Greetings. And welcome to Mirion Technologies Inc. Third Quarter 2022 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. Thank you. Mr. Gaddy, you may begin.

Good morning, everyone. And thank you for joining Mirion's third quarter 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 third quarter ended September 30, 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 Web site at ir.mirion.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 afternoon, everyone. We're grateful for your continued support of Mirion and look forward to providing some additional color around our third quarter results and updated outlook this afternoon. To get started, I'd like to applaud the team's continued ability to generate strong order growth during the quarter. Demand for Mirion's product offerings remains robust evidenced by the strong order performance in both operating segments. This performance paired with a strong backlog and continued strategic investment in our inventory position has given us confidence in our ability to deliver a good fourth quarter and a good start to 2023. Similar to what we've seen throughout the year, third quarter presented a challenging operating environment, especially in our industrial business. Supply chain challenges were present throughout the quarter and there's no sign that these challenges will cease in the short term. However, the team has worked systematically to find creative and sustainable solutions, and we stay in confidence in our position to serve the strong demand. As presented in our release, we've updated our outlook for fiscal 2022 to reflect the state of the macro environment and the underperformance of our industrial segment in Q3. The team is hyper focused on operational execution, and while delivering on our longer term strategic priorities. With that, I'll turn the call over to Mirion’s CEO, Tom Logan.

Larry, thank you, and good afternoon, everybody. Before I dive into results, I'd like to take a moment to commend the hard work that took place across the enterprise during the quarter. I spent much of that time working in the trenches with different teams across the company, and I'm tremendously proud of the progress that has been made to set us up for future success. There are few areas I'd like to address regarding our third quarter performance and the updated outlook we shared this afternoon. First, our order performance during the quarter was outstanding. We generated 23% year-to-date order growth, reflecting strong vertical market conditions coupled with our broad category leadership. Normalizing for the effects of foreign exchange, our order intake is up approximately 29% with meaningful contribution from all major verticals. As a reminder, this excludes the impacts of honey Kevie, the NBD reversal in 2021 and both recent acquisitions. Second, the company achieved 9% organic growth during the quarter led by 21% in medical and 2% in industrial. Foreign exchange continues to be a headwind principally in our industrial segment. To help mitigate FX and related interest rate exposures, we recently implemented a fixed cross currency swap on a portion of our debt that Brian will address later. Third, we're experiencing a trend on the industrial side of the business where order cycle times have been nominally longer than anticipated. This pattern is impacting both our nuclear power and defense end markets. Finally, we are updating our 2022 guidance to reflect recent business trends. We believe that we have positioned ourselves well in the form of inventory and operational preparedness to meet elevated demand across our end markets and are expecting a strong fourth quarter. Our focus is on executing and delivering strong results in Q4…

Thanks, Tom and good afternoon, everyone. To kick off my comments, I'll ask you to please turn to Slide 6, as we take a deeper review of our third quarter results. For the quarter, total company adjusted revenue was up 8.7% and adjusted EBITDA was down slightly compared to the same period in 2021. Total revenue in the quarter was $160.9 million with adjusted EBITDA totaling $30.8 million. On an organic basis, revenue was up 9% year-over-year. Adjusted gross margin was 50.4% in the third quarter, a slight contraction of 60 basis points from the same period last year. As expected, we were price cost positive in the quarter, which was offset by the impact of product mix and the acquisition of SIS. Adjusted EBITDA margin performance contracted 180 basis points to 19.1%. Excluding public company costs, adjusted EBITDA margins would have been flat for the quarter. Please note that we recently passed our first anniversary as a public company. So the third quarter is the last period we'll be comparing against a full quarter without public company costs. Adjusted earnings per share was $0.03 for the third quarter. I also want to highlight just how impactful foreign exchange dynamics were on our business. Foreign exchange negatively impacted adjusted revenue performance by 5.7% during the third quarter. We are now expecting an approximately 5% negative impact to the top line in 2022 compared to the 4% we stated previously. As Tom mentioned, we've begun actively hedging our foreign exchange and interest rate exposures, and recently implemented a fixed price cross currency hedge on 14% of our third party debt. Total savings expected is approximately $2 million on an annualized basis at today's rates. Flipping over to Slide 7 for a deeper look at the Medical segment. Adjusted revenue grew 23.3%…

Brian, thank you. Before we open things up for your questions, I'd like to leave you with a few key takeaways from this afternoon's call. First, our order intake and momentum has been exceptional all year. Customer demand across our product portfolio remains robust. As I've said before, I've never seen our end markets more supportive of sustained growth than right now. Next, the third quarter presented a conversion challenge in the industrial segment and I'm proud of the way our team responded in due course. We exited the quarter with positive momentum across the business and are expecting to finish the year strong. Operational execution is my number one priority. Thank you again for your time and continued support. Let me now pass things over to Alex Gaddy to open things up for Q&A.

