Mirion Technologies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Myerian Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Gatti, Senior Vice President, Strategy.

Operator

Thank you, Alex. You may begin.

Speaker 1

Good afternoon, everyone, and thank you for joining Marion's Q3 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 ks and quarterly reports on Form 10 Q that we file from time to time with the SEC under the caption Risk Factors and Amyrion's other filings with the SEC. Quarterly references within today's discussion are related to the Q3 ended September 30, 2023. The comments made during this call will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles.

Speaker 1

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 Merion's IR website at ir.merion.com. Joining me on the call today are Larry Kingsley, Chairman of the Board Tom Logan, Chief Executive Officer and Brian Shoppe, Chief Financial Officer. Now, I will turn it over to our Chairman of the Board. Larry?

Speaker 2

Thank you, Alex. Good afternoon, everyone, and thank you for joining our Q3 earnings call. We published a solid set of 3rd quarter numbers today, which sets us up well for the Q4. Importantly, our results demonstrated progress on several of the key focus areas and initiatives we have been talking about all year. Quarter performance was outstanding.

Speaker 2

The team saw strength across the portfolio and closed key orders on the Nuclear Power side of the business. Backlog grew sequentially for the 5th consecutive quarter. I'm encouraged by the strong momentum we are building across the enterprise. The outlook for both the Medical and Technology segments looks quite positive in an otherwise mixed macro environment. The focus on networking capital has begun to pivot performance as networking capital was a source of cash in the quarter.

Speaker 2

This is a step in the right direction and just the beginning of what we expect should be stronger and consistent operating performance. The Board and I are confident in the team and the approach to driving capital efficiency and in the short term, our deleveraging targets. Overall, Myriad is on solid footing heading into Q4. Quarter flow and backlog coverage are robust. The team is executing well and leverage continues to tick down.

Speaker 2

Moreover, market fundamentals are constructive and that positions the company well for profitable future growth. I'll now pass the call over to our CEO, Tom Logan. Tom?

Speaker 3

Thank you, Larry, and good afternoon, everyone. I'd like to begin my comments today by thanking my Myeron colleagues for their efforts during the Q3 and helping us to deliver an excellent set of results. Q3 organic order growth was outstanding with an increase of approximately 46% compared to the same period last year. Despite strong revenue performance, we expanded our backlog for the 5th consecutive quarter, delivering year over year backlog growth of 11% and achieved a new record backlog position of $799,000,000 as of the end of Q3. Strong quarterly order flow was headlined by large new build and spare parts orders from nuclear customers.

Speaker 3

The size and scope of the orders We're in line with our expectations and are a reflection of the positive nuclear sentiment we've been seeing globally. 2nd, we delivered total company organic revenue growth of more than 17% compared to the same period last year. Technologies led the way with organic growth north of 26%. 3rd, adjusted free cash flow with $17,200,000 in the 3rd quarter, which is an encouraging step in the right direction. The team did a great job of executing against our working capital of patient initiatives and things are progressing according to plan.

Speaker 3

Cash flow remains a top priority for me and we are committed to building off this momentum going into the Q4. 4th, we've reiterated our financial guidance for 2023. Our backlog position provides good line of sight into the Q4, giving us confidence in achieving our financial targets for the year. Finally, we closed on the acquisition of EC2 this week, adding another strategic software platform to our medical business and the first to service our nuclear medicine customers. I'll get into more detail on this later in the call.

Speaker 3

Before I cover quarterly financial results, I'd like to expand on our orders performance and talk about what we are seeing in some of our end markets. Starting with nuclear power, we continue to see momentum in this space. We booked several large orders in the quarter, including a new build project in Asia and a spare parts order in Korea. In the emerging small modular reactor market, We booked more than $10,000,000 in orders from 5 different developers year to date through October. We are seeing healthy demand and engagement from our nuclear power customers.

Speaker 3

We expect several utility scale new build orders like the one we received in Q3 to materialize over the planning horizon, supporting future growth. The installed base is steady with improving customer fundamentals and the decommissioning pipeline is encouraging as well. Additionally, we remain excited to play an active role in the small modular reactor development space, supporting the global push for cleaner energy generation. We continue to prioritize building relationships across the developer landscape and are seeing orders come in at an increasing pace. In the Medical segment, we remain encouraged by the strength we're seeing across the portfolio, especially internationally within the European radiation therapy market.

