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

All right. Ready for the next fireside chat. We're excited to have Mirion here with us today. We have both Tom Logan, who is the Founder and CEO; as well as Brian Schopfer, CFO. Guys, great to see you. Just saw you a couple of days ago at the Investor Day. And clearly, there's been a lot of positive momentum with the shares.

But maybe before we get into the specifics about your company, Tom, let to turn it over to you, as everybody in the audience might not fully be aware of what Mirion does, so why don't you level-set it for us?

Yes. So we describe Mirion as being really the only pure play in the detection, measurement and analysis of ionizing radiation, which you should think of as being x-ray, gamma, neutron, alpha-type radiation, really kind of a unique position on the electromagnetic spectrum. It sounds very esoteric, very dry. We think it's an unbelievable market. And we're the only pure player in that category. We are the category leader in 17 of 19 of our product categories globally. We are substantially larger than any of our competitors. And to be clear, our head-to-head competitors in this space that would be familiar to you would be companies like Thermo Fisher, AMETEK, Fortive and a variety of regional players. We have a considerable investment into R&D and development that manifests itself into cutting-edge applications and space exploration, deep science, et cetera, but the most important thing to understand, because we'll get into the segmentation of our business between Medical and Nuclear & Safety, is the technological leverage that we possess, Joe. In other words, given the fungibility of this technology across vertical market boundaries and across segments, the discovery that we do anywhere in our network becomes relevant broadly across that network. And the great thing is that given the scale of our total addressable market, this gives us the ability to continue to scale up both organically and inorganically to a substantially larger size without ever having to conglomerate, without ever really losing the benefits of that technological leverage.

Yes. Let's double-click on the different segments, just again, helping everybody to level-set. Two-thirds of your business coming in from your Nuclear segment, other 1/3 of your business coming from Medical. Let's just focus on what used to be now, I guess, the Technology -- change from the Technology segment. So talk about the Technology segment holistically and then obviously, today, there's a lot of optimism around what the trajectory of the Nuclear business could be over the next several years, so maybe just touch on that as well?

So what we refer to now as our Nuclear & Safety segment, as Joe noted, is about 2/3 of our business. Within that, there are 3 principal segments that I would call out. Nuclear power is the largest at 60% and importantly, this makes us one of the better plays as a public company to really participate in the nuclear renaissance that's taking place given the exposure that we have, and given the character of that exposure, which we can do a deeper dive on later in the conversation. But in addition to that, we have defense, which is both military and civil defense. Today, we equip 22 of the NATO Armed Forces with green gear, that is essentially ruggedized versions of the scientific instrumentation that we do elsewhere. We also have a very healthy kind of Life Sciences and Laboratory business in that segment overall. The dominant theme here though, of course, is commercial nuclear power, which is a fascinating and very exciting dynamic right now.

So let's dig in a little deeper on commercial nuc, right? So maybe just kind of walk through, you went through this at the Investor Day, the opportunity over the life cycle of a nuclear plant, that's the long-term opportunity. But then even like the near to medium term, where do you expect to see the biggest momentum in your business over the course of the next 12 to 24 months?

