All right. Good afternoon, and thanks, everyone, for joining us for the Mirion Technologies session. I'm Quinn Fredrickson, Senior Research Analyst at Baird, covering advanced industrial technology. Mirion is the global leader in detection and measurement technologies for sensing ionizing radiation in the nuclear power end market, as well as a leader in radiation therapy, quality assurance, dosimetry, and nuclear medicine. With us this afternoon to discuss Mirion is Tom Logan, who is the Founder, Chairman, and CEO, and Brian Schopfer, who is the Chief Financial Officer. I'm going to hand it off first to Tom for some introductory comments and some slides about Mirion, and then we'll come back for Q and A.
Quinn, thank you. Thanks to everybody for joining us this afternoon. I'm going to give you two brief panels as an overview regarding who we are, what we do, and what our areas of focus are. Firstly, to begin with, Mirion is, in our view, the global leader in ionizing radiation detection and measurement, as Quinn noted. Today, we're organized into two operating segments. Our largest segment is our nuclear and safety business. This represents about 70% of our total revenue, and within that, there are three key sectors that we serve. Far and away, the largest is commercial nuclear power, and following that, we have significant presence in labs and research, and defense and diversified. Our second group, medical, is about 30% of our total revenue, and here again, we have three sectors.
We have radiation therapy delivered externally, so think of a linear accelerator, a LINAC, or other external beam therapy modalities. Nuclear medicine, where we play a significant role in the overall value chain, ranging from diagnostic and therapeutic instruments through compounding equipment, dose calibration instruments, and the like. Then finally, we have our dosimetry services, which you can think of as an outsourced subscription service, which supports healthcare professionals, keeps them safe from ionizing radiation. The big story, I think what everybody is focused on right now, is nuclear power. Clearly, the world is undergoing a major shift in energy balance, and the focus on nuclear power as a component of the overall mix certainly has elevated notably over the last two to three years.
Importantly, Mirion today gets nearly half of its total revenue from commercial nuclear power, with a presence in more than 98% of the global operating fleet, representing roughly 450 reactors. So, we are broadly diversified globally, have a significant presence across that footprint, and importantly, 80% of our nuclear power-related revenue comes from the installed base. This is a critical attribute of our business, and I'm sure as we get into Q and A, we will talk about our exposure to data center build-out and a variety of other measures, but I just want to anchor you on this key fact that, again, 80% of our revenue comes from the installed base. With that, Quinn, over to you for Q and A.
Yep. For the audience, if you have any questions, you can send it to session3@rwbaird.com, and we'll field those from the iPad. I think just to start off, might be helpful to level set the group on the third quarter print. I think the things that stood out to me, 62% organic orders growth, overall organic revenue growth accelerated to 6.5%, strength in nuclear power end market, specifically with 14% organic growth. Maybe if you could just unpack a little bit what drove the strength in that third quarter, and then the factors that support further strengthening in your fourth quarter outlook.
Yeah, I think the key factors, firstly, the order dynamics really were comprehensive, not narrowly confined to a specific segment or specific component of that segment overall. I think the key overall drivers that we're seeing here are things that we've been foreshadowing for some period of time. Firstly, when we look at nuclear, again, roughly half of our total business, and again, reflecting on this anchor that 80% of our nuclear business comes from the installed fleet.
What we have been seeing is a significant growth in capital commitments to that installed base overall, recognizing that these are assets that have gone from being challenged a decade ago, with difficult supply and demand dynamics in the electrical generating markets overall, poor margins, regimes of extreme capital rationing, to where we are today, where the world faces a profound shortage of electrical generating capacity that candidly is not solvable in the near term. That has fundamentally changed the economics of owning and operating a nuclear power plant, and as a consequence, the operators have been very motivated to maximize the benefit of these assets. That's happened in a number of ways. Firstly, as it relates to the capital commitment necessary to remediate some of the capital rationing that took place over the prior decade.
