Greetings and welcome to the Mirion First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Gaddy, Vice President of Finance for Mirion. Thank you. You may begin.

Good afternoon, everyone and thank you for joining Mirion’s first quarter 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 first quarter ended March 31, 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 the presentation accompanying the call today. All earnings materials can be found on Mirion’s IR website at ir.mirion.com. I would also like to call attention to the rebranding initiative we launched on Monday, May 1, 2023. As a result, our business segment, formerly referred to as industrial will be called Mirion Technologies or Simply Technologies in the future. There has been no change to our financial reporting methodology beyond the naming convention for the Technologies segment. 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?

Thanks Alex and good afternoon everyone. To get us started today, I wanted to thank everyone dialed in this afternoon for your continued interest and support of Mirion. We are pleased to report strong results to kick off 2023. Our backlog position has increased sequentially, which is a reflection of both favorable end market dynamics and the commercial effectiveness of RT. Results are highlighted by higher-than-expected revenue growth for the first quarter. This top line performance demonstrates a clear continuation of the positive momentum that we established coming out of Q4. Moreover, we are pleased that we saw strength in both of our reporting segments. Adjusted EBITDA and adjusted gross margin performance were within our expectations for the quarter. We are not as happy though with our working capital performance as it was a drag on free cash flow generation year-over-year. Tom and Brian will share more details later in the call, but I wanted to note that the team has a robust plan in place to achieve targeted working capital parameters. In particular, the team has a credible strategy to dramatically improve inventory turns. Overall, I believe that the business is well positioned to deliver solid performance in 2023. I am excited for what the future holds for Mirion both this year and beyond. With that, I’ll pass the call over to Tom Logan, Mirion’s CEO. Tom?

Alright. Thank you, and good afternoon, everyone. I’d also like to begin today by congratulating my Mirion colleagues on an outstanding start to 2023. Our first quarter results are a direct testament to your commitment to serve our customers and to live out our mission every day. Looking at our first quarter results, there are a few highlights I’d like to leave you with today. First, our order book remains in a strong position as we kicked off 2023 with first quarter order growth of 6% and generated sequential growth in backlog despite a record fourth quarter. The composition of our order growth is particularly noteworthy as we are seeing the greatest strength from smaller recurring customers. This trend is a clear reflection of underlying health in our end markets. Second, we delivered total company organic revenue growth of approximately 8% in the quarter, outperforming our internal expectations. Third, net leverage improved to 3.6x adjusted EBITDA as of March 31, and I continue to expect a reduction in leverage to 3.1x or below by the end of the calendar year. Finally, we reaffirmed our 2023 financial guidance this morning with organic revenue growth expected to be 4% to 7% and adjusted EBITDA of $172 million to $182 million. Before getting deeper into our financial results for the quarter, I’d like to note a couple of things that occurred since we last spoke. First, the leverage position we reported today was made possible through the $150 million direct investment we received in February. We used $125 million of the funds to pay down debt and improve our leverage position. This debt repayment lessens our annual interest expense burden adds financial flexibility for the future and moves us closer to achieving our medium-term target of getting leverage below 3x. Second, following the…

Thanks Tom and good afternoon everyone. To begin my commentary, I’ll ask you to please turn to Slide 5 to take a deeper look at our first quarter results. Total company revenue was up 11.6% and adjusted EBITDA was up 4.9%. Total revenue in the quarter was $182.1 million, and organic growth was 7.9%. Adjusted EBITDA totaled $36.6 million in the quarter, with margin contracting 130 basis points to 20.1%. As stated on our last call, we were anticipating a challenging margin environment in the first half with headwinds coming from the SIS acquisition in product and geographic mix. Results excluding cash performance were in line with our expectations. Margin performance was largely impacted by a lower contribution of medical software sales to total business mix in the quarter higher international and distribution channel contribution and the dilutive impact of SIS. Price was approximately 3.5% in the quarter, offset by cost inflation, causing price cost to be neutral for Q1. It’s important to note that we strongly believe that these are short-term mix headwinds and not long-term structural changes. Turning now to Slide 6. Adjusted free cash flow was negative $7.2 million during the quarter. Cash flow was largely impacted by net working capital, primarily inventory. Working capital management, including inventory efficiency is a high priority for me and the broader Mirion team. We’ve mobilized a team dedicated to improve our inventory turns across the company. We have a strong plan in place, and we are hyper-focused on driving working capital to be a source of cash for the full year. At the end of the March quarter, leverage improved to 3.6x, spurred by debt repayment stemming from the direct investment we received in February. As Tom mentioned, we repaid $125 million of debt, which lessens our annual interest expense…