Thank you, Tom. That concludes our formal comments for today. I will turn it back to the operator for Q&A.

[Operator Instructions] Our first question is from Joe Ritchie of Goldman Sachs.

So let's just start on where things maybe got a little bit worse this quarter on the supply chain side, in industrial, because I remember last quarter you guys had talked about building an inventory buffer, improving like some of your supply chain partners. But it seems like on the margin, things were worse than expected. So maybe just a little bit, let's just start with a little bit of color on that.

In general, I think the your recap is correct. But as you know, we've worked very hard on improving just kind of the robust dynamics of our supply chain, our general view, my view specifically, is that the global supply chain is not going to go back to what it was prior to COVID, that we are fundamentally in kind of a different environment. And the imperative for us is to operate well in that environment, and I'm confident that we're doing that. What we have experienced during the course of the year, I think is emblematic of what we saw during the quarter. And that is not of some broad based thematic secular issues in the supply chain, but rather kind of rolling episodic issues that typically have been confined to a narrow product category or product line. And in this particular quarter, as probably the top example, we had issues with specialized highly qualified types of tubing and metals within our -- some of our nuclear business overall, where again, just kind of given the more specialized nature of that business, the context of the type of batch processing that typically flows from that business, this led to certain disruptions in the supply chain overall. But in general, our view is that we've continued to evolve organizationally, in terms of managing the supply chain. We have changed our overall stance with the supply chain management terms of how proactive we are in managing through that, and that's precisely why we delivered 9% growth overall in the in the quarter, was essentially catalyzed by again some of the improvements that we've made in dealing with this new world order that exists.

And I guess, next logical question, right, if you kind of think through the updated segment organic growth guidance that Brian just gave, you're basically assuming still kind of like high teens, maybe low 20s type organic growth in industrial, is a pretty big step up in the fourth quarter. And so what can you do to kind of help us feel confident that you know, even in this supply chain backdrop you're going to be able to deliver on what seems to be pretty good backlog?

Well, I think there's a couple of things, Joe. I think you're right. I think high 20s is probably a bit high. But a couple of things give me cover. First off, we have a lot of inventory. There's -- since December, we've built $36 million of inventory and you can see that we're not planning for a drastic reduction in the fourth quarter. I think we'll see that at some point next year. So I think you'll see us continue to do that to be able to execute. I think the second thing to note, and I'll give you -- this is both for the fourth quarter, but also give you some thoughts on 23 here, which is if you look at our backlog coverage for both the fourth quarter and if you think about '23, we're high single digits above the coverage number where we sat last year. So the orders are there. This is all about execution. And you heard Tom say, we're very focused on this, this is number one priority, we got Mike in place on the medical side. And there's a lot going on kind of in the trenches to make sure we get product out the door.

Maybe one last one for me. I think historically, we've talked about a conversion rate in medical in that kind of like 50% plus rate. Obviously, supply chain is probably hampering some of that a little bit, but I think you guys put up like a mid 20s type incremental margin this quarter. And I'm just curious, like, just any color specifically on the quarter and then like getting back to that 50% plus rate over the long term?

I think, first off in the quarter, like I mentioned on the call, we've seen a little bit of mix kind of between the businesses and just how the business has fell. The other thing, obviously, we just talked about was, we continue to have asked on the sales and marketing side and we've invested and we've been doing this all year in our capabilities in Europe, and those are clearly paying off with the order rates. I think that business we will continue to invest in that business in those ways, as long as it pays off. But I think you see kind of the incrementals come back in probably next year. And I think we end up with -- we still end up with a very good print in the fourth quarter. And I think you don't see quite as much growth in the fourth quarter as we saw in the second and third quarter in medical. But I think we still think there's good growth there and good incrementals.

