Mirion Technologies Inc

NYSE:MIR

Earnings Call Transcript 2021-Q4

[Operator]

Greetings! And welcome to Mirion Technologies Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time all participants are in listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Gaddy, Vice President of Finance. Please go ahead.

[Alex Gaddy, Vice President of Finance, Investor Relations]

Good morning, everyone, and thank you for joining Mirion’s earnings call announcing financial results for the fourth quarter and full year ended December 31, 2021. My name is Alex Gaddy, Vice President of Finance and Investor Relations at Mirion and I will be moderating today's event. A few housekeeping items before we get started. I would like to remind you that the discussions 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. As a reminder, quarterly references within today's discussion are related to the fourth quarter ended December 31, 2021 unless otherwise stated. The discussions during this call will also include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the appendix of this presentation for this conference call. Please note that today's prepared remarks will be followed by a Q&A session. Our earnings presentation and transcript will be published today, and 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, Founding, Chief Executive Officer; and Brian Schopfer, Chief Financial Officer. Now, I will turn it over to our Chairman of the Board, Larry Kingsley. Larry.

[Larry Kingsley, Chairman]

Thank you, Alex, and good morning everyone. We appreciate your interest in Mirion and we're pleased to announce our earnings results for our fourth quarter and full year 2021, as well as to share our expectations for the business for fiscal year 2022. Before I turn the call over to Tom, I'd like to take a few moments to highlight some of the key takeaways from ‘21 and to share my thoughts on the company heading into ‘22. As Mirion continues to evolve and develop its public company journey, there is a lot to be excited about going forward. All of the same themes that I highlighted in our call in November remain intact and I want to reiterate how well positioned Mirion is to capitalize on what we believe is a favorable macro environment across the company's diversified product portfolio. I’d like to leave you with three key takeaways from my portion of this morning's call. First, the company overcame a variety of challenges during the fourth quarter and still delivered solid results. Between the surge of the Omicron variant, the state of the global supply chain, labor supply headwinds and the company wide effort needed to become a public company, Mirion was able to grow its business and advance many of its key strategic initiatives. Second, the company specific and macro growth opportunities across the product portfolio are proving sustainable. This includes supportive trends in both the industrial and medical segments and a healthy M&A pipeline, exemplified by the recent CIRS acquisition. Third, and probably most importantly, the team at Mirion has a strong history and is adapting well to the needs and requirements of being a public company as we all expected. Tom Logan has an outstanding reputation delivering meaningful returns for investors over the course of nearly two decades and I am more confident than ever in his ability to guide the talented team at Mirion into what I believe is a promising future for the company. After successfully taking Mirion public, Tom can once again return his focus to what he does best, running his business and executing on meaningful growth opportunities. It's important for me to reiterate just how unique Mirion’s story is. This is a solid company with resilient underlying markets and a diverse and differentiated product portfolio with high barriers to entry. Mirion has leading positions within its chosen markets, and I'm excited to see what the company is able to accomplish as it continues to deliver on its strategic priorities going forward. In partnership with Tom, I believe that there is a strong opportunity for operating margin expansion as Mirion develops and enhances its ability to gain on pricing and cost efficiencies. The consistent execution of the Mirion operating system will create returns and Mirion’s strength in that area is particularly noteworthy. We are pleased with how Mirion is performing as a new public company, especially given the environment and operational challenges all companies are facing at the moment. With that, I'll turn the call over to Tom who will walk us through the market and the business performance in some detail.

[Tom Logan, Founding, Chief Executive Officer]

