Thank you for joining us for the Mirion Technologies session. I'm Rob Mason, the senior analyst at Baird, covering advanced industrial equipment. Just to start off, Mirion's a global leader in detection and measurement technologies for sensing ionizing radiation, and its solutions play across a wide range of end-use markets, from medical and labs, nuclear power, and civil and defense applications as well. So, with us this morning from Mirion, we have Tom Logan, who's the CEO, and then Brian Schopfer, who's the CFO. Tom's gonna start off with a few opening comments, and then we'll jump to questions and be able to take your questions as well. Just feel free to raise your hands to submit those, and we'll work those in. So Tom, I'll hand it off to you.
Rob, thank you. Good morning, everyone. So, just as a lead-in, Rob mentioned that we fancy ourselves as being the global leader in the detection and measurement of ionizing radiation, which sounds like an unbelievably esoteric field, but it's actually incredibly exciting. I hope we can make the case today as to why it's a very, very interesting market and just some of the unique dynamics of our company that have made us relatively successful. By way of introduction, again, I'm Tom Logan. I am the founding CEO of Mirion. I've been doing this now for 20 years, and very happy to be here today to talk about our current arc and where we think we're taking the company.
But just to set a little bit of context for the company overall, let me begin with the market. When we talk about ionizing radiation, firstly, we are talking about alpha, beta, gamma, X-ray, and neutron radiation. We're not talking about microwave radiation or anything else on the electromagnetic spectrum. Technically, ionizing radiation can knock an electron out of orbit. And as I think most of you are aware, ionizing radiation can be both a hazard and of great benefit to humankind. And the key to our company, and you'll hear this, I think, as we go through the discussion, is that we are a leader in designing detectors, signal chain management, software, various applications in detecting ionizing radiation.
At the most cutting edge, our instruments have been used for the discovery of the last 9 elements on the periodic table. We have been deployed on most of the significant interplanetary space probes, most recently on the European Space Agency Jupiter mission. But our instruments detected the presence of water on Mars. We're on the International Space Station. We've developed instrumentation for NASA, for the Artemis program, the Mars mission, done a lot of work for the ESA. But even more broadly, we are deeply, deeply involved with the global physics community in the quest for better understanding of the composition of the universe, particularly dark matter.
While this is not a huge component of our overall revenue, it's the important thing, again, is what we learn from this in terms of how to design the most advanced detectors. Ultimately, what we have proven time and time again is that we can take those learnings out of the science lab, put them into commercially viable form factors, produce them at an industrial scale at attractive cost points, and this then becomes the linchpin for everything that we do. Because as we talk about the business, you'll see that we have two very different segments: technology segment and a medical segment. That technological leverage is the key to everything that makes it coherent and gives us the ability to grow the business to a substantially larger size today.
So today, our currently served market is about $4 billion. We're roughly an $800 million revenue business overall, but this is within a total addressable market that's closer to $20 billion overall. Our fundamental mission as a company is to leverage this, what we believe to be unrivaled knowledge, in the detection and measurement of ionizing radiation, to make the world a better place. And we do that by ensuring, clean air, clean energy, protecting borders, transit points, events, and the like, and improving human health outcomes, principally in the field of cancer care overall. A few key metrics for the business. Today, we have 18 major product categories. We're the global leader, meaning the number one player, in 15 of those 18 product categories, on a global basis.
We are also substantially larger on a like-for-like basis than our nearest competitors, who would include Thermo Fisher, Ametek, Fortive, and some other great, great industrial technology companies. The reason this is important is, is because it gives us a couple of, of ancillary benefits. Firstly, if you think of a network effect, where you take a combination of points of presence and content, given the scale, given the global footprint of our business, we enjoy a greater network effect than our competitors. What this allows us to do, in the main, is in areas where we have an underrepresented share position. So take a product category, we may be number one globally, but we may be the number two or three player in a given market.
That network effect, geographical presence, content, broader solution capabilities, gives us the ability to systematically gain those, those share positions that we think we deserve overall. And historically, this has allowed us to to outgrow our markets. The second important element of scale is that today we spend about 10% of our revenue on engineering, which is comprised of of pure R&D, sustaining engineering for our existing product lines, but also customized customer projects. And this gives us the ability, again, by virtue of that scale, that outspending relative to our competitive set, to really drive the innovative innovation pace within our industry. So this creates a bit of a flywheel effect, and we feel like we have been spinning that up throughout our history and continue to gain a momentum overall.
