Earnings Call Transcript - MIR Q1 2024

Operator, Operator

Hello, and welcome to the Mirion Technologies First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to hand the call over to Alex Gaddy, Senior Vice President of Strategy and Investor Relations. Please go ahead.

Alex Gaddy, Senior Vice President of Strategy and Investor Relations

Good morning, everyone, and thank you for joining Mirion's First Quarter 2024 Earnings Call. Please be aware that some of the remarks during this presentation will include forward-looking statements, which may differ significantly from actual results. The factors that could lead to these differences are outlined in our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC under Risk Factors, as well as in Mirion's other SEC filings. Today's discussion will focus on the first quarter ending March 31, 2024. There will also be mentions of financial measures that are not in line with generally accepted accounting principles. A reconciliation of these non-GAAP financial measures to the closest GAAP measures can be found in the appendix of the presentation associated with today's call. All earnings materials can be accessed on Mirion's Investor Relations website. Joining me today are Tom Logan, Chief Executive Officer, and Brian Schopfer, Chief Financial Officer. Now, I will hand it over to our CEO, Tom Logan. Tom?

Tom Logan, CEO

Thank you, and good morning, everyone. To get us started today, I'd like to firstly thank my Mirion colleagues for delivering a very solid start to 2024. Taking a look at our Q1 results, there are a few key highlights that I would like to note. First, our end markets remain healthy across the enterprise, supported by improving fundamentals, particularly in nuclear power and cancer care. Order growth was relatively flat in Q1, but this isn't surprising given the strength we saw last year and the fact that Q1 is historically our lightest volume quarter. Overall, we continue to see excellent customer engagement, but the timing dynamics impacted quarterly order growth. As an example, we received an approximately $15 million European defense order at the outset of Q2, which is not included in the results shared today. Second, I am proud to announce the commercialization of our InstadoseVUE technology, which we believe will revolutionize the occupational dosimetry space. We've commercially deployed thousands of units during a Q1 soft launch, and customer interest in the product is high. We expect the adoption cycle for InstadoseVUE to be lengthy, but we are confident in the distinct differentiation that this product brings to the marketplace. Note that for competitive reasons, we will not be providing quarterly updates on badge volume going forward. Third, in terms of financial performance, we delivered total company organic revenue growth of 5.5% in the quarter, which was in line with our expectations. The technologies business led the way with 8% organic growth. Total company adjusted EBITDA grew by 8% year-over-year, reaching nearly $40 million for the quarter. We delivered 40 basis points of adjusted EBITDA margin expansion led by our technologies business, which provided 170 basis points of expansion. Finally, we have reaffirmed our 2024 financial guidance and continue to project organic revenue growth of 4% to 6% and adjusted EBITDA of $193 million to $203 million. Brian will provide more detail on our quarterly financial performance. So I'd like to use most of my time today to discuss areas of critical importance as we think about medium and longer-term growth. Note that more than two-thirds of our top line growth is driven by two super trends, namely nuclear power and cancer care, which we expect to be robust, global, and long-term. Turning first to nuclear power, which is in the midst of a global resurgence. The world's demand for energy is increasing dramatically with all geographies struggling to find reliable sources of cost-efficient clean power. The emergence of AI and the attendant growth of high-energy-consuming data centers is putting increased demands on energy infrastructure. Additionally, we see continued