Secondly, through life extension and power uprates, meaning extending the permitted operating envelope of those plants, but also getting a more permitted capacity out of those power plants. Then finally, we are beginning to see a higher degree of digital modernization. We've seen this flow into orders, Quinn, as you noted. We've seen strong, not only order growth, but organic revenue growth in this sector, and I think that is clearly a sign of strengthening momentum in the sector overall. Importantly, the signal, the binary gateway that has been passed through here really is reflected in that permitting activity. This is a dynamic that, again, is not exposed to the rate of data center build-out. It's not exposed to political winds. Essentially, the bell has been rung, and in our view, we're looking at a decade or more of strong capital spending growth in this sector overall.
Beyond that, as we look at the other element of nuclear, which is new build activity, we were happy to have booked a very large new build utility scale order in Egypt. We are also happy that we have seen growth in the small modular reactor market, which has grown over the last year from roughly just over 1% of our revenue to closer to 4% of our revenue overall. Importantly, this revenue, in the main, is tied to the leading players in the SMR market overall. These are companies that have raised significant capital, have a high degree of technological readiness, and in our view, importantly, they are going to be very focused on deploying that capital as quickly as they can to prove the validity of their first-of-a-kind reactors.
Turning to the medical segment here, we have seen recovery in the two major verticals or two major sub-segments within this, in both radiation therapy, where we are beginning, in our view, to see a normalization of the post-COVID dynamic that has created a bit of flatness in growth overall in the med tech sector. We are beginning to see that come off the peg and, we believe, normalize.
Similarly, in nuclear medicine, we are seeing a pickup in activity, and here, the big driver is the advent, the evolution, the growth in the so-called theranostic space overall. Lastly, in our dosimetry market, we continue to see solid service revenue growth, which is really the core of that business overall. None of this is surprising to us. It is certainly gratifying to see a tighter correlation between our backlog growth, which has led our organic revenue growth, and the conditions feel durable to us.
Touched on a number of drivers there that I want to explore more, but start off on catch-up CapEx. What inning do you think we are there, and does that manifest more in the U.S. versus the rest of the world? I think you have discussed Paragon's peaks business is where you are seeing the benefits of that most concretely, so I presume it is more of a North American tailwind. Is that the right way to think about it?
We would actually characterize it as a global phenomenon, recognizing that the writ large, the factors that led to this prolonged capital rationing really have been global in nature, driven by a variety of supply-side and demand-side dynamics. Our view is that we're still in the early innings here. Certainly, Paragon for us is the canary in the coal mine. For those of you not less familiar with the company, Paragon is an asset that we acquired just under a year ago, and the core of their business is supplying spare electromechanical components into the North American operating fleet overall. Paragon organically grew 20% last year. This year, we've guided 25% organic growth for Paragon, and I think this is the strongest possible indication of the dynamic that we are seeing, again, based on that or driven by that catch-up capital spend.
There's also been a lot of momentum with a number of headlines on life extensions and power uprates recently across multiple hyperscalers. Just curious if the urgency of bringing those uprates online for the hyperscalers accelerates the order to revenue conversion opportunity for Mirion.
Yeah, there certainly is a great deal of urgency as it relates to the uprates. On our earnings call a couple of weeks ago, we talked about the fact that their recent announcements amount to about 2 GW of operated capacity. That essentially represents two new nuclear power plants. Certainly, the hyperscalers are the hungriest for that incremental power overall. It is reflective of a dynamic within the North American nuclear industry where the highest priority for capital spending today is anything that will generate an additional megawatt of capacity overall. To be clear, there's a very high degree of urgency there overall.
When I look at the dynamic that we expect to experience within the sector, again, the American install base, I see it as being a more metered, accelerating rate of growth, again, recognizing that capital spending plans are developed very far in advance in both the regulated and deregulated players within the American industry. The key signal for us, the key dynamic, is that by extending the operating lives of these power plants by 20 years, that essentially encompasses the operating lifespan of almost the entirety of the categories of instrumentation that we sell into nuclear power.
