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

Greetings and welcome to the Mirion Technologies Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Gaddy. Thank you for joining. You may begin.

Good morning, everyone, and thank you for joining Mirion's Fourth Quarter and Full Year 2022 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 and in Mirion's other filings with the SEC. Quarterly references within today's discussion are related to the fourth quarter and full year ended December 31, 2022. The comments made during this call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the appendix of this presentation accompanying the call today. All earnings materials can be found on Mirion's IR website at ir.mirian.com. Joining me on the call today are Larry Kingsley, Chairman of the Board; Tom Logan, Chief Executive Officer; and Brian Schopfer, Chief Financial Officer. Now I will turn it over to our Chairman of the Board, Larry Kingsley. Larry?

Thank you, Alex, and good morning, everyone. I'd like to get today's call started by thanking you all for your continued support of Mirion throughout our first full year as a public company. '22 was a dynamic year for Mirion from navigating a challenging supply chain environment to responding to record inflation and the Russia-Ukraine conflict. There was no shortage of hurdles to overcome. I'm incredibly proud though of the Mirion team's resolve in the face of adversity and believe the [indiscernible] results we reported this morning are a direct testament. Our medical business accelerated upon recent growth trends, while industrial took a meaningful step forward during the quarter. Overall, the team was able to deliver on expectations laid out on our last call and has built positive momentum heading into 2023. Mirion has positioned itself well to deliver growth this year, and I believe the guidance published this morning showcases the cycle-resistant nature of our strategic positioning in the market. Mirion's diverse portfolio of products, services and experienced management team have a long track record of proven results. The team has the right road map in place to capitalize on what we expect will continue to be a robust demand environment. We are entering '23 with strong momentum across our end markets and a growing backlog. I'm also very encouraged by the execution-focused mentality we built through the course of '22, and the team has clear focus on the key strategic initiatives required for growth, profitability and cash flow generation. The future for Mirion is bright. Customer engagement and demand are strong, and our teams remain committed to executing. I'm now going to turn the call over to Tom Logan, Mirion's CEO. Tom? Tom, I think you're muted.

