Mirion Technologies, Inc. (MIR) Earnings Call Transcript
May 9, 2023
Earnings Call Speaker Segments
Hello, everyone. Yes. So I'm really excited to have CEO of Mirion Technologies and the CFO, Thomas Logan and Brian Schopfer here with us. Before we get started, I'm sure you all saw the disclosure statement, and I'm sure you've already been -- read to -- already saw [ last ] time. But just sort of kicking off, Brian, thank you so much for being here.
Yes. Could you just -- sort of just give us a high-level overview about the company? I'm sure…
Of course.
Plenty of investors are still new to the name.
Yes, certainly. So my name is Tom Logan. I am the founding CEO of Mirion. So this is my 20th year with the company and pleased to be here this morning to tell you about it. I will note that we put together a PowerPoint deck that you can reference. I'm not going to go through it today, but I think it's a good leave behind to look at some of the elements of the business, the markets that we play in and how you might want to think about it as investors overall. But to give you what is probably going to be a long-ish elevator pitch, I'll begin by telling you that we describe ourselves as being the global leader in ionizing detection, measurement and analysis. That sounds very arcane out of the chute to begin with. Let me parse that a little bit. Firstly, when we talk about ionizing radiation, we're talking about radiation that can knock an electron out of its orbit or cause tissue damage in human beings. We're talking about alpha, beta, gamma X-ray and neutron radiation. We're not talking about microwaves or anything else on the electromagnetic spectrum. The focus that we have commercially is on 2 key sectors. One is what we have historically called our industrial business, which we recently renamed technologies, which focuses on commercial nuclear power, defense, life sciences and other industrial applications. And our other segment is medical which focuses on cancer care, nuclear medical applications and practitioner care. Now the key to our business overall, the way to -- I would encourage you to think about it is that we are the dominant player in our chosen field. So today, we're roughly an $800 million business operating within a $4 billion currently served market, which in turn lies within a total addressable market that's more in the range of $18 billion to $20 billion. So it's a vast market. But we are the leader in our chosen field. Our 3 largest competitors would include Thermo Fisher, AMETEK and Fortive, 3 great companies, great industrial technology names overall. But in each instance, we are substantially larger on a like-for-like basis. And extending even further, if you were to look at our category leadership position, today we are the global leader in 15 of our 18 product categories, meaning we are the global #1. The history of our company is one of effectively being a compounder. We've been private equity owned for the vast majority of our history again. I've been enrolled since founding the company beginning in late 2003. We took the company public via SPAC in October of 2021. But throughout that private equity history, we generated substantial returns for our shareholders and enjoyed a spirited top line growth CAGR of about 12 points for organic, 8 inorganic in a period of time where that was compared to -- very favorably to best-in-breed industrial tech companies. Our view is that there's an opportunity for us to continue our journey, continue to scale the business substantially within our chosen markets and while doing so to drive margin expansion, improve velocity of capital employed and ultimately create a company of substantially larger scale, but doing so in a fashion that is strategically coherent. Final thing that I will note is that -- touching on that strategic coherence point. The unifying theme that cuts across our reporting segments really drives our business technologically, commercially and administratively, again, as this domain focuses on ionizing radiation. Today, we are the global leader in scientific applications, noting that our products have been deployed on a majority of interplanetary space probes. Even just 2 weeks ago we launched detectors on the European Space Agency JUICE mission, where our detectors will be serving the magnetosphere of Jupiter and it's key [ moves ]. But more broadly, our detectors confirm the presence of water on Mars. We're on the international space station. We were on the Artemis launch a few months ago, et cetera. Our products have been used broadly in the deep science community involved in the discovery of the last 9 elements on the periodic table, very involved in the quest for a deeper understanding of dark matter and fundamentally, the origins of the universe. The -- those are fun talking points, but importantly, the learnings that we develop in terms of material science, signal chain management and other factors in those leading agile applications has immediate relevance to the work that we do in our 2 reporting segments and the key product categories that we have. And so this is what feeds the ecosystem. And ultimately, as we continue to gain scale, we'll generate more and more of a flywheel [ fix ]. So that's a high-level view of who we are, how we think about our company and why we're excited about the future.
Yes. I mean, there's a lot of jumping off points. But I guess just -- I want to first start off with -- 2022 was a really tough year. A lot of different idiosyncratic events that no one could have predicted. So just in your view, like what are the sort of the key takeaways, key lessons that you've learned recognizing you're still very early stages in being a public company?
