Q2 2023 Mirion Technologies Inc Earnings Call
Greetings and welcome to the median technologies second quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode. A brief question 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 Anna Scotty Vice President of Investor Relations. Please proceed.
Good afternoon, everyone and thank you for joining <unk> second 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 U S.
We see under the caption risk factors and in other other filings with the SEC.
Quarterly references within todays discussion are related to the second quarter ended June 30th 2023 the.
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 measures to the most directly comparable GAAP financial measures can be found in the appendix of this presentation accompanying the call today.
All earnings materials can be found on Marion's IR website at IR Dot Maryanne dotcom.
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 Kingsley Larry.
Thanks, Alex and good afternoon, everyone.
You all for joining our quarterly earnings call and for your continued support for myriad.
This morning, we published solid Q2 results that we believe position us well for the remainder of 2023.
Then you did see consistent backlog growth, which is the most encouraging forward looking indicator for the rest of the year.
And entering 2024.
Our second quarter was highlighted by better than expected top line performance from both operating segments.
Reflects the continuation of the trends we reported on over the last couple of quarters and we expect this to bolster momentum heading into the second half.
Margin performance was within our expectations for the quarter as we began gaining greater price cost trends traction.
And moving beyond the supply chain disruptions.
Additionally, we anticipate the unfavorable geographic and product mix impacts to ease in the third and fourth quarters.
Cash flow and net working capital efficiency are not yet achieving targeted performance expectations.
But I'm deeply familiar with the plan and I have confidence in the team and the approach.
Ill get into more detail later in the call, but the focus remains on improving inventory turnover.
Increasing collection velocity and.
In other material flow and transaction efficiency improvements.
The company's robust backlog, improving execution and favorable vertical market dynamics bolster our confidence.
On behalf of the full board.
We have confidence that management is executing well against the appropriate set of priorities for the business.
Lastly, it's worth noting that adds up mid July .
The prior private equity controlling sponsor has fully exited their position and Marion.
With that we have removed another overhang on the stock.
So I'll now pass the call over to our CEO Tom Logan.
Uh huh.
Larry Thank you and good afternoon, everyone to get things started I'd like to begin by thanking my Maryann colleagues for their very hard work during the second quarter.
Let's get right into the details around our results beginning with some highlights from the quarter first Q2 was another solid quarter of order growth, we booked approximately 9% adjusted order growth compared to the same period last year and expanded our backlog position for the fourth consecutive quarter.
We continue to see strengths from smaller recurring customers and have a high degree of engagement are larger technologies projects second we outpaced our internal expectations for total company revenue for the quarter delivering organic growth of nearly eight and a half per cent compared to the same period last year.
The technologies group led the way with organic growth of over 9%.
Third free cash flow was $2 3 million.
In the second quarter, while this is admittedly a meager something it was consistent with our expectations for both the quarter and the year cash flow was challenged by higher interest expense and net working capital dynamics for the quarter. Finally, we've updated our financial guidance for 'twenty twenty-three, we increased and tightened our revenue ranges.
Raised our adjusted EBITDA expectations, bringing our new mid point towards the upper end of the previous range. We also updated adjusted free cash flow guidance to the range of $45 million to $75 million for the full year.
Now before delving into our quarterly financial results I'd like to highlight our first half orders performance and some of the trends we're seeing in our end markets. If we turn to slide four our first half order growth was 6% driven by strong performance from labs, and research defense and diversified industrials offset by <unk>.
Year over year comps within both the nuclear power and nuclear medicine businesses in the medical segment, we continue to see market strength radiation therapy quality assurance order growth has been robust driven by positive results from our national account marketing strategy and the investment in our European sales Center.
And does cemetery, we continue to see stable growth and good customer engagement with our digital platform as we prepare to launch our third generation of instead of technology in 'twenty 'twenty four and finally with a nuclear medicine, we continue to enjoy macro tailwind, including new diagnostic and therapeutic radiopharmaceutical approvals and growing patient.
Procedural volume.
