Mirion Technologies, Inc.

Greetings, and welcome to the Merion Technologies second quarter 2024 earnings conference call. At this time, all participants are in 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, Jerry Estes, Manager of Investor Relations, Thank you, sir. You may begin.

Good morning, everyone, and thank you for joining Merion's second quarter 2024 earnings call.

A reminder that comments made during this call 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 reports on Form 10-K, quarterly reports on Form 10-Q, and in Merion's other SEC filings under the caption Risk Factors. Quarterly references within today's discussion are related to the second quarter ended June 30th, 2024. 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 today's call. All earnings materials can be found on our IR website at ir.merion.com. Joining me on the call today are Tom Logan, Chief Executive Officer, and Brian Schoffer, Chief Financial Officer. Now I'll turn it over to our CEO, Tom Logan. Tom?

Tom Logan, Chief Executive Officer, Brian Schoffer, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom Logan, Chief Financial Officer, Tom First, I'm very excited to announce that we've signed a strategic partnership agreement with EDF, the largest operator of nuclear power plants in the world, making Marion an exclusive content supplier for all of their nuclear new build projects spanning the next two decades. This is expected to be the largest commercial deal that we have ever signed by many multiples, and is a testament to our technological leadership position in the nuclear space and our longstanding relationship with EDF. Moreover, this fortifies our competitive positioning in the new build arena over the coming decades, where we expect to see significant global development. Next, second quarter order growth was relatively flat compared to the same period last year. We continue to see strong engagement from customers across the business, led by nuclear power, where orders were up by more than 15% in the second quarter. I'm confident in the overall health of our end markets and believe that the macro trends supporting our business will be long in tooth. Third, both sides of the business delivered steady organic revenue growth in Q2. Technologies led the way with 4% growth, reflecting strong nuclear power demand. And medical delivered 3% organic growth, driven by accelerating activity in nuclear medicine. Across the enterprise, we continue to invest in our ground game, most notably to the creation of a chief revenue officer, launching our e-commerce platform in Q4, and bolstering our inside sales capabilities. Fourth, adjusted free cash flow was nearly $9 million in the quarter, delivering on our commitment to being cash flow positive for the first half of the year. Finally, we have updated our 2024 financial guidance. We've raised our adjusted EBITDA target to 195 to 205 million and reiterated our ranges for organic revenue growth of 4% to 6%, adjusted EPS of 37 to 42 cents, and adjusted free cash flow of 65 to 85 million. Moving on from our second quarter financial results, I'd like to spend some time reflecting upon the dynamics in each of our end markets. Let's turn to slide four. Before I dive in here, I want to note that we will not be providing segment by segment order numbers going forward. The competitive environment in many of our businesses is intense, and we don't wish to unnecessarily help our competitors. That being said, order growth was generally flat compared to the first half of last year. While we didn't print a massive growth number, we did see solid order volume and continue to see strong engagement across the business. Backlog grew 11% from the same period last year, and we expect to book approximately $30 million in orders from two nuclear projects that slipped from Q2 to Q3. In the medical segment, first half order growth was approximately 3%, led by strong performance from dosimetry and nuclear medicine. Radiation therapy QA saw negative order growth in the first half, driven by softer international orders largely stemming from the depreciation of the Japanese yen and the market disruptions due to anti-corruption efforts in the China market. On the domestic side of RTQA, we continue to see better order performance and are encouraged heading into the back half of the year. In occupational dosimetry, we saw strong order growth in the first half buoyed by the launch of our third generation of insta-dose technology, the insta-dose view. Within nuclear medicine, first half organic order growth was approximately 18%, and we continue to see strong engagement as market momentum improves. I've noted strong attendance and incredible energy at the nuclear medicine trade shows that I've attended over the summer. And the overall momentum around the Theranostic movement continues