Yes. So, 2022 was our first year as a public company. Again, we became public in October of 2021. And it was a tough year. And it was a combination of factors, [ Con ], as you noted. Firstly, simply being a new public company, absorbing the significance of the incremental public company costs, which for us created a margin hit of about 170 basis points overall, as we've scaled up to deal with all of the related compliance issues, becoming comfortable with the cadence of managing the tyranny of quarterly earnings and all that goes with it in terms of investor outreach, and essentially just kind of completing that rookie lab as a public company. Obviously, substantial learnings there in terms of how we position our company, how we guide our views in the marketplace overall. But the -- arguably the more significant challenge is not just for us but for many industrial players last year with the macro factor that everybody in the world had to deal with supply chain issues, tight labor markets, a spike in inflation, the devolution of global trading relationships. But 2 things in particular created headwinds for us last year. One was the impact of the conflict in Ukraine where historically, we have been involved in Russian nuclear power projects outside of Russia. And last year, we had a significant project in Finland called the [ Honey Kevie ] project that was canceled as a result of the conflict in Ukraine, and that was a significant hit to us in terms of just the ratable growth profile of the business. This was a business that essentially was in backlog that we had anticipated metering out throughout the course of the year, and it was attractive in terms of margin profile, run rate et cetera. So that went away. And then on top of that, with the significant break in foreign exchange trading rates, noting that we are fairly naturally hedged as a company, but at the margin, we do favor a stronger euro. And given the fact that dollar-euro broke through parity at its lowest point last year, that hit us in a disproportionate fashion overall. Between the 2 of those factors, between Russia and FX, we lost about 8 to 9 points of top line growth that just went away, and it went away fairly [ abruptly ]. We remain confident for much of the year that given the very significant defense business that we have, where we have a proud history of being a supplier to 18 or 19 of the NATO armed forces, we are arguably one of the most capable of suppliers to the civil defense community in the wake of a nuclear incident where, if we were to pro forma back our current construct to Fukushima, as an example, over a 2-year period we saw an episodic spike of about $150 million in extraordinary revenue associated with our activities in that specific incident to shore up the sanctity of the food supply, provide environmental protection, monitor the safety and health of impacted individuals through in vivo applications, et cetera. And the point of all of that is that you can imagine that we've had very high level of engagement, both as it relates to military and civil defense applications because of the acute nature of the situation in Ukraine and felt that for much of the year that this would translate into overperformance in our Defense segment, which ultimately we continue to have a very bullish outlook on. But we didn't quite see the pickup there that we expected last year. And so all of these things kind of conspired to make it a challenging first year as a public company. But to be clear, we learned a lot about it. We came out of the year stronger. Obviously, we saw a substantial change, not only in performance, but share price performance over Q4, and that's the momentum that we hope to carry into the future.
And just taking that as a jumping off point. I know we've discussed a few times just the value creation framework for Mirion. You just got a significant equity investment as well. You have a stated target of deleveraging to 3.1, even -- perhaps even better than that?
Correct.
Could you help frame what that opportunity looks like? And then what's the -- sort of reenergizing the value creation?
Yes. So for us, the historic value creation of our business has been a combination of strong organic performance and -- but also acquisitive growth. Again, at the time of the pipe raise when we were preparing to go public, we were talking about a 15-year growth rate of about 12 points for organic, 8 inorganic in a period of time where that was best-in-breed in terms of industrial technology peers. A very, very difficult macroenvironment for much of that history, much of that period of time. But on top of that, we've been a very acquisitive firm. Over the last 6 years, I believe, we've done 16 acquisitions and I think they've been well struck both in terms of point of entry, but also in terms of how we have been very quick to monetize synergies overall with those newly acquired businesses. This is an important part of our story. It always has been candidly. But one of the big adjustments to becoming a public company is the impact of leverage. For most of our history, we've operated with 6x leverage, which because of our high free cash flow conversion has always been very comfortable for us. But we understand well that ultimately, the public markets would like us to be somewhere in the 2 to 3x leverage range and anything above that starts to become increasingly uncomfortable. This obviously was a significant motivation and taking the direct primary investment from T. Rowe Price, which brought our leverage down to where it is today at 3.6x. But we understand that we need to demonstrate the deleveraging capability of the company, and we're very focused on doing that, and as you noted, getting leverage down to 3.1 or below by the end of the year. Longer term, our view is that there is a very comfortable pocket for us to operate within -- in the near to intermediate term to -- through a combination of organic growth with a focus on margin expansion and again, higher capital velocity in general, plus a focus on what's likely to be smaller bolt-on deals that are generally lower risk, generally lower cost and faster to integrate overall. Our view is that there is a very attractive opportunity for us to focus there and to really demonstrate our capabilities as a compounder. And that as we do that over a sustained period of time, I think we will earn the right to over time do larger deals. But for the near term, that's certainly our principal area of focus.