Diving into our results, there are a few key areas I'd like to highlight today. First, we finished the year with 8% year-over-year order growth for the full year, which in turn resulted in backlog growth of 10%. This excludes the impact of the Hanhikivi project cancellation, as previously discussed. Second, we delivered total company organic adjusted revenue growth of over 19% for the quarter and nearly 6% for the full year. While these numbers could have been higher without the negative impacts from the Russia-Ukraine conflict and foreign exchange pressures, I'm incredibly proud of the effort and commitment displayed by our team. Third, net leverage reduced to 4.4x EBITDA as of December 31, driven by better free cash flow performance in line with our expectations. Note that my goal is to reduce leverage below 4x by the end of 2023. Finally, we initiated 2023 financial guidance this morning. Looking ahead to the full year, we're expecting organic growth of 4% to 7% with adjusted EBITDA of $172 million to $182 million. Now let's get into more detail on our order performance and market outlook for 2023. Beginning with Slide 4, our end market demand dynamics remain strong heading into 2023, showcased by 8% year-over-year order growth in 2022. On a constant currency basis, order growth was 13% for the full year. We continue to see broad-based demand across business segments and are encouraged by our robust backlog coverage. We expect conversion rates to increase materially in 2023, covering approximately 55% of our next 12-month revenue. On the medical side of the business, we experienced incredible growth dynamics last year and expect to see these positive trends continue, albeit at a more moderated rate. Year-over-year medical order growth was 14% or 15% on a constant currency basis. A few things to note here. First, we launched our one Mirion Medical strategic initiative, which has begun delivering positive results to the business. I expect to see additional momentum to take shape both internally and externally as 2023 progresses. In dosimetry, we are excited about the official launch of our next generation of Instadose technology. As a reminder, we expect Instadose to provide growth to the business through licensing opportunities, organic share gains and conversion of existing customers to the platform. Next, in radiation therapy quality assurance, we remain encouraged by both international and domestic demand dynamics. We're expecting high single-digit top line growth from RTQA in '23, supported by the investments in our European sales center and national account marketing strategy to drive positive growth for the business. Finally, 2022 was a great year for our nuclear medicine business, showcasing how strong the combined Biodex and Capintec assets are for Mirion. We are anticipating a more normalized growth rate in 2023, with organic revenue growth expected in the mid-single digits. Now moving on to industrial. The segment generated approximately 5% order growth on an as-reported basis in 2022 or roughly 14% on a constant currency basis, supported by strong customer engagement across our end markets. In nuclear power, we are seeing encouraging activities in all areas of the nuclear power life cycle particularly from new builds in the installed base. Government sponsors across the globe continue to view nuclear power as an attractive energy source, particularly in Europe and Asia. The macro environment remains favorable, and we are encouraged by the long-term trends in the space. Relatedly, the small modular reactor movement has been building steam across the world. We are seeing SMR-related orders hit our books and are strategically engaged with prospective customers as they ramp up development work. This is a great long-term opportunity for Mirion, which could [ dwarf ] utility-scale reactors, and we look forward to playing an integral role in enabling the safe development and operation of these potentially game-changing power solutions. Moving on to our defense and diversified industrial businesses, we lapped a number of large orders in Q4 2021, which made '22 comparisons tough. We continue to see elevated engagement from our NATO customers in the defense space and expect this trend to continue for the foreseeable future. Note, however, that order cycle times are lengthier than historical norms. Finally, in Labs & Research, we booked a large order providing germanium detectors, dosimeters and handheld devices to a new oncology isotope production facility in Germany. This is an exciting order for us in the Industrial segment as it was made possible by the strengthening Mirion Medical brand. As we continue to mature in our 2-segment structure, we expect similar cross-selling momentum to pick up. Looking at the business as a whole, the outlook for 2023 is strong. We expect elevated customer engagement across our end markets and are maintaining robust growth projections for the future. Let's turn now to Slide 5 to discuss our fourth quarter and full year results in more detail. At the total company level, we delivered 19.1% organic revenue growth in the fourth quarter and 5.7% organic revenue growth for the full year. We enjoyed continued exceptional performance from our medical business in the fourth quarter and full year, delivering organic growth of 24% and 15%, respectively. Strength in medical was broad-based across all 3 of our end markets with nuclear medicine leading the way. In the Industrial segment, the fourth quarter was a step in the right direction as we delivered nearly 17% organic growth. Fourth quarter growth was supported by improvements in our operating environment as well as strong execution by our team. We saw some signs of supply chain pressure easing, and we experienced generally more favorable order timing dynamics compared to prior quarters. Before I pass the call over to Brian, I wanted to touch briefly on our business development initiatives and M&A strategy. We remain committed to our disciplined capital allocation policy with highly selective screening criteria for M&A that supports our deleveraging commitments. The pipeline remains robust, and our criteria for investment continues to focus on building category leadership within our chosen end markets with defensible products, services and software offerings. But to be clear, I intend to reduce leverage below 4x by year-end. With that, let me pass the call over to our Chief Financial Officer, Brian Schopfer. Brian?