Brian, thank you. Before we move into Q&A, I’d like to leave you with a few key takeaways from today’s call. First, our Q1 top line performance was ahead of our expectations, supported by positive trends in both our order book and backlog position. Second, I’d like to reiterate that our margins were challenged in Q1 relative to last year, but we were expecting the mix headwinds we saw in the quarter and performance was in line with our expectations. Third, we are focused on improving our free cash flow conversion and are working aggressively to ensure that net working capital will be a source of cash for the full year. And finally, strong order flow, engage customers and supportive market conditions give us confidence for the remainder of 2023. As a result, we reaffirm our 2023 P&L cash flow and leverage targets for the year. We will look forward to updating you with our second quarter results this summer. At this time, let me pass the microphone back to Alex Gaddy to open up Q&A.

Thank you, Tom. That concludes our formal comments for this afternoon. I’ll pass things back to the Operator. Please go ahead.

Thank you. [Operator Instructions] Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Good afternoon, guys. Thanks for a few questions.

Good afternoon.

Good afternoon. Congratulate – congrats on a nice quarter. So obviously, 2022, very solid performance despite challenges such as supply chain in Russia. While those challenges haven’t disappeared, how would you compare revenue visibility today versus say May of ‘22?

Yes. Let me lead off to that, Chris. This is Tom and thanks for the question. In general, we are seeing an improvement in our markets. As you recall, last year was a year of big macro challenges for most of the Industrial Technologies segment, broad-based, including supply chain issues, spike in inflation, higher interest rates, global geopolitical tensions. But in particular for us, we had negative impacts associated with the cancellation of a large nuclear project. They use Russian technology and with foreign exchange. If we roll the clock forward to today, in general, we would tell you that we see a meaningful improvement in the macro environment for Premier on overall. Clearly, there are still some vestiges of supply chain instability. But we think overall, the supply chain dynamics have improved materially. Certainly, as we look more broadly at other macro issues like exchange rates, interest rates and our ability to essentially offset some of those pressures with cost and operating performance. We feel good about the year. The bottom line is that as we look at our backlog at our order intake, our customer engagement dynamics and general vertical market conditions. We feel good about the year overall.

Yes, we continue to have higher coverage for the rest of the year out of our backlog. And I think that’s encouraging. It continues to be an encouraging fact pattern for us across the company.

Got it. Very helpful. Just trying to understand SG&A a little bit better. So obviously, SG&A included lots of one-time adjustments in 2022, some again in Q1, but it was a little more than 50.5% of revenue in fiscal ‘22. Amortization we expect to come down a bit in 2023, still a bit elevated. Just trying to understand what’s a normalized percentage of revenue for SG&A moving forward?

Yes. I mean, obviously, the as you think about this, Chris, the going – our going public last year, a lot of purchase accounting noise and the profits interest kind of noise that continues to run through the P&L. So I think all in, if you think about calendar year ‘23, that 55% comes down to the mid-40s. I think as we continue to run the amortization through the SG&A line as the profits interest, which is accounting candidly, more than anything else. I think you see a pretty normalized number in the mid- to low 40s. And if you stripped out amortization as a whole kind of in the 30% range. So you can see we still have a big piece of amortization to flow through the P&L. And the profits interest kind of has another year tail or so on it. But I think it’s probably in the mid-40s, when you don’t adjust for amortization and probably in the low 30s to the high 20s when you do.