So just to frame the response, today we have a foothold, a presence of some type in more than 95% of the operating nuclear reactors worldwide, which number about 440 reactors in total. Somewhat uniquely, we participate cradle-to-grave in the life cycle of the nuclear power plant which today surpasses 100 years. We can think in general of about 5 to 10 years of front-end planning and construction. We can think in terms of an operating life cycle, typically of about 80 years now, even though there will be a number of plants that operate for more than a century. And then finally, on the back end, there's about 5 to 10 years of decommissioning. And so as a company, we participate throughout that life cycle. But what's important is that 80% of our revenue in nuclear power comes from the installed base. So think of it as kind of a highly engineered razor-razorblade model, where when we become the incumbent in a nuclear power plant, that position tends to be highly defensible for many, many different reasons. But that competitive moat is deep and is broad. And the downstream tail of recurring revenue and/or repeat revenue is visible, it is predictable, particularly when you apply that against a large base overall in one of the more attractive dynamics or components of our business. Now in the near to intermediate term, that recurring revenue from the installed base, again, 80% of our nuclear revenue overall is the most critical component, because you have to put -- again, contextualize this and understand that for more than a generation, more than 20 years, the global nuclear industry has had economic headwinds driven by supply factors, driven by demand factors, driven by regulatory factors and other factors. Today there seems to be a broad resolution of all of those elements supporting for different reasons. In some cases, it's decarbonization. In some cases, it is energy security and energy independence. But what is emerging as maybe the most dominant factor is really the recognition the world simply doesn't have enough generating capacity to support the AI revolution and the emerging electric economy. But what has happened as a consequence is that it has radically changed the profitability dynamics of the global installed base. And so as operators are shifting from kind of a defensive hyper-aggressive capital rationing mode on both CapEx and OpEx to more expansionary mode where their motivation now is to operate power plants at higher capacity factors, to operate the capacity of their nuclear assets and to life-extend those assets, that creates a fundamentally different dynamic for us within that recurring revenue stream. It drives faster replacement cycles to the degree that there is more of a discretionary envelope for certain categories, classes of instrumentation, it benefits us in kind of narrowing that envelope overall. And this is what we're likely to see playing out as we really go through this inflection point and the good portions of the industry. Beyond that, we have a robust and growing utility-scale newbuild pipeline. But beyond that, we have this very exciting SMR movement, small modular reactor movement, that is really gaining in momentum, gaining in scope overall, that become -- kind of just at the tail end of our planning horizon really, we believe, will begin to kick in meaningfully.

So one of the things we spoke about offline at your Investor Day was, I was trying to make the corollary to, like the heavy-duty gas turbine market and the fact that you can plan -- you can see these outages planned over a several-year period. And I think to your point, nuclear -- we haven't talked about nuclear in a favorable way for the better part of the last -- since Fukushima, right? And so -- but clearly, like this recurring revenue stream has continued for your business. I guess as you think about the next couple of years and the way that you plan out at least the service component to your business, and ultimately what these life extensions could mean for that going forward, like is there a way to kind of contextualize that for the broader audience?

Broadly, obviously, the opportunity gets bigger to provide a higher degree of value-added services. But there's some additional themes too, Joe, that I would call out that I think are going to be important endemic factors within the industry. One is just kind of the workforce population demographics within the industry where today the industry is still kind of dominated by baby boomers and, to some degree, Gen Xers, and we are seeing a generational change in the employment base at these power plants that will drive a different skill set, the need for a higher degree of digitization and digital tools. Overall, that typically tend to correlate very, very closely with service offerings. The 2 tend to be very integrated in terms of how you go to market, how you deploy, how you land and expand in these areas. And I think that may be the most interesting and maybe a bit of an overlooked dynamic that we expect to see emerging over the next few years, certainly within our planning horizon. It's an area we're investing in very heavily because we think we can bring some important value-added solutions to the market here.

You mentioned the 2 other areas, so we've been really focused on the kind of near term -- maybe longer-term opportunities with both SMRs and utility-scale new nuc. I guess let's start with utility-scale new nuc. You mentioned that you're in 95% of the facilities worldwide. Historically, China has been like a big new build market. Just talk to us about your position in that specific market and where you see the biggest opportunity across your portfolio on the new build side?

So in the Chinese market, we've been in that market since its inception, so for roughly 30 years. We're in the vast majority of operating Chinese nuclear reactors, continue to be very, very active in new-build activity there. As the Chinese nuclear infrastructure and capabilities build up, we've seen a diminishing wallet share in that market which is -- I think that function is slowing down to a degree, but that continues to be a very important, a very attractive market for us overall. Where we see greater activity, though, today in terms of the immediacy of new build activity right now is principally in Europe, where there is a significant amount of activity. I think you may have seen in our Investor Day that we really highlighted current reactors under construction in Europe, and planned, which number over a 100 in aggregate. And it's very tangible in terms of what activity is happening where, in a scenario where not only are we very well positioned, but we're hyper focused on the development in that region. But it's not just Europe. Beyond that, there's interesting activity in North Africa, in the Arab Gulf region, elsewhere in Asia, most notably right now in the Korean market, and importantly, in India. We announced again this week at our Investor Day, the inking of a strategic deal with ECIL, the Electronic Corporation of India, which is one of the leading instrumentation players in the legacy Indian nuclear industry, but also a key participant as we're looking at future build activity there which we think will be substantial. So different waves in different regions, but fundamentally, the -- we see an expansionary utility-scale, new build pipeline, and it's very tangible.