to be quite positive. Anticipated changes by CMS for the reimbursement of radio diagnostic drugs in the U.S. market can only add to the favorable market dynamics. I'm encouraged by the evolution of our nuclear medicine strategy and believe that we are increasingly well positioned to capitalize on the macro trends in this market. In the technology segment, we saw an approximately 3% order step back from the first half of last year. Nuclear power saw positive first half order growth in the low single digits, supported by steady demand from the installed base. We continue to be excited by the dynamics at play within nuclear and are expecting good order flow in the second half of 24 and into early 25. On a personal note, earlier this week I attended our largest annual customer event, which is geared toward the nuclear industry. In my two decades of keynoting this event, I've never seen higher energy or enthusiasm. Moving on to defense, orders were flat compared to last year, despite a strong 28% growth comparison from the first half of 2023. As mentioned on our last call, we booked approximately $15 million of European defense orders at the outset of the second quarter and maintain a positive outlook for this market in 2024. Finally, labs and research had negative order growth compared to last year. Similar to defense, our labs business faced a tough 31% order growth comp and governmental budgetary dynamics had a negative impact on order timing in Q1. We saw a small ramp in the second quarter and expect momentum to build as the year progresses. Overall, I'm encouraged by both market and customer dynamics across the enterprise. The nuclear power and nuclear medicine super trends continue to provide a strong foundation for future growth, and there's a lot of positive momentum materializing across the enterprise. Looking ahead to Q3 and Q4, we're facing tough order growth comps from last year due to large project orders, but we expect to see accelerating flow business as the installed nuclear base gains momentum. Before I pass things on to Brian, there are a few items that I'd like to highlight looking ahead to the second half of the year and beyond. First, I'd like to touch on our margin performance in the second quarter. We saw better than expected adjusted EBITDA margins, especially within our technology segment. Margin expansion was driven by strong execution and positive results stemming from our procurement initiatives and operating leverage. We continue to emphasize our business system to improve overall cost performance and capital velocity. Regarding procurement, we're six months into a sweeping strategic effort to consolidate our supplier base, which we believe will yield 150 to 300 basis points of EBITDA margin improvement over the next three years. In addition, we have doubled down on daily management in our factories and the cadence of Kaizen events. I'm pleased with the progress we are making and continue to be bullish on our ability to deliver on our 30% long-term margin target. Secondly, cash flows remain a key area of focus for me and the team. I'm pleased that we were cash flow positive for the first half of the year, but we have a great deal of work yet to be done to improve conversion going forward. Capital spending will moderate now that the big InstaDos launch investment is behind us. Inventory turns remain a big opportunity for us as we'll continue to grind out improvement in the quarters ahead. I'm confident in our strategic approach here and believe that we are well-positioned to improve our cash conversion the back half of the year and into 2025. Thirdly, I'm pleased to announce some organizational changes that we've recently implemented. These updates include the following. First, we've named Luis Rivera as the executive vice president of our medical group, reporting to me while I retain leadership of the segment. Louis previously led our radiation therapy QA business, and I believe he will have a strong, positive impact in his new role. Additionally, we have named Mark Siviter as Marion's inaugural chief revenue officer, where he will oversee Marion's global sales organization. Prior to this role, Mark led our medical sales team and played an integral role in the success we've seen on that side of the business. I'm confident that Mark will be instrumental in helping us achieve our long-term revenue growth aspirations. Finally, we decided to exit our medical lasers and alignment business. This business unit was a non-core element of our portfolio. It did not fit clearly into our long-term strategy. As part of the shutdown, we are moving all related operations from Middleton, Wisconsin to our Norfolk, Virginia factory to drive increased efficiency from our operating footprint. With that, I'll now hand the call over to our Chief Financial Officer, Brian Shopfer. Brian?