In the technology segment, we remain encouraged by market dynamics as well as a reminder, we delivered over 70, 17% order growth in this segment in the first half last year. So comps were tough in the nuclear power business, we see improving dialogue with our within our installed base, coupled with a strengthening newbuild cadence cluster.
The labs and defense were also strong in the first half with notable contributions coming from the North American lab space and European Defense markets overall, our demand environment is favorable and we expect strong first half order performance to support expectations for the second half and beyond let's now flip over to slide five.
To discuss our second quarter results in more detail.
As previously noted we delivered almost eight 5% organic revenue growth on a consolidated basis in the second quarter supported by solid organic growth in both segments on the medical side. We added the recent momentum and delivered nearly 7% organic revenue growth during the quarter performance was spurred by continued strength in our radiation therapy.
P quality assurance and market, what's encouraging growth internationally in both the legacy Sun nuclear and C. I R. S Phantoms businesses offsetting a slowdown in domestic demand within the business. Additionally, Q2 was positive for the technology segment as we delivered over 9% organic revenue growth segment performance here was.
Strong across geographies and products.
A couple of final highlights I'd like to make before Brian jumps soon first as we transition to the second half of the year operational excellence lies at the very top of my agenda with a clear focus on both free cash flow and margins.
On cash flow or primary opportunity is to improve inventory turns.
During the pandemic and subsequent global Sup.
My chain dislocation I directed the organization to build up strategic inventory reserves as a mitigate to the frequent and often unpredictable supplier decommit. We experienced now we see greater stability across our supply base and can come off this war footing to a significant degree consequently, we have bolstered.
Our industrial planning capabilities from Boston organizational as well as a process standpoint, our near term goal is to drive inventory turns to our peer group median of roughly four times and to get after this aggressively we've organized tiger teams to drive improvements in demand planning production scheduling and distribution planet.
While the impact is not yet reflected in our numbers I'm confident we will see meaningful results in the back half of the year.
On margins, we've seen compression as a result of incremental public company costs. The transitory impact of the S. I S integration and the price cost effects of our backlog public company costs have now been lapped and are stable to down we're making great progress on the S. I S integration and expect it to be margin neutral within our.
Lanning Horizon finally, we're beginning to see the aggressive price action taken in 2022 turn into greater price realization as it flows through backlog, while simultaneously seeing a reduction in the inflationary rates of labor and material inputs. All of this is reflective of my view that we will continue our long history.
We have margin expansion in the quarters and years ahead.
Let me now pass the mic over to our Chief Financial Officer, Brian shop right.
Tom and good afternoon, everyone.
To begin my commentary I'll ask you to please turn to slide six to take a deeper look at the second quarter results.
Total company revenue grew by 12, 2% in the quarter, while adjusted EBITDA was up 4%.
Quarterly revenue was $197 2 million and organic growth was 8.4%.
Adjusted EBITDA was $44 3 million margins contracted 170 basis points to 22, 5%.
As expected our Q2 Mark.
I can file with <unk>.
We saw in the first quarter margin rate headwinds as anticipated stemming from the <unk> acquisition and incentive compensation true up in the prior year as well as a product and geographic mix impacted margin performance we.
We saw lower medical software as a percent of total sales and a higher international and distribution channel contribution again in Q2.
We expect improvements in the second half as these mixed headwinds begin to abate in the third quarter and benefits from cost out initiatives are expected to materialize our price cost impact was positive in the quarter with 4% price contribution are dilutive on an overall margin rate basis.
Well, let's now dive into more detail around our segment performance during the quarter, starting with the medical segment on slide seven men.
Medical revenue was up one 8% during the quarter with organic growth of six 9%.
Medical topline performance in the second quarter was better than expectations.
As previously mentioned growth in medical is expected to moderate in the third and fourth quarters versus the average of 15% that we've seen over the last five reporting quarters.
As a reminder, we completed as it completed the divestiture.
Of the buybacks physical rehab business, which impacted reported revenue by over 5% in the quarter.