Thank you, Larry. Before I dive in, let me echo Larry’s sentiments about the strength and relevance of our relationship. It’s incredibly valuable to me to have an ally and a strategic sparring partner with the domain experience, the relationship capital, and the reputations that Larry brings to the table. I’d also like to thank each of my 2,600 colleagues across the globe who have gone above and beyond to help us become a public company, that driver our strategic and are through an incredibly challenging operating environment. The work you do is paramount in keeping people and the environment safe and healthy. I'm thrilled that we were able to successfully enter the public arena, but candidly I’d have to say that I'm excited to get back into running the business full time. We have a lot to look forward to and we're very well positioned to execute in 2022. Now beginning with slide four of the deck, I’d like to take a few minutes to highlight our view on the various markets in which we operate and show our outlook for this upcoming year. I'll begin with the medical segment, which accounted for 34% of our total company revenue in 2021. We're expecting to deliver high single digit growth in 2022 and are maintaining a positive outlook across Dosimetry, Nuclear Medicine and Radiation Therapy QA. I’d like to reiterate our goal for medical to exceed more than half of our total company revenue over the longer term planning horizon. In occupational Dosimetry, we operate in a stable market and employ a subscription based business model, with high volumes of recurring revenue. We maintain a positive outlook on this space and expect growth to be supported by converting existing customers to our innovative digital Instadose platform in addition to gaining market share in international markets. In Nuclear Medicine we are encouraged by many factors supporting this space, including favorable demographic trends and improving supply chain for medical isotopes and the exciting growth of Theranostics applications. While we’ve experienced some acute short term supply chain challenges in this space, demand for our products remains extremely robust and I'm confident that by the end of the first half order fulfillment will be back on track. Finally, the radiation therapy business continues to enjoy strong demand fundamentals based upon clinician preference for independent quality assurance solutions, and improving post pandemic demand dynamics. We are confident in our new product pipeline heading into calendar year ’22, and are particularly excited about the incipient launch of the first cloud based version of our industry leading QA workflow software platform, SunCHECK. Turning now to the industrial segment, we continue to expect mid-single growth in 20 – mid-single digit growth in 2022. We are highly encouraged by the positive sentiment in the nuclear power end markets, especially with regard to nuclears role in supporting the global decarbonisation movement. We expect to see positive tailwinds from life extensions, demographically driven replacement cycles, strong government subsidies and high natural gas prices. In the new build space we anticipate activity to continue increasing as carbon emission reduction continues to take center stage in the global environmental push. I'm also happy to report that we had major new build awards in China and Brazil during the fourth quarter, which continue to solidify our medium and longer term outlook. In my nearly two decades and role as CEO, candidly I've never seen better conditions in the nuclear industry. The installed base is healthy, new build activity is accelerating and decommissioning opportunities are solid. Turning out of the lab and research space, we’ve benefited from a relatively strong market aided by stricter environmental regulations and stable government funding. We're expecting continued stability and consistent growth going forward, supported by our new product pipeline. Let's now turn to our December results shown on slide five of the earnings presentation. I'd like to begin by noting the fact that we completed our acquisition of CIRS in December and look forward to fully integrating the company into our operating model and realizing the benefits we identified during diligence. For the quarter we delivered 2.7% of organic revenue growth compared to the same calendar period in 2020. Looking at the full year, we achieved 3.6% organic revenue growth. As I mentioned earlier, our Nuclear Medicine business has been constrained by supply chain dynamics, primarily component availability, which is negatively affected growth in the quarter and in the year. We've been working hard to qualify additional suppliers and engaging creative agreements to offset these shortages. I'm optimistic that we're nearing the end of this difficult period. We had healthy order intake for the quarter, including the large orders that I mentioned earlier. Backlog at the end of the year was almost $750 million and continues to solidify our medium to longer term outlook. I'm very proud of our sales teams who have been working incredibly hard across the globe and the health of our backlog is the clearest reflection of their efforts. In addition to the challenging supply chain environment, we’ve been assertive with pricing actions to counter the growing inflationary trends that have dominated recent headlines. Given the prominence of our backlog flow through to the P&L, it’s important to note that there is an implicit lag before price action is reflected in our financial performance. Executed actions today are expected to deliver at least 200 basis points of pricing growth skewed toward the back half of 2022, outstripping the expected impact of inflation. Before I turn it over to Brian for a deeper dive into our financial performance, I'd like to take a quick run through our expectations for 2022. As a reminder, we have converted our fiscal year from a June 30 to a December 31 year-end and guidance will reflect the 12 months ended December 31, 2022. Reported adjusted revenue growth is expected to be between 5.5% and 7.5% with organic growth of 5% to 7%. Adjusted EBITDA margins are targeted between 24% and 25% and this includes 100 to 200 basis points of expansion if we exclude the impact of public company G&A costs. There are three key areas of focus for our team as we execute on our 2022 operating plan. First, commercial and pricing excellence. In addition to already executed actions, we are implementing an enhanced set of value based pricing tools. Second, is our continued investment and strategic cost savings initiatives. Most notably we've implemented a streamlined operating model, which we expect will reduce complexity over time and in addition the company continues to optimize its industrial footprint and integrate newly acquired assets. Finally, the combination of new pricing tools plus operating initiatives that are already underway should ensure strong operating leverage for the year. We have a lot to look forward to across the enterprise; we're very encouraged by the trends we see in our order books and in the underlying markets. So with that, let me know pass the baton over to our Chief Financial Officer, Brian Schopfer, who will discuss our financial performance and 2022 outlook in more detail. Brian.