decarbonization commitments globally and the push for energy independence driving elevated interest in nuclear power. As stated before, we believe nuclear power is a green energy source and will play a primary role in meeting increased energy demand through both utility-scale reactors and small modular reactors. While the overall demand function for Mirion's nuclear business remains robust, there's an emerging body of public policy that makes us confident in the significant tailwinds supporting the end market. Looking at the U.S. for a moment, the federal government has set a net-zero target for the year 2050, and it's difficult to see a path where nuclear power doesn't play a meaningful role in meeting that goal. Nuclear power plant operators are performing well financially, which is changing the calculus surrounding capacity utilization, life extension, and even capacity uprates. Extraordinarily, we saw the restart announcement of the Palisades Nuclear Power Plant in Michigan in Q1, a previously closed facility. We view this as another evidentiary point supporting the criticality of nuclear power in the American power market. Beyond life extensions and restarts, the EPA has recently issued sweeping new rules requiring existing coal plants to limit and capture carbon emissions and sets forth strict operating rules for future new coal plants. Additionally, an April publication from the DOE under the auspices of its coal and nuclear initiative highlights the expected economic and environmental benefits of replacing coal power plants with SMRs or utility-scale reactors. With 30% of the nation's coal plants expected to retire by 2035 and over 300 existing and retired coal plants that have been deemed suitable to be replaced by nuclear plants, nuclear has a promising opportunity here. Now while the dynamics I've just touched on are U.S.-centric, they can be broadly extrapolated to global markets as well. As a reminder, nearly 40% of our total company revenue in 2023 was tied to nuclear power as we are the leading provider of safety-critical radiation detection and measurement solutions to the global nuclear fleet. Mirion's unmatched product portfolio is reactor technology agnostic and serves all three stages of the plant's life cycle, namely new construction, plant operations, and decommissioning. We are in robust strategic engagement with the burgeoning SMR community and are committed to extending our relationships with traditional utility-scale OEMs and utilities worldwide. There's a similar super trend unfolding in the area of cancer care, which represents nearly 30% of our total company revenue. This has been driven by fundamental growth in radiation therapy, which is supported by an aging population in developed markets and improving standards of care in developing markets, as well as the revolution in nuclear medicine catalyzed by the emergence of therapeutic radioligand treatments. More to come here in future calls, but the opportunity for Mirion to participate and drive future growth is clear, compelling, and significant. Now turning to our commercial and operating teams, we are focused on improving our execution in the following areas. First, I'm committed to continued improvement within our French business, which will enhance our organic growth, margins, and capital efficiency. Second, we are aggressively executing on self-help themes, including extending pricing heuristics, cost-saving, and procurement programs, internally focused AI automation, and capitalizing upon Mirion's inherent operating leverage. Let me reiterate here that we remain confidently committed to reaching our five-year 30% adjusted EBITDA margin target. Third, the continued evolution and enhancement of the Mirion solution set through our investments in digital capabilities, customer-facing AI, and our robust new product development pipeline. Lastly, we aim to supplement the business through strategic and opportunistic M&A, primarily geared toward new capabilities and defending and extending our category leadership. With that, let me pass the call over to our Chief Financial Officer, Brian Schopfer. Brian?