Joe, let me just build on that too. I've been running our medical business directly now for the majority of this year, right up through the appointment of Mike Rossi. And that's a combination of both the medical group as well as our RTQA business. And it's the latter where we really saw the pickup in costs related again to our European Service Center, which principally flows through COGS, and then secondly in broader sales and marketing activities, which had been focused on really improving our commercial capabilities, and also just a simple reversion to more active travel tradeshow participation, et cetera. I made those decisions very deliberately. And as Brian noted, those are the direct genesis of the kind of top line order dynamics that we've seen, which again have been extraordinary, particularly in Europe against the headwind of a stronger dollar where we compete against strong, localized competition. Again, that is attributable to the investments that we've made here and importantly, these are kind of step function increments. This is not something that will continue to build on a ratable basis as we continue to drive organic top line growth, but rather we should see the leverage garnered from this materialize fairly quickly.

Next question is from Chris Moore of CJS Securities.

Maybe we could just start on Instadose. You talked about that being -- this quarter you had the first sale there. Can you provide some more details in terms of the commercial launch over the next 12 months? Are there specific milestones, kind of what the biggest challenges are that you see at this stage?

Let me just provide a few high level comments, not everybody on the call or listens to the call maybe familiar with it. But Instadose is a revolutionary technology that digitizes the field of occupational dosimetry. That field is really focused on protecting workers who are potentially exposed to a harmful or hazardous source of ionizing radiation, the vast majority of them are medical. The great advantage of Instadose is that it obviates the need to send essentially these radiation detection badges or passive dosimeters back and forth. And in the process of eliminating that logistical load, it increases compliance within a clinical setting, it improves the safety margin as we find through experience, that again, clinicians are more likely to gain immediate feedback and to tailor their procedural behavior. And finally, it represents a significant cost savings to the fundamental sponsor of these various healthcare facilities. This technology is unique and it's offered in a global market that today is still very much in an analog mode, there is nothing like this technology. We have been at this now for about eight years, have built up a substantial book of business, really anchored to this technology. But we're about to cross the threshold, that threshold is that we are currently in the process of preparing the launch of our third generation of the Instadose technology, which will be a breakthrough in performance and usability and accessibility characteristics, again, for our clinical customers. But more broadly, in our view, this will become the market clearing technology that will allow us to drive a more sweeping conversion of the analog base overall. The fundamental choice that we have is whether to kind of eat our own cooking and use this as a proprietary technology to drive our service business or rather to make it available to the world, recognizing again, that this is a superior technology, literally anything else on the market, it is an abundance technology. And it's true to our mission to essentially serve the greater good of humanity to make this type of technology available. So that's exactly what we've chosen. And we're in the process now of developing a more sweeping campaign and offering , so that we can systematically again make this technology available to any and all qualified service providers around the world in a way that will be a win-win. It will provide a superior customer experience for their direct customers, it will lower their costs on an aggregate basis and, in our view again, it will provide a net benefit to this critically important sector.

I know you're not giving '23 guide at this point in time. But can you maybe just talk a little bit about free cash flow expectations for next year in terms of normalization? What you're thinking? Sounds like Q4 inventory is not going to be down that much. Just kind of any thoughts you might have on free cash flow in '23?

I think, we see the inventory positions in our, basically just our net working capital, improve as we go throughout the year next year. I do think we'll return to -- the first quarter, I think, will be a good cash quarter. Obviously, we have a big fourth quarter, which gives us a good opportunity to do something there. But I think as the quarters go next year, you'll see the net working capital kind of normalize and then come down. We've always talked about this business as having net working capital opportunity, we still believe that. And I think we've said on a number of occasions that we didn't feel this was the time to work on optimization, this was the time to make sure we were delivering and able to execute.

Last one from me, just maybe revisit the Russian impact for a little bit. You had -- in the Q1 initially, I think eliminated roughly $35 million in revenue from Russian customers, projects involving Russian counterparties, felt that partially could be recovered through the -- maybe $20 million of nuclear and defense. On the Russian side, is that $35 million still a good number, are you doing a little better than you expected there, or kind of how I should look at that?

