Greetings. Welcome to Mirion Technologies Incorporated Fiscal Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Alex Gaddy, Vice President of Finance and Investor Relations. Thank you. You may begin.

Good morning everyone, and thank you for joining Mirion's second 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 second quarter ended June 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 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 website 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. Good morning everyone. We're grateful for your continued support of Mirion, and look forward to discussing our results and outlook with you this morning. Earlier today we published our earnings results for the second quarter of 2022 and reaffirmed our guidance for the full year. To get started, I'd like to commend the Mirion team on delivering another quarter of solid results in what continues to be a dynamic operating environment. As we previewed a few months ago, the supply chain remained a focal point in the second quarter. Overall, the condition of our supply chain has shown signs of improvements, but continues to be a very dynamic situation. That situation has been further aggravated by a short-term revenue mix shift, as a result of canceled Russian and Eastern European content. Tom and Brian will update you on the specifics, but again, the team is managing well given the situation. The order inflow during the quarter was very robust across most of the business and indicative of strong market positions in both of our operating segments. That strong order performance paired with the overall supportive macro trends across our end markets, bolsters both our near and medium-term revenue projections. We remain confident that we will deliver on our second half expectations. While the macroeconomic environment will provide many with significant headwinds for the back half of this year and for fiscal 2023, Tom and I remain resolute in our belief that looking forward we have the best market environment for our combination of products of any recent period. And that coupled with the team's ability to deliver the results, ensures our confidence in a very healthy growth outlook. I'll now turn the call over to Mirion's CEO, Tom Logan. Tom?

Larry, thank you and good morning to everyone. To get things started, I want to say thank you to all of my Mirion colleagues for your continued hard work and determination during the quarter. Your dedication and tenacity in overcoming the challenges our business has faced over the last few quarters is commendable. And you should all be proud of the role you've played in delivering the results we reported this morning. There are a few key areas of focus that I'd like to highlight coming out of the second quarter. First, we delivered outstanding order growth in the first half, notching a 25% increase from the same period last year with both Medical and Industrial contributing strong increases. Second, supply chain and unfavorable order timing dynamics concentrated in the Industrial segment had a meaningful impact on the quarter overall. We were encouraged by Medical's performance in the quarter, noting that this segment was not immune to those noted supply chain challenges. Third, we are confident in our ability to achieve our reaffirmed 2022 guidance. Even with headwinds in inflation, supply chain and foreign exchange, our strong order momentum gives us a high degree of support for our second half expectations. Before we get into financial performance, I want to spend some time on what we are seeing in our end markets and why we are encouraged, heading into the second half. Turning to slide four, you'll see year-to-date order performance across our end markets. It is clear the trends we've consistently discussed are manifesting in stronger order intake. Beginning with Medical, we've seen positive momentum, as COVID-related healthcare system impacts have moderated, especially in the US, Clinic growth and robust capital budgets have supported the growth in our radiation therapy and nuclear medicine businesses, while our strong technology advantage…

Thanks, Tom. Good morning, everyone. To begin my comments today, please turn your attention to slide 6, as we dive deeper into our second quarter financial results. As Tom stated earlier, order growth in the first half has been outstanding. We are seeing the health of our end markets, show up in the order book, and I am proud of our sales team for executing against our growth goals. While order momentum has been positive, we continue to experience a number of operational challenges in the quarter, related to supply chain effects, and order timing. Let's now get into the details. For the quarter, total company adjusted revenue was down 4.3% and adjusted EBITDA declined 14.6% compared to the same period in 2021. On an organic basis, our revenue was down 1.7% year-over-year. Total revenue in the quarter was $175.8 million, with adjusted EBITDA totaling $42.6 million. Adjusted gross margin expanded by 30 basis points compared to the second calendar quarter of 2021 finishing at 51.6%. Overall, I am quite pleased with gross margin performance, despite volume absorption challenges. We are seeing pricing initiatives, strategic cost actions and better mix, offset the noted headwinds. It is also important to note that, approximately $3.3 million of public company costs are included in this quarter's adjusted EBITDA results, which accounts for 190 basis points of margin compression. Adjusted EBITDA margin contracted 300 basis points to 24.2% and adjusted earnings per share was $0.13 for the second quarter. Turning now to slide 7 to look at the Medical segment, adjusted revenue was up 19.7% and organic revenue grew 15.1%. Organic growth was strong across all three Medical verticals. I was especially proud of our nuclear medicine team in realizing the benefits of the integration work and seeing the cost actions now paying dividends.…