Medical adjusted EBITDA margin was 32, 8% in the quarter, a 40 basis point contraction compared to the same period last year medic.
Medical margin performance was impacted by a higher international revenue mix within our radiation therapy quality assurance business and a low lower overall percentage of software revenue.
This was offset by the divestiture of the biotechs rehab business moving.
Moving on to slide eight and the technology segment.
Acknowledges revenue grew by 18, 5% in the quarter with organic growth of nine 3%.
Revenue performance was led by broad based strength in our labs and research and market that was continued nuclear power moment.
Across North America, and Europe technologies, adjusted EBITDA was $35 2 million representing growth of six 7% in the quarter.
Adjusted EBITDA margin contracted 310 basis points to 27, 2% driven by product and geographic mix and a larger contribution from the <unk> acquisition.
S I S impacted adjusted EBITDA margins in the segment.
120 basis points during the quarter. Additionally, we saw a negative impact of approximately 100 basis points year over year from lower incentive compensation in the prior year related or from a lower true up.
One time true up related to our nuclear projects business in France.
Turning to Q 'twenty two.
That did not repeat this year.
Turning now to slide nine adjusted free cash flow was $2 3 million during the quarter as we've discussed on prior calls cash flow performance, primarily net working capital efficiency not at the standard we expect.
Albeit slightly slower than planned we are seeing the shorter shorter term actions put in place beginning to take hold especially in our inventory positions were.
We're continuing to invest in our sales and operations planning functions globally. Both in terms of process and talent. This is a journey, but we are well down the path of progress there.
Good confidence in the approach and plan we've set in motion net.
Net leverage finished the June quarter at three six times.
Looking ahead to the second half of the year, we remain committed to achieving our leverage target of three one times or lower with an execution focused mindset.
Finally, let me walk you through our updated 2023 financial guidance on slide 10.
As Tom noted earlier, we have raised and tightened our topline guidance, we are expecting revenue growth of 8% to 10% on a reported basis was 68% organic growth.
<unk> revenue growth is expected at mid single digits for medical high single digits from technology.
Oh geez.
Expected between 175 and $185 million with adjusted EBITDA margins between 22 and 23% adjusted.
Adjusted free cash flow guidance is $45 to $75 million for the full year.
We continue to expect a positive contribution of net working capital at the midpoint of guidance, but the majority are expected in the fourth quarter.
Overall, I'm really proud of the Marion team for delivering another solid quarter, we've still got work to do on cash, but I am confident we are headed in the right direction with that let me pass the call back to Tom to close this out.
Brian . Thank you before opening things up for Q&A. There are a few items I'd like to reiterate as we conclude our prepared comments. This afternoon first topline performance was ahead of our expectations for the second quarter supported by a robust backlog position and favorable demand dynamics across our end markets second our margins were tighter than the second.
<unk> quarter compared to last year, but performance was within our expectations, we're expecting P&L dynamics to improve in the second half as previously discussed third we remain highly focused on improving our free cash flow and continue to expect networking capital to be a source of cash for the full year.
Finally, we are confident heading into the back half of the year and have updated our guidance. Accordingly, our end markets are healthy demand is strong and we are executing well I look forward to updating you with our third quarter results. This fall.
Let me now pass it over to Alex to open things up for Q&A.
Thank you Tom that concludes our formal comments for this afternoon operator, let's go ahead and start the Q&A session.
Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two 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.
Darkies one moment, while we poll for first question.
Our first question comes from Black microscopy with Citigroup. Please proceed.
Good morning, guys nice quarter.
Thanks, a lot.
Well I think so.
Yeah. So let me just.
Stepping back bigger picture can you give us an update on what.
What youre seeing in your M&A pipeline today and.
More broadly how you're thinking about M&A potential going forward over the next few quarters and into next year.
Sure let me cover that Brad So our glad the very little has changed actually you know on our last call I think we are we updated.