[Brian Schopfer, Chief Financial Officer]

Thank you, Tom. I'd like to get started by thanking our team for their hard work and dedication to help us close out our first year end as a public company. I'd also like to thank the investors and analysts on the line for taking the time to get to know our business. We appreciate your time and look forward to continuing the relationship that we have established thus far. And with that, let's turn to slide seven and take a deeper look at our results for the fourth quarter. As Tom noted, our team delivered a solid performance with total revenue growth of 20% and adjusted EBITDA growth of 17%, each compared with the same calendar period from the previous year. Total company organic revenue grew by 2.7%, primarily due to the performance of our industrial business, offset by the Nuclear Medicine challenges that Tom mentioned. Our total sales in the quarter were $180.9 million with adjusted EBITDA of $44.8 million. Adjusted gross margin expanded by 300 basis points to 51% for the quarter, while adjusted EBITDA margin declined slightly by 70 basis points to 24.7%. Adjusted gross margin expansion was driven by our medical segment contributing to a higher percentage of Mirion's total company revenue. This expansion is offset further down the P&L by higher operating expenses associated with recent acquisitions in the medical segment, continued growth focused R&D investment and corporate expenses related to public company requirements. Looking at our performance for the calendar year, we delivered adjusted revenue growth of 32% with 3.6% organic revenue growth and adjusted-EBITDA growth of 29% year-over-year in 2021. Our adjusted gross margin increased by 280 basis points to 51%, but adjusted EBITDA margin decreased by 60 basis points to 24.2% compared to the last year. The adjusted EBITDA margin was impacted by operating expenses related with going public and the acquisition of Biodex diluted margins. Next, let's turn over to slide eight and nine to take a look at our quarterly and calendar year results by segment, starting on slide eight with the medical segment. Adjusted revenue was up 91% and organic revenue was relatively flat. As a reminder, organic growth has a limited contribution from the Sun Nuclear acquisition executed in December of 2020. Our organic growth in this segment was mainly impacted by supply chain issues we saw within our Nuclear Medicine business. The adjusted EBITDA margin for the Medical Segment was 32.4%, an 80 basis point decline from the same period last year, primarily driven by the dilutive impact of recent medical acquisitions as expected. We continue to prioritize the integration of these acquisitions and expect our margin profile to improve as these efforts advance in the coming quarters. Turning to slide nine, the industrial segment reported adjusted revenue growth of 1.1%, with organic revenue growing 3.3% from the same period last year. Industrial adjusted EBITDA was up 1.4% compared to the same period last year. Adjusted EBITDA margin remained flat due to mix, strengthening U.S. dollar and inflation impacts. I'd also like to highlight some key items looking at our capital structure and current liquidity profile. Slide 10 of our earnings deck shows that we had $84 million of cash-on-hand and $166 million of available equity, which includes our undrawn revolver of $82 million. Our CIRS acquisition resulted in a net use of cash in the quarter totaling $54 million and nominally increased our net leverage after closure. Adjusted free cash flow was positive for the six month period ending December 31, 2021 compared to the prior year. Higher adjusted EBITDA and solid net working capital performance contributed to the positive change. Finally, turning to slide 11 to go through some more details on our full year 2022 guidance. As Tom explained earlier, we've issued reported adjusted revenue guidance of 5.5% to 7.5%. Organic growth is expected between 5% and 7%. FX for the year is expected to negatively impact reported revenues by approximately 1.5% and lastly CIRS should deliver 2% in organic growth. The adjusted EBITDA target range is $175 million to $185 million for the calendar year 2022 and adjusted EBITDA margin is expected to be between 24% and 25%. We're targeting 100 to 200 basis points of adjusted EBITDA margin expansion, excluding the impacts of public company G&A costs. We expect approximately $11.5 million in incremental public company G&A cost for the year, which will result in an estimated 150 basis points adjusted EBITDA margin reduction. Adjusted EPS outlook for the year is expected between $0.45 and $0.50 per share and adjusted free cash flow is projected to be positive $90 million to $110 million. To help with modeling considerations, we are utilizing our outstanding share count as of December 31, 2021 to establish guidance, expect our effective tax rate to be 24% to 26% and are assuming a U.S. dollar to Euro FX conversion rate of $1.13. And with that, let me turn things back over to Tom to close us out.