Thanks, Tom, and good morning, everyone. To kick off my commentary, I'll ask you to please turn to Slide 6 to take a deeper dive into our fourth quarter and full year results. Looking at the fourth quarter, total company adjusted revenue was up 20.5%, and adjusted EBITDA was up 25.9%. Total revenue in the quarter was $217.9 million, and organic growth was 19.1%. Adjusted EBITDA totaled $56.4 million in the quarter, with margin expanding 110 basis points to 25.9%. During the fourth quarter, we realized approximately 5% growth from price offset by inflation and onetime costs associated with accounts receivable reserves as well as a onetime supply chain reserve relating to circuit boards. Looking at the full year, total company adjusted revenue was $77.8 million, featuring 5.1% reported growth with organic growth of 5.7%. Adjusted EBITDA was down slightly compared to 2021, finishing at $164.7 million, with adjusted EBITDA margin contracting 130 basis points compared to 2021 to 22.9%. As a reminder, year-over-year adjusted EBITDA margin performance was negatively impacted by approximately $12 million of public company costs in 2022 or approximately 170 basis points. This was our last time comping against a period without public company costs. Fourth quarter adjusted free cash flow was $19.5 million, much more representative of the go-forward expectation for the company. Higher interest rates and net working capital requirements continue to be a challenge, but I am encouraged by the progress exiting the year. As a result, we saw leverage reduced to 4.4x as of December 31, slightly ahead of what we guided on our third quarter call. Looking forward, our operating teams are very focused on achieving Tom's leverage target of 4x or lower by the end of '23. I'd also like to note that foreign currency exchange dynamics continue to be an important area of focus for Mirion. While we've recently seen positive trends in the EUR to USD exchange rate, FX headwinds impacted adjusted revenue performance by 5% in the fourth quarter and 4.5% for 2022. As we disclosed in our third quarter call, we have been actively hedging our interest rate exposure through fixed price cross currency hedges on our third-party debt. We've executed 2 hedges, bringing our total fixed debt to approximately 30%, which we expect to offset approximately $4 million of cash interest on an annualized basis. Before getting into the segment details, I'd like to take a minute on Slide 7 to reflect on the key variables impacting our top line in 2022. There was no shortage of headwinds in 2022. We had to overcome challenges stemming from the Russia-Ukraine conflict, foreign exchange pressure and record inflation. Our top line was affected by approximately $50 million of headwinds from lost Russian-related revenue and negative foreign exchange impacts, totaling approximately 8% of reported revenue growth. We were able to replace $12 million of the lost Russian-related volume, supplemented with $6 million of incremental pricing actions while successfully acquiring and integrating the Collins acquisition. Let's now take a deeper dive into segment performance. Please turn to Slide 8 for our Medical segment. Starting with fourth quarter performance, adjusted revenue grew 25.4% with organic growth of 23.6%, driven by double-digit organic growth from all 3 end markets. Nuclear Medicine led the way again this quarter as integration efforts continued to deliver good results, and the team converted more of our backlog into revenue. Medical adjusted EBITDA margin was 33.4% in the quarter, a 90 basis point expansion compared to the same period last year. For the full year, Medical adjusted revenue grew 19.2% with organic growth of 15.2%. Adjusted EBITDA was up 23.3% to $86.8 million. Margin improved by 110 basis points, supported by strong price realization and the integration of Capitec and Biodex. These growth numbers are outstanding and I'd like to commend our medical team on their great work throughout the year. As we look forward, Medical's first half of 2023 will see a more normalized growth trend in line with our long-term algorithm with tougher comps in the back half of the year. Let's now turn over to Slide 9 for the Industrial segment. Adjusted revenue grew by 17.9% for the quarter, with organic growth of 16.8%. We set strong but achievable expectations for Industrial in the fourth quarter, and I am proud of the effort our teams put in to deliver. Performance was principally driven by strong execution. Adjusted EBITDA for the Industrial segment was up almost 22% in the quarter, and margin expanded 100 basis points to 30.2%. While I'm pleased to report margin expansion, performance was limited by the incurrence of one-off transitory costs related to increased accounts receivable provisions and onetime supply chain expenses, as I noted earlier. Looking at Industrial full year performance, adjusted revenue was down 2% with organic growth of 0.9%. Revenue performance was principally hindered by foreign exchange headwinds and lost Russian-related revenue, a revenue impact of roughly 11% for the year on the Industrial segment. Adjusted EBITDA was down 5% and margin compressed by 90 basis points from 2021. Margin performance was impacted by volume absorption, product mix and inflation. Additionally, dilution from the Collins acquisition negatively impacted Industrial adjusted EBITDA margin by nearly 40 basis points on its own. Finally, I'd like to walk through the guidance we have issued today. Turning over to Slide 10. We are projecting organic growth of 4% to 7%, supported by mid-single-digit organic growth from both Medical and Industrial. I'd like to note that Medical is comping a very strong year, and as a result, we are moderating our growth expectations versus what we saw in 2022. Given recent trends in the USD to EUR exchange rate, we are anticipating FX to positively impact top line growth by about 0.5%. The net inorganic revenue impact from Collins and Biodex is expected to be 1.5%. To provide a quick update on the physical medicine divestiture from our Biodex business originally announced in November, we expect the deal to close during the first quarter of 2023. As a reminder, we purchased Biodex and Capitec for a combined $41 million, representing approximately $60 million of revenue and less than $2 million of adjusted EBITDA at deal closure. Today, the combined business post-synergy multiple is below 2x and is accretive to Mirion's consolidated adjusted EBITDA margin. The physical medicine component of Biodex is not core to our category leadership in the segment. For 2023, we are expecting adjusted EBITDA between $172 million and $182 million, with margins likely remaining unchanged to 2022 at the midpoint of guidance. Pricing cost inflation are estimated to be neutral for the year. Thinking through the sequence of the year, we expect more modest performance in the first half as we work through product and customer mix headwinds, mainly stemming from our sensing business within the Industrial segment. We anticipate these mix pressures to ease as we get into the second half of the year with adjusted EBITDA margin improving sequentially. I'd also like to note the dynamics coming from our inorganic contributions. We expect the Biodex divestiture to be accretive to margins with the Collins acquisition more than offsetting these benefits. As a result, we project net inorganic impact to our adjusted EBITDA margin of approximately negative 50 basis points in 2023. Saying this differently, we would expect 50 basis points of better margin rates than what the midpoint suggests had we not done both of these deals. We are anticipating adjusted EPS of $0.28 to $0.34 and adjusted free cash flow of $50 million to $70 million, with an expectation of positive contribution from net working capital for the year. To help with modeling considerations, we are utilizing our share count as of December 31, 2022, to calculate EPS. We expect our effective tax rate to be between 25% to 27% and are assuming a USD to EUR exchange rate of 1.07. Note that there is an additional guidance slide in the appendix of our presentation laying these out as well as a bridge around our revenue assumptions. With that, I'll pass the call back to Tom to close things out.

