the sense that our supply base is highly diversified, highly regionalized, and so as a consequence, our exposure to thematic issues like direct exposures to the situation in Shanghai or more broadly to Southeast Asia are more muted than we might find with a number of our peers. But it does mean that we see effects that oftentimes are a little bit surprising. So what we saw in the quarter was a new issue for us, as you pointed out, in our radiotherapy business, where we had an issue obtaining power supplies. And this was an issue that we had worked very, very closely with our core supplier. Candidly, over a number of months, we had, we believe, good reason for optimism that we'd be able to kind of shore up the delta over the quarter. Our supplier ultimately was not able to close that gap. And this is somewhat reflective of what we saw in the December quarter on the nuclear medical side, where at that time we noted that we had a, what I would say is broadly a comparable issue with certain sub-assembly components overall. And our general view around the supply chain is that as a company, you know, our general processes have over indexed to becoming extremely proactive, where we no longer take it as an article of faith that we will receive a key component a key sub-assembly on a scheduled date. We're extremely proactive about confirmation and reconfirmation. But still, given the state of the global supply chain overall, we continue to see issues like this, which we've characterized historically as brush fires that we have been successful in containing. But on the other hand, given the broad macro conditions, we don't have particular cause for optimism right now that we're nearing an end to this.

Got it. Very helpful. Maybe just on pricing, can you talk a little bit more about the pricing escalators in your contracts? Are they different between medical and nuclear, between U.S. and Europe? And finally, what's the likelihood of having to give some price back at any point in time?

Yes, I think there are two broad elements to our revenue stream that I would encourage you to think about from a pricing standpoint. One is the revenue that flows through backlog, and typically that represents about half of our next 12 months of revenue. And within that backlog, there is a diversity of contracts. Some of them have a fairly short turn time, six months or less. Some of them are multi-year in nature. What you would find across the gamut of those contracts is that the vast majority have pricing escalators and or opportunities to essentially gain price as scope changes, as schedule changes, et cetera. The key distinction between that and the remainder of our business, what we would broadly characterize as our book and bill and our subscription-based technology-enabled services business is that the pricing inflators have a bit of an implicit time lag. And so this is why on the prior quarter, We noted that we feel very good about the price action that we've taken as a company. We feel like we've been proactive across both the industrial and the medical segments. We feel that our price actions have been well received and well supported in the market in large measure because of the criticality of what we supply and the related price elasticity of demand. But our view is that overall, again, given that lagging effect associated with price escalation and backlog, we expect to see more visible pickup in positive price costs in the back half of the year.

Yeah, just for what it's worth, Chris, we got about 1.5% price in the first quarter, and we expect that to pick up as the year goes on.

Got it. That's helpful. Thank you, guys. And last one for me is, You know, you have previously talked about new construction, you know, being roughly, I don't know, 17 to 18 percent of nuclear revenue. Given the current backlog, the significant recent uptick in new plants being announced, would you expect that percentage to look much different, you know, four to five years from now?

Chris, I would. Yeah, I think when you look at the dynamics that we've articulated and, you know, I think review that really in the context of my nearly two decades as CEO of this company, where we've seen numerous economic cycles and we've certainly seen a fairly significant change in fortune to the nuclear industry overall. I will tell you without a doubt, the conditions in the industry, again, are better than they have been at any time during my tenure with this company. That's driven by, as I noted in the remarks, a combination of strong government support across all regions. We're seeing it in Europe. We're seeing it in North America. We're seeing it in Asia Pacific, coupled with an extremely high increase in the cost of landed natural gas, which, again, we've noted has more than doubled year over year. And based on a complicated array of both supply-side dynamics and demand-side dynamics punctuated by the Ukraine crisis, We expect that to continue for a long period of time. What this means is that the government support, both for the operating fleet, which represents about three-quarters of our nuclear revenue, or about 30% of our total business, is higher, but also the new build activity we think is very likely to be accelerated in a number of the nuclear states and kind of incipient nuclear states that we've talked about on prior calls. So I would tell you that while we've not updated our long-range plan to incorporate some of the emerging new assumptions around new build activity, I would tell you that collectively we believe we will see a pull forward of certain projects into our five-year planning horizon that ultimately at that 0.5 years out that you mentioned are likely to move the needle overall. Got it. Very helpful.

I'll jump back in line. Thanks, guys.

Thank you, Chris.

Our next question comes from Andy Kaplowitz with Citigroup.

Please go ahead. Good morning, everyone.

Hey, Andy.

I just want to go into that last question a little bit more in the sense that the environment changing since Russia invaded Ukraine, you give us a lot of examples into what countries are doing. You did add 10 million of incremental defense and nuclear EBITDA this year. But could you give us a little more color into what that incremental business actually is? And do you see the inflection accelerating as early as 23 in your nuclear and defense businesses?

