Q3 2023 Mirion Technologies Inc Earnings Call

Greetings and welcome to the Marine 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 Gatti Senior Vice President strategy. Thank you Alex you may begin.

Good afternoon, everyone and thank you for joining Marine'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 in <unk> other filings with the SEC.

Quarterly references within todays 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.

A 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 at <unk> IR website at IR Dot Marion Dotcom.

Joining me on the call today are Larry Kingsley Chairman of the Board, Tom Bogan, Chief Executive Officer, and Brian Shopper, Chief Financial Officer, now I will turn it over to our chairman of the board.

Ari.

Yes.

Thank you Alex good afternoon, everyone and thank you for joining our third quarter earnings call. We published a solid set of third quarter numbers today with.

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.

Florida 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.

It's quite positive in an otherwise mixed macro environment.

The focus on net working capital has begun to pivot performance as net working 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.

Board and I are confident in the team and the approach to driving capital efficiency.

And in the short term our deleveraging targets.

Overall, Marianne is on solid footing heading into Q4.

Order flow and backlog coverage a robust the team is executing well.

Our leverage continues to tick down.

Moreover, market fundamentals are constructive.

That positions the company well for profitable future growth.

Now I'll 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 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 the 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 newbuild in spare parts orders from nuclear customers the size and scope of the orders were in line with our with our expectations and are a reflection of the positive nuclear send them we've been seeing globally.

Second we delivered total company organic revenue growth of more than 17% compared to the same period last year.

Acknowledging 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.

You 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're committed to building off of this momentum going into the fourth quarter.

Of course, we've reiterated our financial guidance for 2023, our backlog position provide 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 E. C. Squared this week getting another strategic software platform to our medical business and the first to service our nuclear medicine customers.

Get into more detail on this later in the call.

Before I cover our 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 states, we booked several large orders in the quarter, including a Newbuild project in Asia, and a spare parts order in Korea.

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 newbuild orders like the one we received in Q3 to materialize over the planning horizon supporting future growth.

Stall 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.

Medical segment, we remain encouraged by the strength, we're seeing across the portfolio, especially internationally within the European radiation therapy market.

That's been in the European support center is paying off as we continue to win share in the region.

Domestically, our RT QA sales teams have reported a lengthening order cycle and our T hardware enhancements and we continue to augment our Sunshine 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 geographies and importantly, we were we achieved a 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.

The medical growth was led by strong international sales growth in our RT QA end market.

Before I pass the Baton I'd like to make a few additional comments for Q4 first cash flow and margin expansion remains the top of my priority list as we continued to delever the business and aim to establish our reputation as a compound our teams executed well in the third quarter and I remain confident in our strategy to enhance inventory.

And net working capital performance in the future.

Second I have really taken the reins of our medical business and will serve as interim group President until we find the right long term fit for the role as a reminder, I spent much of 2022, leaving the segment optimizing the operating model and organizational structure and defining the myriad medical brand.

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 our focus on commercial and operational excellence I have confidence that group President locale law and his team will leverage the new organization to accelerate the attack.

<unk> of our gross margin and cash flow objectives.

Concert with that remark I've also announced a few important changes to the corporate organization. These changes include the naming of Sheila Web is our inaugural Chief Digital officer.

Appointment of Doctor James Cox to the position of Chief Technology Officer, and the promotion of Aaron's Chesney 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 EC squared the maryanne family.

To give you some color on the acquisition E C squared as medical software business that will operate within our nuclear Medicine Group Company has a strong recurring revenue profile and offers design implementation and support for our portfolio of comprehensive workflow software solutions through this acquisition will be able to prove.

<unk> 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 five and a half million dollars a pro forma adjusted EBITDA for calendar year 2020.

Three.

And so the acquisition to be accretive to merit medical.

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 that the value that D C squared and our new teammates and bring them areas with that I'll now turn things over to our Chief Financial Officer, Brian shop right.

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 good traction 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 Mitch 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 23% Asics.

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 continued 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 five 2% and price contributing approximately 3%.

Top line performance was in line with expectations as we Comped, a very strong Q3 last year for.

For reference our two year organic stack was 26% in the segment.

Organic growth was offset in Q3 by the divestiture of the biotechs physical rehab business, which impacted medical reported revenue by nearly 6% in the quarter.

Medical adjusted EBITDA margin was 34, 2% at 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 action in Q1, and the biotechs divestiture, which accounted for more than half of the margin expansion.

Flipping over to slide eight and the technology segment.

Technologies revenue grew by 32, 8% in the quarter with organic growth of 26, 3%.

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.

