Mirion Technologies, Inc.

Greetings and welcome to the Merion third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Gaddy, Senior Vice President, Strategy. Thank you, Alex. You may begin.

Good afternoon, everyone, and thank you for joining Merion's third quarter 2023 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 10-Q that we file from time to time with the SEC under the caption risk factors and in Merion's other filings with the SEC. Quarterly references within today's discussion are related to the third quarter ended September 30th, 2023. 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 the presentation accompanying the call today. All earnings materials 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, Chief Executive Officer, and Brian Shopper, Chief Financial Officer. Now, I will turn it over to our Chairman of the Board. Larry.

Thank you, Alex. Good afternoon, everyone, and thank you for joining our third quarter earnings call. We published a solid set of third quarter earnings numbers today, which sets us up well for the fourth quarter. Importantly, our results demonstrated progress on several of the key focus areas and initiatives we have been talking about all year. Quarter performance was outstanding. The team saw strength across the portfolio and closed key orders on the nuclear power side of the business. Backlog grew sequentially for the fifth consecutive quarter. I'm encouraged by the strong momentum we are building across the enterprise. The outlook for both the medical and technology segments looks quite positive in an otherwise mixed macro environment. The focus on networking capital has begun to pivot performance as networking capital was a source of cash in the quarter. This is a step in the right direction and just the beginning of what we expect should be stronger and consistent operating performance. The board and I are confident in the team and the approach to driving capital efficiency. And in the short term, are deleveraging targets. Overall, Merion is on solid footing heading into Q4. Order flow and backlog coverage are robust, the team is executing well, and leverage continues to tick down. Moreover, market fundamentals are constructive, and that positions the company well for profitable future growth. I'll now pass the call over to our CEO, Tom Logan.