That's awesome here. Look, you had already highlighted the EDF partnership before. So those 2 partnerships, there -- the way I thought about it is basically an expansion of your existing relationship, but like what does it ultimately mean from a commercial standpoint for your business?

Yes. From a commercial standpoint, this is reflective of the fact that all major companies, including Mirion, by the way, are very focused on trying to consolidate their supply chain, shrink it down to fewer more strategic suppliers where more nuanced supply agreements can be struck. Brian mentioned this, that we've been very actively involved in consolidating our supply base. We see 150 to 300 basis points of margin expansion driven by that. And that's certainly the motivation for our customers. They want to do the same thing. We are one of only 25 suppliers that EDF has named or has struck similar strategic deals with. We've not disclosed the nature of the products that are being sold under this or any of the specifics in and around this. But at its core, what this essentially represents is a sole-source supply agreement for certain types of solutions that we are selling, where we have prenegotiated terms and conditions, the economic dynamics associated with that. And what that allows for is just a much more streamlined, compacted planning horizon when you're building a new power plant and taking it to market. So we're thrilled to have that relationship with EDF. It's a great honor.

It's just worth noting too, Joe, that what we're talking about here, and they've committed to build 6 to 14 new nuclear reactors in the next 20 to 30 years, right? So this isn't hypothetical. I mean, this is stuff that they're active -- very actively working on.

Brian, I'm going to bring you in a minute, but one last thing that I wanted to touch on. You mentioned SMRs, a lot of buzz around SMRs. We just had a company here basically said the opportunity for them is probably 10 years out, right, on SMRs. I thought it was interesting that you guys mentioned at your Investor Day that your content for SMR is actually going to be -- or content per megawatt is going to be higher. Can you just kind of explain that? And then also in terms of how you're seeing this market develop? This is more kind of like 2030 plus for you guys, is the right way to think about it?

Yes. So 2 things. Firstly, in terms of market development, right now the action is in and around first-of-a-kind instances and we've disclosed previously on earnings calls that, in the last 18 months or so, I think we booked about $12 million of backlog on various SMR projects. So the point there is that the activity is tangible. It may not be material at this point, but it continues to accelerate and grow overall on this -- in this particular space. In terms of the revenue opportunity for us, again, at our Investor Day earlier this week, we threw out 2 key metrics that are meant to really just show kind of order of magnitude, understanding that when you're looking at the SMR market, you have vast differences. In some cases, SMRs are simply derated or miniaturized variants of Gen 3 light reactor -- or light water reactors that are just being made smaller. But in other cases, it is fourth-generation, advanced technology that would include things like pebble-bed technology, sodium-moderated or sodium-cooled, high-temperature gas-cooled reactors and the like. So there are vast differences between those. And so what we've done is to just kind of look at a fairly heterogeneous mix of both utility-scale and SMR players and evaluate what's the dynamic for us, what is the revenue opportunity for us overall? And the calculation is that for SMRs on a $1 per megawatt of capacity, it's about 60% greater. For utility-scale, right now, our opportunity is about $25,000 per megawatt of capacity. It's about $40 for an SMR. And that reflects the fact that for certain types of instrumentation, there are some scale diseconomies associated with a smaller output reactor overall. And that more than anything else is the driving factor as it relates to that specific market.

Yes, helpful. Brian, let's bring you in. So you guys gave basically a path for 2025 and long-term targets at your Investor Day earlier this week. Maybe just kind of discuss some of the key tenets to the framework and then also your confidence in delivering against those targets?

