Mirion Technologies, Inc. (NYSE:MIR) Q4 2023 Earnings Call Transcript

Mirion Technologies, Inc. (NYSE:MIR) Q4 2023 Earnings Call Transcript February 14, 2024

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Operator: Greetings and welcome to Mirion Technologies Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Gaddy, Senior Vice President, Strategy and Investor Relations. Thank you, Mr. Gaddy. You may begin.

Alex Gaddy: Good morning, everyone, and thank you for joining Mirion’s Fourth Quarter and Full Year 2023 Earnings Call. A reminder that comments made during this presentation will include forward-looking statements and actual results may differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ are discussed in our Annual Report on Form 10-K and quarterly reports on Form 10-Q that we file from time to time with the SEC under the caption Risk Factors and in Mirion’s other filings with the SEC. Quarterly references within today’s discussion are related to the fourth quarter ended December 31st, 2023. 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.mirion.com. Joining me on the call today are Tom Logan, Chief Executive Officer; and Brian Schopfer, Chief Financial Officer. Now, I will turn it over to our CEO, Tom Logan. Tom?

Thomas Logan: Thank you, Alex, and good morning, everyone. Thank you all for dialing in today and for your continued support of Mirion. To kick off my commentary today, first I’d like to congratulate and thank my Mirion colleagues for helping to put together a great 2023. We delivered a record year for the company and I’m proud of the progress we’ve made as a team while continuing to build a great business. Looking at the fourth quarter and the full year, there are a few things I’d like to start with. First, we closed out 2023 with record backlog generated by fourth quarter organic order growth of 30%. This is our sixth consecutive quarter backlog expansion, reflecting growth of 15% compared to year-end 2022. Our vertical markets are healthy and I’m encouraged by our top line coverage heading into 2024.

Second, we delivered organic revenue growth of 5% in Q4, yielding $801 million of total company revenue for the year. The Medical segment led the way with organic growth just under 10%. Adjusted EBITDA in the quarter was a record $61 million, contributing to a full year result of a record $181 million. Third, we generated $62 million of adjusted free cash flow in the fourth quarter, resulting in net leverage finishing the year at 3.0 times EBITDA beating expectations. I’m extremely proud of the team’s execution against the cash and leverage targets we laid out early in 2023. And this performance bolsters our confidence and sustained momentum in this area in 2024. Finally, we’ve initiated financial guidance for 2024. For the full year, we are expecting organic revenue growth of 4% to 6%, adjusted EBITDA of $193 million to $203 million, and adjusted free cash flow of $65 million to $85 million.

Moving on to panel four, I’d like to address 2023 orders performance and our end market conditions in greater detail. Beginning with the Medical segment and specifically our Radiation Therapy business, we remain encouraged by the positive momentum we’ve generated in the European market by bolstering our sales and support capabilities in the region. In the US, our sales reps have reported some nominal improvements in overall market conditions, reversing some of the negative trends we saw through much of ’22 and ’23, triggered by widespread post-pandemic financial pressures in the US healthcare system. Our digital and new product portfolios remain key areas of focus for growth and we expect a strong 2024 in radiation therapy. Within Occupational Dosimetry, the business remains well-positioned as we commercialize the next generation of Instadose technology this year.

Core services and hardware demand remain well supported heading into the New Year. Lastly, recent trends in the Nuclear Medicine market continue to support our belief that this segment will be a strong growth engine for us. Early results from the ec2 acquisition are encouraging and the integration is proceeding on pace. Our early experience confirms the view that ec2 will meaningfully improve Mirion’s position to meet the growing demand stemming from theranostic applications for cancer care. This revolution in nuclear medicine is enhancing the ability for physicians to more accurately image, diagnose and treat cancer, yielding improved patient outcomes and reduced treatment costs. ec2 accelerates our commitment to digitizing the medical portfolio, supporting higher levels of recurring revenue and expansion into adjacent niches within the nuclear medicine value chain.

As a final note, our medical exposure, inclusive of technologies products being sold into medical channels now constitutes 38% of total company revenue and 44% of total company EBITDA. Moving on to the Technologies segment and beginning with nuclear power. 2023 order growth was extremely robust, supported by the large orders we reported in Q3. The installed base remains a strong driver and an important focal point of sustained and defensible growth for Mirion going forward. We are encouraged by the global pipeline of new build opportunities and expect to take advantage of the growing and accelerated commitment to utility-scale nuclear power. Popular and political support continues to improve and we’ve seen governments across the globe declare nuclear power as a green energy source.