Tom? Thank you, Larry, and good afternoon, everyone. I'd like to begin my comments today by thanking my Marion colleagues for their efforts during the third quarter and helping us to deliver an excellent set of results. Q3 organic order growth was outstanding, with an increase of approximately 46% compared to the same period last year. Despite strong revenue performance, we expanded our backlog for the fifth consecutive quarter, delivering year-over-year backlog growth of 11% and achieved a new record backlog position, of $799 million as of the end of Q3. Strong quarterly order flow was headlined by large new build and spare parts orders from nuclear customers. The size and scope of the orders were in line with our expectations and are a reflection of the positive nuclear sentiment we've been seeing globally. Second, we delivered total company organic revenue growth of more than 17% compared to the same period last year. Technologies led the way with organic growth north of 26%. Third, adjusted free cash flow was $17.2 million in the third quarter, which is an encouraging step in the right direction. The team did a great job of executing against our working capital optimization initiatives, and things are progressing according to plan. Cash flow remains a top priority for me, and we are committed to building off of this momentum going into the fourth quarter. Fourth, we've reiterated our financial guidance for 2023. Our backlog position provides good line of sight into the fourth quarter, giving us confidence in achieving our financial targets for the year. Finally, we closed on the acquisition of EC Squared this week, adding another strategic software platform to our medical business and the first to service our nuclear medicine customers. I'll get into more detail on this later in the call. Before I cover quarterly financial results, I'd like to expand on our orders performance and talk about what we're seeing in some of our end markets. Starting with nuclear power, we continue to see momentum in the space. We booked several large orders in the quarter, including a new build project in Asia and a spare parts order in Korea. In the emerging small modular reactor market, we booked more than $10 million in orders from five different developers year-to-date through October. We're seeing healthy demand and engagement from our nuclear power customers. We expect several utility scale new build orders like the one we received in Q3 to materialize over the planning horizon, supporting future growth. The install base is steady with improving customer fundamentals and the decommissioning pipeline is encouraging as well. Additionally, we remain excited to play an active role in the small modular reactor development space, supporting the global push for cleaner energy generation. We continue to prioritize building relationships across the developer landscape, and are seeing orders come in at an increasing pace. In the medical segment, we remain encouraged by the strength we're seeing across the portfolio, especially internationally within the European radiation therapy market. Our investment in the European Support Center is paying off as we continue to win share in the region. Domestically, our RTQA sales teams have reported a lengthening order cycle in RT hardware enhancements, and we continue to augment our SunCheck software platform which should position us well to better meet clinical demand in the future. Our solutions are best in class, and we remain encouraged by the space as a whole. Let's now flip over to slide four to discuss our third quarter results in more detail. As I mentioned earlier, we delivered consolidated organic revenue growth of 17.3% in the third quarter. Technologies led the way at 26%. Growth was supported by strength in our key end markets and geography. And importantly, we achieved this strong revenue growth while increasing our backlog, which positions us well to deliver future growth. In medical, we sustained positive momentum and delivered 5% organic growth, despite comping a 20% organic growth quarter last year. Medical growth was led by strong international sales growth in our RTQAN market. Before I pass the baton, I'd like to make a few additional comments for Q4. First, cash flow and margin expansion remain at the top of my priority list as we continue to de-lever the business and aim to establish our reputation as a compounder. Our team's executed well in the third quarter, and I remain confident in our strategy to enhance inventory and network and capital performance in the future. Second, I have retaken the reins of our medical business and will serve as its interim group president until we find the right long-term fit for the role. As a reminder, I spent much of 2022 leading the segment, optimizing the operating model and organizational structure, and defining the Mirion medical brand. The segment is performing well, and I have the utmost confidence in our team to continue executing on our growth strategy. Third, as you know, I've been working very closely with the technologies team over the course of the year. As a byproduct of that work, this week we announced internally that we're executing a group-level reorganization designed to create higher business line accountability and augment the focus on commercial and operational excellence. I have confidence that Group President Loic Elwa and his team will leverage the new organization to accelerate the attainment of our growth, margin, and cash flow objectives. In concert with that reorg, I've also announced a few important changes to the corporate organization. These changes include the naming of Sheila Webb as our inaugural Chief Digital Officer, the appointment of Dr. James Cox to the position of Chief Technology Officer, and the promotion of Aaron Chesney to the position of Chief Marketing Officer. I expect each of these changes to enhance our near and long-term value creation, particularly in the areas of digital transformation and the accelerated application of artificial intelligence. Finally, I'm excited to welcome our new colleagues from EC2 to the Murion family. To give you some color on the acquisitions, EC2 is a medical software business that will operate within our nuclear medicine group. The company has a strong recurring revenue profile and offers design, implementation, and support for its portfolio of comprehensive workflow software solutions. Through this acquisition, we'll be able to provide additional value to our nuclear medicine customers, helping them to simplify daily operations and streamline therapeutic and diagnostic processes. We acquired the business for $33 million and expected to generate $12 million of annual revenue and $5.5 million of pro-form adjusted EBITDA for calendar year 2023 and for the acquisition to be accretive to medical margins. We've acquired a highly strategic medical software business without negatively impacting our commitment to deleveraging. And I'm excited to see the value that EC2 and our new teammates can bring to Miriam. With that, I'll now turn things over to our Chief Financial Officer, Brian Schoffer. Brian?