Yes. I mean we are -- so I guess we put 2 sets of guidance out earlier this week. So we put long-term guidance out of 6% to 8% organic growth. We think -- from kind of a tenant standpoint, we think Nuclear Power grows high single digits over the next 4 years. We take Nuclear Medicine, which is one of the other businesses we haven't talked about, but we're very excited about, a bit smaller of the portfolio today. We think that grows at high single digits plus. We also talked about a 2% pricing annual number in those numbers. So I think we continue to believe we can get price in this market as well for a lot of the reasons Tom said. I think as you move down the chain, the other thing, I think, that's important for people to realize and think about, because nuclear is a longer-cycle business. Joe, you and I talk about this all the time, like, unfortunately, you don't read it in the paper today and we book an order tomorrow, these things tend to take time to develop. So one of the other core pieces of the long-term guidance we put out there was a 30% EBITDA margin target. And we went into detail about how do we get there. We think 200 to 300 basis points is operating leverage. We think 150 to 300 basis points is procurement. And then we think the remainder piece is really driven by our Mirion business system. And I would tell you that, that business system really encompasses all 3 of those components. But in that last bucket, you're talking about site closures. We've done about 4 of those over the last 4 or 5 years. We have one going on right now. We've exited some unprofitable business lines that we had acquired as part of some of the medical acquisitions we've done. Right answer for us, a bit of a headwind on revenue for us, but still absolutely the right answer. Pricing, some of the centralization we're doing in the digital space to leverage our spend, that is a big deal. And then I think the last one, and I'll hit on it because you're going to ask me about it anyways, is cash flow, right? We've put out that by '26, we think we can flow through 50% of EBITDA in free cash flow, and we put out our '28 number as 60%, right? That margin expansion is a big piece of that. We continue to get productive on the net working capital side, huge piece of that. That doesn't mean we actually have to generate working capital in any given year if you do the math. But what we're seeing, and we talked about this in the third quarter is -- third quarter to third quarter last year, just to prove that we are making progress, we saw a 10-day reduction, right? So we are making progress there. I think we continue to have optionality on the interest expense line. Even without rate cuts, our debt continues to trade above par. There are some other things we can probably do out there from an interest rate standpoint. We've committed to getting rid of the non-ops, right, over the next 4 years. That number has come down dramatically since we've gone public. We are committed to making that go away or absorbing it up into the EBITDA numbers. And then we're doing a lot on taxes. How we became public didn't give us a lot of ability upfront to structure. I think we're spending a lot of time right now on how do we optimize and what are the right things to do. So we're a little bit early in that journey. A long-winded answer, but I think those are the -- as you think about the long-term targets. Just quickly on '25, because we did initiate '25 guidance. We're a quarter earlier than we normally would. We try to make your life easier, Joe.

Thank you.

It's pretty similar, candidly. We gave 5.5% to 7.5% organic growth guidance. We did give 4% to 6% total revenue growth guidance, right? That assumes we're not going to close any more M&A this year. So that has M&A -- anything M&A-wise would be incremental to that. But we are seeing a headwind on the FX side and it's not inconsequential. It's 150 basis points on the top line. And we gave some rough figures so you can size that as we go forward. We talked about margin expansion next year, both at the low and the high end of the range, right? So this is something that isn't back-end loaded, right? We're committing to targets next year that kind of go in line with the targets we've given long term.

Makes sense. And yes, I was going to ask you about free cash flow guidance. And just to contextualize it for everybody, you guys are going to do roughly, call it, $60 million to $70 million or so in free cash flow this year. And the 2028 targets imply something close to $200 million, right? So pretty substantial increase over that time frame.

Absolutely.

You said it's not back-end loaded. You've given us our 2025 numbers. I mean, so beyond '25 is the right way to kind of think about the margin progression is sort of linear in '26, '27? Or just any thoughts around that would be awesome?

Yes. I think it's more linear than it is anything else. And again, operating leverage is our biggest friend. So as we grow being disciplined on our cost base, growing on top of that fixed cost base, is very important to us and is something that Tom and I are super committed to doing.