Some other key metrics of the business, you know, well, well-covered from a patent standpoint, we are truly global in the sense that we have an operating footprint in a dozen countries. Today, we have just shy of 3,000 employees globally, and, you know, again, reflective of that position of dominance that we have overall. I'm actually gonna stand up 'cause I can't read the screen from here. The-
Let's do this.
The competitive thesis for us overall is that firstly, you know, as we noted, we are leading the innovation in our field. It's a very exciting field. We see tremendous headroom to grow, not only organically but acquisitively. M&A has been an important part of our story overall. We've done 16 acquisitions since 2016. Most recently, we announced just last week, the acquisition of a very attractive strategic software business correlated with our nuclear medicine business, a company called EC2. We're just delighted to have been able to pull this down, but to do it in a way where it's consistent with the overall de-leveraging objectives that we have as a company.
Secondly, if you look at the growth profile of our business, we have a very high degree of recurring revenue. Historically, Mirion has been a very resilient kind of an acyclical business. If you consider the history of our company and the macro headwinds that we've dealt with for much of that time in terms of growth, Great Recession, Fukushima, just a whole host of other issues, we have systematically grown through contractionary economic periods, a variety of macro headwinds. And a big reason for that is the recurring revenue profile of the business, where today more than 70% of our revenue is either recurring or repeat in nature. Thirdly, what we are selling overall is a compulsory solution set into highly regulated industries where the barriers to entry are high.
In other words, our customers have to buy what we're selling, and given our tenure in market, given our scale, given our brand equity overall, more often than not, when somebody has to make that compulsory buying decision, they turn to us overall. We're a company that has, in our view, very strong operating metrics. You know, we have high gross margins, high EBITDA margins, high free cash flow conversion. I think some of that's been kind of lost a little bit in the mix in this period of time since we've become a public company and had a variety of macro issues that have you know kind of put some fog over that.
Historically, though, we have driven about a 1,200 basis point margin expansion over the course of our history and are very confident as a company that this margin expansion will continue to be a fixture in our future. Our explicit target is we have a strong view that we can drive EBITDA margins north of 30 points within our planning horizon, and really demonstrate to the world that we are a compounder and hopefully be seen as the next great industrial technology company. Another factor behind our resilience is the diversification of our portfolio. Again, we'll touch on this momentarily in terms of how the business is split between our medical group and our technologies group.
Deep and broad moat, and I think we've proven historically that we're good allocators of capital overall. Let's turn now to our medical segment. This is the smaller of our two segments. The medical segment really is comprised of three primary businesses within it. The largest by far is radiation therapy quality assurance. So this really relates to cancer care. Today, in the developed world, specifically in the US, a newly diagnosed cancer patient has about a 65% likelihood of being prescribed external beam therapy as a component, a modality in their overall treatment strategy. We provide the quality assurance solution, software, capital equipment, and expertise that allow this market to operate safely, efficiently, and effectively overall.
This business represents about half of our total medical business. The economic drivers here, really the market drivers, are a combination of an aging population demographic in the developed West. Obviously, as people get older and you see an aging population demographic, there is a higher incidence rate of cancer overall. But it's also driven by advancements in technology, which is an important theme, and an important driver of our business overall. Secondly, we have our nuclear medicine business. This business is really focused on supporting the value chain within nuclear medicine, which historically has largely been a diagnostic market, supporting PET, SPECT scans, and other types of diagnostic radiological procedures. There is a revolution taking place today in nuclear medicine, though, and that is in the form of therapeutic radiopharmaceuticals.
Many of you have seen the advancement of drugs like Pluvicto, which is a drug focused on prostate cancers. In its first year, it became an $800 million drug. The essence of therapeutic radiopharmaceuticals is that the drug makers have increasingly figured out strategies for taking a known ligand that has a binding propensity with different types of cancer cultures, combining that with a therapeutic dose of ionizing radiation, typically in the form of alpha or beta radiation, and then effectively delivering a rifle shot dose of radiation therapy at the cellular level to those tumors. As you might imagine, there's incredible excitement taking place here.
