Mirion Technologies, Inc. (MIR) Earnings Call Transcript & Summary

All right. I think we're ready to get going with the next session. So really happy to have Mirion here with us today. This is a radiation -- I'm going to let Tom describe it, but it's a radiation, detection and measurement company that went public in October of last year. We're really happy to have both Tom Logan, the Chairman and CEO; as well as Brian Schopfer, the CFO, here with us today. On stage with me, my name is Joe Ritchie. I cover the multi-industry companies, as my colleague, Ronny Scardino as well. And so we're going to be tag team with Q&A. So maybe we'll just start, Tom, for the benefit of those who don't know your business that well. Maybe just kind of level set us a little bit on the business, how you think about value creation over time and then we'll kick it off from there.

We'd be happy to do so. And Joe, Ronny, thanks for the invitation today. It's a pleasure to be here. So Mirion is a company that has been around for about 2 decades. I am the founding CEO. So I've been with the company that entire time. And as you noted, our primary focus is on ionizing radiation, which to many seems a bit arcane. And it seems -- first hearing, it sounds a little bit niche, but overall, as you begin to understand the business that we're in, firstly you appreciate that it's a large market. The total addressable market for solutions that essentially relate to this type of ionizing radiation it's about $18 billion on a global basis are currently served market is about $4 billion. And so as a $700 million business within that environment, it gives us headroom to grow both organically and acquisitively. We're a company that today, if you're to look at the composition of our business, what you would find is that our industrial segment, which represents about 2/3 of our business, is dominated by commercial nuclear power, which represents about 40% of our total revenue overall. But in addition to that, we have a strong defense business, close of both military and civil defense related solutions, life-sciences and then other industrial infrastructure. On the medical side, which is, again, about 1/3 of our business overall, what you'll find is that our dominant segment there relates to cancer therapy, where we are a global leader in providing QA solutions to the radiotherapy cancer market overall. In addition, we have a significant play in nuclear medicine and an occupational dosimetry. Importantly, when you look at our share position overall, we have 17 major product categories. We are the global leader in 14 of those 17 product categories. And you would also find a common set of characteristics in and around the nature of what we do, where in general, we are selling into highly regulated markets where our solutions are compulsory in nature, switching costs are high, cost of failure is high. So as a consequence, there is a relatively concentrated competitive group, a very high degree of retention. And the bottom line is because of all of this, about 3/4 of our revenue is recurring or repeat in nature, an important part of our story overall.

Yes. So Tom, maybe using that as a jumping off point. If you think about your business, both at the nuclear and the medical business over time, help frame kind of the growth rate of those businesses. And particularly now, there's a lot of discussion around the R-word and whether we're going to go into a recession. Like how does your business typically perform in down cycles and over time?

Yes. So again, noting that I've been CEO of this business from its inception, we began creating Mirion beginning in 2003. We formally created in 2005. And so if you think about the macro picture from that inception to where we are today, it's a macroeconomic epic that on one end is bookended by the -- great recession beginning in arguably in 2007 with about a 5-year tail. Bookended, I would have said on the other end by COVID, but now it's the conflict in Ukraine. Within that broader time frame, we had another recession. We've had tremendous dislocation and reorganization of the global electrical energy production markets with a direct bearing on nuclear power. You had the Fukushima incident. You've had trade wars between China and the West. You've had a whole host of issues. Yet throughout that period of time, our company has grown at a top line CAGR of about 12 points of which 1/3 of that, about 4 points is organic in nature. If you were to compare that with best-in-class industrial technology firms over a similar period of time, you'd see that we compare very favorably. And importantly, if you look at that trend as to what our performance has been throughout the cycle, throughout both recessionary economies and growth economies, but also in the midst of black swan events like we've seen today or most recently with COVID and the Ukraine situation is that we continue to move through those in a very stable, very resilient fashion. Overall, I think that's a critical part of our story.