Got it. Very helpful. And maybe just one more for me, can you offer maybe a little more context around what you’re seeing from SMRs and the opportunity that they present for Mirion moving forward?

Yes, Chris, we continue to be very excited by this. In fact, we’re sponsoring a conference nearby here in our – nearby our headquarters here in Atlanta this week. We continue to be very engaged overall with the SMR market. And as a reminder to those on the call, we see the small modular reactor market as being kind of the next wave of nuclear technology with a focus really on replacing decommissioned coal plants over the next several decades. We see this as a supplemental movement to our existing utility scale nuclear business, and we share the overall industry excitement about the prospects for this market. We continue to work very closely with leading SMR players. I would note that in the quarter, even though many of these projects, in fact, most of these projects are still in the very early stages. We booked more than $2 million in backlog in the quarter associated with SMR projects overall. So our view is that the momentum continues to build. Our view is that we’ve got a tremendous portfolio of solutions that was augmented by the acquisition of the Collins Infrastructure business, which helps provide the digital and security backbone that is so relevant to these new reactor sites. And overall, we feel good about our progress.

Got it. And very helpful. I will jump in line. Thanks, guys.

Thanks, Chris.

Thank you. Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your questions.

Good morning, everyone.

Hi, Andy.

Brian, I think you had mentioned for ‘23 to expect relatively flattish margin, including the inorganic headwinds. You started out Q1 slightly lower than that as you expected. But are supply chain really challenges starting to get better at all? Are you still expecting overall EBITDA margin to be relatively flattish for the year?

Yes. I think for the year, we continue to be comfortable with what we talked about on the last call. I think what – in the first half, we know – we knew and continue to know we will have a bit of margin challenges here. You saw it in the first quarter. I think you’ll see it a bit more in the second quarter. But again, that visibility we have on the backlog gives us very good confidence in the back half of the year, seeing the margin performance pick up. And so I think, yes, I think, yes, I think we have another quarter a bit of margin pressure here in the second quarter and then the back half looks better.

Brian, let me just ask a follow-up on that. Any sort of – any incremental thoughts on cadence EBITDA margin in Q2 versus the rest of the year? Is that basically just expect a little bit of more pressure in Q2, as you said?

Yes. I mean, Andy, we don’t give quarterly guidance. So the year guide is continues to be intact. And I think you’ll see margins in Q2 be pressured by Q1.

Got it. And then let me ask for Tom or Brian. Can you remind us again of the tough comps in Medical for the remainder of the year, but you did 10% in Q1, which means that if I look at the rest of the year, mid-single digit, maybe a little bit lower is what’s in the model. And that’s sort of despite pretty strong markets and your normal guidance, I guess, is mid-single digit plus and then pricing is pretty good. So anything that’s a headwind this year on medical growth? Or is it really just the tough comps?

Yes. I mean, maybe I’ll answer first and then you can add on Tom. I mean, look, we’re – the first quarter was our easy comp for the year. We had some pretty big supply chain issues last year in the first quarter, which gave us kind of good double-digit growth. And I’ll tell you the medical guys performed very, very well here in the first quarter. Now we start comping 15, 20, 24 percentage point growth numbers. And I think we’re just – we want to continue to be cautious in our expectations. I don’t think we’re seeing any end market changes. We saw very good, as I mentioned, international quarter this quarter, which tends to be a little bit lower margin because of the distribution channel. But I think it’s more comps versus anything else.

Yes. I’ll reinforce that, Andy, the – this is all about us, again, lapping significant comps and just being responsible about how we guide the balance of the year. When we look broadly at the key factors driving the top line demand in medical, as you noted, market conditions continue to be favorable, but beyond that, as we continue the evolution of our medical group, remember that we rebranded our medical business middle of last year or late last year. We brought on Mike Ross is the President of the overall Medical Group. And I will tell you that the coherence and notably, the commercial synergies that we see beginning to emerge here are exciting to us. So overall, again, we reassert guidance as it relates to the medical business overall. Again, we’re just trying to be responsible about what we see right now, and we continue to be encouraged by the fundamentals.