What this effectively means for us, recognizing that our positions of incumbency tend to be highly defendable and also recognizing that we are a category leader, the global number one in 20 of 22 product categories that we sell, certainly in the case of nuclear power overall, is that we are going to see wave after wave of upgrade opportunities that I think will span more than a decade in duration.
What product line or product lines would tend to see the greatest demand pool from an extension and power uprate?
The most immediate impact will be those that relate to the power output directly in the core, and this would include neutron measurement systems, this would include radiation monitoring systems, and reactor protection systems overall. But behind that, to be clear, there are an array of different classes of instrumentation which are focused on human and environmental protection, broadly referred to as health physics instrumentation. Things like active and passive dosimeters, contamination and clearance monitors, area monitors, and the like. We see a significant opportunity over time to upgrade and further digitally enhance that instrumentation. Then there are balance of plant opportunities in terms of laboratory instruments, area monitors, survey meters, radiation-tolerant cameras, security systems, both cyber and physical. It is a very rich vein of opportunity for us.
Switching over to the new build side of nuclear power, it is only 20% of your revenue there, but does seem like concerns over the AI data center outlook tend to weigh on your stock, as you mentioned. Just how should we think about if data center construction was to slow, what influence that would have on utility scale new builds or even the installed base activity?
Yeah, so firstly, as it relates to utility scale, think of the legacy providers, Westinghouse, EDF Framatome, KEPCO, others, that are known for being reactor designers. The opportunity there continues to accelerate, and understand that in our forecast horizon, we take a very conservative view toward new large-scale nuclear build-out in the U.S. In fact, we, in our planning, don't anticipate any new builds in the U.S. within our intermediate term planning horizon. Where the action is right now is globally, where based not only upon broad-based energy needs, but based upon an elevated concern and focus on national energy security that has been exacerbated by the war in Ukraine, exacerbated by the closure of the Strait of Hormuz. This has created a greater degree of urgency and a national security focus on energy supply overall.
Our view, and I think a broad-based view if you survey any independent data source, is that we are going to see an acceleration in the rate of growth of new large-scale nuclear throughout the world. In the recent quarter, we announced a large order for two new reactors in Egypt. We have foreshadowed an incipient order in France for six new EPR reactors, that right now is subject to EU approval, which we expect to be forthcoming. Overall, the dynamic there continues to improve. What I think people understand less well is the dynamic in and around the small modular reactors. From an investor standpoint, I think investors look at the handful of publicly traded small modular stocks, or small modular reactor stocks, and they see a high degree of risk. They see technological risk, they see commercial risk, they see regulatory risk associated with that.
Our perspective is very different. Firstly, we believe that this is an emerging sector that has a real opportunity. We understand the entrepreneurial energy behind it, and the desire to really do to nuclear what commercial space players, notably SpaceX, did in the orbital launch market overall. Our specific view is that the two dozen or so players that have raised significant capital, many billions of dollars of capital, have a high degree of technological readiness, are going to spend that capital quickly, with a sense of urgency, with a focus on gaining first mover advantage overall. We're very happy to partner with them and support this evolution overall. Our view is that essentially, Mirion represents a play on the SMR sector rather than a bet on an individual player.
Maybe we can touch on the non-nuclear power portions of the segment, which include labs and research and defense and diversified industrials. You raised guidance for labs and research on the third quarter call from flat to up low single digits for the year. That was a business that had been dealing with some headwinds from DOGE. Are we out of the woods from a DOGE perspective? Then maybe if you could speak to just some of the longer term drivers in that business.
Yeah, our view is that we are seeing a normalization in this market. To be clear, it wasn't just DOGE, it was the sequential government shutdowns that created a lot of instability in the sector and just kind of slowed down contractual flow overall. We are very constructive on the segment overall, recognizing that the biggest demand driver for us in this sector is waste remediation. There is an enormous stockpile of legacy, highly radioactive waste that has to be characterized and ultimately remediated. We play a significant role in this activity overall. Our view is that from a political standpoint, there is strong bipartisan support of continuing this activity. Our view is that this is something that is a GDP grower over time, and as we talk about low to mid single digit growth, I think that is reflective of that overall.