Speaker 3

Our investment in the European support center is paying off as we continue to win share in the region. Domestically, our RTQA sales teams have reported a lengthening order cycle in RT hardware enhancements, and we continue to augment our SunCheck or platform, which should position us well to better meet clinical demand in the future. Our solutions are best in class and we remain encouraged by this space as a whole. Let's now flip over to Slide 4 to discuss our Q3 results in more detail. As I mentioned earlier, we delivered consolidated organic revenue growth of 17.3% in the Q3.

Speaker 3

Technologies led the way at 26%. Growth was supported by strength in our key end markets and geographies. And importantly, we achieved the strong revenue growth while increasing our backlog, which positions us well to deliver future growth. In Medical, we sustained positive momentum and delivered 5% organic growth despite comping a 20% organic growth quarter last year. Medical growth was led by strong international sales growth in our RTQA end market.

Speaker 3

Before I pass the baton, I'd like to make a few additional comments for Q4. 1st, Cash flow and margin expansion remain at the top of my priority list as we continue to delever the business and aim to establish our reputation as a compounder. Our teams executed well in the Q3 and I remain confident in our strategy to enhance inventory and net working capital performance in for the future. 2nd, I have retaken the reins of our medical business and will serve as its Interim Group President until we find the right long term fit for the role. As a reminder, I spent much of 2022 leading the segment, optimizing the operating model and organizational structure and defining the Myeron Medical brand.

Speaker 3

The segment is performing well and I have the utmost confidence in our team to continue executing on our growth strategy. 3rd, as you know, I've been working very closely with the Technologies team over the course of the year. As a byproduct of that work, This week, we announced internally that we're executing a group level reorganization designed to create higher business line accountability and augment the focus on commercial and operational excellence. I have confidence that Group President, Loic El Wah and his team will leverage the new organization to accelerate the attainment of our growth, margin and cash flow objectives. In concert with that reorg, I've also announced a few important changes to the corporate organization.

Speaker 3

These changes include the naming of Sheila Webb as our inaugural Chief Digital Officer, the appointment of Doctor. James Cox to the position of Chief Technology Officer and the promotion of Aaron Chesney to the position of Chief Marketing Officer. I expect each of these changes to enhance our near and long term value creation, particularly in the areas of digital transformation and the accelerated application of artificial intelligence. Finally, I'm excited to welcome our new colleagues from EC2 to the Myriad family. To give you some color on the acquisition, EC2 is a medical software business that will operate within our nuclear medicine group.

Speaker 3

Company has a strong recurring revenue profile and offers Design, implementation and support for its portfolio of comprehensive workflow software solutions. Through this acquisition, we'll be able to provide additional value to our nuclear medicine customers, helping them to simplify daily operations and streamline therapeutic and diagnostic processes. We acquired the business for $33,000,000 and expected to generate $12,000,000 of annual revenue and $5,500,000 of pro form a adjusted EBITDA for calendar year 2023 and for the acquisition to be accretive to medical margins. We have acquired a highly strategic medical software business without negatively impacting our commitment to deleveraging. And I'm excited to see the value that EC2 and our new teammates can bring to Marriott.

Speaker 3

With that, I'll now turn things over to Chief Financial Officer, Brian Schoffer. Brian?

Speaker 4

Thanks, Tom, and good afternoon, everyone. To get started, I'll ask you to please turn to Slide 6 to take a deeper look at our 3rd quarter results. Total company revenue grew by 18.8% in the quarter, while adjusted EBITDA was up 26%. Quarterly revenue was $191,200,000 and organic growth was 17.3%. Looking at adjusted gross margin performance, we saw a 210 basis point contraction from the same period last year.

Speaker 4

Gross margins were primarily impacted by 2 things. First, a larger revenue contribution from the Technologies segment negatively impacted overall company margins by approximately 110 basis points. 2nd, mix and non repeat items and technologies drove more than 100 basis point impact to gross margin. I'll get into more detail later in the segment discussion. Adjusted EBITDA was $38,800,000 with adjusted EBITDA margin expanding 100 and 20 basis points to 20.3%.

Speaker 4

As expected, margins expanded in both segments. At the total company level, price cost was positive on a dollar basis, but continues to be negative on a rate basis. Pricing dynamics continue to be the focus for us as a team. Moving on now to our segment performance in the quarter, starting with Medical on Slide 7. Medical reported revenue was flat year over year with organic growth of 5.2% and price contributing approximately 3%.