Yes. So on the defense side, first of all, in terms of the pickup of activity, this is a – A scenario that we've seen before, I want to stress that our company, if you were to pro forma back our current construct back to the 2011 timeframe, we were deeply, deeply involved in the civil defense response to the Fukushima incident. And if you look through the pro forma impact of that, what you would have seen is episodic a revenue spike of about $130 million over that period of time. And I note that because it reflects the capabilities that we have as a firm, both I think the more intuitive military products, which I'll touch on in a moment, but also the more comprehensive suite of civil defense solutions that we brought to bear there and are prepared to bring to bear if we see any similar type of regional nuclear incident at any time in the future. Given the acute nature of the situation in Ukraine and the sobering effect that that has had on European military budgets in particular, where I think most strikingly Germany announced that they are immediately evolving toward a military spend allocation of about 2.8% of GDP, having been well under 2% for many, many years, that is reflective of the heightened and acute defense posture that we're seeing in region. And recognizing the array of potential both military and civil defense threats that could ultimately lead to some type of radiological release, we have seen an incredible pickup in indications of interest in and around the solutions that we offer, again, from both a military and a civil defense standpoint. So on the military side, We currently equip 19 of the NATO Armed Forces. We have been the incumbent military dosimetry supplier for most of the last three decades. And we are in the midst right now and have been in a generational upgrade to the technology that we've deployed. We clearly expect to see an acceleration of this activity over time. And I will tell you that the indications of interest that we have seen overall are in the mid-eight-digit range, again, in terms of the scope of what we could potentially see over a multi-year period in order pickup. That does not include any potential civil defense activity that might be sponsored through the IAEA, through the American federal government. or by the EU itself. And so the key point here is that this is an area where we have seen a pickup in activity. We have seen this movie before, not only in Fukushima, but we were present in Chernobyl. We were present in Three Mile Island. And so we expect that, again, if there is an incident or a perception of an evolving acuteness of risk that this may lead to some additional revenue opportunity for us overall.

Thanks for that, Tom. And then maybe this is related, but you gave us the core orders number of up 19%. Could you give us more perspective on how orders have evolved over the last couple of quarters and what you expect moving forward, and then how we should think about that translating over time into your segments, given the supply chain headwinds that are out there?

Yeah, what we're seeing is strength in orders across the board. It's not isolated to one segment or the other. And I think it's reflective of the vertical market conditions that we've talked about. You know, we talked this morning a lot about the health of the nuclear power industry, and ultimately that health will translate into more recurring revenue from the installed base. It's almost an inevitability. Again, given the fact that operators clearly are motivated and incentivized to run their power plants at higher capacity utilization or capacity factors and to life-extend the existing infrastructure. Invariably, that throws off both incremental OPEX budgets and CAPEX budgets, and ultimately some of that finds its way to ops. So that is the macro demand driver that more than any other factor on the industrial side is leading the kind of order dynamics that we're talking about. But, you know, on top of that, on the industrial side, we have the military activity that we've noted that's picking up and we expect could pick up considerably. And, you know, with the exception of the new build activity associated with Rosatom projects that we have taken out of the forecast, you know, otherwise the new build activity overall would be strong. I want to be clear on that point as well. Again, I think we were fairly direct in the commentary that we've made that our goal today is simply to get underneath any remaining Russian exposure, and this is why we've lowered guidance. To be clear, there is potential upside. We've had no indications of any delays or cancellation of discussion. around the projects in Hungary and China that we've noted in the past that they use Russian technology. And to the extent we see that flow through in an ordinary course, that would represent upside to the year overall. Second point is on the medical side where, just again to reiterate, the overall demand drivers in the industry are driven by a combination of demographics and technology. and new product releases, and all of those factors are undergirding very healthy medical sector demand for us overall.

Just one comment, Andy. I know you're going to ask another question, but I would say that when you look at the end markets within the orders, there isn't a large military order or something that came in in the quarter. This is just our normal business, right? At the end of the quarter, we're only four weeks into this conflict. So I think it's really important to point out that there's not some anomaly because of what's going on. We haven't really seen that in the order book.

Brian, let me ask you. Yeah, no, that's helpful. Let me ask you a follow-up then on sort of how to think about quarterly cadence of earnings going forward. You know, should we assume supply chain impacts are still relatively acute in Q2 and Q3 and then sort of, you know, they get sequentially better? And obviously, you're starting out relatively low in Q1 versus your organic targets for the year. So should we expect just a gradual ramp up in organic revenue? What's your visibility to that ramp up?