Just one more for me. And then Larry mentioned the sort of focus on cash this year. Obviously, it started out a little slow, but what are you doing differently to ensure that cash generation does improve and you can meet your leverage target? And what milestones should we be watching to see that improvement?

Yes. I mean, first off, I think I said on the call last time, and as I have talked to many of you, we continue to march towards net working capital being a source of cash this year. And I think I have said that I think it’s back – it’s more back-end loaded as we work through all of this in the first half of the year. One of the things we have done is we have a team at Mirion called the Performance Excellence Group. So, it’s like an internal SWOT team, and they do everything from cost reduction projects, M&A, etcetera. Right now, that team is, last week, they are at two sites – or one site this week, they are at another site in Europe. So, we have literally deployed the SWOT team side-by-site, there is four sites that really move the needle. And we have very regular cadence with Tom and I and the operating teams to move the needle. So, we are not only are we focused on it. We have augmented the factory resources to help give more bandwidth for improvement. So, I think there is plenty for us to do here. You have seen this before. It takes time to – it takes time to work through this. And – but I think the focus is very acute from the Mirion side. Tom, do you have anything you want to add?

Yes. No, I would echo everything that Brian said that part of the – and a good part of the inventory build that we saw in the quarter was, to a large degree, really motivated by strength that we are seeing, in particular in our life sciences space and notably, the continued high level of engagement we see in the defense community. And our view is that, again, based upon not only the normal operational cadence for the year, but the additional measures, as Brian noted that this is something that we feel good about, noting that historically, we are very proud of our track record as a business of driving margin expansion and a high degree of free cash flow conversion historically. We are extremely self-aware. We understand the optics of the inventory increase. But again, we feel confident about our ability to bring it into our expected range.

Appreciate the color guys. One other thing, Andy, sorry on net working capital, just to note outside of inventory, I mean we have opportunity in multiple places, right? We can do better on payables in our medical business. We have opportunity on the DSO side, right. So, although the inventory was the Q1 kind of needle mover, I would tell you we have more levers than just inventory to help us achieve the goals here in ‘23. So, just maybe some added color for you.

Great color. Thank you.

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Thanks. Good afternoon everyone.

Hi Joe.

Okay. So, can we just start on the technologies margins and just like parse that out a little bit. So SIS, and we knew it was going to be a drag in the first quarter, but it seems like the 250 basis point drag was higher than expected. And so what happened there? Any specific color you can give us on that and the impact it had and what it’s expected to have in 2Q?

Yes. I think a couple of things. I think the drag in Q2 is a little better than in Q1. Now, the numbers are bigger, right. So, the impact kind of squeezes a bit. But I think this business is one we are still learning. We continued to invest and keep costs in this business that benefit the entire kind of technologies business overall from a digital standpoint. So, we are choosing to continue to invest kind of over the medium and long-term on the digital side. But at the end of the day, I think there is just a bit more cost in some of the projects in the quarter that we didn’t see coming. We are new – is new still to us. And I think we are all over it. I think the team is hyper-focused on actions. And I think we continue to feel very, very good about the acquisition that we did, both operationally and what we can do to it operationally over time, but even more important on that strategically. By the way, I would also mention, the company has a track record of acquiring these type of assets and over time, working margins up to kind of accretive to the company. We did it with Biodex same-size business, actually almost the exact same profile. That took us 18 months, 24 months to kind of get the margins where we – where they are accretive to the company. And I think Tom and I both continue to be very excited about the asset that we bought and what it can do strategically.

Got it. Okay. That’s helpful, Brian. And then maybe since you mentioned Biodex just quickly, what can you just give us like how does that impact the P&L for the year, the fact that that you divested in April?

Yes. That was in – I mean we knew that was happening. We had put that into the guidance. So, that was already all factored in. It’s – from a margin standpoint, in general, it’s accretive to the company.