Thanks, Tom, and good morning, everyone. To begin our financial commentary this morning, please turn to slide five for an overview of our second quarter results for the total company. Revenue grew by 5% in the quarter, while adjusted EBITDA was up 10.2%. Quarterly revenue was $207.1 million, and organic growth was 3.6%. Adjusted EBITDA was $48.8 million, with adjusted EBITDA margins expanding 110 basis points to 23.6%. Q2 margin performance came in better than originally expected at both the gross margin and adjusted EBITDA levels. I'll get into more details on margins in a few moments, but we saw gross margin and adjusted EBITDA margin expansion in both segments in the quarter and for the first half. Moving on to our segments, starting with medical on slide six. Medical revenue growth was 7.7%, with organic growth of 2.6%. Medical top line performance in the second quarter was led by nuclear medicine, where the EC squared business added over five points to the top line. We made solid progress catching up on shipments following the ERP related slowdown in Q1. In the RTQA business, performance was led by strength in Europe, offset by market disruptions due to China anti-corruption dynamics. Medical adjusted EBITDA margin was 34.3% in the quarter. a 150 basis point expansion from last year. Medical EBITDA margins were supported by a strong quarter from EC squared and solid execution across the portfolio. As Tom noted earlier, we also announced the closure of our RTQA facility in Wisconsin during the second quarter. The change will positively impact medical adjusted EBITDA margins by approximately 70 basis points on an annualized basis. This move simplifies our operating footprint It is a great example of the self-help cost-out initiatives we have at our disposal to reach our longer-term 30% margin target. Moving on to the technology segment on slide seven. Revenue grew by 3.7% in the quarter, with organic growth of 4.1%. Top-line growth was led by a strong quarter for nuclear power, while FX had a negligible impact. I'm encouraged by the positive momentum we're seeing in our European technologies business, especially in nuclear power, and expect to see continued strength in the coming quarters. Technologies adjusted EBITDA was $38.9 million, with margins expanding 190 basis points from the same period last year. Adjusted EBITDA margin expansion was supported by good execution in the segments. We realized early results from our procurement improvement initiatives and benefited from operating leverage in our sensing business, along with solid operational performance across the rest of the portfolio. While our French business was a headwind to margins on a year-over-year basis in Q2, performance was better than we had originally expected, and we were pleased with the progress being made there. Turning now to slide eight for a look at leverage and cash flow. Our net leverage ratio took down to 3.0 times at the end of the quarter. We also completed a debt refinancing initiative, which is expected to save us around 75 basis points in total, 50 basis points of improvement versus the SOFR spread, and an annualized estimate of approximately $5 million in net interest savings. CapEx was higher year over year in Q2 and the first half as a whole, driven by incidents launch investments. We expect CapEx to return to more normal levels in the second half of the year. Cash performance was generally in line with expectations, but networking capital was a use of cash in the first half of the year. We made solid progress on accounts receivable and inventory, but more work remains to be done. Progress was offset by the timing of cash payments within our nuclear project business. Improving networking capital efficiency remains a top priority, and inventory turnover continues to be our most significant opportunity to improve networking capital dynamics. Finally, let's flip over to slide nine to take a deeper look at our updated guidance for 2024. As Tom highlighted earlier, we've reiterated our revenue growth targets for the year and continue to expect 5% to 7% top-line growth, with organic revenue growth of 4% to 6%. However, there are some slight changes to how we expect to achieve the organic growth number. Namely, we are now expecting low single digit plus growth for medical and mid single digit plus growth from technologies. The updated estimate in technologies organic growth is supported by strong year-to-date performance from the segment and continued positive momentum across our end markets. On the medical side, and in conjunction with the shutdown of the Middleton facility, The updated medical growth estimate is inclusive of our decision to exit the lasers and alignments business, which is expected to impact medical organic growth by approximately 80 basis points for 2024 and nearly 200 basis points on an annualized basis. Just to reiterate, this is a margin accretive action for the medical group. The updated medical estimate is also reflective of slowing order activity driven by the depreciating Japanese yen as well as the anti-corruption lockdown in China. Positive domestic momentum is expected to offset some of the impact. We are expecting operating conditions to improve in the international markets in 2025 based on increasing strength in the yen and deferred demand in China. As a reminder, our medical business has performed very well over the last few years, with two-year stack growth in 2023 of better than 20% organic growth. So a bit of a normalization was expected. We have slightly raised our adjusted EBITDA guide and are now expecting 195 to 205 million of adjusted EBITDA with margins between 23 and 24%. Our adjusted EPS range remains unchanged at 37 to 42 cents. We've also held our adjusted free cash flow range at 65 to 85 million. However, we do expect free cash flow to come in towards the lower end of that range. I'd also like to note that we completed the redemption of all outstanding public and private warrants during the second quarter. This action greatly simplifies our capital structure. It is a good step forward for us as we continue to mature as a public company. I point you to slide 20 in the appendix for an updated look at our share count considerations following the redemptions. One final item of note before we open things up for Q&A. I am excited to announce that we will be hosting our first ever investor day later this year and are targeting early December for the event. More details to come on the, on the event as we get closer, but this will be a great opportunity for us to share our updated strategy and longer term financial targets with the investment community. Looking at where we stand halfway through the year, I feel good about our financial results thus far and believe that we are well positioned to deliver a strong finish to the year. I look forward to updating you with our third quarter results this fall. With that, I'll now pass it over to Jerry to open things up for Q&A.

