Greetings and welcome to the Mirion Technologies Second Quarter 2024 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, Jerry Estes, Manager of Investor Relations. Thank you, sir. You may begin.

Good morning, everyone, and thank you for joining Mirion's Second Quarter 2024 Earnings Call. A reminder that comments made during this call 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 Reports on Form 10-K, quarterly reports on Form 10-Q and in Mirion's other SEC filings under the caption Risk Factors. Quarterly references within today's discussion are related to the second quarter ended June 30th, 2024. 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 today's call. All earnings materials can be found on our 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?

Jerry, thank you, and good morning, everyone. Getting straight to our quarterly performance. I'm pleased with the solid results we reported yesterday evening. I'd like to extend a big thank you to the Mirion team for their efforts and results. A few items of note to kick things off. First, I'm very excited to announce that we've signed a strategic partnership agreement with EDF, the largest operator of nuclear power plants in the world, making Mirion an exclusive content supplier for all of their nuclear new build projects spanning the next two decades. This is expected to be the largest commercial deal that we have ever signed by many multiples and is a testament to our technological leadership position in the nuclear space and our longstanding relationship with EDF. Moreover, this fortifies our competitive positioning in the new build arena over the coming decades, where we expect to see significant global development. Next, second quarter order growth was relatively flat compared to the same period last year. We continue to see strong engagement from customers across the business led by nuclear power where orders were up by more than 15% in the second quarter. I'm confident in the overall health of our end markets and believe that the macro trends supporting our business will be long in tooth. Third, both sides of the business delivered steady organic revenue growth in Q2. Technologies led the way with 4% growth reflecting strong nuclear power demand and Medical delivered 3% organic growth driven by accelerating activity in Nuclear Medicine. Across the Enterprise, we continue to invest in our ground game, most notably through the creation of the Chief Revenue Officer, launching our e-commerce platform in Q4 and bolstering our inside sales capabilities. Fourth, adjusted free cash flow was nearly $9 million in the…

Thanks, Tom, and good morning, everyone. To begin our financial commentary this morning, please turn to Slide 5 for an overview of our second quarter results for the total company. Revenue grew by 5% in the quarter while adjusted EBITDA was up 10.2%. Quarterly revenue was $207.1 million and organic growth was 3.6%. Adjusted EBITDA was $48.8 million with adjusted EBITDA margins expanding 110 basis points to 23.6%. Q2 margin performance came in better than originally expected at both the gross margin and adjusted EBITDA levels. I'll get into more details on margins in a few moments, but we saw gross margin and adjusted EBITDA margin expansion in both segments in the quarter and for the first half. Moving on to our segments, starting with Medical on Slide 6. Medical revenue growth was 7.7% with organic growth of 2.6%. Medical top-line performance in the second quarter was led by Nuclear Medicine where the EC squared business added over five points to the top-line and we made solid progress catching up on shipments following the ERP-related slowdown in Q1. In the RTQA business, performance was led by strength in Europe, offset by market disruptions due to China anticorruption dynamics. Medical adjusted EBITDA margin was 34.3% in the quarter, a 150 basis point expansion from last year. Medical EBITDA margins were supported by a strong quarter from EC squared and solid execution across the portfolio. As Tom noted earlier, we also announced the closure of our RTQA facility in Wisconsin during the second quarter. The change will positively impact Medical adjusted EBITDA margins by approximately 70 basis points on an annualized basis. This move simplifies our operating footprint and is a great example of the self-help cost-out initiatives we have at our disposal to reach our longer term 30% margin target. Moving…

Thanks, Brian. That wraps up our formal comments this morning. I'll hand the call back over to the operator to kick off the Q&A session.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Hey, guys. Good morning.

Hey, Joe. Good morning.

Hey, Tom or Brian, look, I recognize that you guys are going to be coming up against some tough comps in the second half of the year as it relates to orders. At the same time, it seemed like you had like roughly $30 million in orders. Nuclear push out to 3Q. I guess as you kind of think about the health of the order pipeline into the second half of the year, maybe just provide a little bit of color on like what you expect to happen to backlog as we progress through the rest of the year. Do you think you can hold backlog at current levels? Is it going to decline? And what does the overall health of the pipeline look like?