Brian, thank you. I'd like to close with a few key takeaways, before we take your questions. First, the order book performance reflects healthy vertical market development as we've discussed consistently over the last few quarters. Second, while this quarter showed challenges in a variety of categories, we have seen improvements and expect momentum to carry into the second half. And lastly, we remain committed to our full year guidance and delivering against these expectations with relentless execution. Thank you all for your time today. I'll now pass it back to Alex to lead our Q&A.

Thanks Tom. That concludes our formal comments for today. I'll turn it over to the operator for Q&A.

Thank you. [Operator Instructions] Our first question is from Andy Kaplowitz with Citigroup. Please proceed.

Tom or Brian, Medical up 15% in Q2 showed nice sequential acceleration. Are the supply chain issues now primarily behind you in that segment? And could you see a period of enhanced growth versus that sort of 5% to 7% that's your normal target? And then separately you also displayed strong incrementals in the segment over 50%. How much of those incrementals is a function of just enhanced growth versus the Mirion just can deliver on supply chain issues and that they're not impacting the business?

Yes. Andy, this is Tom. I'll take the first part. I'll let Brian address the second. But in terms of the supply chain environment for Medical, I'd say no we're not out of the woods. This is an area where our engagement is at a very high level. I'm personally and directly and significantly involved with discussions not only internally but with our key suppliers as is Brian and many other senior executives. Our view in general is that we are seeing a more constructive environment for certain types of commodities, particularly relatively high takes for us things like lead, cold-rolled steel and the like. But we're simply not seeing any level of easing yet, as it relates overall to discrete electronic components. So within the Medical business there continue to be issues, where essentially what we've always characterized as firefighting, where we will find that there is some component that we source directly or indirectly through a contract manufacturing partner that suddenly with short notice or no notice is put on end of life or simply unavailable, and we have to scramble to find and qualify alternative componentry. That will continue. Even with the results we reported, again, as I alluded to in my comments, that was with a little bit of drag on the supply chain. Had the supply chain been operating at pre-pandemic levels, I think, our performance arguably would have been higher for the quarter.

Yes, I think, on the margin side Andy, a couple of things, right? We've talked about buying Biodex and integrating with Capitec, and you're really seeing that integration come together this quarter for the first time. So I think, we're super pleased with where we stand there and we think that will definitely continue for the rest of the year. So I expect to see good incrementals as we progress here. The other thing going on is we've always talked about a number of factory closures. One of them is in this side of the house which was a move we made from Southern California to Tennessee. And again that's coming together it's behind us. There's still some bumps in the road, but you're seeing it in the numbers. And I think the third thing you're seeing here is price. I mean we got good price in the quarter on the Medical side. I think we're to Tom's point there's still challenges but this team is hitting on a lot of cylinders and a lot of things are coming together for us on the Medical side in a very robust way from a margin and top-line perspective.

That's helpful guys. And then order strength is obviously encouraging to see in Industrial, but the organic revenue declines have accelerated a bit over the last couple of quarters even if we exclude supply chain. We know a lot of that is Russia, but maybe you could give us more color on exactly when better orders translate into better revenue for the segment and reach that mid single-digit target you have for 2022. Because obviously you have to have a very significant swing in organic growth to make that target and is it more Q4 loaded?