Thank you, Brian. Now we have a couple more comments this morning. I'll hand the call back over to the operator to kick off the Q&A session.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your lines in the question queue. You may press star 2 if you would 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 keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Hey, guys. Good morning. Hey, Joe. Good morning.

Hey, Joe. Tom or Brian, I recognize that you guys are going to be coming up against some tough comps in the second half of the year as it relates to orders. At the same time, it seemed like you had roughly $30 million in orders, nuclear push out to 3Q. I guess, as you think about the health of the order pipeline into the second half of the year, maybe just provide a little bit of color on what you expect to happen to backlog as we progress through the rest of the year. Do you think you can hold backlog at current level? Is it going to decline? And what does the overall health of the pipeline look like?

Yeah, so maybe a couple thoughts there, Joe. First off, yeah, I mean, just a reminder, we're copying... hundred million of large orders between Q3 and Q4. A lot of that's in Q3 actually. But we feel very, very good about where we sit today. The businesses continue to be out there in the markets. The pipelines are very strong across both businesses, candidly. Tom and I, like Tom said, just spent some time with the North American customer base at our event in Texas this week. And the dynamic there is very good. The medical team continues to be very optimistic about what they're seeing in the pipeline. I think to answer your question directly, look, order rates probably won't be positive on a year-over-year basis in the back half of the year. But I like backlog, you know, continuing to, I would say in the third quarter, backlog will be up versus the third quarter last year for sure. And I think the fourth quarter, I think there is visibility to us being flat to where we started the year. Now, look, that can move around a little bit just based on kind of order dynamics and timing. But I think we feel very good about where we're sitting. And this isn't something, you know, Tom and I are... particularly worried about. I mean, when you look at these larger project orders, you know, they burn down over time. And there'll be other project, there'll be other orders that come in either, you know, at the back end of this year or candidly in the front half of next year. But the pipeline is very good. And I think our visibility into that pipeline continues to be very good.

Yeah, Joe, this is Tom. Just to tag on to what Brian said, the, you know, we look ahead multiple years, you know, not only the back half of this year, but into 25 and beyond. Again, if you look at just the queue that we see coming in terms of larger projects, which typically but not exclusively tend to be nuclear projects, again, we feel good about it. To be clear, I think we've always been clear on this. It's not rateable. It is a little bit lumpy. But as it flows through revenue, obviously it's smooth because typically for a large nuclear project, that revenue is booked over a number of years. In addition to that, I think it's also important to note that in terms of the flow business that we're seeing, so the business above and beyond these large orders, which typically is driven from our installed base, again, very clearly the case in nuclear, but not exclusively. This is also broadly true in radiation therapy, QA, et cetera. Very clearly, based on the health of the installed base, we're seeing a pickup in that flow business. And to be clear, this doesn't necessarily get reflected in backlog because it trades within a quarter. So, again, to be clear, we're very confident about where we sit right now. We're not at all concerned about either order flow or market strength there. It's very positive.