Both -- it's important to note that during both the -- great Recession and the many recession, the business grew high single low double-digit growth. So this is a business that has demonstrated that track record.

Yes. Really, just I think Fukushima, and there's maybe one other year, right, where you guys had a down year in growth?

Yes, mainly driven by some of the turmoil in the nuclear industry, which also included the bankruptcy of Westinghouse, the restructuring of AREVA and a parade of horribles. But even where we saw the industry overall under duress, our protection to the downside has, I think, been extraordinary.

And when you think about the growth going forward, I think you previously outlined a mid-single-digit growth rate. But you look at the last 3 quarters, it's been a ton of volatility in the business. So maybe you could comment on that, maybe comment on how you think about lumpiness of your sales?

Yes. So when you look at our company overall, I mean, the word lumpy is typically viewed in a pejorative sense, and we're talking about industrial tech companies. I think it's maybe more accurate to say we're a business that when you look at the industrial activity is one that does experience some seasonality where again, given the dominant position of nuclear power on the industrial side, again, about 40% of our total revenue, that is a business that does see seasons where it's spring and fall outage related activity that really tends to drive the marginal revenue growth because of the importance of that core installed base overall. Conversely, if you were to look at our medical business, which is increasingly a significant part of the mix, it's 1/3 today, but it's certainly the faster growing of the 2 segments, there's a much more stable business where the growth rate overall is more ratable, more predictable. We have a higher degree of subscription-related business and really pure recurring revenue business overall. So I think the story is that recognizing that some of the work that we do in the nuclear space can be associated with large new construction projects where scheduled delays or scheduled changes can have an impact, again, to some degree on the rec patterns overall. That does create a little bit of quarter-to-quarter variability. And this is certainly one of the reasons why -- as a company, we don't provide quarterly guidance. We guided the year and our track record of doing so is one that we're incredibly proud of. If you look at the -- our performance relative to plan for, again, a period of nearly 2 decades. When you look at the mix of the current year, I think it's worth just noting explicitly that I think we've had 3 factors that have created a little bit of turbulence in our marketplace. So overall, one is certainly the ongoing conditions within the global supply chain where I think we've handled those very adroitly. I think we've handled them very well. Our supply chain issues in general because we are a low-volume, high-mix company tend to be more regional in nature. They tend to be more contained, but we have been fighting this fight now for the duration of the COVID pandemic. I think we've done it well. But to be clear, there is still some volatility in the global supply chain. Second issue relates to Ukraine, where we had our earnings call last week. We revised our guidance for the year, reflecting that about 5% of our revenue for the current year was associated with Russian activity. About $10 million direct sales into Russia, the remainder associated with projects involving Russian technology. And so as a matter of being conservative and really getting underneath any additional exposure or getting underneath this issue overall for the year. We simply took all of that out of guidance, took about $30 million in revenue out of guidance. Understanding, that we hope and expect that some of that will continue to enjoy, but also noting that we've seen significant offsets elsewhere in the business. So -- but again, from a guidance standpoint, our goal has been to get underneath that overall. Final thing to note overall, Ronny, it's just that with the quarterly timing, understanding that for the March quarter, in particular, we were lapping a very strong quarter. If you look at the stacked 2-year growth rate of the business overall, which I think is a better analytical framework for looking at it. You'll see that the growth on a 2-year stack basis was about 10% overall. So the numbers look better when you take a little bit of more expense.

And just to be clear, if you think about calendar year '21, we talked about this quite a bit before but just to remind everybody, organically we did grow a little bit sub 4%. If you pro forma in Sun Nuclear, which wouldn't be in those organic numbers guys, we'd be right at the 5% kind of that mid-single-digit number. What that tells you is that's on nuclear business, and we've said this, grew around 15% organically itself. It does not represented in our numbers because we don't only own it for the year. So I would say that although we have -- not to discount that we have missed a little bit here in the September, December and March quarters, when you look at the full picture for -- on the calendar year basis, you're in that 5% range that we've been talking about since the beginning.