[Tom Logan, Founding, Chief Executive Officer]

Thank you, Brian. Before we open things up for questions, I'm going to leave you with just a few closing thoughts. Firstly, 2021 was a huge year for Mirion as we became a public company. It was a huge lift, a huge resource dedication internally and we're very, very pleased with the results, but candidly again, I'm very much looking forward to focusing on the business again as we journey through 2022. Secondly, our end markets are healthy; and finally, we're confident in our strategy. So I'd like to close by again sincerely thanking my colleagues on the Mirion team and let me turn it back over to you Alex.

[Alex Gaddy, Vice President of Finance, Investor Relations]

Thank you, Tom. That concludes our prepared remarks for today. We will now open things up for Q&A. With that, I’ll turn it back over to the operator to get things started.

[Operator]

Thank you very much. [Operator Instructions]. One moment please while we poll for questions. We have a question from the line of Joe Ritchie with Goldman Sachs. Please go ahead.

[Joe Ritchie, Goldman Sachs]

Hi! Good morning Larry, Tom, Brian and Alex. Great to join you guys today and I appreciate all the details this morning.

[Tom Logan, Founding, Chief Executive Officer]

Thank you, Joe.

[Brian Schopfer, Chief Financial Officer]

Thank you, Joe.

[Joe Ritchie, Goldman Sachs]

So before I get going, I have Ronny Scardino on my team as well and I think we are going to tag team some questions here. So maybe I'll just kick it off and then can turn it over to Ronny; we’ll just go back and forth. But the first question I have is really look, you're two quarters in as a public company. We recognize that also kind of happens to coincide with like probably the worst supply chain backdrop that most of us have ever seen. But the question though really relates to organic growth and the confidence you have in achieving that 5% to 7% long term target, and what's embedded into your 2022 guide, given that we haven't seen it quite yet in the first couple quarters, maybe let's start there.

[Tom Logan, Founding, Chief Executive Officer]