Yeah, so maybe a couple thoughts there, Joe. First off, yeah, I mean, just a reminder, we're comping $100 million of large orders between Q3 and Q4. A lot of that's in Q3, actually. But we feel very, very good about where we sit today. The businesses continue to be out there in the markets. The pipelines are very strong across both businesses candidly. Tom and I like Tom said, just spent some time with the North American customer base at our event in Texas this week. And the dynamic there is very good. The Medical team is -- continues to be very optimistic about what they're seeing in the pipeline. I think to answer your question directly, look, order rates probably won't be positive on a year-over-year basis in the back half of the year. But I like backlog continuing to, I would say in the third quarter, backlog will be up versus the third quarter last year for sure. And I think the fourth quarter, I think there is visibility to us being flat to where we started the year. Now, look, that can move around a little bit just based on kind of order dynamics and timing. But I think we feel very good about where we're sitting. And this isn't something Tom and I are particularly worried about. I mean, when you look these larger project orders, they burn down over time and there'll be other project -- there'll be other orders that come in either at the back end of this year or candidly, in the front half of next year. But the pipeline is very good. And I think our visibility into that pipeline continues to be very good.

Yeah, Joe, this is Tom. Just to tag onto what Brian said the -- we look ahead multiple years, not only the back half of this year but into '25 and beyond. Again, if you look at just the queue that we see coming in terms of larger projects which typically but not exclusively tend to be nuclear projects, again, we feel good about it. To be clear, I think we've always been clear on this. It's not ratable. It is a little bit lumpy. But as it flows through revenue, obviously it smooths out, because typically for a large nuclear project, that revenue is booked over a number of years. But in addition to that, I think it's also important to note that in terms of the flow business that we're seeing, so the business above and beyond these large orders, which typically is driven from our installed base, again, very clearly the case in nuclear, but not exclusively. This is also broadly true in Radiation Therapy QA, et cetera, very clearly based on the health of the installed base, we're seeing a pickup in that flow business. And to be clear, this doesn't necessarily get reflected in backlog because it trades within a quarter. So again, to be clear, we're very confident about where we sit right now. We're not at all concerned about either order flow or market strength here. It's very positive.

I would one -- just maybe to throw a little bit of context on that flow business. I think as we look at the year that are projecting out, we think that flow business is kind of a mid-single digit order growth number for us. And that tends -- we tend to look at that orders kind of below $5 million because it kind of smooths out under that. So maybe just some context, Joe, on what we're seeing and expected.

Got it, guys. That's really helpful color. I appreciate that. I thought that the fact that you signed that long-term partnership, exclusive partnership with EDF was notable. At the same time like I know that you guys have had strong market share in the Nuclear segment already. I'm just curious like how does this potentially expand on an already existing relationship and how do you see this kind of playing out over the next couple of years with EDF?

Yeah, I mean, to your point, Joe, we've had an outstanding relationship with EDF for many decades for which we're tremendously grateful. They've been an absolutely a terrific trading partner for us historically. And we've noted, I think repeatedly, some of the strong content we've had, most recently with the Hinkley Point C project in the UK with EDF. And certainly, we would -- if we had not signed this large commercial deal, we would certainly have expected a future flow of strong business from EDF. But what this does is that it streamlines commercial terms and all of the attendant negotiation in and around that. It strengthens our position competitively and effectively it gives us not only greater confidence in investments that we're making into the space, but it also clearly has an impact on our cost structure in terms of supporting this commercial activity overall. So we're very happy about it, and again, very honored to have this place of pride with EDF.

That's great. And if I could just maybe squeeze one more. You guys referenced the anticorruption dynamics in China in the RTQA market. I think that's -- there's been talk about this now for probably the better part of the last like 12 to 15 months. I guess, how do you see this kind of like impacting your business going forward? At what point do you think you kind of get to a bottom in that piece of the business going forward?

Yeah, I think, just, as we think about the numbers, what I would tell you is that the impact in the first half of the year on the revenue side was pretty negligible on the Medical side mainly with a little bit of kind of timing movement between the first half and the second half on the Technology side. But that's -- that has nothing to do with the anticorruption. That's just project stuff. And I think on the order side, our RGQA business was definitely down in orders in the first half and we expect it to be down in the second half as well. Our expectation, I think this is common, Joe, that you guys have heard from other companies that have released this week. I think we expect '24 to probably be the low point. We expect the dynamics to get better maybe late in the fourth quarter, but into '25 is what we're forecasting at this point.