I do want to get to Russia, and we'll dig into that in a bit. But maybe just for the benefit of everyone, if you could talk about how you view your competitive landscape. You talked about 14 out of 17 markets being a leader. So how do you think about your competitors and the landscape itself?

Yes. So if you look globally at our largest competitors, what you would find is that at the top of the list would be Thermo Fisher AMETEK and Fortive. And in each instance, we compete with them -- compete against them with a subset of our broader product category. There's nobody that looks exactly like we do as a company. And so those competitive boundaries tend to be a little bit more contained overall. It's more typical that if you look at the breadth of our product line that we're competing against in many instances, smaller private or regional firms that tend to have more pocketed strength, where we may be the global leader in a given category. And I think the -- a good example, Brian mentioned, Sun Nuclear, global leader in radiation therapy QA for cancer therapy. But there are regional competitors that have greater strength as an example, in the European market overall. One of the great benefits that we have as a company is the benefit of the network effect where because there is fungibility across market boundaries for the technologies that we deploy. So as an example, technology that we develop for a big science application, as an example, for satellite technology as relevance commercially in other vertical markets overall. And what that allows us to do is to really leverage this network effect where more points of presence coupled with a greater breadth of relevant products in the catalog gives us the ability to stay is simply to sell more things to more people. And as we do that, what we found historically is that our organic growth rate has exceeded the market and that implies very clearly that we have systematically taken share from our competitors, which most often include those smaller regional players.

And many of which are private, right? So when you think about your inorganic strategy going forward, I think it's about 5 points per year and inorganic growth, you're tracking a little bit below that this year. So maybe just talk about how you're going to either fund and how you approach your algorithm as it relates to M&A?

Yes. So as we think about M&A, we think this is a real core strength of the business. We have been historically throughout our history, a very acquisitive firm. We expect that to be an important source of value creation as we move ahead. As a newly public company, we have a number of constraints to be mindful of. Firstly, we recognize that we need to become seasoned and build up a shareholder base that understands our business well, embraces it and has a proper perspective on some of the value creation drivers that we're seeing overall. Secondly, coming out with a level of leverage that's a bit higher than we'd like to see. Right now, our leverage is at about 4.5x. We think the right zip code for us is probably more in the 3x to 3.5x leverage overall. And so it's an important priority for the business overall to delever. And in the midst of all of that, we have M&A. So today, we have a great M&A pipeline that would handle support the 5 to 10 points of annual inorganic growth that we've guided. But clearly, in the environment that we're in right now, where the market is in a risk-off mode, they're far greater I think general concerns or a level of awareness around leverage and liquidity than we were seeing even 3 months ago. That certainly informs the way we think about M&A that we're not going to go completely pencils down on M&A, but I think we're going to take a very measured approach as we look at capital allocation. And importantly, to compare all ultimate sources of capital with one another economic line. We think about the relative benefits strategically and tactically a peer delevering versus a combination of that and M&A and then potentially other things like buybacks and dividends and the like. We're constantly evaluating all of those things. But at the end of the day, our view is that we will continue to do some deals this year, but we will be measured in our expectation as that we will be on a net deleveraging journey this year.

So that's all very helpful commentary. I want to go back to Russia because I thought it was prudent that you took all of it out of the guide. I guess based on where we sit today, I guess it's a very fluid environment. I'd be curious like the potential opportunity to see some upside from what got pulled out from Russia. And then you guys talked about a $10 million EBITDA opportunity from both nuclear and defense. Maybe give some color around the confidence in booking those projects to ensure that comes through.