Yes. I think -- I mean, it's quite obvious when you do the math that we need to start seeing that in the third and fourth quarter so the backend of the year. I think, if you -- we're not going to give quarterly guidance, but I think that what you'll see in the third quarter's performance we've done before. I think the fourth quarter for sure is a little heavier than what we would normally like to see. But we need good growth mainly on the Industrial side in both quarters to hit the numbers. I mean, I think, it's just math. I would -- I think I'd be a little heavier on the fourth quarter than not, but we need to deliver execution-wise on both quarters.

Let me just chime in or tag along here too, Andy. And just to remind the listeners that last quarter we took 4% of our full year revenue out of guidance because of the Russia Ukraine situation. And the fact that we're sustaining guidance and have delivered the level of order intake that we have for the quarter -- reflects just how resilient our business model is and how scrappy our team is. I'm incredibly proud of what they've done. And when you look through our internals on the coverage to Brian's overarching point, yes, we've got to execute well in Q3 and Q4 but it's in our hands to do that. And we've got obviously a level of confidence that we can perform here.

One more big picture question then I'll get back in queue. Larry made the comment, but maybe Larry or Tom could address the comment about having a highly visible longer-term outlook into 2023. What's the probability that Mirion actually resumes more of the normalized growth you've targeted that mid single-digits regardless of whether the global economy slows down? And obviously, Mirion does have a fair amount of exposure to Europe, but a lot of that exposure is nuclear. Maybe you can give us a little more color into your medium-term outlook focusing on 2023.

Yes. Candidly, Andy I've never felt -- go ahead Larry.

I was just going to say, Andy just to give you a little bit more color on my comments versus things that I've seen otherwise, historically, the nice thing about Mirion is it's a longer-cycle business. Generally speaking, you do have more visibility than most of what you see in industrial tech kinds of revenue profiles. And Mirion has certainly seen really strong order growth as we've now said three or four times already. The combination of the fact that we have pretty decent predictability, the macro trends for both segments look really strong and that the order book is so strong for sure lead to a really healthy outlook for 2023. But Tom can give you a lot more detail. Thanks.

Just building on what Larry said, I've been in role here for nearly 19 years. And as you and I have discussed Andy, I literally have never seen better market conditions than what we have today. Historically the story of Mirion has been to Larry's point kind of non-cyclical long-cycle business where we've actually done very well throughout recessionary periods over the last two decades. And that is a function of those longer demand cycles. But when I look at our business overall on the Industrial side just to refresh some numbers, nuclear power is nearly 40% of our total enterprise level revenue. And within that about three-quarters actually a little more than three-quarters comes from the installed base. Five years ago the installed base was struggling. Marginal economics were poor for a whole host of reasons. And the focus was on how to manage through those. Do we need to shut down plants? Do we need to curtail operations? And the two things that have changed are number one the political support, which has been spawned by a complex combination of decarbonization desire, strategic energy, supply issues, outright pure economics, again a variety of factors that vary region-by-region. But that popular support has translated into political support, which has provided a broad combination of subsidies and/or at least benign regulatory constraints for the industry overall. That's been tremendously helpful. But secondly with the pricing of natural gas, which tends to really drive the marginal price of electricity in all major markets we have seen a secular change. It is not going to go down anytime in the near-term. And the consequences of all of these factors coupled with the obvious geopolitical issues in Europe are highly suggestive of an environment where nuclear power is going to be a very, very healthy organization or segment for an extended period of time. And that generally augurs well for capital budgets and operating budgets and efficiency operates and things that essentially correspond well with the solutions that we offer. Beyond that, obviously, on the military side maybe on a more short to intermediate term, clearly there's an elevated view of the threat matrix in Europe but not only in Europe. From a civil defense standpoint, I think the view is that risks are elevated on a more global basis. And we believe this is an area where again our solutions can be very helpful to the perceived needs responding to these threats overall. Beyond that not to filibuster here, but medical market health continues to be strong. We are performing at a higher standard. The bottom line is that when we look at the combination of vertical market conditions coupled with our evolving capability driven by the evolution of our operating model, which in turn gives us a superior ability to execute, we feel pretty good about the future.