The other element of the labs and research business relates to modernization and upgrades of our nuclear arsenal. To be clear here, we are not involved with weapons production, but we do make instrumentation that is necessary to ensure environmental safety and human safety as this work is being done. We are clearly seeing some uplift as it relates to that activity overall.
Switching gears to the medical side.
By the way, I think the orders in the third quarter were kind of better than 20%. While the revenue is still catching up, and you will see kind of that in the fourth quarter, I mean, the order dynamic continues to be very positive in the labs business.
Right. Brian, switching to the medical side, start off in RTQA. It has been a bit of a challenging environment with the hospital CapEx being restrained and some anti-corruption issues in China, but you did raise guidance on the second quarter. You are targeting high single-digit growth for the year. I know some of that was influenced by a large radiation-hardened camera order. Could you just speak to underlying trends in the market that you are seeing as we look out into 2027?
Yeah, I think you characterize it well. I think we are starting to feel like there is a bit of a normalization in the U.S. healthcare market. If you look out at the rest of the world, China feels more stable than it has felt over the last couple years. I think we still have more work to do in Japan, which has weighed quite heavily on our RTQA business. But I think more broadly, if you look at our partnerships with specifically Varian, who is the 800-pound gorilla in the linear accelerator world, they are owned by Siemens Healthineers, obviously. They have just announced at the largest trade show at the end of September, they are coming out with a new product, next-gen linear accelerator.
These are our software packages that are replacing many of their quality assurance software packages, which I think shows the commitment and partnership between the two firms, but just where we stand kind of in that space from a proven supplier and partner standpoint. So, we partner with them on many facets, this being one of them. We talked about a large OEM order in this space as well. So we continue to see, I think this sets us up for some good tailwinds as we go in the future, specifically in the RTQA space.
Okay. Any comments on how to think about the impacts of that new Varian product for your medical business?
Yeah, I think we'll talk about that more as we kind of turn the page. Software's been growing double digits for us already over the last two years. We've continued to invest in this space. AI has actually really helped us speed up those cycles from a product release standpoint. So we continue to be pretty bullish about our software and service business there. And I think we'll talk more about that as we move into 2027.
Okay. Maybe touch on nuclear medicine as well. When I traveled with you guys over the summer, I was struck by a couple of things you said that seemed like they could be real positives for that business, which is the shift from beta emitters to alpha emitters. And then the second was the expansion beyond just prostate cancer. Could you just elaborate on both of those and why those could be potential tailwinds for you?
You stole my thunder on why nuclear medicine, why we like this space so much. I mean, look, we've owned these businesses for quite some time. I think we bought our first nuclear medicine business back in 2019. We did an add-on in 2020. So we put two essentially money-losing businesses together that is now accretive on the hardware side to the company's EBITDA, which kind of shows you the prowess of our M&A capabilities. And then we've added since then a software business. So now we have a hardware-dominant platform with a software business that's growing faster than the hardware business. It looks a lot like what we see on the RTQA side. But you're exactly right. I mean, the two things I think that strike us is, one, back in 2024 when we had our investor day, there was something like 100 drugs in the FDA pipeline.
That's now swelled to over 1,000, right? It's touching everything from basically any type of cancer you could imagine, heart disease, Parkinson's, Alzheimer's, et cetera. So there's a broad use of drugs here. The other thing we're seeing is a move from beta emitters to alpha emitters. By the way, this is where the leverage of the platform really starts to show its capabilities, because on the nuclear and safety side, we are the best in the world at alpha spectroscopy. Therefore, being able to port that technology over into the nuclear medicine side kind of gives us a hand up as that market really begins to take off.