Can we just talk about the -- we're going to get to the Medical segment too because there is some exciting stuff happening in that segment. But can we just talk about the -- just the order trajectory from here? Fully recognizing that, in the fourth quarter of this year, you've got a super tough comp, I think your orders were up 30% last year, if I recall correctly. But let's -- how do you guys see the orders maybe over the next 12 months, right? And then specifically, there was a one-off with the debooking this past quarter, if you guys can just address that, that would be helpful as well?

Yes. So let's do them reverse quickly. I mean, look, last year, in the third quarter, we booked a $40 million order in Turkey. It was for 4 nuclear power plants. And what's come to our attention is they may have double-awarded 2 of those to another competitor and are basically making us try to compete. We're just -- if there's 2 people with the same order, that's not an order, and we're working on that situation with the client. We also are very confident because of our -- just because of our product portfolio and our history with this customer that we'll be able to get a lot of that back. But we did take it out of backlog in the third quarter. It was the right thing to do. I think on the order pace side, look, I'm not going to commit to orders numbers here. What I would tell you is a couple of things, Joe, that maybe happening underneath. First, we introduced this in the third quarter, we gave a bit more color this week on -- today, as we sit here, we see about a $300 million to $400 million pipeline of larger opportunities. And I would tell you, most of these opportunities are $15 million and above type opportunities. We've also disclosed that about 1/3 of that opportunity is new builds, right? And it's mainly -- it's outside of China and North America, so it's mainly kind of Europe, maybe North Africa, et cetera. And then the other 2/3 is actually with the existing customer base. So I think what's also relevant for people newer to the story is, we do have a bit of a razor-razorblade model. But the good news for our razor is we make money on the razor, we don't lose money. And we make good money, right? We make better than 30% kind of EBITDA margins on that razor. But that existing customer base obviously comes with higher margins. I think the other thing we're seeing on the order front is really on a cycle time front is, we're able to process more orders faster now. So our order to delivery times are starting to shrink with all the factory work we're doing, specifically in the Nuclear & Safety business. The Medical business has always been a little bit of a faster churn. I think we like the order dynamics we're seeing. They're not always even, right? Europe can be better in some quarters than North America and vice versa, but we like what we're seeing from a pipeline standpoint. And maybe lastly, just to comment on that, one of the things Tom did in the second -- third quarter, we put in a new Chief Revenue Officer, right? And this is -- I think this is going to be more important than maybe people realize. And I think we're already starting to see it. Just the amount of structure that's now being put into the sales team, relooking at compensation plans, rethinking how we're doing things, I think it's going to be immensely important, especially for that flow business, which is the engine of the company.

Makes a ton of sense. Tom, I want to come back to you, did a great job of just explaining your -- the Nuclear business. Maybe just touch on the Medical business as well?