One, just maybe to throw a little bit of context on that flow business, I think as we look at the year that we're projecting out, we think that flow business is kind of a mid-single-digit order growth number. for us, and we tend to look at that at orders kind of below $5 million because it kind of smooths out under that. So maybe just some context, Joe, on what we're seeing and expecting.

Got it, guys. That's really helpful, Collar. I appreciate that. I thought that the fact that you signed that long-term partnership, exclusive partnership with EDF was notable. At the same time, like I know that you guys have had strong market share in the nuclear segment already. I'm just curious, like, how does this potentially expand on an already existing relationship? And how do you see this kind of playing out over the next couple of years with EDF?

Yeah, I mean, to your point, Joe, we've had an outstanding relationship with EDF for many decades, for which we're tremendously grateful. They've been an absolutely terrific trading partner for us. Historically, and we've noted, I think repeatedly, some of the strong content we've had. Most recently with the Hinkley Point C project in the UK with EDF. And certainly, if we had not signed this large commercial deal, we would certainly have expected a future flow of strong business from EDF. But what this does is that it streamlines commercial terms and all of the attendant negotiation in and around that. It strengthens our position competitively and effectively it gives us not only greater confidence in investments that we're making into the space, but it also clearly has an impact on our cost structure in terms of supporting this commercial activity overall. We're very happy about it, and again, very honored to have this place of pride with EDF.

That's great. If I could just maybe squeeze one more. You guys referenced the anti-corruption dynamics in China and the RTQA market. I think there's been talk about this now for probably the better part of the last 12 to 15 months. I guess, how do you see this kind of like impacting your business going forward? At what point do you think you kind of get to a bottom in that piece of the business going forward?

Yeah, I think, you know, just as we think about the numbers, you know, what I would tell you is that the impact in the first half of the year on the revenue side was pretty negligible on the medical side, mainly. We had a little bit of kind of timing movement between the first half and the second half on the technology side, but that has nothing to do with the anti-corruption. That's just project stuff. And I think on the order side, our TGA business was definitely down in orders in the first half, and we expected to be down in the second half as well. Um, you know, our expectation, I think this is common Joe that you, you know, that you guys have heard, uh, from other companies that have released this, this week. You know, I think we expect, you know, 24 to probably be the low point. We expect the dynamics to get better, maybe late in the fourth quarter, but, but into 25 is what we're, uh, is what we're forecasting at this point.

Yeah, I'd add to that too, Joe, that I don't think we've ever kind of called a turn in the Chinese market. It's just it takes longer for deals to materialize because people are being much more careful, and we certainly understand that. And if you listen to some of the leaders in the space, in particular Siemens Healthineers, I think you'd get a pretty comprehensive picture of the dynamics in that market. But what's important is that I think there are two – factors that are likely to improve the dynamics in the Chinese market, whether it happens in Q3 or Q4 into 2025, it will happen. One is that people will get beyond kind of this speed bump on the anti-corruption and pent-up demand will begin to flow through again in a more rateable fashion. And then secondly, Chinese stimulus programs will begin to kick in, which also will be favorable broadly in industrial markets, but certainly in healthcare markets as well. We believe both of those factors ultimately will be beneficial to demand in China. So this market continues to be important to us. I think Brian encapsulated well the fact that our exposure here is not great, but we expect it to be a continued source of growth in the future as soon as we get past this short-term disruption.

That's perfect. Thank you very much, guys. Thanks, Jill.

Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking a couple questions. Maybe just start with, Tom, you referenced the anticipated CMS changes on reimbursement. Maybe just can you talk a little bit further about the impact or potential impact and, you know, any thoughts on timing you might have?