This is, for us, one of the most exciting markets that we play in today, and this is why we acquired EC2, again, the software company that we announced last week. We believe this will allow us to really broaden and deepen our position in the value chain for nuclear medicine and allow us to fundamentally change some of the operating model dynamics embedded within there, and perhaps we can get back into that a little bit later. Final business to touch on here is occupational dosimetry. This is a business where we monitor, on behalf of the employers of radiation workers, the cumulative dose that those workers have incurred.
This is required by regulation in every civilized part of the world, and typically done on an outsource basis, and the vast majority of those radiation workers are medical workers. Today, we are the number 2 player in this market, so this is one of those 3, 3, 3 product categories where we're not number 1, we are second to Fortive here. But we have a very compelling technology, which is essentially digitizing what is today an analog market, an analog service provision. And, we're very excited about the opportunity to effectively take our technology platform, make it available to the entire world, and we, we believe that'll be a game changer, here overall. Flipping to our technology segment, this is the larger of our, our 2 segments, overall.
The dominant vertical market that today is served by our technologies group is nuclear power. Commercial nuclear power right now is going through... Yeah, I hate to use the word renaissance because that's been used so many times in the past, but it's going through a very vibrant resurgence, not only in terms of large-scale, utility-scale power plants, but also the emergence of something called small modular reactors. Our nuclear business really has three components to it. The biggest component is the installed base, which is about three-quarters of our nuclear power revenue. Then we have new build activity, which is typically closer to, you know, 18%-20% of the revenue. The balance would be decommissioning activity. What we are seeing today in commercial nuclear power is a very, very strong new build pipeline.
So we announced earnings last week, and one of the key features of our earnings release was very significant order growth year over year and attended backlog growth on top of a very strong revenue quarter overall. Much of that was driven by new build activity, or I should say a significant component of it, was driven by new build activity in commercial nuclear power. When we look at the overall pipeline of activity that we see for additional projects flowing over our planning horizon and deeper and broader relationships with the key strategic players, the reactor designers and the major sponsors of power plants, we're very excited about this business overall. But to be clear, the dominant component of the nuclear power market really is that installed base.
This is where we see the very strong recurring revenue. Understand that today, once we gain a foothold in a commercial nuclear power plant, we are likely to be there for the duration of that power plant's life. Putting that into context, if you're simply at the American base, today, the American base has just over 90 operating nuclear reactors. Most of those will end up operating for 60 years. Some will operate for 80 years. There may be a few that operate for a century, which is a, you know, kind of a mind-boggling concept.
But once we become the incumbent, again, because of the deep and broad competitive moat that we have, we are highly, highly likely to be there for the duration of that power plant's life, up to a century in total. That gives us, again, the visibility, the predictability, and the ability, downstream to offer some really exciting new solutions, particularly as we think about digitization of what is today almost entirely, an analog capital equipment business, the application of AI and other emerging technologies, overall. So the nuclear power industry is stronger than it has been at any point, candidly, in our history.
It's driven by a combination of political support, in turn, driven by popular support, and for different reasons in every major market, sometimes driven by energy security, as is increasingly the case in Europe, sometimes by economics, sometimes by the desire to decarbonize the electrical generation process overall. But for whatever reason, we're seeing the strongest political support globally for nuclear power than we've seen in a generation. And secondly, given the changing dynamics in the natural gas market, that has essentially lifted the marginal cost of electricity in both industrial and retail markets, which has been an absolute game changer in terms of the economic health of the operators in this field.
And so as the operators get healthier, operating budgets get a little bit fatter, capital budgets get a little bit fatter, and ultimately, that helps us overall. In the technology segment, just being mindful of time, we're also very involved in the defense markets, both civil defense, homeland security, and military. On the military side, I think today we equip about 20 of the NATO militaries, NATO armed forces with green gear, that again, is focused on detecting radiation, overall, but very broadly involved in civil defense, again, a border security, event security, and things like that. Finally, labs and research is an important business to us.
This is where we are taking our most advanced laboratory instruments that at their core are really designed to take a sample of unknown composition and determine what's in it. What is the isotopic composition of that sample? Many, many applications here in terms of research, safety, environmental remediation, and the like, in all of these markets for us today are strong and vibrant. You know, I think I've touched on the acquisition of EC2, and we'll just close here the comments and open it up to Q&A just for the recap of our Q3 earnings report. So organic order growth of almost 50%, 46% compared to Q3 2022. This is our fifth consecutive quarter of backlog expansion as a company.