Speaker 4

Top line performance was in line with expectations as we comped a very strong Q3 last year. For reference, our 2 year organic STACK was 26% in this segment. Organic growth was offset in Q3 by the divestiture of the BioDex Physical Rehab Business, which impacted medical reported revenue by nearly 6% in the quarter. Medical adjusted EBITDA margin was 34.2%, a 4 50 basis point expansion from the same period last year. EBITDA margin performance was supported by an proving product mix compared to the first half of the year, cost out initiatives we actioned in Q1 and the BioDex divestiture, which accounted for more than half of the margin expansion.

Speaker 4

Flipping over to slide 8 in the Technologies segment. Technologies revenue grew by 32.8% in the quarter with organic growth of 26.3%. Growth in the quarter was driven by 5% of price, the timing of revenue recognition, business mix and a lower comp from the prior year period. As a reminder, our Q3 is seasonally our smallest quarter. In the Q4, we expect low single digit organic growth for Technologies, which will be comping a significant Q4 number from 2022.

Speaker 4

For the full year 2023, we expect high single digit growth for the Technologies segment. Technologies adjusted EBITDA was $27,700,000 representing growth of 37.1%. Adjusted EBITDA Margin expanded 70 basis points to 22.6%. Key drivers of performance include the following. First, we were able to generate some operating leverage off of a strong top line quarter, but not to the level that we would expect.

Speaker 4

Cost inflation was higher, which offset the strong pricing result. We were price cost positive on a dollar basis, but negative on a rate basis. Additionally, we comped 1 month of Q3 2022 without the SIS acquisition. This impacted adjusted EBITDA margin by 40 basis during the quarter. Note that Q3 was the last quarter with any SIS acquisition inorganic impact.

Speaker 4

Lastly, we saw a few non repeat items that coupled with segment mix in the quarter impacted Technologies margin by approximately 200 basis points. These items were largely isolated to our French businesses and our North America Civil Defense product line. These one time impacts are not structural in nature. Turning over now to Slide 9 for cash flow and leverage. Adjusted free cash flow was $17,200,000 during the quarter, bringing our year to date figure to 12,300,000 As expected, cash flow performance took a step forward.

Speaker 4

However, we still have a lot of work to do to deliver on our expectations for the Q4. Net working capital was a source of cash providing a benefit of $8,700,000 and we began to see inventory reduce in the quarter. We continue to target net working capital as a source of cash for the full year and improving our cash conversion. Moving on, net leverage ticked down to 3.4 times at the end of September quarter. As Tom mentioned, we are confident in our ability to continue delevering the business through strong operational execution and we have reiterated our 3.1 leverage target for year end.

Speaker 4

This includes the impact from acquiring EC2. Finally, looking at Slide 10, we have reiterated our financial guidance for 2023. We expect full year reported revenue growth of 8% to 10% with 6% to 8% organic growth. Adjusted EBITDA is expected between $175,000,000 $185,000,000 with adjusted EBITDA margin between 22% and 23%. Adjusted free cash flow is expected between 45 and $75,000,000 for the full year.

Speaker 4

Overall, a solid Q3 and I'm confident with our momentum heading into the Q4. I'll now pass the call back to Tom to close things out.

Speaker 3

Thank you, Brian. Before we begin Q and A, there are a few things I'd like to leave you with this afternoon. First, our backlog position and overall order momentum coming out of the Q3 was very strong, bolstered by large nuclear power orders. Engagement across the business remains positive and we're confident heading into the Q4. 2nd, both of our reporting segments delivered quarterly results in line with expectations.

Speaker 3

Top line growth was robust and EBITDA margin expansion evidenced across the board. 3rd, we saw a notable improvement within our cash flow dynamics in Q3. There's still work to be done and this remains a key priority for me and the rest of the team. And finally, we've reiterated our 2023 guidance, including our 3.1 times leverage target for year end. I believe the business is well positioned to to deliver on expectations heading into the Q4.

Speaker 3

I'll now pass it over to Alex to open things up for Q and A. Alex?

Speaker 1

Thanks, Tom. That concludes our formal comments for this afternoon. Operator, let's go ahead and start the Q and A session.

Operator

Thank you. We'll now be conducting a question and answer session. A confirmation tone will indicate your line is in the question Thank you. Our first question is from Joe Ritchie with Goldman Sachs. Please proceed with your question.

Operator

Thanks. Good afternoon, everybody.

Speaker 3

Hey, Joe.

Speaker 4

Hey, Joe.

Operator

Hey, can we start on the orders and specifically on the nuclear new build? So I saw that the orders increased by $85,000,000 Yes. How much of that was nuclear newbuild? And then I guess the way to think about that is probably that's probably a little bit of a longer cycle business for you. So when would you kind of expect to see that come through the P and L?