Appreciate all the color, guys.

Our next question is from Joe Ritchie with Goldman Sachs. Please proceed.

Great. Thank you. Good morning, everyone.

Hi, Joe.

How are you?

All good. All good. It's Friday. So, my first question, maybe let's just touch on this. I know you don't want to give quarterly guidance, but you did make a comment around a lot of the orders coming through in the last month of the quarter. I just want to get a sense for like how short cycle are the orders that came through book and ship versus longer cycle, like, any color that you can give around that? Just to provide a little bit more confidence in the industrial growth ramp in the second half of the year?

Yeah. I think, I mean, in a normal operating environment, I think Tom and I would have expected to see a bit of those orders that came in June to be able to convert. That's not abnormal in certain parts of the business. It just depends on what the order and product mix look like. What I think I would say Joe is we have very good coverage on the next two quarters. Obviously that built in June from where we sat in say April and May. And we'll see how things look and come together here in the third quarter. But the reality is, we're holding our guidance. Our confidence is high and we believe this is mainly about execution here in the back half of the year versus anything else.

Okay, good. That's great to hear. And I guess, you guys I remember I think the last time you reported you talked about kind of like a $10 billion or $10 million not billion sorry, EBITDA offset from defense and nuclear, on the lost Russian sales. Is that still kind of coming through as expected?

Well, I would just pull you to that orders page, right? I mean look our nuclear orders this quarter or for the first half, you're talking about a 50% up year-over-year number. And I think, I've given some color that I thought that would come kind of somewhere out of Southeast Asia. And what I would tell you is, we're seeing that. And we're seeing it in the underlying installed base for sure. I think on the military side, we noted here our defense orders so this is military and homeland security in defense, is up almost -- is up over 20%. And the other thing I would note, just on these order growth numbers, these are on as-reported numbers. When you actually -- there's actually a drag in here from the euro, a year ago as well. I think on a volume standpoint, we're really excited about where we sit. And I would say, that our commentary from the first quarter is proving true and it shows up in our order rates very clearly.

The other thing, Joe, is that on the defense orders the order cycle is longer than you might think. And just a note that, there's a lot of activity in pipeline and we continue to be very enthusiastic about this segment.

When we get those orders, we've got to be able to -- when we get those orders right, we tend to be able to turn that stuff, depending on what the products are pretty quickly. So those tend to convert well but they like to Tom's point, they take -- they do end up taking time to come into the book.

Got it. Okay. That's, helpful. One last one. And Tom I heard you say earlier, that there were no cancellations on any of the Russian-related projects. I know that you took Russia out of the guide. I remember, that if there weren't any cancellations that that could be potentially some upside in the second half of the year. I'm just curious, how is that kind of playing out relative to your expectations?

Yes. I think there's -- I think the answer to that is yes there's still upside. I think candidly, it's probably more in 2023 than anything else or more moving into 2023 than anything else. But yes, I expect to see some Russian-related technology or even direct Russia revenue in the back half of the year. I'm not going to give you a number, because that's -- it's still pretty fluid. But I think, as you think about what was in there I think, we see probably more of that ending up in 2023 than maybe coming in the back half of the year. But our order book is great and I think, it's nothing but upside for the backend of the year.

Okay, great. Thanks, guys.

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

Good morning. Thanks for taking a few questions guys. Maybe can you just provide a little more color around the types of orders you're seeing flow into backlog? Are these orders filling direct demand, or are customers placing kind of just-in-case orders?