Yes. So overall, if you look at the impacts of the conflict in Ukraine, there are many and they are vary. And I'll try to be concise in my commentary. In the near term, clearly, it creates some level of risk in and around again, the volume of business that we saw under Russia, which historically and in our plan for this year was about $10 million as well as projects outside of Russia that use Russian nuclear reactor technology, noting that this is a technology developed by Rosatom, which is one of the leading nuclear reactor designers in the world. It's exceptionally good technology, certainly very, very competitive with the other larger players, which would include Westinghouse, the French company, EDF, Korean technology, Chinese technology, et cetera. But given the nature of, again, the conflict and the escalation of sanctions, that we've seen and certainly the dynamic, the geopolitical dynamic that we've seen in and around that, it has created stress points. The most immediate and tangible of which was a project in Finland, where the consortium in Finland made the decision to terminate a project involving, again, Rosatom and their affiliates overall. And that actually happened early last week. More broadly, if you look at some of the remaining projects that we have had put in our forecast, have taken out of our guidance for this year that would include work in Hungary and work in China. And to be clear, that's work that continues. The geopolitical dynamics as between Turkey and Russia, China and Russia are very different. And so we continue to provide support to those projects overall. And there is potential that, that work will continue. But again, to take this issue off the table, we've removed those factors from our guidance overall. The other short-term dynamic that we're seeing, obviously, is that there's a huge focus on military spending and civil defense spending in the region. Historically, we have equipped 19 of the NATO militaries, 19 of the NATO armed forces with radiation detection gear that is militarized. It is green gear. It is suited for battlefield applications. And more broadly, we have been a primary player in civil defense applications. We were there at 3 Mile Island at Chernobyl. Most recently at Fukushima, where if you were to pro forma back our revenue profile, what you would see is that we had episodic revenue related to the Fukushima incident of about $130 million. This is a reflection of the capabilities that we have overall. So as we have seen an elevated risk in the European region, the NATO footprint, in particular, the level of inquiry that precedes any kind of purchasing activity that we have seen both from defense agencies as well as civil defense agencies has been extraordinarily high. And from that, we have booked some smaller to moderate orders that provides some of the offset to the Russian revenue that we took out of guidance. But to be clear, we're in dialogue for many other opportunities. We expect that in the near term, there are opportunities associated with this. But more broadly, just to put a bit around all of this. When we look beyond the current year and we look at the dynamics that have been induced in the nuclear industry, it is very clear that this has been a sobering event, not only the European community, but writ large on a global basis that supports the commercial nuclear power industry -- and from that, we've seen some immediate changes in response relating to the desire to build more nuclear reactors, run existing reactors longer and hotter, which we think ultimately lifts up our business. And finally, we expect that the ultimate military and defense spending posture, not only Europe but elsewhere in the region, is going to see a much higher level of activity overall that may last several years.

The other -- just one comment, too, we told everyone that we saw a quarter growth at 19% in the first quarter. I would tell you, a lot of the dynamic I was talking about would have been booked by the end of March, right? So the reality is that's a really good 19%. It is not -- it has almost nothing to do with the things that Tom just talked you through on Ukraine and kind of the new nuclear power spending that we think and we continue to see.

Tom, just following up, that's a good point, Brian. Like before we got on stage, you mentioned that you were at a conference in Europe. I'm just curious, like I don't know if it was related to your business, I'm assuming it was. What's kind of the mood on the ground today?

The mood is phenomenal. So I was actually at a conference called ESTRO in Copenhagen over the weekend, incredibly proud to be there with our international sales and marketing team overall. We had 2 major product release announcements relating to our cancer therapy business. One product called SunScan that we think dramatically enhances capabilities in the machine level QA space; secondly, related to the first cloud-based version of our key workflow software product. But the buzz was incredible, the level of excitement that we're seeing about the new products, the dynamic within that market today is exceptional, but it also gave me an opportunity to see as well how well integrated even very early on our most recent acquisition, CIRS is within this broader cancer therapy footprint. So in general, I will tell you, and the irony is that when we're facing again, market risk of conditions, obviously, we've seen some pressure in our stock. We're seeing a very choppy equity market overall as well as the fixed income markets. But despite all that when you look at the core drivers of value creation in our business, the organic demand drivers, the way that we are approaching the -- some of the opportunities to enhance price cost, improve the operational cadence of our business, the M&A opportunities, et cetera. In many respects, things have never been better. We're very encouraged by what we see out there.