Yeah, so, Andy, the way I think about this is a couple things. First off, you know, we mentioned that we have about $8 million of revenue in the second quarter that we've got to take out of the forecast, right? that revenue is very hard to replace this quick with kind of how our order profile is there. So I think the way I think about this is that plus some supply chain is going to make Q2 from like an organic growth percentage look better than Q1, right, but not as good as where we had expected it in our prior kind of viewpoint. What that then obviously means is we have a back half of the year that ramps. And there's good visibility to that with good order flow, frankly, in Q1 and in April that supports this. We have good line of sight to the projects that are coming and have come on delivering the back half of the year. So we're quite confident in in what we put out. But I think 2Q is another quarter that's a little bit challenging. And then we expect Q3 and Q4 to be pretty robust. The other thing just to mention is price ramps as we go here. Like I told Chris, we saw about 1.5% in the first quarter. Candidly, I would tell you that's a little better than what we had planned for. that gets better in the second quarter and gets materially better on the exit. So that helps as well in the back half of the year.

Thanks for that, guys. I'll get back in the queue.

Thanks.

Again, as a reminder, it's star than one to join the question queue. And the next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Thanks. Good morning, everyone. And nice to have other analysts on the call this time. So I'll kick it off. And my colleague, Ronnie, has got a few questions as well. Maybe just starting out with the quarterly performance in one queue. I'm just curious, however you guys want to describe it, as you think about both of the segments, how did things kind of trend as the quarter progressed? and then any comments on April as well would be helpful.

Yeah, I think the way the quarter progressed, so first at the macro, the supply chain situation got more challenging as the quarter went on, frankly, and even as the month of March went on, I would tell you, more and more challenging.

I think that You know, that – so that's kind of what I would say probably about the first quarter.

But, again, we're fairly happy with where we ended up here in the first quarter. I think on April, you know, I would tell you that, you know, things have gotten – are getting better, but other things are – have gotten worse. So I think it's a little bit of a we feel good about – where we think we'll land here in April. Um, but, but there's definitely some positive and there's definitely some negative. Um, you know, the one thing I don't, we didn't, we didn't touch on, we talked a lot last quarter about our new bad business. I'll tell you, um, these guys had a phenomenal March. Um, they're set up to have a very good second quarter. And I would, I would tell you everything we, Tom and I and the team have, um, expected to happen there is now starting to come through into fruition. And I think that, you know, we definitely have our feet under us in that business. So I think that's kind of how I would think about it. More challenging as the quarter has gone on and even more challenging as March went on.

Got it. That's helpful, Brian. I guess just the follow-up I have is so, you know, the order trends were good, you know, 19%. How do I think about the conversion of those orders and backlog? And then I guess maybe a related or unrelated question. You guys kept the EBITDA margin guide for the year. It's interesting. A lot of our industrial companies are saying we're increasing pricing because of increased inflation that's having an impact on margin. So I'm just curious, just like the confidence in that margin guide for the year and maybe how your business differs from in your ability to maintain margins there. So I guess two questions there.

Yeah, so maybe I'll take a shot at both of them and then Tom can come in over to the top. First off, I want to point to our industrial margins this quarter. I mean, we were down organically and still had very robust margin performance. So I think I think, first off, that points to a culture of discipline in the business. So based on what we're seeing in the first quarter, based on the incremental actions we're taking on both the supply side and on the pricing side, we feel very confident about the range we put out there. I would also tell you one of the things we're finding, which is a bit interesting, is We're seeing more inflationary pressure as we try to get things faster, but the supply dynamic on giving the supply chain a little bit more time is definitely helping our cost pressure as well, which also leads to why we're confident kind of in the back half of the year, both on margins but also on shipments.

Scott, and then just the, I don't know, the conversion, like how do you think about the conversion? How does that come through into your earnings?

Yeah, obviously, I mean, it's kind of the same comments I made with Andy on, you know, how I'm thinking about Q2 and Q3 and Q4 being, you know, a bigger ramp. So I think that 19% is a mix of stuff that will take a couple quarters to convert, and there's obviously some short-term stuff in there as well. So there's nothing abnormal in the mix of the order conversion that changes our profile. I think where our caution is is around execution and making sure that we can execute on the second quarter.

Hey, guys. This is Ronnie Scardino.

So, just going to weigh in with another question. So, look, we thought it was prudent you guys removed the Russia-related revenue or EBITDA from your updated guide. But what stood out, at least to me, was the fact that you added $10 million for these new opportunities in defense and nuclear. So, it would be great to try to gauge your visibility into these earnings and your confidence, I guess, to achieve it this year and I mean, what I'm really trying to get at is, are you seeing orders that support this outlook?