Speaker 4

Yes. So, look, if you think about the order growth We saw in the quarter year over year, so up $85,000,000 We saw 2 orders approximately the same size, about $40,000,000 each. One is the nuclear newbuild project, one is a spare parts order out of Korea. If you think about the new this particular nuclear newbuild, we actually Believe we'll see where we know we'll see some revenue in the Q4, and then we'll start to see a ratably trade over the next kind of 2 to 3 years. Joe, so it's pretty this one is impacts us near term, which is not always the case in this business.

Speaker 4

But this order is good for us for next year from a rev rec standpoint.

Operator

Got it. That's helpful, Brian. I guess maybe, the reason I thought maybe it was a little bit longer cycle was just because there was no change to the expectations in the Q4 for technology. So was this something that you guys had already contemplated when you gave us the original guide? And then I guess, Tom, as you kind of think through, I think you made it oh, go ahead.

Operator

You want to answer that, Brian?

Speaker 4

No, go ahead. Go ahead, and then I'll answer.

Operator

No, no. And then Tom, you made a mention of other potential new projects on the nuclear new build side and your pipeline. Just any more color around that would be helpful.

Speaker 3

Yes, maybe I'll let's take it in reverse order. I'll answer that and then Brian can So, yes, if you look at the pipeline that we see for nuclear newbuild projects, Recognizing that we work with most of the major NSS players, NSS being the Term of art for nuclear reactor designers. The pipeline is as good as I've seen it. And our view is that as we look At our specific planning horizon that we expect that we will see continued growth in the sector. I will note that nuclear projects are notoriously difficult to predict in terms of quarterly timing.

Speaker 3

And so that's something that we'll shy away from. But I will tell you that our expectation is that this will be a continued theme, including in 2020 for

Speaker 4

us. And then quickly, Joe, on we didn't move up guidance for the Q4. I mean, look, this Loic and the team have been working on for a while. And like Tom said, these are really hard to predict when they're going to land. The impact on the Q4 is pretty small.

Speaker 4

I mean, it's less than a couple of $1,000,000

Operator

Okay. All right, great. One other quick one and I'll Pass it on. Just on free cash flow, congrats on the improvement this quarter. Still need more improvement in 4Q to hit hit the range for the year.

Operator

So just talk about your confidence in getting to that 45% to 75% and what's within your control?

Speaker 4

Yes. I mean, look, I mean, there's a couple, there's definitely some payments on a few projects, that matter for the Q4. But we I mean, there's a reason we reiterated our range and our leverage target. The team is very aggressively attacking kind of both the structural issues and the near term kind of Things that will impact this, so I think there's a lot of this is in our control and we feel very good about the guidance we put out this morning.

Operator

Great. Thanks, guys.

Speaker 4

Thanks,

Operator

Our next question is from Andy Kaplowitz with Citigroup. Please proceed with your question.

Speaker 5

Hello, everyone. How are you doing?

Speaker 3

Hey, good afternoon, Andy.

Speaker 5

So Tom or Brian, just maybe following up on Joe's question. In terms of like the bookings, and I know you don't want to give us too much on the 24 setup, but when I sort of look at the 2 segments, you talked in the past About Merion's ability to grow, call it, mid single digit plus in the 5% to 7% range. Is the visibility higher than normal? Like how would you say it as we sit here sort of in November thinking about the 24 puts and takes?

Speaker 3

Yes, let me tee it up and then I'll let Brian talk About a little more. I would say that in general, Joe, what we've seen is an improving coverage dynamic where, if you look at our backlog coverage relative to guidance, and this has been the case for much of this year that In general, sequentially, we are seeing an improvement in that coverage and we're certainly encouraged and heartened by the record backlog that we're sitting on here at the end of Q3.

Speaker 5

It's helpful, Tom. And Brian, maybe again a follow-up on a question like in Technologies, you mentioned sort of low single digit growth in Q4, tough comp, But we didn't model 26% growth in Q3. Was there any sort of pull forward there or like You're being conservative, like how do we think about in the context of such strong growth in Q3?

Speaker 4

Yes. Look, there's definitely some movement between kind of Q3 and Q4 from what we kind of thought in June. Yes, I think we feel again, I think we feel pretty good about what we said. We're comping like a 20% number from last year in the technology segment on the organic side. As well as 17, sorry, 17% last year.

Speaker 4

So that's a big number. I think we're very comfortable with the revenue range and we will need to we will see some EBITDA margin expansion in the Q4 as well.