In the fourth quarter, we expect a 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.

Technologies, adjusted EBITDA was 27.7 million representing growth.

It was a 37, 1%.

Adjusted EBITDA margins 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 result, 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 S. I S acquisition.

This impacted adjusted EBITDA margin by 40 basis points during the quarter.

Note that Q3 was the last quarter with any S. I S acquisition inorganic impact.

Lastly, we saw a few non repeat items that coupled with segment mix in the quarter impacted technologies' 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 corner.

Net working capital was a source of cash providing a benefit of $8 7 million and we began to see inventory reduced in the quarter.

We continue to target net working capital as a source of cash for the full year and improving our cash conversion.

Moving on net leverage ticked down to three four times at the end of September quarter.

As Tom mentioned, we are confident in our ability to continue delevering the business through strong operational execution, and we've reiterated our $3 one leverage target for year end.

This includes the impact from acquire a E C squared.

Finally, looking at slide 10, we have 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 margins margin between 22 and 23%.

Adjusted free cash flow is expected between 45 and $75 million for the full year.

Overall, our solid third quarter, and I'm confident with our momentum heading into the fourth corner 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 a large nuclear power orders engagement across the business remains positive and we're confident heading into the fourth quarter.

Both of our reporting segments delivered quarter quarterly results in line with expectations topline growth was robust and EBITA margin expansion evidence across the board third we saw a notable improvement within our cash flow dynamics in Q3, there's still work to be done on this remains a key priority for me and the rest of the team and <unk>.

Finally, we've reiterated our 2023 guidance, including our three one times leverage target for your out 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 well now be conducting a question and answer session. If you'd 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'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing with Barclays.

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, and good afternoon everybody.

Hey, Joe Hey, Joe.

Hey can we start on the on the orders and specifically on the on the nuclear new build so I saw that the orders increased by $85 million yeah, how how much of that was nuclear new build and then and then I guess.

The way to think about that is probably that's probably a little bit of a longer cycle business, where you are so when would you kind of expect to see that come through the P&L.

Yeah. So.

Look the if you think about the order growth we.

We saw in the quarter year over year, so up $85 million.

We saw two orders are approximately the same size about 40 million. Each one is the nuclear new build project. One is a spare parts order out of Korea.

If you think about the the nuc. This this particular nuclear new build we actually believe we'll see where we know we will see some revenue in the fourth quarter.

And then we'll start to see it Ratably Jay trade over the next kind of two to three years, Joe So it's pretty.

This one this one is impacts us near term.

Which is not always the case in this business, but but disorder is is good for us for next year from a Rev Rec standpoint.

Yeah.

Got it that's helpful. Brian I guess, maybe the reason I thought maybe it was a little bit longer cycle that just because there was no change to the expectations in the fourth quarter for technologies or was this something that you guys had already contemplated.

When you when you gave us the original guide and then I guess as you kind of think through I think he made it.

Go ahead, you want to you want answer that Brian.

Go ahead go ahead and I'll answer that.

No no and and then and then Tom.

You made it you made a mention of other potential new projects on the nuclear new build side in your pipeline just any more color around that would be helpful.

Yeah, maybe I'll, let's take it in reverse order at all.

Brian again yesterday.

As part of the question. So yeah, if you look at the pipeline there.

What we see for nuclear Newbuild projects, recognizing that we work with most of the major and Triple S player's centralized being the term of art for nuclear reactor designers.

Yeah. The pipeline is as good as I've seen and our view is that as we look at our specific planning horizon that we expect that we will see.

Growth in the in the in the sector.

I will note that our nuclear projects are notoriously difficult to predict in terms of quarterly timing and so that's something that will shy away from but I will tell you that our expectation is that this.

This will be a continued theme, including including in the 'twenty 'twenty four for us.

Yeah.

And then quickly Joe on Yeah, we didn't move up guidance for the fourth quarter I mean look there's the Lubbock and the team have been working on thus far.

For awhile.

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, that's it's less than a couple million bucks.

Okay, Alright, great one other quick one and I'll pass it on I guess on free cash flow.

Congrats on the improvement this quarter I still need more improvement in pork you to hit that hit the range for the year. So just just just talk about your confidence in getting to that 45 to 75 and what's within your control.

I mean.

Look I mean, there's a couple there's definitely some payments on on a few projects that matter for the fourth quarter, but we agree with you I mean, there's a reason we reiterated our range and our leverage target.

The team is very.

Very aggressively attacking kind of bought the structural issues in the near term kind of.

Things that will impact us.

So I think there's a lot of this is in our control.