We established a record backlog position of $799 million, and this, again, highlighted by growth in new nuclear power plant orders, but also, spare parts, part of that overall, you know, support for the installed base in nuclear. We reported consolidated Q3 organic revenue growth of 17.3%. So again, bear in mind that this backlog growth, the establishment of a new record, a new high water mark in backlog, was on top of a 17% organic revenue growth quarter for us as a business. Divided between medical, which grew at 5.2%, but medical was lapping a prior year quarter of around 20% growth overall?
Yeah.
So, you know, the two-year stack on that medical growth in the quarter was about 25%, but very strong growth in in technologies overall. Saw some nominal expansion in our EBITDA margins, 120 basis point margin expansion. Adjusted free cash flow of $17.2 million, which is a lower number than we would like to see, but understand that we've been going through, you know, just a major reversion of our footing, our strategy as it relates to inventory in particular, going from kind of a defensive war footing with the incredible supply chain disruption that we've seen into a more normalized pattern. So we are in a mode now where working capital is a source of cash and generated about $8.6 million in cash in Q3.
We expect that theme to continue for some time. Finally, we reiterated guidance for the year. Organic growth rate of 6%-8%. Adjusted EBITDA in the range of $175 million-$185 million. Adjusted free cash flow, $45 million-$75 million. Final point is that we reiterated our leverage target for year-end. We're at 3.4x now. Our year-end target is 3.1x, and that is with the acquisition of EC2 Squared. So why don't I leave it there, and then, Rob, we'd be happy to open it up for-
Perfect
-for Q&A.
Perfect timing. Covered a lot of ground. Maybe just to start, you know, referencing the top bullet point there on the order growth, you talked about the vibrancy that's come back to the nuclear power market. How should investors be thinking about the order cadence going forward, knowing that, you know, those orders can sometimes be lumpy?
Yeah.
How should... You know, what do you see on the horizon, I guess, around the nuclear power space?
Yeah, I think you hit it right, that looking specifically at nuclear power, yes, big orders tend to be chunky. For us, a big order for a new power plant would be in the $80-$90 million range, and that typically would be spread against two reactors. We see a lot in our pipeline today, a lot of activity in Europe, particularly, you know, as we look at the planning horizon in the UK, in France, in Eastern Europe. We see a lot of activity in other parts of the world. Certainly, Asia continues to be an important market for us, China, Korea, Japan. Emergence of a growth market in the Arab Gulf region, and this is where the activity is.
A lot of people, you know, particularly Americans, have the habit of thinking, you know, we're not building any new nuclear reactors, so therefore, no new nuclear reactors are being built. But the reality is very different when you look at it through a global lens. There is a lot of activity, and we are very, very busy in terms of the strategic evolution of the longstanding alliances we have with all the major reactor designers. And all I would say is that we're very bullish about the future growth. Yes, it'll be chunky, but we think the overall cadence is likely to be accelerating over our planning horizon.
Within that new build component, what is the way to think about the baseline for the existing installed base, level of orders, opportunity for growth around that as well?
Yeah, we've always characterized our technologies business as being a mid-single-digit organic grower. What we're seeing today is that if you look at the vertical, the vertical spread there, is that the installed base is healthier than it has been literally in a generation. New build activity we've touched on, but also decommissioning activity is picking up, and on top of that, there is an emerging new technology called small modular reactors that is really focused not on replacing utility-scale nuclear, but rather replacing coal plants and serving as a cogeneration source for you know, server farms and a variety of other applications overall.
We have booked just on the SMR front, about $10 million in orders with a number of the emerging strategic players there over the course of the past year. But our expectation is, you know, consistent with that historical guidance. So we expect to see kind of a mid-single-digit, you know, order and volume growth in that installed base over our planning horizon.
Yeah, when you, when you peel back Q3, when you look at our year-to-date order growth and take out some of the lumpiness of the orders, we're still seeing mid to high single-digit order growth across the, the business.
Okay. Yeah.
How are you thinking about backlog coverage? I mean, it's high, but how are you thinking about that conversion, here as we go through Q4 and into 2024?