Brian Schopfer, CFO

Thanks, and good morning, everyone. To kick off my commentary this morning, let's turn to Slide 4 to take a look at our first quarter results. Total company revenue was up 5.8%, and adjusted EBITDA was up 7.9%. Total revenue in the quarter was $192.6 million, and organic growth was 5.5%. Adjusted EBITDA totaled $39.5 million, with margins expanding 40 basis points to 20.5%. Overall, quarterly performance was in line with our expectations, and I'm pleased with the progress shown regarding margin expansion. Let’s now dive into more detail around our segment performance during the first quarter. Let's begin with the Medical segment on Slide 5. Medical revenue grew 0.6% on both a reported and organic basis, and the ECS acquisition almost fully offset the Biodex divestiture in terms of revenue contribution. As a reminder, this will be the last quarter of inorganic impact from the Biodex divestiture. Medical top-line performance was negatively impacted by approximately $4 million, stemming from the implementation of a new ERP system within our nuclear medicine business. While we did expect an impact from the ERP implementation, the temporal impact was larger than originally anticipated. The implementation was completed in February. We do not expect further material ERP-related issues in Q2 or the rest of 2024. Order dynamics and backlog remain strong within nuclear medicine, exemplified by order growth of 17% and the doubling of our backlog versus the same period last year. Excluding the impact from the ERP, medical organic growth would have been approximately 7.1%. Medical adjusted EBITDA margin was 30.7% in the quarter, generally flat compared to the same period last year. Had we not experienced the ERP blip, we would have seen solid margin expansion in the segment. Margin enhancement remains a key area of focus, and we expect year-over-year margin expansion in Medical for the full year. Moving on now to Slide 6 in the Technology segment. Technologies revenue grew by 8.7% for the quarter, with organic growth of 8.4%. Top-line growth was broad-based across the segment and supported by strong quarters from our Nuclear Power and labs businesses. Technologies adjusted EBITDA was $33.1 million, up 16.1% from the same period last year. Adjusted EBITDA margin expanded 170 basis points to 26.3%. As expected, Technologies margins took a step forward in Q1, supported by strong execution. Overall, I am pleased with the progress made against our improvement initiatives, particularly in France, where we are gaining momentum. We still have work to do and expect improvement in the back half of the year, but Q1 was a good first step. Turning over now to our cash flow performance for Q1. Adjusted free cash flow was negative $4.5 million, and net working capital was a burn in the quarter. This was generally in line with expectations. And while negative in the quarter, performance versus the same period last year is an improvement. More specifically, inventory momentum is improving as we saw an $11 million reduction versus the same period last year. Secondarily, you will also see a larger-than-normal CapEx number, which reflects us executing our InstadoseVUE Lounge plan by having product on hand. Absent the CapEx investment in InstadoseVUE, cash flow would have been positive in Q1. Our target for the first half continues to be cash flow positive for the enterprise. Before diving into our reaffirmed guidance for the year, I wanted to highlight the warrant redemption announcement we made a couple of weeks ago. We have opted to exercise our right under our warrant agreement to redeem all of our outstanding public warrants. Warrant holders may choose to exercise their warrants by either paying the exercise price for one full share or redeeming their warrants on a cashless basis at a ratio of 0.22 shares per warrant before May 20, 2024. This action is a meaningful step in simplifying our overall capital structure while eliminating future dilutionary effects for existing shareholders. Finally, I'd like to close out my comments by highlighting our reaffirmed 2024 guidance on Slide 8. Given our solid start to 2024, we are maintaining our previously issued financial expectations with organic revenue growth of 4% to 6% for the year, supported by mid-single-digit organic growth from both segments. We are also reaffirming our adjusted EBITDA guidance of $193 million to $203 million. Thinking through the cadence for the rest of the year, we expect Q2 margin pressure in our Technology segment, primarily related to product mix. In addition, we are making investments in supply chain and procurement, with the associated costs hitting in the first half and benefits beginning to materialize in the second half and into 2025. We are very excited about this initiative and will talk more later in the year about it. Despite the dynamics, visibility into our margin expansion in the second half is robust and supportive of the overall enterprise expansion target for the year. Adjusted free cash flow remains at $65 million to $85 million for the year and adjusted EPS in the range of $0.37 to $0.42. Overall, the first quarter was a good start to the year, and I am encouraged heading into the rest of 2024. With that, I'll now pass things back to Alex to open the call up for Q&A.

Alex Gaddy, Senior Vice President of Strategy and Investor Relations

Thank you, Brian and Tom. That concludes our formal comments for this morning. Let me pass things back over to the operator to open up the session for Q&A.

Operator, Operator

And our first question will come from Chris Moore of CJS Securities.

Christopher Moore, Analyst

Maybe we'll just start on the nuclear. As Tom was talking about it, all you hear about these days is the need for electrification; nuclear power more is, I think, viewed as part of the equation. You mentioned a new restart in Michigan. I think there was a long-awaited new reactor that came online in Georgia recently as well. I guess I'm just trying to understand within the U.S., obviously SMRs seem like they're an easier sell. What are you hearing in terms of new utility scale builds?