Yeah, so the general view within the industry, just for those who are the uninitiated, CMS basically is the American Center for Medicare Studies. They really establish reimbursement protocols for in the American healthcare market that drive not only government reimbursement, but also much of private insurance reimbursement overall. So it's incredibly important. As we've talked about historically, there's incredible development taking place right now in nuclear medicine. We generally refer to it as the Theranostics movement or radiopharmaceutical therapy. But it involves a couple of elements. One is using improved molecular imaging techniques using PET scanning technology coupled with evolving nuclear medical tracers or radioisotopes that are used for this type of molecular imaging. And secondly, it involves therapeutic doses, which, again, utilize common ligands, but carry different radioisotopes that in general carry more energy and have a therapeutic impact overall. In the evolution of the space, there's been an increase in cost commercially of these radiodiagnostic drugs, and CMS simply hasn't kept up. Reimbursement rates have been very low. in the range of hundreds of dollars when the market value of these drugs and what the healthcare providers are actually paying is thousands of dollars. And so what CMS has signaled is a strong intent to correct this discrepancy in the beginning of 2025. And if that happens, I think the logical kind of axiomatic pathway here is that healthcare providers will be less reluctant to prescribe protocols that may be money losing today, but in the future will be, you know, a margin accretive for them overall. So that's the, that's the gist of it.

Got it. Very helpful. I would see you good job cleaning up the public and private warrants. Is there anything else from a capital structure standpoint that, that, you know, those seem like the more obvious, anything else that, that can be done to improve the cap structure there?

First off, I think we've made a lot of progress over the last two and a half years on the balance sheet, whether it's Charterhouse getting out of the capital stack last summer, obviously the warrants, we did our debt repricing, etc. You know, I think we continue to look at the, you know, we'll continue to look at whether we can do more on the repricing side, on the debt. You know, we'll, you know, your question really also then comes down to capital allocation. And Tom and I are continuously looking at, you know, M&A versus delevering and, you know, how to make those trade-offs. And I think we continue to evaluate those kind of, you know, as the quarters go by and we generate more cash. But I think we I think we've made a lot of improvements. I don't think there's anything huge and structural left to do from the way we went public. So I think it's really about focusing now on executing our plan, growing margins, free cash flow for sure, and continuing to grow. I think the growth in the end markets is promising, and therefore that's where we're focused. I think most of the capital structure stuff is behind us, And if there's something opportunistic, you know, that comes along, we'll, we'll, we'll always look at things. Uh, but I think, I think a lot of the heavy lifting now has been done.

I think it's important to note as well, uh, Chris, that, you know, we've, we've, uh, guided earlier in the year that, uh, organically, you know, we'll continue to de-lever this year to below two and a half times, assuming we, uh, we don't, uh, we don't enter into a large M&A deal. And I want to be clear that that continues to be our default mode. You know, our view is that, uh, We've got a tremendous position right now for the growth that's evolving organically in both nuclear and in the healthcare space. Assets that have a high degree of interest to us right now continue to be kind of, again, these small ball deals that we've done in the recent past that really don't have a significant impact overall. on net leverage. And so that continues to be our default notice. We know that there's a good opportunity for us to bring down leverage a little bit more and continue to be extremely focused on the operational quality of the business overall and the attendant margins and pre-cash flow generation.

Got it. Very helpful. I'll leave it there. I appreciate it, guys.

Our next question comes from the line of Andy Kaplowitz with Citi. Please proceed with your question.

Good morning, everyone. Hey, Andy.

Tom or Brian, you mentioned some early benefits from your procurement initiative, specifically in technologies, and you talked about 150 to 300 base points in margin over the next three years. Your technology's EBITDA margin was close to 30% this quarter, so could you talk about how the program could play out for technologies in particular, how does it evolve over the second half in 2025?