Brian, thanks. Before we open things up for questions, I'd like to recap 2022 and to highlight a few key areas of focus for us as we prepare for 2023. First, we finished 2022 with positive momentum built off our strong fourth quarter results. Our team's commitment to execution enabled us to deliver on the expectations we set back in November. Second, we are entering 2023 with robust backlog and NTM revenue coverage of approximately 55%. Third, we've taken a balanced approach to setting guidance and believe we have adequately considered the risks and opportunities we see for the year. Fourth, we remain committed to deleveraging our balance sheet through disciplined capital allocation. Any acquisitions will be highly selective and supportive of my goal to reduce leverage below 4x by the end of the year. Next, operational execution remains front and center. I spent most of 2022 running both the Medical Group and our RTQA businesses in addition to my day job. This culminated in a wholesale rebranding of Mirion Medical, a sweeping reorganization and a significant improvement in our operational performance. With the onboarding of Michael Rossi, I now have the bandwidth to focus a greater degree of attention on our Industrial group. Finally, we have the best team in the industry, and I am relentlessly focused on employee engagement and organizational health. I'm confident that we are well positioned to have a great 2023 and look forward to updating you on our progress in May. Thanks again for your time and continued support. And I'll now pass things back to Alex to open up Q&A.

Thank you, Tom. That concludes our formal comments for today. I'll turn it back over to the operator for a question-and-answer session.

[Operator Instructions] Our first question comes from Andy Kaplowitz with Citigroup.

Your medical-related growth continued to accelerate over the last few quarters of '22. I know you talked about strength in all of your major medical businesses, and I know you're forecasting mid-single-digit growth in '23. You talked about demand normalization and tough comps. You have 2 of the 3 medical businesses project to be up high single digits. I think dosimetry is up mid-single digits. So are you just being conservative on the overall segment, especially given the new insides rollout or are you seeing any slowing in any of your medical businesses, and that's why you've got lower growth model?