Yes Joe, this is Tom. I would tell you that we remain very confident in the 5% to 7% of gross that we guided throughout the – you know essentially the going public process, which would include both the pipe raise and also the official de-stacking. The rationale behind that is, that again if you look at the market conditions that we've addressed today across the reporting segments. So firstly, in the industrial segment which is dominated by commercial nuclear power. Again, I cannot understate the quality of the underlying dynamics right now in the nuclear industry. As I noted in the prepared comments, I've been enrolled now for more than 18 years and as we look across the key elements of the nuclear power industry, which we would define as the installed base dynamics, new build activity and decommissioning activity, we see tremendous strength in each of those areas supported by continued focus on decarbonizing the global economy, the change in alternative energy supply dynamics, most significantly the significant increase year-over-year in natural gas pricing and beyond that, the tremendous new build activity that in many respects is driven by regional energy security needs overall. And so the combination of these factors makes the nuclear industry very attractive to us and is noted we're seeing that in our order intake, we're seeing that in our backlog. As we look across the other sectors of industrial, which would include the life-sciences or lab space, the military and defense space, other industrial applications. Again, for the reasons cited we’re seeing strength there, not only in the current year, but as we look ahead we expect to see sustained strength. Finally, on the medical segment, the dynamics again are consistent with what we've guided previously. On the radiotherapy side we are seeing strong demand, not only driven by the growth globally of radiotherapy clinics, but also driven by the new product pipeline that we've been very focused on and which will continue, I believe to yield exciting results as we look ahead. We talked a little bit about the Nuclear Medicine space and you know express some level of disappointment regarding supply chain constraints over the current quarter and over the six month reporting period, and to be clear this is a space where the demand is very, very strong. Our backlog is at record levels. We merely have been constrained in terms of shipping product based upon some very narrow, very specific, some subcomponent availability, and as I noted we’re working very hard to clear that away. Our longer term outlook remains very positive for this space, and then finally in our occupational Dosimetry market again as noted, we're very bullish about the technological platform that we've developed and call Instadose the leverage ability of that digital platform across the global market. So all of those factors contribute to strong underlying market growth and above and beyond that, when you look at the things that we are doing as a company, as we gain scale and sophistication to improve our market coverage, to narrow areas, we are even noting that we tend to be the other number one player in the majority of our product categories. In some cases our share position is a bit uneven and we're working very hard to close those gaps overall, and a combination of those factors and enhanced focus on pricing juristics and a very strong new product pipeline, all of those factors in our view will support that range of growth that we've guided throughout.

[Brian Schopfer, Chief Financial Officer]

Joe, this is Brian, just two minor other things. One is, I would emphasize that just in our organic growth numbers, is very little Sun right, and Sun definitely grows high single digits as we've talked about before, so I put that into the mix too. And the second thing I would mention is, our first quarter will be our toughest comp as we go through the year. The quarter we went through, you know obviously this processed off of – it's a double digit comp, so that's going to be the hardest comp as we think about it and I think we've laid all of that out in the materials that we provided this morning as well.

[Joe Ritchie, Goldman Sachs]

Yes, no that's great. I appreciate the answer Tom, and then Brian yeah, it was great to see that all the segment level details that you guys gave on a quarterly basis in the presentation. You know Tom, I want to follow up on a comment that you made in your prepared comments about nuclear, because it's an area that we get a lot of questions on. You said that you've never seen a better I guess point in time than in your history in the space than you're seeing today with the nuclear industry, and I'm just curious like, you look at your low single digit growth guide for 2022. I'm just trying to square those – the comment with the growth expectations and if you could maybe kind of provide color beyond 2022 on the different parts of your business, whether it's decommissioning new builds or the installed business.

[Tom Logan, Founding, Chief Executive Officer]