So, we continue to be very constructive there. We've done a lot operationally to get that business kind of back in shape from combining three businesses plus an ERP implementation. I think you've seen that weigh a little bit over the last, call it, 6- 12 months, kind of the de-stocking kind of make its way through the platform. We continue to be very optimistic about where that business is going and think that we'll return to growth here over the next couple quarters.
Is there a relationship between the number of drugs in the pipeline and treatment center build-out historically?
Yeah, absolutely. Our growth today is tied to cancer centers, not drug revenue. Right now, outside of drug revenue where you're seeing therapeutics kind of come at enormous price tags, I think one of them is charging $250,000 for a treatment set. The next fastest growing space in this sector is cancer centers growing, and that's where our revenues are mainly tied to. One thing I also would like to mention here is, we think we have a tremendous opportunity, and we are making some investments, actually some significant investments on the software side here, positioning us more with the drug makers, right?
The further upstream we go, the earlier in the cycle we can capture, and I think the more of the spend we can capture. So, we continue to be, again, very excited about this space. It has taken a bit longer than I think we thought it would back in 2024, but I think we're starting to see kind of the third quarter was definitely a move in the right direction, and we'll continue to see growth in that segment as we go.
Shifting to margins, you did remove the 30% EBITDA margin target for 2028, which was understandable, and frankly, I think pretty well anticipated. Can you just discuss what's the right way to think about the cadence for margin expansion from here?
Yeah. Why don't I take that, Quinn? Just by way of context, the 30-point EBITDA margin target we set in 2024 based upon our kind of worldview in late 2023, so I think three years ago. What's changed since then is really three factors that have developed in the interim. Firstly, the spend on AI and cyber, which we view as two sides of the same coin. As AI capabilities have grown dramatically and very rapidly, the cyber risk has grown in an attendant fashion overall. This year, we'll spend about $10 million in OPEX alone between the two of them overall. Secondly, the Paragon deal. Again, a deal we're thrilled with. Paragon's an amazing company, amazing people that have really enriched our company in a very short period of time. If you look at the broad book of Paragon's business, it is margin accretive.
If you look at the dynamics on the synergies monetized to date relative to our deal model, we are crushing it in terms of commercial synergies, operational synergies, administrative synergies. There is, however, a nascent product line that we're developing focused on reactor protection systems, whereas we have gained a more granular level of knowledge on Paragon and the markets. We understand better that this is an investment that firstly makes great strategic sense, but it's front-end loaded, and our expectation is that the margin accretion will occur beyond the initial 2028 deadline and will be dilutive until then. Finally, it's the growth of the medical business, where certainly we did hit a flat spot, again, broadly experienced throughout the med tech sector. Two years of flat growth in our medical business.
Medical margins generally run about 15 points higher than nuclear and safety margins, so that is effectively a mix down over that period of time. All of which gave us the view that while that target is still potentially attainable, it has become a distraction and created some cognitive dissonance on the part of investors. We have withdrawn that guidance, and instead, are essentially firstly noting that historically, if you look at the period of time from creation of Mirion through our IPO, about a 15-year period, there was margin accretion of about a point a year. We took a bit of a step back when we took the company public simply because of the quantum of public company costs that we took on, coupled with a very difficult operating environment in that post-COVID era, supply shocks, some revenue volatility, and some other factors.
Over the last couple of years, we have been growing at about a point a year, and our view is that as we look ahead, as we anticipate strengthening vertical markets, driving in all likelihood a higher organic growth rate for the business, given the very high operating leverage that we enjoy as a company, coupled with the potential benefits that we expect from AI and continued operational improvement, all of these factors we think could provide further uplift to that rate of margin accretion. So right now, our view is that we are running at about a point a year. We will probably do that or better prospectively, and we anticipate we will provide sharper guidance around this early in 2027.
Great. We are at time, so thanks, Tom. Thanks, Brian. Appreciate it.
Thank you, Quinn.
Thanks, Quinn.
Thanks for coming.