Our view that our M&A pipeline continue to be a vigorous and of great interest to us and that you know we are extremely committed to bringing leverage down to what we've guided consistently which is at or below three one times at the end of the year.
And remain confident that there is an opportunity for us to too.
Essentially.
Execute on some smaller potential deals over over our planning horizon. So you know not not when falling within a specific timing bucket that allows us to again strengthen.
Some of the strategic markers that are of great interest to us.
While simultaneously managing leverage in a in a downward arc overall and we remain confident in our ability to to do that and and continue to be quite active in our or outreach from an M&A standpoint.
Okay.
Helpful color, Tom I appreciate that and then.
Maybe just.
Digging on cash flow and working capital dynamics I know you talked about.
Net working capital is still expected to be a source of cash for the year and focused on getting inventory turns down but.
You may be give us some color or specifics on that.
And processes that you're.
Lamenting that give you confidence in improving free cash generation in two two.
<unk> and beyond.
Yeah, Let me, let me start a lead and then I'll invite Brian to two to chime in here, but you know I've been doing this a long time I've been in role here for almost 20 years, and I think with as with any industrial technology business.
Working capital in General is something that requires a degree of pressurization within the within the organization and the dynamic that always exists as the interplay between carrying cost of of working capital, particularly inventory versus the economic impact of a potential stock.
Out in a in a lost order overall I think historically, we've been very good at managing that dynamic, but you know as I stated in my my scripted comments.
What we learned as we went through these post pandemic supply shock was that supplier behavior became more erratic and we as well as others did experienced a last minute supplier D cabinets.
And and order cancellations and the like which clearly had a knock on effect in certain segments of our business overall, and so automatic that drove to the Amazon.
Nation to build strategic.
Inventory buffers.
To avoid a again the economic toll of of potential stock out situations, while we really began to accommodate and and generate a better understanding of the of the likely future dynamics of our supply chain and today. What we're seeing is a as a continued evolution in a favorable direction. You know I think we have a much.
Better handle overall on where our supply chain risk lies and we can take a much much more targeted approach to how we think about against strategic buffer inventories.
Inventories, but this gives us the ability to to really focus the organization then on tightening what had been a looser envelope that I'd implemented again during the this post pandemic supply shock shock pair it the way we're getting after that is is very conventional you know, it's it's a ground game, where it is a combination.
Of improving.
The quality of the caliber of demand planning flowing that through procurement strategies and production scheduling activities and ultimately into our distribution resource planning and we're attacking all of those things on a multi dimensional basis again as noted on the comments we have mobilized.
Just a broad based teams.
To really escalate the focus beyond you know kind of the normal cadence and we're confident that a that that will oh all of that will in your or to a positive effect over the back half of the year and that's what gives us the kind of.
So we've.
And the overall cash flow dynamics for the full year.
Great. Thanks, Tom I appreciate that.
Hop back in the queue.
The next question comes from Joe Ritchie with Goldman Sachs. Please proceed.
Hi, Thanks, good afternoon guys.
Hey, Joe Hey, Joe.
Hey, So just just on technologies for a second and great to see the kind of orders accelerate growth with the first half of the year.
When you think about the cadence.
The revenue profile for the second half of the year you guys had like outside of shipments in the fourth quarter of last year I'm, just curious like whether there's anything we should we should think about high just because of that just the way things kind of played out at the end of last year.
Yes, I think.
I'll take this I think that our expectations are.
Really around a very robust third quarter.
Joe.
We don't really give quarterly guidance as you know, but I think organically, we see a very good third quarter.
And a double digit type third quarter.
And then the fourth quarter kind of in line with the with the overall guide for the year.
Got it.
Joe Hey, Joe.
Yeah go ahead, John Sorry, I was just going to add to that and say that you know when we look at the you know again the context of of market dynamics.
Intake backlog coverage et cetera.
A very positive about the dynamic within technologies.
Year over year. So it's a I think our position here is strong.
Coverage to Tom's point continues to be kind of mid to high single digits better conference than where we sat last year, so that that gives us confidence in.