Sure. So Joe, the way I would address it overall. Firstly, just to note that if you look at our total nuclear power related business, it represents about 38% to 39% of our total revenue and we can further subdivide that element into the three component pieces that I referenced previously. The installed base typically is about three quarters of our nuclear power related revenue. New build or new construction activity is typically in the 15% to 20% range, decommissioning activity, which is really nascent. The developing market overall represents the remainder, so it begins with the installed base. If you look over the last couple of decades at some of the dynamics within the installed base of nuclear power, you’re seeing a lot of challenges where as an example, in the U.S. you have seen a situation where the operators of nuclear power plants, of which there are about 93 operating today in the United States, and about half of those sold their power into deregulated markets. And if you look at market conditions over the past decade, where we've seen a significant proliferation of combined cycle gas, turbine power plants, you have seen some unusual demand patterns as we emerge from the great recession overall; you’ve seen the increased impact of heavily subsidized wind and solar power and all of those factors created stress for the American nuclear base, which at its peak created a situation where about 30% of the American fleet was economically challenged and potentially facing shut down situations. To fast forward to today, if you are to look at that installed base and really use this as a proxy, there are different conditions regionally in other parts of world, but let's use this as a proxy for the way the dynamics have shifted. Is that if you look at present what you've seen is that firstly there have been significant subsidies offered to the operators of nuclear power stations, both at the state level, as well as the federal government level, wherein the most recent infrastructure legislation there's about $6 billion of operational subsidies for nuclear power plants, all of which is obviously intended to keep them open, to keep them profitable, to keep them spending capital overall. In addition, if you look at kind of the macro market conditions, again as I noted previously, really the key driver of the relative economics of combined cycle gas turbine power plants versus nuclear power is the price of gas, and as folks have seen that those overall natural gas pricing has more than doubled on a year-over-year basis and the general outlook there you know is that it will remain high for an extended period of time. The net effect of all of this in the installed base is that the operators have more confidence in the economic viability of nuclear power plants and as a consequence, a number of things happened. Firstly, they tend to run at higher capacity factors, which is the term of art within the industry for capacity utilization. Secondly, they are spending more capital and we will see that occur in the peak outage seasons in the spring and the fall when most of the maintenance and upgrade capital is spent on power plants overall, and in many cases people are again talking about further life extension of the existing installed base. Again, you know it's a complex answer, but using the United States as an example as to how market conditions have changed, the net effect of all of this again is that the operators have much more confidence in the economic viability of the plants, the time horizon within which they will operate and all of that again tends to drive higher levels of capital spending overall. Looking briefly at new build activity, I'm sure many have seen the activity which is considerable, which is happening outside of the United States. We don't expect to see significant new build activity in the U.S., but right now if you were to look at this segment overall and our views on growth, we expect this to be one of the fastest growing segments of our business overall, and this is predicated on activity that's occurring throughout Europe and in the Pacific Rim in the NIM [ph] and importantly its supported by backlog. So if you look at our internal views on the growth of new build activity, again which are quite bullish, what you would find is that the vast majority of that, and by vast majority, I mean well over three quarters is supported by backlog that we have in-hand today and if you had to add to that backlog figure, the bidding activity, the quotation activity where we're responding to RFPs and RFQ’s, that coverage approach is 90% or better. Now, all of which is to say that this is not something that we expect to happen; this is something that is happening. You know essentially covers again a very bullish internal forecast on new build activity that spans our planning horizon. The final thing I would say is that when you look at decommissioning, which again is a developing market, and this is really driven by the fact that of the you know roughly 450 operating nuclear reactors globally, that many of them were built in the 70’s and 80’s and there is a very predictable decommissioning profile that will occur over time and we're beginning to see that. You know we’re beyond the leading edge, getting into an accelerating rate of decommissioning activity overall, which is net positive for the company, because we participate broadly in that decommissioning activity. So, you know I think you get the point. I could go on for quite a while on this, but the point is again that the overall demand dynamics are good. We are very confident in the numbers that we see out there and to be clear we're working very hard to continue to evolve and augment the solutions that we offer into the industry, to help productivity, to help digitize what is today almost entirely an analog base of sensors, and we think as we look ahead there'll be richer opportunities to exploit those factors.

[Joe Ritchie, Goldman Sachs]

Well, it makes sense. I think Ronny’s got a quick question, a follow-up for Brian.

[Ronny Scardino, Goldman Sachs]

Yeah, thanks guys. Ronny Scardino here and I'll just – I’ll chime in next. So Brian, you talk about 1Q being the toughest comp. So just want to try to understand the lumpiness of growth of really we should really expect in the business, whether there's any seasonality. Basically I’m just trying to understand how much growth in any one quarter should deviate from that long term growth framework, and specifically weather 1Q growth you think would be negative?

[Brian Schopfer, Chief Financial Officer]

Yeah, so like I said, I think the first quarter's our toughest comp, right, double digits. I think where we sit today is you know we think it'll be a flattish quarter more than anything else. As you look at the rest of the year, the balance of the quarter, I expect you know decent growth in all three quarters. We have a much easier Q2, Q3 comp as we've now disclosed and I think that you know it's fairly balanced after the first quarter. The other thing I would just mention is, as you think about our – you know we’ve changed from a fiscal year to a calendar year, you know I do think we are seeing and probably will see a little bit of movement in revenue from our historical June quarter into the September quarter. I think this is a positive thing for the company frankly and it'll all balance, balance of our planned workload etc. So I am expecting to see a little bit of shift there. When you talk seasonality, I mean general rule of thumb, 20% in the first quarter, 30% in the second, 20% in the third, 30% in the fourth is generally kind of what you – what we expect to see from a revenue kind of percentage standpoint.