Okay. And then Tom, maybe just going back to your order commentary, so great to see the first quarter start off at plus 6%. I thought that it was interesting. I didn’t see this – didn’t see you guys put out the details like you had previously on a slide on how each of the different sub businesses did. So, any color that you can kind of give us on each of the kind of like sub-segments and what you are seeing across your business?

Yes. Overall, what I would say, Joe, is that in medical, as we noted, we saw strength across all three segments, driven by a combination of lapping a relatively light quarter last year in medical, but also just good underlying strength and momentum in the markets. In the industrial, I should correct myself and say in the Technologies segment overall, our greatest strength in the quarter came out of the labs and research space, again, where I noted this on the working capital discussion, we are seeing great order strength for some of our scientific instruments that are high-purity germanium-based and we are scaling up to be able to comply and fulfill with these or these projects, which are in exciting new niches for us. And also, generally in defense, we saw strength. Everything else was not as noteworthy overall in terms of the growth dynamic.

Okay. Great. Maybe just a follow-on there. I know we have been talking about these orders, maybe broader order trends in defense. It sounds like things are starting to percolate a little bit, any other color there? I remember last year, you guys built inventory, particularly for some of those defense orders. And I am wondering if some of that inventory build is still sitting on the books.

Yes. It definitely continues, as you said, to percolate the level of customer engagement continues to be very high, and this spans both military applications as well as civil defense applications. In fact, I will note that just today, we received about a $10 million order for civil defense applications in the French market overall. So, we continue to be encouraged again, by the overall dynamic in defense. We do have an inventory position that is supportive of opportunistic orders that may flow into the order books overall and continue to view this as an important sector to watch.

I would say, just on that order, he commented on, not all of that will deliver this year. So, that’s – there is some timing aspect of when that will flow into the P&L, some of it this year, some of it next year.

Alright. Great. Thank you.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I will turn the floor back to Mr. Logan for final comments.

Okay. Well, thanks everybody for participating today. I would like to close with just a few comments to reinforce what we talked about both in the prepared remarks as well as the Q&A. Firstly, we like our market conditions and our customer engagement. We feel great about the overall top line dynamics in the quarter and continue to have a constructive view for the year. And that’s everything. We – if we have a strong demand profile, then everything else, yes it becomes a lot easier overall. Secondly, clearly, we have a high level of focus right now in both margins and cash. We are, again highly self-aware. But importantly, we have a strong history of being good operators. So, over the course of our history, we have driven a margin expansion of well over 1,000 basis points, high degree of free cash flow conversion. We, again have a strong plan for driving a higher degree of free cash flow conversion for the year. And we feel good about our ability to execute that plan. Thirdly, just a couple of fun things to note that we didn’t really bring out on the call, but really kind of reinforced who we are as a company. Part of that is that we are very proud of the fact that our engagement in the big science community continued during the quarter, where Mirion participated in the European Space Agency JUICE Mission, which is focused on serving the Jupiter system and in particular, the magnetosphere and so our instruments are being used as critical detectors in serving the magnetosphere of Jupiter of its most magnetic moon, which is Ganymede. And again, this is reflective of kind of the leading-edge technological capabilities that we have that are so important in feeding the broader commercial ecosystem that we play in overall. Secondly, to note that, again, about our rebranding, we have received just a tremendous response to the Mirion Medical rebranding, and we have equal expectations for what will follow with the rebranding of industrials to technologies overall. But to be clear, the website redesign, what we call internally Mirion [indiscernible] is really a substantive event. This is not merely the veneer, not merely the front end of our commercial ecosystem but rather reflects a substantial upgrade to the infrastructure that will drive, again, the higher level of engagement and ultimately, order conversion that I cited previously. So, that’s something for us to watch and it’s something that we hope to bring out in final quarters. The last thing, and maybe the most important thing, again, is the reasserting guidance for the year. We feel good about our position. I feel good about all of the dynamics that feed into that, and we will very much look forward to updating you on our results for Q2 early this summer. So, until then, we wish you all well and thank you for participating today.

Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.