Why were sitting in that segment.
Yeah, and so maybe maybe you guys can elaborate on on.
What's driving the strength in technology. So I saw you guys pick up the organic growth expectations basically from mid to high single digits and then.
And then.
Theres a lot of concern I guess is it.
Across the industrial channel that Nike Air business, specifically around just Destocking, that's occurring and I'm. Just curious just any comments that you can overlay on the portion of your business itself through independent distribution.
And what Youre seeing from a channel perspective as well.
Yeah, So what I'd say is that given the mix of our business which are.
Every business is unique and certainly we feel ours is as that way as well and historically, we have been a a company that has demonstrated very little cyclicality, we've been kind of in a cyclical company.
What I would tell you is that in the technologies operating segment overall.
The when we look at the the kind of the key underlying dynamics in the nuclear markets.
You know we are seeing recognizing the most important thing to us in the nuclear markets is the health of the install base and our view is that that that customer franchise is healthy in all major markets and so the level of engagement there and activity continues to reflect that point of view overall.
What we're also seeing is a is a pickup in engagement as it relates to our newbuild activity and our expectation is that this is an area where again over our planning horizon.
We expect to see strength in the market overall, and we expect to see an attendant benefits accrue.
Accruing from that overall.
Defense has been a sector that we we've talked about a lot over the last few quarters, particularly given our expectation that given the risks are in Europe as it relates to or stemming from the war in Ukraine are that that might translate into a greater demand.
And for some of the civil Defense solutions that we offer and some of the NATO military Green gear that we provide.
To a degree we have seen that you know we have seen.
If you look at our defense and diversified Industrial's overall first half order growth of 28% is a very strong reflective of some activity there.
Some of which is Ah is outside of cycle and I think we've we've noted that as an example, we booked a $10 million of European Civil Defense order in the second quarter again, thats kind of reflective of that overall theme. The final thing I would notice on labs and research you know kind of our life Sciences space overall, where order.
Order growth in the first half.
For 30%.
Okay.
This is a fairly well.
Hum demand dynamic that's driven not only by our conventional base of of government and University funded materials labs nuclear radiochemistry labs and alike, but also by by new applications like mining where are some of the solutions that we offer.
Lend themselves very well to a high.
High degree of productivity increases and we're seeing strong demand coming from that overall so.
As it relates to you know kind of any early indication of.
A reversal of of those trends or a change in the the stance of our customers.
We're not seeing it today and given the history that we've had in these market segments again, I'd say, we've we're caring carrying confidence as we come into the back half of the year and beyond the one thing I would add maybe Joe to that is.
We don't know, we don't typically sell through distribution channels that stock.
Our products tend to be order customer specific application specific et cetera. So the risk that we've shopped product in the channels and and now people are waiting to sell that to me that's not something that's historically, how our channels have worked specifically in the technology segment.
But even more broadly.
There so I think thats.
Something else to think about is it just isn't the business model on the technology side at all.
Yes.
Super helpful color from both of you if I could just squeeze one more.
Question, just on margins in technology, specifically around Fas.
Well, maybe you could just talk about high level, how the integration is going and then also as you kind of think about that the margin impact you called out.
Both Nick and SaaS this quarter, how is that expected to trend going forward.
Yeah, I mean first off on the integration.
Yes, I think we're super happy with where the integration is going.
I always I always.
Look at Biotechs, right, which was a similar type asset, but candidly base both size on the topline and Bottomline.
Business took us two years to integrate it's now accretive.
To the company at a margin level, we were thoughtful.
That one we.
It's a little bit more.
What I would say.
Hard integration, where we close factories and all of that's up on this one.
It's a little different we're purposely keeping some of the cost around.
Because of the more medium to long term investment, we're making on the digital platforms right. So as you think about our business on the technology side very little software. This is an enabler for us.
That takes that takes time we.
We did we.
We did take some cost out of the business kind of in in June as well.
So that wouldn't really be reflected in the in the second quarter numbers, we expect to see that flow through here in the back half and into 'twenty four for sure.