So one more from me. I'll turn it over to Ronny. Since you mentioned the volatility in the market, there was a Bloomberg article yesterday that I know created a lot of negative buzz as well. And so maybe I'll just kind of turn it over to you if you guys want to kind of respond to that.

Yes. I think just obviously, we went bubbling via Goldman Sachs' back. I think there's 2 important things to remember here. One is Goldman did invest 200 million in our pipe. None of that is actually on their balance sheet. They actually syndicated that to their partners and MDEs and some high net worth individuals. So those shares are personal shares, they were paid for by the people. So that's one. I think the other one is the promote is invested yet. It only vests at 12, 14 and 16, right? So the vast majority that Goldman the sponsor can make is still invested. That article has nothing to do with packs that were lease-backed already. We're a public company. We operate as a public company. They have 2 board seats, Larry Kingsley is one, Jo Natauri is the other. So no impact at all from that other article other than some noise.

Great. Yes. I'd love to move back to thinking about the guidance and going -- how you thought about pricing. I think last quarter, it was 200 basis points. It's probably more than that now for the year. So just for the benefit, how does it work with repricing your backlog and other escalations in place? Anything that you can help kind of…

Yes. So a couple of comments, I'll let Tom maybe fill in the gaps. First off, we said last week, we saw about 150 basis points of price in the first quarter. It doesn't sound like a lot, but when your backlog covers about 45% to 50% of your next 12 months revenue, we were quite pleased. Frankly, it was a little better than what we had expected. So very happy there. And I'll tell you, the medical business really did a nice job for us on the pricing side in the first quarter. We had said 200 basis points of price in our number in December. That number is now -- our expectation is it closer to 300 basis points of price. We think -- and I said this last week as well, we think that the fourth quarter number will be closer to 5% of price that we've put into the P&L. So like we talked about before, that 2% is not reflective of what we'll see on an annualized basis. We've clearly been out there. We've done more than now we continue to do more. And I think this is something that continues to evolve, Ronny it's one that we're talking about every day, every week. We continue to adjust where necessary and both strategically and broadly. And we're frankly pretty confident about our ability to not only get that price in the market, but then retain it as things calm down. And I think that is something that I think will be very powerful from an earnings perspective over the medium term is our ability to keep price.

And as you think about the margin story, you guys have a phenomenal track record of expanding margins over the last 2 decades. And I'd love to think walk through how you guys think about the opportunities going forward? Like what are the low-hanging fruits. I know you've thrown out a 30% EBITDA margin target. Like is there a timeframe when you think about that?

I don't think we've thrown that out. I think it's very thought out and there's a clear road map. I think the anchor to that story is our operating leverage. We have taken on some costs to be a public company. It's been a little bit more expensive than we originally thought. But our operating leverage is fantastic, and it's proven. If we grow 4% and it drops through at gross margins, which we've done before and we've done in our history, multiple times over periods of time, that gives you a 1% EBITDA uplift right there. The other thing I would remind you of is just on the macro scale we bought Biodex in September of '19. It was a $40 million business, 0 EBITDA. It's about a 150 basis point drag on the company. We've told the market, and by the way, we're seeing this in the results, that business will be accretive to us on a margin basis at the end of the year. So there's another 150 basis points there. Then you can start talking about the 2 footprint rationalization opportunities. One, both were just finished here or are finishing, I guess. Right now, that begin to come in, and we're seeing very good results out of our European business. With regards to that, we have -- we've said this multiple times. We have too much capacity. We can take footprint capacity out of the market. We'll do that. I think one thing -- I think we'll continue to think about that. That's not today. I would say that's not something we're leading with in the very short term. But the other one is the price/cost stuff. And I think over the medium term, that's a benefit to us in potentially a fairly accretive way as once things do come down because they will.