[Ronny Scardino, Goldman Sachs]

Got it. No, that is helpful. I guess maybe just switching to incrementals quickly, I think the guide it takes in mid-20’s type you know incremental if you exclude [inaudible], which you know seems conservative in light of the long term goal, which I think has you know maybe doubled that on an incremental basis. So I guess question one is just you know how do you still feel about that long term incremental target and then you know what is laying down margin specifically in 2022?

[Brian Schopfer, Chief Financial Officer]

I mean, so just stepping back, let's talk about ‘22 for a second. I mean it's mainly just digesting our public company costs. You know what I think we found as we've gone through this process and baked into our planning cycle is it’s a little bit more expensive than we thought it would be to be public, and some of that stuff is not controllable. It's not nice to have stuff. It's insurance, etc. So as you think about the incrementals from ‘21 to ’22, it's mainly a public company costs issue with a little bit of mix, right. So there's a little bit of mix, a little more new build, a little less recurring. Something we had always knew was coming. It’s probably a little heavier than we had originally planned, but I think we're okay with it. As we think about the go-forward, I think this is the biggest year for us to digest cost and I expect you know our longer term guide to get to 30% margins is something Tom, Larry and I are extremely focused on.

[Ronny Scardino, Goldman Sachs]

Yeah, that is helpful. And just remind us, I know there was a discussion at one point of allocating corporate costs more into the segment. You know did that occur with this additional data that you’ve given and – or is that something we could expect in the next few quarters.

[Brian Schopfer, Chief Financial Officer]

Yeah, I think you'll see us come back out at some point in the first half year with some more on that. You know we did have a couple of million dollars move from corporate to the industrial segment in our planning; it didn't happen in the fourth quarter. So there was a little bit of noise in the – that we'll see in the ‘22 numbers, but any broader reallocation will come back around too on that year in the first half. I want to keep it clean and then as cool as we can.

[Ronny Scardino, Goldman Sachs]

Thanks Brian. Yeah, I’ll turn it back to Joe1.

[Joe Ritchie, Goldman Sachs]

Yeah, I mean we'd be remiss if we didn't ask you guys’ questions about M&A. You know clearly it’s like top of mind for investors, really to drive both top line growth and also margin expansion and so I guess maybe my first question is in the near term is the focus still on M&A or is deleveraging the balance sheet more of a focus today?

[Tom Logan, Founding, Chief Executive Officer]

This is Tom. What I would say is that they are both important. That you know firstly on the M&A side, I think if you look at our track record, in terms of sourcing attractive deals that are strategically coherent, essentially securing the purchase at attractive pre-synergy multiples and ultimately it integrated, that we’ve done well in all of those areas. It's been a very, very important contributor to the overall growth of the business; not only over the last five years, but throughout our longer term history. That will continue to be the case, and I think the expectation that we put out there, 5% to 10% of inorganic growth continues to be very sustainable. There are a few things to note, that firstly if you look at the contribution of CIRS, that will add about 2% of additional growth to the CY ‘22 topline. And as we look beyond that at our ability again to add additional deal flow that will take us into that range, we remain confident. Now on the leverage issue, clearly our view and our expectation is that over the intermediate to longer term, certainly over our planning horizon, we will very deliberately seek to delever the company. Our target as we have cited historically and which we maintain, is that we'd like to bring leverage down into the 3x to 3.5x range overall, so that's leverage as a multiple of the company’s EBITDA overall. Today we’re just over – we’re about 4.3x and we understand that there's an investor desire and expectation that will bring that down as we move ahead. However, when you look at the free cash flow generation of the business, our free cash flow generation overall is about $100 million, and if you look at a reasonable set of assumptions regarding entry multiples, EBITDA margins, immediately attainable synergies, things like that, I would tell you that we remain comfortable that we can again add inorganic growth within the range that we've guided, with nominal deleveraging in the near term, so we are certainly sustaining our view. I’ll conclude the comments here by noting that right now our pipeline is great. We continue to be very active in cultivating a pipeline that's consistent with the strategic objectives of the business and we feel very good about where we sit on the front right now.