Thanks, Tom, and good afternoon, everyone. To get started, I'll ask you to please turn to slide six to take a deeper look at our third quarter results. Total company revenue grew by 18.8% in the quarter, while adjusted EBITDA was up 26%. Quarterly revenue was 191.2 million and organic growth was 17.3%. Looking at adjusted gross margin performance, we saw a 210 basis point contraction from the same period last year. Gross margins were primarily impacted by two things. First, a larger revenue contribution from the technology segment negatively impacted overall company margins by approximately 110 basis points. Second, mix and non-repeat items and technologies drove more than 100 basis point, drove more than a 100 basis point impact to gross margin. I will get into more detail later in the segment discussion. Adjusted EBITDA was 38.8 million with adjusted EBITDA margin expanding 120 basis points to 20.3%. As expected, margins expanded in both segments. At the total company level, price cost was positive on a dollar basis, but continues to be negative on a rate basis. Pricing dynamics continue to be the focus for us as a team. Moving on now to our segment performance in the quarter, starting with medical on slide seven. Medical reported revenue was flat year over year, with organic growth of 5.2% and price contributing approximately 3%. Top line performance was in line with expectations as we comped a very strong Q3 last year. For reference, our two-year organic stack was 26% in this segment. Organic growth was offset in Q3 by the divestiture of the Biodex physical rehab business, which impacted medical reported revenue by nearly 6% in the quarter. Medical adjusted EBITDA margin was 34.2%. a 450 basis point expansion from the same period last year. EBITDA margin performance was supported by an improving product mix compared to the first half of the year, cost-out initiatives we actioned in Q1, and the Biodex divestiture, which accounted for more than half of the margin expansion. Flipping over to slide eight in the technology segment, technology's revenue grew by 32.8% in the quarter, with organic growth of 26.3%. Growth in the quarter was driven by 5% of price, the timing of revenue recognition, business mix, and a lower comp from the prior year period. As a reminder, our third quarter is seasonally our smallest quarter. In the fourth quarter, we expect low single-digit organic growth for technologies, which will be comping a significant Q4 number from 2022. For the full year 2023, we expect high single-digit growth for the technology segment. Technology's adjusted EBITDA was $27.7 million, representing growth of 37.1%. Adjusted EBITDA margin expanded 70 basis points to 22.6%. Key drivers of performance include the following. First, we were able to generate some operating leverage off of a strong top-line quarter, but not to the level that we would expect. Cost inflation was higher, which offset the strong pricing results. We were price cost positive on a dollar basis but negative on a rate basis. Additionally, we comped one month of Q3 22 without the SIS acquisition. This impacted adjusted EBITDA margin by 40 basis points during the quarter. Note that Q3 was the last quarter with any SIS acquisition inorganic impact. Lastly, we saw a few non-repeat items That coupled with segment mix in the quarter impacted technology's margin by approximately 200 basis points. These items were largely isolated to our French businesses and our North America civil defense product line. These one-time impacts are not structural in nature. Turning over now to slide nine for cash flow and leverage. Adjusted free cash flow was $17.2 million during the quarter, bringing our year-to-date figure to $12.3 million. As expected, cash flow performance took a step forward. However, we still have a lot of work to do to deliver on our expectations for the fourth quarter. Networking capital was a source of cash providing a benefit of 8.7 million, and we began to see inventory reduce in the quarter. We continue to target networking capital as a source of cash for the full year in improving our cash conversion. Moving on net leverage ticked down to 3.4 times at the end of September quarter. As Tom mentioned, we are confident in our ability to continue delivering the business through strong operational execution. And we've reiterated our 3.1 leverage target for year end. This includes the impact from acquiring EC squared. Finally, looking at slide 10, we've reiterated our financial guidance for 2023. We expect full-year reported revenue growth of 8% to 10%, with 6% to 8% organic growth. Adjusted EBITDA is expected between $175 and $185 million, with adjusted EBITDA margin between 22% and 23%. Adjusted free cash flow is expected between $45 and $75 million for the full year. Overall, a solid third quarter, and I'm confident with our momentum heading into the fourth quarter. I'll now pass the call back to Tom to close things out.

Thank you, Brian. Before we begin Q&A, there are a few things I'd like to leave you with this afternoon. First, our backlog position and overall order momentum coming out of the third quarter was very strong, bolstered by large nuclear power orders. Engagement across the business remains positive, and we're confident heading into the fourth quarter. Second, both of our reporting segments delivered quarterly results in line with expectations. Top-line growth was robust and EBITDA margin expansion evident across the board. Third, we saw notable improvement within our cash flow dynamics in Q3. There's still work to be done, and this remains a key priority for me and the rest of the team. And finally, we've reiterated our 2023 guidance, including our 3.1 times leverage target for year-end. I believe the business is well positioned to deliver on expectations heading into the fourth quarter. I'll now pass it over to Alex to open things up for Q&A. Alex.

Thanks, Tom. That concludes our formal comments for this afternoon. Operator, let's go ahead and start the Q&A session.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

One moment, please, while we poll for questions. Thank you. Our first question is from Joe Ritchie with Goldman Sachs.

Please proceed with your question.

Thanks. Good afternoon, everybody.

Hey, Joe. Hey, Joe.

Hey, can we start on the orders and specifically on the nuclear new build? So I saw that the orders increased by $85 million. How much of that was nuclear new builds? And then I guess the way to think about that is probably a little bit of a longer cycle business for you. So when would you kind of expect to see that come through the P&L?

Yeah, so...