Tom Logan, CEO

Yes, Chris, I think the view on new utility-scale builds in the U.S. still is one of caution. I think if I were to put together the hierarchy of effects that I would expect to see in the U.S. market, it would go something like this. Firstly, if you look at plants that were deemed marginal 5 years ago or 10 years ago that are still in operations, and we're kind of easing up toward a decommissioning event. I think the majority of those, if not the entirety of that group, is now viewed as candidates for life extension. With that, there is typically some amount of capital spending associated with doing that, oftentimes involving additional permitting requirements, et cetera. Secondly, I would highlight the SMR initiatives, which continue to gain steam. It seems like maybe within the last 6 months, the world has awakened to the fact that these initiatives are catalyzed by the incredible growth of AI-related data centers; the world simply doesn't have enough electrical generating capacity. As we look at the kind of extrapolated requirements well into the future, having a more robust AI-driven economy, it's very clear that the demands for nuclear power, both utility-scale and SMRs, are going to mount. I think in this country, it's a combination of that phenomenon, coupled with the policy goals of decarbonization that will ultimately drive us into a period where I think growth will meaningfully exceed what people projected even 5 years ago in the American market.

Christopher Moore, Analyst

That's very helpful. It makes complete sense based on what I'm hearing. The backlog at $841 million has decreased slightly sequentially but has increased by $100 million compared to last year. Could you discuss how the split between the segments has changed? I assume it's primarily on the nuclear side, and I'm trying to understand how much of that backlog we can expect to be recognized this year.

Brian Schopfer, CFO

Chris, thank you for your question. Tom and I are not particularly worried about the sequential backlog. We are optimistic about the dynamics as we move into Q2. We’ve had several discussions with our team over the last few weeks, and there is a very positive sentiment throughout the business. Our focus is less on quarter-to-quarter performance because this is more of a long-term business. Timing is important regarding when orders are booked. You heard Tom mention an order of about $50 million being booked early in Q2. We are pleased with our current situation. Historically, we've indicated that looking at the next 12 months of revenue, 45% to 50% is already in backlog. I believe this dynamic hasn't changed significantly; it is probably closer to the higher end of that range. We continue to be encouraged by what we see and hear, and we are focused on executing our plans moving forward.

Christopher Moore, Analyst

Got it. Helpful. Maybe the last one for me. Can you just provide a little more specifics on the current challenges in the French business that you talked a little bit about?

Brian Schopfer, CFO

Yes. Look, we saw meaningful progress in the first quarter. We're all super engaged, I consented to Europe next week and will come out of there in a couple of weeks. So we continue to be very involved. We're happy with what the French team is doing in the broader European team. Part of the good news for the first quarter for us is that it wasn't only the French business that's all margin expense. We actually saw similar results across the segment in the Technologies business. So we like our setup. We're confident in the plan, and the team is executing. It takes a little bit of time, specifically in Europe, to see everything play out. But we feel good about where we sit today.

Tom Logan, CEO

Chris, I would add to that too, noting that in France specifically, our largest and key customer is EDF, the operator of all the nuclear power stations in Europe. I think it's widely known that EDF had a difficult year last year due to numerous outages related to component issues within their power plant infrastructure. This had an overall impact on demand patterns and a knock-on effect on us, as this is our dominant customer in the region. Candidly, I think we were a little slow to adjust to some of that. And we're addressing it. We've made some operating model changes in that area. It’s all the self-help things that we've talked about. It's about being smarter about pricing in the market, continuing to drive our business system, and maintaining focus on all elements of ERP, including procurement, production, scheduling, and distribution. It's basic blocking and tackling. The team is doing a great job. I'm headed over there this afternoon to catch up with them and provide encouragement on how we can go further faster. But we feel like we're definitely on track here.

Brian Schopfer, CFO

We had a good first quarter too with the French customer we were discussing. So I think we feel quite good about what we've seen.

Operator, Operator

The next question comes from Vlad Bystricky of Citigroup.

Vladimir Bystricky, Analyst

Good morning. So maybe just to start off, a follow-up on Chris' question around backlog. Can you provide a little more color into how you're thinking about or how we should think about orders and backlog this year? And given your expectations around potential new build nuclear work and your comments around nuclear sentiment, would you expect to grow overall backlog by year-end?