Chris, your numbers a little bit high. Our number overall, in terms of kind of the lost revenue associated with these Russian technology projects was less than $30 million. But it's important to note that this was a significant headwind we faced early in the year. Essentially, we saw 4% of our revenue that was important kind of base load quarterly distributed revenue that evaporated at the drop of a hat. And I'm incredibly proud of the way our team has rallied to overcome that. Recognizing that additionally, not to belabor the point, we have foreign exchange headwinds of nearly 10%. So we look at the overall order growth rate but more fundamentally, when we look at the top line growth rate of the business, in a world where we've seen that kind of dynamic change, we obviously have continued to see the same headwinds that others have faced in terms of supply chain friction, inflation, elevated interest rates, et cetera. But I think we've demonstrated tremendous resilience as a company as we've done that, and continue to involve or evolve and adapt the quality of our operations to these challenges. And I'll tell you, I've been doing this for nearly 20 years in role. I've said this many, many times. But I've never felt so positively about the end market dynamics we face, the likely tenor of those end markets that we're carrying forward, the quality and duration of our backlog as we exit 2022 and heading into 2023. And so I think we've acquitted ourselves well. And we understand that we need to execute well and deliver the goods, particularly on the industrial side. But I'll tell you, I feel very, very good about our ability to do that.

Just one small comment. I mean, our FX impact this year is 5%, I think, Tom, is just talking about the change in the euro. I would just say that, as well, we've seen a little bit of Russian revenue kind of dribble in it, but it hasn't been super material overall. Maybe one last thing that is important to just to add on is the backlog in the orders we're booking, definitely churn faster, right. So that doesn't mean one quarter out, that could mean three or two, or three or four quarters out. And I think that's why we, like I told you, our backlog coverage in the next year is kind of high single digits year-over-year. And I think that's really important, because the fact that we've taken kind of a pause on those Russian projects continue to grow order performance and frankly keep our backlog where it is, is super encouraging.

I'd like to tag on one more thing to Brian's one more thing. And that is that I think we've not adequately described the dynamic in the defense sector. We've been talking about this for much of the -- recognizing that the history of Mirion is one where, when the world faces a nuclear crisis, and this has been true with Three Mile Island with Chernobyl, with Fukushima, we've been there and we've been there in a big way and provided critical expertise, critical equipment, critical solutions overall to those situations. And more broadly, we are, as we've noted before, perhaps the leading supplier of radiation detection technologies and solutions to, I think, more than 17 of the NATO militaries. And the combination of those two dynamics, recognizing the elevated threat that we see coming out of Ukraine, has caused us to see a significant uptake in dialog in and around the capabilities that we have to offer. I think an important component of the inventory that we've built has been focused on being able to address that need should it arise. And candidly, we've expected that we would see a bit more of this incipient demand translating into revenue in Q2 and Q3. We remain hopeful, we remain of a strong view that we are going to see considerably higher defense related business overall, but it's hard to call the timing. And this is part of the reason why we've deliberately put a wide range on the Q4, on the full year. It's because of the embedded optionality in and around that just again, provide a little bit more color around that specific dynamic.

Our next question is from Andy Kaplowitz of Citigroup.

Tom, I wanted to follow-up on your last comment. Just simply are you starting to see industrial orders turn into revenue now in early November a little faster, or are you still seeing similar supply chain dynamics slowing order conversion at this point?

I think there are two dynamics that work here. And so the answer is, in general, Andy, it’s faster. And the two dynamics that work here are that firstly, the inventory position that we've built very deliberately supports that activity. We know we're going to have a big Q4. We are very focused on providing all the conditions precedent to make sure that is executable, and that's certainly a big factor and the investment that we made an inventory leading into this. The second is the commentary about the duration. We've often talked about the nuclear market being comprised of the installed base, which is the biggest component, it’s about three quarters of our nuclear power related revenue, followed by new build activity, which is typically 15% to 20% followed by a decommissioning activity, which is the remainder. One of the interesting things about our order dynamics this year is that we haven't booked any large utility scale new nuclear projects. So all of that growth in orders in backlog is really more geared toward the install base and smaller projects, which tend to trade quick -- faster, they tend to have a shorter order cycle time. And so when we talk about the duration of our backlog, that's what we mean. We mean that the quality of the backlog gives us more coverage, as we look ahead at the next 12 months and as we look at concluding the year. So all of that gives us confidence and conviction about how we'll exit this year.

Tom, maybe just to follow-up on that last point. You've got 20% order growth, 20% plus order growth without new nuclear. The conversations with customers, maybe give us an update, how they're going, given the energy crunch in Europe? Now how does this order pattern trend as you go into '23?