Look, if you think about the order growth we saw in the quarter year over year, so up $85 million, we saw two orders approximately the same size, about $40 million each. One is the nuclear new bill project. One is a spare parts order out of Korea. If you think about this particular nuclear new build, we actually believe we'll see, or we know we'll see some revenue in the fourth quarter. And then we'll start to see it rateably trade over the next kind of two to three years, Joe. So it's pretty, this one impacts us near term, which is not always the case in this business. But this order is good for us for next year from a RevRec standpoint.

Got it. That's helpful, Brian. I guess maybe the reason I thought maybe it was a little bit longer cycle was just because there was no change to the expectations in the fourth quarter for technology. So was this something that you guys had already contemplated when you gave us the original guide? And then I guess, Tom, as you kind of think through, I think you made a – oh, go ahead. You want to answer that, Brian? No, go ahead. Go ahead, and I'll answer. No, no. No, no. And then, Tom, you made a mention of other potential new projects on the nuclear new build side and your pipeline. Just any more color around that would be helpful.

Yeah, maybe I'll – let's take it in reverse order. I'll answer that, and then Brian can answer the first part of the question. So, yeah, if you look at the pipeline that we see for nuclear new build projects, recognizing that we work with most of the major N-triple-S players, N-triple-S being the term of art for nuclear reactor designers. You know, the pipeline is as good as I've seen it. And our view is that as we look at our specific planning horizon that we expect that we will see, you know, continued growth in the sector. I will note that nuclear projects are notoriously difficult to predict in terms of quarterly timing. And so that's something that we'll shy away from. But I will tell you that our expectation is that, you know, this will be a continued theme, including in 2024 for us.

And then quickly, Joe, on, you know, we didn't move up guys for the fourth quarter. I mean, look, Loic and the team have been working on this for years. for a while. And like Tom said, these are really hard to predict when they're going to land. The impact on the fourth quarter is pretty small. I mean, it's less than a couple million bucks.

Okay. All right, great. One other quick one, and I'll pass it on. Just on free cash flow, congrats on the improvement this quarter. Still need more improvement in 4Q to hit the hit the range for the year. So just talk about your confidence and getting to that 45 to 75 and what's within your control.

Yeah. I mean, look, I mean, there's a couple, there's definitely some payments on a few projects that matter for the fourth quarter. But we, I mean, there's a reason we reiterated our range and our leverage targets. The team is, you know, very aggressively attacking kind of both the structural issues and the near-term kind of things that will impact this. So I think there's a lot of this is in our control, and we feel very good about the guidance we put out this morning.

Great. Thanks, guys. Thanks, Drew. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Andy Kaplowitz with Citigroup. Please proceed with your question.

Hello, everyone. How you doing? Hey, good afternoon, Andy. So, Tom O'Brien, just maybe following up on Joe's question, in terms of like the bookings, and I know you don't want to give us too much on the 24 setup, but You know, when I sort of look at the two segments, you talked in the past about, you know, Marion's ability to grow, call it mid-single-digit plus in the 5% to 7% range. Is the visibility, you know, higher than normal, normal? Like how would you say it as we sit here sort of in November thinking about, you know, the 24 puts and takes?

Yeah, let me tee it up, and then I'll let Brian talk about it a little more. I would say that in general, Joe, what we've seen is, an improving coverage dynamic where if you look at our backlog coverage relative to guidance, and this has been the case for much of this year, that in general, sequentially, we are seeing an improvement in that coverage, and we're certainly encouraged and heartened by the record backlog that we're sitting on here at the end of Q3.

It's helpful, Tom, and Brian, maybe again a follow-up on a question. In technologies, you mentioned low single-digit growth in Q4, tough comp, but we didn't model 26% growth in Q3. Was there any sort of pull forward there, or you're being conservative? How do we think about it in the context of such strong growth in Q3?

Yeah, look, there's definitely some movement between kind of Q3 and Q4 from, you know, what we kind of thought in June. Yeah, I think we feel, again, I think we feel pretty good about what we said. You know, we're comping, what, like a 20% number from last year in the technology segment on the organic side. well, 17, sorry, 17% last year. So, you know, that's a big number. I think we're very, I think we're very comfortable with the revenue range and, you know, we will, we will need this. We will see some EBITDA margin expansion in the fourth quarter as well.