No, I think if you look firstly on the Industrial sector, Chris that what you would find is that the order pickup. And again, I think Brian referenced Page four in the presentation just showing what our strong order growth has been sector by sector. But clearly in the nuclear sector there's been a pickup of activity spanning both the installed fleet and more broadly new build activity. And we expect that candidly to be the new norm, again as plants are making more money OpEx budgets CapEx budgets increase. And again, there are certain tools instruments solutions that we provide that allow plants to run more efficiently and run at greater capacity. And our expectation is that we're going to continue to see a pickup in these product categories for us as we get into the seasonal cycle this fall and then thereafter. So, what I would say on the Industrial side is that, if you look at the demand, no it's not defensive in nature it is responsive to secular market changes, that's true in nuclear power. Clearly on the defense side, it is not a prospective, kind of prophylactic view. It as a direct response to immediately perceived threats. And the same could be said in general about the behavior that we're seeing in life sciences and in other elements of that business. On the Medical side it's a combination of factors, part of it is our improved operational execution in the nuclear medical business, as we've really gotten our arms around supply chain management and been able to systematically work through a higher level of backlog than we normally would have carried. We still have further to go, but we've made great progress there. The team has performed brilliantly. And on the radiotherapy business, there we continue to see just very strong performance, reflecting more macro trends maybe a little bit of still COVID-related market recovery. But generally, the macro trends are what's supporting that business growth overall. So, I guess the summary of all that is, that no we think the demand pickup that we're seeing is organic. It is not defensive in nature and in particular we don't see it as being particularly sensitive to recessionary demand patterns in the broader economy.

I would also just remember that obviously this is not true for the occupational dosimetry side and we do have products that look different than this. But a lot of our product portfolio is $20,000, $30,000 to $100,000 per product and that's a wide range. But the point isn't the range, the point is these are things you typically hold 5 or 10 on a shelf. When one breaks, you come it's we're -- there's a need and we're fulfilling a need more than stocking somebody's shelves.

Got it. Very helpful. And you just referenced Dosimetry. So just year-to-date order growth is down 10%. It looks like that's more of a reflection of kind of Q1. Can you just kind of talk to the trajectory there?

Yes, I mean listen I think the Q2 order number is very solid high or mid-single digits frankly which is very robust compared to how that end market grows. Listen this all relates to some -- we did an ERP conversion last year, well before we were even contemplating going public and in this business, we recognize orders when we bill, and we made some billings in the first quarter that we typically would have made in the fourth quarter of the year before. So, I think when you get past all the noise at the half, this is -- we still have kind of mid-single-digit numbers in the order book and we expect good growth in that business in the back half of the year. I think we're super excited about some of the opportunities around Instadose that we're talking to customers about.

Got it. Helpful. And maybe just a little more detail on pricing initiatives kind of how they will flow into the numbers in the second half?

Yes. I think we said, Tom said like, we saw 3.5% this quarter. Again, that's a touch higher than I think we would have anticipated. I think that's continuing to give us broad confidence in our pricing being sticky. I think that will continue to ramp in the back half of the year. And my comments that I said before, hold true. I mean we think it's 5% in the fourth quarter or right around 5% in the fourth quarter. So, we're confident in what we're doing. We continue to be thoughtful about putting price into the market where we need to but also doing it on a value-based standpoint. So we feel good. I mean price cost does expand in the back half of the year as we thought. Not a whole lot of changes versus what we've been expecting. I think we're executing well in this area for sure.

Got it. Thank you. And last one for me just maybe a little more detail of the goal of getting below fourth times leverage by the end of the year, kind of, what's embedded in there?

You guys are making me work hard this call. Yes, I mean listen, the math is at the midpoint of our EBITDA. And with an acquisition that could get us -- that would get us to the bottom end of the range. We still expect to be at or below four times. So, that means cash generation has got to pick up in the back half of the year. And we have to hit our marks on the EBITDA side. We've got to hit the midpoint. And with the right type of deal, all of those things coming together gets us there. If we don't do the deal, obviously, that probably -- that number still holds for us. So, I think we feel pretty good about getting down there and improving that we can lever up for deals and then lever back down when we operate well.

Got it. I’ll leave it there. Appreciate guys.

Thanks, Chris.

We have reached the end of our question-and-answer session. So, this will conclude today's conference. You may disconnect your lines at this time, and thank you again for your participation.