I think we see continuation, that fundamentally recognize that the world needs nuclear power. And typically, there are two fundamental macro conditions that more than anything else govern the health of the industry. One is political support, which in turn is a reflection of popular support. And we could go region by region and talk through that. But again, political support for nuclear power is higher than it has been at any time in my nearly two decades at the helm of this company. And secondly, it's the price of natural gas that tends to set at the margin electrical market or electrical energy market pricing. And that's true, again, in all major markets that we serve. Obviously, the price of natural gas is at a near term high. The supply conditions, I think, are well understood. And there is a strong likelihood that we're going to continue to see natural gas prices elevated. Even if we were to go back to a normalized situation in terms of geopolitics, get back into a mode of trying to drive, greater level of shale gas exploitation in this country, et cetera. I think the prevailing view, the conventional view is that it will take five years or more to see the normalization in natural gas pricing, and it's simply unlikely that we're going to see natural gas revert back to where it was pre-pandemic. The takeaway from all of this is that that improves dramatically the profitability of nuclear power operators around the world. It creates a situation where the focus has really become quite acute in terms of how to improve capacity utilization. The term of art in the industry is capacity factors, how to minimize downtime, how to life extend plants, and in many cases, how to think about operating capacity. And that more than any other factor drives the demand for the capital equipment that we sell into the industry and that's precisely what we're seeing overall. But beyond that, as it relates to new build activity, we continue to see tremendous activity and again, this is on a global basis, this is in every major market as it relates to new build activity. We are very bullish about the likely developments in new build activity and projects that we anticipate booking. And so my fundamental view is, as we look at nuclear, again, is that this is a market that has changed really in a significant inflection point where the installed base, again, is likely to be very healthy for any rational planning horizon. And there's no doubt that we're going to see an acceleration of new build activity across the globe.

Tom or Brian, I think you talked about price versus cost being green in 3Q. I think you said it was 3.5% year-over-year growth in Q2. What was it in Q3 in terms of price? And I know it's supposed to accelerate. But obviously, gross margins are still under a bit of pressure from the things you've talked about. So can you give us an update on price versus cost and what it has been and what you expect it to be?

I think -- so Q3, Andy, is about 4% on the bright side, overall. I think historically, I'd said we'd be closer to 5% by the end of Q4. I don't see a reason to change that. And by the way, we continue to put price into the market where we get, and I think actually even recently, we've been pretty aggressive about that. So the challenge we're seeing is we are seeing inflation, right, just like everybody else. And so it's impacting our rate a little bit. But like you said, on a dollars basis, we're for sure price cost positive. And I think we continue to watch this and we continue to take action as we can. And we're also very focused actually on the supply chain side about how do we begin design out VA/VE, how do we make sure we're attacking as some commodity prices have gone down those places. Electronics are clearly a little bit harder, but they're also a smaller piece of the overall economics of our products. So I think we're all over this, we're being super aggressive, it does take time. This isn't something, from a cost perspective, we can see in the next quarter or even two quarters. But I think as ‘23 kind of comes here and then goes, we'll continue to more aggressively be able to attack the cost base, just like we're doing on the price side.

Just one more question from me, Brian. Any color -- any more color on the acquisitions and how much if any EBITDA, you expect them to contribute in the second half of 22?

I don't want to be [specific]. I mean, this was a small deal we did on the SIS. So we’re coming up here on one year on CISRs. So that will begin to lap in organic. I think we're pretty pleased with how that's going. And candidly, we've integrated that pretty holistically into the business. The SIS deal, we're super excited. I think when it's all said and done, and you can actually see it in our leverage calc, right? I mean, there's a couple of [mill], almost over $4 million on an annualized basis kind of baked in. I think that will continue to prove to be very attractive and it's a sub 2 times post synergy deal for us. We'll do these deals all day long. So we continue to look for more like that out in the market and we'll go from there.

We have reached the end of the question-and-answer session. I would like to turn the call back to Thomas Logan for closing comments.

Ladies and gentlemen, we appreciate your time, your interest and your support. Again, this is very exciting time for us at the company. We are excited by the momentum that we've garnered during the quarter as we exit the year and come into the New Year. And again, we're hyper focused on execution and I look forward to updating you on our results in a few short months. So thank you and good day.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.