Yes, 2 things, Andy. Firstly, on the dosimetry business, historically, that is a slow growing market. With the advent of Instadose we believe that over the last number of years, we've been able to grow at a nominally higher rate than the market overall. But the growth rate there is inherently more conservative than what we'll find in either RTQA or in Nuclear Medicine. The other important thing to note is that we just were lapping a barn burner of the year this year in both of the RTQA and Nuclear Medicine segments. And while market dynamics continue to be very favorable and our outlook is positive, I think we're just being measured in terms of how we're forecasting growth.

That's very helpful, Tom. And then I think we understand that you lapped significant order growth in Q4 in Nuclear and Defense, but you mentioned the clear pipeline of incremental new-build nuclear orders. So do you think your nuclear business in terms of orders reaccelerate from here? And then we know you're expecting more defense-related orders, you mentioned the elongated order cycle for these types of orders. Do you see them getting over the finish line in '23?

Yes. Firstly, on the nuclear power market, if you look at our order intake for the year, clearly, we are seeing an acceleration of demand overall. And that's broadly reflective of the trends that we've talked about on numerous occasions, principally noting the very high degree of government and popular support for nuclear power is an important solution to a variety of energy problems. And secondly, the elevated price of electrical pricing, which is principally driven by gas pricing overall. Our view is that, that strength continues. We do generally believe there is a lag effect between secular market changes within the nuclear industry and the downstream impact on our business. And so we are hopeful that as the industry overall continues to gain momentum and gain health that we will see that continue. It's important to note that our installed base is about 3/4 of our nuclear power-related revenue, which, as you've seen in the presentation, constituted about 35% of our total revenue last year. So looking at the installed base as far and away, the most important lens through which to evaluate the overall nuclear market and, as noted, those trends are favorable. But on the new build side, we continue to see significant activity in terms of the pipeline of projects that we're engaged with and we expect to see a broad-based acceleration in utility scale developments continuing over the next decade or more. On the defense side, we continue to note that the degree of engagement that we have with the 19 NATO militaries, NATO Armed Forces that we support, continues to be high as it does with other supernational agencies and government departments. We have noted that in general, with government-contracted business that post-COVID order cycle times have lengthened. We continue to remain bullish about our prospects to see significant order intake here. But to be clear, we've been very measured, very conservative about how we have projected that for the year.

The other thing, Andy, just to give you some context on nuclear power. If you take out some of our larger orders, so let's say, above, call it, $5 million, on an as-reported basis, you're kind of mid-teens on the order growth. So if you adjust that for FX, we're kind of more in the 20% range. So I think the point is the underlying [ business ], there's some noise with some of the bigger orders throughout the year, but the underlying business clearly continues to be healthy.

That's helpful guys. And then lastly, could you go over the margin headwinds in '23 for Industrial and Medical. Obviously, you're forecasting lower-than-average incrementals for '23. How much impact do you expect the mix issues in Industrial to have on your business? And I think even if we exclude the inorganic headwinds, you aren't forecasting that sort of normalized 50-plus percent incrementals for Medical. So what else is holding you back there? Maybe your assumptions around price versus cost and supply chain would be helpful.

Maybe I'll take that. So first off, I mean, we're basically assuming in the guide for price cost, so price versus inflation, to be neutral. So I think we're going to work super hard to make sure that we do get some benefit there. But right now, where we're sitting, we're saying price cost neutral. The other thing we're seeing in the first half is that we have a bit of one of our businesses that will improve throughout the year. And it's more about volume and just the product mix, and it's really timing related. We have very good visibility into this business. It's just a little bit weaker in the first half than what we would have liked, and it's just about how the factors are going to be loaded through the year. So I think we have good confidence. And the other thing I would say, Andy, is we're almost 10% higher in backlog coverage this year versus where we sat at this time last year. I think that gives us just a lot of confidence in the visibility we have thinking about '23.

Yes. And by that one, when Brian says it's 10% higher, it means 10 points. So it's essentially taking us up from mid-40s coverage in the mid-50s. So it is a significant increase.