Got it. And let me weave my last question and maybe two parts, like on the margin side, like in technologies, Brian, you talked about sort of one-time costs, like what, you know, repeat, obviously one time it means we shouldn't have more, you know, costs like that, but maybe give us a little more detail there. And then you made the, you're still not a positive on a price versus cost rate basis. Like what does it take to get there? Um, because I would assume demand is, you know, pretty good as we see, uh, and supply chain is getting better commodities, you know, generally have gone down. So, so what can you do to get there?

Yeah. So, uh, You know, on the one-timers, look, I mean, we saw some catch-up costs out of the French business, you know, and it's mainly in the projects business. And we saw some higher costs on some civil... some of our civil products this quarter. I mean, we're burning through kind of inventory, which is good. And I think that kind of also goes to the second question, which is, you know, one of the, you know, we're focused on inventory reduction for two reasons. One is to generate more cashflow, but two, exactly what you just said, as the supply chain does get better, that allows us to, to pull through, you know, better material costs through the P&L. So I think it's, it's, it's, you know, it's that that gets us there from a rate basis on the price-cost side.

Thanks, guys. Andy, thank you.

Thank you. Our next question is from Chris Moore with CJS Securities. Please proceed with your question.

Hey, guys. Thanks for taking a couple questions. So, yeah, maybe just, I know you're not getting into 24 too much at this point in time, but Maybe just the puts and takes that fiscal 24 gross margins will be above 23.

Well, I mean, you know, as we think about it, I mean, we're not going to give guidance right now for next year. But I think, you know, what both Tom and I said in our prepared remarks was margin expansion and cash flow are our top priorities for, you know, both of us, but also the entire company. I mean, we're looking at... you know, we're very focused on this, I think is probably what to say. Well, look, I think there's good pricing dynamics that continue to be out there. I talked about that being a focus. I think the team is very focused on the supply chain side, right? And as we work through the inventory stuff, that is helpful. You know, our structural, you know, we put a pretty big kind of structural pay increase through this year with all the inflation and kind of competition that's out there. I think that looks a little bit different next year for us. But I think when you put it all in, and by the way, we're adding software business via EC2 to the mix, and I think we feel very good about what the software business kind of more holistically across Merion will do for us next year versus what we kind of saw this year. So I think we feel pretty good about the puts and takes here. And, again, it's a focus. I mean, that's probably the most I can give you without giving you a specific target that we have. But, you know, we expect expansion.

Fair enough. That sounds good. Backlog almost $800 million up five consecutive quarters. Obviously, you talked about the new nuclear build order there. Is the balance between medical and technologies, is that much different than it was, you know, a year ago?

No. Well, a little bit just because the backlog's grown and most of the growth is on the technology side. I mean, our medical backlog, you know, is less than 20%. If you think about the backlog, less than 20% of it is medical.

Got it. And maybe just the last one for me. I mean, you guys have been clear that you're not just going to flip a switch on insta-dose, see penetration ramp, you know, quickly and dramatically. That said, I mean, Do you expect penetration at the end of 24 to be significantly different than end of 23, or is this really a three- to five-year kind of transition?

Yeah, Chris, it really is a three- to five-year transition. We expect that we will fulfill orders on this in the first half of next year. But in terms of meaningfully impacting the current VIX, You know, again, I think this is just a longer campaign, and it will occur systematically, but not, you know, not at the kind of accelerated rate that might be implied.

Got it.

I appreciate that. I will leave it there.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Tom Logan for closing comments.

Okay, well, ladies and gentlemen, we appreciate your participation today. Again, we're happy to report what we believe is a very solid quarter. And to be clear, I think we've noted this well throughout the call. We're very encouraged by the strength of our top line and the level of customer engagement and the favorable market dynamics that underpin that. These have always been key factors. and the relative acyclicality of Mirion as a company. And we're happy to see that coming through and coming through so strongly at this point in the year. Further, as you know, that is the toughest part of any business to manage. That if your top line is good, the rest of it is far more within your control. So all of that is to say that we feel good about the momentum of the business coming into Q4. We feel pleased with how we're sitting organizationally, the operational and commercial priorities that we're focused on, and we very much look forward to speaking to you again in three months' time. So thanks again, and we'll leave it there for the day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.