Brian Schopfer, CFO

Well, look, I think it's a good question. We need to be a bit careful about talking about quarter-to-quarter dynamics given these projects; some of the bigger projects that really move the backlog can shift dates. What I can say is that I'm encouraged about where we sit. If things go as we expect, we may see backlog expansion by the end of this year. However, that depends on a few things we're working on in the pipeline. If something doesn't happen on schedule, I don't see that as a concerning issue as it's just timing that may shift a bit. But the order dynamics are great, and customer engagement is strong. Yes, I think we would expect to see some backlog growth by year-end. However, I'm less concerned if that doesn't happen until the first half of next year.

Tom Logan, CEO

Let me add to Brian's comments with a couple of additional points. Firstly, let me reiterate what Brian said, we take a very cautious approach to projecting backlog, particularly regarding nuclear new build activity, simply because the timing can be difficult to pin down. Additionally, we take a very conservative probabilistic approach to what we think will win and what the potential of a project order aggregation might look like. Generally, our actual performance from a bid and backlog standpoint has exceeded those conservative views. Our goal is to remain cautious, but I think it’s important to note that given what all participants in the nuclear industry recognize as a saturated environment, strategic partnerships and alliances are far more significant than in the past. I can tell you that the energy we are putting into forging more strategic relationships with the most significant players in the industry has increased significantly compared to historical efforts. That is where we are focusing our efforts—on developing long-term strategic relationships that can accommodate the anticipated period of strong growth with a rising tide for all involved.

Vladimir Bystricky, Analyst

Got it. That's helpful color, guys. Appreciate it. And then maybe just as I'm thinking about the year, can you provide any more color into how you're considering seasonality or the cadence? I know Q2 is usually stronger than Q1. Do you foresee typical seasonality this year, and also with that $4 million of nuclear-related revenue, should we expect that flowing through steadily, or is there more of a significant catch-up in Q2? How should we think about that $4 million coming back?

Brian Schopfer, CFO

Yes. I don't think the seasonality changes all that much. I did say in my comments that I expect some margin pressure in the second quarter, mainly on the technology side and due to some investments we're making in the supply chain, which we are excited about. We believe this has a nice impact on us in the back half of the year, but it may hit our margins in the first half. The back half of the year from a margin standpoint looks strong, and the cadence is pretty consistent with last year. The business from a growth perspective is much more even overall. We saw 5.5% in the first quarter, and we like that type of range moving forward. We expect a bit of margin pressure in Q2 but a robust margin expansion in the back half of the year.

Operator, Operator

Our next question will come from Andy Kaplowitz of Citigroup.

Andrew Kaplowitz, Analyst

Brian, I wanted to ask you about free cash flow. You did have better, I guess, lower cash burn than last year's first quarter. However, it seems to be two steps forward, one step back in terms of cash generation. What happened in the quarter, and what's your conviction that you can achieve your target for the year? I did notice your expectation of positive free cash flow in the first half, so it seems you could recoup much of that in Q2.

Brian Schopfer, CFO

Yes. I mean, look, we held our guidance and our conviction is clear that we'll be within that range. I think the first quarter was a good step forward for us. As I discussed in my comments, we made a strategic investment in the CapEx area. So the elevated CapEx was specific to the first quarter. Absent that, you would have seen a positive cash flow number versus the negative one we reported. We feel good about cash flow for the first half, which is different than it was last year, and we're set up well. I would reiterate that we are spending time with the team on this. It continues to be a very high priority for us as a company. There is still a lot of room here for improvement. I mentioned the $11 million in inventory reduction year-over-year, and we feel very good about our current standing. We like our free cash flow guidance for the year, as currently projected.

Andrew Kaplowitz, Analyst

That's helpful, Brian. I'm sorry if I missed this detail. But regarding the European integration, I just want to ask about any challenges you might be facing. Are there any other ERP integrations we must focus on, or is this mainly a one-off? Also, regarding your commentary about the $4 million, will it return sooner rather than later, given the robust orders in nuclear medicine?