I'd add to that too, Joe, that, I don't think we've ever kind of called a turn in the Chinese market. It's just -- it takes longer for deals to materialize because people are being much more careful. We certainly understand that. And if you listen to some of the leaders in the space, in particular, Siemens Healthineers, I think you'd get a pretty comprehensive picture of the dynamics in that market. But what's important is that I think there are two factors that are likely to improve the dynamics in the Chinese market. Whether it happens in Q3 or Q4 into 2025, it will happen. One is that people will get beyond kind of this speed bump on the anticorruption, and pent-up demand will begin to flow through again in a more ratable fashion. And then secondly, Chinese stimulus programs will begin to kick in, which also will be favorable broadly in industrial markets, but certainly in healthcare markets as well. We believe both of those factors ultimately will be beneficial to demand in China. So this market continues to be important to us. I think Brian encapsulated well the fact that our exposure here is not great, but we expect it to be a continued source of growth in the future as soon as we get past this short-term disruption.

Perfect. Thank you very much guys.

Thanks, Joe.

Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking a couple of questions. Maybe just to start with, Tom, you referenced the anticipated CMS changes on reimbursement. Maybe just can you talk a little bit further about the impact or potential impact and any thoughts on timing you might have?

Yeah. So the general view within the industry, just for those who are uninitiated, CMS basically is the American Center for Medicare Studies. They really establish reimbursement protocols in the American healthcare market that drive not only government reimbursement but also much of private insurance reimbursement overall. So it's incredibly important. As we've talked about historically, there's incredible development taking place right now in nuclear medicine. We've talked -- we generally refer to it as the theranostics movement on our radiopharmaceutical therapy, but it involves a couple of elements. One is using improved molecular imaging techniques using a PET scanning technology coupled with evolving nuclear medical tracers or radioisotopes that are used to -- for this type of molecular imaging. And secondly, it involves therapeutic doses which again utilize common ligands, but carry different radioisotopes that in general carry more energy and have a therapeutic impact overall. In the evolution of the space, there's been an increase in cost commercially of these radio diagnostic drugs and CMS simply hasn't kept up. Reimbursement rates have been very low in the range of hundreds of dollars when the market value of these drugs and what the healthcare providers are actually paying is thousands of dollars. And so what CMS has signaled is a strong intent to correct this discrepancy in the beginning of 2025. And if that happens, I think the logical kind of axiomatic pathway here is that healthcare providers will be less reluctant to prescribe protocols that may be money losing today, but in the future will be a margin accretive for them overall. So that's the gist of it.

Got it. Very helpful. Obviously, good job cleaning up the public and private warrants. Is there anything else from a capital structure standpoint that those seem like the more obvious, anything else that can be done to improve the cap structure there?

Yeah, I mean, look, I think we're -- I think first off, I think, we've made a lot of progress over the last kind of 2.5 years on the balance sheet, right, whether it's charterhouse, getting out of the capital stack last summer, obviously the warrants, we did our debt repricing, et cetera. I think we continue to look at the -- we'll continue to look at whether we can do more on the other repricing side on the debt. Your question really also then comes down to capital allocation and Tom and I are continuously looking at M&A versus delevering and how to make those trade-offs. And I think we continue to evaluate those kind of as the quarters go by and we generate more cash. But I think we've made a lot of improvements. I don't think there's anything huge and structural left to do from the way we went public. So I think it's really about focusing now on executing our plan, growing margins, free cash-flow for sure, and continuing to grow. I think the growth in the end markets is promising and therefore that's where we're focused. I think most of the capital structure stuff is behind us, and if there's something opportunistic that comes along, we'll always look at things. But I think a lot of the heavy lifting now has been done.

I think it's important to note as well, Chris, that we've guided earlier in the year that organically we'll continue to delever this year to below 2.5 times, assuming we don't enter into a large M&A deal. And I want to be clear that that continues to be our default mode. Our view is that we've got a tremendous position right now for the growth that's evolving organically in both nuclear and the healthcare space. Assets that have a high degree of interest to us right now are continue to be kind of, again, these small ball deals that we've done in the recent past that really don't have a significant impact overall on net leverage. And so that continues to be our default mode. We know that there's a good opportunity for us to bring down leverage a little bit more and be -- continue to be extremely focused on the operational quality of the business overall and the attendant margins and free cash flow generation.