Sure. Just so we're clear, the 150 to 300 is actually at the total company level, not just in technologies. Yes, of course. Of course, I understand. But look, I mean, I think we've done a ton of work in the first half of the year, you know, behind our business system on getting this done. And, you know, I think... What's interesting is, you know, a lot of the early benefits have kind of been, you know, some of the stop spending stuff, some of the kind of organic, you know, rethinking how we engage with the supplier base, et cetera. You know, this next phase is really about how do we reduce our supplier base? I mean, we have a category and, you know, Tom and I were talking to the team about we have a category. We have over 1,000 suppliers, right? That doesn't need to be the case. That can be less than 100. As you can imagine, the benefits of going from a lot of little POs to a few bigger relationships that we both have skin in the game on, but also the complexity kind of underneath the hood, is tremendous. So I think you'll continue to see margin expansion because of procurement. you know, some in the back half of the year, but I think it's more a 25, 26, you know, phenomenon more than anything else, you know, with a tail into 27, just because some of this takes time and we don't turn our inventory that fast. Right. So we're working on two things here at the same time. I think we're super encouraged what we're finding. I think we're very encouraged about the engagement from our underlying businesses and teams. And I think this is a meaningful impact for us. So I think we're very bullish about this. I think it's a concrete example on top of the operating leverage we expect to get on how we get from where we are today to that 30% margins. And I think you're starting to see it in the P&L, and I think you'll continue to see it through the back half of the year and into 2025.

Some additional color here too, Andy, is that firstly we've evolved the organization around this. So this is not a project. This is just an evolution in the way we do business. And to be clear, it covers not only direct but also indirect procurement. So the impact is not purely at the gross margin level, but really at the EBITDA margin level overall. And secondly, there's been a subtext here in that we've been very clear about our 30% EBITDA margin target within our planning horizon. And I think we've been clear that in our view we can get there largely through operating leverage, largely by being disciplined about both SG&A and factory overhead and just taking the natural fall through of our relatively high gross margins on the business to drive that margin expansion. We have noted that we're very focused also on operational quality and self-help in that realm. And so here today, we're just being a little bit more tangible about one area in that pool, which is procurement. And, you know, we're very, very pleased with what we're seeing. Again, half a year into this initiative, we expect it's going to pay meaningful dividends.

It's helpful, guys. And then, Tom, nuclear medicine, I think, is your fastest growing medical business. And obviously, you seem quite excited about it. But How big could it end up being over time, and can it help you offset if RTQA tends to be slower for longer? Ultimately, do you still believe that medical is a mid-single-digit growth business, but maybe the mix ends up changing a bit?

Yeah, I mean, firstly, just to note that from an RTQA standpoint, if you look at the long-term growth trends there, they've been double-digit. It's a tremendous business. It's a field that continues to grow, and there's not been a secular change in that dynamic. Again, I would attribute all of the growth to two factors. One is that we're lapping big comp numbers from last year, but secondly, it's China and Japan, as I think we've detailed with some precision in the call today. I candidly... The evolution in nuclear medicine is quite unpredictable. I think everybody expects with confidence that this is a market that is going to change cancer care overall, not just cancer care, but also cardiac care and potentially Alzheimer's, which would be far greater than either of the latter two. but nobody expects it will somehow render RTQA obsolete. Today in the U.S. as an example, a newly diagnosed cancer patient has about a 65% chance of being prescribed external beam therapy as part of their overall treatment protocol. There's a high likelihood that that continues, and what we're likely to see is just a shifting nexus between radiopharmaceutical therapy and external beam therapy and conventional chemo-based oncology and surgical oncology, dot, dot, dot. So the dynamic will change. It will change differently for different categories of cancer. But the bottom line is that today, globally, the world is dramatically underserved from an external beam therapy standpoint. The world today It only has about half of the linear accelerators and the treatment clinics that it needs. And so we continue to be quite bullish on that business and don't see nuclear medicine cannibalizing it. We see it really as being additive.

Yeah, I think just one other comment maybe is that business, medical overall, we said is a high single-digit grower for us, not mid-single. This year, it's obviously good single coming off of two very big years, the last couple of years. And maybe one other thing we're seeing, you know, the team's been talking to us a lot about is actually the nuclear medicine business and the RTQA business working together, right, in the field. And nuclear medicine kind of being, you know, additive, like Tom said, to the RTQA treatment regime. So I think there's a bit of – I think we continue to just like this space a lot.