Our Q4 conversion is pretty good. I mean, these big orders don't impact Q4 quite as much as, you know, as you look at 2024. As we think about 2024, what we've historically said, and which does hold true, is, you know-
... somewhere between 45%-50% of our next twelve months of revenue is already sitting in our backlog. So obviously, some of these larger orders kinda help that. So I think that, but I think those are still pretty good metrics for us, that about 50% of the next twelve months sits in backlog today.
Yeah. Yeah, and then, you know, to layer on just your, your earlier comments, just around, around the overall recession resistance-
-durability. It's been there in the past, historically-
Yeah
-you know, referenceable. What's been the standard deviation around revenue during kinda some of these, you know, more turbulent economic periods?
Yeah, it's the standard deviation would be relatively high, Rob. But what you would find if you looked historically over the last 20 years, is that some of our strongest organic growth has come during economic contractions. So, you know, I hate to call it a you know, kind of an adverse correlation, but the correlation has been, you know, tenuous, maybe.
Understood.
We tend to be acyclical.
Why is that inversely correlated?
Well, I was trying to avoid inversely correlating—but just saying it's acyclical. But it's acyclical, again, because of the, you know, the recurring nature, the compulsory nature of what we're selling. And you know, the fundamental demand drivers across each of our vertical markets. So that, coupled with the, you know, kind of a heterogeneous product mix, geographic diversification, et cetera, all of that tends to make us very resilient.
I think the other thing, as we look forward, one of the things we're spending a lot of internal investment dollars on is digitization, right? That should do nothing but bolster kind of what we're talking about now. It takes time to get there, but I think that actually helps us on a go-forward basis as well.
It's a huge theme for us because, again, if you were to look at our install base of deployed sensors today, we have more than 1 million deployed analog dumb sensors globally today. Not connected to the internet. They're... You know, think of them as being kind of steam gauge readouts. And so, as you might imagine, the opportunity to enable, IoT enable, those sensors to provide value-added software tools at a time when the labor markets are such that there's a generational loss of talent and a real need on the part of our customer base to provide more value-added solutions. So our goal is to be the leader in digitizing the vertical markets that we play in today.
And to that end, you know, one of the other things that we announced last week was the creation of an inaugural Chief Digital Officer to really drive and consolidate some of the efforts that we have underway there.
Thought I saw a hand go up. Yes.
I was curious about, since you're lumping long cycle-
How are your contracts structured? I think about, like, fixed cost-
-contracts, get in trouble. How are you guys structuring your contracts?
Yeah, the vast majority of our contracts are not long-term, you know, fixed-price contracts. There are a few exceptions to that that tend to be, you know, military IDIQ business, but that's a very, very small part of the mix overall. Most of them are kind of bid as, you know, contemporaneous with the project. There are a number of things that we can do to hedge, you know, certain potentially high-cost or volatile supply chain components using upfront cash deposits that we get from the customer. So historically, you know, we've been very good at sustaining margin, growing margin, as a result of that, and expect that that will continue.
There's also generally pricing mechanisms in there-
Yeah
... in the contracts that allow us to, you know, best you can, keep up with inflation.
I don't know the company well, but have you taken losses in the past? Have you taken losses on any contracts?
Nothing material or in a big way. I mean, look, there's always a little bit of margin movement when you talk about larger contracts, but, you know, that's not our history. Our history is actually one of taking a contract at a certain margin and doing considerably better than that.
Just while we're on the topic of margins, just-
Sure
... you know, the walk to 30%-
Sure
What are some of the major steps on that bridge that you-
It, you know, it's interesting, Rob. The biggest... I know we're up on time. The biggest thing in that bridge is operating leverage.
Yeah.
It's fixed cost discipline, and growth on top of that, and the compounding effect that comes with that. Sure, there's a little bit of, you know, other cost-out initiatives. Price, cost, we're very focused on more on cost as we go forward, than price, but keeping our price discipline is also really important. But more than anything else, what matters is operating leverage and the cost discipline across our factor base.
Is there a number around price that we should think about?
Yeah, I mean, look, we said we did about 4% so far this year. I don't really like to talk about price too much on a forward-looking basis, but yeah, I think, I think we'll continue to be thoughtful and aggressive in the marketplace.
Perfect. Perfect.