Yeah, so, Ronnie, I'll take that. This is Tom. The answer is yes. We're seeing a pickup in orders both on the commercial nuclear power side as well as on the military side that gives us confidence in that number overall. And we continue to see, again, just kind of strong... pre-order dynamics in terms of the level of dialogue that we are engaged with relevant NATO-based military forces. And so our view is that that number is well supported. And we are working hard to continue to do what we can to provide compelling solutions into the region. And if we do, we might see some upward bias to those numbers overall.

That's great. And just, I guess, one follow-up. What were those sales associated with the $14 million in EBITDA that you called out for the Russian impact?

I mean, you know, most of that is a couple things.

It's two projects that are in our backlog, Hungary and China, that we talked about. Again, I think we have some optimism that, you know, we're taking more of a prudent stance in our guidance approach than hopefully where we land. We've obviously taken out all of our direct business into Russia, and any expected orders for Rosatone projects that we were expecting to get. That doesn't mean we won't get those orders. It doesn't mean we won't between this year, next year, and the coming years continue to deliver on those orders. But I think this was really about us taking this question off the table, and that's the key here.

Yeah, Ronnie, I'd add to that, too, that obviously we took HANI-TV, the Finnish project, which has been canceled out of the mix. In aggregate, I think the total is roughly $30 million from a top-line standpoint that we've taken out of the forecast. Again, I think that highlights just the resilient nature of our business, that our exposure to Russia directly and indirectly is probably a bit greater than our peer group. We want to be, again, conservative in our stance here, but we're very proud of the way the team has pivoted and really hit the mats in terms of delivering additional revenue in other markets. I think that's the story of our history, and it just highlights the implicit diversification of our business.

Great. Thanks, guys. We'll pass it along.

The next question is a follow-up from Andy Kaplowitz with Citigroup.

Please go ahead. Good morning again. Hey, Eddie. Brian, I just want to follow up on cash flow for a second. You know, like all industrial companies, it seems like you've had to invest in working capital a bit. So how are you thinking about your ability to generate cash flow to tackle leverage this year? And is that sort of the key focus for your cash this year?

Yeah, so obviously we brought our cash flow guide down. I tell you, you know, There's three components of that, just for transparency. Five is the EBITDA, obviously the range we brought down. Five is on interest. We're hedged through June, but we are still 100% floating. And then five, a network of capital. The cash generation picks up throughout the year. I think we will see us generate cash next quarter, but we will have to invest to hit the back end of the ramp. And it's something we're super focused on. I mean, I think the teams are very focused on generating cash. We want to continue to do deals, but also de-lever. And we need to hit the marks, and we will hit the marks here.

Appreciate that. And then, Tom, maybe just a follow-up on supply chain for a second. Like, you know, you mentioned – You know, you're well-positioned in the sense that you're sort of low volume, high value. That helps you a bit. But, you know, everybody's having issues with electronic components. You know, you talked about China. Do you have any sort of direct exposure that we should know about there and anything else we should think about as we model, you know, supply chain going forward?

Yeah, our direct exposure to China, Shanghai in particular, is very limited. Where we see the exposure would be really on kind of the second-order effects side. that flow through our big electronic contract manufacturing firms. And the two leading firms that we use are both highly regarded global ECM players. One is outside of Manila. The other is in Mexico. And so we have seen discrete electronic component issues for really throughout the last two and a half years. We have learned to be far more proactive in terms of identifying early areas where firstly, you know, our kind of sales and operational planning horizon has been extended effectively more than doubled. Secondly, we identify and work very closely with our ECM partners to identify early on any components that may be at risk from a supply or a price cost standpoint. And we've been effective by and large in, you know, finding alternatives where we have run into issues. Again, this continues to be a pebble in our shoe. It is an environment where overall conditions continue to linger. But for us, historically and really as we've seen through the last three quarters, it's led to more of a delay impact in certain areas that are not correlated you know, based on issues that have emerged late in the game. We continue to, you know, I'm not happy with that. I'm not happy overall that, you know, we're not delivering perfect operational performance, but we continue to get better, and the key to that is proactivity.

Thanks for that, guys.

We have no further people in the question queue, so this concludes our question and answer session. I'll turn the conference back over to management for any closing remarks.

Ladies and gentlemen, thanks again for your participation today. We appreciate your support to our many shareholders. I just want to, again, reiterate a few key takeaways from the quarter. Challenging operating environment really highlighted by a combination of both supply chain issues and a black swan event in the form of the war in Ukraine. Notwithstanding all of that, we've during the quarter delivered robust core order growth, again, of 19%. We have seen an evolution in our vertical markets and key segments that is extremely favorable on a net basis. And I'm very proud, again, of our team's ability to navigate a very dynamic, unpredictable, changing environment. So we appreciate all of that. We look very much forward to briefing you in August as we talk about the second quarter. And we'll look forward to that event now. So thank you again for your time today. Good day. The conference is now concluded.

Thank you for attending today's presentation. You may now