And then just sort of on that path. Yes. So just on that, I know in the most recent quarter, within the Technology segment that you had discussed about the SIS acquisition. Could you sort of elaborate what that -- what the expectation is on the integration for that and what the synergies are?
Yes. So SIS is the deal that we acquired about 1 year ago, a very attractive deal for us where we acquired the critical infrastructure business from Collins Aerospace. And what that represents for us is an opportunity to essentially take the position of this business, which is -- they are the leading provider of security software platform for nuclear power installations in the U.S. That technological backbone gives us the ability to essentially use that as a foundation, a platform to replace about a dozen different supervisory software applications that we have supporting different product elements today to integrate those into a more unified ecosystem, if you will. It also gives us the ability to take that platform internationally where we have great strength and to take it more deeply into other relevant market segments like the Department of Energy, potentially the DoD, where they don't exist today. This was an asset that was -- I would characterize it as a bit of an orphan asset, kind of an island of misfit toys asset within the mix of a larger business that was tremendously attractive to us overall and gives us the opportunity to unleash value. But the integration story is one of, firstly, integrating the infrastructure of the 2 businesses, focusing on the margin profile and just kind of the core operating cadence of the business. And our view is that we're making significant progress there overall. But while we are doing that, to be really mapping out the strategic vision that will drive the evolution of this digital platform within our business. It's not unusual when we are buying an asset that is a bit of a turnaround or a redirect to see margin compression in the wake of the immediate integration campaign. As an example, we bought a company a few years ago called Biodex that -- $40 million business in the nuclear medicine space operating at breakeven. In a period of about 2 years from a run rate standpoint, we got that business up to being neutral to positive in terms of run rate impact on overall EBITDA margins. But it is a journey, and it's not something that happens with the flick of a switch in year 1. And so this year, we're seeing a little bit of that -- the margin -- the dilutive margin impact in the Technology segment because of SIS, but we expect that over time that will abate and abate probably fairly quickly.
I would also say on that deal, we're holding on to a bit more cost because of the software and technology aspect that we think has broader appeal to us in the rest of our industrial business. So I think some of this is intentional where we're making an investment that we think in the medium term or long term candidly will pay off.
I know we haven't talked as much about this yet, but 2023 guidance. Just at a -- in your framework -- I mean it seems very reasonable. How are you thinking about what needs to be done and sort of what needs to happen in order for you at the higher end of that range?
Yes. I mean, listen, I'll refer you back to a couple of weeks ago, right, where we reaffirmed guidance at that point. 2023 for us is about execution and that's candidly what we're focused on. And that's what matters. It's all about operational execution, orders, revenue and then driving EBITDA. And that's what -- and the cash flow. And we're very focused on the cash flow piece of this, and we're very focused on the execution for the year.
Yes. Just kind of I can -- if I can add to that a little bit. I think many people who have been following the company understand that the last year to add even an additional level of stress to the company overall, but my life specifically -- for much of last year, I ran our medical group and I ran one of the key businesses inside that medical group, which was our radiation therapy QA business. And over the -- and I did this in addition to my primary job as CEO of the company. That resulted in a massive change to the operating model, a wholesale rebranding of our medical group. And with that, as you have seen in the numbers, significant momentum last year and carrying into this year. Now that is behind me. We brought in an incredible executive to run the medical group, Mike Rossi. And with that first year being public behind us, it gives me the ability to spend a considerable amount of incremental time on our industrial segment. And many of you may have seen that we announced a rebranding of our industrial group, and Mirion, overall, last week, accompanied with the unveiling of Gen 4, Mirion 4.0 on our website, which is not merely a veneer Potemkin Village. It is a substantial upgrade to the infrastructure of our web capabilities, which will have real and we believe, immediate impacts on customer engagement and ultimately conversion of lead generation that's coming in through this platform and other digital gateways overall. And so when we talk about execution, part of the story is that, again, we have more time now to focus on running the business. And there is a direct relationship between that and the ultimate performance that we see. To Brian's point, we reaffirmed guidance in our earnings call last week. We feel good about where we sit. And again, the focus is clear. We know what we need to do.