Something we strongly believe in and support. This is perhaps best exemplified by the commitment made at the UN COP28 Climate Change Conference to triple net nuclear operating capacity by the year 2050. Notwithstanding the extraordinary magnitude of this goal, this commitment underscores the positive overall momentum we are seeing across the globe. Moving on to the labs and research end markets, the dynamics are constructive. More than 60% of our business in this segment is driven by DOE funding, where we anticipate continued support. Workforce retention dynamics are tight within the national lab system, creating an opportunity for us to sell more value-added services. We are seeing favorable growth in Asia, new big science projects and an increased opportunity in crossover radiopharmaceutical capital equipment.

In defense, momentum is supported by the booking of approximately $20 million in non-traditional defense orders in Europe in 2023. And in addition, we see a strong pipeline for the global military and defense markets in 2024. Before I pass the mic over to Brian, there are a few areas of focus that I’d like to highlight for 2024. First, we expect to release more than 40 new product introductions and enhancements this year. That represents a substantial increase over the 10 new product launches we saw in 2023. This reflects our commitment to be the innovation leader in our space with an increasingly digital flavor. Second, as we exit a year of solid financial performance, we’re keeping the pedal down, focusing on margin expansion and enhanced free cash flow conversion.

As we’ve said in the past, our five-year goal is for 30% adjusted EBITDA margins for the enterprise. We are increasingly confident in our ability to deliver upon that goal within our planning horizon and expect to take a meaningful step forward in 2024. Finally, we are committed to capital efficiency coupled with smart, opportunistic M&A. The M&A pipeline is robust and we will continue to evaluate opportunities on a highly selective basis. 2023 was a big step forward where we continue to be active in M&A while reducing leverage from 4.4 times at the start of the year to 3.0 times at the end of 2023. With that, I’ll now pass the call over to our Chief Financial Officer, Brian Schopfer. Brian?

Brian Schopfer: Thanks, Tom, and good morning, everyone. To get my comments started, please turn your focus to slide five for a deeper look at our fourth quarter and full year results. For the fourth quarter, total company revenue grew by 5.7% and adjusted EBITDA was up 8.2% compared to the same period last year. Fourth quarter revenue was $230.4 million and organic growth was 5.3%. Adjusted EBITDA for the fourth quarter was $61 million and adjusted EBITDA margins expanded by 60 basis points. It is worth noting that we were comping a 19% organic growth quarter from Q4, 2022. For the full year, total company revenue was up 11.6% and adjusted EBITDA grew 9.7%. 2023 revenue was $800.9 million and organic growth was 9.3%. We delivered $180.7 million of adjusted EBITDA for 2023 with margins of 22.6%.

As we’ve talked about all year, the net impact of acquiring SIS and divesting Biodex impacted margins by approximately 70 basis points. Moving along to take a closer look at segment performance. Starting with medical on slide six. Beginning with fourth quarter results, Medical revenue grew 6.8% with organic growth of 9.6% and a net inorganic revenue impact of 3.2% from the Biodex divestiture. This was slightly offset by the ec2 acquisition we closed in November. The RTQA business led the segment in Q4 on the back of continued strong international sales momentum through our European sales and service center. This business was comping 24% organic growth from Q4, 2022. Medical adjusted EBITDA margin performance was excellent in the fourth quarter, expanding by over 500 basis points to 38.5%.

Performance was supported by strong operating leverage, product mix and solid execution across the segment in addition to positive benefits from the Biodex divestiture and the ec2 acquisition, which were both accretive to margins. As a reminder, Q1, 2024 will be the last quarter of a benefit from exiting the Biodex rehabilitation business. For the full year, Medical revenue was up 4.7% with organic growth of 8.1% being partially offset by the Biodex divestiture. Our RTQA and phantoms businesses were the strongest performers in the year. This brings our two-year stacked organic growth in the segment to over 23% in the medical, 23%. Medical adjusted EBITDA margins expanded 220 basis points to 34.2%. The Biodex divestiture was a positive tailwind for margins, delivering approximately 150 basis points of support for the full year.

The Medical team executed well across the board and we certainly look forward to carrying this momentum into 2024. Now, moving along to the Technologies segment on slide quarter. For the fourth quarter, Technologies revenue grew by 5.1% with organic growth of 3% for the quarter. Our International business in France and Asia, mainly Korea, led the way. This is a strong result after an outstanding fourth quarter last year, where the team had delivered approximately 17% organic growth. Technologies adjusted EBITDA margin contracted by 70 basis points versus the fourth quarter last year to 29.5%. Margin degradation was driven again by our French business, which experienced a number of challenges in the fourth quarter, including product mix headwinds and a broader operational challenges.