Speaker 5

Got it. And Let me leave my last question in maybe 2 parts like on the margin side. Like in Technologies, Brian, you talked about sort of one time costs. Like Repeat obviously, one time, it means we shouldn't have more costs like that, but maybe give us a little more detail there. And then you made the you're still not A positive on a price versus cost rate basis?

Speaker 5

Like what does it take to get there? Because I would assume demand is pretty good as we see And supply chain is getting better, commodities generally have gone down. So what can you do to get there?

Speaker 4

Yes. So on the one timers, look, I mean, we saw some catch up costs Out of the French business, it is mainly in the projects business. And we saw some higher cost on some civil Some of our Civil products this quarter, I mean, we're burning through kind of inventory, which is good. And I think that kind of also goes to the second question, which is One of the we're focused on inventory reduction for 2 reasons. 1 is to generate more cash flow, but 2, exactly what you just said, as the supply chain does get better, That allows us to pull through better material costs through the P and L.

Speaker 4

So I think It's that, that gets us there from a rate basis, on the price cost side.

Operator

Thanks, guys.

Speaker 3

Andy, thank you.

Operator

Thank you. Our next question is from Chris Moore with CJS Securities. Please proceed with your question.

Speaker 6

Hey, guys. Thanks for taking a couple of questions. So, yes, maybe just I know you're not getting into 'twenty four too much at this point in time, but maybe just the puts and takes that fiscal 'twenty four gross margins will be above 'twenty three?

Speaker 4

Well, I mean, as we think about it, I mean, we're not going to give guidance right now for next year. But I think What both Tom and I said in our prepared remarks was margin expansion and cash flow are our top priorities for both of us, but also the entire company. I mean, we're looking at We're very focused on this, I think is probably what to say. Look, I think there's good pricing dynamics That continue to be out there. I talked about that being a focus.

Speaker 4

I think the team is very focused on the supply chain side, right? And as We work through the inventory stuff that is helpful. Our structural we put a pretty big Structural pay increase through this year with all the inflation and kind of competition that's out there. I think that looks different a little bit different next year for us. But I think when you put it all in and by the way, we're adding software business via EC2 to the mix.

Speaker 4

And I think we feel very good about what the software business kind of more holistically across Myriad will do for us next year versus what we kind of saw this year. So I think we feel pretty good about the puts and takes here. And again, it's a focus. I mean, that's probably the most I can give you without giving and a specific target that we have, but we expect expansion.

Speaker 6

Fair enough. That sounds good. Backlog almost $800,000,000 up 5 consecutive quarters. Obviously, you talked about the new nuclear build order there. Is the balance between medical and technologies, is that much different than it was a year ago?

Speaker 4

No. Well, a little bit just because the backlog has grown and most of the growth is on the technology side. I mean, our medical backlog is less than 20%. If you think about the backlog, less than 20% of it is medical.

Speaker 6

Got it. And maybe just the last one for me. I mean, you You guys have been clear that you're not just going to flip a switch on in situose, see penetration ramp quickly and dramatically. That said, I mean, Do you expect penetration at the end of 'twenty four to be significantly different than end of 'twenty three? Or is this It really is a 3 to 5 year kind of transition?

Speaker 3

Yes, Chris, it really is a 3 to 5 year transition. We expect that we will fulfill orders on this in the first half of next year. And the but in terms of meaningfully impacting the current mix, Again, I think this is just a longer campaign and it will occur systematically, but not at the kind of accelerated rate that might be employed.

Speaker 6

Got it. I appreciate that. I will leave it there.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Tom Logan for closing comments.

Speaker 3

Okay. Well, ladies and gentlemen, we appreciate your participation today. Again, we're Happy to report what we believe is a very solid quarter. And to be clear, I think we've noted this well throughout the call. We're very encouraged by the strength of our top line and the level of customer engagements and a favorable market dynamics that underpin that.

Speaker 3

These have always been key factors in the relative acyclicality of Myriad as a company and we're happy to see that coming through and coming through so strongly, at this point in the year. Further, as you know, that is the toughest part of any business to manage, that if your top line is good, the rest of it is far more within your control. So all of that is to say that we feel good about the momentum of the business coming into Q4. We feel pleased with how we're sitting organizationally, The operational and commercial priorities that we're focused on, and we very much look forward to speaking to you again in 3 months' time. So thanks again, and we'll leave it there for the day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Mirion Technologies Q3 2023
00:00 / 00:00
Remove Ads