I'll open it up to the audience after this -- asking this one. You're one of the few companies who continue to see positive orders. Would love to just sort of hear a little bit more about where you're seeing that across both the Technologies and the Medical business.
Yes. What's interesting is that if you look at our history -- and again, this isn't a long-term history, this is a 2-decade history. We've proven to be a fairly [ acyclical ] company. In fact, historically, some of our strongest periods of organic growth came during contractionary period, most notably the so-called great recession beginning in '07 and lasting for a number of years. The reason behind that is that if you look at the demand drivers in our vertical markets, they tend to be acyclical demand drivers. Just to provide some specifics. If you're to look at our 2 largest vertical markets, nuclear power and health care, in the case of nuclear power, what really drives the health of the nuclear power industry is the price of natural gas and political support. Those -- if those are both favorable for the industry in general, it will perform. And if you look at where those factors lie today, they're arguably in the most favorable zone that certainly I've seen in the last 20 years. But probably, if you look at the profitability of the operators of nuclear power plants, they're doing better than they have probably since the 1980s overall. And that's likely to continue, even though we have seen a down trend in natural gas pricing. Our view is that if you take any kind of rational longer-term view and look at the supply and demand characteristics that ultimately power prices across the globe in all major relevant markets will be well supported. And the reason that's important is because more than 3/4 of our nuclear power-related revenue comes from the installed base. And it's like any other business where, if people are doing well, then budgets get fatter, both operating budgets and capital budgets. And ultimately, even though much of what we sell is not discretionary. There always is a discretionary envelope at the margin that governs. And when the industry is doing well, then people have a natural incentive to run plants hotter, at higher capacity factors, to run them longer, minimizing downtime, extending the permitted lifespan of the power plant and then to potentially upgrade the overall output or capacity of the plant. All of those things favor us, and I think we are really looking at a super cycle where that's likely to continue, and this will be disconnected from any short-term recessionary pressures we see here in Europe or other markets in the world. That is augmented with new build activity, which is robust decommissioning activity, which is simultaneously strong, but then behind that, the whole wave of small modular reactors, which is another big theme that is beginning to emerge in a material way. So within that, hopefully, you can see that the -- again -- the demand drivers in that market, again, are not really that much driven by the general level of economic activity in any specific economy. On the health care side, it tends to be driven mostly by demographics that right now for -- certainly for cancer care, but also for our nuclear medicine business. The main driver is an aging population demographic in the developed West, which is the core of our revenue pie, if you will. As people get older, they require more diagnostic procedures, many of which involve nuclear medical applications. They are also more likely to get cancer. And to provide an example in this country, a newly diagnosed cancer patient has about a 65% chance of being prescribed radiation therapy as a component of their overall treatment protocol. And so I think it's axiomatic that as we see an aging population demographic kind of within the G20 envelope that, that drives a greater book of business overall in -- for health care. That is further augmented by a significant expansion into China and to other markets overall. But this is why it gives us confidence not only in terms of our view for the current year, recognizing -- I think many people see significant recessionary risk in the back half of the year. Again, we have been blessed as a company to demonstrate over a very long period of time that the impact of recession, of contraction has tended to be fairly minimal on our business.
Any questions in the audience? Yes. So Tom, you mentioned -- and you've talked extensively about the cyclical nature of the business, recognizing the Silicon Valley happens just about 2 months ago or so. Is that -- is there any risk that you're seeing in any of your end markets from a tightening credit environment?
See -- I mean, candidly, the biggest impact that the credit markets overall have had on us is simply the interest expense that we've been carrying, that we have been -- we came out with slightly higher leverage than we anticipated as we destack for a variety of reasons. We were in a position where most of that was floating rate debt. I'll let Brian talk about what he's done to kind of lay off that risk. But just to note that the -- as the -- as [ Powell ] has been fairly aggressive about tightening, certainly, that's had an impact on our level of interest expense in the near term. And that's probably the biggest factor overall. When you look beyond that at the impact on the industries that we play in, the impact is minimal simply because, again, if you look at the major players in our vertical markets, they tend to either be well capitalized or oftentimes state-owned enterprises or funded by some level of government funding that tends to be impacted very little by that type of environment.