And are we feel very good about the guidance, we put out this morning.

Great. Thanks, guys.

Sure.

As a reminder, if you'd 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, Ryan how are you doing there.

Hey, good afternoon Andy.

So Tom or Brian just maybe following up on Joe's question.

Sort of like the bookings are.

And I know you don't want to give us too much on the 24 set up but you know when I sort of look at the two segments.

<unk> talked in the past about Marines ability to grill call. It mid single digits plus in the 5% to 10% range is the visibility you know higher than normal normal like how would you say it as we sit here sort of in November and thinking about 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 I would say that in general Joe what we've seen is a unimproved and coverage dynamic.

Where you know if you look at our backlog coverage.

Relative to guidance.

And this has been the case for much of this year that in general you know sequentially.

We are seeing an improvement in that coverage and we're certainly encouraged and hardened.

No by the record backlog that we're sitting on here at the end of Q3.

That's helpful Tom and.

Brian maybe you can get a follow up on a question like and technologies, you mentioned sort of low single digit growth in Q4.

Tough comp.

But we didn't model you know 26% growth in Q3 was there any sort of you know pull forward there or like you're being conservative like how do we think about it in the context of such strong growth in Q3.

Well, there's definitely some movement between Q3 and Q4 from a 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 a 20% number from last year and in the technology segment on the on the organic side.

Slide 17, sorry, 17% last year, so that's a big number.

I think we're very I think we're very comfortable with the revenue range and we will we will need to we will see some EBITDA margin expansion in the fourth quarter as well.

Got it and let.

Let me with my last question and maybe two parts I guess on the margin side like in technologies, Brian you talked about sort of one time costs.

You know repeat obviously and the one time it means we shouldn't have more costly type of maybe give us a little more detail. There and then you made are you still not a positive on a price versus cost rate basis like what does it take to get there because I would assume demand as you know pretty good as we see it.

And supply chain is getting better commodities, you know generally have gone down so what can you do to get there.

So you know on the AR on the one timers. So look I mean, we saw some some catch up costs out of the French business and it's mainly in the projects business and we saw some some higher cost on some civil 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.

One of the you know we're focused on inventory reduction for two reasons wanted to generate more cash flow, but to exactly what you just said as the supply chain does get better that allows us to pull through.

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 thanks for taking a couple of questions. So yeah, maybe just.

I know you're not getting into 'twenty four it too much at this point in time, but maybe just the puts and takes that fiscal 'twenty four gross margins will be above 23.

What I mean.

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 with both Tom and I sat in our prepared remarks with margin expansion and cash flow are our top priorities.

For both of US, but also the entire company I mean, where were looking at.

You know what.

We're very focused on this I think is probably what to say well look I think there's 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 now as we work through the inventory stuff that is helpful.

You know our structural yeah we.

We put a pretty big kind of structural pay increase through this year with all the inflation in and kind of competition. That's out there I think that looks different a little bit different next year for us.

But I think I think you know when you put it all in and by the way. We've got we're adding software business via E. C squared to the mix and I think I think we feel very good about what the software business kind of more holistically across maryanne will do for us next year.

Versus what we kind of saw this year. So I think we feel we feel pretty good about the puts and takes here and again its a focus I mean, that's that's probably the most I can give you without without giving you.

Specific target that we have but yeah, we expect expansion there.

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 the balance between medical and technologies is that much different than it was you know a year ago.

Oh, no well, yeah, a little bit just because the backlog has grown in most of the growth is on the technology side I mean, our medical backlog.

You know is less than 20%.

The back if you if you think about the backlog less than 20% of it is medical.

Got it.

And maybe just a last one for me I mean, you guys have been clear that you're not just going to flip a switch and instead dose see penetration ramp you know quickly and dramatically.

That said I mean, do you expect penetration at the end of 'twenty four to be significantly different than than end of 'twenty three or is this it really is a three to five year kind of transition.

Yes, Chris there really is a three to five year transition, we expect that we will.

We will fulfill orders on us in the first half of next year.

And the but in terms of meaningfully impacting the current mix you know again I think this is just a a longer campaign.

It will occur systematically but not you.

Not at the kind of accelerated rate that might be important.

Got it I appreciate that I will leave it there.

Okay.

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 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 were very encouraged by the strength of our top line.

And the level of customer engagement.

The favorable market dynamics that underpin that these have always been key factors and the relative a cyclicality of myriad as a company and we're happy to see that coming through in 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 as far more within your control. So all of that is to say that we are 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 <unk>.

Three months time, so thanks, again, and we'll leave it there for the day.

Yeah.

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

[laughter].