I will get into more detail here shortly on the corrective actions we’ve put in place. For the full year, Technologies revenue grew by 15.8%. Organic growth contributed 10.1% with inorganic growth adding 4.6%. Growth was supported by broad-based top line strength across the segment. As Tom noted, we continue to see robust order activities within our Technology end markets. Our full year adjusted EBITDA margin in Technologies contracted by 160 basis points to 26.2%. The SIS acquisition negatively impacted adjusted EBITDA margins by approximately 120 basis points. As we turn the page to 2024, Technologies margin expansion is a central area of focus for us, with the largest areas of opportunity being in our French business and advancing the integration of the SIS acquisition.

Tom and I have been working with the team in Europe and diving deeply into how we are going to significantly improve operational execution in the region in 2024. We’ve already taken corrective actions and believe we have the right people and plans in place to deliver targeted improvements. However, I recognize this is a journey that will take time, but I do expect to see improvement in the first half of the year. Tom and I will be spending more time with the team to ensure execution and monitor progress. Now, let’s turn the page to slide eight for cash flow and leverage. Fourth quarter adjusted free cash flow was $61.5 million, bringing full year adjusted free cash flow to $73.8 million. Net working capital generated approximately $27 million of cash in the quarter and resulted in a positive contribution to cash flow for the full year.

This result is another great step in the journey and supports our momentum heading into 2024. Networking capital management, specifically inventory, will continue to be an area of focus for us as we aim to improve inventory efficiency, management of payables and accelerated collections. Looking at our progression against our leverage commitment, we executed well and brought our net leverage ratio down to 3.0 times as of December 31st. Beating our target for the year. As Tom mentioned, we will continue to take a very measured approach to capital allocation and prioritize driving margin expansion and cash flow conversion in 2024. Absent M&A and at the midpoint of guidance would result in ending that leverage of approximately 2.5 times by the end of 2024.

As usual, our M&A strategy will reflect a highly selective filtering and evaluation process with clear investment criteria aligned to our strategy and vision. Finally, let’s turn over to slide nine, to look at our financial guidance for 2024. We are projecting organic growth of 4% to 6%, supported by mid-single organic growth from both segments. Revenue growth is expected to be 5% to 7% with FX expected to have minimal impact in the ec2 acquisition projected to provide one point of inorganic top line growth. I am anticipating a more balanced quarterly phasing for the year from an organic growth standpoint. Our adjusted EBITDA range for 2024 is targeted between $193 million and $203 million with margins between 23% and 24%. Price-cost initiatives, inclusive of a heavier focus on material and indirect spend, higher volumes and product mix, are all anticipated to be positive drivers for adjusted EBITDA margin expansion.

It is worth noting that our guidance also includes an increased investment to improve our effective tax rate. We expect these investments will provide some benefit in 2024 with continued investment and progress also expected in 2025. We will update you in the coming quarters as progress is made and we have more color to provide on impact and timing expectations. Adjusted EPS is expected between $0.37 and $0.42 while we project adjusted free cash flow in the range of $65 million to $85 million. From a cash flow perspective, 2024 will likely mirror 2023’s cadence with more contribution in the second half. However, unlike 2023, we are expecting to be cash flow positive in the first half of the year. Other modeling considerations for 2024 include approximately $200 million Class A shares outstanding, an effective tax rate between 26% and 28%, non-ops cash expense of approximately $9 million mainly made up of IT initiatives around ERP, and a us dollar to euro exchange rate of 1.08.

In closing, we had a really solid year in 2023 and certainly a strong finish in the fourth quarter. For ’24, we will be highly focused on delivering margin expansion, leveraging positive momentum in cash flow conversion and continuing to be good stewards of capital With that, I’ll pass things back to Tom for his closing remarks.

Thomas Logan: Brian, thanks. Before we open up the floor for your questions, a couple of key themes are worth repeating as we think about 2024. First, our top line growth is visible, supported by robust order growth, healthy markets and a record backlog. Second, the team is aligned and focused on our top strategic priorities, which include driving margin expansion, improving cash flow conversion, accelerating digitization efforts and enhancing our diverse portfolio of products, services and software. Finally, we have confidence in our 2024 guidance initiated today. 2023 was a good year and we are building on that momentum in every corner of the enterprise. I’ll now pass it over to Alex Gaddy to open things up for Q&A.

Alex Gaddy: Thank you, Tom. That concludes our formal comments this morning. Operator, let’s please go ahead and start the Q&A session.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Joe Ritchie with Goldman Sachs Asset Management. Please go ahead.

Joe Ritchie: Thanks. Good morning, guys, and nice end to the year.