Brian, I like when you correct me to the positive. That's good. So let me ask you about cash flow. I know you're focused on cash flow this year. You know, you didn't change your guidance, but you did have positive cash flow in the first half of the year. You do have a steep ramp, you know, in the second half. I think usually seasonally you generate cash in the second half. But maybe talk about the visibility to get into that range.

Yeah. Look, I mean... you know, or first off we're ahead of where we were last year. And you know, what we, where we ended up last year is, you know, in the range we still have this year, I think, you know, this year looks a lot like last year. Um, and I actually went back and looked at, uh, 22 as well. And 22 looked a lot like 23. So, you know, I think, you know, for, you know, for, uh, many different reasons, you know, we just, we tend to generate a lot of cash in the fourth quarter. that this year won't be any different. And I think we, you know, if we felt like we weren't going to get there, we would have changed the numbers. We didn't. You know, we do think we'll be kind of towards the lower end of the range, not the higher end of the range, you know, from where we sit today. But, you know, there's still a lot of time left to make an impact there.

Thank you. Thanks.

Our next question comes from the line of Yuan Z with B. Reilly. Please proceed with your question.

All right, thank you for taking our questions and congrats on a good quarter. First, on the high level, I'm just curious, if there's a brief recession coming, do you think your customers will be cautious on spending, such as delaying or canceling the orders in the backlog?

Yeah, I'll start, Yuan. This is Tom. In general, if you look at our 20-plus year history, what you would find is that we tend to be a very acyclical business, and candidly, some of our strongest growth has come during recessionary periods overall. And so our view generally is that we're not exposed to the economic cycles, that the demand drivers and our dominant sectors markets, again, tend to be somewhat free of those economic cycles. So, no, we're not expecting, you know, an enhanced risk of a dip in demand based on, you know, just kind of macroeconomic growth numbers.

Got it. Got it. Following on that prior CMS question, can you maybe talk about or comment on your plan to prepare for this upcoming change from CMS?

Yeah, for us, there's candidly very little to prepare. I mean, just for the broader audience to note our positioning in this area, that today we own the leading data management software platform in the U.S., a platform that in the market is known as EC2. that literally connects all of the players from cradle to grave in this space, the isotope producers, the drug makers, the researchers, the radiopharmacies, the CDMOs, and ultimately the clinicians in terms of how product moves through that value chain and ultimately is administered to the patient. You know, as volume overall, I should note that also from a hardware standpoint where the market leader in dose calibration instruments thyroid uptake systems, various types of respiratory studies equipment, and are broadly involved in compounding transport equipment, syringe shields, and a bunch of other peripherals. The general story is that, again, in the American market, obviously our biggest market in nuclear medicine, with any favorable change in dynamics, but particularly in this case where it's procedurally linked Clearly that just reduces friction for the prescription of radio diagnostic procedures and the extent that that's an added driver to volume. It means that people are likely to buy more dose calibrators, to license more of our software and to drag along some of the other kind of balance of equipment, balance of clinic equipment we sell. So there's not a specific action. for us to take, we're certainly prepared for continuing upside evolution in demand.

Got it. Got it. Thanks for the helpful comment.

We have no further questions at this time. Mr. Logan, I would like to turn the floor back over to you for closing comments.

Okay, well, ladies and gentlemen, as always, we appreciate your attention. Just to reiterate our point of view and our message here, as it was good quarter for the company. We executed well. Very pleased with the margin expansion story and the continued strategic evolution of our business, specifically as it relates to the EDF deal, but also the continued evolution of the operational quality of the business. Our focus for the balance of the year continues as it has been to be on driving organic growth in markets that continue to be favorable and where customer engagement continues to be strong and to continue to grind on our cost structure and our capital velocity to hit our goals in terms of margin, pre-cash flow, and ultimately leverage between now and the end of the year. We very much look forward to reporting back to you in Q3 and appreciate your time and attention today. So I wish all of you a good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.