Got it. Very helpful. I'll leave it there. I appreciate it, guys.

Our next question comes from the line of Andy Kaplowitz with Citi. Please proceed with your question.

Good morning, everyone.

Hey, Andy.

Tom or Brian, you mentioned some early benefits from your procurement initiative, specifically in technologies. And you talked about 150 basis points to 300 basis points in margin over the next three years. Your Technology's EBITDA margin was close to 30% this quarter. So could you talk about how the program could play out for Technology in particular? How does it evolve over the second half and '25?

Sure. Just so we're clear, the 150 basis points to 300 basis points is actually at the total company level, not just in Technology.

Yes, of course, of course. I understand .

But look, I mean, I think we've done a ton of work in the first half of the year behind our business system on getting this done. And I think what's interesting is a lot of the early benefits has kind of been some of the stop spending stuff, some of the kind of organic -- rethinking how we engage with the supplier base, et cetera. This next phase is really about how do we reduce our supplier base. I mean, we have a category, and Tom and I were talking to the team about. We have a category. We have over 1000 suppliers. That doesn't need to be the case. That can be less than 100. And as you can imagine, the benefits of going from a lot of little POs to a few bigger relationships that we both have skin in the game on, but also the complexity kind of underneath the hood is tremendous. So I think you'll continue to see margin expansion because of procurement, some in the back half of the year. But I think it's more a '25, '26 phenomenon more than anything else, with a tail into '27, just because some of this takes time and we don't turn our inventory that fast, right? So we're working on two things here at the same time. I think we're super encouraged what we're finding. I think we're very encouraged about the engagement from our underlying businesses and teams and I think this is a meaningful impact for us. So I think we're very bullish about this. I think it's a concrete example on top of the operating leverage we expect to get on how we get from where we are today to that 30% margins. And I think you're starting to see it in the P&L and I think you'll continue to see it through the back half of the year and into '25.

Some additional color here, too, Andy, is that firstly, we've evolved the organization around this. So this is not a project. This is just an evolution in the way we do business. And to be clear, it covers not only direct but also indirect procurement. So the impact is not purely at the gross margin level, but really at the EBITDA margin level overall. And secondly, there's been a subtext here in that -- we've been very clear about our 30% EBITDA margin target within our planning horizon. And I think we've been clear that in our view, we can get there largely through operating leverage, largely by being disciplined about both SG&A and factory overhead and just taking the natural fall through of our relatively high gross margins on the business to drive that margin expansion. We have noted that we're very focused also on operational quality and self-help in that realm. And so here today, we're just being a little bit more tangible about one area in that pool which is procurement. And we're very, very pleased with what we're seeing. Again, half a year into this initiative, we expect it's going to pay meaningful dividends.

Helpful, guys. And then, Tom, Nuclear Medicine, I think, is your fastest growing Medical business. And obviously, you seem quite excited about it, but how big could it end up being over time? And can it help you offset if RTQA tends to be slower for longer? Ultimately, do you still believe that Medical is a mid-single-digit growth business, but maybe the mix ends up changing a bit?

Yeah, I mean, firstly, just to note that from an RTQA standpoint, if you look at the long-term growth trends there, they've been double-digit. It's been a -- it's a tremendous business. It's a field that continues to grow, and there's not been a secular change in that dynamic. Again, I would attribute all of the growth to two factors. One is that we're comping -- we're lapping big comp numbers from last year. But secondly, it's China and Japan, as I think we've detailed with some precision in the call today. I candidly I -- the evolution in Nuclear Medicine is quite unpredictable. I think everybody expects with confidence that this is a market that is going to change cancer care overall, not just cancer care, but also cardiac care and potentially Alzheimer's which would be far greater than any of the -- either of the latter two. But nobody expects it will somehow render RTQA obsolete. Today in the US, as an example, a newly diagnosed cancer patient has about a 65% chance of being prescribed external beam therapy as part of their overall treatment protocol. There's a high likelihood that that continues. And what we're likely to see is just a shifting nexus between radiopharmaceutical therapy and external beam therapy and conventional chemo-based oncology and surgical oncology dot, dot, dot. So the dynamic will change. It'll change differently for different categories of cancer. But the bottom line is that today the, globally, the world is dramatically underserved from an external beam therapy standpoint. The world today only has about half of the linear accelerators and the treatment clinics that it needs. And so we continue to be quite bullish on that business and don't see Nuclear Medicine cannibalizing it. We see it really as being additive.