[Joe Ritchie, Goldman Sachs]

That’s super helpful. And just to clarify a point you just made Tom, so the connection to cash flow, is the assumption that you'll be funding deals with cash and can still deliver via cash or are you also contemplating using equity to do deals.

[Tom Logan, Founding, Chief Executive Officer]

You know, I’d tell you that so we don't have any immediate plans to use equity to fund deals, but our view is that through a combination of cash as well as what would be proportionally lower incremental leverage that ultimately there is a way, there is a pathway for us to again operate within the envelope that we've defined with nominal deleveraging of the business overall.

[Joe Ritchie, Goldman Sachs]

Got it, okay. And then just a couple of other quick clarification. I want to be cognizant of your time as well, so I appreciate all the questions on the call today, but just a few questions that we've gotten from investors as well. The first one, I think you made a comment earlier around price outstripping inflation, 2 points back half of the year. I guess just to clarity that, the point is, is that 2 points ahead of inflation, is that 2 points excluding inflation. Just trying to understand how you're thinking about the framework for 2022.

[Brian Schopfer, Chief Financial Officer]

So that's 2 points of only price. Net inflation is not – is less than that. The way I would also think about that from a sequencing standpoint is, price costs will be negative in the first quarter, neutral in the second quarter and then obviously we gain a bit in the back half of the year. And I'm not – I would tell you that our assumption is not a huge prices cost up-lift on margin, there is some, but it's not a big number.

[Joe Ritchie, Goldman Sachs]

Okay, yep, that makes sense. I think that's how we heard it as well. A couple of investors asked us about Russia, Ukraine and whether you know any general thoughts around the situation that's unfolding there and how that could actually impact your business.

[Brian Schopfer, Chief Financial Officer]

Maybe I'll just tune up on the financial side and then Tom you can add some color. So the way we – if we think about our exposure to Russia and Ukraine, it's mainly Russia. It's about 10 million of direct business into Russia. We have obviously – we are partnering with on some Russian backed or some Russian technology reactors being built in Huntington, Finland etc. and our expectation right now is we may see a little bit of cash kind of move to the right, but we're not expecting a P&L impact at this time. So, I think that's kind of how we're thinking about it internally and we continue to watch what's obviously an evolving situation.

[Joe Ritchie, Goldman Sachs]

Got it great. And then just a last question, because we saw it come out as well with your filings today. Just the COO departure, just give any color around that. Was this always a position that you guys intended to eliminate. Any of your thoughts around it, that would be helpful.

[Tom Logan, Founding, Chief Executive Officer]

Yeah, the expectation was as we got beyond the public exit, that ultimately we would see again an evolution of our operating model, where the key business units or two segment leaders would report directly to me. This has been the case through most of our history, where the operating unit heads have reported directly to me and as we prepared ultimately to exit the other company even long before we planned on the spec exit. There was great utility and creating the COO position to more directly manage the operations while I could focus on my limited bandwidth on exit processes and other strategic matters. Now that that's behind us, it give us license to again revert to the historical model where there's more direct touch and interaction between me and the unit leaders. And so it's something that as we looked at the evolution of the operating model, that we've been thinking about for quite a while. In terms of the actual departure in the 8-K, that decision was made a few days ago. It certainly was in the SEC filing window for the 8-K and really separating apart from the more strategic structural changes to the operating model I noted.

[Joe Ritchie, Goldman Sachs]

That makes sense. Tom, Larry, Brian and Alex, thanks. I really appreciate all the time today.

[Tom Logan, Founding, Chief Executive Officer]

Thank you, Joe. Thank you, Ronny.

[Operator]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session and I'd like to turn the call back to Thomas Logan for closing remarks. Over to you sir.

[Tom Logan, Founding, Chief Executive Officer]

Ladies and gentlemen, so this is our first public earnings call and we're delighted that you had the opportunity to listen in and participate today. Again, I’d close by saying that we feel good about where we are as a business and good about the strategy and the overall market conditions that we see ahead of us and we look forward to updating you on our progress next quarter. But in the meantime again, thank you for your time and attention and we’ll look forward to connecting with you in the future.

[Operator]

Thank you. Ladies and gentleman, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.