Brian Schopfer: Thanks, Joe.

Thomas Logan: Morning, Joe.

Joe Ritchie: Hey, Tom, I think I’d like to start on the new product introductions. That’s really interesting, increasing that fourfold in the coming year. I’d love to hear your thoughts on how you think about payback associated with those new products and ultimately how that translates into better revenue growth for the company going forward.

Thomas Logan: Sure. Great question, Joe. The starting point is that you know a comment that we’ve made with some frequency historically is that we pride ourselves on being what we believe to be the innovation leader in our space. In aggregate, our view is that we spend more money on engineering, broadly speaking, R&D specifically, than the people we compete against and ultimately the measure of that is the cadence of new product offerings that we’re putting out into the marketplace overall. The screening process that we follow as it relates to innovation is really a foundational component of our business system and effectively follows a broader capital allocation process where we do deep dives annually on market segments that are of great interest to us.

That in turn drives the relative R&D commitment allocated to various corners of the business and that ultimately is what results in new product offerings. Our expectation, generally speaking, when you look at the flavor of what is being introduced, the nature of our focus is that we’re in the midst of a gradual but systematic digital conversion within our business. And of course, the hope for result there is that we see a concurrent change in revenue composition that’s driving us more toward a higher degree, a higher component of predictable, visible, recurring revenue versus one-off capital equipment sales overall. So that is the biggest impact overall. But to be clear, innovation is one of the major factors that historically, over the last two decades, has allowed us to outgrow our markets.

Joe Ritchie: Got it. That’s super helpful. And maybe the follow-up to that. Is it concentrated then more in like the Medical or Technologies segment, or are the bets pretty well spread throughout?

Thomas Logan: No, it is actually remarkably symmetrical across the operating groups and again, just kind of reflective of the key priorities that you’ve heard us articulate over the years.

Joe Ritchie: Okay. Makes a lot of sense. Can you guys maybe elaborate on what’s happening in France and within SIS? And you referenced that you feel confident about being able to get the margins back. You mentioned that it impacted your margins by about 120 basis points for the entire year. So just any color around like the margin expansion opportunity within Technologies, particularly associated with the issues that you’re currently dealing with.

Thomas Logan: Sure. Yeah, Joe. So I don’t think we want to go too deeply down that hole. But what I will say is that it’s a combination of factors. One is there’s a bit of mix in there. And understand that in the French market in particular, as the dominant customer in country, EDF has gone through struggles that has had some attendant impact on some of our execution capabilities and just predictability of that business. But we do see that improving and we see it improving, I think, measurably in the year ahead. In addition, there have been a series of kind of one-off events that are non-recurring in nature that we don’t expect to have any bearing on our corrective action pathways as we move ahead. But maybe the most important point and I think Brain articulated this well, we’ve been very actively and directly involved in the region.

We’ve made some organizational changes supporting our near-term objectives and a number of process changes. We believe we have the right people and the right approach to get this thing back on the rails. Very, very confident that we’re going to do that in 2024.

Brian Schopfer: I think on SIS, a couple of things, right? One, that margin contraction on our end was planned, right, because we comped seven months without having it. And when we bought this business, we knew it was a little bit of a fixer-upper that we needed to do. I think we made tremendous kind of quarter-on-quarter progress all year in that business. And I think you’ll continue to see that be a little bit of a tailwind for us in ’24 on the margin expansion side.

Joe Ritchie: Great. One more question before I pass it on to somebody else. I have to ask about orders. It was a great year for you guys, over 20% growth in orders. Another really robust. Last quarter, you guys gave us some good color just around the two big orders that you booked. I’m curious, two things. Number one, just more color around what you saw in your business in the fourth quarter. And then ultimately, how does that ultimately translate into revenue growth, right? Because you put up over 20% order growth, but expectation for mid-single-digit growth this year organically. So just any color around either the longer cycle nature of some of the orders that you’re booking.

Brian Schopfer: Sure. A couple of things, right? First off, we did book another larger nuclear power order, about $20 million in the quarter into Asia, mainly Korea. So there’s that. I think the thing to think about here is this year was specifically a nuclear power candidly, just a very good year. And I think we’ve commented that we don’t think this is a completely one-time event. We think we’ll continue to see good momentum in this business. But if you look at our nuclear power orders this year, right, about a third of those orders traded in ’23, about a third of them trade in ’24, and about a third of them trade kind of ’24 and beyond, right? Those are a little bit round numbers. But the point is it is longer cycle in nature. And I think it just continues to secure kind of the longer-term visibility of our revenue out beyond just the next couple of quarters.