Brian Schopfer, CFO

Yes. Look, we encountered some typical challenges for a couple of weeks during implementation, but March was strong and April is on track. We feel good about our progress, and that should help get things back on track. We're evaluating whether to do one more smaller integration this year, learning from the last experience while ensuring it won't impact a larger business. Yes, I expect that half of the deferred $4 million to return in Q2, with the remaining expected in Q3. This recovery is more about capacity and process than anything else. The orders remain robust, and we feel good about where the business stands.

Andrew Kaplowitz, Analyst

That's helpful. Lastly, Tom. There has been an increasing crescendo around SMRs. While they may take time to become viable, how will that affect the order profile? Could we see more activity in that sector as early as '25 or '26? I know you've had some already, but how significant is it likely to be for the order profile over the next couple of years?

Tom Logan, CEO

I would say, Andy, that it will be material but not significant. Last year, we booked about $10 million in SMR orders, and I don't know that we've disclosed what we anticipate this year. However, looking at the nature of the discussions we're engaged in, my expectation continues to shift upward regarding the solid demand likely to arise here and the viability of some of the top players in this space overall. My view is that over our planning horizon, we will see material growth in SMR orders within the nuclear vertical, but again, I wouldn't characterize it as being significant.

Operator, Operator

The next question comes from Yuan Zhi of B. Riley Securities.

Yuan Zhi, Analyst

Brian, I am curious about what contributed to the order growth for nuclear medicine this quarter, with order growth at 17% quarter-over-quarter and the backlog doubling year-over-year. Should we expect similar growth trends throughout the year?

Brian Schopfer, CFO

When we look at the nuclear medicine space, I would say this area is likely to grow at the fastest rate. A revolution is taking place in radioligand therapy that will dramatically impact cancer treatment modalities around the world. We believe we are well-positioned to participate in this trend because of our legacy position as market leader in dose calibration instruments and a variety of compounding, transport, and clinical assessment instrumentation in the nuclear medicine space. Additionally, through the acquisition of the ECS software platform, the leading data management and workflow software platform in the nuclear medicine space in North America, we can leverage our strong position to offer a more comprehensive solution set that encompasses much of our legacy instrumentation that traditionally had been deployed exclusively on the technology side. Given the combination of a growing market and our strengthening position in that space, I would say our growth prospects here are positive. While I can't guarantee specific growth rates, we are very bullish about the long-term prospects in this area.

Yuan Zhi, Analyst

Got it. That's very helpful. Additionally, you mentioned that about 60% of your Life Sciences lab-related activity is DOE-funded, focusing on environmental remediation and government waste. Do you see this continuing to drive that category?

Tom Logan, CEO

We see that as a solid foundation, which has been the case for many decades, and we don't see that base disappearing. Beyond this, we look to extend into the life sciences space, where our core competencies are in developing and utilizing highly accurate spectroscopic instruments that are crucial for understanding unknown samples' composition. We see many opportunities ahead, particularly in nuclear medicine, where we see a shift towards an acute focus on alpha emitters, presenting an opportunity to leverage our unmatched gamma spectroscopy capabilities to enhance clinical efficiency and safety. Over time, we believe there are many opportunities to build beyond that historical DOE-related base.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Logan for any closing remarks.

Tom Logan, CEO

Ladies and gentlemen, thank you for participating today. Let me just wrap up with a few closing comments. Firstly, we continue to see very strong demand and engagement across our end markets. We're well positioned to take advantage of the positive macro trends driving growth, and we are committed to superior execution. Our financial performance for Q1 was in line with our expectations, and I'm proud of the execution within our Technologies business and the resulting adjusted EBITDA margin expansion we reported today. We remain focused on improving our free cash flow dynamics heading into the rest of '24 and beyond. We continue to expect to be cash flow positive in the first half of the year and have reiterated our cash flow guide for the full year. Overall, I'm proud of our first quarter results and believe the business is solidly on track to deliver the year. We look forward to updating you with our second quarter results in a few months. So again, thank you for participating today. And operator, that will conclude the call.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.