Yes. I mean, I think we've continued to offload the risk on the interest rate side. We put some cross-currency swaps in place. We've put a SOFR swap in place. So we continue to look at opportunities here to hedge where it makes sense. I'd like to see us kind of in the 50-50 range floating to -- floating the fixed, and we'll continue to step into that over time.
And so I want to revisit your point earlier on -- specifically on the Technology segment. SMRs are becoming much more meaningful. We're hearing a lot more about it. I think you had mentioned that you got about a $2 million booking, if I'm right, in the backlog?
In the quarter, yes.
Yes. So how are you seeing that evolve? Like when do you see -- where are you seeing the demand in -- SMR is the nuclear future for North America?
Yes. The SMR movement is very exciting. And for those in the audience who may not be familiar with them, these are smaller nuclear reactors that in some instances, use the same type of technology that's used for utility scale reactors. In some circumstances, they're using more advanced technologies. But generally, it's fair to say that they are intrinsically safe. They are much more automated and essentially fault tolerant than large-scale utility plays. The promise of the SMR market is, firstly, that -- at scale, that these are small reactors that can be largely prefabricated, assembled on-site, either in single installations or in grids. And the target market is [ retiring ] coal plants. And so if you have a coal-fired power plant that's generating 500 or 600 megawatts of power, you cannot simply drop in a 1.4 gigawatt utility scale nuclear reactor there because you don't have an adequate exclusionary zone around that power plant. You would be required to upgrade the entire grid infrastructure to support it. And this is the appeal of the SMRs that they can be dropped into a site like that and in a -- what should be over time -- as leaders emerge with scale economies, it should be a far more attractive economic play in terms of the impact of capital cost and the rapidity of getting these reactors installed and commissioned overall. We see this as a market that adds to the existing utility scale nuclear power market rather than replacing it. We don't see it as a cannibalistic market. We see it as additive, again, because the application here is largely replacing retiring coal plants, and there are many, many players that are competing right now to emerge with the leading technologies. And as you might imagine, we're spending a lot of time trying to work with all of the leading players here to really offer our comprehensive suite of products, which we believe is unmatched in the space in our chosen field. And we're -- we think that this is going to be an important source of revenue for the business, not in the near term, but probably in a period of time that begins 5 to 10 years from now. But in the interim, we do continue to book backlog. As you noted, Con, we booked about $2 million in backlog on various SMR projects in this quarter, and we expect that trend to continue over time.
And so just moving over to the Medical side. You've talked about the RTQA opportunity. How -- like where are the additional adjacent opportunities you're looking at? Where do you want to expand further into?
Yes. Within Medical in general, the trends that are appealing to us -- and again, understanding the kind of measured approach that we expect to take toward acquisitive growth over the next few years. Again, coming back to the whole leverage story and trying to be fairly conservative there. We see opportunity for bolt-on transactions in and around our existing ecosystems in both -- well, in all of our medical segments, RTQA, nuclear medicine and occupational dosimetry, and we expect that those things will continue. But thematically, if we were to look at what excites us the most, it's probably the nuclear medicine business because what we're seeing right now is the advent of therapeutic drugs that contain radioactive isotopes focused on cancer care. That will be a revolution in our view. We've seen these in the form of endocrine system cancers and more recently with prostate cancer applications. There is likely to be just massive growth in this field overall. And generally speaking, when a new therapy is introduced, it has a combination of a diagnostic component and a therapeutic component, all of which, at the end of the day, is likely to grow the nuclear medical space at a substantial rate we believe, ultimately, over a long period of time, will be higher than RTQA or the other elements within our medical business. Right now, we've got a strong position in the nuclear medical value chain, but we're very interested in continuing to improve our footing there and really trying to evolve our business away from one today that's largely focused on capital equipment to one that -- where we're enjoying higher recurring revenues in the form of software, consumables, services and other elements that feed that overall ecosystem.
I think we're just about out of time. Tom, Brian would you make -- would you like any closing remarks?
Yes. Just to wrap up. Firstly, thank you for your time and attention. We're very excited about our journey. And hopefully, we are able to share a little bit of who we are and how we think about our business over time. We'd encourage you to look at all of the various materials that are available online that I think provide richer content about the specific elements of where we play. But again, we welcome your interest. Love to have you as shareholders, and I hope to speak with -- to many of you over the course of the conference. Thank you for hosting.
Thank you so much. Appreciate it.
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