So I'm going to open it up to the audience for questions, we're happy to keep going, but if anybody has a question, feel free. All right. Keep up. We got one right there. You got a microphone coming.

Could you just touch quickly on the backlog and your ability to reprice if you have any at all?

Yes. So if you look at our total backlog, it's -- we've provided some data around this, but it's more than $700 million overall. If you look at the composition of that, what you would see is that it is a balance between some larger projects, which tend to be related to nuclear power new build opportunities, which typically takes several years to trade out and then a mix of smaller, shorter order cycle products that flow through the mix overall. Within that, you would find varying price escalation elements or pricing triggers. The way I would characterize it in general is that we have a good ability to drive over a longer period of time, price action within backlog typically driven either by explicit escalators or opportunities to drive change through engineering design changes and the like. The key distinction that I would make relative to our more typical book-and-bill business. It's just the rapidity within which we can monetize that overall. It moves a little bit slower than the book and bill. We -- but it's not a non-zero event. We do have the ability to gain some price uplift on backlog.

I think the other thing to think about is the cost side. We also have a little bit more flexibility about when we need material on some of those larger projects. One of the things we're seeing in many places, actually is if you give some flexibility to the supply chain, you tend to be able to hold kind of your cost structure fairly in line. And we've seen some good success on that. So there's more flexibility on the cost side, I think, within that backlog and then maybe people would think? Maybe just kind of closing the sale with like one final question. I think the nuclear business tends to be a little bit misunderstood. I'd love to kind of hear your thoughts, Tom, on like why fundamentally, you think it's -- you're very bullish on the outlook over the long term. But then also, as you kind of think about your portfolio and where you will do M&A, is medical going to become a bigger part of the portfolio over time?

Yes. So on the nuclear side, there are 2 factors that drive the overall health of the global nuclear industry more than any other one is government support. The other is the price of natural gas. Government support even predating the Ukraine crisis was running at a very high level because there's been just a broad-based acceptance irrespective of political ideology that nuclear energy has to be at minimum a transition strategy as we seek to decarbonize the global economy. When we've seen this across regions, across nuclear states and there's been momentum there, what we have seen with the situation in Ukraine now is that it's made the situation even more acute in the sense that there's also a greater premium that's being placed on sanctity of energy supply, not only in the region but understanding more broadly that there is correlation with the price of natural gas, the impact ultimately on LNG pricing in both the Pacific Rim as well as in Europe is clear. The bottom line is that the level of political support, even in unexpected pockets. By that, I mean in my home state of California for the first time there is an active discussion about reversing the policy stance on shutting them last remaining nuclear power plant at the ablation. And that's reflective, again, of the politics that we're in today. But it's beyond that. It's obviously the entire European footprint. We've seen a decisive tilt toward a more favorable political stance in nuclear. But we've also seen this in South Korea where recent presidential election has been very supportive of that. We're even seeing it in Japan, where a recent survey came out in the last week or so. that highlighted the fact that a majority of Japanese citizens for the first time since Fukushima, now would like to see a greater reliance on nuclear power. That, coupled with the fact that for both supply and demand reasons, the pricing of natural gas has changed in a fundamental and long and tenor fashion. All of that means that the nuclear operators and sponsors today are operating with a much higher degree of confidence about the future of these large capital investments and they're making more money today than they have probably since the 1980s. And so as a consequence, reactors are being run hotter. They're seeking to life extend them. They're seeking to build more. And all of these things ultimately find their way to us overall and really give us a more bullish outlook on the nuclear industry even relative to what we had 6 months ago.

It's good to hear. Tom, Brian, thanks so much for being with us here today. Really appreciate it. I enjoyed the session. Gentlemen, thank you. I appreciate the invitation.