You know Tom commented that we think we can get the margin profile.
Two two of myriad standard kind of over over time here, but.
But I think we're trying to be very thoughtful because you know there is a great asset it has more value to us kind of across our portfolio.
And could we do more on the cost outside quickly, yes, but I think that hurts, our long term growth perspective, and therefore.
We're being patient.
With that and we're purposely we're purposely continuing to invest.
Got it makes sense thanks, guys.
The next question comes from Chris Moore with CJS Securities. Please proceed.
Alright, thanks for taking a few questions guys, Yeah, maybe Brian maybe you could just talk a little bit more specifically on pricing.
Kind of like the cadence are there any potential wildcards out there later in fiscal 'twenty three from a from a price cost perspective.
Yes.
Look we continue to model basically price cost neutral.
Across the company.
And for the year I've continuously said all continuously say I think there's opportunity for us to do better than that and I think we.
We will see how the back half kind of plays out but we're we're very.
The inventory stuff we're doing.
As we're going through that we're looking at cost as well. So I think there's there's dual application there.
For the company, we're expecting 4% price this evening here across the board.
That's that's candidly in at all.
Both segment levels and at the company level.
So I don't I don't see any surprises coming in there I think we're well.
We're adequately thinking about this and you know hoping that not hoping but.
<unk>, a us to see some improvement as the back half of the year.
But we're we feel very good about where we are price wise, we feel very good about what the teams have done in the markets. We continue to evaluate.
Where do we need or can we push more price in both segments I think the technologies team has done.
Even done a bit of a another round here kind of in in the second and third quarter. So we will see that flow through over time.
So I think we feel good about where we're at.
Got it very helpful. Oh, Dissymmetry orders were up 2% in the first half is there a point, perhaps second half of 'twenty four maybe a little further out when instead dose will likely pick that pace a little bit.
Bed or visibility there is still.
As you know is still not where you'd want it to be.
Yes, Chris what I, what I'd say is that we're certainly not guiding 24, right now but if.
If you look historically at how we have guided the market growth in that business overall at a mid single digit growth or better.
Certainly you know our digital story here instead us as as a key component of that overall and as we commercialize the third generation of this technology. We certainly expect some some related uplift overall, so I think it does move the needle but to be clear we're not.
No we're not calling the shots at this point.
Got it helpful. And then maybe just the last one in on obviously in new nuclear plant construction.
Debt.
It takes a while before before.
Embedded in and start seeing it from an income statement perspective, but from a kind.
Tangible progress perspective is there anything that you can you can point out in terms of you know how things are perhaps further along today.
They then they might have been 12 months ago.
Yes, I mean, the main thing here as well you know firstly as it relates to Newbuild projects. So we have in backlog today.
Those are by and large are evolving on schedule and consistent with expectations. So really nothing that I would add there, but what I what I would say is that as it relates to new project related activity, we've been very busy.
You know again very actively engaged with our global customer base and continue to be very encouraged by the activity that we're seeing and so we expect that this will.
Further bolster a nuclear market that really has come alive and.
We think it's a market that has legs and so we're we're happy to have the position that we have right now.
Okay.
Got it I will leave it there I appreciate it guys.
Thank you at this time I would like to turn the call back to Mr. Tom Looby for closing comments.
Well, ladies and gentlemen, let me just conclude by firstly thanking you for your time and attention today.
And as always the support for our company.
Today, we have a we have noted a number of key things you know we feel good about our market dynamic.
We feel good about how we're translating that into order intake and top line performance.
We understand that margins and cash flow are a show me story, but this is a very familiar story to us.
To me in particular over my 20 years of leadership of this company.
And you know as stated throughout the call we have a high degree of confidence in our ability.
To deliver the results that we're guiding and very much look forward to posting you on the on the result says we as we report out the third quarter in the fall and so until then again. Thank you for your time and attention and I wish you all a a enjoyment of the last vestiges of summer and we will very much look forward to our next.
Carl.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.