Yeah. I think just one other comment, maybe is that business we've, Medical overall, we've said is a high single-digit grower for us, not mid-single. This year it's obviously mid-single coming off of two very big years, the last couple of years. And maybe one other thing we're seeing. The team has been talking to us a lot about is actually the Nuclear Medicine business and the RTQA business working together, right, in the field and Nuclear Medicine kind of being additive like Tom said to the RTQA treatment regime. So I think there's a bit of, I think we continue to just like this space a lot.

Brian, I like when you correct me to the positive. That's good. So let me ask you about cash flow. I know you're focused on cash flow this year. You didn't change your guidance, but you did a positive cash flow in the first half of the year. You do have a steep ramp in the second half. I think usually seasonally you generate cash in the second half, but maybe talk about the visibility to get into that range.

Yeah. Look, I mean, first off, we're ahead of where we were last year, and where we ended up last year is in the range we still have this year. I think this year looks a lot like last year, and I actually went back and looked at '22 as well, and '22 looked a lot like '23. So I think for many different reasons, we just -- we tend to generate a lot of cash in the fourth quarter, that this year won't be any different and I think we -- if we felt like we weren't going to get there, we would have changed the numbers. We didn't. We do think we'll be kind of towards the lower end of the range, not the higher end of the range from where we sit today, but there's still a lot of time left to make an impact there.

Thank you.

Thanks.

Our next question comes from line of Yuan Zhi with B. Riley. Please proceed with your question.

All right. Thank you for taking our questions and congrats on a good quarter. First on the high level. I'm just curious, if there is a brief recession coming, do you think your customers will be cautious on spending such as delaying or canceling the orders in the backlog?

Yeah, I'll start, Yuan. This is Tom. In general, if you look at our 20-plus year history, what you would find is that we tend to be a very acyclical business. And candidly our -- some of our strongest growth has come during recessionary periods overall. And so our view generally is that we're not exposed to the economic cycles that the demand drivers and our dominant markets again tend to be somewhat free of those economic cycles. So, no, we're not expecting an enhanced risk of a dip in demand based on just kind of macroeconomic growth numbers.

Got it. Got it. Tom, following on that prior CMS question, can you maybe talk about or comment on your plan to prepare for this upcoming change from CMS?

Yeah, for us, there's some candidly very little to prepare. I mean, the -- just for the broader audience to note our positioning in this area, that today we own the leading data management software platform in the US, a platform that in the market is known as EC squared. That literally connects all of the players from cradle to grave in this space, the isotope producers, the drug makers, the researchers, the radiopharmacies, the CDMOs and ultimately the clinicians, in terms of how product moves through that value chain and ultimately is administered to the patient. As volume overall, I should note that also from a hardware standpoint, we are the market leader in does calibration instruments, thyroid uptake systems, various types of respiratory studies equipment and are broadly involved in compounding transport equipment, syringe shields and a bunch of other peripherals. The general story is that, again, in the American market, obviously our biggest market in Nuclear Medicine, with any favorable change in dynamics, but particularly in this case, where it's procedurally linked, clearly that just reduces friction for the prescription of radio diagnostic procedures. And to the extent that that's an added driver to volume, it means that people are likely to buy more dose calibrators, to license more of our software, and to drag along some of the other kind of balance of equipment, balance of clinic equipment we sell. So there's not a specific action for us to take. We're certainly prepared for continuing upside evolution and demand.

Got it. Got it. Thanks for the helpful color.

We have no further questions at this time. Mr. Logan, I would like to turn the floor back over to you for closing comments.

Okay, well, ladies and gentlemen, as always, we appreciate your attention. Just to reiterate our point of view and our message here, as it was good quarter for the company, we executed well. Very pleased with the margin expansion story and the continued strategic evolution of our business, specifically as it relates to the EDF deal, but also the continued evolution, the operational quality of the business. Our focus for the balance of the year continues as it has been to be on driving organic growth in markets that continue to be favorable and where customer engagement continues to be strong and to continue to grind on our cost structure and our capital velocity to hit our goals in terms of margin, free cash flow and ultimately leverage between now and the end of the year. We very much look forward to reporting back to you in Q3 and appreciate your time and attention today. So I wish all of you a good day.

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.