Sure. Yes. So Medical business, again, about 1/3 of our total revenue. Three primary segments within this. The largest today is quality assurance solutions in the radiation therapy market. So here think external beam therapy today in a western market, a newly diagnosed cancer patient, has a greater than 50% probability of being prescribed external beam therapy or radiation therapy as a component of their overall treatment protocol. Interesting market and that it's -- the growth here is really driven by a combination of an aging population demographic in Western markets, but also the fact that, today, if Western standards of care are applied globally, the world today only has about half of the radiation therapy clinics that it needs. We have the leading workflow software platform in this market. We are the #1 player in independent capital equipment used to calibrate and facilitate the delivery of this treatment to patients, noting that clinicians dramatically prefer independent QA solutions to make sure that these machines are delivering a dose of beam, if you will, that is on spec in terms of geometry and energy. I'd also note here that we announced a strategic deal that we struck earlier this year with Siemens Healthineers. Siemens Healthineers is the dominant player by a wide margin in the LINAC market, the linear accelerator market, which is the primary delivery mechanism for the -- so feel similar dynamics to those that we talked about, the Westinghouse. Secondly, we have nuclear medicine, which is one of the most exciting markets that we play in today. Today nuclear medicine is undergoing a revolution from its historical routes, it's kind of a sleepy diagnostic market [indiscernible] today where drug-makers have figured out how to combine therapeutic radioisotopes, so much higher energy than diagnostic tracers, to combine those with linkers, typically referred to as ligands that will bind to a specific antigen or a specific protein on a cancer cell, and allow that radioactive packet to be delivered intracellularly to essentially destroy that cancer cell DNA from within. It is an incredibly exciting market right now. Today if you were to look at the FDA approval pipeline, there are more than 100 so-called theranostic drugs, both diagnostic and therapeutic, focused on this market in all major classes of cancer. Today this -- while it's a relatively young market, the 2 leading drugs in this market would include Pylarify, a Lantheus diagnostic drug, and Pluvicto which is a Novartis therapeutic drug, both of which are focused on the prostate cancer market. In their first 2 years, each of these became billion-dollar drugs. And so this is a market where people expect to see significant revenue growth. I think GE, when they bought a small software company called MIM expressed the view that it grows from a $5 billion market to a $40 billion market within a 4-year period overall. Many would share that view. But our play here is that, again, we have a leading software position where we have the leading software -- data management software platform in North America that really connects all of the major players in this space: the drug makers, the isotope producers, the contract manufacturers, the pharmacies and the clinicians. But we're also the global leader in instruments like dose calibration instruments, other clinical instruments like thyroid uptake systems, but also kind of balance of clinic things that would be common form factors to what we make in the nuclear power industry. We expect to continue to broaden our position in this value chain. Very, very exciting market for us overall. We expect it to revolutionize cancer care. Lastly, we are a significant player in the occupational dosimetry market. Think of that really as a market where we're providing an outsourced service to the employers of radiation workers, most of whom are medical to really monitor the cumulative dose incurred by their workers which is required by regulation. Here we're excited by the fact that we are the leader in digitizing this industry globally, which historically has been very analog in nature.

That's super helpful. Radiopharma is a market that, honestly, I'm still getting to know well but from what I gathered, like there's a lot of opportunity, particularly on the therapeutic side of the equation. As you think about you being maybe a little bit more front-footed from an M&A perspective, like what are some adjacencies or ways that you can create additional share of wallet in this market?

Yes. I mean, conceptually think about our ecosystem as being centered on our software platform, again, this data management software platform, which we believe we can take internationally today. It's principally a U.S. marketed platform. We obviously have incredible distribution -- commercial distribution capabilities in Mirion Medical in Europe, in Asia, in other markets overall. But secondly, we hope to augment it in ways that make it clinically higher value-added, but also in terms of things like radionuclidic purity, which is important for isotope producers overall. So we think we can improve not only the footprint, but the capabilities of the software platform, improve the UX and do a number of other things that make it stickier and more compelling and, ultimately, give us kind of a land-and-expand dynamic in that place. This, in turn, will give us the ability to evolve our business model as it relates to capital equipment sales, perhaps opening the door to a bit more power by the hour, a bit more flow revenue for the capital equipment both in terms of nuclear medicine instrumentation as well as kind of balance of clinic radiation monitoring solutions overall. So this is how we build out that position in the value chain. Ultimately, as we continue to drive the evolution of our software platform, we believe we'll have some unique insights in terms of clinical efficacy, yield and a whole host of other important metrics relating to the drugs that flow through this network that we may be able to anonymize and monetize down the road. And we view that as really kind of the ultimate prize here in this market.

Exciting times for the company. Tom, anything -- any closing remarks that you'd like to leave us with?

I guess the biggest closing remark would be just noting that we've been a public company now for about 3 years. We've worked very, very hard to build name recognition, get our name out there, and really begin to earn a multiple that I think is reflective of where our peers trade. And given, again, the underpinning dynamics in our business, the fact that -- I've been doing this for 21 years, never had anything but headwinds, we have tailwinds today, we're really excited about where we can take the company and how we can really kind of prove out again that we are a category of one. And it's really an interesting space, and we'd love to spend more time with many of the investors here today to really tell that story.

Excited for you guys. Thanks for spending some time with us today.

Joe, thank you.

Thanks, Joe.